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Operator: Good morning, and welcome to United Airlines Holdings Earnings Conference Call for the Fourth Quarter and Full Year 2025. My name is Colby, and I'll be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions. [Operator Instructions] This call is being recorded and is copyrighted. Please note that no portion of the call may be recorded, transcribed or rebroadcast without the company's permission. Your participation implies your consent to our recording of this call. If you do not agree with these terms, simply drop off the line. I will now turn the presentation over to your host for today's call, Kristina Edwards, Managing Director of Investor Relations. Please go ahead. Kristina Munoz: Thank you, Colby. Good morning, everyone, and welcome to United's Fourth Quarter and Full Year 2025 Earnings Conference Call. Yesterday, we issued our earnings release which is available on our website at ir.united.com. Information in yesterday's release and the remarks made during this conference call may contain forward-looking statements which represent the company's current expectations and are based upon information currently available to the company. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release, Form 10-K and 10-Q and other reports filed with the SEC by United Airlines Holdings and United Airlines for a more thorough description of these factors. Unless otherwise noted, we will be discussing our financial metrics on a non-GAAP basis on this call, and historical operational metrics will exclude pandemic years of 2020 to 2022. Please refer to the related definitions and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures at the end of our earnings release. Joining us in Houston today to discuss our results and outlook are Chief Executive Officer, Scott Kirby; President, Brett Hart; Executive Vice President and Chief Operations Officer, Toby Enqvist; Executive Vice President and Chief Commercial Officer, Andrew Nocella; and Executive Vice President and Chief Financial Officer, Mike Leskinen. We also have other members of the executive team on the line and available for Q&A. And now I'd like to flip the call over to Scott. Scott Kirby: Thank you, Kristina, and thank you to everyone for joining us today. 2025 had more than its fair share of unusual challenges, but the people of United did a truly remarkable job of living our no-excuses culture, focusing on the customers and overcoming obstacles. Last year, was really a proof point that the strategy we've had to build a revenue-diverse, brand-loyal airline at United for the last decade is not only working, but it's remarkably resilient in tough times as well. The proof is in the numbers, and we expect to be the only U.S. airline that managed to grow EPS year-over-year despite all the headwinds. The United team truly is the best in global aviation, and I'm very proud of them. They have made today's United a remarkably different airline than it was in the past. Before turning to 2026, I want to wish all the best to a friend and an industry icon, Glen Hauenstein. My first real introduction to what has become modern successful airlines like Delta and United was at Continental in 1994 with Glen and Andrew Nocella as they were dismantling CALight and building the Newark and Houston hubs that we at United are now proud to call our own. I remember Glen once coming into the conference room where I sat and yelled at me for being too loud. Something, by the way, that my wife, Kathleen, wholeheartedly agrees with Glen on. At an airline, I think the most important and impactful job is building a great commercial strategy, and a large modern airline simply cannot succeed without a commercial superstar. Glen and Andrew are simply in a separate league from all the other commercial minds around the globe. And Glen, on a personal level, given the momentum at United, I'll just say that your retirement timing is impeccable. After a solid year in 2025, 2026 sets up as more of the same at United, but with a much better industry backdrop. Our plan has been working for the last decade and while we make minor adjustments to it every year, the core of building a great revenue-diverse, brand-loyal airline remains the same. We've had the right strategy for a long time now and the United team across the board is just better at executing than any other airline in the world. I'm proud of them and excited as we continue to build the best airline in aviation history. On to you, Brett. Brett Hart: Thank you, Scott, and good morning. While 2025 presented a challenging macro backdrop for the industry, we remain laser-focused on the customer experience and on building brand loyalty. Continued investments in the travel experience, communication and reliability helped us navigate disruption and deliver for our customers. Our strong Net Promoter Scores for the year highlight the care and consistency built into the United travel experience. Despite the operational headwinds of the year, we finished 2025 with an almost 3-point increase in our overall Net Promoter Score. And during the month of November, amid an unprecedented government shutdown and real-time flight reductions, we had the best NPS month in the company's history. This is a testament to our customer focus, decisive actions and customer-friendly policies and commitment to transparent communication especially during disruptions. Toby will share in more detail the specific actions we took to produce these customer-friendly results. We've also continued to innovate, and in the fourth quarter, we introduced new features and more personalized updates in our award-winning United app, including enhanced mobile bag tracking, virtual gate, real-time boarding updates and more detailed arrival information. These enhancements are designed to improve transparency, save customers' time and provide clearer real-time communication at key moments of the journey. With more than 85% of customers using the United app on the day of travel, another one of our competitive advantages and we are confident that these investments are meaningfully enhancing the United experience, earning customer trust at every touchpoint and winning brand-loyal customers. On labor, we are currently in active negotiations with 4 of our labor unions. We look forward to reaching industry-leading contracts with these groups, and we'll share more when able. We have a bright 2026 ahead of us, and I want to thank our employees for the important work they do every day. I am proud to say they will be receiving over $700 million in well-deserved profit sharing for 2025. Their resilience and shared commitment to our values and customers are what make United strong. I now hand it over to Toby to discuss our operation. Toby Enqvist: Thank you, Brett, and I'm happy to join you all on this morning's call. At United, we're proud of our no-excuses culture and last year it was really put to the test as the United operations team confronted a wide array of challenges outside of our control. I'm so proud of how the team responded and delivered for our customers. Capitalizing on investment in our people, new tools and other innovations allowed us to be nimble and react quickly to capacity directives from the FAA and to recover faster and stronger during other irregular operations than ever before. As a result, we had the highest seat completion factor in our history and #1 of the big 3 legacy carriers in 2025. In fact, at O'Hare in 2025, we canceled half the seat rate of our largest competitor. We flew a record 189 million passengers and ranked #1 in STAR D0 for the second year in a row. For the year, United ranked #2 in on-time departures and #2 in cancellations. Our United Express operation delivered 134 days of perfect completion. This is a remarkable performance in the face of the outside challenges that we face at Newark and staffing challenges at the ATC. Beginning in the early November, the FAA directed airlines have temporarily reduced departures at 40 major airports due to staffing and system constraints from the prolonged U.S. government shutdown. We work closely with FAA leadership to swiftly implement the reductions, and we want to thank them for their partnership. At United, we were intentional with how we made these cuts. From the start, our priority was protecting the integrity of our network. We made a clear decision not to cut long-haul international and hub-to-hub flying. Those flights are the backbone of our network and aided in retaining connectivity and flexibility for our customers. We focused on reductions where we could minimize customer impact, with the majority of cuts concentrated on regional flying and non-hub domestic routes with smaller narrowbody aircraft. In many cases, that meant trimming frequency on routes where there were multiple daily options rather than eliminating connectivity altogether. Where we could, we consolidated flights in fewer departures with larger aircraft to move the same number of customers more efficiently and reducing further disruption. Even with these changes, total cancellations were only approximately 4% of departures during peak periods and had a minimal impact to our capacity in the quarter. Operationally, I'm very proud of how our team managed the rolling schedule changes. We're no strangers to managing through irregular operation and that has contributed to the speed and flexibility in which we respond to these situations. We published cancellations several days in advance to give peace of mind to our customers and directly communicated any changes through our app and website and focused on reaccommodating customers wherever possible as quickly as able. Notably, nearly 60% of our customers, who's flights were canceled were rebooked within 4 hours of the original departure time. Any customers traveling during this period could request a refund even if their flight ultimately operated and that included nonrefundable and Basic Economy tickets. It was the right thing to do. Thank you to each United employee who helped us successfully navigate these real-time schedule changes. We closed out the year on a high note. United delivered the best operation in the industry over the holidays, ranking #1 in on-time departures and on-time arrivals. We canceled less than 1% of our flights during the holidays. And following the Caribbean airspace closure in early 2026, we added 10% more seats over a 3-day period to help customers return home, an outstanding way to close out the busy holiday season. 2025 is a year we should all be proud of, especially given the multiple headwinds United and the industry faced. Running a strong operation sets the foundation for delivering on our financial commitments and it helps attract the brand-loyal customers that we speak so much about. Thank you again to our incredible team here at United, and I look forward to building on our momentum in 2026 together. Now to you, Andrew, to speak about the revenue environment. Andrew Nocella: Thanks, Toby. United's top line revenues increased 4.8% to $15.4 billion in the quarter on a 6.5% increase in capacity year-over-year. Consolidated TRASM for the quarter was down 1.6%. Q4 was United's highest revenue quarter ever. Premium cabins outperformed main cabin once again in the quarter. Premium cabin revenue were up 12% year-over-year on a 7% more capacity. PRASM for premium cabins outperformed the main cabin by almost 10 points in Q4. Main cabin revenues were up 1% on a 6% more capacity for the quarter. For the year, premium revenues increased approximately 11%, while standard and Basic Economy revenues were down approximately 5%. We did see a nice bounce back in our international flying in Q4 after a challenging Q3. The Pacific and the Atlantic performed well with PRASM turning positive in both regions. Latin America, on the other hand, had yet another challenging quarter. Cargo revenues for 2025 were up or were $1.8 billion to -- up 2.1% year-over-year. Loyalty revenues for 2025 were up 9%. Remuneration from global co-brands was up 12% for the year and 14% for the quarter. And for the third year in a row we added over 1 million new co-brand cards. As we look to Q1 2026, we expect to see sequential improvement. The possibility that all regions have positive RASM year-over-year. Last year did start very strong from a bookings perspective but then dropped off sharply towards the back 3rd of January and for the rest of the quarter. Based on what we've seen so far this year, bookings and yields are outpacing the strong start from last year, and we're hopeful that the momentum will continue, which could admittedly cause our guidance to feel a bit conservative. We also expect the domestic capacity environment to be quite favorable for the first half of 2026 with small but meaningful amount of perennial unprofitable capacity by others leaving the market. However, in Q1, premium revenues continue to lead the way, while standard main cabin seats continue to show some weakness. This main cabin weakness is due to unprofitable capacity offered by other large spill demand U.S. carriers as ULCC capacity becomes less relevant. We also have a tailwind in Newark later this spring with operations running well. We expect Newark to give United a unique RASM tailwind versus the industry considering the events last spring. With the number of flights now limited to what the runways can accommodate, our customers can and are booking in confidence. We did make aggressive Latin capacity adjustments for Q1 to correct underperformance we saw in Q3 and Q4. However, recent geopolitical events are having a measurable negative impact on bookings in the Caribbean. Yet, we still have a chance at positive Latin RASM depending on when concern dissipates. All United hubs were once again profitable in Q4 and for all of 2025. A fully profitable hub framework allows United to invest incremental capacity on a solid foundation. We think we're only 1 of 2 large U.S. carriers that can say all their hubs are profitable in 2025, and these same 2 carriers are expected to represent the bulk of industry profits in the year. We also believe that of the 3 airline hubs located in Chicago, only United's hub was profitable in 2025, and we expect it will be profitable again once again in 2026. Today, I also wanted to talk about our commercial focus points for 2026 to drive higher RASMs and margins. Our first focus will be new seasonal capacity shaping of our long-haul schedule. Peak demand for international travel has spread from the second and third quarters to other parts of the year. As a result of this shift, we expect the fastest-growing quarter for United's international capacity to be Q1 in 2026 with minimal growth in Q3. Flattening capacity across the quarters would have not been correct in 2019, but it is today. A second focus will be enhanced merchandising of our growing product lineup. We plan to increase segmentation and customer choices with our changes, which we'll announce in early 2026. This effort includes the largest redesign of united.com in a decade. Our third focus will be enhanced connectivity. We will soon approach the connectivity goals we set in 2021 with the United Next Plan by 2027. As a result, 2025 represents United's high watermark on domestic capacity growth as we draw this very successful part of the United Next plan to an end. Our fourth focus will be MileagePlus, enhancing the growth potential in the coming years via drawing a larger distinction between true loyalty programs and reward programs offered by others. We have a legacy contract that continues with our banking partners regarding core economics, but we still have plenty of ideas to boost growth in revenue in the meantime. And premiumization is our fifth focus in 2026. We've had this premium focus for almost 8 years now. And while our lead is now being followed by a range of other U.S. carriers, it's United's 7 business-centric hubs that dictate this plan and why we expect to be more successful at it. Last spring, we announced our new Elevated interior for our widebody jets, including the new United Polaris Studio suites, Polaris suites with doors, along with countless other upgrades to the soft product. 4 Elevated 787s are now being prepared for delivery in the coming weeks, and we expect 16 more for the remainder of 2026. These aircraft, along with other new deliveries will result in our premium capacity growth accounting for more than half our growth in '26. We look forward to another innovative set of products and aircraft announcements in 2026. United is defining what premium means for all customers, no matter where they sit or what they pay. Our United Signature Interior mods and Starlink installs are now moving at pace and will be completed in 2027, creating consistent premium product we hoped for when we announced United Next in 2021. A quick but important preview for 2027 is our long-term focus on gauge. While gauge is not a focus in '26, it will be in '27 and beyond as a much higher percentage of our growth equation. Most of our commercial focus areas in '26, of course, ladder up to decommoditizing our product, providing consumers with more choices and winning a higher share of brand loyal customers. We like our plan. We remain focused on doing more of the same in the coming years. With that, I offer my thanks to the entire United team for a great but challenging 2025 and hand it off to Mike to talk about our financial results. Mike? Michael Leskinen: Thanks, Andrew. We closed out 2025 on a high note and delivered fourth quarter earnings per share of $3.10 within our guidance range of $3 to $3.50 and that's despite a $250 million impact to our pretax earnings from the government shutdown. 2025 was a challenging year for the airline industry. Between macro volatility and idiosyncratic challenges at Newark, each quarter of 2025 experienced a material event that pressured earnings and further widened the performance gap between industry leaders and laggards. Our full year 2025 EPS came in at $10.62 which was slightly up versus 2024 and despite an $0.85 headwind from our challenges at Newark. I expect we will be the only U.S. airline to grow EPS last year. This is an incredible proof point of United's ability to execute through times of elevated uncertainty when most of the industry cannot. An airline with a business anchored by brand-loyal customers isn't only more profitable, it's also more resilient. Our plan is working, and I'd like to thank the entire United team for their hard work in the face of all these challenges. I'd particularly like to thank our frontline flight attendants, pilots and customer service representatives. Through an extraordinarily difficult time during the government shutdown, you served our customers, leading to the highest Net Promoter Scores in United's history. Over the last year, we've invested $1 billion in the customer and, as a result, customers are taking note. From larger clubs to free StarLink Wi-Fi to United product offering as well as further segmentation continues to attract more and more brand-loyal customers, driving strong top line performance and more durable earnings. The investment in the customer has been enabled by our industry-leading efforts to drive cost efficiencies across the core business. In the fourth quarter, our CASM-ex year-over-year was up only 0.4%, bringing our full year 2025 CASM-ex up to 0.4% as well. We expect this performance to be industry-leading and will continue to drive efficiencies across the business in 2026. Now turning to the outlook. Looking to the first quarter, we expect earnings per share to be between $1 and $1.50, an approximately 37% earnings improvement versus the first quarter of last year at the midpoint and margin expansion year-over-year. Building off a strong quarter, for the full year 2026, we expect earnings per share to be between $12 and $14. At the midpoint, this represents over 20% growth and implies continued margin expansion as we march towards double-digit margins. Turning to the fleet. This year, we expect to take delivery of over 100 aircraft -- 100 narrowbody aircraft and approximately 20 widebody aircraft. Accordingly, we expect our capital expenditures for the year to be less than $8 billion consistent with the $7 billion to $9 billion multiyear CapEx guidance we provided back in 2024. On the balance sheet, becoming investment-grade rated is a major priority of mine, and in 2025, we made meaningful progress towards investment-grade metrics. We paid off $1.9 billion of our high-cost COVID-era debt and brought our total cost of debt down to 4.7%. Our net leverage at the end of the year was 2.2x. As a result of our deleveraging efforts, combined with our earnings power and industry bifurcation, we've received 5 upgrades to our credit ratings across Moody's, S&P and Fitch over the last 13 months. United is now just one notch below investment grade at all 3 agencies, our highest ratings in over 25 years. In 2026, we plan to delever further and target net leverage below 2x with the intention of achieving investment-grade metrics by year-end. We're hopeful to achieve investment-grade rating shortly thereafter and are committed to managing our balance sheet to achieve that goal. Free cash flow generation remains a key priority. In 2025, we generated $2.7 billion in free cash flow, and in 2026, we expect to deliver a similar level of free cash flow given higher aircraft deliveries. In the medium term, we expect free cash conversion to remain around 50%. And as we exit the decade, we continue to expect free cash conversion to expand to around 75%. On the buyback, we have $782 million left in authorization from our Board of Directors. We will continue to balance our priority of being investment grade with making opportunistic purchases of our shares when market opportunities present themselves, hopefully less frequently. 2025 proved United could effectively manage through macro volatility and company-specific challenges while also delivering resilient earnings. Our relative margins remain strong and moving forward our focus will be on continued margin expansion and achieving double-digit margins. The industry continues to transform, and competitive dynamics are evolving with United firmly in the lead. Taken together, United Airlines is positioned for another year of growth and success that will drive value to our employees, our customers and our shareholders. Now back to Kristina to kick off the Q&A. Kristina Munoz: Thank you, Mike. We will now take questions from the analyst community. Please limit yourself to one question and if needed, one brief follow-up question as we hope to get to as many of you as possible. Colby, please describe the procedure to ask a question. Operator: [Operator Instructions] Your first question comes from Conor Cunningham from Melius Research. Conor Cunningham: Just on the corporate travel comments, you've noted a lot of strength there in January so far and I actually think that's your much -- most difficult comp of the quarter. So if you could just talk about how things change throughout 1Q. I just think that you're going to be exiting at a much higher booking rate in March than you are right now. So if you could just talk about that in general. Andrew Nocella: Thanks, Conor. I think I agree with your conclusion. 2026 has gotten off to a really, I think, very strong start. But in particular, business volumes have gotten off and are just really compelling. And the way I look at it is, if you think back to early 2025, we saw actually strong business volumes at first, but those numbers quickly trailed off to be up just very low single digits in February and March. This year, for the same early January week, business revenue is up high single digits and nearly 20% year over 2. So if current business volumes simply continue, you'll see year-over-year growth for the last 2 weeks of January for business, up 12%, 13%, 14%. The further you push this math into February and March, the stronger it potentially gets. So I think I agree with your conclusion. Well, it's still early in the year, but just -- we're off to a great start from a business point of view. Conor Cunningham: Okay. Great. And then, I mean, I know you spent a lot of time diversifying away from the main cabin and with all the premium and corporate and all that stuff that you're doing, but it just feels like we've been -- I mean, you noted ongoing issues in the main cabin into 2026 so far. So if you could just talk about how that segment potentially flips to the positive and are you assuming any sort of like rate of change or that flipping positive at some point later in the year? Andrew Nocella: Well, look, I think it's inevitable. Premium cabins are really on their fourth year in a row. But I do think it's inevitable that the coach cabin, the main cabin improves. And it's a really simple equation. It's the unprofitable capacity offered by others in the marketplace that continues to fly more than you otherwise expect to fly. So we'll see how that all shakes out. I can't predict the timing, but I do think eventually businesses stop doing unprofitable things. We'll have to see when that happens. But I remain bullish that we are going to see the performance of the main cabin flip at some point in the future. And when it does, that will be enormous fuel to our margin growth and be great for the industry itself. So time will tell, but I remain optimistic that we're on the course for that at some point in the future. Operator: Your next question comes from David Vernon with Bernstein. David Vernon: So Scott, maybe I'd like to get your thoughts on how you're thinking about some of the changes that are being discussed around the credit card ecosystem and what that might mean for United as we look forward the next couple of years. If some of these changes are implemented, how do you think about what you can do to manage around it? And what are you and your partners thinking about as the most likely set of outcomes as far as whether it's a cap on interest rates or the credit card competition, what have you. Andrew Nocella: Sure, I'll take the question. I think it's a really good and relevant question, obviously. And first, we're in constant contact with Chase on the issue. Obviously, Chase is our largest co-brand partner, and we talk to them all the time on this issue. And what I'd say is while much remains uncertain, of course, United's portfolio would be impacted. But in our view, it would be impacted a lot less than just about everybody else. MileagePlus co-brand holders tend to skew towards higher FICA band ranges, often revolve at a lower rate and have low loss rates. These factors make us different than most non-airline co-brand programs and maybe even a lot different from a lot of other airline co-brand programs. We're going to let the banks sort this out. Interest rates and revolve rates are more their thing. Our focus is on providing amazing benefits via this program that our consumers love. So a lot more to come on this subject, but we feel like we're on top of it and we will be ready for whatever happens in the future. David Vernon: And then maybe just as a quick follow-up, you mentioned some additional stuff you might be able to do outside of the -- on top of the existing sort of agreements that you have with your card partners. Any more color you can give us in terms of kind of what that means in terms of specific changes or enhancements you can drive the program in the near term outside of renegotiating the contract? Andrew Nocella: Sure, I'll do my best. But first, I want to welcome Jarad Fisher to the team. Jarad's our new Head of MileagePlus. He has experience in credit cards, strong brands and airlines which make him a perfect fit to lead MileagePlus into the next chapter. Richard and Luc have just done a great job. And as you can see from our new card growth stats that I said earlier in 2025 along with our remuneration growth. I know I often talk about these changes at MileagePlus without a lot of details. But what I'll tell you is Jarad and I will have a lot more to say about this, and we're going to say something within the next 10 weeks to accelerate growth and pull levers that we can pull that are in our control. So just a few more weeks and I'll be able to, I think, answer that question sufficiently for you. Operator: Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Great quarter. Mike, maybe this first one's for you. The unit cost has been stellar across 2025 quarters even in light of the investments you guys are making around the product, the experience. And you're debunking that sort of view that there's a variable cost relationship here. So maybe can you dissect what you guys are doing right, what the opportunities are for efficiencies going forward and how that plays into 2026 growth? Michael Leskinen: Thanks, Sheila. And I'm very proud of our cost performance in 2025. I think it will prove to be industry-leading, as I said in my prepared remarks. Look, the cost efficiency in 2025, in the fourth quarter, the operation -- the strong operation form the foundation. And so a lot of credit goes to Toby and his team for driving that strong operation. Strong operation is a cost-efficient operation. But in addition to that, we are driving a real cultural efficiency here at United Airlines. And I'll give a few examples, and we can talk more about it as time goes on. But a few examples are as we continue to invest in an industry-leading app, it drives a lot of automation for quicker check-in. It's customer-pleasing. It also takes some costs out, some variable costs out of our system. We've also overhauled our global procurement organization. And I'm really happy to say that through this first year of that overhaul, we've identified and delivered on $150 million in run rate savings in the procurement organization and there's a lot, lot more to come. And then finally, we are using sophisticated technology to help model -- to model demand for our tech ops organization and that's leading to more productive technicians, fewer grounded aircraft and a more productive fleet overall. So those are few examples. I'll tell you that there's more to come. This is a culture at United to drive an efficient operation. We reinvest a lot of that in the customer, and it's helping to drive higher structural profitability for United. So thanks for the question. Scott Kirby: And I just want to add on, mostly to compliment the team, I think this is, from an investor perspective, one of the differentiating points of United versus all the other airlines in the world. We are the best airline in the world at the real core cost efficiency, something we've talked about a little in the past. And credit to Mike, Brett and Jonathan Ireland, who's sitting in this room; Toby Enqvist, our Chief Operating Officer; and Jason Birnbaum, who runs technology for us. We've culturally are great, but we've also made technology investments that I know do not exist at any other airline. And that's the foundation, the culture and the technology that drives core efficiency. We keep doing more and Mike told you a bunch of the tactical things that happened recently, but then we keep finding more. One of my favorite stories was we finished the budget last year and finished the budget, and Toby came forward and said, I think we got chances to drive another $250 million out of that operation in core efficiency. Nothing that impacts the customer, that helps the airline actually run better and saves money. And there's no other Chief Operating Officer in the world that is doing that. They're all begging for more money in their budgets. Like this is real at United, I think we're going to drive costs for years to come that outperform the rest of the industry because what we're doing is real and is not coming at the expense of employees or customers. Sheila Kahyaoglu: That's great. And maybe if I could ask one on your fleet, you talked about '25 being a high watermark for growth, but you have 100 narrowbody deliveries plus 20 787s. So that's 10% growth by the end of '26 given you only show 20 retirements, plus you have the gauge benefit that accelerates in '26. How are you thinking about the guardrails to capacity growth this year? And where in the network and the fleet plan you're keeping a buffer there? Andrew Nocella: Well, look, we're not going to give capacity guidance other than to tell you that our United Next plan has been working well and this last -- past year was the high watermark. So we'll manage capacity as appropriate for demand, but that's the guidance we're giving today. Michael Leskinen: And Sheila, regarding the 100 narrowbody deliveries, it could be a little more. I mean, Boeing and Airbus have been doing a better job of repairing the supply chain that's been damaged from the pandemic. And so production rates are improving. If we get a few more than that, we're going to welcome that on the narrowbody side. That's going to help us up-gauge more quickly and the profitability of those new aircraft is really robust versus the aircraft that we can replace. And on the widebody front, it's a similar story. We expect 20 787s in 2026. I think we'll take about that amount in future years as well. And that modernization of the widebody fleet is not just for growth, but it helps drive better profitability and better returns on capital for United going forward. So I feel really good about the CapEx profile and what it's going to do to the financials. Operator: Your next question comes from the line of Catie O'Brien with Goldman Sachs. Catherine O'Brien: Andrew, I wanted to start with you and just dig in on how you're thinking about the sequential trends by region underlying your 1Q EPS guidance. Is it fair to assume that most of the $250 million pretax hit was driven by lower domestic revenue? So just trying to understand, like should we see the most sequential improvement in domestic? Obviously, you had really strong performance in some of the international regions in the fourth quarter, so really just trying to get a sense of the relative improvement you're expecting between the 4 regions. Andrew Nocella: Yes. Clearly, in Q4, the larger hit was domestic. I wouldn't say international is 0 from the government shutdown, but it was mostly domestic. As we look into 2026, we do have this Caribbean situation which is impacting the numbers there. So I'm going to be careful what I say about the Caribbean. We still think it could be positive but it's going to be close. But we are looking for sequential improvement everywhere. Clearly, the Atlantic is leading the way, which is great to see. We're growing a lot across the Atlantic. A lot of it is Israel, but we're still growing a lot across the Atlantic. And we think we've got the capacity equation really dialed in, in that region. So we're really proud of that. Pacific, I think looks pretty darn good. South Pacific is not as good as the North Pacific. And domestically, it's going to be another improvement. And what I'd say is premium cabins are leading the way, not only domestically, but across the entire network. Catherine O'Brien: Great. And Mike, maybe one for you on the '26 cost outlook. Obviously, understand -- not asking for guidance. But you just detailed a bunch of things that you were really excited about this year, the operation, the procurement, like there are some pretty big numbers that you guys have gotten out of the system. I guess, on the '26 punch list, like what are the opportunities you're most excited about? Is it just following down some of these same paths? Like how should we think about the opportunity to cost out this year versus the great success you had in '25? Michael Leskinen: Thanks, Catie, for the question. I think a continued strong operation, number one. I mentioned global procurement. We're just getting started there, so you should see continued improvements on that front. And then we're working with our technology team led by Jason Birnbaum and there's some significant multi-hundred-million dollar opportunities there. So we'll give you more details as we deliver on those, but this is a permanent cultural shift at United to drive efficiency. Operator: Your next question comes from the line of Ravi Shanker with Morgan Stanley. Ravi Shanker: So it's pretty clear that your full year guide is quite conservative. I think you guys may have hinted at that in your comments as well. Just trying to get a sense of kind of is this as conservative as it usually is? Or do you see reasons to make it kind of even more conservative for '26? Just trying to get a sense of how many acts of God are in that full year guide for this year. Andrew Nocella: Well, look, the way I would -- obviously, Scott said something last night about this, so it helps with the answer just a little bit, I suppose. But let's think about the process. We think carefully about all these forecasts and we're pretty consistent on how we approach it. We did our forecast for 2026 more than a few weeks ago. And clearly, as we refined it coming into the new year, we focused on refining it in Q1 because that's where we're at. And we focus less on refining it in Q2 and beyond because that's how we do the process. So we'll see how it goes. I'll just start off with the year's gotten off to a really great start. The international entities are looking pretty darn good, even the Caribbean, considering the situation we're facing there. So we remain bullish, and business demand looks really pretty amazing right now and we'll see if that continues. If all of that continues, which I assure you we think it is, and Scott definitely thinks it is, our forecast will prove to be more conservative than it usually is. But that's all I'll go with at this point. Maybe Mike wants to add to that. Michael Leskinen: Ravi, I'd just say 2025 proved a year. If we talk about acts of God in this industry, we got walloped. The industry got walloped. And I'm incredibly proud of United's full year results. I'm particularly proud of the fourth quarter where we had a government shutdown. Just about every other major airline had to issue 8-Ks to update their guidance and we delivered within our original guide. That is testament to how we guide at United Airlines to make sure that we deliver on our financial commitments even in imperfect times. And 2026 will be no different. Ravi Shanker: Very helpful. And on that note, kind of obviously you guys are coming to the end of the United Next kind of original guidance range. I mean 2026 seemed like eternity away back in '21, but here we are. So what can we expect next in terms of like when do we get the next set of long-term targets from you guys? Obviously, incremental loyalty, [ disclosure ], kind of what's the timing on that? And what is the forum for that? Michael Leskinen: Ravi, I am thinking about that. And all of our quarterly calls and, frankly, when we go to conferences we talk -- I think we talk very big picture, very long term, which is serving us well. It is important that we have long-term goals that we communicate with the investor base. At this point in time, our commitment to get to double-digit margins, our commitment to get to free cash flow conversion of 75%, our commitment to get to investment grade, those are the longer-term benchmarks that we're fighting for. And so I feel like we're in a pretty good position around long-term targets at this time. Andrew Nocella: And I'll just add, we look forward to sharing what comes next. And what comes next is something that I've been thinking about, and the entire commercial team has been thinking about for years because in order to prepare for what comes next, we need to put that into place with a lot of foresight and a lot of thought. So we look forward to sharing with all of you at some point in the future. But rest assured that we have a lot of, I think really great commercial plans and opportunities for the latter part of this decade. Operator: Your next question comes from the line of Jamie Baker with JPMorgan. Jamie Baker: Scott, I'm guessing the term CALite just got a few dozen more Google searches today... Scott Kirby: Well, you remember it without searching. Jamie Baker: Yes. No, I appreciated the comments. So Andrew, sorry, I'm just getting over a cold here. Andrew, in your prepared remarks and also to Conor a few minutes ago, you mentioned that some degree of unprofitable domestic flying out there is increasingly a function of hub-and-spoke peers as opposed to the usual domestic discounter suspects. Now in the case of discounters, I think it was very reasonable to assume that a lot of that would go away just given the staggering system-wide losses. But the difference with certain hub-and-spoke competitors that you referenced, their returns are subsidized by loyalty and premium. So put differently, discounters had no choice but to back off. As Scott likes to say, it's just math. But hub-and-spoke peers do have a choice. I'm curious if you agree with that. And if you do, does it influence your confidence that ultimately some of these competitors do cull that loss-producing capacity? Andrew Nocella: Yes. I think it's a really good question. I think economic gravity is the same for all and money-losing businesses need to figure that out and do something different. And in this case, I do think money-losing routes or hubs should ultimately be closed. I have some experience in this. I've worked on closing a number of hubs in my career at different airlines, not at United, obviously. And these decisions are complicated and big. But ultimately, it was making rational capacity decisions and recognizing what makes money and what loses money kind of has led at least United to where we are today. And there's only one other airline, I think, that can say that all of their hubs make money. And so I still have a lot of confidence. I just don't know when, but I have a lot of confidence that money-losing flights will eventually exit the system, and airlines will move to what they do best, and the industry will be better off, and all the airlines will be better off. But I don't know when and it may be a while, and they do have a lot longer runway than other airlines for all the reasons you said earlier. But again, I'll go with economic gravity applies to all. Scott Kirby: And by the way, Jamie, I'm just going to, since Andrew talked about closing hubs, say one of the things just my opening remarks about Andrew and Glen being the 2 best in the world. They have each closed 3 hubs that I can count in my career. The most important thing for a successful commercial airline is know when to pull out of loss-making markets. It's emotionally hard to do. Very few people have the discipline to do it. It is the most important characteristic for somebody that's going to run a network at any airline in the world, and it's rare. Jamie Baker: I appreciate that, Scott and Andrew. And then just a quick follow-up, something, Andrew, I think you and I were discussing it in person not so long ago or maybe it was me and Patrick. But the fact that many of your recent international additions were coming in at a margin premium to their geography as opposed to a deficit that would hopefully rise over time. I'm curious if that's still the case. And if it is, how long can that continue? And should we assume that those premium margins get competed away over time? Or are they sustainable, which would imply the broader geography also gets more profitable, holding other inputs constant? Andrew Nocella: Yes. That's a very broad question. And look, I would say that there's nobody better in the world than Patrick than -- looking at these opportunities. And what we have found, which I think is contrary to normal, is that the fruit that we're picking off the tree after all these years continues to be excellent. In other words, we're able to find different opportunities because the world is getting smaller. The aircraft technology obviously with the 787 has changed. But most importantly, United is different today than it was a decade ago. And our differences in attracting the brand-loyal customers, as Scott often says, our product, everything we do, has enabled us to add these new routes that couldn't have been done years ago and add them at higher margins than the bulk of what the airline has done. So it's a remarkable journey. And I think on the international front, we're frankly just getting started. New York, San Francisco, Washington and L.A., when you combine all those together going across the Pacific and the Atlantic, there's just amazing opportunities. And I think, obviously, you know that the A321XLR is being made for us and will arrive and we're going to use that aircraft for its unique capabilities, not unlike Continental did 20-plus years ago with the 757. And I think we'll be the only airline to use the aircraft in a way that really does bring on a bunch of new markets. We're not trying to down-gauge, over-gauge widebody jets, for example. We're looking to expand our network and our scope and our depth. And there's just a lot more to come on this front. And so kudos to the whole United team. It is just an amazing achievement, and we look forward to seeing what our international network will look like a decade from now. Operator: Your next question comes from the line of Tom Fitzgerald with TD Cowen. Thomas Fitzgerald: I wonder if you could expand a little bit on the distinction between the loyalty program and rewards program. You've commented on that a few times. I'd love to hear like how investors should think about MileagePlus being differentiated. Andrew Nocella: Sure. I think the most simple way to think about it is churn of members. People join our program and stay with it just about forever and people grab and get our credit card and stay with it for a very, very long time period. So we have very little churn in our programs, and therefore we don't need to do extraordinary things to attract people to United. We already have done it with a great product, a great network and rewards that they really want, which is travel. Like people really want a first-class seat or a Polaris seat to Tahiti as a reward. And all of the other programs out there tend to use constant bonus points and other benefits and have a lot of revolve around customers going in and out, switching credit cards, so on and so forth, often to game the systems. And I just think an airline program, and particularly the United program, is different. And as we approach the future, we should harness the power of that to figure out how we can make it even stickier and grow it faster, which is what we'll talk about in the next 10 or 12 weeks. Thomas Fitzgerald: Okay, that's really helpful. And then just as a quick follow-up, it seems like an important monument that 2025 is a high watermark on domestic capacity growth. So maybe just remind investors how they should think about as you guys harvest some of the gains from achieving your United Next investments. Andrew Nocella: Sure. In 2021, we announced United Next and we announced the growth that would come from the connectivity. The growth was always the outcome of the connectivity. We weren't growing for growth's sake. I think that's really important. And remember at the time we did distinguish that not all growth is equal, which was really controversial back in 2021 because I think many thought it was, and I think we proved it was not. So as we've gone through the whole cycle of United Next, we are approaching our connectivity goals. We'll hit them in 2027, probably a year late given some of the delivery delays we experienced from Boeing, but close on time in the grand scheme of things. And as we do that, our hubs have reached this critical level, around 650 flights per day in our mid-continent hubs with a lot of connectivity, big banks and large airplanes. It's exactly what we were contemplating. So as we go forward past 2027, we're going to be a lot more focused on gauge and growing our operation that way versus more flights. We do think there is a point when hubs grow past 900 flights per day, for example, that the marginal economics become really challenging. You compete against yourself, and you drive a lot of operational complexity no matter how many runways you have available to fly from. So we really like our plan. It's based on moderate frequency levels and large aircraft. And I don't want to give too much of a preview for what comes next, but that was a good hint as to where we're going. But -- so that's -- the high watermark comment is related to all of that. And I'm glad to get back to focused on gauge in 2027 and beyond. I think it's going to be very lucrative for the business. Operator: Your next question comes from the line of Brandon Oglenski with Barclays. Brandon Oglenski: Congrats to the team on what was a pretty good year in a tough environment. But Scott, and I don't mean to kiss up too much here, but I think a lot of folks on this call really appreciate your industry commentary and a lot of your projections have been correct the last few years. Can we talk about just broader industry growth? Because if we look at revenue to GDP or even revenue growth last year was effectively flat versus GDP that was up 3% or 4% nominal or real. Do you think this signals that we're just like in a shrinking industry now? Or has Zoom taken over? Or has this really been too much low-cost capacity in the industry just can't get pricing? What's your prognosis here? Scott Kirby: It's a supply challenge -- problem. It's not a demand challenge. It's a supply problem and it's a supply problem. I'm not going to call it low-cost capacity. It's a supply problem with [ fuel ] carriers. And Andrew said it and I'll repeat it, like economic gravity ultimately wins, doesn't win overnight. Ego usually beats economic gravity in the short term, but economic gravity always wins in the end. And I feel pretty optimistic that even in this environment, well, I feel really good even in this environment how well United is doing. The brand loyal strategy I thought was going to be successful. I've been on this path with Andrew for really for 20 years. We switched airlines but we've been on this path for 20 years. I thought it would be successful. It is more successful than I thought. Like it is remarkable how much resilience we have in bad times or to competitive activities. And so that's good. But I look at some of the flying competitors, and it's going to push north of negative 20% margins this year. You can do that for a little bit of time. But when the down -- I actually have to be honest with you, I think that supply really comes out when the next downturn hits. The next downturn is going to make it extremely tense for airlines that are going into it with breakeven-ish margins in good times. And so I think that's probably what it takes for the next kind of wave of supply. So I think we'll do okay in main cabin between now and then. We'll do well in premium. I think to an earlier question we are targeting growing margins adjusted for any kind of anomalies that happen, growing margins a point a year, that means we got to make up a point from last year, by the way. And I think that takes us into the low double digits. And then I think when the next downturn hits, coming out on the other side of it and the supply comes out, we come out with mid-teens margins. So that's a long answer, but off the cuff, but that's what I think is going to happen. Operator: Your next question comes from the line of Michael Linenberg with Deutsche Bank. Michael Linenberg: Just touching back on kind of what Jamie brought up. I think the prevailing view is that domestic will be the best-performing geography in 2026, maybe domestic RASM, maybe profitability. But when I think about the fact that one of your competitors in Chicago is adding a lot of flights and I've seen reports that they're already losing, I don't know, $700 million or $800 million under their current schedule. Is that going to be a drag on your domestic to the point that maybe it's transatlantic, maybe it's another geography that comes out on top, or do you have maybe a diversified enough domestic network? I mean you have a massive domestic network that will be more than overshadowed by strength in some of your other markets, like Newark, for example, which is probably going to run very well in 2026. Scott Kirby: Well, thanks for the question, Mike. I was afraid we were going to get through the call without addressing Chicago. So I'm happy to do it. And it's probably a good follow-up to the last question that I talked about. And I wanted to start with, at United Airlines, we've been a decade-long strategy to build a brand-loyal customer airline. That was all designed to get us out of the commoditized part of the industry where all that mattered was the schedule. And that meant in both -- focusing on the product, the technology and service to get customers to choose us. That's been a really successful strategy. It didn't happen overnight. It really has been a decade in the making, but you can see the results, and we've had market share increases everywhere that we fly. In Chicago, to be specific, in 2016, American actually had higher local market share with Chicago-based customers and higher share with business customers. In 2025, even after all the growth from our competitor, United now has a 22-point lead with Chicago-based customers in Chicago and a 38-point lead with the brand-loyal business customers. Being a brand-loyal airline just really inoculates us mostly from that competitive activity. And in fact, in 2025, even with all that growth, the Chicago RASM outperformed the rest of the system by 1%, and we made a $500 million profit. By the way, I think we probably would have made $600 million. So it probably cost us about $100 million. But our competitor lost $500 million even though they didn't start that really until May, so bigger on a full year basis. As we enter 2026, there's another wave of growth coming from that competitor. Mostly that's going to wind up exactly the same as it did last year, with one difference. In 2025, American added gates. That means we watched it. We could have responded. We chose not to. They're going to win 3 gates back at our expense when the analysis comes out later this year. We knew that was going to happen. We figured we'd just let it settle into a new normal and that would all be fine. But in 2026, we're drawing a line in the sand. We are not going to allow them to win a single gate at our expense in 2026. We're not trying to win gates, but we're going to add as many flights as are required to make sure that we keep our gate count the same in Chicago. Look, we're just going to stay focused. We've had the right strategy at the whole network for a decade. We're going to keep doing it. It's a winning strategy. It's working. We're going to keep doing that in Chicago. For what it's worth, I think that we will likely grow our earnings. Certainly, we'll make at least the same $500 million, I believe. And likely, we'll still be able to grow our earnings in Chicago for the same reasons it worked last year. American, and we're pretty good at estimating this is likely to push to about $1 billion in losses in Chicago. But we're going to just stay focused on the strategy that's worked for the last decade. Our team is doing a great job taking care of customers and it's working for us. Operator: Your next question comes from the line of John Godyn with Citigroup. John Godyn: Scott, I was hoping you could revisit your thoughts on the shape of industry structure from here. We've seen M&A announced among some of the smaller carriers. There seems to be an expectation of more. I'm curious what you think equilibrium in the industry looks like. And second, obviously when I think about your history, America West-US Air, US Air-American Airlines, you're no stranger to be a leader in M&A. Is there any scenario where United gets involved in M&A considering you have what seems to be an accommodative DOJ, which isn't always the case? Scott Kirby: Well, I'm not good at resisting the bait, but I'm going to resist the M&A bait today. Bob Rivkin is nodding appreciatively at me. I'm not talking about that. But I think the structure of the industry is ultimately going to be low-cost carriers will shrink down to the niche that works for low-cost carriers. That is big leisure markets. And I don't know if they're going to liquidate, if they're going to merge, if they're just going to all shrink for sure. But they're going to shrink down to the niche that works and that'll be good for them. I think they can have solid margins, but it's a much smaller niche than where they are today. I think there's going to be 2 brand-loyal airlines. That's already the case. I gave you the numbers in Chicago. That game is over. I realize that not everyone knew the game was on. The game is over. And when we have that big of a lead with customers, like you just don't win it back because you'd have to have technology, product, services that were somehow better than United and somehow better than Delta to even start and you're a decade behind. And then I think the rest of it will be sort of finding places where you can get big in other cities, non-hubs of Delta or United and you can have a network that works and that's a little more commoditized, but you can have a network that works. And so I think that's what the structure. And it's an open question about whether consolidation helps us get to that structure. But that's where the structure is going to end with consolidation or without. Operator: Your next question comes from the line of Scott Group with Wolfe Research. Scott Group: So last quarter, I think you laid out an expectation we should get at least a point of margin improvement a year. I think, Scott, you just said it again. I guess the high end of the guidance range gets you there. The midpoint would be less than a full point. So I don't know, just at the end of the day, like help us think about price, costs this year given the momentum you've got right now, the comps that come in Q2, Q3. Like I would have thought this would have been the year where like it's a pretty clear like point of margin. Like is it just the conservatism that maybe you said a couple times? Or are there other things we should be cognizant of, I don't know, labor, what's going on in Chicago? I don't know. Just help us understand like if this is the year we should be doing the full point of margin. Michael Leskinen: Scott, I love that you did the math. And trust me, we've done the math, too. This industry got hit by multiple asteroids last year. We want to make sure that we deliver on our financial commitments. We've given you very clear targets for the longer term, and we're going to deliver on those targets. The timing of which there's some uncertainty around. But the full year guide was very deliberate. We're telling you that if current booking trends stay on this path, there's upside and you should think about that as you make your own estimates. Operator: Your next question comes from the line of Chris Wetherbee with Wells Fargo. Christian Wetherbee: Maybe, Mike, just want to -- following up on that question. As you think about unit costs as you go through '26, obviously there's labor dynamics that we have to factor in. Exclude that, take a look at 2025, how good of a benchmark or sort of range that for us to use as we think about sort of ex labor dynamics of unit costs for 2026? And then maybe zooming out a little bit, sounds like you still sort of have lots of opportunity in terms of managing cost efficiency as we move forward. So how big a story is this beyond '26? Michael Leskinen: Yes. Thanks, Chris, for the question. And look, we're not going to give PRASM guidance. We're not going to give CASM guidance. But we've been pretty clear about this is a new culture at United around cost management and discipline and driving efficiency. And let me remind you, we really have not benefited from gauge yet. That gauge benefit is still on the come. So '25 was a great year. We're going to work really hard to make '26 an equally great year from a CASM standpoint. And keep in mind, some of the tailwinds we haven't really started to even benefit from. Operator: Your next question comes from the line of Atul Maheswari with UBS. Atul Maheswari: First, just quickly, do you think there can be any meaningful tailwind from the soccer World Cup this year? And if so, is there anything that's assumed in the guide and any way to dimensionalize how large that tailwind can be? Andrew Nocella: I'll take that. Look, we're looking forward to it. I'm sure some of us will attend a few games. I think the interesting thing we see is it creates what would be normally countercyclical traffic flows. So it creates inbound into the U.S. demand in June, which is normally an outbound time period. So quite frankly, yes, I think that we do expect some upside from that. Given the broader macro trends, I'm not going to judge exactly how much that is, but we do think this particular sporting event will be a positive for United. There are other large sporting events that are not because they drive just leisure traffic and business traffic evaporates in those situations. This is not one of the situations. So we do expect some level of upside. But I want to caution you, it's still -- given the size of United, I'm not sure it's all that meaningful, but it is positive. Atul Maheswari: Got it. That's helpful. And then second question, one point of pushback that we get from longer-term investors who want to deploy capital to airlines and to United is that how can industry capacity discipline persist as Boeing and Airbus ramp up deliveries from here, like headline numbers for last year is still pretty positive with respect to capacity growth? So how can that persist? Like what can you say to give comfort to those investors that capacity discipline can, in fact, persist [ against ] ramp-up deliveries? Scott Kirby: First, we never say those words and I'm not even going to repeat them because that's not how we think, and we don't ever say those words. But what I think the limit on capacity is not about aircraft. It is engines. It is already engines. There's about 800 aircraft around the globe that are grounded with engines. We even have some -- we bought tons of spare engines in advance, but we even have some that are going to be grounded this year for engines. The engine manufacturers are not going to catch up to the combination of the need for MRO replacement engines and new aircraft deliveries, in my view, until sometime next decade. So engines are the constraint. Operator: We will now switch to the media portion of the call. [Operator Instructions] Your first question comes from the line of Leslie Josephs with CNBC. Leslie Josephs: Just wondering, can you please clarify what you meant about the Caribbean? This is an airspace closure in the beginning of the year that's impacting bookings now in Q1 and you said that it was measurable. Could you provide some more detail on that and how much that might cost? And then second, your competitor in Atlanta was hinting at some segmentation at the front of the plane. Just wondering where United might be on that. And is that -- could we see a stripped-down business class or first-class products maybe no seat assignment or something along those lines? Andrew Nocella: Leslie, it's Andrew. Look, on the Caribbean, we're a pretty big airline in the Caribbean and we're a small airline in the Caribbean. I'm just pointing out that there's been a little bit of a book away from the Caribbean. I don't think it's measurable in the grand scheme of things when it comes to United Airlines, to be blunt. But demand has been impacted by the situation in Venezuela to some extent. We expect that to dissipate over time. And in fact, the last few days have been better than the first few weeks of the year. So I think we're in good shape on that front. And look, on cabin segmentation, I'll add that that's been very good for United Airlines over the years as we invested in more premium products and larger array of products out there. So we're going to continue to do that. The only more reasonable hint I'll give you is that we have a large redesign of united.com coming as we seek to do different things on how we sell products. So we'll leave it to that, and we'll talk to you sometime in the first quarter or second quarter about our overall strategies on merchandising. Operator: Your next question comes from John Pletz with Crain's. John Pletz: Scott, any color, additional color on Chicago? Drawing a line in the sand, does that mean you're going to add flights? Scott Kirby: It does. John Pletz: Can you give me a little color on what scale you might be considering adding flights here? Scott Kirby: They will be -- the color will be they will be in the black while American is in the red. John Pletz: All right. And any idea how much, I guess, is what I'm asking? Scott Kirby: No. I'm not going to announce that today. I think we're going to have a scheduled load next week. That'll give you the answer. Operator: That concludes our question-and-answer session. I will now turn the call back over to Kristina Edwards for closing remarks. Kristina Munoz: Thanks, Colby, and thank you all for joining us as we celebrate our 100 years here at United Airlines. Contact Investor and Media Relations if you have any further questions. Bye. Operator: Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Evolution Mining Limited December 2025 Quarter Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Lawrie Conway, Managing Director and Chief Executive Officer. Please go ahead. Lawrie Conway: Thank you, Harmony, and good morning, everyone. I trust you've had a good break and wish you a very healthy and successful 2026. I'm joined on the call today by Matt O'Neill, our Chief Operating Officer; Fran Summerhayes, our Chief Financial Officer; and Peter O'Connor, our GM, Investor Relations. Today, we released our December quarterly report, which will be a reference point for the call. Fran and I will be back in a few weeks when we release our FY '26 half year financial results. Before going into our quarterly results, I want to take a moment to reflect on the tragic event that happened here at Bondi on 14 December. 15 people were murdered due to racism. No violence is accepted even more so violence linked to racism. This heartless and cowardly act of terrorism, whilst many people and families were enjoying the Bondi environment, specifically the Jewish community celebrating Hanukkah. I know this has impacted our country, including our team members at Evolution. The attack is something that should have been avoided. The lack of action by the federal government over the past 2.5 years on racism is inexcusable. The refusal to call a Royal Commission until the overwhelming majority of Australian spoke of the need for it, and then to try and condense the time frame for political reasons is disappointing. It lacks leadership. On the contrary, the leadership of the New South Wales state government with quick and strong action and support was very welcome. My biggest concern is that we learned nothing from this and do not make Australia a safer and more inclusive country. Our condolences go out to the family and friends of those who were murdered. Our thoughts and prayers go out to everyone who was impacted by the attack, and we also thank all the first responders volunteered support during this incident. Turning back to Evolution. This was another quarter and the eighth consecutive quarter where we've safely delivered to plan. We produced 191,000 ounces of gold and 18,000 tonnes of copper at a very low all-in sustaining cost of $1,275 per ounce for continuing operations. We did it safely with our TRIF remaining low at 5.8. Gold production improved by 10%, while our all-in sustaining cost improved by 26%. Importantly, the cash generation has really gained momentum as we realize the benefits of the current metal price environment. Our underlying group cash flow improved 176% to $541 million or around $2,800 per ounce when normalizing for the FY '25 annual tax payment made during the quarter. Reported cash flow was up 110% to $412 million. The cash flow was achieved at a gold price around $800 below current spot. The group cash flow was on the back of record mine cash flows with operating cash flow up 57%, just over $1 billion, while net mine cash flow doubled to $727 million, with the operations increasing their cash flows in the range of 55% to 140%. The cash flow charts on Page 1 of the report very clearly shows our cash-generating capacity. We are on track to deliver almost $4 billion of operating cash flow. This is 40% higher than when we issued our guidance in August and is anticipated to be 25% higher than what we have delivered in the first half. Our cash balance improved to $967 million after we repaid $110 million and $116 million in net dividends. We have no debt due until FY '29. Our gearing is now at 6% compared to 11% at September and 30% just 2 years ago. We are well on track to being net cash this year, providing further balance sheet flexibility, including returns to shareholders. We remain on track to deliver original group production guidance of 710,000 to 780,000 ounces of gold, and 70,000 to 80,000 tonnes of copper. Group copper production is expected to be at the low end of guidance due to the weather event at Ernest Henry. At the end of the quarter, Ernest Henry received 300 millimeters of rain in a 24-hour period, resulting in water ingress to the underground mine and temporary suspension of the operation. All personnel were safely accounted for and no injuries reported. Recovery activities are progressing well with only short-term operational impacts expected. It is anticipated that the impact at Ernest Henry is about 7,000 to 8,000 ounces of gold, and 4,000 to 5,000 tonnes of copper for FY '26. Group all-in sustaining cost guidance is updated to $1,640 to $1,760 per ounce and is a 6% improvement on our original guidance, reflecting continued cost control, the impacts of higher by-product credits, partially offset by the Ernest Henry weather event. The updated group guidance further entrenches [Audio Gap]... Matt will go through the operational performance soon. However, I do want to call out a couple of key highlights. About 2.5 years ago, some analysts were calling Cowal's best days behind it. One even saying that the cash Cowal was over. Well, this quarter, it delivered $361 million of operating cash flow at $4,500 per ounce and $284 million of net cash, which equates to more than $3 million per day even after investing in the OPC project. This level of cash flow alone is better than a number of Australian multi-asset, mid-tier companies, and the operation has at least 16 more years ahead of it. Mungari delivered record net mine cash flow of $104 million, which is a 142% improvement for the quarter and represents nearly 50% of the plant expansion project capital. At Red Lake, the operation is settling into the desired rhythm of 30,000 to 40,000 ounces per quarter and positive net cash flow. That produced 33,000 ounces and doubled their net mine cash flow to $80 million. They have now delivered over $200 million of net cash flow in the past 18 months. On the projects front, Mungari successfully moved to commercial production and the establishment of the Castle Hill mining hub is now complete, following the full sealing of the haul road during the quarter. The Cowal OPC project made solid progress this quarter and remains on plan and budget. Studies for the next key growth projects being E22 at Northparkes and Ernest Henry are complete, and we'll go to our board for assessment during the March quarter. With that, I'll now hand over to Matt to take through the operational performance. Matthew O'Neill: Thanks, Lawrie. As noted, we have successfully completed another strong quarter of safely delivering to plan, and we remain on track to meet full year guidance, allowing us to continue to benefit from the rising metal price environment. I'm pleased our safety performance remains in a healthy position with the teams at each of the operations continuing to focus heavily on this area. We did see a small increase in our total recordable injury frequency rate this quarter, which was driven by an elevated number of injuries at our Cowal and Mungari operations during the month of October. Our safety focus remains on leading indicators, and we continue to perform strongly here. On the production front, as noted, we're on track to meet full year guidance. For me, the production highlight of the December quarter was the successful ramp-up of the Mungari operation where we achieved an annualized run rate through the mill for the quarter of 4.1 million tonnes. Throughout the quarter, the team ran the new mill through a range of operational parameters, and I'm happy to say that they're very pleased with how it has performed. Similarly to the September quarter, we had minor interruptions to mining activities in the open pit at Cowal due to wet weather. Again, it was pleasing to see that the work the team have done on resilience and reliability pay off as we experienced only minor variations in the plant due to these events. As noted, works continue to progress well on the OPC project with the project ahead of schedule and in line with budget. The Red Lake and Mt Rawdon operations continued to deliver in line with their plans with minimal variations throughout the December quarter. As noted earlier in the call by Lawrie, Ernest Henry experienced a significant rain event at the back end of the quarter on the 29th of December. The Cloncurry region had its average annual rainfall of 420 millimeters fall in just a 72-hour period, 300 millimeters of which fell in just 24 hours. During this event, all personnel were evacuated safely from the mine via the shaft and the multiple dewatering systems, both in the pit and underground operated as designed to reduce the impact of the rain. We diverted water away from key infrastructure areas and into the bottom of the mine, minimizing the impact on mine infrastructure. Whilst we are dewatering and remediating the mine, we've moved forward the scheduled February plant shutdown to align with these works. The processing plant shutdown is underway now and scheduled to be completed by the end of January. Current estimates are for full year production from Ernest Henry to be lower by between 7,000 and 8,000 ounces of gold and 4,000 to 5,000 tonnes of copper. At Northparkes, we achieved a significant milestone during the December quarter, with the completion of the E26 sublevel cave after 10 years of operation and the successful ramp-up of E48 sublevel cave taking its place. In summary, we remain on track to meet the group's full year guidance and take advantage of the strong market conditions we are currently enjoying. This brings the formal part of our update to an end, and I'll now hand back to Harmony for questions. Operator: [Operator Instructions]. Your first question comes from Levi Spry from UBS. Levi Spry: Happy New Year. I mean, I guess, just firstly, on the -- moving to a net cash position sometime this half. Can you just talk a little bit around how the Board might address that in February, what the competing sort of interests are in terms of CapEx and exploration, maybe what you can bring forward potentially? And specifically, I'm thinking about your projects, but also the OPC and how you're going to optimize that going forward, Northparkes? Lawrie Conway: Thanks, Levi. Happy New Year, and I'll get Fran to add a couple of comments. Our cash flow only just has increased since the day she joined. Look, we will move to a net cash position over the remainder of this year. And it is -- highlights that if you deliver a plan essentially in an unhedged environment and do that safely, you actually get the benefits. What the Board will consider our policy is percentage of cash flow, targeting 50%. We look at it on a full year outlook basis. And at the end of each financial year, we look at the policy. So we look at the policy at the end of the year. I don't expect it to change too much, but we've got certainly flexibility around the percentage that we pay. In terms of then internally, I think our discipline around capital allocation and projects will remain key. We have seen that OPC is advancing well, and I was out there last week and it's actually a lot higher than what it was 6 months ago and 3 months ago, which is good for the project and does open up some flexibility around that project and what we do. Exploration, I think Glen is going at full tilt, but he's looking at some opportunities there. And then obviously, the Board will consider E22 and during the quarter as well. So yes, well -- as I said, we'll look to make sure we continue to reward shareholders in this environment, discipline around our capital [ allocation ], be that in projects and exploration, but a good problem for Fran to have as to what to do. Fran, anything to add? Frances Summerhayes: No, you summarized it well. Levi Spry: Yes. Okay. And then just at Ernest Henry, maybe for Matt, look, a pretty significant event, maybe lost a little bit, otherwise very good quarter. What's the current status? So you expect the plant to turn back on at the end of the month, but interesting in terms of the mine and dewatering... Lawrie Conway: Yes. I'll get Matt to do that. I mean, yes, Levi, I think it didn't impact on the December quarter, as Matt said, it was right at the end, but it is what we're going through into this quarter. And Matt outlined a little bit on the call, but maybe just, Matt, color around the mine and the plant and the surface. Matthew O'Neill: Yes. So I'll start with the surface. Things went quite well for us on the surface with that volume of water. The plant is completely fine. And so what we chose to do is instead of having that shutdown in February is that we will do it ourselves and that we would bring it forward into January, so giving us a bit of time back in that month. In terms of the mine, the infrastructure, there's some minor flooding remediation works that we need to do in areas that were sort of pockets rather than anything else as the water sort of moved through the mine, some of the pockets filled up and so that's tail end of 2 conveyors that doesn't take much to get back and then some works around a hydraulic pack that was sort of sitting in a pit in the crusher. So there's nothing material from the infrastructure side. Currently, we're dewatering into the existing dewatering system quite significantly. So we're sort of up around sort of 35 megaliters a day. The current status is that that's progressing ahead of plan. And like I said, we'll turn the plant back on at the end of January and then work our way back through that, bringing the mine back on through that month as well. Lawrie Conway: And just a thing to point out, Levi, versus what we experienced in March '23 that the pumping stations and the main power substations were not impacted like they weren't really impacted at all this time. Matthew O'Neill: No, that's right. We kept those operational throughout. We had a period where we didn't put people into the mine because we didn't want to put anyone at risk. And so we had tripped out until we got someone back in there to fix it. But outside of that, all of the infrastructure worked exactly as planned. The size of the event was probably the issue. It's almost triple the size of anything we've seen before. The [ 100 million ] a day was about the maximum from the last couple of events. And we did see that in the lead up to this event, and then we saw the 300 millimeter, so that the systems all worked as planned. The scale of that event isn't something that we've seen in that region for quite some time. And you could see around some of the neighbors in the area as well. The past has had some pretty significant impacts that they've not seen. So that was the issue for us. But managed well, infrastructure good, and we'll get back up and running in the short term. Operator: Your next question comes from Hugo Nicolaci from Goldman Sachs. Hugo Nicolaci: Lawrie, Matt, Fran, congrats on a fairly strong quarter. I just wanted to -- first question in and around sort of more strategic one. Obviously, this gold cycle has been pretty strong, if not unprecedented, with prices where they are, obviously, producer discipline has been pretty key in terms of capturing that operational leverage and not chasing low-grade ounces for the sake of volumes has been pretty -- has delivered a pretty good cash result. But looking at it from here, so the gold prices arguably more than double where a lot of these mine plans were set. I mean, is there room to start recutting how you look at these things to optimize value from here if this is the gold price going forward? Lawrie Conway: Yes. Look, I'll let Matt have a bit of talk about the plans and the mines, the open pits and the underground. But essentially, we look at the current price environment and as we're mining in certain areas, if more material becomes economic, we're taking those, we're right into our life of mine and mineral resource, ore reserve review now. But we don't just let the short-term metal price drive the wrong behaviors. Matt? Matthew O'Neill: Yes. We are taking advantage of that in the short term. But the discipline that I'll keep pushing with all of the operations is that any of the lower grade is not to displace any of the original plan or high-grade materials. So where that starts to help us is that when we can increase the capacity either through the plant or the materials handling systems, we can do that because most of the operations do have that capacity if we were to drop cutoff grades, we see some reasonable increases in some of those operations. And probably 1 of the key ones that sort of stands out in this environment, both copper and gold, is Northparkes, and you'll see that that's where a lot of the work is occurring and a lot of the focus for trying to take advantage of that is sitting. So yes, we are doing it, but I don't want us to drop back to erode the margin significantly by chasing stuff that's economically viable in this market. Hugo Nicolaci: Got it. That's helpful. And then second one, just following on from Levi's question at Cowal on the OPC. I mean, obviously, ahead of schedule there. If you've got the team on site, how do you think about bringing forward the next stage [Technical Difficulty] or just maybe the recent rainfall we've seen maybe limit your ability to do that immediately? Lawrie Conway: Yes. Look, Hugo, I think what we're doing, the northern bond as we completed in the last quarter enables us to then start works around E46 and a lot of other surface infrastructure in the northern end, which is why it was scheduled first. The water in the lake is receding and receding at a good rate. And unfortunately, when I was at Cowal, they said they would have liked some of the weather that -- or the rain that Ernest Henry got because it is fairly dry out there and at Northparkes. So when we look at it, it's anticipated that the lake would be dry by the middle of this year. And you might recall when we approved the project, the south -- the south part of the lake move was scheduled for FY '28 and scheduled to be dry. So it does provide an opportunity for us to consider bringing that 1 forward because you wouldn't want to be waiting a couple of years and find out that you got a wet lake or a full lake again. So that's something that we're working through right now. And then I think in terms of the other surface infrastructure and works that Joe and the team are looking at, I think, they will build that into the plan. It will allow us to look at the IWL, whether we build that up in preparation for having 2 and 3 open pits in the next couple of years do that earlier. Certainly, 1 thing that we'll look at is just anything else that can be done now in the environment that they're experiencing. Hugo Nicolaci: And then maybe last one, if I could, maybe 1 for Fran. Just can you remind us how the copper quotational pricing periods were just looking at the realized pricing on some of the byproducts. It looks pretty favorable versus average prices in the quarter. If you could just remind us if there's any timing or any impact there we should be considering? Lawrie Conway: Yes. Hugo, it's not simple for you on your side to be able to, I guess, model them because at Ernest Henry, you've got a quotational period that gets nominated every month. At Northparkes, you've got a quotational period that gets nominated quarterly, and you've got 2 offtake partners in terms of Sumitomo, our joint venture partner and IXM as our offtake main partner. And so they have to nominate them. And if we look at it in the -- at the end of September, we had about 8 shipments outstanding that were still open to pricing about 21,000 tonnes of copper, split sort of 3 at Ernest Henry and 5 at Northparkes. They, at the end of September were priced around $15,000 a tonne. They then move to the December pricing, and that was around $18,500 a tonne. So that's what lifted our achieved copper price for the quarter by about $3,000 a tonne. At the end of December, we've got about 4 shipments outstanding around 10,000 tonnes that will get finalized in this quarter. And then it depends on what each of the offtake partners nominate in the next 3 months for their pricing. So that's why it's a little bit difficult. Where we stand today, it's averaged about 19,200 month to date. That's what some of those shipments are going to get repriced at -- if they finalize this month. As I said, it's not easy for you. But it's really dependent on what the offtake partners or what they nominate. Operator: Your next question comes from David Radclyffe from Global Mining Research. David Radclyffe: So just a bit of a follow-up to Hugo's question. Because obviously, when you look at the quarter, it was really only Mungari that was setting a new record, and that obviously reflects the expanded capacity. But there is some late mill capacity across the group. So just trying to understand if there are any near-term opportunities you're considering to push throughput and take advantage of this environment. And if not, what is the constraint there? Is it the fact that you're not prepared to budge on the current capital budget. Just trying to understand there how you could actually push the mills a bit harder. Lawrie Conway: Thanks, Dave. I'll let Matt just give a run-through on each of them. I mean -- but I will start off by saying it is not about the capital constraint. It is about making sure that if we commit the capital, we're going to get the returns. I think when we look at it and if you see the announcement today, the land around Ernest Henry, that we've now picked up that plus the previous project that we announced a while ago, that gives us a continuous footprint all the way around the plant. That's all within trucking distance. And so we've got 1 program has already started. This 1 will be the next one. So that's giving us an opportunity because it's constrained by the mine and you obviously got berth. But we will look at all of those opportunities where we can. Matt, 9 months? Matthew O'Neill: Yes. I think Ernest Henry is the main 1 for us. We do additional milling capacity available today compared to what we bring through the mining system. So we are open to that, whether it's our own material through exploration or whether it's a toll agreement with people in the region. That's something that we're actively pursuing. Then outside of that, if I look at Northparkes and Cowal as the next 2, they are mill constrained. So we spent some money at Cowal on the mill setting it up for the next 20 years in the last financial year. And -- we also spent a bit of money there on improving the recovery. So we are working on opportunities account to increase throughput through the mill, but it's something I'm certainly not wanting to rush through there. So those do essentially mill constrained with improvements and incremental improvements possible, and we can feed them from our own sources. Mungari is a similar story. So Mungari, obviously, now ramped up. What we were wanting to do there, our strategy there is to run the Castle Hill complex, which is running very well at our baseload feed and then supplement that with our underground feed, which is where the grade from -- grade comes from and gives us the ounces. The opportunity there is to be able to postpone or defer any of the lower-grade material from Castle Hill by putting in higher-grade product through the mill. And obviously, we run the finances on that depending on what we do. So the exploration team, that's 1 of our key spend areas and where we do see an upside if we can get additional underground feed. We want it to come from our own material. That's where we make our best margin. That said, we do have opportunities where we will and can and have toll treated other people's product at a higher grade if the finances make sense for us from deferring that material. So those are your areas. Outside of that Red Lake does have mill capacity. There's not a huge opportunity there for either increasing our own material, which is still the bottleneck from the mining operations. But third parties, there's not a huge amount around there, but those are things that John and the team are looking at when they come up. I think that's the run through of most of the operations. David Radclyffe: Right. Maybe if I could just come back on Mungari there because I think on the site visit you were still ramping it up and hadn't really tested it and it looks from the commentary that you may have sort of pushed it a little bit here with third parties. So are you confident -- you're obviously confident you can get to capacity. Did the engineers sort of leave anything there in terms of conservatism? Do you think you could run Mungari a bit higher than nameplate? Matthew O'Neill: No, that's something we're investigating. At the moment, it did ramp up exactly as we wanted to. We had periods where we were above nameplate, but that was more related to the material [Technical Difficulty] or a little bit softer. So like most mills, depending on what we're putting through, it will give us a rate. But that's what I'd like us to do. At the moment, we're certainly not promising that, but that's what we're working on. Lawrie Conway: And I think if you look at it for the quarter, it annualized at a whole point [Technical Difficulty] special production. Operator: Your next question comes from Daniel Morgan from Barrenjoey. Daniel Morgan: Lawrie, just going back to the Cowal southern bund decision. Can you just maybe expand what drives the decision to execute a bit faster on the Southern bund? Is it it's easier, costly, more productive and sort of costs? Or is it revenue items are you're going to have potentially access to more or more material, better grades and can grade sequence like what goes to the decision to execute earlier if you do so? Lawrie Conway: Yes. Dan, look, I think the primary 1 becomes where the lake is sitting at with the level of -- that it's receded as you'd recall, we've always planned to do it dry, it's more cost effective. So that's -- that is the primary decision point because it's not about what can we afford the capital as long as we're staying within the $430 million, we'll be fine. Then in terms of -- the second part of it is, what does it give the site in terms of flexibility. So having put all of that infrastructure around the southern area, it gets the ability to look at E41 and when we time that. But that's coming into FY '27 and beyond. And I think that's why the secondary piece is that flexibility it provides to Matt and the Cowal team is that for a period, we'll be on low-grade stockpile material. You're going through the cutback of Stage I, so if you can open up E46 and E41, it just derisks that operation a lot more. Daniel Morgan: Right. Another question. Just there is a footnote on Page 2 regarding Northparkes, where there's been some sort of a positive adjustment relating to stream deliveries, the number there is $18 million, that was an outflow. It just seems a bit lower than what I thought. Is there any -- can you just clear up what's going on there? Lawrie Conway: Yes. So during the period, there was a reconciliation of the finalized pricing and payments for the stream with Triple Flag and as the final pricing and everything that came through on that back for a number of periods resulted in a credit back to us. So that's why the $18 million, I think last quarter was about $32 million. So there was a benefit relating to the final pricing. That is one... Daniel Morgan: That's a one-off? Or is it something that there's an annual true-up or something that we might see again in a year's time or that could be adverse or better or... Lawrie Conway: More of a one-off, Dan, is going through with Triple Flag about the whole mechanics of it, and we're obviously learning it in the first year. We've then done all the reconciliations with them, and that it's more of a one-off. Daniel Morgan: Okay. Very clear. Just shifting over to Red Lake. It looks in -- you've made a breakthrough at Cochenour, where if I read that correctly, does that mean that you are no longer going to be using ore passes and that you're going to truck down, ore down to the high-speed tram. And is there benefits in terms of grade and reconciliation that could come? Matthew O'Neill: Yes, Dan, it's Matt. Look, we will still be using ore passes, but what it does do is derisk those. We've got some duplication and contingency in that system given the issues we had earlier on. So we will still use all passes through that. The biggest benefit for us there will be ventilation as well. And also the mobility of some of our equipment. So it's more of an operational flexibility and reliability thing that it will give us. It doesn't necessarily impact grade and other bits and pieces at this stage. It does open up some other areas. And allow us to do things a little quicker, but that's really around operational flexibility that the benefit comes. Daniel Morgan: And just last question is mainly cost, I mean, obviously, there was a provisional pricing stuff that came through, but signs of cost control are evident as well. Just on Mungari specifically. There's obviously a bit going on with various third-party ore purchases. You had commercial declared partly through October. And so the AISC number is not necessarily completely clean as a go-forward guide. Just wondering if -- what's the latest view on what Mungari costs roughly are going to be on a clean basis? Lawrie Conway: Yes. Dan, I think when Matt talked about testing of the plant and everything the team took the opportunity around that ore purchase to get that type of material through the plant earlier. So those costs and ounces are excluded. So when you look at what we've reported for Mungari for the quarter, that AISC and the costs are really about just our ore. So it gives you a good reflection of -- so about $2,000 an ounce, you take it that most of October, there were commissioning costs. So you're going to be in the early low 2,000s -- going forward, when it hits the 50,000-ounce quarterly run rate is what you should expect to see. So we're at $1,980, I think, was a quarterly cost for Mungari. As I said, some commissioning in there, but it is only on our ounces and our costs. Operator: Your next question comes from Matthew Frydman from MST Financial. Matthew Frydman: Lawrie and team. Happy New Year. I guess my question is a continuation of some of the earlier discussion. I'm very interested in the outcome of the 2 studies that are currently undergoing board review, and I'm sure you'll present that [ in time ]. And I guess I hate to sound a bit like all of a twist, but wondering what's next to be considered in terms of any sort of formalized growth studies out of those options that Matt discussed conceptually the key growth projects that you're moving into that pipeline over time? And I guess the secondary question to that is just looking at your reserve on Marsden, obviously, a big low-grade reserve there in your numbers. I think it was last cut at $1,350 an ounce gold price. So we're only about $5,000 an ounce higher than that at the moment. So I guess at what point does that become a viable growth project? Or does that reserve need to be, I guess, reconsidered at all? Lawrie Conway: Matt, Happy New Year. I definitely hope that our now nonexec chair is listening because he would love to hear about [ Marsden ]. I'll start on that, well, look, I mean, for us, on Marsden, anything that we do there would have to be better than what we've got at Northparkes and Cowal. And so that's really what it's got to compete against at the moment. So it sort of sits there in the background. It certainly doesn't get the priority from Nancy and the team, but it does get looked at. It's good to see that you talked about Bert and E22 and you've moved straight on and gone, okay, what's next. I think for us, Bert is really important to Ernest Henry because of the capacity we've got in the plant. So that will be something that the Board will consider the studies are finished, and we'll take that to them this quarter. E22 really is what can unlock what we have at Northparkes in terms of increasing both mining and processing capacity. We've got such a large resource there. We've got to look at how can we expand that over time because it's not going to reduce the NPV of the asset. So that's something, I think, when we take that through to the Board this quarter, it's like, okay, what does E22 give us as a -- we looked at a block cave, the sublevel hybrids the -- sort of the best outcome is the block cave, and we've talked about that previously. Now we've got to work out where does that fit into unlocking the rest of the operation around expanded capacity. I think when you look at -- the other thing is what's next. At Cowal, we've got the OPC going. We've got E46, E41, E42 operating. We get the undergrounded capacity. And what Matt's talked about is, okay, with all of those ore sources and the work we've done on the plant, are there ways to increase the processing and production rates at Cowal. And then I think when you look at Mungari, Matt also talked about it earlier. We've got the base feed at Castle Hill, the underground is really which is getting most of the exploration dollars is what gives us an opportunity of can we get more than 20% of our material going through that plant. And can we get the plant running at greater than nameplate. Matthew Frydman: Okay. And then maybe, I guess, the follow-up to that then is then how we think about capital allocation for the business going forward. As you just described, you're pretty advanced in terms of your capital spend across the majority of the portfolio. You've got a couple of formalized, I guess, growth projects still on the pipeline in terms of Bert and E22. But overall, clearly, the business is generating a lot of cash. How should we think about any kind of revision or revisiting of the capital allocation policy, I guess, in the absence of any other sort of big scale growth investments like Marsden like we just spoke about. And how does that look in the current gold and copper price environment in terms of how attractive that capital is to spend externally to the business? Lawrie Conway: Yes. Look, Matt, it's a good situation to be in. I mean, 2 years ago, we were getting asked that how can we afford these projects and now we're getting asked how can we [Technical Difficulty] -- that discipline. I think we've outlined our capital sort of spend for the projects that are already in the pipeline. As being that $750 million to $950 million, what now with what we're seeing, the progress at Cowal and the outcomes of the studies and where the metal prices is what can we incrementally invest in, either bring projects forward, accelerate them or new projects to bring forward production growth. As long as if you look at the portfolio at the moment, the asset's average annual rate of return is sitting around that 16%. If we can generate those sorts of returns, then we would increase our capital allocation. If we were to increase that allocation by $100 million, $200 million a year, and we can generate those returns given the cash that we're generating today and where the balance sheet sits, I think that would be the best use of a part of the extra cash flow we're getting. We obviously are still remaining committed to increasing returns to shareholders through dividends, and they'll share in the increased cash flows automatically by our current policy. But if there's ways to [Technical Difficulty] -- through the second half of the year as well. Matthew Frydman: Got it. That's a sensible way to think about it, obviously. And obviously, the balance sheet has changed very quickly. So a nice position to be in. Thanks. Lawrie Conway: Thanks, Matt. Operator: Your next question comes from Adam Baker from Macquarie. Adam Baker: Just back to Mungari. I noticed the 127,000 tonnes to 9,000 ounces gold is third-party ore process in the region. Just curious if you could touch further on that. Is this a normalized rate we could expect moving forward? I know you're looking at further opportunities. And just to give us a bit of flavor, are there any companies out there knocking at your door to process the material in the region? I know, it's about 10% to 15% of your planned throughput capacity at the moment. Lawrie Conway: Yes. Look, Adam, I'd say, firstly, yes, there's people out there that would like for a brand new mill that's got capacity for them to put some ore through. I think as Matt outlined on the call, we used the opportunity to purchase that ore to really test the plant through the commissioning rather than waiting until we get our ore, both the main ore out of Castle Hill and the underground through given we've got a large campaign this second half on the underground. So that was -- I would sort of almost say that's one-off. But if we've got capacity, we will take it because we believe with our mine plan we've got 4.2 million tonnes of our ore that will go through the plant. If there is spare capacity, we would look at it. But right now that is only really around the commissioning part of the plant that we did that purchase. If we do, it's going to displace. I mean, this 1 did -- yes, it made a profit, didn't make a lot of money for us, but it allowed us to learn a lot about the plant. Adam Baker: Yes. And the reduction in cost guidance, I mean, that makes a lot of sense due to the stronger byproducts. Just trying to understand the 6% improvement at the midpoint, how much of that would roughly be driven by the stronger byproducts versus it's a better-than-expected cost control from Mungari, et cetera? Lawrie Conway: Look, Adam, it's a combination of both what the split -- it depends on how we go through the second half. But like we're achieving $2,000, $3,000 a tonne halfway through the year above what we had sort of guided at. Current price at [ $19 ] is sitting about $4,500 a tonne above. So the byproduct credits are pretty important in that regard. But if you look at our gross operating and our net operating cost spend against our budget, it's pretty well in line, a little bit lower in some areas. And then when you look at our sustaining capital, we're actually tracking well against our guidance a little bit. I'd say, a little bit of an opportunity for some of the sites to ask Matt for a little bit more money given the cash they're generating, but I do think the discipline around all of the capital has been very good across the business. Operator: Your next question comes from Mitch Ryan from Jefferies. Mitch Ryan: I just wanted to sort of pick at 1 of your answers to Matt Frydman's question with regards to accelerating Northparkes. You sort of said you're obviously looking at E22 and accelerating that, but then also that expanding capacity. I just wanted to understand, is your thinking materially impacted by the Triple Flag agreement? And is there anything you're able to do around that with expanding Northparkes? Lawrie Conway: Yes. Look, Mitch, I mean, yes, when you look at Northparkes, you've got a stream over it that we only get 40% of the gold and pay 100% of the cost. So it has an impact on what we can do in unlocking Northparkes. What I'd like is that we've engaged actively with them since we -- since we've owned the asset, they know they have a role to play, and we continue to work through what role they have in the site going forward in unlocking the value. I think because when we look at it, we've got -- it's permitted to 8.6. It's running. It can get to 7.5. We've got 600 million tonnes in resource. If you keep running at those rates, this mine is running for 75 years. So increasing processing capacity and mining capacity is the right thing to do at some point. But we've got to make sure that it's going to give us a good return, both on a pre- and post-stream basis. Mitch Ryan: Okay. And then my second question relates to Ernest Henry. Just noting that you've obviously been able to pull forward some of those works. But were there any works that will be unable to be rescheduled into the shut that was bought forward? And if so, will they be deferred or completed later in the half. Lawrie Conway: The short answer probably is no. So nothing material. There were some minor tasks in the underground that we couldn't complete just based on access. So they will be completed, but they won't drive a processing plant shutdown or a material underground shutdown in the quarter. So I'd say 95% of the tasks we've been able to pull forward or defer depending on which one it is. Operator: Your next question comes from David Coates from Bell Potter Securities. David Coates: Thanks for your time this morning and congratulations on a great quarter. Matt, it's a bit of a high-level question. There's been a lot of discussion and questions this morning about where you guys can value add. Is it dropping cutoff grades? Is it expanding plants? Is it maybe regional acquisitions. Just wondering -- and we're in this -- what's fairly unprecedented gold price environment, not just the price but still the rate that it's risen. Are there any -- out of all the sort of growth of value-adding options that you guys presumably are considering and have been discussed, what are the ones that are sort of floating to the top as the best bang for your [ buck in ] in this sort of environment as well at the moment across the portfolio? Lawrie Conway: Yes. Look, I'll get Matt to talk about what he sees as the opportunities at each of the assets. I mean, for us, if we can get more ounces or tonnes, copper tonnes out of any of our operations that basically improves our margin, that's really where we're going to focus. I mean I think we've always got to be conscious of is that in this current pricing environment, if you do approve a project and Cowal OPC as an example, and Mungari was an example, your time to bring those to production is 2, 3 years' time. So you've got to have the real confidence in terms where the metal price will be in that time versus those short-term ones around improved marginal increases in processing capacity or recoveries or those things. They're the ones that you can certainly bring on straight away. But the others, you're going to be looking 2 to 3 years at confidence that when you do bring them on, they're going to be in a good environment. And Mungari is an example, in '23, gold price was about 40% of what it was is today. And they're coming on at the right time. I've been involved in projects that gone the other way. Matt, you want to talk about some of the things that we're looking at. Matthew O'Neill: Yes. And aside from the ones that have already been spoken about of sort of [ E22 ], if I just run through the operations quickly. The area that excites me most, if I pick Cowal is -- and I'm stealing Glen's thunder, but is the exploration and the resource potential that's there. So investing the money in the drilling, investing the money in the mining, [Technical Difficulty] those 2 things, there's an opportunity to extend, which is not as exciting as growing, but there's also a pretty good opportunity there depending on where we see the long-term metal prices level out at, that you would grow Cowal again, that's pretty -- that's very exciting in terms of the results we're getting back through that, and Glen will give an update next time we talk through that. And then the other 1 there is also Mungari. In a similar vein, the margin and the value comes from the underground. So that the mill capacity is good, but if we can invest in our drilling and increase that percentage of underground through, that's where we get our growth in ounces without a material one. So they're our best bang for buck. And then the, like I said, Ernest Henry exploration, you do have that capacity there. But the cave and whatever else is reasonably sort of restricted there. So additional ore sources around the region that we would see growth from with that one as well. Operator: [Operator Instructions] Your next question comes from Zane Guo from JPMorgan. Zane Guo: Just the 1 for me today on capital management. How do you think about the dividend versus a buyback into the half? Lawrie Conway: Yes, Zane. We've talked about this previously. I mean, we -- buybacks are a part of a capital management plan that we look at -- I mean, for us, they need to be sizable. If you're looking at 10% of the value of the organization as a benchmark, that's a large commitment over. And I go back to the point of like if we've got projects that we can invest in that get a greater return for our shareholders, that will be the first priority. The second part is that the flexibility around our dividend policy, where in this rising price environment, our shareholders will receive a greater portion of cash flow than what they have in the past. And I think that really gives the best value for our shareholders. So I don't expect that buybacks would be on the table for consideration by the Board this half year. Operator: Thank you. There are no further questions at this time. I'll now hand back to Mr. Conway for closing remarks. Lawrie Conway: Thanks, Harmony, and thanks, everyone, for taking the time on the call today. We've got another safe and successful quarter. The cash flow is building the projects that we're running to are on plan and on budget, and we really look forward to updating you in a few weeks' time where Fran can tell you what we are doing with the cash as we release our half year results. Thank you. Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the VEF Fourth Quarter 2025 Earnings Call and webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to hand the conference over to your first speaker, David Nangle, CEO. Please go ahead. David Nangle: Super. Thank you very much, and good morning, good afternoon all. I welcome you today from Manila in the Philippines, where I'm on the road, seeing companies and looking at some of our investment companies in Dubai for the last couple of days. This is -- welcome to our Q4 '25 results presentation. I do have Alexis Koumoudos, our CIO, with me on this call as per usual. And I'll spend the next -- we'll spend the next 15, 20 minutes just running through key highlights of the quarter and the year, given it is the end of year quarter and outlook for everything that we see at VEF and then happy to answer any questions that you have. Moving on to Slide 2 in the presentation. It's an evolution of what we've been saying for most of the year. Like the NAV does continue to trend higher. We're very happy. It's a reflection, obviously, of everything in our NAV, which is our portfolio of companies and their performance. Q4 in itself was up a healthy 6.9% in dollar terms and over 22% for the full year, obviously less in SEK, given the SEK strength versus the dollar. But the big driver in Q4 was Creditas, which we'll speak about and its latest fundraise, which came through quite nicely in Q4. But generally speaking, the NAV this year was a reflection of our portfolio, and it's really about a portfolio that the risk reward is much better than it was in the past. We're majority at, give or take, breakeven and growth is very much back in focus. That's been reflected in our top names like Creditas, Konfio, and Juspay, which is humming along quite nicely at a very healthy clip. The focus in the quarter, and obviously, it's a big part of our story is Creditas, and had a very big quarter in terms of, one, results, it's been coming. We talked about the transitionary period from hyper growth and burn to no growth in breakeven and now they're starting to put the foot back down on growth again, but more sustainable growth at this point in the cycle. So through the quarters this year, we've seen them get towards 20% year-on-year credit growth, which is driving the income statement. We'll talk about that. And that was key to see those results coming through quarter-on-quarter-on-quarter as we went through the year, and that's key for our value and our future. Also from the Creditas side, they had a number of standout events in the quarter. We already mentioned or touched on the latest funding round, but also they closed the Andbank. They got a bank license in Brazil, which is key for the franchise value and their funding and also made a substantial higher at top level. And then last point, the whole area of capital, capital management and capital allocation effect. We've, in 2025, very focused on strengthening the balance sheet, exits. We'll talk about that in this presentation coming in, capital coming in, to pay down some debt, buy back some shares. And as a team and as a Board, we're sitting down and strategizing as we look into 2026, how we manage our capital for the best risk reward for our shareholders, both in the short term and to manage that discount to NAV, but also for the longer term in adding new portfolio companies, that's a broader discussion point. Moving on to Slide 3. The key highlights and numbers I've touched upon, of the NAV in dollar terms, up 6.9% and 22.9% for the quarter and for the year, year-on-year. And from a SEK point of view, a healthy quarter of 4.6%, not a lot of currency diversion and up 2.8% for the year. Share price obviously been weaker, flat year-on-year at the year-end and up 3.3% in the quarter. And on Slide 5, this is a chart we show every quarter and what you're starting to see since year-end '24 is a gradual pickup in the NAV in dollar terms to now $434 million. As I say, this is -- there is a micro level of our portfolio companies, but then obviously, it feeds down from the macro level and the cycle level. Venture capital, capital is in a better place. Capital is flowing. Macro is in a better place. The companies that were invested in quality companies are starting to grow again, and that's feeding through to a growing NAV, which is key, obviously, for everything that we do here at VEF. And Alexis is going to talk [indiscernible] provide slides around the NAV dilution over the year, and I'll come back on some key points before we open up for questions. Alexis Koumoudos: Thanks, Dave. Hi, everyone. Yes, just looking at Slide 5, which highlights the valuation approach and key takeaways for the portfolio in the quarter. The main mover there is Creditas moved from mark-to-model in the previous quarter to this latest transaction priced at the $108 million Series G round that they closed in December, which resulted in a $33 million uplift to the NAV. The rest of the top 3 names like Konfio and Juspay remained at mark-to-model and latest transaction, respectively, which results in the portfolio being valued on 69% at latest transaction and the remaining 31% of the portfolio being valued on a mark-to-model basis. And of those 31%, 90% plus of those mark-to-model valuations reflect multiples further down the P&L, i.e., like below just the revenue multiple. Moving on to Slide 6. So on Slide 6, we just break down the NAV evolution in the quarter, and we show the breakdown of that and how it's attributed to different factors. So the biggest part of NAV growth in the quarter is attributable to Creditas' round and the impact of that round on the valuation of the company. In the portion of the portfolio that's mark-to-market, you can see the slight positive portfolio growth was partly offset by the market pullback in the quarter. So the holdings that are valued at mark-to-model had a relatively neutral impact in the quarter. Just on to Slide 7. So -- in Slide 7, we show an aggregation of the NAV evolution over the year and how the different parts or the attribution to that over the quarter. So overall, in 2025, we saw a strong contribution to NAV growth from portfolio performance, the market performance through comp multiples and also strengthening non-USD currencies. And importantly, we also converted $37 million of our appreciating NAV to cash, which shows up in that net $18 million positive cash position over the course of the year. So in aggregate, there was $81 million of positive NAV evolution. As Dave mentioned, that was 23% year-on-year dollar NAV strengthening. And on a per share basis, that's 26% year-on-year once you factor in the buybacks that we did over the course of the year. And then just on Slide 8, we use this slide to just reiterate our -- how we continue to feel confident in the strength of the portfolio, the fact that we have a portfolio that's growing 25% to 30% year-on-year on a self-sustaining basis. And Dave will -- a lot of that is driven by Creditas, and Dave will get into some of the details of that in the preceding slides. But we're also feeling confident that there's been a change in the environment, far more fundraising activity in our markets. It's definitely heating up, and there's been a flight to quality, which has benefited our portfolio. And we expect to see rounds like Creditas and Juspay to continue to take place and continue to benefit our portfolio and help us improve our liquidity and balance sheet. So handing back to you, Dave. David Nangle: Super. Thanks, Alexis. Look, I think from a portfolio point of view, as Alexis alluded to, what's key is that you invest in quality companies and you've got a through cycle performing portfolio. And that's what we're starting to prove out having gone through the boom years up until 2021, the VC winter of '22 and '23, where we reevaluate our portfolio and set a valuation mark lower and then the recovery and the growth that we're seeing in 2025. So you get to -- you invest in these companies, you live with them through cycle, you see them in the up and the down cycles, and that's how you build longer-term value. So we're very happy with the overall portfolio where it is. And we do have tailwinds from an ecosystem, VC capital flows, valuation point of view, all very helpful to what we do. Specific to us, obviously, is Creditas. Creditas performs. It's a big part of VEF performing, as we all know. And 12 months ago, these numbers weren't what they are and what you see today. And this is what we said the management was going to do, and they are delivering, and we expect that to continue into 2026 and beyond this year. And what you have is an improving growth profile at a very managed risk-reward basis as they manage their cash flows on a neutral basis. And in Q4, we'll get to about 20% year-on-year loan growth. Revenues are following that growth. And that's key for future value of Creditas as it looks to be, at some point in the future, a public company with real value needs to start growing again, that engine has really kicked in. As impressive or as important is the -- what they're doing from an efficiency and cost point of view, enabling AI tools across the business, and you're starting to see that efficiency gains kicking in. So you're not just getting growth, we're getting more efficient growth, which is the future of this company and the industry as a whole. Besides the numbers themselves, what is key for Creditas in Q4, all these things kind of came at the same time, but they've been work in progress for quite some time. One was obviously the announced Series G funding round, $108 million coming in, and we spoke about that in Q4. The bank license itself was approved in Q4, and that's key, lower cost of funding, more availability of funding and a franchise uplift for the overall business and its optionality going forward. And in the top team, Ricardo Forcano came in from formerly a BBVA Group, top management. It's the type of caliber of top management that the company is now attracting, not wasn't attracting, but it is on the front foot, and that's the kind of talent that comes with that. So it's kind of like an ABC trade. So I think from all aspects of Creditas, we're very excited as we look at the company where it's positioned, the tailwinds that it has, capital position, economics, et cetera, as it goes into '26 and '27. And besides Creditas, I want to talk about cash exit capital. What's key is we're always looking at our cash and capital position and our balance sheet strength, and then we're making -- looking to make logical decisions around that positioning. At the same time, we're very focused on the short term, more so in the past and now transitioning as we balance, obviously, short term is important, but start to look at the medium to long term for VEF and for all our shareholders. From a cash position point of view, we had $15.9 million of cash and liquid assets at the end of Q4. And that's -- our balance sheet is stronger than it was in the past. But what's key is we paid down half our bonds, but we still have $26.1 million of bonds outstanding. So we're in a negative net cash position, and those bonds are due at year-end '26. So any kind of decisions that we make has that in mind. And that's a kind of a cash liquidity risk management overlay to everything we do. When that capital started to come in from the exits we did last year, the initial allocation was obvious, pay down some debt, start to buy back your shares. Now that we're net negative on cash, we balance that with how we look to more cash coming in and also thinking about the future and looking at pipeline and balancing all that into a broader strategy. That's all a work in progress at this point in time. What I will say is the key to all of this and us having the tools or the ability to do more as in pay down more debt, and we do aim to go debt 0 by year-end. That's one of our inherent goals. We do have options around rolling the debt, but the plan is to buy back more shares and then put capital to work in new pipeline companies, Key to that is capital in and key to that as exits. We had a very -- off the back of promises to investors, we had a very healthy last 12 months in delivering exits, which are hard in our industry, and we delivered 3, as I said before, in India and in Brazil via IPO, via M&A and via secondary sale, the biggest and the most juicy of which was Juspay, about $37 million of gross proceeds came in, in the last 12 months. We look at the next 12 months, and we're fairly confident that we will see more exits. We're working on the number. By no means is a VEF wind-down vehicle, but we're taking our opportunities to take capital off the table at NAV plus/minus in our companies to bring that money in, and that strengthens our balance sheet, puts us in a stronger position. And with that capital in play, then we have the range of decisions to make and actions that we took like we did in 2025 around debt and -- around VEF debt and VEF equity. I think this whole ideology is just keeping the market updated on how we're thinking. We haven't set anything in stone at this stage. As I say, a lot of it is around our capital strength with more capital strength, you can make more decisions and what's the priority. There's more capital you have, you can prioritize different things for both short term and long term. But bolstering the capital position is key at VEF, bolstering our balance sheet. We want to be a strong investment company with optionality of capital. We've paid down half our debt. We would like to go debt-free by year-end. Narrowing the trade discount has not gone away as a concept. We're all shareholders. We value our shares and narrowing that discount is a key part of anything we do. We cross-reference that with our cash capital position versus our -- what money is due in the bond markets. And then we're starting to gradually overlay that with the future and the future growth of VEF because we look at our portfolio, we look at Creditas, Juspay, Konfio, we look at the past of Tinkoff, EasyGo. We know we have the muscle to invest in best-in-class fintech companies. We know those companies compounded value, and we know we can realize that value for shareholders as we've seen with Tinkoff, EasyGo and more recently with Juspay. So balancing that long term with the short term is all part of the strategy that we're doing at the moment, cross-reference with the capital position we find ourselves in today. And just to finish off, so the broader investment case, and this is very similar to last quarter. We keep on saying it's about the portfolio. Any investment company is about its portfolio. And I think we have proven through cycle that we have a quality portfolio that our investment radar is good and that names are now starting to break out then in terms of growth, profitable growth and they're raising fresh capital. So we're in a as comfortable and as positive position as we've been for a long time in terms of the quality of our portfolio. And that's the basis for value creation and growth. Then you've got exits. Exit markets are back, but it's hard work to exit. We're proving that we can exit our positions and we can exit them at the right price. There's been no fire sales, nothing forced at the door, the right exits at the right time at the right price, strengthening our balance sheet. Then you've got questions around capital allocation. And we look to win the near term as well as the long term and put that capital to work in the most value-added way. It was paying down some debt, it was buying back some shares. And now while we're in a negative net cash position, we sit back, we strategize as and when the next capital comes in, how do we allocate that. And then we're debating the short term versus the long term because it's very logical given our track record of investing versus the very short-term obvious traded discount playbook of buying back your shares. We get that. We're very cognizant of that. And within the pipeline, we are flexing that muscle again. We are seeing best-in-class EM fintech companies around the world. We are excited about names that we could potentially bring into our portfolio. We need to cross-reference that around, A, our capital position; and B, the opportunity to create value for everybody involved by our shares and obviously delevering our debt. I will stop there. And operator, very happy to open the floor to questions at this stage. Operator: [Operator Instructions] We are now going to proceed with our first question. And the questions come from the line of Linus Sigurdson, from DNB Carnegie. Linus Sigurdson: And starting off with a question on the Creditas raise. If you could just walk us through maybe some of the details and how this has affected your ownership stake in terms of dilution? David Nangle: Yes. I think last part first, from an ownership point of view, we broadly own what we did before. But there was a lot of moving parts to that in that the round itself was led and underwritten by Ann Bank, who's a key investor in Creditas. And so the capital came in. But there were a number of notes outstanding convertible notes of which we held from previous round back in '22 and '23. So they converted at a discount to the overall round price. So net-net, we still own the same -- sorry, approximately 9% of Creditas. It didn't move that much given the mechanics and the math of the round. And then from a valuation point of view, there was obviously the headline valuation, but we value Creditas at the convertible note, the discounted notes just to be conservative and in line with our most recent effective capital in. Linus Sigurdson: That's very clear. And then a question on Juspay, which you saw putting out some numbers a few months ago. And just any updates on how they're tracking along? What should we expect for 2026? Should we see some moderating momentum? Or is this going to continue to compound in the same way? David Nangle: Yes. Alexis, do you want to grab that? Alexis Koumoudos: Yes, Juspay continues to execute well. So I think in -- for the calendar year of 2025, the company grew around 40% top line. We are forecasting the company expects to grow like at a similar pace this year. I think the big variables within that are as they -- last year was about planting seeds in international markets, and this year is about seeing those seeds like really thrive and start to contribute to the top line. So I think some of the variability about them being able to deliver 40% or maybe more will come from their success internationally. And so far, we're feeling pretty strong. There are some large signed contracts, which can be quite juicy and fruitful. But yes, I'd say 40% to 50% top line growth for '26 similar to '25. David Nangle: Yes, Linus, what you have is, you've got the -- the top 3, you've got names like Creditas and Konfio that are coming back into their own and starting to compound back into that 20% plus growth zone. And they can easily go to 30% given the markets are in the TAM. But Juspay has been compounding at a healthy clip through that cycle. So -- and we do expect a healthy year again next year. Linus Sigurdson: I appreciate that. And then my final question was just double-clicking on this near-term capital allocation. How we should interpret those comments on balancing? I mean, should we think some new smaller exit before buybacks are resumed at scale? Or is this something you'll be starting in the near term? David Nangle: Yes. No, look, it's a very fair question, and we're not ignorant to the share price. And we -- what I'd say to you is we're making no firm statement today, and that's not hiding behind anything, but it's very clear that we need to manage our capital position given what we need to outlay at least on paper from a debt point of view by year-end. And that was a very cognizant management and Board decision when we stopped the buyback as in let's get the balance sheet to a more comfortable position for everybody involved. We are comfortable on line of sight of exits. We would like to see those exits coming in. Nothing is guaranteed. But as they do and the capital position strengthens and you go net cash positive, then you have the decision tree, whether you keep the capital to pay down your debt. Is that the most important thing in an ever-changing environment, that may be more important than buybacks. And then you cross-reference that with the clear IRR that you have in buying back your own shares as well as the indication to the market, which is very positive. And then you start to cross-reference that with the long-term value when you see some awesome fintech companies like the ones we've invested in the past that we could potentially add to the portfolio. Now we're trying to get all our ducks in a row. And we're being -- I think we're being maybe overly transparent and communicative with the market about how we're thinking as opposed to just finishing our thinking and putting all down on paper. But I think that we respect the market enough to share as we go. I think we've always done the right thing for long-term value for shareholders. We can't control the share price. That's very clear. But I think to your point, Linus, I think more capital in gives us more comfort to do more across all areas of capital deployment. Operator: We are now going to proceed with our next question -- and our next questions come from the line of Stefan Knutsson. Stefan Knutsson: Firstly, on geopolitical situation in South America following like the U.S. operation in Venezuela, have you seen any impact on your business or any increased risk that you foresee going forward after this development? David Nangle: Interesting. Not really in the specific context in a global context, clearly, there's a lot of moving parts geopolitically and U.S. is at the forefront of a lot of them. And these are unpredictable. We wouldn't expect anything to happen in any of our investment countries in Latin America or elsewhere similar to what happened in Venezuela. I think it was a very specific case in point. And obviously, we like the event. We like the outcome of the event, but the event itself and the nature of it was tricky, let's say the least. But no, I think from the landscape in Latin America, the markets that we look at Brazil and Mexico haven't been touched really by that. And we talk to a lot of global investors who invest in emerging markets in LatAm. And even to other markets like Colombia, Chile, et cetera, we haven't really seen any impact. I think there's a very specific excitement around the potential for Venezuela off the back of what happened. But it's a country with many possible -- lots of potential and many possible future scenarios. So I think removing bad leadership is only the start, but then the pathway, there's a lot to work on there. But no, we've seen no negative outcomes or volatility or risk to any of our countries. This is all within the domain with a very fluid, noisy global geopolitical kind of environment, much more than it was in the past. Stefan Knutsson: Yes. And then I think like most of the questions was answered by Linus question, but maybe if you can share any operational update on Konfio and how their banking license application is going. David Nangle: Yes, that's fair. It's been overweight Creditas communication in Q4. And obviously, Juspay Alexis spoke about Konfio did very similar results to what Creditas did in terms of top line growth, loan growth and top line growth in the 20% bracket, albeit it wasn't the upcurve that Creditas had quarter-on-quarter through the year. It was more sustained through the year. It is a bank that can do a lot faster growth and Creditas can be the same given the TAM that their environment in. So an easy do 30% growth plus as we look into 2026. I don't think it will start off that way. I think it will -- Q4 is generally faster than Q1, so it really picks up. Margins are holding steady and tight. They're cash flow positive, have a strong cash position. And on the bank license, we'll see. It's one where they're position that we said it before, I think as a Konfio is planning life without a bank license, albeit we know the benefits of a bank license. So very clear that it's in line to get one. Just when you're talking about regulators and timing, it's always a risk. The upside is clear. Like Creditas getting its bank license in terms of funding costs and franchise value. But we're comfortable it will get the banking license. We just wouldn't like to put a time on it because we've been there before with regulators and bank licenses and these things just take time. But the good thing in Mexico is we have seen bank licenses being handed out. So it's something that is and has happened. So it's not like it never happens. Operator: We are now going to proceed with our next question. And the questions come from the line of [Tobias Carlsson]. Unknown Analyst: And I have 2 questions. The first one is about -- that I can read in your report that you underline that you want to make new investments. And I wonder how you're going to finance them considering that you also want to reduce the debt and perhaps also buy back shares. My second question is if you intend to try to reduce the discount to net asset values as it's 50% right now. David Nangle: Tobias, thank you very much for the questions. And I think our sharing around our direction of travel has been bigger picture and broad as opposed to specific. And we didn't mean to mislead our investor base in what we're doing. We are an investment company. We are working pipeline. We are very keen to get best-in-class fintech companies around emerging markets into our portfolio. It's been part of our muscle and our job for the last 10 years. So when I say we've been building that muscle again, we've been out there looking for these best-in-class companies. And that's part of our job. At the same time, when we looked last year and the year before, it was a very clear priority around strengthening balance sheet, getting capital in, putting capital to work where it was most clearly needed, delevering, paying back the debt, and that's there still as a goal for this year. There are 25 million plus/minus to go. And clearly, to buy back shares is part of the IRR given where VEF shares currently trade. What we did was we paused effectively in Q4 of last year around the buyback and touching the debt for now because of our cash position going lower than our debt that was due at year-end. And we wanted to continue to strengthen our balance sheet. It's a general top-down statement where we are looking to transition to going -- to getting VEF back on the front foot investing. The debt still is very much there. It has to be paid. It will be paid. Our shares do trade at a deep discount to NAV. And there's many ways of delivering, closing that discount to NAV, and we have been working, focusing on communication, Investor Relations. We bought back some shares last year, transparency for our bigger companies, exiting our positions at NAV plus/minus to prove that our NAV is real. We continue to work that mandate. So there's many ways of attempting to -- we don't control the share price, but attempting to decrease that discount to NAV. And it's in our interest as much as all shareholders' interest to have that discount lower if even nonexistent. That is part of our short-term, medium-term goal. We stopped doing everything for now until we get the capital in, and we're just strategizing around these things. And there will be a priority depending on how much capital we get in, what pipeline companies we see, the IRRs in those pipeline companies versus IRR and our shares versus buying back the debt. So I think it's all just there. I think our track record last year was buying back shares and paying down debt. We're just talking about the 3 different aspects and saying we're ready to go on all. But with $15 million of cash and $25 million of debt, we just paused, took a moment, strategy discussing and we're going to -- we're really focused on the exits because with more cash, we can do more things. So it's -- that's on balance sheet. We're also looking at potentially doing off-balance sheet structures. We can use our investment muscle, our ability to find, underwrite, get allocations, best-in-class fintech, but do it off balance sheet by potentially SPVs. So it doesn't have to be A, on balance sheet. It can be B, off balance sheet, which doesn't touch VEF, but can benefit VEF in terms of fees, carry and different ways. So we're just looking at all of this. We're discussing it internally. We're positioning ourselves. Maybe we're opening too much to the market, but I'd like to share as we go. And I'd like to listen to the market and the market speaks very clearly, we take all that on board and we try and make the right decisions as we go. Operator: We have no further questions at this time. So I'll now hand back to you, David Nangle, for closing remarks. David Nangle: Yes. Thank you. Look, thank you, everybody, for following us, for the interest in our story and our stock. We have people coming in asking questions by e-mail. And otherwise, we will come back to you for sure. We're very happy with where we're at in terms of our portfolio. That's key. You can't do anything with a strong portfolio. We're very happy where we are in terms of cash generation and delivering exits. If not every investment company that's in a position like us being able to do this, it puts us in a strong position. And then we're very clear and maybe overly leaning in around our thought process around what we do on capital allocation as we look forward. Watch this space. We'll be more clear as we go forward as capital comes in, but we're listening to the market as well as trying to make the right decisions for VEF, both short term as well as long term. But thank you. Operator: This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.
Operator: Thank you for standing by, and welcome to the Regis Resources quarterly briefing. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Jim Beyer, Managing Director and CEO, to begin the conference. Jim, over to you. Jim Beyer: Thanks, Paul. Good morning, everyone, and thank you all for joining us for the Regis Resources December quarter FY '26 results. Joining me on the call today is our CFO, Anthony Rechichi, also our COO, Michael Holmes and Head of Investor Relations, Jeff Sansom. We'll refer at times to figures -- some figures and tables in the quarterly report that we released earlier today. So you may find it useful to have that document at hand when we refer to them. All right. So look, I'll start with safety. During the quarter, our operations continued to perform strongly from a safety perspective. The 12-month average lost time injury frequency rate finished the quarter at about -- at 0.34, which remains well below the Western Australian gold industry average. Our objective remains unchanged in this area to provide a workplace free from serious injury. We continue to focus on leadership, discipline and continuous improvement to support safe and reliable operations across the business. Turning now to our production performance. Over the quarter and in fact, across the last several quarters, the team has continued to deliver the plan. The message we have consistently communicated to the market has not changed. Regis operates quality assets with strong leverage to the gold price. And when combined with the rolling life extension potential of our underground mines that we continue to see, this positions the business extremely well to deliver consistent ounces and cash flows well into the future. Operationally, the quarter group gold production for the period was 96,600 ounces at an all-in sustaining cost of $2,839 an ounce. And that, by the way, includes $179 an ounce of noncash stockpile inventory movement unit cost. This consistent delivery across both Duketon and Tropicana again demonstrates the reliability of our operating base and the strength of our margins. The performance translated directly into strong financial outcomes and further balance sheet strength. During the quarter, we generated $419 million of operating cash flow and increased our cash and bullion by $255 million, leaving us with an end of December balance of $930 million in gold -- in cash and gold. Also during the quarter, after taking into account our strong balance sheet and great outlook, we resumed dividend payments, declaring and paying a fully franked dividend of $0.05 a share, returning $38 million to our shareholders. Now this was underpinned by strong financial performance delivered in FY '25. This brings the total amount of dividends paid by Regis to $580 million since 2013. It reflects -- the restart of dividends, reflects our confidence in the sustainability of our cash flows and the strong position the business is now in and also in our fundamental understanding the value growth and returns to our shareholders are a fundamental objective of our business. To that end, Regis is unhedged and continues to be. We continue to invest in underground growth and exploration. And thanks to the strong operational performance, now has the capacity to balance this disciplined reinvestment with returns to shareholders. And with that, I'll now hand over to Michael and then Anthony, who will provide more detail on operations and financial performance. Thanks, Michael. Michael Harvy Holmes: Thanks, Jim, and good morning, everyone. Operationally, the December quarter was in line with expectations, both across Duketon and Tropicana, and the teams to continue to deliver its plan and the consistency of execution across the business remains a key strength for Regis. At Duketon, open pit on underground operations produced 57,600 ounces. Open pit mining continued at King of Creation, Gloster and Ben Hur, delivering 13,600 ounces at an average grade of 0.82 gram per tonne. Mining conditions were stable and performance was in line with plan. Our underground operations at Garden Well and Rosemont continue to perform reliably producing 32,000 ounces at 1.8 grams per tonne. Development rates across both undergrounds were pleasing and supported steady ore delivery through the quarter. Total underground development at Duketon was 3,896 meters with approximately 40% classified as capital development, reflecting the ongoing investment in Garden Well Main and Rosemont Stage 3. Both projects continue to schedule and are progressing as planned towards commercial production. The Duketon Mills performed to expectations and throughput was supported by planned stockpile feed. During the quarter, we also progressed activities associated with the BuckWell open pit at Duketon North. Following the reserve upgrade announced during the quarter -- during the period, early establishment and pre-strip works commenced to position the operation for first ore later in FY '26. BuckWell is a capital-efficient near-term opportunity that leverages existing infrastructure, approvals and available mill capacity at Moolart Well. From an operational perspective, it provides a flexible source of ore to support the Moolart Well once low-grade stockpile processing concludes while fitting well within the broader Duketon mining sequence. Turning now to Tropicana. At Tropicana, Regis' attributable production for the quarter was 39,000 ounces, representing another solid quarter of delivery. Open pit operations delivered 18,800 ounces at an average grade of 1.96 grams per tonne, with performance in line with expectations. Underground operations delivered 17,400 ounces at 3.14 gram per tonne, again, consistent with plan. Overall, both Duketon and Tropicana continued to perform reliably during the quarter, delivering consistent production while progressing key underground and near-term growth projects. With that, I'll now hand over to Anthony to take you through the financials. Anthony Rechichi: Thanks, Michael. Good morning, everybody. As Jim outlined earlier, the December quarter again demonstrated the strength of Regis' financial position with consistent operational delivery translating directly into strong margins and cash generation. Gold sales for the quarter were for just under 100,000 ounces for an average realized price of $6,436 an ounce, generating $641 million in revenue. Operating cash flow for the quarter was $419 million, with $231 million generated at Duketon and $188 million coming from Tropicana. Also in cash and bullion and referring to Figure 2 in this morning's ASX release, the coppers increased by $255 million during the quarter, taking the total balance to $930 million as at 31 December. Importantly, this increase was achieved after the payment of a fully franked dividend of $0.05 per share which totaled $38 million, while continuing to invest across the business and at McPhillamys. On the capital expenditure front, we spent $115 million in the quarter. At Duketon, this included underground development, preproduction mining activities and waste removal as well as investment in plant and equipment. A significant portion of this spend related to the continued advancement of Garden Well Main, Rosemont Stage 3 and early works at BuckWell. At Tropicana, expenditure related to underground development at Boston Shaker and Tropicana underground, preproduction costs at the Havana Underground and sustaining capital across the operation. Exploration expenditure during the quarter was $19 million, reflecting the strong level of activity across both Duketon and Tropicana and $5 million were spent during the quarter on McPhillamys. As previously outlined, following the Section 10 declaration, all McPhillamys expenditure is expensed through the profit and loss account. To close out and to also remind everybody, because of what has been strong profitability for a while now, Regis will return to a cash tax payment position, starting with the FY '25 tax payable of approximately $100 million, which will be paid in March next month. Well, month after, I guess. Going forward, we expect to make monthly corporate tax installment payments since the long period of tax loss benefits that we've enjoyed has come to a close. Overall, the December quarter highlights the magnificent cash generating capacity of the business with strong operating margins and disciplined capital allocation supporting balance sheet strength and shareholder returns. With that, I'll hand back to Jim. Jim Beyer: Thanks, Anthony. Look, now I want to talk through some of the broader corporate areas, and I'll start or return back to capital allocation. I'll repeat myself earlier that during the quarter, we resumed the dividend payments and a $0.05 fully franked share, returning $38 million to shareholders. The resumption of dividends is not expected to be a one-off decision. It reflects a clear shift in how we now view our business and the outlook of gold price, which then leads to the question of capital management. We are generating strong reliable cash flows. We have a robust balance sheet, and we're able to invest in the business while maintaining financial flexibility, a great position. Now in relation to looking ahead, we're in the process of finalizing a formal capital allocation policy as our Chairman mentioned at the last year's Annual General Meeting 2025, which we expect to release in February with the half year results. So that's discussing the ultimate outcome of our business, i.e., returns to shareholders. I'd now like to go right back up to the front of the business and talk about exploration. During the quarter, we released our biannual exploration update, which highlighted several very exciting opportunities that are popping up across both our underground and our open pits. Now as a result of these pleasing results and the resulting confidence to continue, we've actually increased our forecast spend on exploration this year. So we're continuing with our budgeted drilling program plans that we already have laid out for the rest of the year. But we're also adding to the program by basically maintaining the range at one of the -- at the projects that we drilled earlier in the year that have proved successful and warrant continuing. This increased our FY '26 exploration forecast and hence our guidance by about $20 million to result in the new guidance range for exploration of $70 million to $80 million. At Tropicana, the good news keeps on coming as drilling consistently delivers extensions to our known mineralization, increased confidence in underground growth opportunities and identify new targets to continue to build the underground pipeline. So our increase in exploration spend this year is deliberate, disciplined and pleasingly driven by results. It reflects the quality of the opportunities we're seeing and our confidence in converting exploration success into future production and ultimately, cash flow, particularly where it leverages off our existing infrastructure. On McPhillamys, as previously flagged, the judicial review for the Section 10 was heard in the federal court in Sydney last month in December, and the judge has reserved this decision and we sit and wait for the outcome. Now as we've mentioned before, in parallel, we continue to progress work on alternative pathways to return McPhillamys to an approvable position, and that includes ongoing assessment of an integrated waste landform solution for the tails. This work is progressing methodically and over a longer-term time frame, it takes time for us to work on these alternatives. Now finally, I'd like to touch on the Buckingham Wellington pits was -- and Michael has talked on these before and as we call them now, BuckWell. BuckWell is a capital-efficient near-term opportunity that, as Michael said, leverages existing infrastructure approvals and our available milling capacity. It is a cracker of incremental value. We're going to get 221,000 ounces out of it at an average all-in sustaining cost of $3,524 an ounce. And this is all in the release we put out last quarter. Now at consensus average price of 5,387 an ounce, it has a pretax NPV of $270 million and an internal rate of return of 127%. Now that's a 5,387 spot today. I don't know what it is right this very minute, but earlier this morning, it was 7,125. If we run that through it, the math is pretty simple. Pretax NPV would be more than double. This is a great project, and it's a great example of the work that our team is doing. With a bit of a fresh look at our old assets, sometimes a little bit of extra drilling. And in this case, we've been able to add significant annual production to Duketon by now being able to keep the Duketon North operation in production until early FY '32. That's 5 or so more years delivering a total of 221,000 ounces recovered. What a great project. And the great part about it is that it's a -- the stage nature of the development provides flexibility in sequencing and timing. It enables us to adjust the pace and the extent of the mining to reflect the prevailing gold price. This is not a commitment to start mining now and get ounces in 2 or 3 years' time, hoping that the gold price is where it is, not that it's going to draw, but it gives us flexibility in the unlikely circumstances that the gold price did go down. This allows the company to advance profitable ounces in a higher gold price environment while retaining discretion to defer later stages, if required. The plan is consistent with our disciplined capital management approach and demonstrates the ability to respond decisively to favorable market movements. So wrapping up, to summarize, the team delivered another quarter of consistent operational performance. This performance translated into strong cash generation and further balance sheet strength. We resumed the dividend payment and are progressing a formal capital allocation framework to guide future shareholder returns. We're increasing exploration investment supported by a strong track record of success and reflected by our increase -- as is reflected in this increased expenditure and really driven by successful early-stage outcomes. At McPhillamys, we continue to pursue all available pathways while awaiting the outcome of the court process. The addition of BuckWell pit to our production outlook means Duketon North will now be in operation to produce gold through to the end at least FY '31. The Regis team has delivered a strong result over the quarter, and we believe the business is well positioned to continue delivering long-term value for shareholders. Thank you. And I'll now hand back the call to you, Paul. Operator: [Operator Instructions] Your first question comes from the line of Levi Spry of UBS. Levi Spry: Happy New Year. Very good one for you. I guess, two questions, please. Firstly, on the exploration front, so nice to see that increase in the budget there. Can you just give us a bit of context around the activities that are involved there. So how many rigs you got running, sort of roughly where they are, what sort of meters that converts to and I guess, how that sits with your internal capacity in terms of your going full tilt at that? Or could you spend some more? Jim Beyer: Look, I can't -- I haven't got the exact details of the additional meters close at hand. What I can say is in addition to what we had already planned. So there will be additional activity that will need to be -- well, it's actually already underway to where we were either decommissioning rigs to move on to somewhere else. We've now kept them and brought in other rigs to go to the previously planned locations elsewhere. So there's quite a bit of activity on that. I mean we've got Beamish. Beamish South is an area that we've seen some particularly interesting results that are keeping us there. But also there's some very early indications in -- across our greenfields exploration areas that we want to put some more money in. But certainly, a key 1 is Beamish, which we're getting quite excited about. And -- but the basic answer to your question is, are we sort of shifting gear around? Or are we mobilizing more equipment we'll be mobilizing more equipment. We'll certainly be running more equipment, more people than we were planning to do in the second half. NCX for $20 million. Levi Spry: Yes. I guess sort of partly where I'm going. Are they easy to get? What -- how is the capacity in the WA drilling industry? And are they charging more? Like everyone's drilling lot meters. Just trying to understand. Yes. Talk a little bit about the [indiscernible]. Jim Beyer: Yes, I don't think there's any issues for us in sourcing that extra gear in equipment. So haven't seen that, I mean our commitments. The team believes that they can get the work done, the additional work done that we have planned. So we're not seeing that. And in terms of access, access is always the usual issue nothing expanded. Nothing has got worse, I should say. Levi Spry: Got it. Okay. And then going back to shareholders' returns sort of pace with the result, can you just flesh out the competing interest there a little bit and that balance sheet, $930 million, what is potentially a comfortable sort of number? What other competing interest do you have? So you've got that tax piece? Do we expect CapEx to be similar to this year plus the BuckWell, sort of CapEx and exploration sort of running at those sort of levels? Is that -- are they some of the goalposts that you're working to? Can you just sort of flesh out some of those parameters? Jim Beyer: Yes. Look, the capital that we've got laid out in front of us is definitely -- it's -- we're not expecting any major jumps or leaks of where -- from where we are at the moment. Quite frankly, we've got a pretty good problem that we're sitting at and sitting on, which is we've got a good, clear and reasonable capital expenditure program sitting in front of us. Nothing unexpected. And therefore, we're in a good position to be able to be comfortable with what our dividend policy should be. I'm sort of -- it's a pretty general question that you're asking, Levi. I mean, we have big leaks of capital, probably the biggest leak of capital that we've got sitting in front of us clearly is McPhillamys, but that's at least a couple of years away, and we've got nothing else of material scale at the moment sitting in our internal or organic options. So I think it's pretty -- it's -- our ability to pay a dividend was pretty clear and our ability to potentially continue to pay that is quite clear as well. Sorry, Levi. I mean if you if your question is where else are we -- what else could impact on our ability to continue to pay a dividend? We've got -- we're making excellent margin. We don't have anything significant coming up on our capital demand. So the ability is there, of course, notwithstanding gold price, but we're confident -- I think everybody is pretty confident. We understand how the gold price is going to perform certainly in the near to medium future. So I don't see any other significant demands on our capital for now. Levi Spry: Yes, quite the contrary. I'm trying to work out how big it might be. Jim Beyer: Yes, that's what we're working our way through, and it really ties in with the policy. And as I mentioned in the release, and I think I said earlier on that we will -- our plan is to provide a policy on capital return with the first half profit results, which will be around about this time in a month's time. Operator: Your next question is from the line of Adam Baker of Macquarie. Adam Baker: Jim, just firstly on the Duketon open pit. I did notice the grades have fallen a little bit quarter-on-quarter and compared to the second half of last year, your mining grades are around 0.82 grams per tonne. What should be expecting the grades moving forward, expecting normalized levels around this? Or are you going to continue to bring forward the low-grade tonnes in regards to Buckingham and Wellington? Is that going to see a bit of an uplift in grade from those levels? Or just trying to get a feel for how you're thinking there with open pit volumes. Michael Harvy Holmes: Yes, Adam, it's Michael here. The grades have fallen a bit. I mean it's a function of the mine sequence of where we are in the different pits. And so as we're working down there into the better grade generally at the depth of the pits and also it's a function of the stockpile fee. We have been feeding the better grade stockpiles. And as we sort of move forward, we're sort of moving into the lower grade stockpiles to supplement the feed through the mill. So expecting that sort of similar grade, but it will fluctuate depending on where we are with the fresh material. But no great fluctuations. Just the usual variation really. Adam Baker: What was the kind of reserve grades for BuckWell, you may have already pre-disclosed this, but is that kind of in the low 1s or where are you sitting at for that project? Michael Harvy Holmes: I don't have the number off the top of my head. Jim Beyer: What was the question? BuckWell? Michael Harvy Holmes: The grade of BuckWell. Yes, it's around about -- yes, just under 1, around about 0.9. Adam Baker: Yes, makes sense. And just in addition to the capital management framework policy, you touched on dividends, but it seems that you're also considering share buybacks as you say in the announcement and/or how do you weigh that up just versus the dividend payout versus considering some buybacks like some of the peers have done over the last 12 months as well. Jim Beyer: Yes. Look, I mean, it's a -- that is how do we weigh it up? Well, we wait and we try and work out what's going to give the best value to our shareholders. There's a number of share buyback initiatives that are in play with some of our peers. Just how much is being done is sort of one thing that we look at, what's announced and what's executed. Obviously, you got to have a view on what your share price is. But there are a number of different ways that we can return -- give returns to shareholders. There can be regular dividends that are tied to our profit and our announcement, there can be special dividends or there can be buybacks. And they are the things that we're looking at, right? We sort of got to trade them off. We've got to figure out which ones provide real benefit? Where is our share price trading? Are we -- is our value right? Are we under or over? And there's multiple things there, Adam, that we're looking at. And ultimately, we will work out and let the market know what our final view on that is. But it's pretty clear that the idea and the capacity for returns are there. So that is quite clear the form of it is probably takes a little bit of finalization, but fully franked dividends are a great way of returning our profits to shareholders. Operator: Your next question is from the line of Hugo Nicolaci of Goldman Sachs. Hugo Nicolaci: Jim and Anthony, congrats on another strong quarter of cash build. Just first one on McPhillamys. I appreciate the timing there is a little bit out of your control, but sort of any indications to the timing there or sort of getting outcome this quarter, that time line might have changed? Jim Beyer: Yes. Good question, Hugo. No, not really. I mean there's no statutory time line for any judicial person to come back. We think that -- yes, I would like to think that we're going to hear something by the end of this quarter, but there's no certainty on that. I mean, in fact, by the time we take into account holiday and Christmas, it's probably not unreasonable to expect we won't hear anything until what is it the June quarter sometime. And even then, there's no -- as I said, there's no fixed time line on when -- how long a judge takes to come back with their decision. Hugo Nicolaci: Fair enough. Just to double check there. And then just one more on capital returns and only because it's a nice enviable position to be in that you do have so much capital accrued. But in terms of that you'll come out with in February. I mean, is there anything that we should consider that might guide why the policy would be sort of materially different to some of your peers in that sort of 20% to 30% of operational free cash flow being paid out? Jim Beyer: Hugo, what I can tell you is that we're working on our dividend and return policy, and we will be informing the market of what that is when we release our half year results later on in February. Hugo Nicolaci: Fair enough. I thought I'd try that question one more way. But now, we look forward to that update in February. On the operations, then maybe just Duketon North, can you maybe just confirm what that produced this quarter? And then just give us a bit of color there on the time line through this half to ramping up the extension? Jim Beyer: Sorry, what were -- what was the question? Hugo Nicolaci: Sorry, Duketon North. Michael Harvy Holmes: The question related to -- Hugo was the direction -- sorry. Keep going. Jim Beyer: Keep going, Hugo. Hugo Nicolaci: So I was going to say, yes, the question was just for Duketon North, so how the production from the stockpiles is tracking at the moment? And then just a bit more color on the time line through 2026 in terms of wrapping up for the extension. Jim Beyer: Yes. So it's sort of minor. We get sort of minor improvements through the Duketon North of the stockpile. So it's sort of nothing sort of material there about ran to that 1,500 to 2,500 tonnes, depending on the ounces, depending on the grade. BuckWell sort of is not really producing grade this year and financial year and that will be ramping up next financial year. Hugo Nicolaci: Yes. Got it. And then just lastly, on Tropicana, just looking at some of the cost components there. It looks like milling costs sort of tracking up about sort of $26, $27 a ton last couple of quarters. Is that sort of the right rate to think about going forward from here? Or are there pieces like labor cost inflation or sort of power and contracts there on the gas piece that might push those costs a little bit further or be a benefit going into next year? Jim Beyer: I don't think there's any reason to think that those numbers should be viewed any differently going forward. Operator: [Operator Instructions] Your next question is from the line of David Coates of Bell Potter Securities. David Coates: Jim and team, congratulations on a strong quarter. And look, just a bit following on from the question on cost. More of just around like underlying unit costs across the board. I was sort of hearing different reports that cost inflation across the industry in general is easing or in some cases, maybe not. But just wondering what you guys are seeing in terms of your underlying unit costs and input costs. Jim Beyer: Well, I mean, at a high level, I would say that you can see where our costs are coming in on our AISC guidance and there's nothing that we're seeing or experiencing that's going to drive that higher. But on an individual basis in specific areas, I'd sort of pass over to Anthony or Michael to make a comment on that. Anthony Rechichi: Yes. Look, David, it's Anthony here. Look, my comment on that is except for -- so on the AISC front, as we've sort of already talked about there or in the public, we've been talking about we're purposely pursuing some of the higher cost ounces. Now that's -- they're grade related. So that's what you're seeing in AISC. In actual input costs, though, like what is things costing down at the ground for getting per gold produced unit. Look, besides general CPI increases, and they are still there, nothing standing out. What we're not seeing is in your earlier comment, yes, maybe some people are seeing it go down. We don't see that. But we're seeing, yes, just typical CPI, not necessarily more than that and not less. David Coates: Not cool. I was seeing people saying stable, but I haven't seen going down yet. But yes, so it is unwinding. Anthony Rechichi: Yes. I guess stable is the right way to say it. If we say stable in line with CPI, I guess, it's kind of stable, yes, if you say it that way. Operator: And there are no further questions at this time. I would like to turn the call back over to Jim for closing remarks. Jim Beyer: All right. Thanks, everybody. Appreciate you joining on what is another busy day and also appreciate the questions. As usual, if there's anything to -- anything you want to follow up, give us a call. Also I'd just take the opportunity now to thank for those who aren't aware, Jeff's leaving at the end of this month and heading off to Alicanto. So good luck with the new role, Jeff. Thanks for everything. And we'll let you know who Jeff's replacement is in due course. All right. Thanks, everybody. Have a good day. Operator: This concludes today's conference call. Thank you all for joining us. You may now disconnect.
Operator: Hello, and welcome to the Australia (sic) [ Australian ] Foundation Investment Company Half Year Financial Results Briefing. [Operator Instructions] I'd now like to hand the presentation over to Mr. Mark Freeman, Managing Director of AFIC. Thank you. Please go ahead. Robert Freeman: Okay. So good afternoon, everyone, and I'm Mark Freeman, the CEO and Managing Director of the Australian Foundation Investment Company. So welcome to this half year result briefing. I'd like to begin by acknowledging the traditional owners and custodians from all the lands we are gathered on today and pay my respects to their elders past, present and emerging. I have joining me today on the webinar, Brett McNeill, who is the Portfolio Manager for AFIC. Just as a bit of background, Brett has recently taken over the responsibility for the AFIC portfolio. So Brett's actually been with us for over 6 years now, having successfully managed the Djerriwarrh portfolio, which is one of the LICs we manage within the group. We believe Brett's appointment will strengthen the application of our investment processes against AFIC's long-standing investment frameworks. We also have with us in the room Winston Chong, who is the Assistant Portfolio Manager; Andrew Porter, our CFO; Matthew Rowe, our Company Secretary; Geoff Driver, our General Manager for Business Development; and Suzanne Harding, who is also involved with business development. This briefing is based on the material available on the company's website. The presentation slides will change automatically via the webcast. Finally, please note, following the presentation, there will be time for questions and answers. You can ask a question via the webcast using the tab at the bottom of the screen. So just moving to the presentations now, just starting with Chart 2, which is the disclaimer, which just says we're here to talk about what the company is doing. We're not giving any advice as such. So I'll just quickly hand over to Brett and Winston to run through that shortly. But just as an introduction, I'd just like to say that we are -- the Board, myself and the team, we are clearly disappointed with the results for last year. There's obviously been a lot going on in markets, some very strong sector moves and some very weak ones, and Brett will go into all the reasons for that. There's always -- we're always looking to improve and develop on our execution against our processes. I can say though that when I look through the portfolio, we are still holding good companies. Clearly, there are some elements in the market that we have missed. But I don't see that we're holding poor businesses in poor sectors. We do feel like we are holding good companies. There's been price reactions over the last year. But ultimately, I always look through and say, are we holding good companies with strong balance sheets that have the ability to grow their profits over the long term, and I still believe that, that is the case with the portfolio. But with that introduction, I'll pass over to Brett. Brett McNeill: Thanks, Mark. Good afternoon, everyone. It's great to be here presenting AFIC's first half financial results today. So the agenda for today's presentation was listed on Slide 3. I'll begin with an overview of the key features of AFIC, along with restating our investment objectives. Our CFO, Andrew Porter, will then go through the financial result highlights. Winston and myself will give an update on the broader share market as well as our portfolio, and then I'll give some outlook comments before we open up for questions. So if we turn to Slide 5, this was some of the key features of the Australian Foundation Investment Company. So AFIC predominantly invests in Australian and New Zealand companies. It's the largest listed investment company on the ASX. It's got 150,000 shareholders and a structure that has an independent Board of Directors. Importantly, shareholders own the management rights to the company. This provides for low-cost operations, which you'll see in the low management expense ratio, and there's no additional fees such as performance fees or the like. We're a long-term investor. We tend to run low portfolio turnover, which we think helps provide tax effective returns and we have a long history of having delivered stable to growing fully franked dividends to shareholders. And AFIC is managed by a team that also manages three other listed investment companies being Djerriwarrh, Mirrabooka and AMCIL, and we think this gives us good benefits of scale. One, it helps keep costs low, but two, it also allows for the generation and sharing of investment ideas across the group. So given that background and approach, AFIC has two key investment objectives and these we state on Slide 6. So firstly, we aim to pay stable to growing dividends over time. And secondly, we aim to provide attractive total returns over the medium to long term. So on the next few slides, I'll go over how we've done against these objectives in recent times. So if we look firstly at how we've performed against the first of our objectives, which is to pay stable to growing dividends over time, and this chart here on Slide 7 shows AFIC's ordinary dividends, these are the blue bars, along with special dividends being the purple bars, each on a full year basis back to 2019, and we also show AFIC's earnings per share on the yellow line. So the key points to make we think from this track record is that we can clearly see the delivery of stable to growing dividends with the ordinary dividend having increased from $0.24 in 2019 to $0.265 in 2025. Importantly, we're able to maintain the dividend at $0.24 across the years 2020 and 2021. And this was despite dividend cuts across the broader share market resulting from the COVID pandemic, and you can see the result of that having flowed through to our earnings per share results in both of those years. So pleasingly, the stable to growing dividend has also been accompanied by special dividends from time to time, these having been paid in full year 2019 and full year 2025. And for the current financial year, 2026, we have declared a $0.025 special dividend on top of the $0.12 ordinary dividend for this first half '26 result and we've also announced another $0.025 special dividend, which is expected to be paid with the final year dividend later this year. On Slide 8, we address our second objective, which is to deliver attractive total returns over the medium to long term. So the chart here shows a 30-year track record, and I think it illustrates the power of really an investment style that takes a long-term approach, focuses on owning high-quality companies, benefiting from compounding returns and keeping costs low. So $10,000 invested in AFIC's portfolio 30 years ago in 1995 had grown to $155,000 by 2025, and this compares to a value of $136,000 from an equivalent investment in the broader share market. So the long-term returns have been very strong, but the short-term performance is not what we wanted to be with AFIC's total return and NTA performance being very disappointing over the last 6 and 12 months. So I'll go through the reasons for this in the market and portfolio update section of today's presentation. But at this point, I'll pass to our CFO, Andrew Porter, and he's going to give a rundown of our financial results as well as an update on our share price versus the NTA. Andrew J. Porter: Thank you, Brett, and good afternoon, ladies and gentlemen. So for many of you, these four boxes will be a familiar format. The profit for the half year at $147 million was down 4.6% from last year. That's equivalent to $0.117 per share. But it's important to note, as Brett stated, that we've maintained the interim dividend at $0.12, so above the earnings per share, and also paid a special dividend of $0.025. That is, of course, one of the benefits of an LIC is that ability to pay a consistent dividend over time. As Brett said, we maintained the dividend during COVID, we maintained the dividend during the GFC, as I'm sure many of you are aware. So of that fall in the profit, the income was down $4 million on last year, and that was mainly to the -- down to some of the larger companies reducing their dividends from the prior year over 6 months. For instance, BHP, we received $23 million worth of dividend in the previous 6-month period and $19 million in this 6-month period. Woodside and Woolies were some of the other ones where we've had a reduction in dividend. There was also a change in the tax charge. For those of you who are studying the financial statement in some detail, you'll notice the tax charge looks a bit high. This has been caused by two things. There's a mix. We had lower proportion of franked dividends to unfranked income and the larger the franked dividend component of your income is, the less tax you pay. So that's had an impact. There's also some timing difference on deferred tax which will sort itself out by the end of the year. We mentioned the interim dividend of $0.12 and $0.025 in special, so $0.145 in total. As I said, the Board has had a policy and will have a policy of where possible if the ordinary dividend is going to be increased, we'll look to have a bias towards doing that at the interim so that we can increase or rather, I should say, decrease the disparity between the interim and the final dividend. But at the moment, that's flat at $0.12, but with that addition of $0.025 special as per the announcement on the 25th of November, when as Brett has said, there'll also be $0.025 at the final. Management expense ratio, that is a measure of the cost of running the company, 0.11%, that's $0.11 for every $100 invested. So the actual costs were down due to the nonvesting of incentives and some one-off costs we received in the prior period or had to pay in the prior period, I should say. That 0.11% is artificially low because of the timing of that nonvesting of incentives, but it's not out of the ballpark for what we've seen in the past. We had -- it was 0.10% in 2020, for instance, 0.13% in 2022. But the big driver of that tends to be the size of the portfolio. The portfolio itself, as I said, $9.9 billion. So that's down from $10.4 billion at the 31st December 2024, and Brett and Winston will go through some of the components of that later. Moving on to the next slide, which is something that shareholders who look at the NTA announcements each month will be familiar with. It's the share price relative to the NTA, it's at a premium, so above the 0% line, you're effectively paying more -- you're paying more than the fair price of the shares that we own that is set by the market. So you're buying $100 worth of share at $110 for instance, if it's a 10% premium. And conversely, if it's a discount we're able to buy the shares, let's say, $100 worth of shares for $90 at a 10% discount. The discount was about 9% at the end of December 2025. And it does appear, as you'll see from here, that there has been a long period of discount and what the company has been doing, we have been doing buybacks, we introduced recently a share buyback program. And as per the announcement, we will look to continue that in the next 6 months if the market conditions allow. And there's also you may see that there's been an increase in the marketing that we have Suzanne, as Mark has said, has joined us and is spending a lot of time talking to planners, et cetera, about the benefits of investing in LICs. But if we go on to the next slide, it was once attributed to Mark Twain that history doesn't repeat itself, but it often rhymes. And you can see here that actually we have been in periods of discount before. You can see here on this particular slide going back through the Black Monday, just before the GFC, the tech bubble, et cetera. So what we are going through now may will have different causes and different effects, but it is in itself not unusual, I mean, we have seen this in the past. And you can see here a much longer period back to '89 where the premium discount can bounce around the place. So with that, I will hand over to Brett, but obviously, we'll be around for any questions following the presentation. Brett McNeill: Great. Thanks, Andrew. So turning now to our update on markets and the portfolio. So the left-hand side of Slide 14 shows AFIC's NTA performance, which is after cost and realized tax. This is our total returns shown in the blue bars, and we compare this to the performance of the broader share market being the ASX 200 Accumulation Index in the purple bars. So starting with the shorter-term performance. As we can see, AFIC's performance for the 6 months to December 2025 of minus 2% and over 1 year of 1.2% are both well below the returns of the market over both of these time periods. And the short-term underperformance has now dragged down our 3-, 5- and 10-year returns as well. So before I go into the reasons for this, just cover off on the right-hand side of Slide 14 to give some more detail on what have been the drivers of the market's 6-month returns on a basis before franking credits broken up by sectors. So if we work down the chart, we can see clearly, it's been the material sector that has contributed most of the market's gains over the last 6 months. So we've had the large-cap miners such as BHP and Rio Tinto having produced very strong share price performance. But most of the materials sector returns have actually come from the small and mid-cap resource companies, especially the gold stocks. And at the other end of the scale, it's interesting that traditional growth sectors, such as information technology and health care, have both had a very poor 6 months of share price performance. So I want to give some more detail, though, now on why AFIC's total return, so our NTA performance has been well behind the benchmark over the last year, and we list the key reasons for this on Slide 15. And we've really grouped it into three key buckets. So the first group of stocks behind this underperformance are some large cap companies that performed poorly over 2025. Starting with CSL, which delivered a total return of minus 37% for the calendar year. So it's the former market darling that suffered a huge derate in recent years. It's been a very frustrating investment for us over this time. And whilst there's still short-term pressures on the business, we think the long-term growth potential remains and hence, we intend to maintain our large investment in this company. James Hardie was down 38% for the year, and this was really following an acquisition that was not well received by the market. We still own the stock today, but we have reduced our position given our view on the company's balance sheet, in particular, as well as a lot of management and Board turnover that's happened in recent times. CAR Group was down 13%, but this was despite what we saw as continued good results as well as a very smooth leadership transition, and it's our belief that the stock looks good long-term value at this point. The second group of companies contributing to the underperformance over the last year we've grouped as some small companies that also performed very poorly during the year. In the case of both Reece and ARB, they have been strong compounders over the long term, but they have suffered from some issues in 2025 that we think are mostly short-term related. Our view is that both remain very high-quality companies, and they both have good long-term growth potential. In the case of IDP, it's been a very disappointing investment for us. We bought the stock too early, but we do intend to hold for now as long as we retain confidence in management and the balance sheet. The third group of companies covers one of the biggest stories in markets in recent times, which has been the rise in the gold price. The major gold stocks have had an unbelievable run with Evolution up 170%, Northern Star up 78% and Newmont up 156%. It's been the case that AFIC historically hasn't been a large investor in gold stocks but this has clearly been a mistake in recent times, and it's cost us over the last 12 months in terms of performance versus the benchmark. At this point, we find it hard to see value in such a hot sector but we will keep more of an open mind towards this sector in the future. So for now, I'll pass to Winston, who's going to talk about recent portfolio changes and provide a summary of the key aspects of the portfolio at year's end. Winston Chong: Thank you, Brett. The 6 months to 31st of December has seen transaction activity levels in line with our long-run averages. Our buying during the period has been concentrated in both Woolworths and Telstra, which presented opportunities to increase our existing weightings in high-quality blue-chip businesses at attractive valuations. You'll see there that we also increased our position in Sigma Healthcare, which is the owner of the Chemist Warehouse business. Chemist Warehouse is the market leader in health and beauty retail in Australia, a category that is experiencing strong secular growth. The company continues to take market share and roll out stores in both Australia and New Zealand with an emerging footprint further abroad as well. The shares have underperformed in the last year despite meaningful progress on growth plans, and we've taken the opportunity to build a more meaningful position given the long growth runway ahead. We also continue to add to CSL, which, as Brett mentioned, has been a disappointing investment for some time, and is currently experiencing some short-term competitive pressures. Despite this, we continue to see a good long-term investment case at current valuations. Weakening sentiments towards artificial intelligence-related stocks presented an opportunity to add some Macquarie Technology at what we believe were levels that represent a compelling value particularly when we consider the build-out of its data center project and the longer-term outlook for the business. You'll see on the bottom left of this slide that we've added three small cap stocks to the portfolio during the period. This reflects a more refined approach to the management of AFIC's small cap positions to take a more diversified portfolio approach, leveraging the expertise and experience of the Mirrabooka portfolio management team. The result of this is that we've added positions in Life360, Objective Corp and Temple & Webster. Collectively, these three additions currently represent about 0.3% of the portfolio. To fund the buying, on the right-hand side, you'll see that we've trimmed stocks in -- we've trimmed positions in stocks where the valuations were getting stretched, namely Wesfarmers, Netwealth and the banks. We've also moved to reduce our position in James Hardie to reflect the increased balance sheet risk and governance risk following the AZEK acquisition. We also exited our position in WiseTech during the period after buying some earlier in the year. We've taken a more circumspect approach to the governance risk associated with the investment. Over the next few slides, we'll provide some context to some of the transactions just mentioned to highlight our approach to buying when we see value and selling when we see valuations reaching extremes. Firstly, on Woolworths, many of you will recall that last year, Woolworths went through some operational and reputational issues. We saw its share price and market cap decline as the green line on this chart illustrates. Despite these issues and a required turnaround, we believe that Woolworths has a strong brand and significant latency in its store network. At around $27 to $28, Woolworths' market cap was about the same as that of Coles despite Woolworths having nearly 30% more stores. And so we took the opportunity to meaningfully increase our positions at around those levels. Secondly, on Telstra. Our buying in Telstra has been premised on the track record of dividend growth that the company has been establishing over the past few years following a rebasing as shown in the blue bars here. Telstra's cash flows and dividends are backed by a strong mobile business built on Australia's leading network, steady earnings from its infrastructure business and solid cost control by a capable management team. We expect this to continue, and the significant amount of cash being generated means the grossed-up dividend yield plus growth on offer looks attractive relative to other large cap industrial companies. As a result, we've been buying around the current share price. Our trimming in Wesfarmers has really been informed by valuation. We continue to view it as a high-quality business being the owner of Bunnings, Kmart and Officeworks, and we rate the management team highly. While we continue to hold a position, we materially reduced it over the last 6 months at an average price of around $92. At that price, the dividend yield was below 3%, which, as this chart illustrates, is well below its long-run average yield of 3.6% as well as the yield of the broader market. Similarly, our trimming in Netwealth was based on where valuation got to. At around $34 where we were selling, the price-to-earnings ratio was above 60x. Our view on the business hasn't changed in that it's a quality founder-led business with a long runway of growth as investment flows shift on to its platform. However, we view the valuation at those levels as extreme. And as you can see on the chart here, the PE has since returned to a more appropriate level for the growth on offer. To provide a sort of portfolio summary, you as shareholders hold a portfolio of nearly $10 billion in 59 stocks with a net tangible asset value of $7.90 per share. You'll see on this slide that our top -- in our top 25 holdings, we have exposure to some resources companies such as BHP, Rio and Woodside. These are all companies with solid management teams and world-class low-cost producing assets. We still have a meaningful position in the banks for income as well as stocks like Transurban and Telstra, which we've spoken about supporting our dividend yield. And also in the top 25, we have some high-quality industrials with the likes of Goodman, ResMed, CAR Group and Fisher & Paykel Healthcare that we expect to underpin good capital growth over the long term. In summary, we believe the portfolio is a diversified mix of high-quality companies structured to deliver on our income and capital growth objectives. And with that, I'll pass back to Brett for an update on our international portfolio and some outlook comments. Brett McNeill: Thanks, Winston. So on Slide 22, we give an update on our international equities portfolio and strategy. So the first point to make is that the portfolio has continued to generate value for AFIC shareholders. But at this point, we aren't considering a listing of a separate fund. So we believe the better strategy for now is to continue to invest in international equities within AFIC, but to do it in a more concentrated and complementary style. To give some more detail on the portfolio, we show some of the key statistics here. So the portfolio as of the end of December was worth $170 million. This represented 1.7% as a percentage amount of AFIC's total portfolio value. And the amount of international stocks owned within this international portfolio was 27 and you can see some of the biggest holdings on the chart, including NVIDIA, Microsoft, Netflix and Visa. Obviously, we're happy to take questions on this and any other aspects of the presentation in the question session shortly. But for now, I'll make some quick comments on the outlook, which we list on Slide 24. So the market backdrop at the moment. I think one of the key features is one of extreme geopolitical uncertainty, but it's interesting when you plot that against the share market that remains close to all-time high levels. So to us, we think it leaves the market looking moderately expensive in our view, especially when we look at long-term valuation metrics, such as price-to-earnings ratios and dividend yields. Notwithstanding this, we have found some select buying opportunities recently in some high-quality companies. As Winston mentioned, these have included companies like Telstra and Woolworths, which were bought primarily to income as well as other companies like Sigma and some small caps like Macquarie Technology Objective Corp, Life360 and Temple & Webster, which we want to own more for long-term growth. Overall, we continue to believe that our investment style of focusing on owning high-quality companies for the long term is the right one for us to meet our dividend and total return objectives whilst recognizing that our short-term performance has not been where it should be, hence the focus on improved investment returns under this style and approach. And finally, AFIC's strong level of franking and profit reserves means we have declared $0.025 special dividend for this first half result, with the additional $0.025 special dividend also expected with the full year result in July this year. So with that, thank you very much for listening, and I'll pass over to Geoff to run the question-and-answer session. Geoffrey Driver: Thanks, Brett and Winston. So quite a few questions here. I'll start with this one. This is quite a long one, so I'll try and, I guess, encapsulate as best as I can. We run four different listed investment companies with different objectives. Would it be better from a shareholder perspective to actually combine all of these funds and run them as one and have a sleeve of active management within the portfolio along each of these teams that we manage? Robert Freeman: Okay. So look, we do observe, there has been some consolidation within the LIC industry. We saw that through the Soul Patts Group. And as we stand at the moment, each of our four LICs is an independent company with an independent Board of Directors. Those Boards have the responsibility to oversee the strategy and determine where the portfolios and where the company should head looking forward. In each case, I guess we've -- the sense has been that each of the LIC has been fulfilling a different need within the market. AFIC is more of a broad-based fund. Djerriwarrh gives much higher dividend yield than what you get from the market, particularly when you include franking credits. So we've certainly felt that, that fund suits a particular part of the market, particularly those in the superannuation phase where they can get full value for franking credits. And Mirrabooka, with its focus on small to mid-cap, has over long term produced some very good returns, but often, that can come with higher volatility. So I guess, while I take on board those comments and it's probably fair to say that the Boards are constantly reviewing the strategies and where they should operate in, if they are fulfilling those needs, then the sense has been to continue on that part. But as the case with all companies should be, strategy needs to be constantly reassessed as we go forward. Geoffrey Driver: A question here. Good to see the MER stay ultra low at 0.11% annualized. Any comments on sustaining that edge? And also, could we share any specific internal process improvements you're implementing to reinforce current disciplined decision-making in buying, holding and selling, especially as difficult markets may persist for some time? Robert Freeman: Okay. So I'll just make a comment on the MER, then I'll pass to Brett to talk about how we transact on the portfolio. Having an extremely low MER is a critical part of our strategy. We want to be viewed as having a similar, I guess, cost to an ETF, and it's very important philosophically that most of the gains that come from the portfolio go to the owners of the company, which are the shareholders. And so being -- or having a very low MER is certainly something we want to sustain going forward. And that's quite an important part of the way we think about the business. So that will always remain in focus, and we always continue to look for ways to improve our cost out where we can. Just the second piece, just on the portfolio management. Brett McNeill: Yes, sure. I mean I think when you look back over the long term, AFIC's approach is tried and tested, and I think it's proven and that's what we try to show with long-term performance numbers. But when you have 6 and 12 months like we have had, there's always a need to test and retest things and question things. And the main conclusion of this that everyone was involved in is we think the overall approach is the right one. So investing in high-quality companies for the long term, and focusing on fundamental value, assessing factors and behaviors such as it was mentioned, keeping calm in volatile markets is absolutely essential, and we think the right one, but it doesn't mean that we can't do things better. And some of the ones that have stood out to us, we think, are executing on the transactions better and I think some of the selling over the last 6 and 12 months has been terrific, particularly when you look at Commonwealth Bank and Wesfarmers, the trimming of those positions at the valuations. On the other side, though, unfortunately, we've missed some buying opportunities. We've talked a lot about resources, but there's been some other high-quality blue chips as well that it would have been good to add to. So the whole team is involved, I think, in uplifting the process based on the frameworks that we've got that we think have been proven, but everyone is highly focused on doing a better job of executing against those frameworks. Geoffrey Driver: Thanks, Brett. There's a few questions on international in terms of our approach going forward. So the question is, it's been 5 years we've been sort of looking at the international potentially separate LIC. I guess the question is why we sort of reached the position now where we're sort of managing more of in-house in terms of that short position. And then also the other question around this is are we looking to hold less stocks with a more concentrated portfolio. And finally, on the international questions I got here is will it -- how will it impact AFIC's approach to income within -- generating income within the portfolio given international stocks don't generate a large dividend. Robert Freeman: So I guess we were very clear on day 1 when we started this process, and we kept shareholders up to date, we felt that the Australian market over the long term, there's some risks that our market could narrow and every time we see a takeover, it reduces another stock. We talked about the fact that many of our companies, even though they're listed in Australia are truly international businesses and our understanding what's going on globally is becoming more and more important to understanding our own stocks and that we felt that our long-term investment approach can be utilized in the global markets, as I said, because markets have really become easy to transact in just because you're seeing here in Australia doesn't mean you need to just buy Australian stock. So what we said from day 1 is that we think it can add value to the AFIC portfolio at the very least and that we will embark on a path and we'll be looking to learn from that along the way, and there are a number of outcomes that we set at the start, which could be to not do it anymore, to keep doing it or to keep it a part of just AFIC, maybe even doing a separate LIC. And we've spoken in the last couple of years how we're doing some work behind the scenes but we weren't making any final decisions. We were keeping all options open to us as we've continued down that journey. So the initial investment into international, I think, was just over $100 million. That's worth $170 million. So the investments added $70 million to the portfolio. So it's been value adding to the shareholders. And as we have continued on that journey now, we felt like we're ready to make a decision. So we were prepared for an LIC, we were prepared to continue the way we are, we were prepared for all the options but I think where we got to now is that we felt the best way for us forward at this point was to have a more concentrated view, just be a stock picker to the AFIC portfolio trying to add to businesses that can add value to the overall portfolio. And so in that context, we see this as just additional stock to the portfolio rather than a separate portfolio and be willing to buy stocks when we see opportunities and sell when we think we need to sell. And it's where we've landed on, and we think that's the best strategy to go forward from here. And hopefully, we can continue to make the same sort of returns to the portfolio. Now the amount we have in it could go up if we see weakness in overseas markets and we're starting to see good value, we could add to that. We are aware that they are lower-yielding companies. But at the moment, as a group, it's worth 1.7%. So it's almost like a single stock in one of the companies we own, for example, whether you take Brambles or [ Hardie ] or Goodman Group or CSL, they're all international businesses that probably have a similar yield, but we've got 27 stocks at the moment in we call it on holding. So it's very similar to a single holding in a more international-focused business. But we are aware of that, but as Brett touched on, that's why we look for other opportunities in our market to add stocks where we can get dividend yield from. So we're very comfortable with where now we were landed on. It means we can be much more focused, much more picky about what we go into when we get out of it. And as I said, I hope we can continue to make the same returns that we have over the last 5 years. Andrew J. Porter: And it wouldn't change our income objectives. Geoffrey Driver: Again, a number of questions about where the share price is trading relative to NTA. What do we see has been driving that large persistent discount? Secondly, what are we trying to do about it in terms of in the market. And the other question I've got here is the split between retail and institutional investors on the register. Well, actually, most of our -- we have very few institutional investors. But -- so most of our investors will be retail investors either through individuals or through financial advisers or stock brokers. Mark, can you talk about the discount. Robert Freeman: So just on that discount, I mean, I'll probably just draw you back to Slide 12, if you get a chance to have a look at it again where we show you clearly that this is not something new. We've seen it before. And this is probably a little bit of a scary bit in a way, but in fact, all the previous periods where we've traded at a discount, it's been when the market's been hot in some way, shape or form. Markets had that sort of elements in it, and we've -- not just us, we see this across the sector, particularly the other, what I'd call traditional LICs. So this is not unusual to us. This is a sector theme. And when the markets get a bit hot, we kind of get left behind. And that chart clearly showed you that when you had the tech bubble, we got left behind, then tech crashed and we suddenly went to a premium. You had the late stages of the GFC, market was running hot, we got left behind. But then post GFC, we went back to a premium because in many cases, we had more, what we call, quality businesses, we were able to sustain the dividend through tough times and we didn't really have the speculative parts of the market. Then we got down Black Monday, get the same theme. I would say this time around, we were at a large premium only a couple of years ago, which was during COVID, we had quite a long period of trading at a premium, and we're kind of unwinding that. But again, there are elements in the market that are very speculative. And so this has sort of been a consistent theme, but it's tended to proceed in a significant market pullback. And I'm not giving any forecast at all, but that's -- there's been a pattern there that we haven't seen before, and this is not new. It is frustrating, though, for us, and I understand it's very frustrating for shareholders. With the special dividends we're paying at the moment, it is presenting an attractive dividend yield along the way. We are increasing our marketing efforts, and we're doing a lot more activity around that. And we understand that the marketing is important. Myself, I've been doing a few podcasts and there's a lot of activity going into this year because I think there's so many competing products out there, we certainly realize we've had to do more out in the market to educate them what is different about a traditional LIC in the way they work, and we will be doing a lot more activity on that front. Geoffrey Driver: And I think the other part of the question came up about the distribution of shareholders is about how we're targeting sort of a younger audience, and I think we are doing that through other means these days in terms of podcasts and other means to try and attract a younger audience to the share registry. Question here about the results on paper are disappointing as we well understand. How is management looking at repositioning strategy to be more inclusive of mid-cap opportunities, particularly given large-cap stocks such as CSL and Telix have been damaging to the results? Robert Freeman: Yes, sure. It's part of the overall portfolio strategy. So by no means do we give up on large caps. And sometimes when all you do is look at what has worked in recent times and then try and flip the portfolio to do that, you can just lock in the underperformance both ways. So we'd never want to react just for the sake of it. I think where we do want to take action is where we see genuine fundamental improvement potential. And one is, I think, better accessing opportunities in the small and mid-cap space. And Winston mentioned part of this. And we think a big element of it is investing in these companies, small and mid-cap, small in particular, in a more diversified approach. So taking probably smaller stakes, but in a greater group -- a greater number of small cap companies. And you can see the start of that action on the portfolio adjustment slide, where we've added Objective Corporation, Life360 and Temple & Webster. We think it makes sense when investing in this part of the market to have that more diversified approach because it's very hard to pick individual winners. As we all know, diversification is one of the most important elements of successful investing. And we think it gives a better through-the-cycle approach to rather than trying to time entry into small and mid-caps. So that's one of the things that we not only have identified, but we think are already putting into action. Geoffrey Driver: Just a question on resources. Are we saying look at these more closely, given we haven't -- we missed out on the sort of gold and silver rallies, more recently? Robert Freeman: Yes, we're definitely looking at the performance more closely because it's been stunning about what it's done to markets, and hence, it was a big thing on that slide where we ran through about the key reasons for our portfolio underperformance versus the benchmark. We want to keep an open mind on these sectors, but we don't just want to fall into the top of just chasing what's run really recently, and gold and silver would be at the top of that list. So there might be opportunities in the future, and there's definitely reasons why the gold and the silver prices run. But we'd only want to make an investment if it's for the right fundamental reasons long term as opposed to chasing short-term performance or to close a gap versus the benchmark, which can clearly work against you, remembering that these are cyclical sectors. Geoffrey Driver: While on resources, a question here about the proposed Rio and Glencore merger. Do you have any comments on that, either you or Mark? Brett McNeill: Yes, sure. I can start. I mean I think our initial approach in these situations is to be generally skeptical of mining sector M&A, and that's just based on experience of this group and what we've seen happen in that part of the market over time. And maybe it's a sign of where we are in the resources cycle. We're always looking for those indicators and observing what's happening in markets by actions rather than words. And there isn't actually a takeover or merger proposal there yet. Clearly, it's been flagged. There's been discussion. So we'll wait and see what comes out after the 5th of February and with Rio's results. But I would also say, we did like -- we really like the idea that Rio presented at their recent Capital Markets Day of having a simpler company focused on better operational performance and cost control and being invested in what they think are the best commodities long term. But overall, we'll see what comes of it. Robert Freeman: Yes. I mean I'll just add to that. I mean we've seen some of these transactions before over time, and not with a great deal of success. And we think Rio's assets are great. And so we're keen to understand from the company why they think this time it's different. And I guess sometimes these can be presented in terms of what it can do to their exposures long term. But what we understand is how it adds valuation, how does it add net present value or NPV to us as shareholders, and that's been the issue. They can always explain this in terms of it's going to give growth in copper long term but if the financial metrics on the deal don't add up, it can destroy shareholder value to us, Rio shareholders. So these are the sort of things we want to understand from the company. Geoffrey Driver: Particularly a question for Brett. Can you comment on the impact of index changes for AP Eagers and Soul Pattinson within the index going in and the recent Amcor going out and also the effect of on-market turnover due to passive ETFs? Brett McNeill: Yes, it's been a huge factor in markets. It's probably been one of the bigger changes that's taken place, particularly over the last probably 3, 5 years is just the influence of index weightings on money flows. It's never going to be a key consideration for us. We want to invest more in quality companies that we can buy at good fundamental values. We think that, again, stands the test of time as opposed to following money flows, but it definitely has an impact on short-term performance. And you see it when stocks go in and out of the index. I mean what we -- just the big impact for us is because we are more long-term focused, we should have an advantage in being able to take advantage of short-term mispricing opportunities. So when stocks go drop out of the index and if the share price falls a lot, if we believe in the long-term fundamentals, that can present a buying opportunity. We need to take advantage of that if that's the right approach. And similarly, the other way, there might be stocks that we still like that go into an index, attract a lot of money and become overvalued temporarily, and there can be opportunities to trim that and rotate the capital into better opportunities at the time, but there's no doubt it's a big influence in the pricing of shares in our market. Geoffrey Driver: I've got a few questions here on dividend policy. So what is our dividend policy in terms of yield? And also, what is our long-term capital growth target? The question then becomes, are we looking to balance the interim and final dividend over time. And then finally, would we ever think about moving to quarterly dividends? Robert Freeman: Okay. So we are aware that there is a difference between the interim and the final dividend. And we have sort of -- we keep giving that some thought. At the moment, there is an imbalance, but obviously, it's the full year results that really determine the dividend outcome. So I suspect there will probably still be a split for some time. But we do every time we think about when we can lift the dividend, is there a way we can put more into the interim, but it doesn't always work out that simply. Sorry, Geoff... Geoffrey Driver: So would we think about our quarterly, and also what's our target in terms of dividend and long-term growth. Robert Freeman: Yes. So there is -- one of the LICs within the stable, but it is a different company, Djerriwarrh has announced they are going to quarterly dividends, but that is more of an income-focused product. And that's really a Board decision, but I guess the most recent view is that probably half yearly is okay at this point. But there has been a bit of a trend to try and move to quarterly generally in the market. So this is an issue that will probably get more discussion going forward. But yes, I'm not sure there's a strong appetite for change at this point, but it certainly needs to be looked and discussed on an ongoing basis. And this is the general approach we take, we like to pay out all the earnings as dividends. So we like to sort of pass dividends and the franking credits through to shareholders. Then obviously, we have capital gains we generate on the way. There's a little bit we hold back for a rainy day to make sure that we've got stability. But beyond that, there's a sense from the Board that we want to get excess fracking credits back out to shareholders. So obviously, we announced the $0.025 special for this and another $0.025 special with the final. And we also did say that we will reconsider at that point our franking credit position, but we're sort of establishing that if there are excess, the general sense is to try and get that back to shareholders. We want to have a mix of yield, we also want to get growth. And there certainly is there an intent to -- or want to outperform the index. If we can do that with stable dividends, very low cost, we believe it's a good product for the long term. Geoffrey Driver: A question here about IDP. I think we've covered in the presentation, but I guess you said we went early. So why did we not wait in terms of actually... Winston Chong: Yes, sure, I can cover that one. So with IDP Education, if we kind of reflect on why we went into early, when you look at kind of the share price declining over the last couple of years, the first point of entry was at a time where one of the markets was under a bit of pressure due to policy changes. What we didn't preempt was the synchronization of policy globally during an election cycle where -- and neither did the company, and that's why we've seen the precipitous decline in the share price and the financial results consequently. When we kind of look at the moment where all the markets are sitting, Australia, which is the largest market, is back into growth. The U.K. overnight, just announced some strategic measures for international students, and even Canada, which has been one of the most difficult markets, is starting to show some early signs of green shoots. So when we experience these declines, the first question we ask is, is the balance sheet okay and the second question we ask is can we back management to manage through that situation. And with IDP, the reason we've maintained the position is because the answer to those questions is yes, and we're starting to see some early signs of improvement. Geoffrey Driver: A question here about CSL and why do we continue to have confidence in it given that it's been poor results and also the canceled demerger? Brett McNeill: Yes, sure. We do have confidence in it, but it's definitely been tested over the last 12 months. So I think there's a whole lot of negative things affecting the company at the moment. So -- and some of them are a result of market type factors like the attitude towards vaccinations and the like in the U.S., but a lot of them are self-inflicted, particularly the confusing strategy around the planned demerger of the Seqirus business. Overall, though, we think there's enough in the company to, I think, say that the competitive advantage is still very strong in CSL, particularly in the immunoglobulin products that they have got, basically life-saving treatments to patients in almost 100 countries around the world. And the returns that CSL can make of this and have made in the long term, I think, are still valid. The concerns that are there are very much impacting the share price, and you can see it in the multiple that the market gives the stock. I mean, CSL once has traded at 35, 40x earnings, it now trades on 16x earnings. So unless we believe that the business is truly broken, it seems like a very low point to give up on the stock. We have been buying in the last year, but that's been too early. But for now, we see a strong case to at least hold the position, given that long-term potential remains, particularly when you've got a balance sheet that's in good shape, so we don't think there's any problems there, and we think management and the Board are very focused on getting things right, particularly addressing things like maybe a bloated cost base and an overly complicated structure and returning CSL to being more of a growth company that it has been in the past. So clearly, it will be one of the most anticipated results in the upcoming February reporting season. But for now, that's our position. We think the company's long-term growth potential and the value that's there today warrants us holding our position at least. Geoffrey Driver: Thanks, Brett. A question probably for you here, Mark. How active are your Board members with making decisions around purchase and sales of specific investments, i.e., are they making it easier or hard for your portfolio managers to make changes that they see are necessary? Robert Freeman: Yes, that's a good question, understanding the role of the Board, it's the investment team that manage the investments. The Board members have to approve the transaction at the end of the day, but the investment team have the ability to run that. The Board are there to give us great insights to utilize their experience in terms of the sectors and markets and companies they've been involved with, and that's invaluable. But in terms of how they do it, Brett, who's Portfolio Manager now for AFIC, has talked about, we do have sort of subaccounts within AFIC and we call them, there's the A account, which is our long term. We've got a B account, and we've also got a trading amount. We've talked a lot about internally the B account, which we can do more activity, how that can be used. And I think Brett's got the license and Brett and Winston to take advantage of opportunities as they see fit in the market. And I think there could have been more use of that over the last few years, but I'm encouraging them to utilize that and to make sure we are hunting for value and capturing value within the AFIC portfolio. Geoffrey Driver: Thanks, Mark. There's a question here about Telstra, a couple of points really. Why are we investing in Telstra given the share price has sort of gone out over the last few years? And also a question about market turnover in Telstra seems to be consistently high in terms of its shares. Winston Chong: Yes. So I guess I'd refer us back to the slide that I presented on earlier before during the transactions. And it really comes down to the role Telstra plays in our portfolio, which is really income. And the points made there around the share price are correct. It has been through a really rough period for shareholders over a long period of time. But really, from where we are today, having -- the company having gone through the NBN transition is now in a really good position where it's paying a sustainable dividend and the growth outlook for that dividend is good as well. And so at current -- in one respect, the share price performance has actually provided the opportunity for us to increase the position at an attractive price and kind of giving us dividend plus growth over the long term. So that's probably why we see at this point, a good investment. Geoffrey Driver: And the same question around Woolworths in some ways, too. Why are we sort of positive around that given where the share price has been trading more recently? Brett McNeill: Yes. Again, a similar story. So it is -- it's been a disappointing year for Woolworths. They've been through a number of challenges. But again, that's where the opportunity presents itself. The yield where we're buying looks attractive versus history. And Woolworths does have a bit of a turnaround ahead of it. We're kind of watching management. We back them at the moment. It's -- again, it's got a strong balance sheet and a lot of these characteristics like market leadership and attractive returning business, but we think there's a lot of latency in that business that's not being realized. Over the long term, we expect it to deliver. Robert Freeman: I'd just add to that. It's about hunting for value. And with that sort of bit of negativity, you had the stock price sell off, Winston, to sort of $26, $27, and that's what we look for is those, we call them price dislocations where we think there's -- a company is going through a bit of a tough time or we were talking earlier, that every company has a tough period. And that's where you can often get the best buying. And if you're convinced it's temporary, so the team did some really good buying around those levels, and now it started to recover, it's back over $30 again. And so you get then good capital growth and a good yield, and it can turn out to be a good return for us. Geoffrey Driver: So a question here about Mineral Resources. We sold it, did the exit. Was the exit a mistake in hindsight? Brett McNeill: Yes. So far, it was because it was below the current share price, but these things take time. I think the lesson from that was our expertise and track record in picking single commodity stocks, particularly those that are up on the risk curve. And whilst the company had a lot of very strong attributes at the time being founder-led and a very attractive sector, it could change quickly, and then it's changed again. So definitely a mistake in the short term. Long term, we'll see, but we could buy the stock today, and we're not -- we've chosen not to buy it. So that's the best indicator of our view of the company at this point in time, whereas our commodity exposure has been concentrated in BHP and Rio. That's where we've seen better value and quality. Geoffrey Driver: A question here. Given all the opportunities available in the U.S. and the outlook for deregulation in interest rates versus Australia, would you consider materially increasing your position in international equities? Many of your top Australian holdings are fully valued by their own admission. Granted capital gains tax on sales, some of these would be taking profits will allow further fully franked dividends, increased international exposure and will be a point of difference versus your competitors? Robert Freeman: Okay. There's lots of questions within that question, but I'll try and pick up on most of it. Certainly, we had a view 6, 12 months ago that a lot of our stocks were very fully valued, and we are a long-term investor. We want to be tax effective. So we try and limit our activity and sometimes you wear that downside. But I would say a whole bunch of our good quality stocks are now looking much better value at the moment. And so that gives us an opportunity to hunt for good quality there. And with our renewed approach on the international, where we're being a bit more focused, we are hunting for value there. So we're taking a bit more of a view is where we see value, that's where we're going to allocate money. We are open to putting more in international if we're seeing good value that can add to the AFIC portfolio. So we can hunt for value in both locations and both of them are available to us. Geoffrey Driver: You've got any view on the oil and gas sector in terms of the stocks we currently own, particularly around the Santos failed merger, failed acquisition, I should say? Brett McNeill: Yes. So we own two stocks in the sector being Woodside and Santos we think are the higher-quality businesses within this space, and it's a sector that's offering and has for quite a while, offered some very good value, and we want to be in what we think are the better quality operators. Both have got a good case for better returns over the next few years. So they've invested in growth projects that will start to complete over the next few years, and that should generate a very attractive level of cash flow, which, if the Boards and management teams of these companies manage that widely, a large part of that should flow through to shareholders in the form of dividends, mostly fully franked dividends. So I think there's a good investment case for both Woodside and Santos, which is why we've retained a holding in both. But a lot of the short-term share price performance is going to come down to simply the oil price, which has been trading -- trending lower over the most recent year and actually on a multiyear view as well. But you see at certain points in time, it's been a pretty calm share market overall the last few years, but you see certain points in time when there is an episode offshore like what has happened in the last couple of weeks, for instance, and you get a spike in the oil price and it can make a big difference to the share price of Woodside and Santos. So again, wanting to keep, I think, a level head and a more through the cycle longer-term view of value rather than being swayed so much by the short-term stuff. Geoffrey Driver: I've got quite a few questions which I'll amalgamate in terms of given the recent performance, how are we viewing both in terms of the investment team, the structure of the investment team and also remuneration around the investment team? Robert Freeman: Well, with the structure, I'm really, really pleased with what we've had in place with Brett and Winston. I think Brett has been with us 6 years, and to my mind, is a proven quality value investor. So -- and I think myself and the Board is just wrapped that he's taken on this responsibility. So really pleased with that. In terms of remuneration, the biggest part of our incentive is performance. And so if the performance is not there, the incentives are not there. So we are all very aligned with the outcomes of the LIC, not only from incentive, but we are all shareholders, some of the significant shareholders across them all. And so performance means everything to us across all those assets. Andrew J. Porter: Just to note, as Mark said, it is across all LICs. So the figures that you see in the annual report, the remuneration report include incentives that are based on performance for the four LICs, not just any. Geoffrey Driver: I noticed the number of participants have gone down quite dramatically here, but I'll ask a few more of the outstanding questions that we've got, and then we'll attempt to get back to those that we couldn't answer online. Interesting question here, Andrew. Dividend declared is $181 million, cash available is $131 million, a difference of $50 million. How AFIC fund the $50 million in difference? Andrew J. Porter: Well, first of all, of course, there is a strong participation from shareholders in the DRP and the DSSP. So that reduces the amount available, and that's cash we've got at the moment. So there's always cash coming in for dividends with companies that we hold and any potential cash that we're getting from the sale of facilities and from the sale of securities. We do have liquidity facilities in case there is a short-term funding gap, but that really is just to tide us over until the dividends come in from the companies that we invest in. So it's not unusual, it's not an issue. Geoffrey Driver: So Winston, the rationale for the new additions, such as Objective, Life360 and Temple & Webster. What are your sort of objectives there in terms of the yield and also growth targets on these? Winston Chong: Yes, I'd say for the first one I make is something that might have been missed in my comments that they are relatively small positions at this stage, they're 0.3% of the portfolio. What we're really looking for in these small-cap stocks, and I think all three that were mentioned fit this bill is really the duration of growth, that they're small, they're at the early stage of their growth runways and that we have growing confidence in the their long-term opportunities, and so they're really there for capital growth as opposed to dividend yield, I'd say. Geoffrey Driver: A question, is Transurban an appropriate holding for the long term? Robert Freeman: Yes, we're very confident that it is. We think it's very hard to find companies to invest in, especially on our share market that effectively have a new monopoly position in a highly defensive and quality sector that has locked-in growth. So when you own collection of the best toll roads in a country that has population growth and a pretty solid economy, the returns and the growth that you can get from that over the long term when you factor in compounding can be very strong. And you see it when you analyze the historic results of Transurban. And then -- so within that, though, you need to have a balance sheet and a capital management policy that reflects the nature of the business. And we think, again, that's been well proven over time in the case of Transurban paying out operating cash flow as a dividend and running a very tight ship on the financials, particularly on the gearing levels, running it all in a sustainable manner can deliver great outcomes for shareholders. And I think we've seen that over the long term in Transurban, and the dividend growth in recent times has been very good, too. Geoffrey Driver: I might make these last couple of questions. Got a question here. AFIC's larger holding in Mirrabooka is giving a greater exposure to small and mid-caps while in recent times, this has been valued as probably trade as a discount. Also, has the writing of call options increased as a means of improving income? Brett McNeill: Sure. So on Mirrabooka, so yes, of course, the share price will fluctuate around NTA. It's got the same company structure as AFIC does, so you're always going to have that premium discount to NTA. I mean, interestingly, the Mirrabooka share price is still above the issue price in the equity raise that we participated in last year. The overall investment we have in Mirrabooka is quite small as a separate investment of about 0.5%. Hence, we think there's a good case to also invest in small and mid-cap equities directly. And the second question, Geoff, was what, sorry? Geoffrey Driver: In terms of would we think of -- sorry, in terms of the way we manage the small mid caps in the portfolio, does it also satisfy that requirement because we're using Mirrabooka? Robert Freeman: Yes. Geoffrey Driver: Another question here on Amcor. It's being sold off. Does it present one of those opportunities you alluded to previously in regard to index changes? Brett McNeill: Yes. So Amcor certainly has been one of the stocks that have suffered from the index changes. So that explains part of the reason. But as long-term investors, that's something that over the long term, we think is a bit of a wash. One thing that has meaningfully changed for Amcor is post the merger or the Berry acquisition, the shareholder base is -- it's a dual listed company. So the shareholder base has shifted its weight more towards the U.S., where packaging stocks are not as scarce, and so the valuations of those stocks attract -- are not as attractive. From here, we continue to hold the stock. We think that the benefits of the merger have not yet been fully appreciated by the market, and will hopefully be proven up over the next couple of years. And so yes, certainly, the index changes have been a big factor in that stock in particular. Geoffrey Driver: A question on Reece here in terms of confidence in the Board and also, it seems that Reece has sort of been running their own race with regard to shareholders. Could you sort of bit of comment around that? Winston Chong: Yes, I'd say as a signing point, it's similar to my comments on IDP before and that Reece have been subject to the external environment. So U.S. housing is in a downturn, and Reece obviously have aspirations to grow our business there. But given where that business is in terms of its maturity has suffered quite a bit. And so in that regard, we kind of take a step back and look at the Board, the management team, are they aligned and find very much so they are and they've been buying back stock recently in support of that and also been managing the balance sheet in a very conservative way that we do think is in the interest of shareholders. When we look at the Reece management team, they have always managed the business for the long term, and that includes managing through the fluctuation. So again, we -- the things we look for when companies are experiencing headwinds like Reece is, are they aligned, do we still back management? And then secondly, do they have a strong balance sheet? And again, the answer to those two questions is yes. Geoffrey Driver: I've a question here about the option strategy, Brett, just to clarify, we're sort of writing call options, and we're not buying options per se. Brett McNeill: Correct. Yes. So when we use options and you may see it indicated on our reports, when indicated options are written against certain holdings, what we're doing there is writing call options predominantly against stocks that are held in the portfolio, and we only do it to generate more income. So we do not use options at all for hedging for speculative purposes. It's purely for income generation. It's not a significant part of our strategy. But we do have the ability to do it against certain stocks. And if it's done well, and hopefully, we've got the expertise within the group, again, proven over time to do -- to run such a strategy, it can generate a good level of extra income, which we obviously can use to pay out as dividends. Geoffrey Driver: Thanks, Brett. Look, we've been going for well over an hour now. So I think the questions we've got, we've basically covered most of them within the presentation, but anything we don't have covered, we'll get back to you directly. But at that point, I think we'll close the presentation, and thanks for your -- to shareholders listening to us and also be aware that we'll have shareholder meetings around the capital cities in March, and also we'll be doing one of these presentations with the final results in July. So again, thank you very much, everyone. Operator: That does conclude today's webinar. Thank you for your participation. You may now disconnect your lines.
Operator: Thank you for standing by, and welcome to the Evolution Mining Limited December 2025 Quarter Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Lawrie Conway, Managing Director and Chief Executive Officer. Please go ahead. Lawrie Conway: Thank you, Harmony, and good morning, everyone. I trust you've had a good break and wish you a very healthy and successful 2026. I'm joined on the call today by Matt O'Neill, our Chief Operating Officer; Fran Summerhayes, our Chief Financial Officer; and Peter O'Connor, our GM, Investor Relations. Today, we released our December quarterly report, which will be a reference point for the call. Fran and I will be back in a few weeks when we release our FY '26 half year financial results. Before going into our quarterly results, I want to take a moment to reflect on the tragic event that happened here at Bondi on 14 December. 15 people were murdered due to racism. No violence is accepted even more so violence linked to racism. This heartless and cowardly act of terrorism, whilst many people and families were enjoying the Bondi environment, specifically the Jewish community celebrating Hanukkah. I know this has impacted our country, including our team members at Evolution. The attack is something that should have been avoided. The lack of action by the federal government over the past 2.5 years on racism is inexcusable. The refusal to call a Royal Commission until the overwhelming majority of Australian spoke of the need for it, and then to try and condense the time frame for political reasons is disappointing. It lacks leadership. On the contrary, the leadership of the New South Wales state government with quick and strong action and support was very welcome. My biggest concern is that we learned nothing from this and do not make Australia a safer and more inclusive country. Our condolences go out to the family and friends of those who were murdered. Our thoughts and prayers go out to everyone who was impacted by the attack, and we also thank all the first responders volunteered support during this incident. Turning back to Evolution. This was another quarter and the eighth consecutive quarter where we've safely delivered to plan. We produced 191,000 ounces of gold and 18,000 tonnes of copper at a very low all-in sustaining cost of $1,275 per ounce for continuing operations. We did it safely with our TRIF remaining low at 5.8. Gold production improved by 10%, while our all-in sustaining cost improved by 26%. Importantly, the cash generation has really gained momentum as we realize the benefits of the current metal price environment. Our underlying group cash flow improved 176% to $541 million or around $2,800 per ounce when normalizing for the FY '25 annual tax payment made during the quarter. Reported cash flow was up 110% to $412 million. The cash flow was achieved at a gold price around $800 below current spot. The group cash flow was on the back of record mine cash flows with operating cash flow up 57%, just over $1 billion, while net mine cash flow doubled to $727 million, with the operations increasing their cash flows in the range of 55% to 140%. The cash flow charts on Page 1 of the report very clearly shows our cash-generating capacity. We are on track to deliver almost $4 billion of operating cash flow. This is 40% higher than when we issued our guidance in August and is anticipated to be 25% higher than what we have delivered in the first half. Our cash balance improved to $967 million after we repaid $110 million and $116 million in net dividends. We have no debt due until FY '29. Our gearing is now at 6% compared to 11% at September and 30% just 2 years ago. We are well on track to being net cash this year, providing further balance sheet flexibility, including returns to shareholders. We remain on track to deliver original group production guidance of 710,000 to 780,000 ounces of gold, and 70,000 to 80,000 tonnes of copper. Group copper production is expected to be at the low end of guidance due to the weather event at Ernest Henry. At the end of the quarter, Ernest Henry received 300 millimeters of rain in a 24-hour period, resulting in water ingress to the underground mine and temporary suspension of the operation. All personnel were safely accounted for and no injuries reported. Recovery activities are progressing well with only short-term operational impacts expected. It is anticipated that the impact at Ernest Henry is about 7,000 to 8,000 ounces of gold, and 4,000 to 5,000 tonnes of copper for FY '26. Group all-in sustaining cost guidance is updated to $1,640 to $1,760 per ounce and is a 6% improvement on our original guidance, reflecting continued cost control, the impacts of higher by-product credits, partially offset by the Ernest Henry weather event. The updated group guidance further entrenches [Audio Gap]... Matt will go through the operational performance soon. However, I do want to call out a couple of key highlights. About 2.5 years ago, some analysts were calling Cowal's best days behind it. One even saying that the cash Cowal was over. Well, this quarter, it delivered $361 million of operating cash flow at $4,500 per ounce and $284 million of net cash, which equates to more than $3 million per day even after investing in the OPC project. This level of cash flow alone is better than a number of Australian multi-asset, mid-tier companies, and the operation has at least 16 more years ahead of it. Mungari delivered record net mine cash flow of $104 million, which is a 142% improvement for the quarter and represents nearly 50% of the plant expansion project capital. At Red Lake, the operation is settling into the desired rhythm of 30,000 to 40,000 ounces per quarter and positive net cash flow. That produced 33,000 ounces and doubled their net mine cash flow to $80 million. They have now delivered over $200 million of net cash flow in the past 18 months. On the projects front, Mungari successfully moved to commercial production and the establishment of the Castle Hill mining hub is now complete, following the full sealing of the haul road during the quarter. The Cowal OPC project made solid progress this quarter and remains on plan and budget. Studies for the next key growth projects being E22 at Northparkes and Ernest Henry are complete, and we'll go to our board for assessment during the March quarter. With that, I'll now hand over to Matt to take through the operational performance. Matthew O'Neill: Thanks, Lawrie. As noted, we have successfully completed another strong quarter of safely delivering to plan, and we remain on track to meet full year guidance, allowing us to continue to benefit from the rising metal price environment. I'm pleased our safety performance remains in a healthy position with the teams at each of the operations continuing to focus heavily on this area. We did see a small increase in our total recordable injury frequency rate this quarter, which was driven by an elevated number of injuries at our Cowal and Mungari operations during the month of October. Our safety focus remains on leading indicators, and we continue to perform strongly here. On the production front, as noted, we're on track to meet full year guidance. For me, the production highlight of the December quarter was the successful ramp-up of the Mungari operation where we achieved an annualized run rate through the mill for the quarter of 4.1 million tonnes. Throughout the quarter, the team ran the new mill through a range of operational parameters, and I'm happy to say that they're very pleased with how it has performed. Similarly to the September quarter, we had minor interruptions to mining activities in the open pit at Cowal due to wet weather. Again, it was pleasing to see that the work the team have done on resilience and reliability pay off as we experienced only minor variations in the plant due to these events. As noted, works continue to progress well on the OPC project with the project ahead of schedule and in line with budget. The Red Lake and Mt Rawdon operations continued to deliver in line with their plans with minimal variations throughout the December quarter. As noted earlier in the call by Lawrie, Ernest Henry experienced a significant rain event at the back end of the quarter on the 29th of December. The Cloncurry region had its average annual rainfall of 420 millimeters fall in just a 72-hour period, 300 millimeters of which fell in just 24 hours. During this event, all personnel were evacuated safely from the mine via the shaft and the multiple dewatering systems, both in the pit and underground operated as designed to reduce the impact of the rain. We diverted water away from key infrastructure areas and into the bottom of the mine, minimizing the impact on mine infrastructure. Whilst we are dewatering and remediating the mine, we've moved forward the scheduled February plant shutdown to align with these works. The processing plant shutdown is underway now and scheduled to be completed by the end of January. Current estimates are for full year production from Ernest Henry to be lower by between 7,000 and 8,000 ounces of gold and 4,000 to 5,000 tonnes of copper. At Northparkes, we achieved a significant milestone during the December quarter, with the completion of the E26 sublevel cave after 10 years of operation and the successful ramp-up of E48 sublevel cave taking its place. In summary, we remain on track to meet the group's full year guidance and take advantage of the strong market conditions we are currently enjoying. This brings the formal part of our update to an end, and I'll now hand back to Harmony for questions. Operator: [Operator Instructions]. Your first question comes from Levi Spry from UBS. Levi Spry: Happy New Year. I mean, I guess, just firstly, on the -- moving to a net cash position sometime this half. Can you just talk a little bit around how the Board might address that in February, what the competing sort of interests are in terms of CapEx and exploration, maybe what you can bring forward potentially? And specifically, I'm thinking about your projects, but also the OPC and how you're going to optimize that going forward, Northparkes? Lawrie Conway: Thanks, Levi. Happy New Year, and I'll get Fran to add a couple of comments. Our cash flow only just has increased since the day she joined. Look, we will move to a net cash position over the remainder of this year. And it is -- highlights that if you deliver a plan essentially in an unhedged environment and do that safely, you actually get the benefits. What the Board will consider our policy is percentage of cash flow, targeting 50%. We look at it on a full year outlook basis. And at the end of each financial year, we look at the policy. So we look at the policy at the end of the year. I don't expect it to change too much, but we've got certainly flexibility around the percentage that we pay. In terms of then internally, I think our discipline around capital allocation and projects will remain key. We have seen that OPC is advancing well, and I was out there last week and it's actually a lot higher than what it was 6 months ago and 3 months ago, which is good for the project and does open up some flexibility around that project and what we do. Exploration, I think Glen is going at full tilt, but he's looking at some opportunities there. And then obviously, the Board will consider E22 and during the quarter as well. So yes, well -- as I said, we'll look to make sure we continue to reward shareholders in this environment, discipline around our capital [ allocation ], be that in projects and exploration, but a good problem for Fran to have as to what to do. Fran, anything to add? Frances Summerhayes: No, you summarized it well. Levi Spry: Yes. Okay. And then just at Ernest Henry, maybe for Matt, look, a pretty significant event, maybe lost a little bit, otherwise very good quarter. What's the current status? So you expect the plant to turn back on at the end of the month, but interesting in terms of the mine and dewatering... Lawrie Conway: Yes. I'll get Matt to do that. I mean, yes, Levi, I think it didn't impact on the December quarter, as Matt said, it was right at the end, but it is what we're going through into this quarter. And Matt outlined a little bit on the call, but maybe just, Matt, color around the mine and the plant and the surface. Matthew O'Neill: Yes. So I'll start with the surface. Things went quite well for us on the surface with that volume of water. The plant is completely fine. And so what we chose to do is instead of having that shutdown in February is that we will do it ourselves and that we would bring it forward into January, so giving us a bit of time back in that month. In terms of the mine, the infrastructure, there's some minor flooding remediation works that we need to do in areas that were sort of pockets rather than anything else as the water sort of moved through the mine, some of the pockets filled up and so that's tail end of 2 conveyors that doesn't take much to get back and then some works around a hydraulic pack that was sort of sitting in a pit in the crusher. So there's nothing material from the infrastructure side. Currently, we're dewatering into the existing dewatering system quite significantly. So we're sort of up around sort of 35 megaliters a day. The current status is that that's progressing ahead of plan. And like I said, we'll turn the plant back on at the end of January and then work our way back through that, bringing the mine back on through that month as well. Lawrie Conway: And just a thing to point out, Levi, versus what we experienced in March '23 that the pumping stations and the main power substations were not impacted like they weren't really impacted at all this time. Matthew O'Neill: No, that's right. We kept those operational throughout. We had a period where we didn't put people into the mine because we didn't want to put anyone at risk. And so we had tripped out until we got someone back in there to fix it. But outside of that, all of the infrastructure worked exactly as planned. The size of the event was probably the issue. It's almost triple the size of anything we've seen before. The [ 100 million ] a day was about the maximum from the last couple of events. And we did see that in the lead up to this event, and then we saw the 300 millimeter, so that the systems all worked as planned. The scale of that event isn't something that we've seen in that region for quite some time. And you could see around some of the neighbors in the area as well. The past has had some pretty significant impacts that they've not seen. So that was the issue for us. But managed well, infrastructure good, and we'll get back up and running in the short term. Operator: Your next question comes from Hugo Nicolaci from Goldman Sachs. Hugo Nicolaci: Lawrie, Matt, Fran, congrats on a fairly strong quarter. I just wanted to -- first question in and around sort of more strategic one. Obviously, this gold cycle has been pretty strong, if not unprecedented, with prices where they are, obviously, producer discipline has been pretty key in terms of capturing that operational leverage and not chasing low-grade ounces for the sake of volumes has been pretty -- has delivered a pretty good cash result. But looking at it from here, so the gold prices arguably more than double where a lot of these mine plans were set. I mean, is there room to start recutting how you look at these things to optimize value from here if this is the gold price going forward? Lawrie Conway: Yes. Look, I'll let Matt have a bit of talk about the plans and the mines, the open pits and the underground. But essentially, we look at the current price environment and as we're mining in certain areas, if more material becomes economic, we're taking those, we're right into our life of mine and mineral resource, ore reserve review now. But we don't just let the short-term metal price drive the wrong behaviors. Matt? Matthew O'Neill: Yes. We are taking advantage of that in the short term. But the discipline that I'll keep pushing with all of the operations is that any of the lower grade is not to displace any of the original plan or high-grade materials. So where that starts to help us is that when we can increase the capacity either through the plant or the materials handling systems, we can do that because most of the operations do have that capacity if we were to drop cutoff grades, we see some reasonable increases in some of those operations. And probably 1 of the key ones that sort of stands out in this environment, both copper and gold, is Northparkes, and you'll see that that's where a lot of the work is occurring and a lot of the focus for trying to take advantage of that is sitting. So yes, we are doing it, but I don't want us to drop back to erode the margin significantly by chasing stuff that's economically viable in this market. Hugo Nicolaci: Got it. That's helpful. And then second one, just following on from Levi's question at Cowal on the OPC. I mean, obviously, ahead of schedule there. If you've got the team on site, how do you think about bringing forward the next stage [Technical Difficulty] or just maybe the recent rainfall we've seen maybe limit your ability to do that immediately? Lawrie Conway: Yes. Look, Hugo, I think what we're doing, the northern bond as we completed in the last quarter enables us to then start works around E46 and a lot of other surface infrastructure in the northern end, which is why it was scheduled first. The water in the lake is receding and receding at a good rate. And unfortunately, when I was at Cowal, they said they would have liked some of the weather that -- or the rain that Ernest Henry got because it is fairly dry out there and at Northparkes. So when we look at it, it's anticipated that the lake would be dry by the middle of this year. And you might recall when we approved the project, the south -- the south part of the lake move was scheduled for FY '28 and scheduled to be dry. So it does provide an opportunity for us to consider bringing that 1 forward because you wouldn't want to be waiting a couple of years and find out that you got a wet lake or a full lake again. So that's something that we're working through right now. And then I think in terms of the other surface infrastructure and works that Joe and the team are looking at, I think, they will build that into the plan. It will allow us to look at the IWL, whether we build that up in preparation for having 2 and 3 open pits in the next couple of years do that earlier. Certainly, 1 thing that we'll look at is just anything else that can be done now in the environment that they're experiencing. Hugo Nicolaci: And then maybe last one, if I could, maybe 1 for Fran. Just can you remind us how the copper quotational pricing periods were just looking at the realized pricing on some of the byproducts. It looks pretty favorable versus average prices in the quarter. If you could just remind us if there's any timing or any impact there we should be considering? Lawrie Conway: Yes. Hugo, it's not simple for you on your side to be able to, I guess, model them because at Ernest Henry, you've got a quotational period that gets nominated every month. At Northparkes, you've got a quotational period that gets nominated quarterly, and you've got 2 offtake partners in terms of Sumitomo, our joint venture partner and IXM as our offtake main partner. And so they have to nominate them. And if we look at it in the -- at the end of September, we had about 8 shipments outstanding that were still open to pricing about 21,000 tonnes of copper, split sort of 3 at Ernest Henry and 5 at Northparkes. They, at the end of September were priced around $15,000 a tonne. They then move to the December pricing, and that was around $18,500 a tonne. So that's what lifted our achieved copper price for the quarter by about $3,000 a tonne. At the end of December, we've got about 4 shipments outstanding around 10,000 tonnes that will get finalized in this quarter. And then it depends on what each of the offtake partners nominate in the next 3 months for their pricing. So that's why it's a little bit difficult. Where we stand today, it's averaged about 19,200 month to date. That's what some of those shipments are going to get repriced at -- if they finalize this month. As I said, it's not easy for you. But it's really dependent on what the offtake partners or what they nominate. Operator: Your next question comes from David Radclyffe from Global Mining Research. David Radclyffe: So just a bit of a follow-up to Hugo's question. Because obviously, when you look at the quarter, it was really only Mungari that was setting a new record, and that obviously reflects the expanded capacity. But there is some late mill capacity across the group. So just trying to understand if there are any near-term opportunities you're considering to push throughput and take advantage of this environment. And if not, what is the constraint there? Is it the fact that you're not prepared to budge on the current capital budget. Just trying to understand there how you could actually push the mills a bit harder. Lawrie Conway: Thanks, Dave. I'll let Matt just give a run-through on each of them. I mean -- but I will start off by saying it is not about the capital constraint. It is about making sure that if we commit the capital, we're going to get the returns. I think when we look at it and if you see the announcement today, the land around Ernest Henry, that we've now picked up that plus the previous project that we announced a while ago, that gives us a continuous footprint all the way around the plant. That's all within trucking distance. And so we've got 1 program has already started. This 1 will be the next one. So that's giving us an opportunity because it's constrained by the mine and you obviously got berth. But we will look at all of those opportunities where we can. Matt, 9 months? Matthew O'Neill: Yes. I think Ernest Henry is the main 1 for us. We do additional milling capacity available today compared to what we bring through the mining system. So we are open to that, whether it's our own material through exploration or whether it's a toll agreement with people in the region. That's something that we're actively pursuing. Then outside of that, if I look at Northparkes and Cowal as the next 2, they are mill constrained. So we spent some money at Cowal on the mill setting it up for the next 20 years in the last financial year. And -- we also spent a bit of money there on improving the recovery. So we are working on opportunities account to increase throughput through the mill, but it's something I'm certainly not wanting to rush through there. So those do essentially mill constrained with improvements and incremental improvements possible, and we can feed them from our own sources. Mungari is a similar story. So Mungari, obviously, now ramped up. What we were wanting to do there, our strategy there is to run the Castle Hill complex, which is running very well at our baseload feed and then supplement that with our underground feed, which is where the grade from -- grade comes from and gives us the ounces. The opportunity there is to be able to postpone or defer any of the lower-grade material from Castle Hill by putting in higher-grade product through the mill. And obviously, we run the finances on that depending on what we do. So the exploration team, that's 1 of our key spend areas and where we do see an upside if we can get additional underground feed. We want it to come from our own material. That's where we make our best margin. That said, we do have opportunities where we will and can and have toll treated other people's product at a higher grade if the finances make sense for us from deferring that material. So those are your areas. Outside of that Red Lake does have mill capacity. There's not a huge opportunity there for either increasing our own material, which is still the bottleneck from the mining operations. But third parties, there's not a huge amount around there, but those are things that John and the team are looking at when they come up. I think that's the run through of most of the operations. David Radclyffe: Right. Maybe if I could just come back on Mungari there because I think on the site visit you were still ramping it up and hadn't really tested it and it looks from the commentary that you may have sort of pushed it a little bit here with third parties. So are you confident -- you're obviously confident you can get to capacity. Did the engineers sort of leave anything there in terms of conservatism? Do you think you could run Mungari a bit higher than nameplate? Matthew O'Neill: No, that's something we're investigating. At the moment, it did ramp up exactly as we wanted to. We had periods where we were above nameplate, but that was more related to the material [Technical Difficulty] or a little bit softer. So like most mills, depending on what we're putting through, it will give us a rate. But that's what I'd like us to do. At the moment, we're certainly not promising that, but that's what we're working on. Lawrie Conway: And I think if you look at it for the quarter, it annualized at a whole point [Technical Difficulty] special production. Operator: Your next question comes from Daniel Morgan from Barrenjoey. Daniel Morgan: Lawrie, just going back to the Cowal southern bund decision. Can you just maybe expand what drives the decision to execute a bit faster on the Southern bund? Is it it's easier, costly, more productive and sort of costs? Or is it revenue items are you're going to have potentially access to more or more material, better grades and can grade sequence like what goes to the decision to execute earlier if you do so? Lawrie Conway: Yes. Dan, look, I think the primary 1 becomes where the lake is sitting at with the level of -- that it's receded as you'd recall, we've always planned to do it dry, it's more cost effective. So that's -- that is the primary decision point because it's not about what can we afford the capital as long as we're staying within the $430 million, we'll be fine. Then in terms of -- the second part of it is, what does it give the site in terms of flexibility. So having put all of that infrastructure around the southern area, it gets the ability to look at E41 and when we time that. But that's coming into FY '27 and beyond. And I think that's why the secondary piece is that flexibility it provides to Matt and the Cowal team is that for a period, we'll be on low-grade stockpile material. You're going through the cutback of Stage I, so if you can open up E46 and E41, it just derisks that operation a lot more. Daniel Morgan: Right. Another question. Just there is a footnote on Page 2 regarding Northparkes, where there's been some sort of a positive adjustment relating to stream deliveries, the number there is $18 million, that was an outflow. It just seems a bit lower than what I thought. Is there any -- can you just clear up what's going on there? Lawrie Conway: Yes. So during the period, there was a reconciliation of the finalized pricing and payments for the stream with Triple Flag and as the final pricing and everything that came through on that back for a number of periods resulted in a credit back to us. So that's why the $18 million, I think last quarter was about $32 million. So there was a benefit relating to the final pricing. That is one... Daniel Morgan: That's a one-off? Or is it something that there's an annual true-up or something that we might see again in a year's time or that could be adverse or better or... Lawrie Conway: More of a one-off, Dan, is going through with Triple Flag about the whole mechanics of it, and we're obviously learning it in the first year. We've then done all the reconciliations with them, and that it's more of a one-off. Daniel Morgan: Okay. Very clear. Just shifting over to Red Lake. It looks in -- you've made a breakthrough at Cochenour, where if I read that correctly, does that mean that you are no longer going to be using ore passes and that you're going to truck down, ore down to the high-speed tram. And is there benefits in terms of grade and reconciliation that could come? Matthew O'Neill: Yes, Dan, it's Matt. Look, we will still be using ore passes, but what it does do is derisk those. We've got some duplication and contingency in that system given the issues we had earlier on. So we will still use all passes through that. The biggest benefit for us there will be ventilation as well. And also the mobility of some of our equipment. So it's more of an operational flexibility and reliability thing that it will give us. It doesn't necessarily impact grade and other bits and pieces at this stage. It does open up some other areas. And allow us to do things a little quicker, but that's really around operational flexibility that the benefit comes. Daniel Morgan: And just last question is mainly cost, I mean, obviously, there was a provisional pricing stuff that came through, but signs of cost control are evident as well. Just on Mungari specifically. There's obviously a bit going on with various third-party ore purchases. You had commercial declared partly through October. And so the AISC number is not necessarily completely clean as a go-forward guide. Just wondering if -- what's the latest view on what Mungari costs roughly are going to be on a clean basis? Lawrie Conway: Yes. Dan, I think when Matt talked about testing of the plant and everything the team took the opportunity around that ore purchase to get that type of material through the plant earlier. So those costs and ounces are excluded. So when you look at what we've reported for Mungari for the quarter, that AISC and the costs are really about just our ore. So it gives you a good reflection of -- so about $2,000 an ounce, you take it that most of October, there were commissioning costs. So you're going to be in the early low 2,000s -- going forward, when it hits the 50,000-ounce quarterly run rate is what you should expect to see. So we're at $1,980, I think, was a quarterly cost for Mungari. As I said, some commissioning in there, but it is only on our ounces and our costs. Operator: Your next question comes from Matthew Frydman from MST Financial. Matthew Frydman: Lawrie and team. Happy New Year. I guess my question is a continuation of some of the earlier discussion. I'm very interested in the outcome of the 2 studies that are currently undergoing board review, and I'm sure you'll present that [ in time ]. And I guess I hate to sound a bit like all of a twist, but wondering what's next to be considered in terms of any sort of formalized growth studies out of those options that Matt discussed conceptually the key growth projects that you're moving into that pipeline over time? And I guess the secondary question to that is just looking at your reserve on Marsden, obviously, a big low-grade reserve there in your numbers. I think it was last cut at $1,350 an ounce gold price. So we're only about $5,000 an ounce higher than that at the moment. So I guess at what point does that become a viable growth project? Or does that reserve need to be, I guess, reconsidered at all? Lawrie Conway: Matt, Happy New Year. I definitely hope that our now nonexec chair is listening because he would love to hear about [ Marsden ]. I'll start on that, well, look, I mean, for us, on Marsden, anything that we do there would have to be better than what we've got at Northparkes and Cowal. And so that's really what it's got to compete against at the moment. So it sort of sits there in the background. It certainly doesn't get the priority from Nancy and the team, but it does get looked at. It's good to see that you talked about Bert and E22 and you've moved straight on and gone, okay, what's next. I think for us, Bert is really important to Ernest Henry because of the capacity we've got in the plant. So that will be something that the Board will consider the studies are finished, and we'll take that to them this quarter. E22 really is what can unlock what we have at Northparkes in terms of increasing both mining and processing capacity. We've got such a large resource there. We've got to look at how can we expand that over time because it's not going to reduce the NPV of the asset. So that's something, I think, when we take that through to the Board this quarter, it's like, okay, what does E22 give us as a -- we looked at a block cave, the sublevel hybrids the -- sort of the best outcome is the block cave, and we've talked about that previously. Now we've got to work out where does that fit into unlocking the rest of the operation around expanded capacity. I think when you look at -- the other thing is what's next. At Cowal, we've got the OPC going. We've got E46, E41, E42 operating. We get the undergrounded capacity. And what Matt's talked about is, okay, with all of those ore sources and the work we've done on the plant, are there ways to increase the processing and production rates at Cowal. And then I think when you look at Mungari, Matt also talked about it earlier. We've got the base feed at Castle Hill, the underground is really which is getting most of the exploration dollars is what gives us an opportunity of can we get more than 20% of our material going through that plant. And can we get the plant running at greater than nameplate. Matthew Frydman: Okay. And then maybe, I guess, the follow-up to that then is then how we think about capital allocation for the business going forward. As you just described, you're pretty advanced in terms of your capital spend across the majority of the portfolio. You've got a couple of formalized, I guess, growth projects still on the pipeline in terms of Bert and E22. But overall, clearly, the business is generating a lot of cash. How should we think about any kind of revision or revisiting of the capital allocation policy, I guess, in the absence of any other sort of big scale growth investments like Marsden like we just spoke about. And how does that look in the current gold and copper price environment in terms of how attractive that capital is to spend externally to the business? Lawrie Conway: Yes. Look, Matt, it's a good situation to be in. I mean, 2 years ago, we were getting asked that how can we afford these projects and now we're getting asked how can we [Technical Difficulty] -- that discipline. I think we've outlined our capital sort of spend for the projects that are already in the pipeline. As being that $750 million to $950 million, what now with what we're seeing, the progress at Cowal and the outcomes of the studies and where the metal prices is what can we incrementally invest in, either bring projects forward, accelerate them or new projects to bring forward production growth. As long as if you look at the portfolio at the moment, the asset's average annual rate of return is sitting around that 16%. If we can generate those sorts of returns, then we would increase our capital allocation. If we were to increase that allocation by $100 million, $200 million a year, and we can generate those returns given the cash that we're generating today and where the balance sheet sits, I think that would be the best use of a part of the extra cash flow we're getting. We obviously are still remaining committed to increasing returns to shareholders through dividends, and they'll share in the increased cash flows automatically by our current policy. But if there's ways to [Technical Difficulty] -- through the second half of the year as well. Matthew Frydman: Got it. That's a sensible way to think about it, obviously. And obviously, the balance sheet has changed very quickly. So a nice position to be in. Thanks. Lawrie Conway: Thanks, Matt. Operator: Your next question comes from Adam Baker from Macquarie. Adam Baker: Just back to Mungari. I noticed the 127,000 tonnes to 9,000 ounces gold is third-party ore process in the region. Just curious if you could touch further on that. Is this a normalized rate we could expect moving forward? I know you're looking at further opportunities. And just to give us a bit of flavor, are there any companies out there knocking at your door to process the material in the region? I know, it's about 10% to 15% of your planned throughput capacity at the moment. Lawrie Conway: Yes. Look, Adam, I'd say, firstly, yes, there's people out there that would like for a brand new mill that's got capacity for them to put some ore through. I think as Matt outlined on the call, we used the opportunity to purchase that ore to really test the plant through the commissioning rather than waiting until we get our ore, both the main ore out of Castle Hill and the underground through given we've got a large campaign this second half on the underground. So that was -- I would sort of almost say that's one-off. But if we've got capacity, we will take it because we believe with our mine plan we've got 4.2 million tonnes of our ore that will go through the plant. If there is spare capacity, we would look at it. But right now that is only really around the commissioning part of the plant that we did that purchase. If we do, it's going to displace. I mean, this 1 did -- yes, it made a profit, didn't make a lot of money for us, but it allowed us to learn a lot about the plant. Adam Baker: Yes. And the reduction in cost guidance, I mean, that makes a lot of sense due to the stronger byproducts. Just trying to understand the 6% improvement at the midpoint, how much of that would roughly be driven by the stronger byproducts versus it's a better-than-expected cost control from Mungari, et cetera? Lawrie Conway: Look, Adam, it's a combination of both what the split -- it depends on how we go through the second half. But like we're achieving $2,000, $3,000 a tonne halfway through the year above what we had sort of guided at. Current price at [ $19 ] is sitting about $4,500 a tonne above. So the byproduct credits are pretty important in that regard. But if you look at our gross operating and our net operating cost spend against our budget, it's pretty well in line, a little bit lower in some areas. And then when you look at our sustaining capital, we're actually tracking well against our guidance a little bit. I'd say, a little bit of an opportunity for some of the sites to ask Matt for a little bit more money given the cash they're generating, but I do think the discipline around all of the capital has been very good across the business. Operator: Your next question comes from Mitch Ryan from Jefferies. Mitch Ryan: I just wanted to sort of pick at 1 of your answers to Matt Frydman's question with regards to accelerating Northparkes. You sort of said you're obviously looking at E22 and accelerating that, but then also that expanding capacity. I just wanted to understand, is your thinking materially impacted by the Triple Flag agreement? And is there anything you're able to do around that with expanding Northparkes? Lawrie Conway: Yes. Look, Mitch, I mean, yes, when you look at Northparkes, you've got a stream over it that we only get 40% of the gold and pay 100% of the cost. So it has an impact on what we can do in unlocking Northparkes. What I'd like is that we've engaged actively with them since we -- since we've owned the asset, they know they have a role to play, and we continue to work through what role they have in the site going forward in unlocking the value. I think because when we look at it, we've got -- it's permitted to 8.6. It's running. It can get to 7.5. We've got 600 million tonnes in resource. If you keep running at those rates, this mine is running for 75 years. So increasing processing capacity and mining capacity is the right thing to do at some point. But we've got to make sure that it's going to give us a good return, both on a pre- and post-stream basis. Mitch Ryan: Okay. And then my second question relates to Ernest Henry. Just noting that you've obviously been able to pull forward some of those works. But were there any works that will be unable to be rescheduled into the shut that was bought forward? And if so, will they be deferred or completed later in the half. Lawrie Conway: The short answer probably is no. So nothing material. There were some minor tasks in the underground that we couldn't complete just based on access. So they will be completed, but they won't drive a processing plant shutdown or a material underground shutdown in the quarter. So I'd say 95% of the tasks we've been able to pull forward or defer depending on which one it is. Operator: Your next question comes from David Coates from Bell Potter Securities. David Coates: Thanks for your time this morning and congratulations on a great quarter. Matt, it's a bit of a high-level question. There's been a lot of discussion and questions this morning about where you guys can value add. Is it dropping cutoff grades? Is it expanding plants? Is it maybe regional acquisitions. Just wondering -- and we're in this -- what's fairly unprecedented gold price environment, not just the price but still the rate that it's risen. Are there any -- out of all the sort of growth of value-adding options that you guys presumably are considering and have been discussed, what are the ones that are sort of floating to the top as the best bang for your [ buck in ] in this sort of environment as well at the moment across the portfolio? Lawrie Conway: Yes. Look, I'll get Matt to talk about what he sees as the opportunities at each of the assets. I mean, for us, if we can get more ounces or tonnes, copper tonnes out of any of our operations that basically improves our margin, that's really where we're going to focus. I mean I think we've always got to be conscious of is that in this current pricing environment, if you do approve a project and Cowal OPC as an example, and Mungari was an example, your time to bring those to production is 2, 3 years' time. So you've got to have the real confidence in terms where the metal price will be in that time versus those short-term ones around improved marginal increases in processing capacity or recoveries or those things. They're the ones that you can certainly bring on straight away. But the others, you're going to be looking 2 to 3 years at confidence that when you do bring them on, they're going to be in a good environment. And Mungari is an example, in '23, gold price was about 40% of what it was is today. And they're coming on at the right time. I've been involved in projects that gone the other way. Matt, you want to talk about some of the things that we're looking at. Matthew O'Neill: Yes. And aside from the ones that have already been spoken about of sort of [ E22 ], if I just run through the operations quickly. The area that excites me most, if I pick Cowal is -- and I'm stealing Glen's thunder, but is the exploration and the resource potential that's there. So investing the money in the drilling, investing the money in the mining, [Technical Difficulty] those 2 things, there's an opportunity to extend, which is not as exciting as growing, but there's also a pretty good opportunity there depending on where we see the long-term metal prices level out at, that you would grow Cowal again, that's pretty -- that's very exciting in terms of the results we're getting back through that, and Glen will give an update next time we talk through that. And then the other 1 there is also Mungari. In a similar vein, the margin and the value comes from the underground. So that the mill capacity is good, but if we can invest in our drilling and increase that percentage of underground through, that's where we get our growth in ounces without a material one. So they're our best bang for buck. And then the, like I said, Ernest Henry exploration, you do have that capacity there. But the cave and whatever else is reasonably sort of restricted there. So additional ore sources around the region that we would see growth from with that one as well. Operator: [Operator Instructions] Your next question comes from Zane Guo from JPMorgan. Zane Guo: Just the 1 for me today on capital management. How do you think about the dividend versus a buyback into the half? Lawrie Conway: Yes, Zane. We've talked about this previously. I mean, we -- buybacks are a part of a capital management plan that we look at -- I mean, for us, they need to be sizable. If you're looking at 10% of the value of the organization as a benchmark, that's a large commitment over. And I go back to the point of like if we've got projects that we can invest in that get a greater return for our shareholders, that will be the first priority. The second part is that the flexibility around our dividend policy, where in this rising price environment, our shareholders will receive a greater portion of cash flow than what they have in the past. And I think that really gives the best value for our shareholders. So I don't expect that buybacks would be on the table for consideration by the Board this half year. Operator: Thank you. There are no further questions at this time. I'll now hand back to Mr. Conway for closing remarks. Lawrie Conway: Thanks, Harmony, and thanks, everyone, for taking the time on the call today. We've got another safe and successful quarter. The cash flow is building the projects that we're running to are on plan and on budget, and we really look forward to updating you in a few weeks' time where Fran can tell you what we are doing with the cash as we release our half year results. Thank you. Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.
Operator: Hello, and welcome to the Australia (sic) [ Australian ] Foundation Investment Company Half Year Financial Results Briefing. [Operator Instructions] I'd now like to hand the presentation over to Mr. Mark Freeman, Managing Director of AFIC. Thank you. Please go ahead. Robert Freeman: Okay. So good afternoon, everyone, and I'm Mark Freeman, the CEO and Managing Director of the Australian Foundation Investment Company. So welcome to this half year result briefing. I'd like to begin by acknowledging the traditional owners and custodians from all the lands we are gathered on today and pay my respects to their elders past, present and emerging. I have joining me today on the webinar, Brett McNeill, who is the Portfolio Manager for AFIC. Just as a bit of background, Brett has recently taken over the responsibility for the AFIC portfolio. So Brett's actually been with us for over 6 years now, having successfully managed the Djerriwarrh portfolio, which is one of the LICs we manage within the group. We believe Brett's appointment will strengthen the application of our investment processes against AFIC's long-standing investment frameworks. We also have with us in the room Winston Chong, who is the Assistant Portfolio Manager; Andrew Porter, our CFO; Matthew Rowe, our Company Secretary; Geoff Driver, our General Manager for Business Development; and Suzanne Harding, who is also involved with business development. This briefing is based on the material available on the company's website. The presentation slides will change automatically via the webcast. Finally, please note, following the presentation, there will be time for questions and answers. You can ask a question via the webcast using the tab at the bottom of the screen. So just moving to the presentations now, just starting with Chart 2, which is the disclaimer, which just says we're here to talk about what the company is doing. We're not giving any advice as such. So I'll just quickly hand over to Brett and Winston to run through that shortly. But just as an introduction, I'd just like to say that we are -- the Board, myself and the team, we are clearly disappointed with the results for last year. There's obviously been a lot going on in markets, some very strong sector moves and some very weak ones, and Brett will go into all the reasons for that. There's always -- we're always looking to improve and develop on our execution against our processes. I can say though that when I look through the portfolio, we are still holding good companies. Clearly, there are some elements in the market that we have missed. But I don't see that we're holding poor businesses in poor sectors. We do feel like we are holding good companies. There's been price reactions over the last year. But ultimately, I always look through and say, are we holding good companies with strong balance sheets that have the ability to grow their profits over the long term, and I still believe that, that is the case with the portfolio. But with that introduction, I'll pass over to Brett. Brett McNeill: Thanks, Mark. Good afternoon, everyone. It's great to be here presenting AFIC's first half financial results today. So the agenda for today's presentation was listed on Slide 3. I'll begin with an overview of the key features of AFIC, along with restating our investment objectives. Our CFO, Andrew Porter, will then go through the financial result highlights. Winston and myself will give an update on the broader share market as well as our portfolio, and then I'll give some outlook comments before we open up for questions. So if we turn to Slide 5, this was some of the key features of the Australian Foundation Investment Company. So AFIC predominantly invests in Australian and New Zealand companies. It's the largest listed investment company on the ASX. It's got 150,000 shareholders and a structure that has an independent Board of Directors. Importantly, shareholders own the management rights to the company. This provides for low-cost operations, which you'll see in the low management expense ratio, and there's no additional fees such as performance fees or the like. We're a long-term investor. We tend to run low portfolio turnover, which we think helps provide tax effective returns and we have a long history of having delivered stable to growing fully franked dividends to shareholders. And AFIC is managed by a team that also manages three other listed investment companies being Djerriwarrh, Mirrabooka and AMCIL, and we think this gives us good benefits of scale. One, it helps keep costs low, but two, it also allows for the generation and sharing of investment ideas across the group. So given that background and approach, AFIC has two key investment objectives and these we state on Slide 6. So firstly, we aim to pay stable to growing dividends over time. And secondly, we aim to provide attractive total returns over the medium to long term. So on the next few slides, I'll go over how we've done against these objectives in recent times. So if we look firstly at how we've performed against the first of our objectives, which is to pay stable to growing dividends over time, and this chart here on Slide 7 shows AFIC's ordinary dividends, these are the blue bars, along with special dividends being the purple bars, each on a full year basis back to 2019, and we also show AFIC's earnings per share on the yellow line. So the key points to make we think from this track record is that we can clearly see the delivery of stable to growing dividends with the ordinary dividend having increased from $0.24 in 2019 to $0.265 in 2025. Importantly, we're able to maintain the dividend at $0.24 across the years 2020 and 2021. And this was despite dividend cuts across the broader share market resulting from the COVID pandemic, and you can see the result of that having flowed through to our earnings per share results in both of those years. So pleasingly, the stable to growing dividend has also been accompanied by special dividends from time to time, these having been paid in full year 2019 and full year 2025. And for the current financial year, 2026, we have declared a $0.025 special dividend on top of the $0.12 ordinary dividend for this first half '26 result and we've also announced another $0.025 special dividend, which is expected to be paid with the final year dividend later this year. On Slide 8, we address our second objective, which is to deliver attractive total returns over the medium to long term. So the chart here shows a 30-year track record, and I think it illustrates the power of really an investment style that takes a long-term approach, focuses on owning high-quality companies, benefiting from compounding returns and keeping costs low. So $10,000 invested in AFIC's portfolio 30 years ago in 1995 had grown to $155,000 by 2025, and this compares to a value of $136,000 from an equivalent investment in the broader share market. So the long-term returns have been very strong, but the short-term performance is not what we wanted to be with AFIC's total return and NTA performance being very disappointing over the last 6 and 12 months. So I'll go through the reasons for this in the market and portfolio update section of today's presentation. But at this point, I'll pass to our CFO, Andrew Porter, and he's going to give a rundown of our financial results as well as an update on our share price versus the NTA. Andrew J. Porter: Thank you, Brett, and good afternoon, ladies and gentlemen. So for many of you, these four boxes will be a familiar format. The profit for the half year at $147 million was down 4.6% from last year. That's equivalent to $0.117 per share. But it's important to note, as Brett stated, that we've maintained the interim dividend at $0.12, so above the earnings per share, and also paid a special dividend of $0.025. That is, of course, one of the benefits of an LIC is that ability to pay a consistent dividend over time. As Brett said, we maintained the dividend during COVID, we maintained the dividend during the GFC, as I'm sure many of you are aware. So of that fall in the profit, the income was down $4 million on last year, and that was mainly to the -- down to some of the larger companies reducing their dividends from the prior year over 6 months. For instance, BHP, we received $23 million worth of dividend in the previous 6-month period and $19 million in this 6-month period. Woodside and Woolies were some of the other ones where we've had a reduction in dividend. There was also a change in the tax charge. For those of you who are studying the financial statement in some detail, you'll notice the tax charge looks a bit high. This has been caused by two things. There's a mix. We had lower proportion of franked dividends to unfranked income and the larger the franked dividend component of your income is, the less tax you pay. So that's had an impact. There's also some timing difference on deferred tax which will sort itself out by the end of the year. We mentioned the interim dividend of $0.12 and $0.025 in special, so $0.145 in total. As I said, the Board has had a policy and will have a policy of where possible if the ordinary dividend is going to be increased, we'll look to have a bias towards doing that at the interim so that we can increase or rather, I should say, decrease the disparity between the interim and the final dividend. But at the moment, that's flat at $0.12, but with that addition of $0.025 special as per the announcement on the 25th of November, when as Brett has said, there'll also be $0.025 at the final. Management expense ratio, that is a measure of the cost of running the company, 0.11%, that's $0.11 for every $100 invested. So the actual costs were down due to the nonvesting of incentives and some one-off costs we received in the prior period or had to pay in the prior period, I should say. That 0.11% is artificially low because of the timing of that nonvesting of incentives, but it's not out of the ballpark for what we've seen in the past. We had -- it was 0.10% in 2020, for instance, 0.13% in 2022. But the big driver of that tends to be the size of the portfolio. The portfolio itself, as I said, $9.9 billion. So that's down from $10.4 billion at the 31st December 2024, and Brett and Winston will go through some of the components of that later. Moving on to the next slide, which is something that shareholders who look at the NTA announcements each month will be familiar with. It's the share price relative to the NTA, it's at a premium, so above the 0% line, you're effectively paying more -- you're paying more than the fair price of the shares that we own that is set by the market. So you're buying $100 worth of share at $110 for instance, if it's a 10% premium. And conversely, if it's a discount we're able to buy the shares, let's say, $100 worth of shares for $90 at a 10% discount. The discount was about 9% at the end of December 2025. And it does appear, as you'll see from here, that there has been a long period of discount and what the company has been doing, we have been doing buybacks, we introduced recently a share buyback program. And as per the announcement, we will look to continue that in the next 6 months if the market conditions allow. And there's also you may see that there's been an increase in the marketing that we have Suzanne, as Mark has said, has joined us and is spending a lot of time talking to planners, et cetera, about the benefits of investing in LICs. But if we go on to the next slide, it was once attributed to Mark Twain that history doesn't repeat itself, but it often rhymes. And you can see here that actually we have been in periods of discount before. You can see here on this particular slide going back through the Black Monday, just before the GFC, the tech bubble, et cetera. So what we are going through now may will have different causes and different effects, but it is in itself not unusual, I mean, we have seen this in the past. And you can see here a much longer period back to '89 where the premium discount can bounce around the place. So with that, I will hand over to Brett, but obviously, we'll be around for any questions following the presentation. Brett McNeill: Great. Thanks, Andrew. So turning now to our update on markets and the portfolio. So the left-hand side of Slide 14 shows AFIC's NTA performance, which is after cost and realized tax. This is our total returns shown in the blue bars, and we compare this to the performance of the broader share market being the ASX 200 Accumulation Index in the purple bars. So starting with the shorter-term performance. As we can see, AFIC's performance for the 6 months to December 2025 of minus 2% and over 1 year of 1.2% are both well below the returns of the market over both of these time periods. And the short-term underperformance has now dragged down our 3-, 5- and 10-year returns as well. So before I go into the reasons for this, just cover off on the right-hand side of Slide 14 to give some more detail on what have been the drivers of the market's 6-month returns on a basis before franking credits broken up by sectors. So if we work down the chart, we can see clearly, it's been the material sector that has contributed most of the market's gains over the last 6 months. So we've had the large-cap miners such as BHP and Rio Tinto having produced very strong share price performance. But most of the materials sector returns have actually come from the small and mid-cap resource companies, especially the gold stocks. And at the other end of the scale, it's interesting that traditional growth sectors, such as information technology and health care, have both had a very poor 6 months of share price performance. So I want to give some more detail, though, now on why AFIC's total return, so our NTA performance has been well behind the benchmark over the last year, and we list the key reasons for this on Slide 15. And we've really grouped it into three key buckets. So the first group of stocks behind this underperformance are some large cap companies that performed poorly over 2025. Starting with CSL, which delivered a total return of minus 37% for the calendar year. So it's the former market darling that suffered a huge derate in recent years. It's been a very frustrating investment for us over this time. And whilst there's still short-term pressures on the business, we think the long-term growth potential remains and hence, we intend to maintain our large investment in this company. James Hardie was down 38% for the year, and this was really following an acquisition that was not well received by the market. We still own the stock today, but we have reduced our position given our view on the company's balance sheet, in particular, as well as a lot of management and Board turnover that's happened in recent times. CAR Group was down 13%, but this was despite what we saw as continued good results as well as a very smooth leadership transition, and it's our belief that the stock looks good long-term value at this point. The second group of companies contributing to the underperformance over the last year we've grouped as some small companies that also performed very poorly during the year. In the case of both Reece and ARB, they have been strong compounders over the long term, but they have suffered from some issues in 2025 that we think are mostly short-term related. Our view is that both remain very high-quality companies, and they both have good long-term growth potential. In the case of IDP, it's been a very disappointing investment for us. We bought the stock too early, but we do intend to hold for now as long as we retain confidence in management and the balance sheet. The third group of companies covers one of the biggest stories in markets in recent times, which has been the rise in the gold price. The major gold stocks have had an unbelievable run with Evolution up 170%, Northern Star up 78% and Newmont up 156%. It's been the case that AFIC historically hasn't been a large investor in gold stocks but this has clearly been a mistake in recent times, and it's cost us over the last 12 months in terms of performance versus the benchmark. At this point, we find it hard to see value in such a hot sector but we will keep more of an open mind towards this sector in the future. So for now, I'll pass to Winston, who's going to talk about recent portfolio changes and provide a summary of the key aspects of the portfolio at year's end. Winston Chong: Thank you, Brett. The 6 months to 31st of December has seen transaction activity levels in line with our long-run averages. Our buying during the period has been concentrated in both Woolworths and Telstra, which presented opportunities to increase our existing weightings in high-quality blue-chip businesses at attractive valuations. You'll see there that we also increased our position in Sigma Healthcare, which is the owner of the Chemist Warehouse business. Chemist Warehouse is the market leader in health and beauty retail in Australia, a category that is experiencing strong secular growth. The company continues to take market share and roll out stores in both Australia and New Zealand with an emerging footprint further abroad as well. The shares have underperformed in the last year despite meaningful progress on growth plans, and we've taken the opportunity to build a more meaningful position given the long growth runway ahead. We also continue to add to CSL, which, as Brett mentioned, has been a disappointing investment for some time, and is currently experiencing some short-term competitive pressures. Despite this, we continue to see a good long-term investment case at current valuations. Weakening sentiments towards artificial intelligence-related stocks presented an opportunity to add some Macquarie Technology at what we believe were levels that represent a compelling value particularly when we consider the build-out of its data center project and the longer-term outlook for the business. You'll see on the bottom left of this slide that we've added three small cap stocks to the portfolio during the period. This reflects a more refined approach to the management of AFIC's small cap positions to take a more diversified portfolio approach, leveraging the expertise and experience of the Mirrabooka portfolio management team. The result of this is that we've added positions in Life360, Objective Corp and Temple & Webster. Collectively, these three additions currently represent about 0.3% of the portfolio. To fund the buying, on the right-hand side, you'll see that we've trimmed stocks in -- we've trimmed positions in stocks where the valuations were getting stretched, namely Wesfarmers, Netwealth and the banks. We've also moved to reduce our position in James Hardie to reflect the increased balance sheet risk and governance risk following the AZEK acquisition. We also exited our position in WiseTech during the period after buying some earlier in the year. We've taken a more circumspect approach to the governance risk associated with the investment. Over the next few slides, we'll provide some context to some of the transactions just mentioned to highlight our approach to buying when we see value and selling when we see valuations reaching extremes. Firstly, on Woolworths, many of you will recall that last year, Woolworths went through some operational and reputational issues. We saw its share price and market cap decline as the green line on this chart illustrates. Despite these issues and a required turnaround, we believe that Woolworths has a strong brand and significant latency in its store network. At around $27 to $28, Woolworths' market cap was about the same as that of Coles despite Woolworths having nearly 30% more stores. And so we took the opportunity to meaningfully increase our positions at around those levels. Secondly, on Telstra. Our buying in Telstra has been premised on the track record of dividend growth that the company has been establishing over the past few years following a rebasing as shown in the blue bars here. Telstra's cash flows and dividends are backed by a strong mobile business built on Australia's leading network, steady earnings from its infrastructure business and solid cost control by a capable management team. We expect this to continue, and the significant amount of cash being generated means the grossed-up dividend yield plus growth on offer looks attractive relative to other large cap industrial companies. As a result, we've been buying around the current share price. Our trimming in Wesfarmers has really been informed by valuation. We continue to view it as a high-quality business being the owner of Bunnings, Kmart and Officeworks, and we rate the management team highly. While we continue to hold a position, we materially reduced it over the last 6 months at an average price of around $92. At that price, the dividend yield was below 3%, which, as this chart illustrates, is well below its long-run average yield of 3.6% as well as the yield of the broader market. Similarly, our trimming in Netwealth was based on where valuation got to. At around $34 where we were selling, the price-to-earnings ratio was above 60x. Our view on the business hasn't changed in that it's a quality founder-led business with a long runway of growth as investment flows shift on to its platform. However, we view the valuation at those levels as extreme. And as you can see on the chart here, the PE has since returned to a more appropriate level for the growth on offer. To provide a sort of portfolio summary, you as shareholders hold a portfolio of nearly $10 billion in 59 stocks with a net tangible asset value of $7.90 per share. You'll see on this slide that our top -- in our top 25 holdings, we have exposure to some resources companies such as BHP, Rio and Woodside. These are all companies with solid management teams and world-class low-cost producing assets. We still have a meaningful position in the banks for income as well as stocks like Transurban and Telstra, which we've spoken about supporting our dividend yield. And also in the top 25, we have some high-quality industrials with the likes of Goodman, ResMed, CAR Group and Fisher & Paykel Healthcare that we expect to underpin good capital growth over the long term. In summary, we believe the portfolio is a diversified mix of high-quality companies structured to deliver on our income and capital growth objectives. And with that, I'll pass back to Brett for an update on our international portfolio and some outlook comments. Brett McNeill: Thanks, Winston. So on Slide 22, we give an update on our international equities portfolio and strategy. So the first point to make is that the portfolio has continued to generate value for AFIC shareholders. But at this point, we aren't considering a listing of a separate fund. So we believe the better strategy for now is to continue to invest in international equities within AFIC, but to do it in a more concentrated and complementary style. To give some more detail on the portfolio, we show some of the key statistics here. So the portfolio as of the end of December was worth $170 million. This represented 1.7% as a percentage amount of AFIC's total portfolio value. And the amount of international stocks owned within this international portfolio was 27 and you can see some of the biggest holdings on the chart, including NVIDIA, Microsoft, Netflix and Visa. Obviously, we're happy to take questions on this and any other aspects of the presentation in the question session shortly. But for now, I'll make some quick comments on the outlook, which we list on Slide 24. So the market backdrop at the moment. I think one of the key features is one of extreme geopolitical uncertainty, but it's interesting when you plot that against the share market that remains close to all-time high levels. So to us, we think it leaves the market looking moderately expensive in our view, especially when we look at long-term valuation metrics, such as price-to-earnings ratios and dividend yields. Notwithstanding this, we have found some select buying opportunities recently in some high-quality companies. As Winston mentioned, these have included companies like Telstra and Woolworths, which were bought primarily to income as well as other companies like Sigma and some small caps like Macquarie Technology Objective Corp, Life360 and Temple & Webster, which we want to own more for long-term growth. Overall, we continue to believe that our investment style of focusing on owning high-quality companies for the long term is the right one for us to meet our dividend and total return objectives whilst recognizing that our short-term performance has not been where it should be, hence the focus on improved investment returns under this style and approach. And finally, AFIC's strong level of franking and profit reserves means we have declared $0.025 special dividend for this first half result, with the additional $0.025 special dividend also expected with the full year result in July this year. So with that, thank you very much for listening, and I'll pass over to Geoff to run the question-and-answer session. Geoffrey Driver: Thanks, Brett and Winston. So quite a few questions here. I'll start with this one. This is quite a long one, so I'll try and, I guess, encapsulate as best as I can. We run four different listed investment companies with different objectives. Would it be better from a shareholder perspective to actually combine all of these funds and run them as one and have a sleeve of active management within the portfolio along each of these teams that we manage? Robert Freeman: Okay. So look, we do observe, there has been some consolidation within the LIC industry. We saw that through the Soul Patts Group. And as we stand at the moment, each of our four LICs is an independent company with an independent Board of Directors. Those Boards have the responsibility to oversee the strategy and determine where the portfolios and where the company should head looking forward. In each case, I guess we've -- the sense has been that each of the LIC has been fulfilling a different need within the market. AFIC is more of a broad-based fund. Djerriwarrh gives much higher dividend yield than what you get from the market, particularly when you include franking credits. So we've certainly felt that, that fund suits a particular part of the market, particularly those in the superannuation phase where they can get full value for franking credits. And Mirrabooka, with its focus on small to mid-cap, has over long term produced some very good returns, but often, that can come with higher volatility. So I guess, while I take on board those comments and it's probably fair to say that the Boards are constantly reviewing the strategies and where they should operate in, if they are fulfilling those needs, then the sense has been to continue on that part. But as the case with all companies should be, strategy needs to be constantly reassessed as we go forward. Geoffrey Driver: A question here. Good to see the MER stay ultra low at 0.11% annualized. Any comments on sustaining that edge? And also, could we share any specific internal process improvements you're implementing to reinforce current disciplined decision-making in buying, holding and selling, especially as difficult markets may persist for some time? Robert Freeman: Okay. So I'll just make a comment on the MER, then I'll pass to Brett to talk about how we transact on the portfolio. Having an extremely low MER is a critical part of our strategy. We want to be viewed as having a similar, I guess, cost to an ETF, and it's very important philosophically that most of the gains that come from the portfolio go to the owners of the company, which are the shareholders. And so being -- or having a very low MER is certainly something we want to sustain going forward. And that's quite an important part of the way we think about the business. So that will always remain in focus, and we always continue to look for ways to improve our cost out where we can. Just the second piece, just on the portfolio management. Brett McNeill: Yes, sure. I mean I think when you look back over the long term, AFIC's approach is tried and tested, and I think it's proven and that's what we try to show with long-term performance numbers. But when you have 6 and 12 months like we have had, there's always a need to test and retest things and question things. And the main conclusion of this that everyone was involved in is we think the overall approach is the right one. So investing in high-quality companies for the long term, and focusing on fundamental value, assessing factors and behaviors such as it was mentioned, keeping calm in volatile markets is absolutely essential, and we think the right one, but it doesn't mean that we can't do things better. And some of the ones that have stood out to us, we think, are executing on the transactions better and I think some of the selling over the last 6 and 12 months has been terrific, particularly when you look at Commonwealth Bank and Wesfarmers, the trimming of those positions at the valuations. On the other side, though, unfortunately, we've missed some buying opportunities. We've talked a lot about resources, but there's been some other high-quality blue chips as well that it would have been good to add to. So the whole team is involved, I think, in uplifting the process based on the frameworks that we've got that we think have been proven, but everyone is highly focused on doing a better job of executing against those frameworks. Geoffrey Driver: Thanks, Brett. There's a few questions on international in terms of our approach going forward. So the question is, it's been 5 years we've been sort of looking at the international potentially separate LIC. I guess the question is why we sort of reached the position now where we're sort of managing more of in-house in terms of that short position. And then also the other question around this is are we looking to hold less stocks with a more concentrated portfolio. And finally, on the international questions I got here is will it -- how will it impact AFIC's approach to income within -- generating income within the portfolio given international stocks don't generate a large dividend. Robert Freeman: So I guess we were very clear on day 1 when we started this process, and we kept shareholders up to date, we felt that the Australian market over the long term, there's some risks that our market could narrow and every time we see a takeover, it reduces another stock. We talked about the fact that many of our companies, even though they're listed in Australia are truly international businesses and our understanding what's going on globally is becoming more and more important to understanding our own stocks and that we felt that our long-term investment approach can be utilized in the global markets, as I said, because markets have really become easy to transact in just because you're seeing here in Australia doesn't mean you need to just buy Australian stock. So what we said from day 1 is that we think it can add value to the AFIC portfolio at the very least and that we will embark on a path and we'll be looking to learn from that along the way, and there are a number of outcomes that we set at the start, which could be to not do it anymore, to keep doing it or to keep it a part of just AFIC, maybe even doing a separate LIC. And we've spoken in the last couple of years how we're doing some work behind the scenes but we weren't making any final decisions. We were keeping all options open to us as we've continued down that journey. So the initial investment into international, I think, was just over $100 million. That's worth $170 million. So the investments added $70 million to the portfolio. So it's been value adding to the shareholders. And as we have continued on that journey now, we felt like we're ready to make a decision. So we were prepared for an LIC, we were prepared to continue the way we are, we were prepared for all the options but I think where we got to now is that we felt the best way for us forward at this point was to have a more concentrated view, just be a stock picker to the AFIC portfolio trying to add to businesses that can add value to the overall portfolio. And so in that context, we see this as just additional stock to the portfolio rather than a separate portfolio and be willing to buy stocks when we see opportunities and sell when we think we need to sell. And it's where we've landed on, and we think that's the best strategy to go forward from here. And hopefully, we can continue to make the same sort of returns to the portfolio. Now the amount we have in it could go up if we see weakness in overseas markets and we're starting to see good value, we could add to that. We are aware that they are lower-yielding companies. But at the moment, as a group, it's worth 1.7%. So it's almost like a single stock in one of the companies we own, for example, whether you take Brambles or [ Hardie ] or Goodman Group or CSL, they're all international businesses that probably have a similar yield, but we've got 27 stocks at the moment in we call it on holding. So it's very similar to a single holding in a more international-focused business. But we are aware of that, but as Brett touched on, that's why we look for other opportunities in our market to add stocks where we can get dividend yield from. So we're very comfortable with where now we were landed on. It means we can be much more focused, much more picky about what we go into when we get out of it. And as I said, I hope we can continue to make the same returns that we have over the last 5 years. Andrew J. Porter: And it wouldn't change our income objectives. Geoffrey Driver: Again, a number of questions about where the share price is trading relative to NTA. What do we see has been driving that large persistent discount? Secondly, what are we trying to do about it in terms of in the market. And the other question I've got here is the split between retail and institutional investors on the register. Well, actually, most of our -- we have very few institutional investors. But -- so most of our investors will be retail investors either through individuals or through financial advisers or stock brokers. Mark, can you talk about the discount. Robert Freeman: So just on that discount, I mean, I'll probably just draw you back to Slide 12, if you get a chance to have a look at it again where we show you clearly that this is not something new. We've seen it before. And this is probably a little bit of a scary bit in a way, but in fact, all the previous periods where we've traded at a discount, it's been when the market's been hot in some way, shape or form. Markets had that sort of elements in it, and we've -- not just us, we see this across the sector, particularly the other, what I'd call traditional LICs. So this is not unusual to us. This is a sector theme. And when the markets get a bit hot, we kind of get left behind. And that chart clearly showed you that when you had the tech bubble, we got left behind, then tech crashed and we suddenly went to a premium. You had the late stages of the GFC, market was running hot, we got left behind. But then post GFC, we went back to a premium because in many cases, we had more, what we call, quality businesses, we were able to sustain the dividend through tough times and we didn't really have the speculative parts of the market. Then we got down Black Monday, get the same theme. I would say this time around, we were at a large premium only a couple of years ago, which was during COVID, we had quite a long period of trading at a premium, and we're kind of unwinding that. But again, there are elements in the market that are very speculative. And so this has sort of been a consistent theme, but it's tended to proceed in a significant market pullback. And I'm not giving any forecast at all, but that's -- there's been a pattern there that we haven't seen before, and this is not new. It is frustrating, though, for us, and I understand it's very frustrating for shareholders. With the special dividends we're paying at the moment, it is presenting an attractive dividend yield along the way. We are increasing our marketing efforts, and we're doing a lot more activity around that. And we understand that the marketing is important. Myself, I've been doing a few podcasts and there's a lot of activity going into this year because I think there's so many competing products out there, we certainly realize we've had to do more out in the market to educate them what is different about a traditional LIC in the way they work, and we will be doing a lot more activity on that front. Geoffrey Driver: And I think the other part of the question came up about the distribution of shareholders is about how we're targeting sort of a younger audience, and I think we are doing that through other means these days in terms of podcasts and other means to try and attract a younger audience to the share registry. Question here about the results on paper are disappointing as we well understand. How is management looking at repositioning strategy to be more inclusive of mid-cap opportunities, particularly given large-cap stocks such as CSL and Telix have been damaging to the results? Robert Freeman: Yes, sure. It's part of the overall portfolio strategy. So by no means do we give up on large caps. And sometimes when all you do is look at what has worked in recent times and then try and flip the portfolio to do that, you can just lock in the underperformance both ways. So we'd never want to react just for the sake of it. I think where we do want to take action is where we see genuine fundamental improvement potential. And one is, I think, better accessing opportunities in the small and mid-cap space. And Winston mentioned part of this. And we think a big element of it is investing in these companies, small and mid-cap, small in particular, in a more diversified approach. So taking probably smaller stakes, but in a greater group -- a greater number of small cap companies. And you can see the start of that action on the portfolio adjustment slide, where we've added Objective Corporation, Life360 and Temple & Webster. We think it makes sense when investing in this part of the market to have that more diversified approach because it's very hard to pick individual winners. As we all know, diversification is one of the most important elements of successful investing. And we think it gives a better through-the-cycle approach to rather than trying to time entry into small and mid-caps. So that's one of the things that we not only have identified, but we think are already putting into action. Geoffrey Driver: Just a question on resources. Are we saying look at these more closely, given we haven't -- we missed out on the sort of gold and silver rallies, more recently? Robert Freeman: Yes, we're definitely looking at the performance more closely because it's been stunning about what it's done to markets, and hence, it was a big thing on that slide where we ran through about the key reasons for our portfolio underperformance versus the benchmark. We want to keep an open mind on these sectors, but we don't just want to fall into the top of just chasing what's run really recently, and gold and silver would be at the top of that list. So there might be opportunities in the future, and there's definitely reasons why the gold and the silver prices run. But we'd only want to make an investment if it's for the right fundamental reasons long term as opposed to chasing short-term performance or to close a gap versus the benchmark, which can clearly work against you, remembering that these are cyclical sectors. Geoffrey Driver: While on resources, a question here about the proposed Rio and Glencore merger. Do you have any comments on that, either you or Mark? Brett McNeill: Yes, sure. I can start. I mean I think our initial approach in these situations is to be generally skeptical of mining sector M&A, and that's just based on experience of this group and what we've seen happen in that part of the market over time. And maybe it's a sign of where we are in the resources cycle. We're always looking for those indicators and observing what's happening in markets by actions rather than words. And there isn't actually a takeover or merger proposal there yet. Clearly, it's been flagged. There's been discussion. So we'll wait and see what comes out after the 5th of February and with Rio's results. But I would also say, we did like -- we really like the idea that Rio presented at their recent Capital Markets Day of having a simpler company focused on better operational performance and cost control and being invested in what they think are the best commodities long term. But overall, we'll see what comes of it. Robert Freeman: Yes. I mean I'll just add to that. I mean we've seen some of these transactions before over time, and not with a great deal of success. And we think Rio's assets are great. And so we're keen to understand from the company why they think this time it's different. And I guess sometimes these can be presented in terms of what it can do to their exposures long term. But what we understand is how it adds valuation, how does it add net present value or NPV to us as shareholders, and that's been the issue. They can always explain this in terms of it's going to give growth in copper long term but if the financial metrics on the deal don't add up, it can destroy shareholder value to us, Rio shareholders. So these are the sort of things we want to understand from the company. Geoffrey Driver: Particularly a question for Brett. Can you comment on the impact of index changes for AP Eagers and Soul Pattinson within the index going in and the recent Amcor going out and also the effect of on-market turnover due to passive ETFs? Brett McNeill: Yes, it's been a huge factor in markets. It's probably been one of the bigger changes that's taken place, particularly over the last probably 3, 5 years is just the influence of index weightings on money flows. It's never going to be a key consideration for us. We want to invest more in quality companies that we can buy at good fundamental values. We think that, again, stands the test of time as opposed to following money flows, but it definitely has an impact on short-term performance. And you see it when stocks go in and out of the index. I mean what we -- just the big impact for us is because we are more long-term focused, we should have an advantage in being able to take advantage of short-term mispricing opportunities. So when stocks go drop out of the index and if the share price falls a lot, if we believe in the long-term fundamentals, that can present a buying opportunity. We need to take advantage of that if that's the right approach. And similarly, the other way, there might be stocks that we still like that go into an index, attract a lot of money and become overvalued temporarily, and there can be opportunities to trim that and rotate the capital into better opportunities at the time, but there's no doubt it's a big influence in the pricing of shares in our market. Geoffrey Driver: I've got a few questions here on dividend policy. So what is our dividend policy in terms of yield? And also, what is our long-term capital growth target? The question then becomes, are we looking to balance the interim and final dividend over time. And then finally, would we ever think about moving to quarterly dividends? Robert Freeman: Okay. So we are aware that there is a difference between the interim and the final dividend. And we have sort of -- we keep giving that some thought. At the moment, there is an imbalance, but obviously, it's the full year results that really determine the dividend outcome. So I suspect there will probably still be a split for some time. But we do every time we think about when we can lift the dividend, is there a way we can put more into the interim, but it doesn't always work out that simply. Sorry, Geoff... Geoffrey Driver: So would we think about our quarterly, and also what's our target in terms of dividend and long-term growth. Robert Freeman: Yes. So there is -- one of the LICs within the stable, but it is a different company, Djerriwarrh has announced they are going to quarterly dividends, but that is more of an income-focused product. And that's really a Board decision, but I guess the most recent view is that probably half yearly is okay at this point. But there has been a bit of a trend to try and move to quarterly generally in the market. So this is an issue that will probably get more discussion going forward. But yes, I'm not sure there's a strong appetite for change at this point, but it certainly needs to be looked and discussed on an ongoing basis. And this is the general approach we take, we like to pay out all the earnings as dividends. So we like to sort of pass dividends and the franking credits through to shareholders. Then obviously, we have capital gains we generate on the way. There's a little bit we hold back for a rainy day to make sure that we've got stability. But beyond that, there's a sense from the Board that we want to get excess fracking credits back out to shareholders. So obviously, we announced the $0.025 special for this and another $0.025 special with the final. And we also did say that we will reconsider at that point our franking credit position, but we're sort of establishing that if there are excess, the general sense is to try and get that back to shareholders. We want to have a mix of yield, we also want to get growth. And there certainly is there an intent to -- or want to outperform the index. If we can do that with stable dividends, very low cost, we believe it's a good product for the long term. Geoffrey Driver: A question here about IDP. I think we've covered in the presentation, but I guess you said we went early. So why did we not wait in terms of actually... Winston Chong: Yes, sure, I can cover that one. So with IDP Education, if we kind of reflect on why we went into early, when you look at kind of the share price declining over the last couple of years, the first point of entry was at a time where one of the markets was under a bit of pressure due to policy changes. What we didn't preempt was the synchronization of policy globally during an election cycle where -- and neither did the company, and that's why we've seen the precipitous decline in the share price and the financial results consequently. When we kind of look at the moment where all the markets are sitting, Australia, which is the largest market, is back into growth. The U.K. overnight, just announced some strategic measures for international students, and even Canada, which has been one of the most difficult markets, is starting to show some early signs of green shoots. So when we experience these declines, the first question we ask is, is the balance sheet okay and the second question we ask is can we back management to manage through that situation. And with IDP, the reason we've maintained the position is because the answer to those questions is yes, and we're starting to see some early signs of improvement. Geoffrey Driver: A question here about CSL and why do we continue to have confidence in it given that it's been poor results and also the canceled demerger? Brett McNeill: Yes, sure. We do have confidence in it, but it's definitely been tested over the last 12 months. So I think there's a whole lot of negative things affecting the company at the moment. So -- and some of them are a result of market type factors like the attitude towards vaccinations and the like in the U.S., but a lot of them are self-inflicted, particularly the confusing strategy around the planned demerger of the Seqirus business. Overall, though, we think there's enough in the company to, I think, say that the competitive advantage is still very strong in CSL, particularly in the immunoglobulin products that they have got, basically life-saving treatments to patients in almost 100 countries around the world. And the returns that CSL can make of this and have made in the long term, I think, are still valid. The concerns that are there are very much impacting the share price, and you can see it in the multiple that the market gives the stock. I mean, CSL once has traded at 35, 40x earnings, it now trades on 16x earnings. So unless we believe that the business is truly broken, it seems like a very low point to give up on the stock. We have been buying in the last year, but that's been too early. But for now, we see a strong case to at least hold the position, given that long-term potential remains, particularly when you've got a balance sheet that's in good shape, so we don't think there's any problems there, and we think management and the Board are very focused on getting things right, particularly addressing things like maybe a bloated cost base and an overly complicated structure and returning CSL to being more of a growth company that it has been in the past. So clearly, it will be one of the most anticipated results in the upcoming February reporting season. But for now, that's our position. We think the company's long-term growth potential and the value that's there today warrants us holding our position at least. Geoffrey Driver: Thanks, Brett. A question probably for you here, Mark. How active are your Board members with making decisions around purchase and sales of specific investments, i.e., are they making it easier or hard for your portfolio managers to make changes that they see are necessary? Robert Freeman: Yes, that's a good question, understanding the role of the Board, it's the investment team that manage the investments. The Board members have to approve the transaction at the end of the day, but the investment team have the ability to run that. The Board are there to give us great insights to utilize their experience in terms of the sectors and markets and companies they've been involved with, and that's invaluable. But in terms of how they do it, Brett, who's Portfolio Manager now for AFIC, has talked about, we do have sort of subaccounts within AFIC and we call them, there's the A account, which is our long term. We've got a B account, and we've also got a trading amount. We've talked a lot about internally the B account, which we can do more activity, how that can be used. And I think Brett's got the license and Brett and Winston to take advantage of opportunities as they see fit in the market. And I think there could have been more use of that over the last few years, but I'm encouraging them to utilize that and to make sure we are hunting for value and capturing value within the AFIC portfolio. Geoffrey Driver: Thanks, Mark. There's a question here about Telstra, a couple of points really. Why are we investing in Telstra given the share price has sort of gone out over the last few years? And also a question about market turnover in Telstra seems to be consistently high in terms of its shares. Winston Chong: Yes. So I guess I'd refer us back to the slide that I presented on earlier before during the transactions. And it really comes down to the role Telstra plays in our portfolio, which is really income. And the points made there around the share price are correct. It has been through a really rough period for shareholders over a long period of time. But really, from where we are today, having -- the company having gone through the NBN transition is now in a really good position where it's paying a sustainable dividend and the growth outlook for that dividend is good as well. And so at current -- in one respect, the share price performance has actually provided the opportunity for us to increase the position at an attractive price and kind of giving us dividend plus growth over the long term. So that's probably why we see at this point, a good investment. Geoffrey Driver: And the same question around Woolworths in some ways, too. Why are we sort of positive around that given where the share price has been trading more recently? Brett McNeill: Yes. Again, a similar story. So it is -- it's been a disappointing year for Woolworths. They've been through a number of challenges. But again, that's where the opportunity presents itself. The yield where we're buying looks attractive versus history. And Woolworths does have a bit of a turnaround ahead of it. We're kind of watching management. We back them at the moment. It's -- again, it's got a strong balance sheet and a lot of these characteristics like market leadership and attractive returning business, but we think there's a lot of latency in that business that's not being realized. Over the long term, we expect it to deliver. Robert Freeman: I'd just add to that. It's about hunting for value. And with that sort of bit of negativity, you had the stock price sell off, Winston, to sort of $26, $27, and that's what we look for is those, we call them price dislocations where we think there's -- a company is going through a bit of a tough time or we were talking earlier, that every company has a tough period. And that's where you can often get the best buying. And if you're convinced it's temporary, so the team did some really good buying around those levels, and now it started to recover, it's back over $30 again. And so you get then good capital growth and a good yield, and it can turn out to be a good return for us. Geoffrey Driver: So a question here about Mineral Resources. We sold it, did the exit. Was the exit a mistake in hindsight? Brett McNeill: Yes. So far, it was because it was below the current share price, but these things take time. I think the lesson from that was our expertise and track record in picking single commodity stocks, particularly those that are up on the risk curve. And whilst the company had a lot of very strong attributes at the time being founder-led and a very attractive sector, it could change quickly, and then it's changed again. So definitely a mistake in the short term. Long term, we'll see, but we could buy the stock today, and we're not -- we've chosen not to buy it. So that's the best indicator of our view of the company at this point in time, whereas our commodity exposure has been concentrated in BHP and Rio. That's where we've seen better value and quality. Geoffrey Driver: A question here. Given all the opportunities available in the U.S. and the outlook for deregulation in interest rates versus Australia, would you consider materially increasing your position in international equities? Many of your top Australian holdings are fully valued by their own admission. Granted capital gains tax on sales, some of these would be taking profits will allow further fully franked dividends, increased international exposure and will be a point of difference versus your competitors? Robert Freeman: Okay. There's lots of questions within that question, but I'll try and pick up on most of it. Certainly, we had a view 6, 12 months ago that a lot of our stocks were very fully valued, and we are a long-term investor. We want to be tax effective. So we try and limit our activity and sometimes you wear that downside. But I would say a whole bunch of our good quality stocks are now looking much better value at the moment. And so that gives us an opportunity to hunt for good quality there. And with our renewed approach on the international, where we're being a bit more focused, we are hunting for value there. So we're taking a bit more of a view is where we see value, that's where we're going to allocate money. We are open to putting more in international if we're seeing good value that can add to the AFIC portfolio. So we can hunt for value in both locations and both of them are available to us. Geoffrey Driver: You've got any view on the oil and gas sector in terms of the stocks we currently own, particularly around the Santos failed merger, failed acquisition, I should say? Brett McNeill: Yes. So we own two stocks in the sector being Woodside and Santos we think are the higher-quality businesses within this space, and it's a sector that's offering and has for quite a while, offered some very good value, and we want to be in what we think are the better quality operators. Both have got a good case for better returns over the next few years. So they've invested in growth projects that will start to complete over the next few years, and that should generate a very attractive level of cash flow, which, if the Boards and management teams of these companies manage that widely, a large part of that should flow through to shareholders in the form of dividends, mostly fully franked dividends. So I think there's a good investment case for both Woodside and Santos, which is why we've retained a holding in both. But a lot of the short-term share price performance is going to come down to simply the oil price, which has been trading -- trending lower over the most recent year and actually on a multiyear view as well. But you see at certain points in time, it's been a pretty calm share market overall the last few years, but you see certain points in time when there is an episode offshore like what has happened in the last couple of weeks, for instance, and you get a spike in the oil price and it can make a big difference to the share price of Woodside and Santos. So again, wanting to keep, I think, a level head and a more through the cycle longer-term view of value rather than being swayed so much by the short-term stuff. Geoffrey Driver: I've got quite a few questions which I'll amalgamate in terms of given the recent performance, how are we viewing both in terms of the investment team, the structure of the investment team and also remuneration around the investment team? Robert Freeman: Well, with the structure, I'm really, really pleased with what we've had in place with Brett and Winston. I think Brett has been with us 6 years, and to my mind, is a proven quality value investor. So -- and I think myself and the Board is just wrapped that he's taken on this responsibility. So really pleased with that. In terms of remuneration, the biggest part of our incentive is performance. And so if the performance is not there, the incentives are not there. So we are all very aligned with the outcomes of the LIC, not only from incentive, but we are all shareholders, some of the significant shareholders across them all. And so performance means everything to us across all those assets. Andrew J. Porter: Just to note, as Mark said, it is across all LICs. So the figures that you see in the annual report, the remuneration report include incentives that are based on performance for the four LICs, not just any. Geoffrey Driver: I noticed the number of participants have gone down quite dramatically here, but I'll ask a few more of the outstanding questions that we've got, and then we'll attempt to get back to those that we couldn't answer online. Interesting question here, Andrew. Dividend declared is $181 million, cash available is $131 million, a difference of $50 million. How AFIC fund the $50 million in difference? Andrew J. Porter: Well, first of all, of course, there is a strong participation from shareholders in the DRP and the DSSP. So that reduces the amount available, and that's cash we've got at the moment. So there's always cash coming in for dividends with companies that we hold and any potential cash that we're getting from the sale of facilities and from the sale of securities. We do have liquidity facilities in case there is a short-term funding gap, but that really is just to tide us over until the dividends come in from the companies that we invest in. So it's not unusual, it's not an issue. Geoffrey Driver: So Winston, the rationale for the new additions, such as Objective, Life360 and Temple & Webster. What are your sort of objectives there in terms of the yield and also growth targets on these? Winston Chong: Yes, I'd say for the first one I make is something that might have been missed in my comments that they are relatively small positions at this stage, they're 0.3% of the portfolio. What we're really looking for in these small-cap stocks, and I think all three that were mentioned fit this bill is really the duration of growth, that they're small, they're at the early stage of their growth runways and that we have growing confidence in the their long-term opportunities, and so they're really there for capital growth as opposed to dividend yield, I'd say. Geoffrey Driver: A question, is Transurban an appropriate holding for the long term? Robert Freeman: Yes, we're very confident that it is. We think it's very hard to find companies to invest in, especially on our share market that effectively have a new monopoly position in a highly defensive and quality sector that has locked-in growth. So when you own collection of the best toll roads in a country that has population growth and a pretty solid economy, the returns and the growth that you can get from that over the long term when you factor in compounding can be very strong. And you see it when you analyze the historic results of Transurban. And then -- so within that, though, you need to have a balance sheet and a capital management policy that reflects the nature of the business. And we think, again, that's been well proven over time in the case of Transurban paying out operating cash flow as a dividend and running a very tight ship on the financials, particularly on the gearing levels, running it all in a sustainable manner can deliver great outcomes for shareholders. And I think we've seen that over the long term in Transurban, and the dividend growth in recent times has been very good, too. Geoffrey Driver: I might make these last couple of questions. Got a question here. AFIC's larger holding in Mirrabooka is giving a greater exposure to small and mid-caps while in recent times, this has been valued as probably trade as a discount. Also, has the writing of call options increased as a means of improving income? Brett McNeill: Sure. So on Mirrabooka, so yes, of course, the share price will fluctuate around NTA. It's got the same company structure as AFIC does, so you're always going to have that premium discount to NTA. I mean, interestingly, the Mirrabooka share price is still above the issue price in the equity raise that we participated in last year. The overall investment we have in Mirrabooka is quite small as a separate investment of about 0.5%. Hence, we think there's a good case to also invest in small and mid-cap equities directly. And the second question, Geoff, was what, sorry? Geoffrey Driver: In terms of would we think of -- sorry, in terms of the way we manage the small mid caps in the portfolio, does it also satisfy that requirement because we're using Mirrabooka? Robert Freeman: Yes. Geoffrey Driver: Another question here on Amcor. It's being sold off. Does it present one of those opportunities you alluded to previously in regard to index changes? Brett McNeill: Yes. So Amcor certainly has been one of the stocks that have suffered from the index changes. So that explains part of the reason. But as long-term investors, that's something that over the long term, we think is a bit of a wash. One thing that has meaningfully changed for Amcor is post the merger or the Berry acquisition, the shareholder base is -- it's a dual listed company. So the shareholder base has shifted its weight more towards the U.S., where packaging stocks are not as scarce, and so the valuations of those stocks attract -- are not as attractive. From here, we continue to hold the stock. We think that the benefits of the merger have not yet been fully appreciated by the market, and will hopefully be proven up over the next couple of years. And so yes, certainly, the index changes have been a big factor in that stock in particular. Geoffrey Driver: A question on Reece here in terms of confidence in the Board and also, it seems that Reece has sort of been running their own race with regard to shareholders. Could you sort of bit of comment around that? Winston Chong: Yes, I'd say as a signing point, it's similar to my comments on IDP before and that Reece have been subject to the external environment. So U.S. housing is in a downturn, and Reece obviously have aspirations to grow our business there. But given where that business is in terms of its maturity has suffered quite a bit. And so in that regard, we kind of take a step back and look at the Board, the management team, are they aligned and find very much so they are and they've been buying back stock recently in support of that and also been managing the balance sheet in a very conservative way that we do think is in the interest of shareholders. When we look at the Reece management team, they have always managed the business for the long term, and that includes managing through the fluctuation. So again, we -- the things we look for when companies are experiencing headwinds like Reece is, are they aligned, do we still back management? And then secondly, do they have a strong balance sheet? And again, the answer to those two questions is yes. Geoffrey Driver: I've a question here about the option strategy, Brett, just to clarify, we're sort of writing call options, and we're not buying options per se. Brett McNeill: Correct. Yes. So when we use options and you may see it indicated on our reports, when indicated options are written against certain holdings, what we're doing there is writing call options predominantly against stocks that are held in the portfolio, and we only do it to generate more income. So we do not use options at all for hedging for speculative purposes. It's purely for income generation. It's not a significant part of our strategy. But we do have the ability to do it against certain stocks. And if it's done well, and hopefully, we've got the expertise within the group, again, proven over time to do -- to run such a strategy, it can generate a good level of extra income, which we obviously can use to pay out as dividends. Geoffrey Driver: Thanks, Brett. Look, we've been going for well over an hour now. So I think the questions we've got, we've basically covered most of them within the presentation, but anything we don't have covered, we'll get back to you directly. But at that point, I think we'll close the presentation, and thanks for your -- to shareholders listening to us and also be aware that we'll have shareholder meetings around the capital cities in March, and also we'll be doing one of these presentations with the final results in July. So again, thank you very much, everyone. Operator: That does conclude today's webinar. Thank you for your participation. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the VEF Fourth Quarter 2025 Earnings Call and webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to hand the conference over to your first speaker, David Nangle, CEO. Please go ahead. David Nangle: Super. Thank you very much, and good morning, good afternoon all. I welcome you today from Manila in the Philippines, where I'm on the road, seeing companies and looking at some of our investment companies in Dubai for the last couple of days. This is -- welcome to our Q4 '25 results presentation. I do have Alexis Koumoudos, our CIO, with me on this call as per usual. And I'll spend the next -- we'll spend the next 15, 20 minutes just running through key highlights of the quarter and the year, given it is the end of year quarter and outlook for everything that we see at VEF and then happy to answer any questions that you have. Moving on to Slide 2 in the presentation. It's an evolution of what we've been saying for most of the year. Like the NAV does continue to trend higher. We're very happy. It's a reflection, obviously, of everything in our NAV, which is our portfolio of companies and their performance. Q4 in itself was up a healthy 6.9% in dollar terms and over 22% for the full year, obviously less in SEK, given the SEK strength versus the dollar. But the big driver in Q4 was Creditas, which we'll speak about and its latest fundraise, which came through quite nicely in Q4. But generally speaking, the NAV this year was a reflection of our portfolio, and it's really about a portfolio that the risk reward is much better than it was in the past. We're majority at, give or take, breakeven and growth is very much back in focus. That's been reflected in our top names like Creditas, Konfio, and Juspay, which is humming along quite nicely at a very healthy clip. The focus in the quarter, and obviously, it's a big part of our story is Creditas, and had a very big quarter in terms of, one, results, it's been coming. We talked about the transitionary period from hyper growth and burn to no growth in breakeven and now they're starting to put the foot back down on growth again, but more sustainable growth at this point in the cycle. So through the quarters this year, we've seen them get towards 20% year-on-year credit growth, which is driving the income statement. We'll talk about that. And that was key to see those results coming through quarter-on-quarter-on-quarter as we went through the year, and that's key for our value and our future. Also from the Creditas side, they had a number of standout events in the quarter. We already mentioned or touched on the latest funding round, but also they closed the Andbank. They got a bank license in Brazil, which is key for the franchise value and their funding and also made a substantial higher at top level. And then last point, the whole area of capital, capital management and capital allocation effect. We've, in 2025, very focused on strengthening the balance sheet, exits. We'll talk about that in this presentation coming in, capital coming in, to pay down some debt, buy back some shares. And as a team and as a Board, we're sitting down and strategizing as we look into 2026, how we manage our capital for the best risk reward for our shareholders, both in the short term and to manage that discount to NAV, but also for the longer term in adding new portfolio companies, that's a broader discussion point. Moving on to Slide 3. The key highlights and numbers I've touched upon, of the NAV in dollar terms, up 6.9% and 22.9% for the quarter and for the year, year-on-year. And from a SEK point of view, a healthy quarter of 4.6%, not a lot of currency diversion and up 2.8% for the year. Share price obviously been weaker, flat year-on-year at the year-end and up 3.3% in the quarter. And on Slide 5, this is a chart we show every quarter and what you're starting to see since year-end '24 is a gradual pickup in the NAV in dollar terms to now $434 million. As I say, this is -- there is a micro level of our portfolio companies, but then obviously, it feeds down from the macro level and the cycle level. Venture capital, capital is in a better place. Capital is flowing. Macro is in a better place. The companies that were invested in quality companies are starting to grow again, and that's feeding through to a growing NAV, which is key, obviously, for everything that we do here at VEF. And Alexis is going to talk [indiscernible] provide slides around the NAV dilution over the year, and I'll come back on some key points before we open up for questions. Alexis Koumoudos: Thanks, Dave. Hi, everyone. Yes, just looking at Slide 5, which highlights the valuation approach and key takeaways for the portfolio in the quarter. The main mover there is Creditas moved from mark-to-model in the previous quarter to this latest transaction priced at the $108 million Series G round that they closed in December, which resulted in a $33 million uplift to the NAV. The rest of the top 3 names like Konfio and Juspay remained at mark-to-model and latest transaction, respectively, which results in the portfolio being valued on 69% at latest transaction and the remaining 31% of the portfolio being valued on a mark-to-model basis. And of those 31%, 90% plus of those mark-to-model valuations reflect multiples further down the P&L, i.e., like below just the revenue multiple. Moving on to Slide 6. So on Slide 6, we just break down the NAV evolution in the quarter, and we show the breakdown of that and how it's attributed to different factors. So the biggest part of NAV growth in the quarter is attributable to Creditas' round and the impact of that round on the valuation of the company. In the portion of the portfolio that's mark-to-market, you can see the slight positive portfolio growth was partly offset by the market pullback in the quarter. So the holdings that are valued at mark-to-model had a relatively neutral impact in the quarter. Just on to Slide 7. So -- in Slide 7, we show an aggregation of the NAV evolution over the year and how the different parts or the attribution to that over the quarter. So overall, in 2025, we saw a strong contribution to NAV growth from portfolio performance, the market performance through comp multiples and also strengthening non-USD currencies. And importantly, we also converted $37 million of our appreciating NAV to cash, which shows up in that net $18 million positive cash position over the course of the year. So in aggregate, there was $81 million of positive NAV evolution. As Dave mentioned, that was 23% year-on-year dollar NAV strengthening. And on a per share basis, that's 26% year-on-year once you factor in the buybacks that we did over the course of the year. And then just on Slide 8, we use this slide to just reiterate our -- how we continue to feel confident in the strength of the portfolio, the fact that we have a portfolio that's growing 25% to 30% year-on-year on a self-sustaining basis. And Dave will -- a lot of that is driven by Creditas, and Dave will get into some of the details of that in the preceding slides. But we're also feeling confident that there's been a change in the environment, far more fundraising activity in our markets. It's definitely heating up, and there's been a flight to quality, which has benefited our portfolio. And we expect to see rounds like Creditas and Juspay to continue to take place and continue to benefit our portfolio and help us improve our liquidity and balance sheet. So handing back to you, Dave. David Nangle: Super. Thanks, Alexis. Look, I think from a portfolio point of view, as Alexis alluded to, what's key is that you invest in quality companies and you've got a through cycle performing portfolio. And that's what we're starting to prove out having gone through the boom years up until 2021, the VC winter of '22 and '23, where we reevaluate our portfolio and set a valuation mark lower and then the recovery and the growth that we're seeing in 2025. So you get to -- you invest in these companies, you live with them through cycle, you see them in the up and the down cycles, and that's how you build longer-term value. So we're very happy with the overall portfolio where it is. And we do have tailwinds from an ecosystem, VC capital flows, valuation point of view, all very helpful to what we do. Specific to us, obviously, is Creditas. Creditas performs. It's a big part of VEF performing, as we all know. And 12 months ago, these numbers weren't what they are and what you see today. And this is what we said the management was going to do, and they are delivering, and we expect that to continue into 2026 and beyond this year. And what you have is an improving growth profile at a very managed risk-reward basis as they manage their cash flows on a neutral basis. And in Q4, we'll get to about 20% year-on-year loan growth. Revenues are following that growth. And that's key for future value of Creditas as it looks to be, at some point in the future, a public company with real value needs to start growing again, that engine has really kicked in. As impressive or as important is the -- what they're doing from an efficiency and cost point of view, enabling AI tools across the business, and you're starting to see that efficiency gains kicking in. So you're not just getting growth, we're getting more efficient growth, which is the future of this company and the industry as a whole. Besides the numbers themselves, what is key for Creditas in Q4, all these things kind of came at the same time, but they've been work in progress for quite some time. One was obviously the announced Series G funding round, $108 million coming in, and we spoke about that in Q4. The bank license itself was approved in Q4, and that's key, lower cost of funding, more availability of funding and a franchise uplift for the overall business and its optionality going forward. And in the top team, Ricardo Forcano came in from formerly a BBVA Group, top management. It's the type of caliber of top management that the company is now attracting, not wasn't attracting, but it is on the front foot, and that's the kind of talent that comes with that. So it's kind of like an ABC trade. So I think from all aspects of Creditas, we're very excited as we look at the company where it's positioned, the tailwinds that it has, capital position, economics, et cetera, as it goes into '26 and '27. And besides Creditas, I want to talk about cash exit capital. What's key is we're always looking at our cash and capital position and our balance sheet strength, and then we're making -- looking to make logical decisions around that positioning. At the same time, we're very focused on the short term, more so in the past and now transitioning as we balance, obviously, short term is important, but start to look at the medium to long term for VEF and for all our shareholders. From a cash position point of view, we had $15.9 million of cash and liquid assets at the end of Q4. And that's -- our balance sheet is stronger than it was in the past. But what's key is we paid down half our bonds, but we still have $26.1 million of bonds outstanding. So we're in a negative net cash position, and those bonds are due at year-end '26. So any kind of decisions that we make has that in mind. And that's a kind of a cash liquidity risk management overlay to everything we do. When that capital started to come in from the exits we did last year, the initial allocation was obvious, pay down some debt, start to buy back your shares. Now that we're net negative on cash, we balance that with how we look to more cash coming in and also thinking about the future and looking at pipeline and balancing all that into a broader strategy. That's all a work in progress at this point in time. What I will say is the key to all of this and us having the tools or the ability to do more as in pay down more debt, and we do aim to go debt 0 by year-end. That's one of our inherent goals. We do have options around rolling the debt, but the plan is to buy back more shares and then put capital to work in new pipeline companies, Key to that is capital in and key to that as exits. We had a very -- off the back of promises to investors, we had a very healthy last 12 months in delivering exits, which are hard in our industry, and we delivered 3, as I said before, in India and in Brazil via IPO, via M&A and via secondary sale, the biggest and the most juicy of which was Juspay, about $37 million of gross proceeds came in, in the last 12 months. We look at the next 12 months, and we're fairly confident that we will see more exits. We're working on the number. By no means is a VEF wind-down vehicle, but we're taking our opportunities to take capital off the table at NAV plus/minus in our companies to bring that money in, and that strengthens our balance sheet, puts us in a stronger position. And with that capital in play, then we have the range of decisions to make and actions that we took like we did in 2025 around debt and -- around VEF debt and VEF equity. I think this whole ideology is just keeping the market updated on how we're thinking. We haven't set anything in stone at this stage. As I say, a lot of it is around our capital strength with more capital strength, you can make more decisions and what's the priority. There's more capital you have, you can prioritize different things for both short term and long term. But bolstering the capital position is key at VEF, bolstering our balance sheet. We want to be a strong investment company with optionality of capital. We've paid down half our debt. We would like to go debt-free by year-end. Narrowing the trade discount has not gone away as a concept. We're all shareholders. We value our shares and narrowing that discount is a key part of anything we do. We cross-reference that with our cash capital position versus our -- what money is due in the bond markets. And then we're starting to gradually overlay that with the future and the future growth of VEF because we look at our portfolio, we look at Creditas, Juspay, Konfio, we look at the past of Tinkoff, EasyGo. We know we have the muscle to invest in best-in-class fintech companies. We know those companies compounded value, and we know we can realize that value for shareholders as we've seen with Tinkoff, EasyGo and more recently with Juspay. So balancing that long term with the short term is all part of the strategy that we're doing at the moment, cross-reference with the capital position we find ourselves in today. And just to finish off, so the broader investment case, and this is very similar to last quarter. We keep on saying it's about the portfolio. Any investment company is about its portfolio. And I think we have proven through cycle that we have a quality portfolio that our investment radar is good and that names are now starting to break out then in terms of growth, profitable growth and they're raising fresh capital. So we're in a as comfortable and as positive position as we've been for a long time in terms of the quality of our portfolio. And that's the basis for value creation and growth. Then you've got exits. Exit markets are back, but it's hard work to exit. We're proving that we can exit our positions and we can exit them at the right price. There's been no fire sales, nothing forced at the door, the right exits at the right time at the right price, strengthening our balance sheet. Then you've got questions around capital allocation. And we look to win the near term as well as the long term and put that capital to work in the most value-added way. It was paying down some debt, it was buying back some shares. And now while we're in a negative net cash position, we sit back, we strategize as and when the next capital comes in, how do we allocate that. And then we're debating the short term versus the long term because it's very logical given our track record of investing versus the very short-term obvious traded discount playbook of buying back your shares. We get that. We're very cognizant of that. And within the pipeline, we are flexing that muscle again. We are seeing best-in-class EM fintech companies around the world. We are excited about names that we could potentially bring into our portfolio. We need to cross-reference that around, A, our capital position; and B, the opportunity to create value for everybody involved by our shares and obviously delevering our debt. I will stop there. And operator, very happy to open the floor to questions at this stage. Operator: [Operator Instructions] We are now going to proceed with our first question. And the questions come from the line of Linus Sigurdson, from DNB Carnegie. Linus Sigurdson: And starting off with a question on the Creditas raise. If you could just walk us through maybe some of the details and how this has affected your ownership stake in terms of dilution? David Nangle: Yes. I think last part first, from an ownership point of view, we broadly own what we did before. But there was a lot of moving parts to that in that the round itself was led and underwritten by Ann Bank, who's a key investor in Creditas. And so the capital came in. But there were a number of notes outstanding convertible notes of which we held from previous round back in '22 and '23. So they converted at a discount to the overall round price. So net-net, we still own the same -- sorry, approximately 9% of Creditas. It didn't move that much given the mechanics and the math of the round. And then from a valuation point of view, there was obviously the headline valuation, but we value Creditas at the convertible note, the discounted notes just to be conservative and in line with our most recent effective capital in. Linus Sigurdson: That's very clear. And then a question on Juspay, which you saw putting out some numbers a few months ago. And just any updates on how they're tracking along? What should we expect for 2026? Should we see some moderating momentum? Or is this going to continue to compound in the same way? David Nangle: Yes. Alexis, do you want to grab that? Alexis Koumoudos: Yes, Juspay continues to execute well. So I think in -- for the calendar year of 2025, the company grew around 40% top line. We are forecasting the company expects to grow like at a similar pace this year. I think the big variables within that are as they -- last year was about planting seeds in international markets, and this year is about seeing those seeds like really thrive and start to contribute to the top line. So I think some of the variability about them being able to deliver 40% or maybe more will come from their success internationally. And so far, we're feeling pretty strong. There are some large signed contracts, which can be quite juicy and fruitful. But yes, I'd say 40% to 50% top line growth for '26 similar to '25. David Nangle: Yes, Linus, what you have is, you've got the -- the top 3, you've got names like Creditas and Konfio that are coming back into their own and starting to compound back into that 20% plus growth zone. And they can easily go to 30% given the markets are in the TAM. But Juspay has been compounding at a healthy clip through that cycle. So -- and we do expect a healthy year again next year. Linus Sigurdson: I appreciate that. And then my final question was just double-clicking on this near-term capital allocation. How we should interpret those comments on balancing? I mean, should we think some new smaller exit before buybacks are resumed at scale? Or is this something you'll be starting in the near term? David Nangle: Yes. No, look, it's a very fair question, and we're not ignorant to the share price. And we -- what I'd say to you is we're making no firm statement today, and that's not hiding behind anything, but it's very clear that we need to manage our capital position given what we need to outlay at least on paper from a debt point of view by year-end. And that was a very cognizant management and Board decision when we stopped the buyback as in let's get the balance sheet to a more comfortable position for everybody involved. We are comfortable on line of sight of exits. We would like to see those exits coming in. Nothing is guaranteed. But as they do and the capital position strengthens and you go net cash positive, then you have the decision tree, whether you keep the capital to pay down your debt. Is that the most important thing in an ever-changing environment, that may be more important than buybacks. And then you cross-reference that with the clear IRR that you have in buying back your own shares as well as the indication to the market, which is very positive. And then you start to cross-reference that with the long-term value when you see some awesome fintech companies like the ones we've invested in the past that we could potentially add to the portfolio. Now we're trying to get all our ducks in a row. And we're being -- I think we're being maybe overly transparent and communicative with the market about how we're thinking as opposed to just finishing our thinking and putting all down on paper. But I think that we respect the market enough to share as we go. I think we've always done the right thing for long-term value for shareholders. We can't control the share price. That's very clear. But I think to your point, Linus, I think more capital in gives us more comfort to do more across all areas of capital deployment. Operator: We are now going to proceed with our next question -- and our next questions come from the line of Stefan Knutsson. Stefan Knutsson: Firstly, on geopolitical situation in South America following like the U.S. operation in Venezuela, have you seen any impact on your business or any increased risk that you foresee going forward after this development? David Nangle: Interesting. Not really in the specific context in a global context, clearly, there's a lot of moving parts geopolitically and U.S. is at the forefront of a lot of them. And these are unpredictable. We wouldn't expect anything to happen in any of our investment countries in Latin America or elsewhere similar to what happened in Venezuela. I think it was a very specific case in point. And obviously, we like the event. We like the outcome of the event, but the event itself and the nature of it was tricky, let's say the least. But no, I think from the landscape in Latin America, the markets that we look at Brazil and Mexico haven't been touched really by that. And we talk to a lot of global investors who invest in emerging markets in LatAm. And even to other markets like Colombia, Chile, et cetera, we haven't really seen any impact. I think there's a very specific excitement around the potential for Venezuela off the back of what happened. But it's a country with many possible -- lots of potential and many possible future scenarios. So I think removing bad leadership is only the start, but then the pathway, there's a lot to work on there. But no, we've seen no negative outcomes or volatility or risk to any of our countries. This is all within the domain with a very fluid, noisy global geopolitical kind of environment, much more than it was in the past. Stefan Knutsson: Yes. And then I think like most of the questions was answered by Linus question, but maybe if you can share any operational update on Konfio and how their banking license application is going. David Nangle: Yes, that's fair. It's been overweight Creditas communication in Q4. And obviously, Juspay Alexis spoke about Konfio did very similar results to what Creditas did in terms of top line growth, loan growth and top line growth in the 20% bracket, albeit it wasn't the upcurve that Creditas had quarter-on-quarter through the year. It was more sustained through the year. It is a bank that can do a lot faster growth and Creditas can be the same given the TAM that their environment in. So an easy do 30% growth plus as we look into 2026. I don't think it will start off that way. I think it will -- Q4 is generally faster than Q1, so it really picks up. Margins are holding steady and tight. They're cash flow positive, have a strong cash position. And on the bank license, we'll see. It's one where they're position that we said it before, I think as a Konfio is planning life without a bank license, albeit we know the benefits of a bank license. So very clear that it's in line to get one. Just when you're talking about regulators and timing, it's always a risk. The upside is clear. Like Creditas getting its bank license in terms of funding costs and franchise value. But we're comfortable it will get the banking license. We just wouldn't like to put a time on it because we've been there before with regulators and bank licenses and these things just take time. But the good thing in Mexico is we have seen bank licenses being handed out. So it's something that is and has happened. So it's not like it never happens. Operator: We are now going to proceed with our next question. And the questions come from the line of [Tobias Carlsson]. Unknown Analyst: And I have 2 questions. The first one is about -- that I can read in your report that you underline that you want to make new investments. And I wonder how you're going to finance them considering that you also want to reduce the debt and perhaps also buy back shares. My second question is if you intend to try to reduce the discount to net asset values as it's 50% right now. David Nangle: Tobias, thank you very much for the questions. And I think our sharing around our direction of travel has been bigger picture and broad as opposed to specific. And we didn't mean to mislead our investor base in what we're doing. We are an investment company. We are working pipeline. We are very keen to get best-in-class fintech companies around emerging markets into our portfolio. It's been part of our muscle and our job for the last 10 years. So when I say we've been building that muscle again, we've been out there looking for these best-in-class companies. And that's part of our job. At the same time, when we looked last year and the year before, it was a very clear priority around strengthening balance sheet, getting capital in, putting capital to work where it was most clearly needed, delevering, paying back the debt, and that's there still as a goal for this year. There are 25 million plus/minus to go. And clearly, to buy back shares is part of the IRR given where VEF shares currently trade. What we did was we paused effectively in Q4 of last year around the buyback and touching the debt for now because of our cash position going lower than our debt that was due at year-end. And we wanted to continue to strengthen our balance sheet. It's a general top-down statement where we are looking to transition to going -- to getting VEF back on the front foot investing. The debt still is very much there. It has to be paid. It will be paid. Our shares do trade at a deep discount to NAV. And there's many ways of delivering, closing that discount to NAV, and we have been working, focusing on communication, Investor Relations. We bought back some shares last year, transparency for our bigger companies, exiting our positions at NAV plus/minus to prove that our NAV is real. We continue to work that mandate. So there's many ways of attempting to -- we don't control the share price, but attempting to decrease that discount to NAV. And it's in our interest as much as all shareholders' interest to have that discount lower if even nonexistent. That is part of our short-term, medium-term goal. We stopped doing everything for now until we get the capital in, and we're just strategizing around these things. And there will be a priority depending on how much capital we get in, what pipeline companies we see, the IRRs in those pipeline companies versus IRR and our shares versus buying back the debt. So I think it's all just there. I think our track record last year was buying back shares and paying down debt. We're just talking about the 3 different aspects and saying we're ready to go on all. But with $15 million of cash and $25 million of debt, we just paused, took a moment, strategy discussing and we're going to -- we're really focused on the exits because with more cash, we can do more things. So it's -- that's on balance sheet. We're also looking at potentially doing off-balance sheet structures. We can use our investment muscle, our ability to find, underwrite, get allocations, best-in-class fintech, but do it off balance sheet by potentially SPVs. So it doesn't have to be A, on balance sheet. It can be B, off balance sheet, which doesn't touch VEF, but can benefit VEF in terms of fees, carry and different ways. So we're just looking at all of this. We're discussing it internally. We're positioning ourselves. Maybe we're opening too much to the market, but I'd like to share as we go. And I'd like to listen to the market and the market speaks very clearly, we take all that on board and we try and make the right decisions as we go. Operator: We have no further questions at this time. So I'll now hand back to you, David Nangle, for closing remarks. David Nangle: Yes. Thank you. Look, thank you, everybody, for following us, for the interest in our story and our stock. We have people coming in asking questions by e-mail. And otherwise, we will come back to you for sure. We're very happy with where we're at in terms of our portfolio. That's key. You can't do anything with a strong portfolio. We're very happy where we are in terms of cash generation and delivering exits. If not every investment company that's in a position like us being able to do this, it puts us in a strong position. And then we're very clear and maybe overly leaning in around our thought process around what we do on capital allocation as we look forward. Watch this space. We'll be more clear as we go forward as capital comes in, but we're listening to the market as well as trying to make the right decisions for VEF, both short term as well as long term. But thank you. Operator: This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.
Jason VanWees: Welcome to the Teledyne Fourth Quarter Earnings Conference Call. Here is our first speaker, Mr. Jason VanWees. Good morning, everyone. Thank you for joining the earnings call. It is Jason VanWees, Vice Chairman. I would like to welcome everyone to our fourth quarter and full year earnings release conference call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Mehrabian, President and CEO, George Bobb, EVP and CFO, Stephen Blackwood, and Melanie Sivec, EVP General Counsel, Chief Compliance Officer, and Secretary. After remarks by Robert, George, and Stephen, we will ask for your questions. But of course, before we get started, attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various assumptions, risk factors, and caveats as noted in the earnings release and/or periodic SEC filings. And, of course, actual results may differ materially. In order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay, both via webcast and dial-in, will be available for approximately one month. Here is Robert. Robert Mehrabian: Thank you, Jason. We conclude the 2025 with the largest quarterly orders, sales, and non-GAAP earnings, as well as operating margin in the company's history. Consequently, we are optimistic about 2026, both due to the performance of our business in 2025 as well as the new leadership in place, with George Bobb as CEO and multiple senior executives with added responsibilities in our business segments. Getting back to 2025, fourth quarter sales increased 7.3% from last year while non-GAAP earnings increased 14.1%. For the full year, sales increased 7.9% and non-GAAP earnings increased 11.5%. Throughout Teledyne Technologies Incorporated, our defense businesses remained healthy and our short cycle commercial businesses continued to recover with most product families increasing either sequentially or year over year. In digital imaging, Teledyne FLIR performed very well with particular strength in unmanned and other defense surveillance systems while within marine instrumentation, we achieved record sales of autonomous underwater vehicles. In terms of capital deployment, 2025 was our second largest year in history, with over $850 million spent on acquisitions throughout the year and $400 million for stock repurchases within the fourth quarter. Nevertheless, having generated approximately $1.1 billion in free cash flow for two consecutive years, we ended 2025 with a leverage ratio of just 1.4 times. Last week, we continued our string of pearls strategy with the acquisition of Didi Scientific, a UK-based manufacturer of high-performance electrochemical gas sensors. Gas sensors are not only a critical technology component used in our environmental instruments, but such sensors are also an attractive consumable business with high recurring revenue. Turning to 2026, while it is still early, we are reasonably confident in our current outlook for both revenue and earnings. That is, we believe full-year 2026 revenue will be approximately $6.37 billion. On net and non-GAAP earnings at the midpoint, will be approximately $23.65. Both of which are consistent with current consensus estimates. As in 2024 and 2025, we expect normal seasonality in 2026, approximately 48% of sales and 46% of earnings in the first half of the year. George will now comment on the performance of our four business segments. George Bobb: Thank you, Robert. In the digital imaging segment, fourth quarter sales increased 3.4% despite a tough comparison, primarily due to strong sales from Teledyne FLIR. Specifically, infrared imaging components and subsystems, many of which are used in our customers' unmanned systems, increased over 20% while sales of FLIR surveillance products and complete unmanned air systems also grew. Clear maritime sales were also a record due in part to imaging systems for unmanned surface vessels and continued positioning of the business to industrial and defense markets. Sales of sensors and cameras for industrial machine vision applications increased year over year but were offset by lower sales of X-ray detectors and scientific cameras. In the fourth quarter, we were awarded our first production rate contract in the loitering munition market under the Marine Corps Organic Precision Fires Light or OPFL program. Also, on December 19, the US Space Agency awarded four prime contracts for 72 Tranche three tracking layer missile warning missile tracking satellites, and we were selected to supply space-based infrared detectors to three of the four primes. This continues our very strong participation across each of SDA's tracking layer programs and positions us well for future 180 basis points to 24.7%, a record for the segment since fully incorporating FLIR in 2021. In the instrumentation segment, which consists of our marine, environmental, and test and measurement businesses, fourth quarter total sales increased 3.7% versus last year. Overall sales of marine instruments increased 3.3% due to strong sales of interconnects used in offshore energy production and for US Virginia and Columbia class submarines, as well as the record sales of underwater autonomous vehicles that Robert mentioned earlier. However, these were partially offset by some reduced sales of products for hydrography and oceanographic research. Sales of environmental instruments increased 6.1%. This primarily resulted from higher sales for gas safety, and ambient air and emissions monitoring instrumentation combined with stabilization in sales of laboratory and life sciences instruments. Sales of electronic test and measurement systems, which include oscilloscopes, protocol analyzers, and Ethernet traffic generators, increased 1.4% year over year, but greater than 10% sequentially from the third quarter. Instrumentation non-GAAP operating margin in the fourth quarter decreased slightly on a tough comparison, however, it increased 36 basis points for the full year 2025 to a record 28.4%. In the aerospace and defense electronics segment, fourth quarter sales increased 40.4%, primarily driven by the KeyOptik and MicroPak acquisitions, as well as organic growth of other defense electronics, and commercial aerospace products. Non-GAAP segment margin decreased year over year due to comparatively lower current margins at the recently acquired businesses. The Engineered Systems segment, fourth quarter revenue decreased 9.9% due in part to delayed contract awards originally anticipated in the fourth quarter. However, despite the lower revenue, segment operating margin increased 259 basis points to better performance on fixed price contracts. I will now pass the call back to Robert. Robert Mehrabian: Thanks, George. In conclusion, I want to reflect on our performance over the last couple of years and the path forward. In 2023 and 2024, the strength of longer cycle businesses, including Teledyne FLIR, marine instrumentation, and aerospace and defense electronics, was largely masked by declines in certain short cycle markets such as industrial machine vision, electronic test and measurement, and laboratory and life sciences. I believe our results in 2025 proved the balance and the resilience of our business portfolio allowing us to cut costs, improve earnings, and significantly grow free cash flow and deleverage. While simultaneously deploying capital on acquisitions and opportunistic stock repurchases. Throughout 2025, as comparisons eased in some industrial markets, and others began a nascent recovery and the strength of our longer cycle businesses began to show through today, we remain confident in executing our strategy of operational excellence focused acquisitions, and stock repurchases when we believe the market does not reflect the broad base of our technologies and competitiveness. As we enter 2026, we believe growth again will be led by our long cycle business. However, unlike the recent past, we currently believe that none of our short cycle businesses will contract on a full year basis. In addition, our leverage ratio remains at the lowest level in years, providing ample financial flexibility to continue our strategy. I will now turn the call over to Steve. Stephen Blackwood: Thank you, Robert, and good morning. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our first quarter and full year 2026 outlook. In the fourth quarter, cash flow from operating activities was $379 million compared with $332.4 million in 2024. Free cash flow, that is cash flow from operating activities less capital expenditures, was $339.2 million in 2025, a record for Teledyne. Compared with $303.4 million in 2024. Cash flow increased year over year in the fourth quarter primarily due to favorable operating results in 2025 compared with 2024. Capital expenditures were $39.8 million in 2025 compared with $29 million in 2024. Depreciation and amortization expense was $84.6 million in 2025 paired with $77.2 million in 2024. We ended the quarter with $2.12 billion of net debt, that is approximately $2.48 billion of debt less cash of $352.4 million. Now turning to our outlook. Management currently believes that GAAP earnings per share in 2026 will be in the range of $4.45 to $4.59 per share with non-GAAP earnings in the range of $5.40 to $5.50. And for the full year 2026, we believe that GAAP earnings per share will be in the range of $19.76 to $20.22 with non-GAAP earnings per share in the range of $23.45 to $23.85. I will now pass the call back to Robert. Robert Mehrabian: Thank you, Steve. We would like to take your questions now. Operator, if you are ready to proceed, please go ahead with the questions and answers. Operator: Thank you. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Greg Konrad with Jefferies. Good morning. Maybe just to start on the outlook for revenues, I mean, you gave a little bit of color around short cycle. But just thinking about that, 4% growth, is there any way to parse organic versus inorganic given the smaller recent deals plus, you know, how you are thinking about, you know, long cycle growth in backlog versus maybe initial assumptions around the short cycle businesses overall? Robert Mehrabian: Okay. Greg, let me start with organic versus nonorganic. We think most of the growth would be organic, about 3.6% nonorganic, a little over 4%, 4.2%, about. In terms of short and long cycle, I do not see a lot of differences between those two. We think that we have probably a little smaller increases in certain areas like environmental and test and measurement, maybe a little over 2%. But that will be offset with a healthy increase in our marine instruments. About 5% and we think FLIR will grow just under five maybe 4.6% to be accurate. So I do not see a lot of difference between short and long cycle. And as I mentioned before, we do not believe over the years. The total year in 2026, we are going to see shrinkage of our short cycle businesses that we have before. Greg Konrad: And then maybe just a follow-up that. I mean, you had really strong Digital Imaging margins in Q4. I think you called out a contingent liability reversal. But how are you thinking about the exit rate for digital imaging? And know, maybe the biggest opportunities into 2026 given you have talked about, you know, a 24% target in the past? Robert Mehrabian: Yeah. Let me start with the question on the contingent liability. I think if you look at that and you balance it out versus, RIF costs, you know, we have been reducing costs as we go along. Fundamentally, it added about 50 basis points to our margins. So even with that, in Q4, we have a 24% margin or a little in excess of twenty four margin in February. For the full year, 2025, digital imaging margins came in at about 22.6%, which was about 30 basis points improved over the prior year. 2026 we are a little more hopeful and we believe that the margins would go up maybe another eighty eighty basis points and, get to about 23.4% and up. With good luck, I hope we will get to the 24%. Greg Konrad: Thank you, and nice quarter. Thanks. Operator: Thank you. Our next question comes from the line of Amit Mehrotra with UBS. Please proceed with your question. Zach Waljasser: Hey, this is Zach Waljasser on for Amit Mehrotra today. My first question is just implied 1Q guidance suggests about 10% earnings growth year on year. While the full year guidance, like, implies about 7%. Just gonna get some help just around the cadence of the year and, like, implied deceleration because compared to last year, the earnings comps are relatively similar one h versus two h. Thank you. Robert Mehrabian: Yeah. You know, it is easier comps in Q1 versus last year. We improved, obviously, earnings, as you said, throughout the year. Traditionally, we have been about 48% in the first half of the year in revenue, and 46% in profitability. We believe that is about gonna be what happens the coming year. Now I am hoping that we can improve on both of those numbers as we get the year started. But it is the we just got through three weeks of the 2026, so I am hesitant to go further out on a limb than than I have. Zach Waljasser: Great. Thank you so much. Robert Mehrabian: Thanks, Zach. Operator: Thank you. Our next question comes from the line of Andrew Buscaglia with BNP Paribas. Please proceed with your question. Andrew Buscaglia: Hey, good morning, everyone. Robert Mehrabian: Morning, Andrew. Andrew Buscaglia: I was hoping you could add some color to some of these bigger seemingly bigger defense awards you are talking about specifically the tracking which seems very topical currently. Can you any way you can size the size of that award or the contribution you expect Teledyne Technologies Incorporated to receive in '26 and beyond? Robert Mehrabian: Yeah. I will I may perhaps that is a question I can pass to George. George Bobb: Sure. So on the tracking layer, of course, we provide very high performance infrared arrays. And that program for us will be north of a $100 million over the next few years. Andrew Buscaglia: And and what are it sounds like you are selling to these, you know, three to four different primes. What what can we in terms of margin contribution from something like that? Is it higher versus corporate average or lower? Or what? George Bobb: I would say it is it is it is about average. I mean, we Robert Mehrabian: Yeah. It is as George mentioned, these are going to probably be fixed price contracts. So our performance will improve again as it always does as a function of time. So early on, maybe our margins will be a little less, but overall, these are really good programs for us. Andrew Buscaglia: And it is I imagine this is multiyear. You will see that so you you will see additional contribution years out or just you know, something 2026 that subside thereafter? George Bobb: So we will start to perform in 2026, but it will be over a a two or three year period. Andrew Buscaglia: Got it. Okay. Thank you. Operator: Thank you. Our next question comes from the line of Jim Ricchiuti with Needham and Company. Please proceed with your question. Jim Ricchiuti: I apologize if you gave this on the call. I had to jump off momentarily. But did you provide an order number and, Robert, any color as to how the book to bill was in the the main segments of the business? Robert Mehrabian: Not yet, Jim, but I will now. First, we in the fourth quarter, which is our most recent numbers that I can get, we think instrumentation as a whole would be is about one. Digital imaging is about one. Or one point o six Aerospace and defense is higher at 1.25. Engineer systems is under one, but that is a lumpy business, and we have had some big orders. During the year. So total, for Q4 is one point o seven. And then for the full year, if you take everything for the full year, it is about one point o eight. So we feel very comfortable that the in all our of our segments, we are either at one or better than one. Jim Ricchiuti: Got it. Thank you for that. What, what were the full year sales from the unmanned business again, if you provided it, I apologize. And I am wondering how you are thinking about the growth in the total unmanned business in 2026. Just given the pipeline? 20 yeah. Robert Mehrabian: In 2025, I would say our Aman businesses combined. All combined. Are about $500 million. We think that will be a little higher in '26 maybe 10% of our overall revenue. Jim Ricchiuti: Great. Thanks very much. Operator: Thank you. Our next question comes from the line of Jonathan Siegmann with Stifel. Please proceed with your question. Jonathan Siegmann: Maybe just following up on on autonomous and unmanned, the the record underwater vehicle sales, can you talk a bit more about the drivers? Last year's reconciliation bill had significant funding increases in this area. And just how relevant is this to to your business, and are you seeing any benefit of it? Thank you. Robert Mehrabian: Yeah. As you know, we have in the underwater vehicle, both we have both manned and unmanned. In the manned vehicles, we are the sole supplier to the Navy SEALs. And we not only have provided all the vehicles, but there is continuous revenue from parts and maintenance. The new stuff that we are doing goes to a whole range of sub c product. Some of them have to do with the infrastructure anti submarine warfare, and some of them have to do with just observations and measurements. For example, our glider are deployed in front of large naval operations. To measure temperature, and density and salinity, which all of these affect acoustic sensors and speeds. So you have to compensate for those. We also have really good program wins, just in The US, but especially in Europe. For security of harbors We provide a whole range of underwater vehicles from very shallow ones that go only a thousand meters down deep to very large vehicles that go as deep as 3,000 meters. So or more. And so we we have a whole suite of I would say, I am just looking at a picture I think I see about 10 or 12 different underwater vehicles. That we are selling not just in The US, These are autonomous vehicles. But also especially in Europe. Jonathan Siegmann: Great. And then on the Lord and Munitions congratulations on that production award. Can we expect to hear anything about developments with the army with with your product? Thank you very much. Robert Mehrabian: Thank you. Well, there is a program called Lasso you may be familiar with. It is a development program. And, it has not all been announced. But it is coming up. We are one of the participants in that program. But, overall, I would say, there is not just the loitering munitions that we have introduced. But we are working on some new ones. As well. So hear more about that as we both develop our products as well as as we win programs. Jonathan Siegmann: Good luck with the year. Robert Mehrabian: Thank you. I just want to make sure that when I was talking about the unmanned on a question that Jim asked. Our 2025 revenue on unmanned both air ground, and underwater was about $500 million. We think that will grow about 10%. I said it would be 10% of revenue in 2026. But it would probably be closer to $550 million. Sorry. I needed to correct that. Go ahead, please. Operator: Thank you. Our next question comes from the line of Guy Hardwick with Barclays. Please proceed with your question. Guy Hardwick: Hi, good morning. Good morning, Robert. Robert Mehrabian: Good morning, Guy. Guy Hardwick: I just wonder how you guys feel about M and A, particularly maybe larger M and A versus share repurchases. Obviously, saw you bought back $400 million of stock in Q4. The stock price big move upwards since then. Maybe that looks relatively less attractive than M and A, but I think a sense from a few months ago that you were not particularly encouraged by M and A prices, except for maybe bolt on deals. Maybe you can give us an update of the M and A picture and whether small versus large. Robert Mehrabian: Sure, Guy. First, let me let me go back to the stock repurchases. We have been very conservative about stock repurchases. When you look at our twenty six year history, we have all in bought maybe $1.2 billion. And only at times where our stock was really we believe was really undervalued with respect to our peers, and the market. So I would say the fourth quarter purchase was opportunistic. As it was twice before in our history that we bought stock. Our primary driver is always been acquisitions. And you mentioned larger acquisitions. First, we consistently like to buy what we call the string of pearls small acquisitions that we can tuck in like the one we just announced, BD Scientific in The UK. With like to do that continuously regardless of whatever else happens. On the larger acquisitions, we have a pretty good list of what is coming up. Both from private equity people who bought a range of products and businesses and combined them. And we do not mind paying a reasonably good price for an acquisition. As long as the quality of the mix of the businesses we are getting is there. While we are hesitant, and we mentioned before, while we are hesitant is when we are buying a fixer upper, and we are bidding 15, 16 times EBITDA, Somebody else walks in and pays 21, 22 times. We really do not think that is for us. But having said that, based on what we see, there is a whole range of acquisitions, what we call, for us, large. Would be let us say, we pay a billion dollars of the or thereabouts. There is a whole range of those that are coming and we would be more encouraged than we were in 2025. Guy Hardwick: K. Thank you. Just that is very helpful. Just one quick modeling follow-up question. In digital imaging, was the FX contribution in the quarter? Robert Mehrabian: I can just talk to you about in general the total contribution in for the year was about 40 basis points. It started negative in the year, picked up, ended in Q4 about 80 basis points in Q1. and averaged out for the whole year at 40 basis points. So it was it was there, but it was not that significant. Guy Hardwick: Thank you. Operator: Our next question comes from the line of Joe Giordano with TD Cowen. Please proceed with your question. Joe Giordano: I wanted to ask on on memory. Obviously, prices are up a ton, and I believe there would be applicability for you guys having to buy that across you know, whether it is instrumentation or T and M and elements of digital imaging. So you comment on what you are seeing there? How big a percentage of sales it is, and how effective you have been able to pass that through to people? Robert Mehrabian: Yeah. Thanks, Joe. First, we do not see a risk net risk. In that area. Some of our businesses, as you said, specifically more geared towards test and measurement instrumentation, do use memory. And may have some constraints in supply cost inflation. Ironically, memory and storage suppliers are also reasonably large customers of our test and measurement instrumentation businesses. So if they spend incremental CapEx by for proper by to for their memories. Then that is generally good for us because that is higher margin contribution business for us. But coming back to what I summarized, net risk is not there. Joe Giordano: That is good to hear. Curious I guess two more for me. One, can you just run us through the organic kind of by segment, what you are thinking for next year? And then I also would like a bigger picture. Do you think and there has been talk from the government about restricting defense companies and what they can do with their balance sheets and how they spend their money. Do you see yourself I I think I know your answer, but do you see yourself in that population of companies that would be potentially targeted there? And if no, does it does it make you wanna do things that others cannot because you have less restrictions? Thank you. Robert Mehrabian: Yeah. Well, let me tell you. We have never been driven by what what others do anyways. So as I said, our preference is buying companies and investing in our businesses. But let me go back Teledyne Technologies Incorporated, I said, we rarely bought our shares back. So $1.2 billion in share buybacks over the twenty six year history is not a whole lot considering we generate that much cash in the last two years every year. Having said that, we have never paid a dividend and we are more concerned about investing. If we cannot buy companies, we are more inclined to invest in our businesses. For example, just last year, we increased our CapEx by 40% and we increased our R&D spending by 10%. So if we cannot find really good acquisitions, even though last year was a good year for acquisitions, we invest in CapEx and R&D and we are gonna do that moving forward. There are pockets of our businesses that are performing really well and, like, where we supply cooled and uncooled infrared sensors and cameras to our various customers will increase more CapEx there. Having said all of that, we have always been a commercial company. Albeit we do have significant defense businesses. Can go as high as 30%. But overall, also, most of our defense businesses are fixed price businesses. I do not think it really applies to us. But, nevertheless, since we do not buy a lot of our own stock, I do not think I am so concerned about that. You asked about revenue. Organic we believe organic revenue growth. I mentioned this before, but I will do it very quickly. In digital imaging, it would be about 3.5%. Overall, it would be around that, 3.5, 3.6%. Aerospace and defense may be a little higher. Instrument would be around that. But we like the fact that it is around three and a half to 4% in our various businesses. Do not expect any of our businesses to decline. Joe Giordano: Thanks, Robert. Robert Mehrabian: Sure. Thank you. Operator: Our next question comes from the line of Alex Preston with Bank of America. Please proceed with your question. Alex Preston: Hey, good morning. Thank you for taking the question. I just wanted to touch on 737. It seems like we got some more certainty on rate increases at the '25. Just wondering if there has been any change to your thinking on destocking into '26. Robert Mehrabian: I will ask George to answer it. I do not think so. But George. George Bobb: Yeah. I would say no major change. And I would just keep in mind that, you know, our overall commercial aviation business is only about 5% of the business. And only about a third of our aviation business is OEM, and only a portion of that is Boeing. So no no no major change there for us. Alex Preston: Got it. Appreciate the color. Robert Mehrabian: Thanks, sir. Operator: Thank you. Our next question comes from the line of Rob Jamieson with Vertical Research Partners. Please proceed with your question. Rob Jamieson: Hey, guys. Thanks for taking my questions. Nice quarter. Just quickly on test and measurement. Just can you go through some of the demand drivers there? Was that mostly the Ethernet test again that was driving strength? And did you see any kind of improvements in some of the other end markets that you serve that might be related to, like, auto or anything like that that you could know, provide insight on? Robert Mehrabian: Yeah. I would say, Rob, in the immediate future, our oscilloscopes high end specialty oscilloscopes are doing well and will continue to do so. Both from the auto market as well as from motor control and power control in the larger data centers. And, also, we have a product a small company that generates Internet traffic capability. So we can simulate that. And basically, you know what is happened to the Internet. It is moving to the terabit range, 1.6 terabit to be accurate. We do have products in that domain. In some of our protocol analyzer business we expect a little slower start in '26 primarily because that business is very dependent on where the large suppliers issue or produce chips. Before they produce their chips, they use our protocol analyzers the engineers, to develop the chips. But until they issue the chips, the users do not buy our protocol analyzers. So there is a little gap in that domain. With the two major producers of chips. Having delayed things. But as we move into the year, that will even itself out. So that is the best answer I can give you. Rob Jamieson: That is helpful. Thank you for that. And then just looking at some of the legacy legacy, you know, machine vision and, CMOS X-ray businesses in digital imaging. You know, are there any you know, do you see the machine vision business starting to recover and you do not expect that to be negative this year, are there any particular end markets or exposures there where you would expect the most upside? And then I guess on the X-ray CMOS, sensors business, you know, just some of the commentary that we have seen recently from, Dentsply that they are expecting recovering sales in the 2026. This kind of aligned with I know you talked about seasonality in the second half, but would you continue to expect, like, a sequential improvement for the medical portions within BI as we move through twenty twenty six? Robert Mehrabian: I will I will ask George to pick that up. Please. But in general, I would say we are we are gonna do okay in the machine vision domain. Because of mask and semiconductor inspection. Etcetera, I will let the X-ray for George to comment on. George Bobb: Yeah. I I would also just add on the on the machine vision side. We saw good single digit growth in both machine vision cameras and machine vision sensors in Q4. And we expect in that overall industrial and scientific division to be up kinda low single digits in 2026. So we we certainly seeing the recovery there. And as Robert mentioned, that is areas like semiconductor mask and wafer inspection. Any inspection of electronic components. On the X-ray side, really, we we are kind of anticipating flat year over year in in 2026. We have we have not built in a a recovery in that business in 2026. Rob Jamieson: Okay. Okay. Thank you for that. Appreciate it. Operator: Thank you. Ladies and gentlemen, that concludes our question and answer session. I will turn the floor back to management for final comments. Robert Mehrabian: Thank you very much, operator. I will now ask Jason to conclude our conference call. Jason VanWees: Thanks, Robert. And again, thanks, everyone, for joining us today. And of course, if you have follow-up questions, my number is on the earnings release. And other news releases. Are available on our website. So everyone. Talk to you later. Bye bye. Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
Paul Bieber: Hello and welcome to Karooooo's Q3 FY 2026 Earnings Call. On behalf of Karooooo, we would like to thank you for joining us today. I am Paul Bieber, VP of Investor Relations and Strategic Finance. We are joined today by Zak Calisto, Founder and Group CEO; Hoeshin Goy, Chief Financial Officer. -- and Carmen Calisto, Chief Strategy and Marketing Officer. I would like to remind everyone that some of the statements that we make today regarding our business, operations and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to several risks and uncertainties. Our actual results could differ materially. Please refer to the safe harbor statement in our Form 20-F, including the Risk Factors in the 6-K that we filed yesterday. We undertake no obligation to update any forward-looking statements. During this call, we will present both IFRS and non-IFRS financial measures A reconciliation of non-IFRS to IFRS measures is included in the 6-K that we filed with the SEC yesterday. Our comments will refer to year-over-year comparison unless we state otherwise. I will now pass the call over to Carmen. Carmen Calisto: Thanks, Paul. Welcome to Karooooo's Q3 FY 2026 Financial Results Presentation. Karooooo delivered outstanding results this quarter, highlighted by accelerating ARR growth, strong subscriber momentum with record net additions and continued robust profitability. We also made progress towards an important milestone and ended the quarter on the verge of USD 300 million in ARR. We achieved these results even as we made significant and planned upfront investments in sales and marketing to drive future recurring revenue and earnings. These achievements underscore our ability to scale efficiently while delivering meaningful view to our customers and shareholders. Before diving into the details, we would like to provide a quick introduction to Karooooo. We operate a SaaS platform for connected vehicles and mobile assets that enables businesses to enhance operational efficiency, reduce costs, improve safety and customer service and ensure compliance. We help businesses simplify decision-making to optimize their physical operations. We serve a large underpenetrated market with strong sustained demand driven by digital transformation, a constant need to improve operational efficiency and an increasing focus on safety and compliance. We are a founder-led business with a strong financial profile, a 2-decade proven track record of execution excellence and a cultural focus on disciplined capital allocation and operational efficiency. Our platform supports approximately 2.6 million subscribers across more than 125,000 businesses spanning a diverse set of industries. Importantly, our financial model is anchored by accelerating ARR growth, high-margin subscription revenue, exceptional commercial ARR retention and powerful unit economics. In Q3, our ARR increased 22% to ZAR 5,106 million, and on a U.S. dollar basis, increased 28% to USD 298 million., Our commercial customer ARR retention rate remained at 95% and subscription revenue accounted for 97% of Cortrak revenue. We continue to scale our proprietary data assets now generating more than 275 billion data points monthly, which we leverage to deliver impactful insights and value to our customers. Finally, our LTV to CAC remains above 9x and underpinned by strong retention, disciplined capital allocation and efficient distribution, which are embedded in our vertically integrated business model and company culture. During today's presentation, we will review both of Karooooo's operating segments, Cortrak and Career Logistics. Katra is our SaaS operations management platform. Cortrak operates at scale and has a very attractive financial profile. Contract's operating momentum is the primary driver of Karooooo's growth and strong financial performance. In Q3, Cortrak delivered exceptional results highlighted by accelerating subscription revenue growth in South Africa. These results reflect the early returns from the strategic investments we have made in expanding our sales capacity in recent quarters and selling video and [indiscernible] tag to our existing customers in South Africa. The results also underscore the continued growth potential in South Africa. In Q3, [indiscernible] generated approximately ZAR 1.2 billion in subscription revenue, an increase of 20% or 27% on a U.S. dollar basis, A strengthening ZAR negatively impacted reported Q3 Cortrak subscription revenue growth. Year-to-date, Cortrak subscription revenue has increased 20% to 15% in FY 2025, a material acceleration, Cortrak operating profit margin was a healthy 28% in Q3. Karooooo Logistics is our rapidly growing delivery as a service offering that empowers large enterprise customers to scale their e-commerce and logistics operations. Karooooo Logistics continues to demonstrate strong growth and operating momentum while delivering real value to our enterprise customers. We report Karooooo Logistics separately as its delivery as a service financial profile differs from Cortrak SaaS financial profile. Karooooo Logistics is strategically important to us as it empowers our customers to scale their e-commerce and logistics operations through a capital-light model while driving high [indiscernible] customer retention. We continue to profitably scale the Karooooo Logistics business. In Q3, Karooooo Logistics' delivery as a service revenue reached ZAR 135 million, an increase of 24% or 31% on a U.S. dollar basis. Given Karooooo Logistics' robust revenue growth, we are very excited about the long-term growth opportunity. In Q3, Karooooo delivered strong consolidated financial results. Total revenue increased 22% to ZAR 1,410 million. Subscription revenue increased 20% to ZAR 1,239 million Operating profit increased 14% to ZAR 369 million and total subscribers increased 16% to approximately 2.6 million. [indiscernible] 20% subscription revenue growth and 28% operating profit margin were the primary drivers of our strong financial performance in Q3. Q3 continued our track record of delivering profitable growth at scale. In Q3, we were a Rule of 60 company when adding our Cortrak subscription revenue growth of 20% and our cartrack adjusted EBITDA margin of 45%. We note that our EBITDA margin does not include any stock-based compensation add-back. Before detailing our Q3 performance, it is important to underscore just how differentiated our financial model has in the context of the broader SaaS universe. We believe we are among the select few SaaS companies operating at a rule of 50 plus based on calendar year 2026 Gap Street estimates. Within a SaaS universe of approximately 140 companies there are less than 10 companies operating at this level, and Karooooo is the only small cap company. Our financial profile is incredibly rare in public markets, especially among small-cap companies, being part of this elite group reflects our unwavering commitment to disciplined and profitable growth. In addition, with an essentially unchanged share count over the last several years and no stock-based compensation growth in free cash flow directly translates into higher per share value given the absence of dilution. This is a key point of differentiation relative to many SaaS peers that fund growth for significant equity issuance and SBC. Now let's discuss our Q3 financial and operational highlights. In Q3, SaaS ARR accelerated to 22% compared to Q2 FY 2026 growth of 20% and ARR growth in U.S. dollars accelerated to 28%, reaching $298 million. Car track subscription revenue growth increased 20%, underpinned by 21% growth in South Africa. The 21% growth rate in South Africa represents a significant acceleration compared to FY 2026 Q2 growth of 18% and 14% in Q3 of the prior fiscal year. Contracts total subscribers increased 16% to approximately 2.6 million, driven by healthy growth across all regions. Notably, CarTrack delivered record subscriber net additions of 111,000 in Q3. Also, year-to-date net subscriber additions increased 30% in Asia. Cartracks operating profit margin remained healthy at 28% despite a 47% increase in sales and marketing expenses in Q3. We were a rule of 60 company in Q3, and our balance sheet remains strong and unleveraged. We ended the quarter with net cash and cash equivalents of ZAR 531 million. Our healthy subscription growth margin, efficient customer acquisition and attractive commercial customer ARR retention rate continued to drive our healthy unit economics. In Q3, our subscription gross margin was 73%, our LTV to CAC ratio remained above 9x, and our commercial customer ARR retention rate was 95%. Our unit economics remain healthy despite the significant increase in sales and marketing expenses during Q3. It is also noteworthy that we accelerated our subscription revenue growth from 14% in Q3 last year to 20% this quarter while maintaining our strong unit economics. We remain committed to profitable growth and strong unit economics as we pursue the expansive growth opportunity ahead of us. We ended Q3 with approximately 1.9 million subscribers in South Africa, an increase of 16% and Q3 subscription revenue growth was 21%, a significant acceleration compared to Q2 FY 2026 growth of 18% and 14% in Q3 of the prior fiscal year. South Africa represented 72% of total [indiscernible] subscription revenue. The pace of growth reflects our strategy to drive [indiscernible] subscription revenue growth through a balanced combination of subscriber additions and selling video and contract tag to our existing customers. South African subscriber and subscription revenue growth is a clear signal that our strategy is driving results. This accelerated growth reflects our deliberate strategy to cement our leadership position in South Africa by simultaneously growing our customer base and selling video and contract tag to customers in South Africa. Average revenue per user or ARPU in South Africa increased 7% to ZAR 162 November 2025 compared to November 2024. We are committed to continue building our distribution capabilities to service the demand for our products from both new and existing customers and we are confident that our investment in sales capacity this year will have a positive impact on Cartrack subscriber growth in FY 2027. We are optimistic about the market opportunity in South Africa and believe there is a long runway to drive strong subscription growth. We ended Q3 with approximately 318,000 subscribers in Southeast Asia and the Middle East an increase of 20% with most of the subscribers in Southeast Asia. Year-to-date, net subscriber additions in the region increased 30%. And Southeast Asia and the Middle East comprised 15% of total subscription revenue, and Southeast Asia and the Middle East subscription revenue growth increased 14%. And -- the pace of subscription revenue growth in the region reflects an increase in subscribers from lower ARPU countries combined with the translation impact of the strengthening ZAR. As the second largest contributor to group revenue, Southeast Asia continues to present the most compelling growth opportunity for our group in the medium to long term. Southeast Asia is a vast under-penetrated market for sophisticated fleet management and video-based solutions, and we are well positioned to capitalize on the opportunity. We ended Q3 with approximately 223,000 subscribers in Europe, an increase of 16%. European subscription revenue increased 24% and Europe comprised 10% of our total subscription revenue. We continue to expand our customer base and drive our distribution capabilities in the region. We have partnered with leading OEMs to provide easy access to our platform seamlessly integrating their connected vehicle data to our platform through APIs. We expect these partnerships to contribute to our results in the medium to long term. In addition, we are experiencing encouraging demand for our proprietary compliance technology in the region as customers seek to simplify compliance with evolving legislation and enforcement. In Q3, Karooooo Logistics continued to build scale and delivered revenue of ZAR 135 million, an increase of 24% and a 7% operating profit margin. Growth in e-commerce orders drove Karooooo Logistics' revenue growth. Karooooo supports our strong financial performance by immersing our platform into large customers' operations, contributing to strong customer retention. Karooooo Logistics also enables us to learn about the operational and logistics challenges confronting our large customers. We see a large opportunity for Karooooo Logistics going forward as large businesses seek to increase their e-commerce offerings and optimize their logistics capabilities through a capital-light model. In Q3, we continue to make progress with our FY 2026 priorities. First, we continue to strengthen our leadership position in South Africa by driving the adoption of video solutions and cartrack tag within our existing customer base. The early results are promising with South African ARPU increasing 7% as of November 2025 compared to November 2024, highlighting growing customer engagement and product uptake. In addition, we expect our ongoing investment in distribution capacity to create durable growth benefits that extend beyond the current financial year. Second, we continue to expand our distribution footprint in Asia and Europe, and we are seeing success in expanding our teams in the regions. Finally, we continue to work with our customers globally to drive broader engagement with our platform and to capture the growing demand for video capabilities, including AI video. We are very excited about the momentum we are experiencing with our video solutions in the market, including AI video. Capital allocation is a fundamental part of our disciplined culture rooted in a 20-year culture of profitable growth at scale and prudent financial management, key drivers of long-term shareholder value. Our capital allocation framework is unchanged and prioritizes Organic growth and innovation, our paramount priority is investing in organic growth and product innovation given our strong unit economics sustained profitability and large market opportunity. Returning capital to shareholders. At current growth rates, our business generates significant excess cash -- with our strong balance sheet and net cash position, we aim to return surplus capital to shareholders when we cannot efficiently invest it for growth, primarily through an annual dividend -- as to avoid doubt, management prioritizes growth over dividends. Strategic M&A. We take a prudent and strategic approach to M&A we view M&A as a tool to accelerate time to market in key geographies, expand our product portfolio or strengthen our competitive position. However, given our compelling organic growth customer-centric culture and attractive unit economics, we set a high bar for any potential acquisitions. Ultimately, we see it as our responsibility to allocate capital thoughtfully, always with the goal of maximizing long-term shareholder returns. I will now hand it over to Hoeshin, who will discuss our Q3 financial performance. Hoeshin Goy: Thank you, Carmen. I will now discuss Karooooo's financial performance for quarter 3 FY 2026. Please note, my comments will refer to year-over-year comparisons unless we state otherwise. Our proven and profitable SaaS business model continued to deliver strong results in quarter 3. Karooooo's total subscription revenue increased 20% to ZAR 1,239 million operating profit increased 14% to ZAR 369 million and earnings per share increased 11% to ZAR 8.55. Earnings growth remained robust despite significant and planned upfront investment in sales and marketing to drive future revenue and earnings. In other words, these investments are fully expensed as incurred while the associated recurring revenue benefits are expected to realize over time. We will now focus on cartrack's financial performance, which is fueled by SaaS revenue momentum. In quarter 3, CarTrack revenue increased 21% to ZAR 1,275 million, and cartrack subscription revenue increased 20% to ZAR 1,236 million. Subscription revenue comprised 97% of CarTrak's total revenue. Quarter 3 ARR growth accelerated to 22%, reaching ZAR 5,106 million. In U.S. dollar, ARR growth accelerated to 28%, reaching $298 million. As you can see from the trend of the charts, cartrack has a proven track record of scaling in varying macroeconomic conditions -- given our consistent execution, resilient subscription revenue model and attractive historic retention rates. In quarter 3, subscribers increased 16% to approximately $2.6 million. Subscription revenue increased by 20% to ZAR 1,236 million and operating profit increased 14% to ZAR 359 million. Cartrack experienced record customer acquisition in quarter 3 with net subscriber additions of 111,478 subscribers. The record net subscriber additions reflects our strategic investment in sales capacity and success selling video and car tract tech. Total subscriber growth increased 16% in quarter 3, underpinned by record subscriber net additions. Importantly, South Africa subscriber growth also increased 16%, underscoring the growth potential in the region. Quarter 3 SaaS ARR accelerated to 22% compared to quarter 2 growth of 20% and quarter 3 FY 2025 growth of 14%. In U.S. dollar, Quarter 3 SaaS ARR increased 28%, reaching $298 million. This marked the fourth consecutive quarter of ARR growth acceleration. We believe the acceleration in ARR growth reflects the underlying momentum in the business and signal that our strategic initiatives are gaining momentum. Cartrack continued to grow its subscription revenue across geographies, highlighted by an acceleration in South Africa. South Africa subscription revenue growth accelerated to 21% compared to quarter 2 growth of 18% and quarter 3 FY 2025 growth of 14%. The accelerations indicates that our efforts to cement our leadership decision are driving measurable results. Europe subscription revenue growth increased 24% and 19% on a constant currency basis. Asia and the Middle East subscription revenue growth increased 14% and 18% on a constant currency basis. Asia and the Middle East reported subscription revenue growth reflects an increase in subscriber from lower ARPU countries in the region, combined with the translation impact of a strengthening South African rand. Healthy growth across regions reflects our strong execution and provide a solid foundation for continued growth. Peru adjusted earnings per share increased 11% to ZAR 8.54. Cartracks earnings per share contribution increased 11% to ZAR 8.35. Karooooo Logistics earnings per share contribution increased 25% to ZAR 0.20. Adjusted earnings per share growth reflects significant planned investment in sales capacity and customer acquisition, evidenced by the 47% increase in sales and marketing expense by Karooooo in quarter 3. Our upfront sales and marketing costs are not aligned with the lifetime value of customer recurring revenue and related earnings in our financial statements. Importantly, our powerful unit economics remain intact and our balance sheet remains strong as we invest in sales capacity. On a year-to-date basis, our adjusted free cash flow increased 37% to ZAR 597 million underscoring the strength of our operating model. Quarter 3 adjusted free cash flow increased 28% to ZAR 239 million. As we pursue accelerated growth we expect free cash flow to reflect our investment to drive growth, while quarterly fluctuations may occur due to working capital dynamics and growth-oriented investment, we remain confident in our ability to consistently generate meaningful free cash flow. Karooooo's consistent free cash flow generation powers our disciplined capital allocation strategy and position us well for future growth. Our balance sheet reflects our track record of durable growth at scale, profitability and cash generation. our net cash on hand plus cash in bank fixed deposit was ZAR 531 million. Debtors collection days remain healthy at 31 days and are within our historical now. In August, we paid a total cash dividend of approximately $38.6 million to our shareholders, which equates to a dividend of $1.35 per share. We believe that our ability to generate healthy cash flow is sustainable given our energy business model, coupled with our track record of consistent execution. We believe Karooooo remains strongly positioned for growth as we operate in an expanding and largely underpenetrated market, fueled by robust and sustained customer demand. This demand is driven by heightened focus on digitalization, lead to improved operational efficiencies and reduce costs and an increasing attention to safety in physical operations. Year-to-date in FY 2026, we have accelerated Tatra subscription revenue growth by expanding our distribution footprint in existing markets, driving broader platform adoptions and capitalizing on growing demand for video solutions, including AI videos. We are encouraged by our positive performance evidenced by CarTrack Quarter 3 subscription revenue growth of 20% and ARR growth of 22%. Kazak delivered a 29% operating profit margin, reflecting strong execution while investing in sales and marketing capacity to support future growth. While we have delivered strong year-to-date results, the appreciation of the South African rand has created a currency translation headwind on our reported revenue, constraining the flow-through of our strong performance to our FY 2026 outlook. We do not hedge our foreign currency exposure. So fluctuation in exchange rates may create some variability in our reported results despite our underlying operating momentum. Given our momentum year-to-date, we are increasing our FY 2026 cartrack subscription revenue outlook to between ZAR 4,785 million and ZAR 4,900 million, implying growth between 18% and 21%. As compared to our previous outlook of 4,700 million, and ZAR 4,900 million, implying growth between 16% and 21%. We are also revising our FY 2026 cartrack operating profit margin outlook to between 27% and 30%. And as compared with our previous outlook of 26% and 31%. Our FY 2026 Karooooo adjusted earnings per share outlook remained unchanged at 32.5 to 35.5. As we work towards closing the financial year, we are executing on 2 fronts: expanding our sales capacity to drive new customer acquisition, and strengthening our relationship with current customers through increased adoption of video and tartrate. While the business is accelerating, we remain people constrained and will continue to build the sales capability to meet these goals. At this stage, we believe the right strategy for the long-term health of the business is to lean into driving adoption of video and cartrack tech with our existing customer base to further cement our leadership decision in South Africa. With that said, we are also confident that our investment in sales capacity this year will have positive impact on subscriber growth in FY 2027. In closing, Karooooo delivered an outstanding result this quarter highlighted by accelerating ARR growth, strong subscriber momentum with record net additions and continued robust profitability. We also made progress towards an important milestone and ended the quarter approaching USD 300 million in ARR. We achieved this result even as we make significant and plan upfront investment in sales and marketing to drive future recurring revenues and earnings. These achievements underscore our ability to scale efficiently while delivering meaningful value to our customers and shareholders. The underlying acceleration in the business reflects the strength of our operating model and early traction from strategic investment in sales capacity and customer acquisition. As we continue to enhance our distribution footprint, we expect our ongoing investment in distribution capacity to create durable advantage that extend beyond the current financial year. with continued execution, disciplined investment and growing regional momentum, we believe that we are well positioned to deliver profitable and durable long-term growth. Finally, we remain firmly committed to thoughtful capital allocation, strong unit economics and our vertically integrated and open operating culture. With that, I will turn the presentation over to Zak Calisto for Q&A. Isaias Jose Calisto: Good evening or good morning to everybody. Thank you very much, Rishi. I'll start off by reading the questions. I've got -- the first question is from it's just simply labeled as investor. I'm not quite sure that is. How are we doing the 70% increase in head count in Asia. Currently, at the end of Q3, we were at around 40%, but a lot of that hires coming in, in January and February. So do you believe we will end up with that 70% that we initially targeted for the year. And a lot of it really is happening this Q4 simply because a lot of -- in these countries, a lot of the people are willing only to change in January. So it's all going according to plan. When will our investment in sales and marketing stabilize? I think to answer that, it's really about how efficient is our sales and marketing. And as we keep our strong unit economics, and our sales and marketing strategy is working, and we're stable, we will continue to increase that given the -- as a large addressable market. So hopefully, I've answered you in a different way. Who own study is the 35% owner of New Zealand? When I initially started the business in 2004, our first employee was actually under bid. -- and Joan de bet owns 30% of the business in New Zealand and immigrated from South Africa to New Zealand approximately 9 years ago. I might be wrong with the number of years, but approximately. We now go over to Joshua Reilly from Nidar. ARPU was up nicely again in the quarter and even more so for the business in South Africa, up 7% year-on-year. how far along in the cross-selling canned cycle, would you say we are in South Africa? Joshua, I would say that we're in the early stages and we are hoping that in the next financial year will get even stronger momentum. And then the next question, net new subscribers were record in the quarter with strength across all geographies. Now I do see half of the market and you win today relative to your sales execution in key markets. We've increased our sales and marketing substantially this year. as we had set out in the beginning of the year? And are we getting huge productivity? Our unit economics remain very strong. And we believe that we're really performing in the key markets. In some markets, we outperform in budgets. Others we are a bit lagging, but overall, it's going good into plan. Then the next question from Telenet William Blair. -- drivers of acceleration, how do you think about the uplift from pure capacity versus scale in productivity from recent high reps. Now this supports your view durable 20% growth prospects. -- given momentum in both subscriber and cross-selling. Delen in the outlook that we gave in the beginning of the year, we expect it to house and we basically have the outlook that our subscription revenue would be around these ranges. We're actually on the upping of the range we gave. And our peso believe that we've got good momentum and it will continue with the momentum. And our hiring recruitment retention of key staff, I think we're doing pretty well this year. And I believe in get better at it. Next question from Scott Ross. Can you address adoption trends for AI camera penetration rates per region competitive landscape impact of 7% ARPU increase in the current quarter? We've really focused a lot of this in our South African operation. We moved into new offices approximately 18 months ago. We've got the space to hire to build out the infrastructure. we're busy building out the infrastructure in most other countries to be able to build out the call centers required to be -- to really execute on this. And the adoption of Cannes is strong at this point in time. But we certainly believe it's early days in adoption and will only get stronger over time. The competitive landscape, we feel very comfortable to compete with our peers, and I believe we'll continue to get stronger in this space. A question from Cornils Maari. Is there any way to roll out to logistics to Europe or Southeast Asia? Or are those market saturated? I think it's very early days when we're talking long term of the e-commerce space and what our large enterprises customers require -- and I don't believe the market is saturated. I believe the market is only going to grow bigger. And we are developing our technology in order to be able to go into Europe and Southeast Asia. -- and to compete efficiently. It must be said that we don't necessarily need to roll out the driver network in every geography. We've done that in South Africa, but it's more for us to learn. What our platform allows us to do is we can integrate with various and multiple e-commerce service providers that have rolled out fleets. And all we do is we become the aggregator to be able to -- our customers to be able to use any of the service providers that can service them. So the model when we go outside of Africa, it might be slightly different. And as we develop the South African market, we also might change our current model despite it's working very well, but we are learning every day. And the market is changing every day. A question from Alex Cole from Raymond Changes. What drove the strong pickup in South Africa subscriber growth versus plan? I think the subscriber growth is going in accordance with plan. and the cross-selling is going in accordance with planned. And I think it's really just about increasing our footprint and our ability to execute. Where do you stand on sales in versus your specific geo plant Southeast Asia and Europe? I think we are on track with all the mining across all regions. Given the magnitude of sales iron plants in Southeast Asia, do you expect subscriber growth to pick up from 20%, 21% level? Or is this a good durable rate? We certainly -- our ambition is certainly to pick that 20%, 21% and to compound on that -- but it's like everything. We -- it's all about the execution, but we feel positive that we're going to have a very strong FY '27 in the region. A question from the [indiscernible]. It seems there are -- there has been an increase in subscriptions in South Africa quarter-on-quarter. How has the shift from used vehicle sales to new vehicle and South Africa impacted subscriptions that does not impact our business. We get -- our customer acquisition is based on customers that have got vehicles. Now the only time when a new vehicle comes into play, it might be when our customers, they basically trade in or sell their vehicles and buy new vehicles. So the impact of new vehicle sales has got an impact on our business, but it's an insignificant impact at this point in time. Is the used vehicle market in states still under pressure given the affordable new vehicles entering the market? We don't really specialize in that. So and that's whether the market is under pressure or not. We don't really look at that. We will more -- we are focused on the services we provide. And does a stronger new vehicle market have a more positive impact on the subscriptions? Not necessarily. Another question from Scott from Roth. Can you provide an update on asset tracking sales connections in South Africa, the ongoing rollout employment and plans for additional markets. At the moment, we don't plan any additional markets. The rollout is going put into plan, but we are looking at expanding into Europe cautiously. So we are adding our annual discussions now in February where we're going to approve the rollout plan or not approve the rollout plan. But fundamentally, there's a huge opportunity to go outside our key markets in Europe that we're currently in. But at the same time, there's also a huge opportunity to grow within the markets and to cement our leadership in the markets we are already operating. Another question from Belle from Regal. How are you thinking about growth versus margin trade-off? I think in the bottom line in the way we look at it, there's actually the IFRS, will you see a bit of a compression in operating profit margins because of the increase in sales and marketing -- but I think that's really a temporary thing and the minute you stop allocating money to the site marketing, then you just get this huge margin expansion. And the reality is all these upfront costs of getting customers, these customers stay with us for a very long time. So there's a huge alignment of these expenses against future revenue. So we're more focused on the long term of the business as opposed to 1 quarter or 1 financial year we're looking at it rather from perspective of what value all we bringing to our shareholders over the 5 years. So we look at it a little bit different. Impressive ability to accelerate growth to extend or with a minimal margin impact that has got to do a lot with the way we run the business and economies of scale. How does this validate both completion and overall opportunity, opportunity for healthy leverage as the impact from upfront investments continue to discount. I think I've probably answered that latter part of your question. Another question from Dannecker. Here is the double down on strategy clearly working. Any areas you feel confident you could step up investment further. I think fundamentally, it's -- our unit economics continues to be very, very strong. So we -- while we -- I mean right now busy approving our budget for the FY '27. We probably are going to push to continue with the current trend we've got and to continue investing in our footprint in the markets we're in and to continue to grow and accelerate the top line. But we've got to conclude our budgets, and we just got to get more the approval before that happens. And a question from [indiscernible]. How does the Volkswagen AM integration tangibly accelerate your European growth compared to your traditional sales-led expansion? It's -- it's in a simple way, it allows us to get vehicles onto the platform rather quickly. The real challenge we have is that the OEM telemetry devices on most occasions, do not talk to what our customers do. So you get a lot of data, but it doesn't help our customers because the data that they require and the data points that are needed to be collected you typically cannot get it off the OEM devices. So we're getting -- closing close to the OEMs in making sure this relationship works and only the practicalities of using these devices. And I believe over time, this will be sorted out. But the good thing is we've integrated with most of the providers in Europe and in Gestao that's all been integrated. So we've got a great platform. We're in the game but there's a lot of operational issues and data points that we are unable to collect through the OEM to limited devices. More questions. question coming from Colin Smith from or Africa Partners. In November, you announced a partnership with Volkswagen is our case. I think we've answered that question. Colin the -- there are another question from Colin Smith from all African partners. Does the materially strong South African rand over the last year at any positive or negative impact on the underlying operations? The positive impact is probably in the production of our [indiscernible] equipment. But fundamentally, that becomes a very small part of the business. The biggest -- the positive impact is if you report in dollars, then obviously, that's a very strong impact. or however report, then it's a negative impact in terms of subscription. So our operations outside South Africa or a negative -- they are negatively impacted towards our revenue. So our revenue in rands as we reported in U.S. dollars would have been up because we report in rands, the lower they've been negatively impacted. Next question also from Colin Smith. -- in existing subscriber chooses to add video Cortec does the sanitary 6-month contract reset? The answer to that is complex, but I think the best way to look at that is that the 36-month contract we signed is nearly not material to us. What's more material to us is how long will that customer stay with us as opposed to the 36-month contract. And what we find with customers they don't really -- we know the contract we sign it, but it sort of goes into the bottom draw. It's more -- can we keep the customer and can we keep the vehicle on the platform while the customer still owns it. And that's what we measure. And we're more reliant on customer service and customer retention than actually trying to enforce a 36-month contract. And that's been our policy since they 1 of starting the business. We take a much more pragmatic way of looking at the business as opposed to trying to get our customers to stick to their agreement when we know the gain the customer is going to stay with us for very long. Next question from Colin. Is the current share price at level that management may consider share buyback? -- on the reality of doing a share buyback in the marketplace as a listed entity, it's very complex. And I think at this point in time, we are just not trying to second-guess the market. We will just continue being focused on growth of the business and the quality of the asset. We're not -- we'll try to do that about 2 years ago, and it's really, really difficult all the SEC rules around that. meta very complex to do that. And if we do that, we might as well just delist. I have another question from [indiscernible]. Once the ARPU interact only driven by Cantor also general price hikes that is driven by the Cameron ag. And what's our ARPU in Southeast Asia this quarter? How much dilution are you expecting? We've always said over time, Southeast Asia market will matter the ARPU of South Africa. And that is as countries like Philippines and Indonesia, and Thailand start to become a bigger portion of the business, these are typically lower ARPU countries compared to New Zealand or the UAE or Singapore. So that over time, we believe that the Southeast Asia [indiscernible] warmer South Africa. So we do believe ARPUs will decrease as the business gets bigger, but that we knew from outset. And we've consistently told the market that. A question from Matthew at conference. What portion of sales are coming from existing customers, new cater customers -- can you describe examples of use cases for seeing for TAG. And I'm not going to go through the presentation now that our users to take is it's basically really, it allows us to track -- to track equipment or vehicles outside the GSM network. And for that, there's lots of use cases. There's no shortage of these cases where that requirement is needed. And what proportion of sales are coming from existing customers. The -- this well to look at that is that your net adds, which we present that's typically new customers. And when you sell into existing customers, typically, what happens is when you do a fleet very pure fleet owners if they got 70 vehicles down into 10 vehicles or if they got 12 vehicles in 3 case typically fleet owners to the full fleet. So typically, when you are selling in the future to these fleet owners, it's really because they've sold vehicles and they've got new vehicles. And that would be basically not showing on net additions. So your net additions is typically most of that business is new customers. And then your churn business, a lot of that is really customers selling vehicles and buying new vehicles. I hope that explains and answers your question. Are there any regulatory or other technical issues with rolling out tag to other markets beyond South Africa, Southeast Asia and Europe? I'm not come with all the markets, but all the markets we're basically rolling out, no. But once again, I say that I'm not familiar with all the markets and all the regulation and typically, every country has got its own regulation. Let me just see if there's any more questions. Williams. How much you expect in the improved South African macro conditions to accelerate fundamental performance going forward. [indiscernible] is done well in South Africa in really tough times and in good terms. And I think us staying well now is really on our ability to scale, our ability to add more people or new building the infrastructure we're developing. And I think the fact that the economic environment is looking good, gives us a tower wind. But I think mono is not because of the economic situation right now, I think it's really just because of our ability to execute in the way we've been building teams. Matthew from conference. Looking at the South Africa subscribers over the next 5 years, what proportion do you think could be could be interested in Catacora analytics. Matt, to be honest with you, I cannot answer that because whatever I say I might be wrong. So I prefer not to answer that. Next question from Max Sure. Is the subscriber growth in South Africa diluting ARPU growth -- on a group level, it remains rather 4% compared to the target of 6%. The target of 6% would be at February 2026 as a to be at year-end. And I think we might be lagging slowly -- slightly what we expected, but we're largely on track. A question from [indiscernible] . What would you do diffi you were to a private company and not the public on here? What would be the difference in your strategies, there would be actually no difference in our strategy. we are focused on building a business. We're not building a business so that we can pipe on it, and we can sell it. We build in the business One, in terms of my succession planning. Mark family is a majority shareholder. We intend to stay that way. And we fundamentally are looking long term and at the business on a long-term perspective. So we're running the business as with its private or whether it's a public company, our Modelo branding remains the same. A question from Prashant [indiscernible]. Can you share a little more color on your bullishness for subcagon ARPU growth in South Africa? What are the distributions tavern growth? -- on net check such an online news record retailers, payers. Okay, the question -- answer to that present, we're not seeing anything different to what we've been doing over the last year and that is continuously improvements, whether it's our technology, whether it's our software platform, whether it's the training of the people, -- so frankly, there's no changes. It's just doing the same thing but consistently improving with what we've done in the past. And we've got a 20-year track record of continuously improving on the past June. Another question from GB. You say you've got another question, but I don't see it. So I'm not quite sure [indiscernible]. Okay. Typically, what is the cost of your subscription as a percentage of the annual revenue for your customer? Typically, what is the cost of your subscription as a percentage of annual revenue for your customers? GB, I don't really understand the question. I apologize for that. And with that, I answered all the questions. I want to thank everybody for attending, and I look forward to speaking to everyone in 3 months time again. Thank you. Bye-bye.
Operator: Everyone, thank you for standing by, and welcome to the TE Connectivity First Quarter Earnings Call for Fiscal Year 2026. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead. Sujal Shah: Good morning, and thank you for joining our conference call to discuss TE Connectivity's first quarter results and our outlook for the second quarter of fiscal 2026. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com. [Operator Instructions] Let me now turn the call over to Terrence for opening comments. Terrence Curtin: Thank you, Sujal. And I also want to thank everyone for joining us today, and I also want to thank those of you who attended our Investor Day last quarter. Before I get into details on the slide, I do want to frame today's call around the key messages that we shared at the event in November and are reinforced by our first quarter results as well as our outlook. And briefly, we conveyed several key tenets of our strategy and business model. First, that we have been investing and have broadened our growth drivers to benefit from secular trends that are driven by the increased needs by our customers around data and power connectivity. Second, our co-creation engineering models ensures product innovation. And that, coupled with our global supply chain investments will drive value for our customers. And lastly, that we will capitalize on the growth and the investments to drive margin expansion with double-digit earnings per share growth and a continued strong cash generation model. Our first quarter results and our expectations going forward to reinforce these key messages that we convey. We delivered over 20% sales growth in the first quarter with growth in both segments by driving content growth above market. We had record orders of over $5 billion, and this was a growth of more than $1 billion versus the prior year, and this order growth was across our businesses. This growth is being driven by new program awards from our customers, demonstrating the operations and engineering moat that we outlined. Our sales growth and order momentum reinforces the broadening that we talked about at our Investor Day. We also have improved our operating resilience through localization of our supply chain. Our teams continue to execute well despite ongoing macro unevenness to deliver record adjusted operating margins and earnings per share in the first quarter, along with strong cash generation. And lastly, we outlined a long-term through-cycle target of 6 to 8 points of annual average growth. With the momentum that we're seeing, we expect to deliver growth in fiscal 2026 that is ahead of this target. So with that as a backdrop, let's get into the slides that we sent out, starting with Slide 3, and I'll discuss first quarter results and our guidance for the second quarter of fiscal 2026. Our first quarter sales were $4.7 billion, growing 22% on a reported basis and 15% organically year-over-year with growth in both segments, and both segments contributed to our sales being above guidance. As I mentioned, we saw orders increase to a record level of over $5 billion, and our book-to-bill was 1.1, reinforcing our momentum, and I'll provide more color on orders as I get into the next slide. We delivered record adjusted earnings per share of $2.72, which was above guidance and increased over 30% versus the prior year due to strong execution by our teams. Adjusted operating margins were 22%, and this was an increase of 180 basis points over last year. We also continue to demonstrate our strong cash generation model with free cash flow above $600 million, and we returned 100% of our free cash flow to shareholders in the quarter while continuing to support investments for future growth. As we look forward, we are expecting our second quarter sales to be $4.7 billion, reflecting an increase of 13% year-over-year on a reported basis and 6% organically. We expect adjusted earnings per share to be around $2.65, and this is 20% growth year-over-year. Sequentially, we expect our Industrial Solutions segment to grow, and this will be partially offset by transportation's typical auto seasonality trends that we see globally. So with that as a quick overview of results, let's turn to Slide 4, so I can get into more detail on our order trends. In the quarter, we saw orders increase by over $1 billion versus the prior year to $5.1 billion. By geography, we saw double-digit organic order growth in all regions on a year-over-year basis. At our Investor Day, we discussed our engineering-centric design model and focus on the need for more data and power connectivity to create value for our customers that will also translate into value for our owners. Our momentum in the key applications continue, whether that is secular growth in AI, the positioning of TE for power connectivity in the utility space, or the data connectivity needed for next-generation vehicles as a key driver of content growth for our transportation businesses. Getting into orders by segment. In the Industrial segment, orders grew over 40% versus the prior year with essentially every business posting double-digit growth versus the prior year. We see ongoing momentum in digital data networks, energy as well as AD&M. In our automation and connected living business, we are seeing recovery in the factory automation applications with organic sales growth in all regions, both year-over-year and sequentially, and I meant orders growth, not sales growth. Transportation orders increased 11% versus the prior year and grew in all businesses. In our automotive business, orders grew year-over-year and sequentially from the fourth quarter to the first quarter, we saw our normal seasonal trends that follow auto production. Commercial transportation organic orders grew both year-over-year and sequentially, indicating ongoing market improvements in both Asia and in Europe. So with that as an overview of the orders, let's get into the quarterly segment results, and I'll start with our Industrial segment, which is on Slide 5. Our sales in the Industrial Solutions segment grew 38% in the quarter and 26% on an organic basis year-over-year, reinforcing the broadening of growth within the segment. Digital data networks had another outstanding quarter, where the business grew 70% year-over-year, and our AI revenue was higher than our expectations. Our customers continue to award us new programs and the orders that we've received are creating backlog for the second half of this year and into 2027. We now expect our AI revenues in fiscal 2026 to be a couple of hundred million dollars higher than our view 90 days ago, with growth expected across every hyperscale customer. To support this acceleration, we continue to increase our investment in our digital data networks business, and Heath will talk more about this in his section. Turning to automation and connected living. The business grew 12% organically year-over-year with growth in each region, and we continue to expect recovery in the general industrial markets as we move through the year. In our energy business, our sales grew 88%, including the Richards acquisition, which enables us to capitalize on strong growth opportunities in the U.S. utility market. Organically, sales increased 15% driven by continued increased investments by customers in grid hardening and renewable applications. And what was nice this quarter is we saw strong growth both in the United States as well as in Europe. In our AD&M business, sales grew 11% organically, driven by growth across both commercial aerospace and defense applications. In these markets, we continue to see favorable demand trends coupled with ongoing supply chain improvements that are helping to support the growth. And in our medical business, we grew 5% organically, which was in line with what we expected. At the segment level, if you look at margins, the Industrial segment adjusted operating margins expanded by over 500 basis points to 23%, driven by strong operational performance and the benefits of higher volume. So with that as a summary of Industrial Solutions, please turn to Slide 6, and I'll get into Transportation Solutions. Our sales in the Transportation segment grew 10% in the quarter as well as 7% organically year-over-year. Our auto sales grew 7% organically in the first quarter, driven by content growth in Asia and in Europe. Our growth over market was at the high end of our 4- to 6-point range in the first quarter and as we shared with you at Investor Day, we expect our content growth to be balanced between data connectivity, e-mobility as well as electronification trends in the car. Our current quarter results show the contributions from data connectivity applications in our results, which are growing across all powertrain platforms. We continue to benefit from our strong global position and localization strategy, and our growth over market in this quarter was driven by China and Europe. As we look forward, our view of auto production in fiscal 2026 remains consistent at roughly 88 million units, which is down slightly versus the last year. Turning to commercial transportation. We saw strong organic growth of 16% year-over-year, and this growth was driven by Asia and in Europe. After 2 years of cyclical declines in the commercial transportation market, we're now seeing recovery in the end markets outside the United States and expect to benefit from our leading global position and content growth driven by architectural changes. In our sensors business, sales were essentially flat, which was in line with our expectations. And on the margin side, for the Transportation segment, the team delivered adjusted operating margins above 21%, which was in line with our expectations. With that overview, let me hand it off to Heath, who will get into more details on the financials and our expectations going forward. Heath Mitts: Thank you, Terrence, and good morning, everyone. Please turn to Slide 7. For the quarter, we achieved record adjusted operating income of over $1 billion with an adjusted operating margin of 22% driven by strong operational performance by our teams. GAAP operating income was $963 million and included $6 million of acquisition-related charges, $10 million of restructuring and other charges, and $57 million of amortization expense. As I said last quarter, I continue to expect restructuring charges in fiscal '26 to be roughly $100 million. Adjusted EPS was $2.72, and GAAP EPS was $2.53 for the quarter and included restructuring, acquisition and other charges of $0.04 and amortization expense of $0.15. The adjusted effective tax rate was approximately 22% in Q1, and we expect Q2 to be at this level as well. We continue to expect the full year tax rate to be approximately 23%, which is similar to last year. Importantly, as always, we anticipate our cash tax rate to be well below our adjusted ETR. Now if we turn to Slide 8. Our results reflect the business model performance that I shared with you a couple of months ago at our Investor Day event. We are seeing broadening of growth that Terrence mentioned 30% plus incremental margins on that sales growth, double-digit EPS growth and a strong cash generation model with balanced capital returns. Sales of $4.7 billion were up 22% on a reported basis and 15% on an organic basis year-over-year. Adjusted operating margins were 22.2% in the first quarter, expanding 180 basis points year-over-year. Adjusted earnings per share were $2.72, up 33% year-over-year driven by sales growth and margin expansion. Turning to cash flow. Cash from operations was $865 million and free cash flow was $608 million, with roughly 100% return to shareholders through share buybacks and dividends. Our cash generation and healthy balance sheet give us continued optionality with uses of capital to support investments for future growth, both organically and through M&A. With the order momentum Terrence mentioned, we are increasing our capital expenditure this year to support the growth -- growing pipeline of customer awards for AI programs. We now expect CapEx to be closer to 6% of our sales this year, we feel strong about our cash generation model and continue to expect at least 100% free cash flow conversion for fiscal '26. Now before I turn it over to questions, let me reinforce that we continue to execute well in both segments, and our Q1 results reflect a strong start to fiscal '26. For the full year, we are set up to deliver sales growth that is ahead of our through-cycle growth target, while expanding operating margins and very strong earnings per share growth. And with that, let's open it up for questions. Sujal Shah: Thank you. Tiffany, can you please give the instructions for the Q&A session? Operator: [Operator Instructions] Your first question comes from the line of Scott Davis with Melius Research. Scott Davis: Everything was pretty positive. And when you guys are spending more money, that's usually a good sign as well. But I just wanted to lead off with the AI stuff because again, it still is the elephant in the room. I mean it sounds like, if I heard you right, which I think I did, you're taking up your forecast by a couple of hundred million from where you were at Analyst Day. I just wanted to confirm that. But more importantly, I just wanted to address the scaling of those revenues. How is -- can you walk us through the kind of linkage between the capacity adds and the scaling and how you expect that to improve margins as that capacity seasons if you can't give specific numbers, just some reference points and historically when you've added capacity for growth like... Terrence Curtin: Yes. Sure, Scott, and happy new year, and I appreciate the question. And just so we're all aligned about what we said at Investor Day, we did talk about getting to a $3 billion of AI revenue out a couple of years. And we're certainly on track to achieve this and -- versus 90 days ago, when we shared the number, we do think the number for this year will be $200 million more than what we just shared. And what's nice is this year, we're going to have growth across all hyperscaler customers. And that's something that we all know with the CapEx trend that's happening in cloud CapEx to make that happen. The other thing is as we continue to build the momentum, the orders that we just talked about were very strong. And certainly, DDN played a part of that strength. And as I said in the comments, some of that is layered out later in the year. On the scaling, let's face it. We have been scaling. So when you look at the growth that we've had around where we positioned ourselves with our hyperscale customers, we've been scaling very nicely. Let's face it, these programs are big programs and that's the time base to scale. Some of the awards we got in the first quarter are for later this year into 2027, I feel that the teams will have it and continuing to be coming in with good margins on it like we have been doing. We have been improving the margins in IS across all the businesses. So it's not just AI, but certainly, we're benefiting from the volumes as we bring these in, and that's why you see some of the margin improvement that we're getting both from the benefit of the ramp of the AI volumes as well as all the businesses improving their margin going forward. And that you saw that strong growth that we talked about in the pre-read comments. Operator: Your next question comes from the line of Mark Delaney with Goldman Sachs. Mark Delaney: I was hoping you could double-click on order trends, both sequentially and year-over-year and what that implies for revenue by end market going forward? And I ask in part to better understand the 2Q revenue guidance of about $4.7 billion compared to orders that were over $5.1 billion at a record high. And maybe if you can speak to the duration of orders and if that's changing at all? Terrence Curtin: Sure. Thanks, Mark. And like I said in the comments, our orders were a record at over $5 billion and that it was $1 billion of order growth. The one thing that's important is it was very broad-based. While we had very strong orders in DDN, if you exclude the DDN orders, our orders were up double digit across TE. So that's the broadened growth we talked about. And in Industrial, our orders were up in 4 of the 5 businesses, double digits as well. So we have seen strengthening of orders here. Now that is continued momentum in DDN for AI applications and also energy, which let's face it, they were big growth drivers for us last year. We're also continuing to see AD&M orders accelerate. And they are typically in aerospace and defense, a little bit longer lead time. And what was nice in the Industrial segment, and I know we've talked to all of you about it is we're continuing to see market improvement in our ACL business, and that was across all regions. Certainly, we're seeing more in factory automation applications, and we're going to continue to see growth as we go through the year in ACL. When you look at Transportation, and this comes into a little bit to the second part of your question, in Transportation, our orders are reflecting what we see in production patterns. So year-over-year orders were very strong. Clearly, our first quarter is the strongest auto production quarter of the year. But then we do have a 3 million unit production decline quarter 1 to quarter 2. And when we look at that, that's really when you look at the guide, you see that we're going to be up double digits in Industrial as we go quarter 1 to quarter 2, but there will be partially offset by auto production in the world, which will be down about 3 million units. So that's really when you look at the order momentum, which is very strong. We do have some automotive production changes that happen here that normally happen that you'll see reflected in our guide. Operator: Your next question comes from the line of Amit Daryanani with Evercore. Amit Daryanani: I just want to go back to the AI discussion for a bit. And I'm hoping you folks can provide some color on what is driving the uptick in AI revenue expectations for the year. Is it just more that the existing programs are doing better? Or you see a better narrative around share gains. Love to just understand kind of what's driving the uptick here? And then maybe if I can just extend that, can you elaborate on what investments TE needs to make to meet this growing demand, both from a CapEx and OpEx perspective? Terrence Curtin: Sure, Amit, and happy new year. So I'll take the first half and I'll let Heath take the second half. I think the first thing you have to be is, we have and the orders reflect that, new program awards and with the hyperscalers is the way you should think about it. And even on some of that backlog, those programs will ramp here over the next couple of quarters and really be bigger in quarter 3 and quarter 4 than what's happening now. So they do extend out a little bit. And what's nice, and I said it to Scott's question is it's across the hyperscalers. So we're going to have growth across the hyperscalers this year. It is a mix of some programs continuing to ramp, but also new programs with the customers that will ramp in the second half. Heath, why don't you talk about the investments that you commented on. Heath Mitts: Sure. Amit, the -- as you can imagine, as we're winning these programs, the ramps are fairly aggressive in terms of the time window to get up to speed and deliver on their production schedule. So we are -- when we talk about increasing our CapEx investments, we're really talking about specific program wins. And the timing of those, we're going to have to spend money over the next couple of quarters to support the production of those in the later part or the second half of our fiscal year and certainly into '27. So as we're stacking up these programs, we're just trying to be transparent that the fact that they are -- there is a specific tooling involved and most of that's going into existing production facilities that we have throughout Asia and a little bit in North America. So we feel good about our ability to ramp, our teams have shown the ability to ramp quickly, but it's -- we're just continuing the acceleration of that, and that's going to require us to take up our CapEx number for this year, but all is feeling good. As you would know, we would not be spending that money if we didn't have revenue and profits tied to it. Operator: Your next question comes from the line of Wamsi Mohan with Bank of America. Wamsi Mohan: Just to stay on the AI topic, I guess, maybe Terrence, could you share some granularity if these programs are NVIDIA-centric, or are they TPU- or other ASIC-centric? And any color on signal versus power? Just to give us some sense of like what the content may be split is across those and what you're seeing in your orders? Terrence Curtin: No, first off being, as we've talked with many of you, if not all of you, we aren't going to talk at the customer level. Like I said, Wamsi, to the earlier question, these are hyperscaler programs. And it's where -- that has driven our growth to date. And I think you can assume it's a continuation of that growth with those customers. And it is across power and data and signal, like you spent time with us in November, it is broad across both spectrums as we move to next-generation architectures that we're working on. And what's really good is the momentum that we've had with our hyperscale customers is just continuing, and you see it in the orders. Operator: Your next question comes from the line of Luke Junk with Baird. Luke Junk: Terrence, hoping we could just double-click on the trends you're seeing within ACL, especially in the industrial trends. It sounds like you're feeling a bit better or maybe quite a bit better than 90 days ago. And Heath, in terms of the incremental margin story in Industrial Solutions, is this strength something that we should think about just as an incremental margin driver as well? Terrence Curtin: No. First off, your comments are fair. We've been very much in the mode of -- and I would say there's two businesses I would put in there, not only ACL, but our industrial transportation business, both of them were in a multiyear downturn. And we continue to see and we started to see it last year, improvement in orders. It's nice to see them broaden out across all regions in ACL. Certainly, in ICT, industrial transportation, it's really in Asia and Europe still. But with the momentum we're seeing with what we're hearing from our customers, we do view more momentum is there. You saw on the slide, we grew 12%. Orders were strong. The one thing I would say when we look at ACL for us, it is around the factory automation and the CapEx side of our Industrial business. Places around residential HVAC, where we play in as well as appliances continue to be soft, but we're seeing the CapEx side of it, and we're seeing it broadly across all regions. So that's -- whether that's Asia, China, Europe, North America. And it's nice to see some of the cyclical pain we had for a couple of years behind us. And as these businesses come up, let's face it, we've talked to you about, hey, they are better profit pools naturally. So they will also benefit our margin as they recover. Heath Mitts: And Luke, on your incremental margins, as we talked about in our business model, in terms of our flow-through. I mean certainly, both segments, I'm confident, will be at their 30% plus flow-through on their growth for FY '26. For the Industrial segment, certainly, the volume growth at these levels is helping a lot. We are able to get volume leverage on this kind of scale. So I would still tune into the 30% plus, but there'll be quarters when we're well out ahead of that for sure. Operator: Your next question comes from the line of Joe Spak with UBS. Joseph Spak: Just within DDN, two quick questions. I guess you're talking about continued sort of AI growth. So with the total revenue flattish quarter-over-quarter would suggest the [indiscernible] kind of slowed or it's even really down, I guess, quarter-over-quarter. Maybe you could help us understand what's going on there. And then even with the AI portion raise, it seems like you might actually be at a run rate higher than [ the level ] you just raised to. So I'm just wondering, is that sort of constrained by some of the capacity? Or would you classify that as just some conservatism? Terrence Curtin: No, Joe, a couple of things. We grew AI programs from quarter 4 to quarter 1 sequentially. So that -- there was growth sequentially there. And also we expect our Industrial Solutions segment to grow sequentially quarter 4 -- quarter 1 to quarter 2. And certainly, we have the production decline in automotive. So I feel very good about the momentum. And like I said, the orders that we have set up for quarter 3 and quarter 4, which is where the bulk of the increase that I talked about, the $200 million is really will come as these programs ramp and into '27. So we feel very good about the momentum. The orders reflect it. The DDN orders were up 70% year-over-year in the quarter, which is very strong and continue to feel that the momentum we have is strong. I don't think it has anything to do with capacity constraints. Operator: Your next question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: Maybe just staying with the AI theme, but more a question on the supply chain and what you're seeing on that front in terms of either tightness on the components or inflation thereof. I'm just wondering what you're seeing overall from that perspective in the supply chain? And if that is the driver of why the hyperscalers are giving you a bit more forward visibility with the orders for the new programs? Or do you think it's just the complexity? Is it more the complexity of the new programs that's driving these sort of longer-dated orders? Any color there would be helpful. Terrence Curtin: Well, first off, our customers are expecting ramps that are very fast. So when you look at this, you're really talking about program launches that will happen later in the year. In our supply chain, honestly, what do we feel and what we procure, we are able to procure what we need to procure. There is inflation around things that are metal related and that's not just the AI supply chain, that's everywhere around us. And our teams are doing the appropriate pricing to make sure we get recovery on that. And from that viewpoint, that inflation is being passed through. And just that they're looking out, they're reserving capacity for the programs. These are very specific programs to a customer. These are not generic components that we're making here. This is very specific to a program. And what's nice is our team continues with the momentum to get these wins with our hyperscale customers and they're just giving us some visibility to make sure the ramps occur. Operator: Your next question comes from the line of Colin Langan with Wells Fargo. Colin Langan: Just DRAM prices have really skyrocketed, do you have any direct impact to that? And if not, do you also see any risk to auto production because of the potential supply issues there. Any thoughts on that risk and issue? Terrence Curtin: Yes, for the memory that obviously is out there that you talk about. We don't buy significant memory that impacts our supply chain. And that's what we're very much focused on. When we talk to our customers right now, there is nothing related to memory that we see slowdowns that are happening that are impacting our customers and our discussions. And I think what's really important is how we continue to service our customers and what's been really nice and you see the growth over market that we delivered is across all three of the levers. So the memory situation is not impacting us at all, and our teams are doing a really good job doing the growth above market in Transportation. Operator: Your next question comes from the line of Guy Hardwick with Barclays. Guy Drummond Hardwick: Congrats on the excellent results. The commercial transportation business was probably stronger than people expected. Was that down to easy comparatives? I know in the slide deck, you said that's growth driven by Asia and Europe. But in terms of order momentum, what would you say the outlook is for commercial transportation for the rest of the year? Terrence Curtin: No, Guy, I mean, let's face it, but last year's first quarter was an easier compare. So that is -- when you look at that growth rate, it is benefiting from that. But what I would tell you, when we look at the first quarter and we even look at the year, and we talked about it a little bit last year towards the end of the year, we continue to see in places like China and Europe and India, whether it's truck builds, construction equipment builds, have improved. And when you look at it, the growth over market you sit there has been strong. When we look at the year, we think global truck build will be up 200 basis points, and we feel very confident we'll outgrow that for the year. The real wildcard we still have to watch is North America. North America truck market is still negative. And I think that's probably the one toggle switch that we have to continue to keep an eye on because we aren't seeing as much order improvement there yet. But outside the United States, it has actually shown a pickup around the world. And certainly, we're hoping as we move through the year, that we can get some of that uptick in the North American production environment as well. Operator: Your next question comes from the line of Asiya Merchant with Citi. Asiya Merchant: Just wanted to just double-click on the EPS guide, slightly down versus sales, which were flat. So are these some below the operating income items that we should consider here? And just related to that, the incremental operating margins, I think you guys are guiding to continue to be strong here. Just given the momentum in the business, looking -- just trying to understand what could be drivers for further expansion in those incrementals. Heath Mitts: Yes, Asiya, the -- I'd say, Q1 to Q2 in terms of just -- I mean, I think there's $0.04 or $0.05 of higher -- of tax and higher interest expense between the 2 quarters. So that's probably your major bridging item if you're just thinking about that. In terms of the incrementals, we feel good about being at 30% or better. And as we work our way through the quarters this year, I don't see anything that would derail that. Certainly, volume is important. And there's no doubt that we've done a pretty good job. There's always more to do, but we've done a pretty good job of reducing our operating footprint, which has the effect of reducing some of our fixed costs, particularly in Western Europe. And as that's come, and you throw volume on top of that, that is certainly lending itself to the incremental flow-throughs. And that has the effect, as we talked about in the Analyst Day, of improving our operating margins. And we've seen that happen. If you look at it consistently over the last several years in most quarters, that's the effect. So yes, we feel good about where we're going to land for this full year, even with some of the incremental investments that we need to make. Operator: Your next question comes from the line of Joe Giordano with TD Cowen. Joseph Giordano: Can you touch on -- like we've just seen like metal price is exploding here, copper, gold, silver. Can you talk about implications for you guys in terms of procurement, in terms of needing to pass cost on and what the customer acceptance of that has been? Heath Mitts: Yes. Joe, this is Heath. You are absolutely correct. I mean we are seeing pressure -- inflationary pressure on the metals specifically. That category is our largest purchase category. So the team is hyper focused. We've made investments as we talked about at the Analyst Day with some of the supply chain investments that we've made to get more scale and leverage purchases. So that has helped. And that team has a very strong pipeline of opportunities to find ways to reduce those costs. But there's no doubt that as the spot market goes up, we feel that. Now it has the effect of us very quickly in passing that on through price or through other mechanisms that we can use to source. So we're not going to use it as an excuse on our margins or our flow-through math. But yes, we're feeling it right now, and it will factor into some of the elements we do with pricing. Operator: Your next question comes from the line of Steven Fox with Fox Advisors. Steven Fox: Just to follow up on some of the supply chain questions from two aspects. Just to clarify, when you're passing them through, are you able to pass the higher cost of metals through on a similar time line as you have in the past? And from -- the real question is, when you think about supply chain and your capacity, the good news is you're seeing, like you said, a broadening of demand, while AI is still growing really fast. How do you feel about just being able to keep up from a capacity standpoint as we go through this year and into next fiscal year? Terrence Curtin: Why don't you take the first half, I'll take the second. Heath Mitts: Yes. Steve, I'll take the first half. On the -- we have improved over the years in terms of our ability or let's say, our agility or nimbleness to pass on pricing on these inflationary measures more quickly. So I would say there are certain things that go through distributors and channel that are a little bit easier to pass on prices more quickly. There's other things that we reopened discussions with when we have OE direct discussions. So yes, I mean it's front and center to the team, and we don't expect any significant time lapse as those discussions commence with the inflationary pressures that we're feeling. Terrence Curtin: Yes. And on the capacity, Steve, first off, being at Investor Day, we highlighted areas where we had added capacity. The AI ramps are really program ramps that are very specific to those programs with those customers because we do that direct. I would tell you, elsewhere, we're in a good spot with capacity. We have some areas that are recovering like we talked about to the earlier question of ACL and ICT, that we have capacity. And we continue to add in areas like energy and aerospace. So even when we did Richards, Richards is doing very well to its original plan, but we're adding capacity there to expand for our energy business as well as making sure we can continue to increase capacity for our aerospace and defense customers, which that market has been -- continues to be strong. We expect it to be strong as the airframers continue to increase their builds as well as what's happening in the defense complex, where that -- those numbers just keep moving up. Operator: Your next question comes from the line of Christopher Glynn with Oppenheimer. Christopher Glynn: A question on energy. The organic comps are pretty notably steeper in the second half. I'm wondering how orders new applications, maybe even are kind of phasing into that. Would there be a kind of a growth adjustment period as you normalize into the kind of long-term Investor Day outlook? Or would you settle kind of right into that, would you expect? Terrence Curtin: No, the momentum continues to be very strong, Chris. It hasn't slowed down at all. And as I said on my comments, we've also started to see an uptick in Europe, which is an area that we've had historical presence in, and our focus has been more in the U.S. But we continue to see nice growth across the businesses, including the ones we bought. And remember, it comes into grid hardening and capacity as the energy network plays out. So as we said at Investor Day, we thought organically, we'd be double digit, I feel like that's where we'll be this year on top of the benefit we get on the inorganic piece in the early part of the year. And it's nice to see the momentum continue. And as I said to Steve, how do we continue to make sure the capacity that we're putting in place supports the growth, and I feel we're on track on that. Operator: Your next question comes from the line of William Stein with Truist Securities. William Stein: I'm hoping to just try to further reconcile the outlook with the bookings. The business trends overall sounds like they're good, they're broadening into industrial, as you highlighted. You had a record bookings quarter, very strong book-to-bill. I fully recognize that in some end markets, the bookings duration is a little longer than typical. So the read into the out quarter might not be as immediate as it usually is. But still, I'm looking at March quarter guidance that looks a few points below normal seasonality. My guess is that this is related to auto production in China, which is weaker, specifically for EVs, but can you sort of verify and maybe linger on that for a moment for us, please? Terrence Curtin: Sure. Will, and happy new year. When you look at it, there is an element in our second quarter guide that our segments are moving in two different ways. And IS is going to be up double digits year-on-year. And I think everything related to orders other than some of the AI orders being further out completely aligned. We do have a 3 million unit auto production downtick from quarter 1 to quarter 2 in automotive, typically runs around 2 million units in an average year, it's a little bit worse this year, but it all ties in with the 88 million units that we see for the year. So we do expect transportation to be down sequentially. That's very -- just the reality of auto production. And our first quarter was higher than seasonal. There is a little bit of, I think, as you're looking at compared to seasonal models, our first quarter, which came in well above guidance was higher than seasonal due to some of the industrial trends. But net-net, we feel very good to where we guided. And certainly, the momentum that the orders show are not only just for quarter 2, but also as we exit through the year, which gives us a lot of confidence around the momentum not only for quarter 2, but for the year. Operator: Your next question comes from the line of Shreyas Patil with Wolfe Research. Shreyas Patil: Maybe if we could just double-click on the discussion earlier on incremental margins. When I look at the quarter, Overall, if I strip out M&A and FX, it looks like incrementals were at 31% in Q1. But between the segments, Industrial might have been closer to 40% plus and Transportation Solutions was in the teens. So I'm just curious, do you expect both segments to converge towards that 30% plus figure that you've talked about previously? Or should we continue to see Industrial running a little bit hotter than that. Heath Mitts: Yes, Shreyas. Well, as I stated earlier, I expect, as we're sitting here at the end of our fiscal year that both segments will be at or better than their incremental flow-through math here, the 30% for the full year. In a given quarter, you can have some noise. I think Transportation this quarter was hit with some foreign exchange noise in terms of what some of that is. But in terms of how it impacted their flow-through math. But it's nothing that I'm overly worried about. So I don't know the second half of your question, which is does the higher running Industrial segment come back down. We'll see. I mean there are some investments that we're making, but as I said earlier on a prior question, at these volume levels, we would expect a little bit more outsized flow through. So we feel good about where both segments are and how they're -- what their trajectory is for the year. Sujal Shah: All right. Thanks, Shreyas. I want to thank everybody for joining us this morning for the call. If you have further questions, please contact Investor Relations at TE. Thanks again, and have a nice day. Operator: Today's conference call will be available for replay beginning at 11:30 a.m. Eastern Time today, January 21, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today.
Operator: Good day, and thank you for standing by. Welcome to Ally Financial Inc. 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. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised, today's conference is being recorded. I will now turn the conference over to your speaker host for today, Sean Leary, Chief Financial Planning and Investor Relations Officer. Please go ahead. Sean Leary: Thank you, Lydia. Good morning, and welcome to Ally Financial Inc.'s fourth quarter 2025 Earnings Call. This morning, our CEO, Michael Rhodes, and our CFO, Russ Hutchinson, will review Ally's results before taking questions. The presentation we'll reference can be found on the Investor Relations section of our website ally.com. Forward-looking statements and risk factor language governing today's call are on Page two, GAAP and non-GAAP measures pertaining to our operating performance and capital results are on pages three and four. As a reminder, non-GAAP or core metrics are supplemental to and not a substitute for U.S. GAAP measures. Definitions and reconciliations can be found in the appendix. And with that, I'll turn the call over to Michael. Michael Rhodes: Thank you, Sean, and good morning, everyone. I appreciate you joining us today for our fourth quarter earnings call. Before we cover our results, I'd like to take a moment to reflect on the year. After my first full year as chief executive, I am grateful and optimistic. Grateful for what has been built before I joined, and optimistic for what's ahead. My optimism is shaped by the strategic refresh we undertook in 2025. Deliberate choices backed by disciplined execution have delivered solid results. At the heart of our refresh was the focused strategy we rolled out to start the year. Focus means we are investing in businesses and segments where we have clear competitive advantages and a reason to win. That is areas where we are unique and special. Our results validate that we are on the right path. 2025 marked a shift where results demonstrated tangible progress, including delivering on the detailed guidance we provided in January. With that, let me recap full year performance on Page five. Adjusted EPS of $3.81 was up 62% year over year. Core ROTCE of 10.4% was up more than 300 basis points versus 2024. Encouraging progress with room to expand further. The three drivers for sustainable mid-teens returns have been consistent and the progress we are making is clear. We have executed against two of the three drivers. And remain positioned to deliver on the final as we progress forward. Retail net charge-offs ended the year below 2%. Importantly, we see further opportunity as we continue to benefit from vintage rollover, and dynamic approach to underwriting and servicing. Clearly, the macro will play a role in how losses materialize in any given year. But we remain confident in the direction of travel over time. Expense and capital discipline remain a top priority. We have been and will continue to be prudent stewards of shareholder capital and make investments to position Ally for durable long-term performance. And we remain on track to deliver NIM in the upper 3% range. NIM increased more than 30 basis points in 2025 when you adjust for the sale of card. That progress along with embedded tailwinds across the balance sheet give me confidence in our ability to drive further margin expansion for full year 2026. Adjusted net revenue of $8.5 billion was 3% year over year, and up 6% when adjusting for the sale of card. Finally, 10.2%. Taking into account AOCI, fully phased in CT one was up a 120 basis points in 2025. Ending the year at 8.3%. These financial results reflect the impact of a handful of deliberate choices including exiting noncore businesses, repositioning a portion of our investment securities portfolio as we continue migrating towards a more neutral rate position. Maintain expense discipline to create capacity for appropriate investments or reducing controllable expenses by 1% versus 2024. And executing two credit risk transfer transactions for a total of $10 billion in notional retail auto loans, sourcing highly efficient capital. Together, our actions have resulted in lower credit risk, lower interest rate risk, higher capital levels, a more efficient expense base, and in aggregate, a stronger foundation. And we grew in the core businesses that we want to grow with a sharp focus on risk and returns. Retail auto and corporate finance loans were up 5% in 2025, on the back of strong momentum in these core franchises. As a result of this progress, we announced a $2 billion open-ended share repurchase authorization in December. The resumptions of repurchases is not a declaration of victory. But a clear indication of the progress we've made and our confidence in the path ahead. And as we've said before, we will start low and slow with share repurchases. The opportunities for growth across our core franchises are encouraging and accretive. Organic growth remains our priority when allocating capital. However, adding share repurchases provides another option for capital deployment as we maintain an unwavering focus on risk-adjusted returns. With that, let's turn to page six and discuss those core franchises. Execution within each of our core franchises has been strong and momentum positions us for sustainably higher returns. Dealer Financial Services delivered an exceptional year of performance, reflecting the benefits of our scale, the breadth of our products and services, and the depth of our relationships with our dealer customers. 15.5 million applications were an all-in record and allow us to be selective in what we originate. Given the strength at the top of the funnel, we originated $43.7 billion of consumer loans. That's up 11% year over year. With a 9.7% origination yield while 43% of volume was concentrated within our highest tier of credit quality, We continue to see opportunities for responsible growth at attractive risk-adjusted spreads based on the uniquely strong partnership we with our dealer network. Beyond headline origination figures, I'm encouraged by the continued growth across smart auction and our pass-through programs. Are expected to contribute durable fee growth moving forward. Moving to insurance. Written premiums exceeded $1.5 billion, a record for Ally. Synergies between auto finance and insurance continue to strengthen our all-in value proposition, enables us to support our dealer partners, across all aspects of their business. In corporate finance, we delivered 28% ROE with strong year over year growth in the loan portfolio. Managing credit risk remains a top priority, and its second consecutive year with no charge-offs reflects the strength of our underwriting. We have the benefit of being a lead agent in virtually all of our transactions, giving us the ability to own the diligence process and structure transactions appropriately. Turn to digital bank. Our customer-first approach continues to set us apart. We ended the year with $144 billion in retail deposit balances. Reinforcing our position as the largest all-digital direct bank in The U.S. We saw solid growth in the fourth quarter and on a full-year basis balances were roughly flat. That's in line with our expectations to start the year. Our focus remains on providing best-in-class products and services to drive customer growth and retention. We now serve 3.5 million customers, as 2025 marked our seventeenth consecutive year of customer growth. Over time, this will continue driving a less rate-sensitive portfolio with lower average account balances. The strength and stability of what we've built is a valuable component of our enterprise. and 92% are FDIC insured. Retail deposits continue to represent nearly 90% of total funding, Before passing to Russ, I want to share a few high-level thoughts. Our core franchises are well positioned. And their success is fueled by our strong do-it-right culture. And leading brand. I am energized by how our 10,000 teammates deliver for our customers every day. And how they've rallied around the focus strategy. Our engagement scores remain in the top 10% of companies globally, for the sixth consecutive year and we were eight points higher than the industry average. Demonstrating Ally's purpose-driven culture, remains a key differentiator. Our brand continues to resonate in the market and serves as a key reason customers come to Ally and want to do more business with us. Overall, 2025 marked a meaningful step forward for Ally. I'm encouraged by the progress we've made, but more importantly, I'm excited for what remains ahead. And with that, I'll turn it over to Russ to walk through the financials in more detail. Russ Hutchinson: Thank you, Michael. I'll begin by walking through fourth quarter performance on Slide seven. In the fourth quarter, net financing revenue excluding OID of $1.6 billion was up 6% from the prior year. We continue to benefit from the momentum in our core franchises, disciplined deposit pricing, and ongoing optimization of the balance sheet toward higher-yielding asset classes. Adjusted other revenue of $550 million in the fourth quarter was down 2% year over year, and excludes a $27 million loss as we move nearly $400 million of legacy mortgage assets to held for sale. This move reflects ongoing optimization of our balance sheet, and is consistent with our focused strategy. We are taking advantage of a strong bid for mortgage credit, to sell portions of our portfolio which carry more complexity and higher servicing costs. Following the expected sale of these mortgage loans, our portfolio will be entirely first lien, fixed rate mortgages, which will continue to run off over time. Full year adjusted other revenue was up approximately 2%. Despite the headwind from the sale of credit card and the exit from mortgage originations. Excluding that headwind, other revenue was up 5%, reflecting the momentum across our core franchises. Diversified other revenue streams, including insurance, smart auction, and our auto pass-through programs are capital efficient and less sensitive to consumer credit cycles. Positioning them to remain tailwinds into 2026 and beyond. Fourth quarter adjusted provision expense of $486 million was down $71 million year over year. Largely driven by continued improvement in retail auto NCOs as well as the exit from the credit card business. The year over year net charge off comparison includes million dollars of credit card activity in 04/2024. The fourth quarter retail auto NCO rate declined 20 basis points year over year to 2.14%. Adjusted non-interest expense of $1.2 billion excludes a $31 million restructuring charge associated with a reduction in force. These decisions are never easy, but reflect our unwavering focus on balancing investments with expense discipline. Our strategic pivot has created a more focused, efficient organization, and these actions create capacity to continue investing in our core businesses in areas like cyber and AI. Full year adjusted noninterest expense was approximately flat year over year while controllable expenses were down 1%. Demonstrating our commitment to cost discipline that will continue going forward. GAAP and adjusted EPS for the quarter were $0.95 and $1.09 respectively. Moving to slide eight. Net interest margin, excluding OID, of 3.51% decreased four basis points from the prior quarter resulting in full year NIM of 3.47%. That is in the top half of the net interest margin guide we provided at the beginning of the year. Continued expansion of the retail auto portfolio yield, and decreasing deposit costs were offset by the repricing of floating rate exposures and lower lease yields during the quarter. Retail auto portfolio yield, excluding the impact from hedges, increased six basis points sequentially as we continue to originate above the portfolio yield. Resilient yields while maintaining consistent risk appetite reflect the benefit of record application flow enabling selectivity in what we ultimately originate. Given the forward curve, we expect the portfolio yield has peaked. And will remain relatively flat throughout 2026, as lower benchmarks are reflected in originated yields. While used values were stable in aggregate, we recognized losses of $11 million on lease terminations concentrated in a subset of weaker performing models. Residual values on plug-in electric hybrids have been pressured following the elimination of the EV tax credit, and OEM recall and increased OEM incentives on new models. Pressure on these models increased later in the quarter, and we'll continue to monitor trends as we move throughout 1Q and into the used vehicle selling season. Our lease portfolio mix is shifting. About half of the leases we originated over the past two years have OEM residual value guarantees. And the leases we have originated without the benefit of residual value guarantees reflect a more diversified mix of OEMs. While we may see pressure moving forward, the ongoing remix of the portfolio should reduce gain and loss volatility over time. Cost of funds decreased 11 basis points quarter over quarter driven by a 12 basis point decrease in deposit costs. Last quarter, we spoke about deposit pricing data starting low as we began another easing cycle. Over time, we expect deposit pricing data will increase driving NIM expansion. We believe a through the cycle beta in the sixties which we continue to expect, is sufficient to reach our high threes NIM target. Importantly, we have strong momentum on both sides of the balance sheet from our multiyear transformation and remain confident in our path to an upper threes margin over time. Average earning assets on a full year basis ended down 2%, consistent with the outlook we shared during second quarter earnings. Importantly, ending asset balances were up 2%, reflecting the growth we've seen in the places where we want to grow and demonstrating our momentum as we head into 2026. In aggregate, ending balances across retail auto and corporate finance were up $5 billion or more than 5% year over year. On a fully phased in basis for AOCI, CET1 for the period was 8.3%. An increase of approximately 120 basis points during the year. During the quarter, we executed our second credit risk transfer of the year issuing a $550 million note on $5 billion of high-quality retail auto loans. Which generated approximately 20 basis points of CET one at issuance. Following our announced share repurchase authorization in December, we repurchased $24 million in common stock reflecting the low and slow approach we've outlined. Moving forward, we'll be dynamic with our level of buybacks in any given quarter. We're encouraged by our ability to execute a story of and, not or. We are prioritizing organic growth across our core portfolios, while maintaining our competitive dividend continuing to build our fully phased in capital levels, and returning capital to shareholders through share repurchases. At the bottom of the page, we ended the year with adjusted tangible book value per share of $40 up nearly 20% in the past year. Earnings expansion and AOCI accretion will support further book value growth over time. Additionally, we updated our calculation of core return on tangible common equity. This new methodology does not alter our earnings outlook in any way. It improves transparency and creates alignment between returns, book value, and ultimately earnings per share. We have added incremental disclosure clearly outlining the changes in supplemental slides of this presentation. In short, we have eliminated the deferred tax asset adjustment from our prior methodology to streamline calculation as well as increase transparency and comparability. As we approach our 9% management target for fully phased in CET1, we believe this new core ROTCE metric is appropriately aligned to our mid-teens target for sustainable return. Let's turn to slide 10 to review asset quality trends. Consolidated net charge-offs of 134 basis points were up 16 basis points quarter over quarter driven by seasonality. We continue to see strong credit performance in our commercial portfolios, resulting in zero net charge-offs for the second consecutive year. Full year consolidated NCOs finished below the range provided a year ago driven by continued improvement in retail auto credit and the aforementioned strength across our commercial portfolios. Retail auto net charge-offs of 214 basis points were up 26 basis points quarter over quarter reflecting seasonal trends. But down 20 basis points compared to a year ago. Year over year improvement across all quarters of 2025 reflects the tailwind from vintage rollover dynamics and the benefit of enhanced servicing strategies. Our full year retail auto net charge off rate was 1.97%, below the bottom end of our guide and notably below the 2% mark we referenced as a key pillar, to achieve our mid-teens return target. Moving to the top of the page, 30 plus all in delinquencies of 5.25% were down 21 basis points from the prior year. Marking the third consecutive quarter of year over year improvement on an all in basis. This continued improvement further reinforces our constructive view on the near term loss trajectory within our portfolio. But we remain mindful of the macroeconomic environment particularly the labor market and used vehicle values. Turning to the bottom of the page on reserves, consolidated coverage decreased three basis points this quarter to 2.54%. While the retail auto coverage rate remained flat at 3.75%. Our retail auto coverage levels continue to balance favorable credit trends within our portfolio against macroeconomic uncertainty. Moving to slide 11 to review auto segment highlights. Pretax income of $372 million was lower year over year primarily driven by lower commercial balances, lease mix dynamics, and reserve build and higher servicing related expenses given growth in the retail portfolio. On the bottom left, we've highlighted the trajectory of retail auto portfolio yields. Excluding the impact from hedges, yields were up six basis points quarter over quarter and 18 basis points year over year. Our scale and record application volume led to another strong quarterly vintage with attractive risk adjusted spreads. Fourth quarter originated yield of 9.6% was down quarter over quarter but demonstrated resilience given the move in underlying benchmarks. Our ability to actively calibrate our buy box with the evolving market supports risk adjusted returns through the cycle. On the bottom right of the page, $10.8 billion of consumer originations were up 6% versus the prior year period. And were enabled by the 10% increase in application volume that we saw. Our established dealer relationships and full spectrum approach enabled this accretive growth despite headwinds. Last year, we faced elevated competition, significant pull forward demand in 2Q and 3Q tied to tariffs and EV tech credit expiration. And fourth quarter new light vehicle sales that were down more than 5% year over year. Record application volume throughout the year has supported our ability to remain selective driving accretive growth while also providing opportunity to monetize declined applications through our pass through program. Turning to insurance on slide 12. Core pretax income was $89 million roughly flat year over year. Total written premiums of $384 million were also relatively flat versus 2024. While insurance losses of a $111 million were down $5 million year over year. Insurance provides a durable, capital efficient revenue source and remains a key driver of our long term growth strategy. As Michael noted, we continue to leverage synergies with Auto Finance to drive momentum within the business and deepen our all in value proposition. As we support our dealer partners in all aspects of their business. Turning to corporate finance on slide 13. The business delivered another strong quarter with core pretax income of $98 million Fourth quarter ROE of 29% and a full year ROE of 28% underscore the strength of the franchise and the durable accretive profile of the business as we continue to look for growth opportunities within the markets we compete in. On a year over year basis, we grew the portfolio by just over $3 billion. Spot portfolio balances can move considerably given the timing of new deals, pay downs, and capital markets activity. Taking a step back, the portfolio has grown at an 8% CAGR since 2022. Reflecting the disciplined approach that continues to guide our growth philosophy and is reflected in the credit characteristics of the portfolio. 2025 marked the second consecutive year with no new nonperforming loans. While criticized assets and nonaccrual loan exposures were 101% of the portfolio, remaining near historically low levels. Leveraging long standing relationships with key partners in the industry remains critical to maintaining our culture of strong risk management. I will discuss our financial outlook on slide 14. We expect full year NIM between 3.63.7%. The range for NIM reflects the evolving path of interest rates as the Fed easing cycle continues. With two cuts assumed for 2026. As we have consistently messaged, we are liability sensitive over the medium term, and asset sensitive in the very near term. We'd expect early beta to drive a relatively flat margin through through 1Q, but given current trends on lease residuals, we expect NIM to be slightly down on a sequential basis. Looking beyond 1Q, we remain confident in NIM migrating to the upper threes over time supported by continued optimization on both sides of the balance sheet. Deposit repricing and continued remixing of the balance sheet towards higher yielding assets will support margin expansion. In aggregate, retail auto and corporate finance are expected to grow in the mid single digits while mortgage loans and lower yielding investment securities will continue to run off. In total, margin expansion will accelerate as deposit pricing data increases toward our through the cycle target consistent with what we observed in 2025 following Fed easing in 2024. Given the fourth quarter NIM of 3.51%, and expectation for NIM to be down a bit in the first quarter, the full year guide implies we expect to be approaching our upper 3s NIM target exiting 2026. As a reminder, our NIM progression will be choppy on a quarter to quarter basis, but we remain confident in the destination. Moving to other revenue. We expect continued momentum across insurance, smart auction, and auto pass through programs to drive low single digit percent growth year over year which includes a roughly $25 million headwind from the loss card fees earlier this year. On credit, we see retail auto net charge offs between 1.82% for the year. 2025 performance showed tangible results from the dynamic underwriting and enhanced servicing capabilities we have implemented over the past two years. Our outlook reflects a balance between continued improvement from the remaining vintage rollover with ongoing macro uncertainty. Last year, we highlighted the continuation of existing trends across delinquency, flow to loss rates, and used values provided a potential path to the low end of our guidance range. Those dynamics largely played out, and we achieved a full year NCO rate just below the low end of our guide. This year, a continuation of these same trends would support performance around the midpoint of our guide. And achieving the lower end of the range would require incremental favorability within these drivers. Looking beyond retail auto, we expect consolidated net charge offs between 1.21.4%. As we have noted, we are pleased with the performance of our commercial portfolios. However, these are not zero loss businesses. Nor do we price for that and our full year guide assumes a return to more normalized losses. On expenses, we expect 2026 to be up approximately 1% with investment focused on our core franchises fueling revenue growth while also investing in areas like AI, cyber, servicing, and customer experiences. This disciplined expense management along with top line revenue growth positions us for positive operating leverage this year and over the medium term. Building upon the momentum we saw throughout the 2025, average earning assets are expected to be up between 24% year over year. Importantly, our growth is focused on the areas where we wanna grow for attractive returns. Retail auto and corporate finance. Finally, we expect an effective tax rate between 2022%. We are encouraged by the momentum we've established across the businesses. We have said that achieving our mid teens return target requires one, an upper threes NIM, two, a sub 2% retail auto NCO rate. And three, capital and expense discipline. As Michael noted, we have achieved two of the three and see a path to achieving the third. That said, it remains a dynamic operating environment, while reaching our targets continues to move closer, we don't feel it's prudent to call a specific quarter. We'll remain nimble and ready to pivot as the macro and competitive landscape evolves. Our focused strategy is working. I'm confident in our ability to deliver improved returns and drive long term shareholder value. And with that, I'll turn it over to Michael for a few closing remarks. Michael Rhodes: Thanks, Russ. Before hanging into Q and A, I want to reiterate what we've accomplished over the past year. And how that positions us for the future. First, our focused strategy has created clarity on where we will compete and how we will win. Second, we have a much stronger foundation. Our balance sheet and risk position are stronger today, giving us greater resilience, and flexibility as we move forward. Our core franchises each have relevant scale and a refined focus has streamlined resources, and strengthened our competitive positioning. Third, we are executing. That means we are operating smarter, moving faster, and delivering improved efficiency and effectiveness. Earnings growth, credit performance and capital metrics all showed meaningful progress. And momentum as we head into 2026. Fourth, authorizing a $2 billion buyback program is an important step. Resuming share repurchases underscores the progress we've made and our confidence in our ability to execute moving forward. Finally, while we were encouraged by our progress, we remain focused on the road ahead. There is more work to do, but I'm certain we are on the right path. And excited for what's ahead as we continue to execute and deliver compelling long-term value for our shareholders. With that, I'll turn it back to you, Sean, so we can head to Q and A. Sean Leary: Thank you, Michael. As we head into Q and A, we do ask that participants limit yourself to one question and one follow-up. Olivia, please begin the Q and A. Operator: Thank you. Star one one on your telephone and wait for your name to be announced. To withdraw your questions, simply press 11 again, Please stand by while we compile the Kenny roster. Our first question coming from the line of Robert Wildhack with Autonomous Research. Your line is now open. Hey, guys. Maybe just to start on the NIM. Ross, I appreciate the commentary that you gave. You said down quarter over quarter in 1Q and then sounded pretty strong on the exit trajectory. Just want to double check that I heard that correctly. And then is there any more detail that you could give on what exactly drives the NIM sort progression through the year and how it ramps from kind of down quarter over quarter to what sounds like a, pretty strong exit rate? Russ Hutchinson: Yeah. Sure. Sure, Robert. Thanks for your question. I appreciate it. When you kind of look at the quarter to quarter NIM dynamic between fourth between third quarter and and fourth quarter last year and and heading into first quarter of of this year, it really comes down to mainly early beta as well as some pressure from, from lease terminations and maybe I'll start on early beta. This is the same thing that we saw last year. Right? We saw soft early beta exiting 2024 and starting 2025. And then we saw some nice catch up in the 2025 with some healthy NIM expansion. Our expectations are to see similar dynamics play out this year. Right? And and as I kinda get underneath what leads to that, rate cuts are beneficial to Ally over time. And we've talked about that before. But we've also talked about near term asset sensitivity. That impacts us on a quarter to quarter basis. So our our NIM progression is not a straight line, and and and we've talked about that before. And it's it's part of why we, you know, we we we don't guide for NIM on a quarter to quarter basis. We we guide on a full year basis. The beta catch up dynamics are strong. The ongoing port mix dynamics that we mentioned earlier are strong and give us confidence in in driving meaningful and sustainable improvement both in profitability and NIM expansion. You know, you you pointed to the NIM guide at at three sixty to three seventy for the year. Yeah. I think as you dig in, and, you know, you think about where we're we're starting the year, it's it's it's pretty clearly implied that we expect some meaningful NIM expansion through the course of the year. You know, again, this kind of NIM expansion that looks looks kinda like the dynamics that we saw play out last year. And, you know, obviously, on a on a quarter to quarter basis, we could get some impacts as no doubt, you know, our expectation is there will be some some kind of ongoing movement in the Fed funds rate throughout the year. But again, we feel confident in terms of the medium trajectory around NIM And I think as you kinda do the know, kinda you know, as you dig in, on on on, you know, our our full year NIM expectation, and then where we're starting the year, I think you'll see that you know, we expect to end the year you know, above the high end of our guide or or you know, approaching our high threes medium term target. You know, the pressure from on the lease side, as as we mentioned earlier, it's it's driven by a few hybrid electric vehicle models, the the plug in hybrid models. Those those specific vehicles were impacted by an OEM recall, as well as significant OEM incentives on new vehicles that that came with the expiration of the EV lease tax credit. And so that's that's kind of what we're dealing with in terms of some of this near term NIM pressure. But, again, I just reiterate our confidence in the medium term and and in terms of the destination in the high threes. Robert Wildhack: That's great. Thank you. And then just quickly on credit and the retail auto coverage ratio specifically. You talk a lot about the tier mix, vintage remixing, net charge offs coming down, etcetera, etcetera. The retail auto coverage ratio, though, hasn't budged in, like, a year. Just curious what you think it would take for you to actually start releasing some of the reserves there in in retail auto? Russ Hutchinson: You know, it's a fair question, Robert. We we get that question from time to time. We've often said, you know, when when we think about our our returns over the medium term, as we think about our targets, we don't include reserve releases. You know, those are more of an output than an input from our perspective. And our our focus is on know, just kinda managing the credit in a prudent way in in terms of how we underwrite, and how we service you know, kinda just our overall approach to the portfolio. As I think about where our reserve is set today, it's really balancing a few things. You know, on the one hand, we're seeing clear benefits as you said, from vintage rollover to vintages that were originated towards the 2023 through '24 and now '25 that are clearly stronger vintages from a from a credit perspective than than what we saw in early twenty three and and and in 2022. So that vintage rollover is a clear benefit. You know, we've made improvements to our underwriting. We've made improvements to our servicing. And we're seeing that that benefit over time. And and and that's certainly something that that we're seeing in terms of delinquency improving, strong photo loss rates, And and, also, we also were seeing good support from from the used vehicle market in terms of of used car prices and severity. So, you know, all those things are are incorporated in terms of how we think about reserves. But at the same time, we're also looking at at at, you know, some of the macro and uncertainty out there, you know, in particular focused on the labor market and use vehicle prices. Our current expectation is that, you know, unemployment over the course of 2026 is gonna be higher than the unemployment that we saw over the the full year of 2025. And there's obviously some uncertainty around that, and that's factored into how we think about reserves. As well as how we think about our forward NCO guide. And then similarly, you know, we we've got we've got a careful eye on the used vehicle market. We're watching what we see on smart auction as well as in the auction lanes. Been very much paying attention to to to used car prices overall. So are a number of things that factor in, but, again, I I just reiterate, reserve releases is not something that we factor into you know, how we think about the business from a a return perspective, and it's not factored into our mid teens return guide. Robert Wildhack: Okay. Thanks a lot. Thank you. Operator: And our next question coming from the line of Sanjay Sakhrani with KBW. Your line is now open. Sanjay Sakhrani: Thank you. Good morning. Maybe, Michael, can we start with contextualizing 2026 as you look ahead to the year? Obviously been a bumpy ride so far. But curious, as you look at the guidance as a whole, where do you think the biggest risks lie, the opportunities as well? Russ, you you could all also chime in. Michael Rhodes: Yeah. Sanjay, thanks for the question. I think about '26. Look, I can't think about '26 without reflecting a bit on '25. And, like, really proud of what this team did in '25, you know, on page five of our material, we call our notable items, and and a lot of good work has been done. And, you know, I started out by talk talking about, you know, both gratitude for what's been built and optimism for what what what's in the future. And so I do feel a lot of optimism for '26, and it's it's anchored on the fundamentals of the business. And so while while '25 was a year where we made a lot of shifts and pivots you know, '26, the the the rhetoric we have inside the organization is really about bridging strategy and execution. And so it's really we we've set the table, I think, quite nicely for ourselves. And '26 will be about building strong volumes with the right margins, the right pricing in the auto franchise. Continue with the momentum we have in the corporate finance business, continue with our customer acquisitions, the strength that we have in our retail bank and our consumer bank, which, you know, again, our balance been relatively flat, but we're attracting a less rate price a less rate sensitive customer. So we like that dynamic, more of that. And then, of course, you know, from a technology perspective, continue to deliver the capabilities that ensure that we win here in the twenty first century and certainly for next year. And so if I take a step back, I feel really good about the fundamentals of the business. In terms, know, when I think about the guide for '26, you can kinda go line item by line item. And, you know, like like, on the expense side, like, you've seen a lot of discipline from this team in terms of how we manage expenses. So, you know, continue to expect to see some discipline on expense management. You know, on revenue, look. There's you know, we have NIM. We have fee income, and I think Russ did a nice job of talking about what's going on with NIM. And hope you took away from that some optimism on the exit rate. Recognize there's probably some bumpiness as we go along. But the balance sheet dynamics are playing out the way we would expect and so I'd expect a continuity of that in 2026. Then, again, on the fee income side, we like what we're seeing. And then credit, look. The dynamics playing out pretty much like we said it would. Last year, beginning of the year, we said if certain things happen, we'd be the low end of the guide. We end up being below that low end. And so, you know, assuming the macro holds, we feel good about that. Consumer behavior right now, I mean, we're pleased with what we're seeing at the consumer. There's a bit of this disconnect between kind of the the rhetoric and some of the headlines. What we're seeing consumer behavior, but we're pleased with what we're seeing on the consumer side. So overall, I feel good about the estimate that we put out for '26 in terms of what we're going to do kind of by line item feel good about the foundation of the business. And I was gonna say, you know, what I worry most about, it's really about the macro. And, you know, if there's something gonna happen that's gonna affect, you know, a lot of financial institutions, not just us, from an unemployment perspective or or some other, discontinuity. But, start up I talk about optimism. I'll probably end this this narrative on optimism. I feel very good about how we're positioned. Russ Hutchinson: Yeah. I mean, I I might just okay. I got Ross. Add add just sorry, Sanjay. You you did say that I could, I could comment as well. Absolutely. Absolutely. Got I mean, might just add just as I kind of cut across the the three main franchises, I just I feel really good about the level of dealer engagement we have. You know, in a in a in a quarter where, like, vehicle sales were down and and there were all sorts of reasons for you know, there are all sorts of reasons and pressures, but but our applications were up, and it supported our ability to be selective and underwrite a really great vintage. You know, similarly, when I look at the consumer bank, you know, we added customers. We kinda hit our expectations on the pin in terms of flat balances for the year. We continue to to affect a nice migration of customer base towards you know, more favorable demographics. On the corporate finance side, we continued with with with disciplined growth, and and we really like what we see in the portfolio in terms of nonaccruals and criticized assets. So, you know, as I look across all three of the franchises, just a lot of really good things going on in in in each of those franchises. And then I turned to the balance sheet as a as a CFO And, you know, I think we've taken deliberate steps to reduce credit risk, to reduce rate risk, and to increase capital. We've we've put a lot of capital on the balance sheet over the course of 2025. And so you know, again, I I feel good about all those things. And so it's really just watching that macro, particularly the labor market and, and the rate of prostate used to be up prices? Sanjay Sakhrani: No question. You guys had a good 2025, and it seems like good momentum in 2026. Just one clarification on some of the questions Robert was asking on credit. Just as we look at the performance of credit, it would seem like the momentum you have on delinquencies suggests further improvement in the charge off rate. And I know, Russ, you mentioned that you would probably need further improvement in delinquencies or momentum in the delinquencies to get to the low end of the range, but seems like there's a progression there. Is there anything sort of weighing against that that we need to think about? Russ Hutchinson: Yeah. I mean, I I I kinda point back to unemployment. You know, our expectation for thousand twenty six is that you know, over the course of the year, unemployment is is gonna be higher than it was in in 2025. And I know some of the data a little up and down with, you know, with some of the stuff that happened later last year, but our our general expectation is that it's that it's higher. And so that is something that weighs on on kinda how we think about it. In terms of our overall NCO guide, you know, at the the the at at the one eighty to to 2% level that that we mentioned earlier, Yeah. We we've effectively kinda priced into that guide the vintage rollover, You know, the the strong indicators we've seen in terms of delinquency, flow to loss rates, used car pricing, you know, as as well as, as well as somewhat weaker a weaker labor market. Versus what we saw in in 2025. So as I kinda think about the range and what takes us you know, above the midpoint or below the midpoint You know, I think we we'd actually have to see you know, some improvement in terms of in terms of delinquency. In terms of photo loss, or in terms of of used vehicle pricing to to get us certainly below that midpoint, you know, that could happen in the context of of a labor market that's certainly stronger than we anticipate. Know, on the other hand, you know, we could see things going the other way in terms of of labor market, used vehicle prices, delinquency, flow to loss, severity, you know, kinda moving in a different And so I I think the outlook that we provided is is, is balanced. Know? And and where last year, we pointed to a continuation of of some of these favorable indicators we were seeing getting us to the low end this year, I'd say you know, given the persistence of of those variables over the last fifteen months or so, we're pricing that into the into the midpoint. Sanjay Sakhrani: Okay. Perfect. You so much. Operator: Thank you. And our next question coming from Delina Mark DeVries with Deutsche Bank. Your line is now open. Mark DeVries: Yeah. Thanks. I had a follow-up question on some of the NIM commentary. I was just wondering if we could get you to maybe quantify kind of the upper bound on what you mean by kind of the upper threes or high threes. And then just a follow-up on that, I think, Russ, you indicated you expect to be the guide, I implies you're kind of near that run rate at the end of 2025. Does that imply you're kind of by then given charge off guidance below 2% range from retail auto that you're you're near kind of a a 15% ROE run rate by the end of the year. Are there other things you need to do around capital efficiency or operating leverage to get there? Russ Hutchinson: It's a fair question. You know? As you can imagine, you know, we've stayed away from calling quarters. And providing, you know, quarterly guidance just you know, just kinda given some of the the choppiness that we've talked about in our business in terms of you know, the the near term impacts of of rate moves and and and things like that. You know? But I but I think as I as I think about your math, you know, upper threes, I think we we we we've talked about it previously as being We talked about kind of 4% back when we still had the card business, and we talked about about a 20 basis point impact to NIM as a result of selling card. And so obviously, we've sold card. And so think that kinda gives you a sense for how we dimension, what we mean by by upper threes. You know, you know, given that that we no longer have that that card business. You know, as as you as you kinda think about the guide for the year at at 60 to $3.70 and you look at kinda where we're starting the year, I mean, I I think the the progression math as you as you parse through that is pretty clear. But, again, I just I just reiterate, you know, obviously, you know, in any given quarter, we have impacts from from just just rate moves that are kind of very near term. You know? But it but in terms of of the medium term, don't don't really have a real impact. And so we don't call the quarter, you know, but I I think the the basic arithmetic around kinda what you need to see over the course of the year is pretty clear. Yeah. We've talked about mid teens in terms of three things. Those three things are unchanged. It's high three NIMs. It's sub 2% retail auto NCO rate, and it's continued discipline around capital and expenses, we don't think we need to make a change to to how we're running the business or what we're doing You know, it's consistent, and we continue to see our our path to mid teens. And so I would characterize us right now as having checked off two of those things. With retail auto NCOs now sub 2% and with the capital and expense discipline that we currently have in place, You know? And I'd say the the kind of one outstanding item is getting them to the to the high threes, and and there's nothing that's changed with respect to that. Mark DeVries: Great. Thank you. Operator: Thank you. Our next question coming from the line of Jeff Adelson with Morgan Stanley. Your line is now open. Jeff Adelson: Hey, good morning. Thanks for taking my questions. Ross, maybe just to follow-up on the discussion around retail auto yields peaking. Is that assuming that you're keeping the yes tier origination mix consistent with these 40% plus levels you've been doing recently? And you know, I know you're still mindful of the macro environment, but you know, how are you thinking about the opportunity to maybe step down a little bit into your pickup of some extra yield, you know, as you talked about in the past and and when would you maybe think about actually doing that if if if at some point? Russ Hutchinson: Yeah. Look. I I'd I'd say yes to your kinda overall question around s tier consistency in in kind of the 40% area. You know, obviously, we don't kinda micromanage that on a quarter to quarter basis, but you know, you know, overall, as we look at flat portfolio yields, I think that's kinda consistent with that level of s tier. I would point out, though, we don't have a set it and forget it approach to credit, and there's a lot going on you know, underneath the surface. And so, you know, even at s tier in that you know, 40% range, as you can imagine, we're doing a lot of work at the microsegment level you know, kind of, you know, analyzing kinda different combinations of of credit characteristics that have over or underperformed our expectations over the last over the last year or two. And so, you know, we're we're continuously tweaking our approach to underwriting, to make it better. And and and our approach to to kinda how we take risk. You know, I would say as you kinda think about that that kinda flattish portfolio yield over the next year. So the the way to kinda think about that is, you know, you know, we're we're running you know, at at about our expected 80% pricing beta on originated yield. And so as you think about, you know, our expectation of of kind of roughly two Fed cuts, over the course of of this year, and you you kinda put on that portfolio beta, and you look at where our originated yield goes versus where our portfolio yield is, I think you kinda get a good sense for why we're pointing to flattish, flattish portfolio yield over the course the year. Jeff Adelson: Okay. Great. That's that's helpful. I'd also just point out while I while I've got you. You know, we're also obviously looking at, you know, continued improvements to deposit pricing. You know, one is early beta catches up and and then two, obviously, as as we get further cuts. You know, we'll look we'll look forward to further benefits terms of deposit pricing there. And so that flattish port portfolio yield is mated to declining cost of deposits. Which is obviously an important driver of of NIM expansion. Jeff Adelson: K. Great. Thank you. And and just in terms of the capital with the slow and slow approach to start here, it was, I think, nice to see you highlight the 9% fully phased in target. I know that's the old historic target overall. Is the way to be thinking about here is, like, once you get there, you know, you can to think about being a little bit more aggressive on the cadence of buyback. And I don't believe you disclosed, but in terms of the securities repositioning, could you just quickly remind us how much capital that consumed? And, you know, I think previously, you were talking about an AOCI accretion of about $350,000,000 per year. How did that perhaps change on the latest repositioning here? Russ Hutchinson: Yeah. So let me you know, let let let me let me try and dissect that. There's yeah, there's there's there's a lot there. I mean, maybe just starting on the AOCI accretion. Yeah. We currently expect, call it, 400 to $450,000,000 per year after tax benefit, from OIC, AOC AOIC our reported accretion going forward. And so that's, you know, that's on top of our our earnings level, and it's a good guy in terms of building tangible book value going forward. You know, on the securities repositioning, you know, that was kinda towards the end of the first quarter. And beginning of second quarter of last year. I'd I'd be happy to have our IR team follow-up with you and spend some time just kinda going through what we disclosed at that time about about the securities repositioning. Yeah. That's obviously been kind of kind of baked into our numbers and and, you know, from our perspective is is is a bit in the past, but we're happy to go through and and kinda go through the dynamics of that from last year if that's helpful to you. Jeff Adelson: Sure. Thank you. Thank you. Operator: And our next question coming from the line of Ryan Nash with Goldman Sachs. Your line is now open. Ryan Nash: Hey. Good morning, Yes. Hey, Ryan. Hey, Ross. Maybe as a follow-up to Jeff's question, maybe help us think a little bit about the pacing of buyback until we reach that 9%? Obviously, understand that, know, it's an open ended authorization, and I I know you've been saying we're gonna start slow and leg into it. Maybe just sort of contextualize how do you think about the pacing of buyback over the medium term. Russ Hutchinson: Yeah. It's a, you know, it's a it's a fair question, Ryan. You know, maybe I just kinda reiterate our our capital priorities, right, which which is first and foremost, organic growth in the places we wanna grow. You know? Predominantly our our retail auto book and our corporate finance book. Those are our highest returning assets. We saw some nice growth in those books over the course of of 2025, and we've got good momentum going into 2026. And so our first priority is is gonna go to to to to growing those businesses, and we think that's the best outcome for our shareholders in terms of driving an improvement in our profitability going forward. And driving some really good IRRs for the investor. You know? And and then, obviously, you know, we've got our dividend As you mentioned, we've got our capital built to 9%. You know, we really see, you know, having this share repurchase authorization in place as something that gives us flexibility. It's another lever to do as we say to, you know, to to, to not chase growth for growth's sake. To continue to be disciplined stewards of our shareholders' capital. And that's, you know, that's important to us. And and, you know, you you pointed out the the 9% fully phased in CET one target. You know, obviously, as as we're approaching that, we will do share repurchases while we're growing capital. We are we are not gonna be, subject to the tyranny of ore. Our story is a story of and, and we think we can build capital, support the organic growth of our core businesses, maintain our our dividend, and do share repurchases. And I think as you and Jeff both pointed out, I I think it's a fair expectation that you know, obviously, as we get through that 9% build, our our share repurchase level will accelerate. And so you kinda think about it, low and slow, but doing share repurchases alongside all the other capital priorities. Kinda getting through that 9%, and then, obvious, you know, it's our expectation that know, getting through the the 9% and and with our earnings levels continuing to improve, that is obviously gonna support, higher levels of share repurchases going forward. Ryan Nash: Gotcha. May maybe just as my follow-up, Russ, On on slide 21, where you show the new core ROTC methodology change, You know, just so I'm looking at it, it doesn't seem like there's any big change here, but I'm curious does, you know, does this change impact the timing or the level of returns that you view as the destination return for for the company? Russ Hutchinson: No. And and this is an important point. This is an updated methodology. It in no way alters our mid teens return target, our timing, or our conviction in our ability to to sustain that target over time. This is a simplification In our view, it increases transparency and comparability It has the benefit of aligning how we think about returns, book value, and earnings per share And so, you know, we think this is this is helpful to our investors in a in a number of ways. Know? But, importantly, we we we remain confident in sustainability of our mid teens return targets. You know? And and and as we kinda pointed out earlier, you know, I just might point out the the the burn off of of AOCI obviously adds to our tangible book value share trajectory over time. On top of what we show in terms of reported EPS. Ryan Nash: Awesome. Thank you. Operator: Thank you. Our next question coming from the line Moshe Orenbuch with TD Cowen. Your line is now open. Moshe Orenbuch: Most of my questions have been asked and answered. But maybe Michael or Russ, could you talk a little bit about the competitive dynamic we've you know, there there have been some players that have come back into the market over the last year, some particularly hard by the end of the year. Anything that that kind of makes you do, I obviously, you noted the 10% growth in applications, but I mean, does it does it make you kind of look at anything different from different credit tiers or anything like that? It just discuss that a little bit. Thanks. Russ Hutchinson: Right. Yeah. Maybe I'll I'll jump in first. You know, I I I kinda added this in the response to Sanjay's question earlier, but I you know, I I feel really good about where the franchises are, in in particular, our dealer financial services franchise. You know, when you look at just the level of dealer engagement we're seeing, you know, there are lot lot of pressures, a lot of headwinds that we saw at the end of the year, you know, between light vehicle sales, the end of the EV lease tax credit, you know, some of the dynamics around pull forward that that probably reversed a little bit in the fourth quarter. But as you pointed out, our application volume was strong. And it supported our credit selectivity and our ability to to get what I think is a really great vintage in the fourth quarter. And and that that really comes from just the strength of the overall franchise. You know, we we are consistent supporters of our dealer partners over time and across all aspects of their business. We we have a, you know, a value proposition that's attractive and helps them in the many aspects of of running a better dealership. And and that, you know, that the strength of those relationships and that engagement directly into the application volume that really is the lifeblood of that business. And so you know, I I you know, it isn't at this this this is an attractive business. And, you know, if anything surprised us, it it's that it took until this year be before a number of our competitors realized how attractive it is. And so we expected that competition and, you know, we're pleased with how the business has responded and continued to to really excel in the face of it. Michael Rhodes: Russ and thanks for that, Russ. And, Moshe, know, great question. And yeah. Yeah. Look. Yeah. This competitive marketplace just a sign of how great the business that we have, like, if you take away, there's been a lot on this call, and I'm gonna take your question and and and kind of frame it. With respect to a lot of what's going on. The competition was more intense this year, but incredibly proud of this team. This team showed up in a big way to strengthen relationships that we have certainly in the auto business and the corporate finance business and the way we've delivered. This whole year has been about strategic pivots backed by disciplined execution. We talk about the fact that we have seen solid results This was a very good year. And, I use the word solid because, you know, as good as we've done, we know there's a path to better. You know, I think, Russ, you talked a lot about that, but we have momentum. We feel good about, how this business playing out. And just a real thanks and a shout out to this team for, for delivering a really, really strong a solid year. And and for the momentum they built going to 26. Sean Leary: Thank you, Michael. Seeing we're a little bit past time, we'll go ahead and wrap it there today. If you have any additional questions, please feel free to reach out to Investor Relations. Thank you for joining us this morning. That concludes today's call. Operator: Goodbye. This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, ladies and gentlemen. And thank you for standing by. Welcome to the Fourth Quarter 2025 Halliburton Company Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question, simply press star 11 on your telephone keypad. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Mr. David Coleman, Senior Vice President of Investor Relations. Sir, please begin. Hello. David Coleman: And thank you for joining the Halliburton Fourth Quarter 2025 Conference Call. We will make a recording of today's webcast available for seven days on Halliburton's website. Joining me today are Jeff Miller, chairman, president, and CEO, and Eric Carre, executive vice president and CFO. Some of today's comments may include forward-looking statements that reflect Halliburton's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-Ks for the year ended 12/31/2024, Form 10-Q for the quarter ended 09/30/2025, recent current reports on Form 8-K, and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason except as required by law. Our comments today also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our fourth quarter earnings release and in the quarterly results and presentation section of our website. Now I'll turn the call over to Jeff. Jeffrey Miller: Thank you, David, and good morning, everyone. I am pleased with Halliburton's fourth quarter performance and the way we closed out 2025. We outperformed our expectations with stronger than anticipated activity and solid execution in both our North America and international completion and production businesses. It is clear that Halliburton's strategy and value proposition deliver differentiated results. Here are some of the highlights from 2025. We delivered total company revenue of $22.2 billion and adjusted operating margin of 14%. International revenue was $13.1 billion, down 2% year over year. North America revenue was $9.1 billion, a decrease of 6% year over year. During the year, we generated $2.9 billion of cash flow from operations, $1.9 billion of free cash flow, and repurchased $1 billion of our common stock. Finally, we returned 85% of our free cash flow to shareholders, reducing our share count to its lowest levels in ten years. These results reflect hard work and dedication by the men and women of Halliburton all around the world. I want to thank each Halliburton employee for your dedication to safety and our value proposition, maximizing value for our customers and delivering returns for our shareholders. Now let's turn to our macro outlook for 2026. We believe 2026 will be a year of rebalancing. The return of OPEC spare capacity and higher non-OPEC production have created a market with abundant supply. We expect supply increases to moderate this year as demand continues to rise. Near term, absent geopolitical disruptions, we expect commodity prices are unlikely to rise. We anticipate moderate softness in some key markets, particularly North America. We expect international activity to be stable year over year. Medium term, we believe supply and demand will rebalance, expect the combination of steeper decline rates, diminishing reservoir quality, and limited exploration success to create favorable tailwinds for oilfield services. I expect the next cycle to begin where it always has, in North America, followed by a global push to meet the growing demand. Let me close our macro outlook with this. I am confident in the future of oilfield services and excited about Halliburton's opportunities now and in the years ahead. Let's turn to our international business. Halliburton delivered another solid quarter under the strength of our global franchise and the resilience of our strategy. For the full year, international revenue was $13.1 billion, a decrease of 2% year over year, outperforming a 7% decline in rig count. While we experienced notable declines during the year in Saudi Arabia and Mexico, the remainder of our international business demonstrated strong growth of about 7%. Looking ahead to 2026, we expect total international revenue to be flat to up modestly. I am confident in the outlook for our international business. First, our collaborative value proposition is winning. What began as alliances with independents has expanded to include IOCs and NOCs across all of our regions. Today, this collaborative approach consistently drives outperformance for Halliburton and our customers. Deep collaboration is in our DNA and we believe it is the future of oilfield services. I am confident Halliburton is uniquely positioned to lead and thrive through this collaborative strategy. Second, our drilling information evaluation technology is now a differentiator for Halliburton in all markets. The depth of our drilling portfolio allows us to compete and win in the most technically demanding integrated projects worldwide. Finally, I believe the market's structure is evolving in a way that differentially favors Halliburton. We see consistent international growth in unconventional development drilling, and intervention, all of which are directly aligned with Halliburton's strengths. Let's take a closer look at our international growth engines. Unconventionals, drilling, production services, and artificial lift. Where we have a clear line of sight to outperform the overall market. We continue to make great progress. In unconventionals, Halliburton uniquely brings North America technology to the international market. Today, we operate in seven countries, and see growing adoption of simulfrac and continuous pumping operations along with our auto frac and sensory technology. In drilling, we completed the first fully autonomous geosteering run for a customer in The Caribbean. Where we maximized reservoir contact and delivered outstanding performance for the customer. Finally, artificial lift delivered record international quarterly revenue and is now active in 15 countries. Turning to our international power business. Our strategic collaboration with Voltigrid continues to gain momentum. I am pleased with our progress so far. Customers recognize that Halliburton's global footprint and for execution are a strong complement to VoltaGrid's distributed power platform. The opportunity pipeline is expanding rapidly across the Eastern Hemisphere with several projects already in engineering review. During the quarter, Halliburton and VoltaGrid secured manufacturing capacity for 400 megawatts of modular power systems. I am convinced more than ever that these opportunities will manifest and provide a significant avenue for future growth. To summarize, Halliburton's international business is strong, Our collaborative value proposition is winning, Our technology is delivering, and our growth engines are aligned with the evolution of the market. I am confident that Halliburton will outperform in 2026. Before we leave international, here are a few of my views on Venezuela. I've always believed that oil and gas is the key to Venezuela's economic recovery. I'm excited about the tremendous opportunity for Halliburton in Venezuela. Halliburton entered Venezuela in 1938 and only exited in 2019 because we are an American company in compliance with US sanctions. Halliburton knows this market well. And we will grow our business there as soon as commercial and legal terms are resolved, including payment certainty. The early steps are already well underway. Now moving on to North America. Halliburton delivered a strong fourth quarter supported by less than anticipated white space and solid execution. For the full year, revenue was $9.1 billion, down 6% year over year. As we look towards 2026, we expect North America revenue to decline high single digits compared to 2025. This outlook reflects the full year impact of reduced customer activity in land operations, our decision to stack uneconomic fleets, and the timing of customer programs in the Gulf Of America. Here are three observations on North America that shape our view and strategy. First, attrition is accelerating at a time when new capital investment is falling. Equipment is working harder than it ever has, due to widespread adoption of continuous pumping and simul frac. This is why I believe a small increase in demand will tighten the market quickly. Second, the largest opportunity for the industry is to increase recovery and I believe that this is only possible with technology adoption. This is why I am so excited about Zeus IQ. Third, the commodity outlook improves, we believe North America will be the first to recover. We have seen this countless times in the past, and the same drivers are in place today. Our strategy in North America is to maximize value. This means that we prioritize returns over market share and we develop technology that addresses customers' most critical opportunities. Improving recovery and drilling longer, faster, more precise wells. Let's look at how we do that. First, with respect to return, as we have done in the past, we will continue to stack equipment that is uneconomic. Prudent stacking of equipment preserves it for the recovery in North America and becomes an avenue to feed our growing international unconventionals business. With respect to technology, our differentiated Zoosk platform is driving value through automation and subsurface measurement. Only Halliburton's ZEUS platform directly measures and automates the control of sand placement which I believe are critical building blocks for improving recovery. This quarter, customer adoption of Zoos IQ, sensory, and auto frac increased by 8%. Which tells me it is working. We are also differentiated with our iCruise rotary steerable and Logix automation. Which deliver precision and reliability in long laterals. No trend in unconventionals is more clear than the growth of lateral lengths along with complex geometries such as horseshoe wells. We see this trend in every major basin. The impact of iCruise has been dramatic on our North America drilling services business. Which grew meaningfully this year despite a 6% decline in rig count. The high performance of iCruise and Logix and the secular trend towards rotary steerable drilling in North America give me great confidence in the continued success of our drilling services business. To summarize North America, our priority is clear. We will maximize value, We have consistently executed this strategy and delivered differentiated results. I am confident this strategy will deliver value for our customers Halliburton, and our shareholders. Before I turn the call over to Eric, let me close with this. I've never been more excited about the future of Halliburton, and here's why. Oil and gas have a critical and recognized role to play in the energy mix of the future. The shift from idealism to pragmatism is refreshing, and consistent with the reality that there will be growing demand for oilfield services for decades to come. Our value proposition is clear. We collaborate and engineer solutions to maximize asset value for our customers. The proven outperformance of our strategy and the ongoing shift towards collaborative work means Halliburton is squarely where the market is headed. And finally, our differentiated technology delivers exceptional value for our customers and for Halliburton. I am confident Halliburton will deliver leading returns and capitalize on future growth opportunities. Finally, I'm also pleased to announce an important leadership update. Shannon Slocum has been promoted to chief operating officer effective January 1. Shannon's COO role will be important to our success as we our strategy and I look forward to him joining us on future earnings calls. With that, I'll turn the call over to Eric to provide more details on our financial results. Eric Carre: Thank you, Jeff, and good morning. Our Q4 reported net income per diluted share was 70¢. Adjusted net income per diluted share was 69¢. Total company revenue for Q4 2025 was $5.7 billion, flat when compared to Q3 2025. Adjusted operating income was $829 million and adjusted operating margin was 15%. Our Q4 cash flow from operations was $1.2 billion and free cash flow was $875 million. During Q4, we repurchased $250 million of our common stock. For the full year, we repurchased approximately 42 million shares at an average price of $23.8 per share. Now turning to the segment results. Beginning with our Completion and Production division, revenue in Q4 was $3.3 billion, flat when compared to Q3 2025. Operating income was $570 million, an increase of 11% compared to Q3 2025, and operating income margin was 17%. Revenue improvements were primarily driven by higher year-end completion tool sales globally, and offset by lower stimulation activity in the Western Hemisphere. Operating income increased due to activity mix improvements from completion tool sales. In our Drilling and Evaluation division, revenue in Q4 was $2.4 billion, flat when compared to Q3 2025. Operating income was $367 million, an increase of 5% sequentially and operating income margin was 15%. Revenue improvements driven by higher wireline activity in the Eastern Hemisphere and increased year-end software sales were offset by lower fluid services in North America. Operating income increased due to better activity mix from our wireline business in the Eastern Hemisphere, and the year-end software sales. Now let's move on to geographic results. Our Q4 international revenue increased 7% when compared to Q3 2025. Europe Africa revenue in Q4 was $928 million, an increase of 12% sequentially. This increase was primarily driven by higher completion tool sales in the North Sea and improved activity across multiple product service lines in Africa. Middle East Asia revenue in Q4 was $1.5 billion, an increase of 3% sequentially. This improvement was primarily driven by increased well intervention services and higher stimulation activity in the Middle East, and improved activity across multiple product service lines in Asia. Latin America revenue in Q4 was $1.1 billion, a 7% increase sequentially. This increase was primarily driven by higher completion tool sales in Brazil and The Caribbean, and higher software sales in Mexico. In North America, Q4 revenue was $2.2 billion, a 7% decrease sequentially. This decline was primarily driven by lower stimulation activity in US land and Canada, decreased fluid services in the Gulf Of America, and lower well intervention services in US land. Moving on to other items. In Q4, our corporate and other expense was $66 million. We expect our Q1 corporate expenses to increase about $5 million. In Q4, we spent $42 million on SAP Sfour migration, which is included in our results. For Q1, we expect SAP expenses to be about $45 million. Net interest expense for the quarter was $86 million. For Q1, we expect net interest expense to increase about $5 million. Other, net expense in Q4 was $25 million. We expect Q1 expense to be about $35 million. Our normalized effective tax rate for Q4 was 19.8%. Based on our anticipated geographic earnings mix, we expect our Q1 and full year 2026 effective tax rate to be approximately 21%. Capital expenditures for Q4 were $337 million, which is $100 million lower than expected due to late equipment deliveries. For the full year 2026, we expect capital expenditures to be about $1.1 billion, consistent with our prior guidance adjusted for the timing impact of late deliveries. This guidance excludes any capital spending necessary for a potential reentry into Venezuela. Now let me provide you with comments on our expectation for Q1 2026. In our Completion and Production division, in Q1, we anticipate a higher than normal roll-off of year-end completion tool sales and lower international activity. As a result, we anticipate sequential revenue to decrease 7% to 9% and margins to decline about 300 basis points. In our Drilling and Evaluation division, we expect sequential revenue to decline 2% to 4% and margins to decline 25 to 75 basis points. I will now turn the call back to Jeff. Jeffrey Miller: Thanks, Eric. Let me summarize the key takeaways from today's discussion. Halliburton delivered solid Q4 results and closed 2025 with strong execution. Despite the market environment. Oil and gas have a critical role to play in the energy mix of the future. I expect 2026 to be a rebalancing year which I am confident is followed by a period of sustained strong growth. Halliburton's international business is strong, Our collaborative value proposition is winning, our technology is delivering, and our growth engines are aligned with the evolution of the market. In North America, we will maximize value, meaning we will stack fleets that do not make adequate return and focus our investments on differentiated technologies that solve for our customers' greatest opportunities. I expect that as macro fundamentals improve, North America will be the first to respond. I am confident in the outlook for our business. And Halliburton's ability to deliver leading returns and capitalize on future growth opportunities. And now let's open it up for questions. Operator: Ladies and gentlemen, if you have a question or comment at this time, please press 11 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. Again, if you have a question or comment at this time, please press 11 on your telephone keypad. Our first question or comment comes from the line of Saurabh Pant from Bank of America. Mr. Pant, your line is open. Saurabh Pant: Good morning, Jeff and Eric. Jeffrey Miller: Good morning. Saurabh Pant: Hey, Jeff, maybe I want to start with the topic which everybody has been bombarding us for the past two weeks, which is Venezuela, if you do not mind. I noted that you said that you said in your prepared remarks, right, that I know it's early days. Right? But you talked about early steps are well underway. Right? So my question is, maybe just help us think about how quickly can Halliburton, your customers, move into the country. What do you need to see to start doing that? And then secondly, ultimately, I know this is not certain. Right? But what is the potential size of the opportunity and how quickly can you scale up in Venezuela? Jeffrey Miller: Yeah. Thanks, Saurabh. Look, I think we could scale up fairly quickly. Yeah. We're working through the mechanics around license and things that we're certain will get in place. But as far as returning to the country, we move equipment around all over the world. So we can move equipment quite quickly. We still have a footprint there in Venezuela in terms of bases and whatnot. And so, you know, getting equipment there to work is fairly straightforward. There are operators in Venezuela today, and so I think there are opportunities for us sooner rather than later to get back to work. And so we're assessing what we would do and where we would start. My phone is ringing off the hook in terms of interest in Halliburton being there. And so confident that we could move fairly quickly in Venezuela. And excited about that. You know, as far as the size of the market, you know, small market today relative to what it was a decade ago. A decade ago, it was probably a half $1 billion business for us. Pretty consistently. Now, you know, as time dragged on, that market started to shrink and it got smaller. But I, you know, quite optimistic about longer term being a much bigger business. And I think in the near term, getting back to work and contributing to our business at Halliburton. Saurabh Pant: Right. No. That's a good update, Jeff. I think we need to keep we need to stay in tune on what's going on, but that sounds like a good opportunity. Just a very different pivot going back to 2026. Jeff. I know you gave some color on your expectations. For activity for revenue, which frankly, is in line to a little better than, I think, several people were thinking. So that's a good place to start. But on the margin side of things, Jeff, as we think about the pluses and minuses, pricing is part of it and not just NAAM, but international pricing, operating leverage, cost is part of it. And then, Eric, maybe a little color on SAP spending trajectory. If we put all of that together, what does the margin side of the story look like 26? Any preliminary thoughts on that? Jeffrey Miller: Well, look, I think the second half looks stronger than the first half, most certainly. You know, when we look around the world, it's pretty steady around the world with the, you know, obviously, larger tenders are gonna be more competitive. And we see some of those. But, you know, by and large, it's a stable market internationally. And so, you know, I see, you know, again, progress as we get certainly into the second half of the year around March. Saurabh Pant: Yes, sir. I've been is it relate Eric Carre: Go ahead, go ahead. Saurabh Pant: No. I was gonna jump to your SAP question, but if you have a follow-up for Jeff, go ahead. Saurabh Pant: No. SAP. Let's cover SAP first, Eric. Eric Carre: Okay. Yes. So SAP, we guided $45 million for Q1, and that's pretty much the run rate that you should be thinking about throughout 2026. So $40 million to $45 million. We anticipate the project to complete in Q4 of this year. Which is a little later than we had earlier guided. We've adjusted the plan slightly as we learn, you know, progressing through the rollout of the system. We've also brought on the scope of the project to include some of the adjacent processes such as outsourcing our payroll and redesigning our overall OTC process. So in summary, about $45 million, $40 to $45 million a quarter until the end of the year, and project completed in Q4. With expected savings of about $100 million a year, after the project is completed. Jeffrey Miller: Right. Sorry. I might go back to your first question a little bit here as well. So when if you if I look at all of 2026, as I said, I think the second half is better than the first half. But, you know, again, North America is taking a conservative posture. I think we've got some bright spots internationally. But I think the more important point is what's happening in terms of the rebalancing of the market. And that's really this pragmatic view of the world as opposed to idealistic. Barrels are being absorbed. Decline rates are higher now than they were in terms of because unconventionals are a larger part of the supply stack. And quite frankly, exploration success has been anemic. And while all that happening, demand is growing. So I think we're setting up for, you know, rebalancing year in '26 of supply and demand to be followed by very sustained strength. Saurabh Pant: Right. No. That makes a ton of sense. Jeff. Like you said, rebalancing here, and really the focus should be on 27-28, Right? And, hopefully, things go in the right direction. So thank you, Jeff, Eric. Thanks a lot. Jeffrey Miller: Thank you. Thank you. Operator: Thank you. Our next question or comment comes from the line of Neil Mehta from Goldman Sachs. Mr. Mehta, your line is now open. Neil Mehta: Hey, Jeff, and good morning, team. Quick question here first on the international breakout. You said up slightly, 26% versus 25%. Can you just go give us a tour around the world, Jeff, and give us perspective by market. Where do you see increments and decrements? Jeffrey Miller: Yeah. Look. And our outlook at this point is flattish to maybe up a little modestly. Look. I think Latin America leads the way. In terms of growth. Brazil, deepwater is powering ahead. Our Argentina, we see quite a bit of growth, and that's, you know, obviously right in our wheelhouse. Ecuador, Guyana, obviously. Guyana has been a strong business for us, and we'll continue to be. And so overall, Latin America, very much bright spot. You know, Middle East, think it's flattish, flattish, maybe even down slightly. And I say that just because I'm well aware of the activity growth in Saudi Arabia, but taking a bit more conservative view of the timing and pacing of that coming back. It likely will, but it's less clear to me sort of how impactful and how early that would be. But overall, the rest of The Middle East is very, very, very, you know, solid business. Pleased with that business. And then Asia Pacific, really looks fairly flattish to us. You know, a lot of gas demand in Asia. So positive things happening, but overall, flattish for '26 anyway. Neil Mehta: Yeah. That's a helpful break. And then, Jeff, maybe just take a moment to talk about VoltaGrid. I think we've gotten more comfortable as an investment community around that business and the potential, and you've announced an important joint venture in Melisa. From where you sit, how important is this business for you guys? How big can it be? Do you see yourself as a logical consolidator over time? Do you like minority today? Just your perspective. Anything you're willing to share about it. Jeffrey Miller: Yeah. Well, look. Well, what I'd say, I'm really excited about where we are and the outlook for that business and the international piece of that business. I won't comment on The U. I think that's well understood in the pace of growth there. Our role and ownership in VoltaGrid. As we look around the world, a lot of interest from customers around the combination of VoltaGrid technology and Halliburton's proven execution and footprint and capability. And so, you know, solid pipeline, like the volume. And so I think that this could be a very big business over time. I mean, it's, you know, like all businesses, we're starting. We're fairly very familiar with the business. It's gonna grow at the pace that it will, but we've already, you know, committed to 400 megawatts. So I think 400 megawatts is a good start. As we place those. And what we've seen historically is that we place a few 100 megawatts, and then that tends to grow over time. As data centers expand. And there's just no question that there's not enough electricity power generation in the world today in The US or anywhere else. So very confident in this, and I think it could be a very big business. Over time. Neil Mehta: Yep. Thanks, Jeff. Operator: The next question or comment comes from the line of David Anderson from Barclays. Mr. Anderson, your line is now open. David Anderson: Great. Thank you very much. Good morning, Jeff. How are you? Jeffrey Miller: Morning, Dave. David Anderson: You've talked about rebalancing of the market. Was wondering if you could talk more about North American stimulation market and how that's rebalancing. You talked about the attrition going on, but I'm not I'm wondering how pricing is holding up here and whether or not you see this firming up throughout the year. Because you're also seeing equipment moving out to Middle East I know you talked about you bringing some equipment down to Vaca Muerta. So how is that component kind of factoring into pricing? Do you expect pricing to kind of hold up here? And is this sort of a part of the rebalancing story? Jeffrey Miller: Yeah. Look. I think, Brett, pricing is fairly stable at this point. We didn't we Q4 is fairly stable. And as we go into Q1, we are Frac business stays very stable as well going into Q1. Now from a pricing standpoint, broadly, I think that, you know, given where pricing is and and and performance of companies in that market, we're fortunate that we outperform them by the market by quite a bit. But, you know, pricing reaches a point where it's, you know, it's not the companies aren't investing in it. We are moving equipment away from it. And so I think it's certainly stable at that level. And, yeah, I think there's incentives to move equipment outside The US, which we're doing in some cases. And so I think we're at a bottom, and I would expect that that improves over time. But I'm not gonna give you a date when it improves. But I think the bias is towards there's not investment in the market in terms of more equipment, and equipment is wearing out, which we know. And equipment, in some cases, is moving outside The US. And some equipment in ours, in some cases, is being stacked. So I think all of those are positive, and rational behavior in a market where, you know, we require returns. David Anderson: That makes a lot of sense. Of course, you do. On that side. I was wondering if you could talk Eric, maybe you could talk a little bit more about the C and P margin progression throughout the year. The guide for first quarter is more or less aligned with what we were looking for. But how should we think about kind of where the rest of the year shakes out in the margin side? And perhaps you could also just talk a little bit how MultiChem, the sale of MultiChem impacts that and maybe the decision to sell MultiChem. And does that provide an uplift for margins throughout the year? Eric Carre: So let me start with the MultiChem. So we think the sales should be completed this quarter. The impact on the margin will be positive, but frankly, it will not be material overall. Talking about the progression of CMP margin, we think the margin progress throughout the year. But let me give you some color as well to the guide of margins from Q4 to Q1. Because while it is not, you know, out of line with the differential in margin that we've seen in prior year, the actual makeup is a bit different. So if you look at the Q1, so we guided about 300 basis points down for C and P margin. So that is actually coming from three buckets. The first bucket, which is over half of the drop, is related to the roll-off of completion tool sales. That part is not unusual. What is a bit unusual is the amount of completion tool sales we had in Q4. If you look at the progression Q3 to Q4, our completion tool, revenue increase was three times what we saw in the prior two years. So that talks a lot to the strength of our completion business, but that's about over half of the drop. Then you get about 25% of the drop that's related to the typical seasonality in the international business for C and P. As our CNP business is increasingly has an increasingly large footprint in the international markets. And that's about 3% to 6% reduction in revenue. So that's kinda typical with historical decreases, and the rest is really a products geographic mix issue, which is really not structural, you know, as it relates to CMP. And then there is a bit of a kind of an optical view on Q4 to Q1, which is we typically have a lot of tailwind with the US frac business, which goes through seasonal factor I mean, seasonality in Q4. And benefits from an uplift going into Q1. We don't have any of that this year as our Q1 frac business in The US looks to be just straight flat to Q4. So again, a little bit of color as the makeup of the Delta is a bit different from prior years. David Anderson: Understood. Thank you very much. Eric Carre: Thank you. Operator: Our next question or comment comes from the line of Arun Jayaram from JPMorgan. Mr. Jayaram, your line is now open. Arun Jayaram: Yes. Good morning. Jeff and Eric. Appreciate the outlook for us on 2026. Wondering if we could maybe think about what your outlook comments around international and North America could mean for overall margins. You gave us some good color on where you expect revenues to kind of shake out. But just trying to narrow thoughts around, you know, the streets today sitting at just under $4 billion of EBITDA 'twenty six? And just trying to want to get just general comfort level of where the Street sits today based on your outlook comments. Eric Carre: Yeah. Go ahead, Eric. No. If you look at, just kinda margins overall as Jeff progresses, we think H2 is better than H1. So you're going to see some slight progression through the year. And, you know, why we typically don't comment on, you know, street estimates or provide guidance at this stage on margins, the $4 billion that you quoted is really within the range of outcomes that we are looking at. Arun Jayaram: Great. That's helpful, Eric. And just my follow-up, Jeff, in your prepared comments, you talked about Zoos IQ and some of the things that Halliburton's doing to help North American operators boost well productivity. I also wanted to talk to you a little bit about some of the updates we've gotten from the majors where they're talking about using lightweight proppant and surfactants. And I was wondering if you could discuss some of these efforts and maybe how you're helping clients maybe to use some of these emerging technologies? And could these be needle movers for Halliburton? Jeffrey Miller: Look. My comments are around our technology. And the technology that we produce, and very pleased with what we're doing. You know, And I think that the ability to place proppant and do things with proppant effectively is one of the really unique features of Zoos IQ. And I think that's, you know, under all conditions, a very valuable solution. And as I said, a building block to how recovery is improved because, quite frankly, where the sand goes has been an unknown in this business since it started in 1947. And, really, just in the last year, or two have we been able to directly measure sand placement and also control, and this is where sand goes. And this is primarily because of the Zeus setup and its ability to, you know, handle the pressure and the things in order to respond to the resume. Arun Jayaram: Great. Thanks. Operator: Our next question or comment comes from the line of James West from Melius Research. Mr. West, your line is open. James West: Thanks. Good morning, Jeff and Eric. Jeffrey Miller: Morning, James. Eric Carre: Hey, James. James West: So, Jeff, clearly, international outlook, second half better than first half, we get that. But as well, a little bit of a wild card, but curious where you think there could be pockets of, you know, strength that emerge knowing that, you know, neither you or I, as long as we were doing this, have a, you know, a crystal ball and the cycle is always gonna play out a little bit differently. But we've got a lot of things in the works here that could influence the oil price. And so could cause some markets to either inflect higher or lower, where do you think the maybe the surprises could come from if you think about a higher oil price environment in the second half and leading into, of course, as you described it, a solid upturn in 'twenty seven, 'twenty eight? Jeffrey Miller: Well, look. I think, Argentina is one that's gonna respond. It's already responding. But I think when I think about that market, the pace of interest in, you know, international investors in that market is high. I mean, that's become a very solid market that's gonna become more and more responsive to commodity price in a positive way. You know, kudos to the operators in that market today who have, you know, taken on the challenge of building infrastructure and back evacuating the hydrocarbons from the market. I mean, these are all of the things that a very dynamic market can do and will do and that's what we're seeing being done in Argentina. I think The Caribbean is another place where really excited about, you know, possibilities and what could happen sort of throughout The Caribbean. You know, as we look at next year, I think that, you know, West Africa is another where we're seeing sort of renewed interest in and better terms for operators and better terms for us where we're able to execute, you know, sort of all of our services in these markets. So I'm pleased with that. I think that's a bright spot. And then ultimately, Algeria I think, over time, you know, in '26 could become a brighter spot than we would expect. So I'm thinking about upside surprise. I think those are some of the places where we could see those. James West: Okay. That's very helpful, Jeff. And then just a follow-up for me. On the power markets broadly. You know, VoltaGrid is obviously you with your investment there and taking them into The Middle East and leveraging your platform is critical here. How are you thinking about other potential investments in power? Is VoltaGrid kind of your main objective here or you talking with others? I mean, how do you think about this, the build-out of, you know, the electrification theme and the data center theme and the power theme? As it relates to Halliburton. Jeffrey Miller: Well, thanks. It's one of the things that we take a step at a time is the bottom line. I mean, we're certainly aligned with VoltaGrid in The US. We're knowledgeable and have built out a team around power that's looking at our international business. Both in The Middle East and beyond The Middle East, most certainly. And so, you know, I think what we'll do, like we do in all things around here, is we take them a step at a time. We build businesses. We don't get ahead of our skis. And, you know, we look for the things that we think will be contributing to that. And so, you know, the outlook is really good in this area. We know a lot about it. And would expect that we continue to grow that business as we, you know, get deals done. James West: Got it. Thanks, Jeff. Operator: Our next question or comment comes from the line of Stephen Gengaro from Stifel. Mr. Gengaro, your line is open. Stephen Gengaro: Thank you. Good morning, everybody. Jeffrey Miller: Good morning. Eric Carre: Good morning, Stephen. Stephen Gengaro: So curious, Jeff, do you what do you think about, like, the fourth quarter was stronger than we had thought and there was less downtime '4. You know, more solid than we expected. I think, you know, the operators that we work for, they busy. I mean, we've got a solid group of customers that take a long view of unconventionals and technology for that matter. And so for that reason, you know, stayed busier certainly for us. And I think that, you know, that's probably how this market may look more this way over time, although I expect there probably will be, you know, solid inflection if commodity price gives us some help. Stephen Gengaro: Thank you. And then the follow-up is just around sort of your expectations for sort of completion of efficiency and sort of the impact on US production, just as we're thinking about, you know, kind of frac demand relative to some of the other high-tech services you provide and how that kinda impacts US production. And if you think we have enough activity right now to sustain production. Jeffrey Miller: Yeah. You know, outlook is we're probably at maintenance sort of levels today, if not below those. Is my view. Know? And I think that, you know, technology driving better recovery is really the key as we look ahead. I mean, the go faster, we are going faster, but we're pumping continuous pumping at rates that, you know, you really just can't pump any faster. And so I think the real hurdle is going to be how to better produce a fantastic resource. And I know that technology is at the core of that same as it has been everywhere. And so look, I think our frac fleets get bigger than they were in the past. You know? And so I think it takes more horsepower to do more work. It takes more technology to keep the both working, continuous pumping. Requires technology as does certainly the ability to place sand. That said, our drilling services business is continuing to strengthen into what has been a, you know, a slowing market, at least from a rig count standpoint. And I think that's a reflection again of technology. You know, what we do with Logix, which is our automation platform for drilling, what the tools themselves are able to do. We see somewhat I mean, that the uptake on that's been fantastic, and I think that's all driven by, you know, the real drilling, requirements to, you know, drill longer wells, longer wells, more complex wells. And so look. I'm just pleased with the growth of technology for both of our divisions today. Stephen Gengaro: Great. Thanks for all the color. Jeffrey Miller: Yep. Thank you. Operator: Thank you. Our next question or comment comes from the line of Scott Gruber from Citigroup. Mr. Gruber, your line is now open. Scott Gruber: Yes. Good morning, Jeff and Eric. Jeffrey Miller: Morning. Eric Carre: Morning. Scott Gruber: I wanna come back to Power as the growth prospect. Are certainly exciting and exciting to hear that they're bubbling to the surface internationally. How do the prospective returns on these power projects compare to your organic investments? You know, you also have pockets of growth, obviously, within your core, and maybe that expands with Venezuela. So just curious how the power project returns kind of compare. Are they higher, lower, broadly in line? And more importantly, kinda how does that shape, you know, the vigor with which you could deploy capital into the power opportunities? Eric Carre: Yeah. Yeah. It's Eric here. So I think it will depend on the opportunities, the country, what type of other potential power sources we would be competing with. So it's really early to tell you that it's, you know, accretive, dilutive to our current return. It will depend. But overall, these are typically very long-term contracts, you know, where you enter in it with a fairly low-risk long-term, very good view of what you have to deliver. And if we look at the comparison of what's been happening in North America, then you could say the returns are probably higher than what we have today. Scott Gruber: I got it. Thank you, Eric. And then, Eric, maybe if you could walk through some of the items that will impact cash conversion this year. You know, thinking about working capital, do you anticipate continued catch-up payments? You know, from your customer in Mexico? Anything to note on cash taxes and, you know, any comment on SAP spending, you know, for the full course of the year? Would be appreciated. Eric Carre: Yeah. I mean, look. There is a lot of moving parts in what you're describing. It's a bit early to comment on working capital impact, collections, etcetera. I mean collections have been great throughout the year. It was a bit challenging as we talked on several calls. Collecting from Mexico. The situation seemed to be going a lot better. So look, we'll give more details and we'll update our thoughts overall on all the kinda ins and outs, that that touches, you know, the projection around free cash flow. Scott Gruber: Okay. Thank you. Operator: Our next question or comment comes from the line of Derek Podhaizer from Piper Sandler. Mr. Podhaizer, your line is now open. Derek Podhaizer: Hey. Good morning. I just wanted to go back to the attrition discussion in US land. Obviously, a lot of moving pieces here between equipment high grading, idling, stacking legacy diesel fleets, redeploying some of those fleets international. Unconventional markets. But just when you look at your fleet, maybe Kansas, the market, is everything deployed that could be, or are there a few fleets that could be thrown together? Just trying to think through the tangible attrition in your comment around the small increase in demand could tighten this market quickly. What does that look like for you? And the market, and what could it mean for C and T specifically this year? Jeffrey Miller: Well, we have consciously stacked fleets. We stacked fleets in Q3. And we stacked some more fleets in Q4, all of which could go back to work for returns that are acceptable to us, and some of those may go. But, you know, from our standpoint, our fleet's in really good shape. And, there are things that could go to work that aren't working. And they will go to work when we see, you know, the appropriate level of pricing for those. But when I look at the whole market in terms of attrition, I'll just use, you know, an observation, in terms of fleet size. You know, we've got let's say, 65,000 horsepower out for a simul frac, we see a number of fleets in the market running 120,000 horsepower to do similar work that tells me that, you know, equipment is being repaired and put together and an effort to keep it working, which tells me that expanding or taking those apart, would be really a challenge. And so the market is moving more towards bigger fracs that require more equipment, and I think the ability to add fleets is just really not there. And so it doesn't take much in my view to create tightness just because the performance requirements are high. The technology requirements are increasing, and all of those things create quite a bit of tightness. Derek Podhaizer: Got it. That's helpful. Moving over to The Middle East, I know in your comments, you talked about a flattish outlook, even slightly down. Can you just maybe walk through some of the regions for us and what you're seeing specifically Saudi, UAE, Kuwait, Oman, Iraq, anything else you'd like to highlight? Jeffrey Miller: Look. I see fairly stable in most of those markets. You know, there's always shifting from completion to drilling and drilling to completion in some. I'd say, you know, UAE is strong. Kuwait is very strong for us. I think Iraq is a good story in terms of activity that we see coming up. And so look, I think as I look across the entirety of The Middle East, fairly stable. See, again, rigs being added in Saudi Arabia, very positive. But taking a bit of a more cautious view around the timing of that. Derek Podhaizer: Got it. Great. Thanks, Jeff. I'll turn it back. Eric Carre: Thank you. Operator: Our next question or comment comes from the line of Marc Bianchi from TD Cowen. Mr. Bianchi, your line is now open. Marc Bianchi: Hey. Thank you. Jeff, I was hoping you could comment on the offshore market outlook in a little bit more detail. I think everybody is sort of anticipating some sort of uptick in the '6. But there have been prior calls for upticks that didn't materialize. So just kind of curious what your view is on that. Jeffrey Miller: Look, I'll leave a lot of that to the rig contract in terms of rig placements, etcetera, but we've won a lot of offshore work. It's very strong for us. Continues to be a significant part of our international business. And I'd say the bias towards integration and our value proposition in offshore is important, and it's one of the reasons that we're winning work in offshore. It's really strong in Norway, Latin America, West Africa. All of those will be busy for us. And I think the other indicator is our completion tool order book is at an all-time high, which, you know, tends to be, again, biased towards deepwater and offshore work. So, you know, from our perspective, that's a strong business for us, and expect it, where we are for it to stay strong in 2026. Marc Bianchi: Okay. Great. Thanks. And then the other question I have was on Venezuela. Going back to that. So you had mentioned that you're looking to grow the business as soon as commercial and legal terms are resolved. And including payment certainty. Can you maybe level set for us what that timeline might look like? And is this going to be led by the IOCs and then Halliburton will follow? Or do you anticipate Halliburton moving in either coincident or perhaps before some of these IOCs make up their mind? Jeffrey Miller: Well, I think there's, you know, paths to both of those. And, you know, as we work through what payment certainty looks like and how we solve for that, obviously, IOCs are an important part of that, but we also there are companies operating there today that we can work for under the right conditions and circumstances. And so, you know, from a timing perspective, as we solve those, which I don't think there's a lot of will to solve for these things. And so, you know, this is, you know, we can mobilize in weeks. I think it's in months. That we, you know? But, again, we work through those things, but I feel confident we can move fairly quickly as opportunities arise. And, again, talking with lots of customers, some operating, some wanting to operate, and, you know, and this will all be a continuum of getting back to work in Venezuela. Marc Bianchi: Okay. Very good. I'll turn it back. Thank you. Operator: I'm afraid that's all the time we have for questions. At this time. I would like to turn the conference back over to Mr. Miller for any closing remarks. Jeffrey Miller: Yes. Thank you, Howard. Before we wrap up today's call, let me close with this. I'm excited about Halliburton's opportunities now and in the years ahead. Our differentiated technology delivers exceptional value for our customers and for Halliburton, and the ongoing shift towards collaborative work means Halliburton is squarely where the market is headed. Look forward to speaking with you again next quarter. Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.
Operator: Please standby, your conference will begin momentarily. Thank you for your patience. Your conference will begin momentarily. Welcome, and thank you for standing by. All participants will be on a listen-only mode until the question and answer session of today's call. Today's conference is being recorded. I would now like to turn the conference over to Kristin Silberberg. Thank you. You may begin. Kristin Silberberg: Thanks, Julie. Good morning, everyone, and thank you for joining us. First this morning, our Chairman and CEO, Bruce Van Saun, and CFO, Annoy Banerjee, will provide an overview of our fourth quarter and full-year results. Brendan Coughlin, our President, and Don McCree, our Chair of Commercial Banking, are also here to provide additional color. We will be referencing our fourth quarter and full-year presentation located on our Investor Relations website. After the presentation, we will be happy to take questions. Our comments today will include forward-looking statements which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review in the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results in the presentation and the reconciliations in the appendix. And with that, I will hand it over to Bruce. Thanks, Kristin, and good morning, everyone. Thanks for joining our call today. Bruce Van Saun: We were pleased to finish the year with another strong quarter. Our financial results were paced by net interest margin expansion of seven basis points, strong wealth and capital markets fees, positive operating leverage of 1.3% sequential and 5.2% year on year, favorable credit trends, and a robust balance sheet across capital, liquidity, and funding. We are executing well on our strategic initiatives. Our private bank finished the year with $4.145 billion in deposits, $10 billion in client assets, and $7.2 billion in loans. The business was 7% accretive to pretax income in 2025, ahead of our 5% target. Importantly, we managed this business to a 25% ROE for the year. We continue to grow nicely in New York City Metro, and our corporate banking expansion into new geographies, verticals, and sponsors is delivering good results. We made significant progress in running down non-core assets from $6.9 billion at the beginning of the year to $2.5 billion at the end, which included a sale of a student loan portfolio. Our top 10 program hit the mark with $100 million plus run rate benefits in Q4. For the quarter, our EPS was up 8% sequentially and 36% year over year. NII is up 9% year on year as net interest margin is up 20 basis points and spot loans grew 3%. Fees are up 8% year on year, paced by capital markets and wealth. Provision is down $25 million year on year as losses reduce on CRE office, and credit in general looks good. We retired 3% of our shares in 2025 and delivered an 80% return of capital to shareholders. For the full year, our EPS of $3.86 was up 19% relative to 2024. We hit most of our line items in the beginning of year guide, which is included on Slide 31. Our expenses were up 4.6% versus the guide of 4% given the fee performance beat and associated incentive compensation and our desire to keep building out private bank and wealth. We delivered positive operating leverage of around 1.25% for the year. As we think about 2026, our focus will continue to be strong execution of our strategic initiatives. The biggest new addition will be Reimagine the Bank, which has been launched and is creating real excitement at Citizens Financial Group, Inc. We've included a couple of slides in our presentation on this program. What I'd like to call out is that the deployment of new technologies and approaches under Reimagine the Bank will deliver meaningful enhancements to customer experience. This will drive some real revenue benefits in addition to the targeted expense efficiency improvements from the program. This program has around 50 initiatives at the outset, but we will add to this over time, providing further upside. Looking ahead, the macro environment for 2026 should be favorable. We see solid GDP growth, stable unemployment, and inflation falling by the end of the year. We project two more Fed rate cuts with the yield curve steepening as the ten-year stays anchored around 4.25%. We anticipate the regulatory environment to stay positive. We will look to take some basic steps on stablecoins; we do not see a big liftoff and impact in 2026. Notwithstanding several of our peers gauging on acquisitions, our focus for the foreseeable future remains on our attractive organic growth agenda. With respect to the 2026 outlook, we expect very strong revenue performance, controlled expenses, significant positive operating leverage, and lower credit costs. NII growth of 10% to 12% will be paced by strong continuing NIM expansion and solid loan growth, led by private bank and C&I. Fees will continue to grow off a strong year in 2025. The capital markets backdrop is highly favorable, and Citizens Financial Group, Inc. is well positioned. Our wealth business is in a great position to grow both with private bank customers as well as branch-based customers. Expense growth is projected to be comparable to this year as we seek to maintain the growth rate of the private bank. We have been disciplined in ensuring that the private bank achieves sustainable growth with attractive returns. The Reimagine the Bank impact in 2026 will deliver one-time costs of around $50 million versus benefits of $45 million, which are incorporated in this guidance. We do not intend to break out the one-time costs as notables as we've done in the past. Credit costs should continue to improve as the CRE office portfolio continues to be worked out. We continue to see mix improvements delivering benefits to the charge-off and provision rates over time. We will manage our CET1 ratio to 10.5% to 10.6% throughout 2026. We envision share repurchases of approximately $700 million to $850 million. We also are hopeful that the Fed modeling improvements will meaningfully lower our SCB. We've included some slides on our medium-term outlook and how the drag from our legacy swap portfolio will dissipate with time. We remain confident in our ability to achieve our medium-term 16% to 18% ROTCE target. To sum up, we are feeling very good about our positioning for the future. Our strategy rests on a transformed consumer bank, the best-positioned super-regional commercial bank, and the aspiration to have the premier bank-owned private bank. We continue to make steady progress and we'll continue to execute with the financial and operating discipline that you've come to expect from us. I'd like to end my remarks by thanking our colleagues for rising to the occasion and delivering a great effort in 2025. We know we can count on you again this year. And with that, let me turn it over to Annoy for his debut performance. Annoy? Annoy Banerjee: Thanks, Bruce. Good morning, everyone. I am excited to be part of Team Citizens and to help execute our well-planned strategy. Now turning to our performance. As Bruce indicated, we delivered strong results in 2025 that were in line with our expectations at the beginning of the year. The fourth quarter delivered continued good performance, and we are well positioned for 2026. Referencing Slides three to seven, I will provide some highlights for the full year and the fourth quarter. First, spending a moment on the full-year results. We delivered EPS of $3.86 for 2025, up 19% on an underlying basis, and that includes a $0.28 or just over 7% contribution from the private bank. Importantly, we also achieved full-year positive operating leverage of approximately 125 basis points on an underlying basis. Net interest income was up 4% as we delivered 13 basis points of margin expansion. Fees were up a strong 11% on an underlying basis, led by record results in both wealth up 22% and capital markets, which had a nice pickup in the second half. Up 9% year over year. Expenses were managed well, up 4.6% on an underlying reflecting the continued investment in the build-out of the private bank and wealth. We also managed credit well, maintaining strong reserve coverage levels with credit losses coming in line with our expectations at the start of the year. We ended the year in a very strong balance sheet position, maintaining robust capital, strong liquidity levels, and a healthy credit reserve. For the fourth quarter, we generated EPS of $1.13, up 8% linked quarter and 36% year on year. And delivered a 12.2% Roxy. The private bank continues to steadily grow its earnings contribution, adding $0.10 to EPS in Q4, up $0.02 linked quarter. Now I will talk to the fourth quarter results in more detail, starting with net interest income on Slide eight. Net interest income increased 3% linked quarter, driven by a strong expansion of our net interest margin and a 1% increase in average interest-earning assets. Our net interest margin continues to steadily expand, up seven basis points this quarter to 307%. Three basis points of the margin expansion was driven by the benefits of non-core run-up and reduced impact from the terminated swaps, what we refer to as time-based benefits. The rest was a combination of fixed-rate asset repricing and lower funding costs, which was partially offset by lower asset yields. We continue to do a good job optimizing deposits in a competitive environment. Interest-bearing deposit costs were down 15 basis points, while total deposit costs were down 12 basis points. Our cumulative interest-bearing deposit beta is about 48% through the end of the year. Moving to Slide nine. Fees are down 2% linked quarter but up 10% year over year on an underlying basis. Our wealth business delivered another record quarter, driven by continued progress in the private bank and strength in the retail network. Up 5% linked quarter and 31% year over year. These results reflected higher advisory fees with continued positive momentum in fee-based AUM growth, including strong inflows from the conversion of private wealth lift-outs as well as market appreciation. Capital markets delivered its third-best quarter ever, up 16% year over year, though down 16% compared with the exceptionally strong third quarter. Several M&A and equity deals were pushed into '26 given the impacts associated with the government shutdown. As a result, we expect roughly $20 million of related fees to be recognized in the first quarter. Despite deals pushing into '26, our equity underwriting performance was still up nicely linked quarter and up significantly year over year. Loan syndication fees were very strong this quarter, driven by refinance activity. And bond underwriting fees were solid, although lower than the very strong third quarter. We continued to perform well in the league tables, ranking second in the fourth quarter and fourth for the full year on both volume and number of deals for middle market sponsor loan syndications. And our deal pipeline across M&A, debt, and equity capital markets remains strong. On Slide 10, expenses are up 0.6% on a sequential basis, largely reflecting continued investment in the build-out of the private bank and private wealth, and higher incentive compensation. Disciplined expense management and strong revenues resulted in approximately 79 basis points of improvement in our efficiency ratio to 62%. Our top 10 program achieved $100 million of pretax run rate benefit exiting the year. And we have launched our Reimagine the Bank initiative, which I will discuss in more detail shortly. On slide 11, average and period-end loans were up 1% or up 2% excluding the non-core portfolio run-up of roughly $500 million in the quarter. We saw solid loan growth across each of the businesses as non-core runoff and balance sheet optimization impacts lessen. The private bank delivered solid loan growth again this quarter, with period-end loans up about $1.2 billion, driven by a pickup in sponsor line utilization, along with growth in multifamily and residential mortgage. Commercial loans were up slightly on a spot basis, driven by net new money originations in corporate banking and higher commercial line utilization, partially offset by CRE paydowns. We continued to reduce CRE balances, which were down about 4% this quarter and 10% for the year. And retail loans saw some nice growth, driven by home equity and mortgage. Next, on Slides twelve and thirteen. We continue to do a good job on deposits, with noninterest-bearing balances up 2%, maintaining a steady mix at 22% of the book. Even as our total spot deposits increased approximately 2% to $183 billion. Average deposits were also up 2% or $3.9 billion, driven by growth in the private bank, commercial, and retail. Private bank deposits reached $14.5 billion at the end of the year, including some larger flows towards the end of the quarter. We continue to focus on optimizing our deposit funding costs, reducing the average rate paid across all businesses, driving interest-bearing deposit costs down 15 basis points linked quarter. This combined with the growth in non-interest-bearing deposits helped to drive our total deposit cost down 12 basis points. And importantly, our non-interest-bearing and low-cost deposit mix increased to 43%, and our stable retail deposits are 65% of our total deposits, which compares to a peer average of above 55%. Moving to credit on slide 14. Credit continues to trend favorably, with net charge-offs coming in at 43 basis points, down from 46 basis points in the prior quarter. Non-accrual loans are down slightly linked quarter, driven by a decrease in commercial real estate. Criticized balances also continued to decline. Turning to the allowance for credit losses on Slide 15. The allowance was down slightly to 1.53% this quarter as the portfolio mix continues to improve due to non-core runoff, the reduction in the CRE portfolio, and lower loss contained front book originations across C&I and retail real estate secured. The economic forecast supporting the allowance is relatively stable with the prior quarter. And as we look broadly across the portfolio, the credit outlook looks good. The general office portfolio continues to work out as expected, and we maintain a robust allowance of 10.8% coverage. Importantly, the cumulative charge-off plus the current reserve translates to a total expected lifetime loss rate of about 20% against the March 23 loan balance. And that level has been consistent with our view for the past year. Moving to Slide 16. We maintained excellent balance sheet strength. Our CET1 ratio is 10.6%, and adjusting for the AOCI opt-out removal, our CET1 ratio increased to 9.5%. We returned a total of $326 million to shareholders in the fourth quarter, with $201 million in common dividends and $125 million of share repurchases. For 2025, we returned $1.4 billion or 80% of our 2025 earnings to shareholders. We repurchased $600 million of common stock at an average price of $44.55, representing about 3% of outstanding shares at the beginning of the year. Our tangible book value per share increased to $38.07, up $1.34 or 4% sequentially, with full-year growth of $5.73 per share, or 18% year over year. Moving to Slide 17 through 20. We are well positioned to drive strong performance over the medium term with our overall focused strategy. A transformed consumer bank, the best-positioned super-regional commercial bank, and our aspiration to build the premier bank-owned private bank and private wealth franchise. The private bank continues to make excellent progress, as you see on Slides nineteen and twenty. We exceeded our balance sheet targets and delivered full-year earnings of $0.28, contributing a little over 7% to EPS in 2025, well ahead of our original projection of 5%. The private bank delivered strong deposit growth again this quarter, ending the year at $14.5 billion. Importantly, the overall deposit mix continues to be very attractive, with about 36% in non-interest-bearing at the end of the year. We also delivered strong loan growth in the quarter, adding roughly $1 billion of loans to end the year at $7.2 billion. Since the launch of the private bank in 2023, we have added 10 wealth teams to our platform, with more in the pipeline. We ended the year with $10 billion of total client assets, reflecting the continued strong conversion rates of the wealth hires. We have more runway here, and we plan to continue adding top-quality teams in key geographies. Given the investments we have made and our plans to further expand the private bank in 26, we think deposits can grow to $18 billion to $20 billion, loans in the range of $11 billion to $13 billion, and client assets $16 billion to $20 billion. We expect this growth will help drive an increase in private banks' earnings contribution to mid-teens in the medium term, while maintaining a 20% to 25% ROE profile. Moving to slides twenty-one and twenty-two. We have launched our firm-wide Reimagine the Bank initiative. The objective is to position Citizens Financial Group, Inc. for long-term success by embracing a host of new innovative technologies across the bank and simplifying our business model, which will reshape our customer experience and drive a meaningful improvement in productivity and efficiency. Slide 21 will give you a sense of the scope of the effort, which spans nearly every part of the bank. Slide 22 lays out our financial targets for the program. For 2026, we expect to minimize the EPS impact of one-time cost and capital investments by prioritizing initiatives with faster paybacks. There will be about $50 million of front-loaded one-time cost that will be effectively offset by $45 million of benefits to be realized later in the year. The program will drive positive net benefits in twenty-seven that we expect will accelerate in 2028. And we are targeting fully phased-in pretax run rate benefits of approximately $450 million as we exit 2028. Roughly two-thirds of these benefits are tied to expense efficiencies, which equate to about 5% of our full-year 2025 expense base. Importantly, we are confident that the financial benefits of Reimagine the Bank will be additive to the 16% to 18% '27. Moving to Slide 23. I will take you through our full-year 2026 outlook, which contemplates a forward curve with two twenty-five basis point Fed cuts, one in June and another in September, ending the year with Fed funds approaching 3% to 3.25% and a ten-year treasury rate anchored around 4.25%. We expect NII to be up 10% to 12% with NIM expanding about four to five basis points a quarter towards 3.25% in 4Q twenty twenty-six. Loan growth is expected to pick up this year, with spot loans up 3% to 5%, average loans up 2.5% to 3.5%, and overall earning assets up 4% to 5%. Noninterest income is expected to be up 6% to 8%, driven primarily by wealth and capital markets. We are projecting expenses to be up 4.5% as we are confident in our revenue outlook and we plan to maintain our investments in growth initiatives. This translates to a 2026 full-year operating leverage in excess of 500 basis points. We have provided a walk showing the key components of our '26 expense growth on Slide 24. Credit is projected to continue to improve through the year with our outlook for net charge-offs in the mid to high 30s basis points. Along with these credit trends, the improving credit trends, the portfolio mix will also continue to improve. And finally, we expect to end the year with a strong CET1 ratio of 10.5% to 10.6%. We expect to generate a substantial amount of capital, which will put us in an excellent position to push forward with our strategic priorities while returning a substantial amount of capital to shareholders. Notwithstanding anticipated strong loan growth, we expect to repurchase $700 million to $850 million in shares this year. Full-year 2026 earnings incorporate a nice lift from the continued growth of the private bank. On Slide 25, we provide the guide for the first quarter. Note that the first quarter has seasonal impacts on revenue, with lower day count impacting net interest income. Taxes on the FICA reset and compensation payouts impacting expenses, Fees are normally softer in the first quarter, but we are expecting a strong performance from capital markets after incorporating the deals that were pushed from the fourth quarter. Moving to Slides 26 to 28. Looking out over the medium term, we see a clear path to achieving our 16% to 18% ROTCE target in 2027, with further momentum in 2028. Reimagine the bank benefits will be additive to returns. Expanding our net interest margin is a key driver, which we project to be in the range of 330% to 350% in 2027. Along with the impact of successful execution of our strategic initiatives, improving credit performance, and delivering a strong capital return to shareholders. To wrap up, we delivered a good performance in 2025 in line with our expectations. We have a strong outlook for 2026 with significant margin expansion, good momentum in wealth as we continue to grow the private bank, and we see our shift coming in on capital markets given the capabilities that we have built over the years. All of this puts us in a very good position to hit our medium-term 16% to 18% ROTCE target in the '27. With that, I will hand it back over to Bruce. Bruce Van Saun: Okay. Thanks, Annoy. And I think, operator, we're ready to open it up for Q and A. Operator: Thank you. Our first question comes from Ryan Nash with Goldman Sachs. Your line is open. Ryan Nash: Good morning, everyone. Good morning. Bruce, appreciate all the details on the reimagine the bank. I think you noted in the slides that this should add 2% on ROTCE. First, maybe just talk about how much of this hits the bottom line versus gets reinvested, and if it is reinvested, are the areas that you will invest in? And second, you know, the slide 28 says that you're not incorporating any of these benefits. Does this increase your confidence in getting to the high end? Do you think this serves more as a hedge in case other parts of the business don't perform? Thank you. And I have a follow-up. Yes. Okay. Bruce Van Saun: Garner the space for that follow-up. Nice move. So I would say that at this point, the program has taken shape. And we have about 50 work streams, and it's all signed out into a transformation office and people that are running with the ball on those streams. And Brendan's kind of leading the overall effort. He can comment as well. So I think, at this point, we have kind of quarter by quarter visibility into each of those work streams and how the kind of implementation cost flow and then how the benefits start to flow. One thing you'll notice there is that over time, the kind of revenue benefits start to pick up as we'll see improved customer experience resulting in less customer attrition, better usage of our products by the customer base. And we think that's really solid in terms of our ability to forecast that. So anyway, the program has taken shape. We're executing it well. As to the question of, you know, what do we expect to flow through, I think the first thing is you got to look at the gross number excluding the implementation costs because implementation costs really are just kind of one-time capital costs in our view. So the run rate will benefit by the full amount. And then I think it's still a bit of an open question as to how much of that flows through. And it kind of depends on kind of where we are at that point in time and what our investment needs and priorities could be. So do we keep investing at the same pace in the private bank? And is it worth investing to keep on that trajectory and to generate more medium-term revenue growth? I think that's a TBD. So at this point, we're kind of just flagging the numbers, here's what we think is possible. We have a lot of wood to chop to actually execute this program, but we'll be reporting on it all along. And then we'll have, I think, more visibility into the flow through as time goes by. If you look historically at all of our top programs, Ryan, we've had a significant flow through. And so we tend to be very disciplined on the remaining expense base. We have this mindset of continuous improvement if we want to invest new dollars try to figure out where to pinch the expense base to self-fund that. So I would expect that the flow through should be high, but we're not gonna make that call at this point. We're just going to give you the contours of what the program could deliver. Ryan Nash: Got it. And then if I look on Slide 27, your prior NIM walk had deposit betas in the low to mid-50s. I think now you're saying high 40s. Maybe just talk about what is driving the change? Is it competition or a change in your strategy? And what are some of the offsets that are allowing the NIM to still reach slightly higher levels versus prior expectations. Thank you. Bruce Van Saun: Yeah. So what I would say is that when the rates first started to fall, the market was very aggressive in trying to recoup some of the happened on the way up. And what's happened since then, I think, is that the market is kind of less aggressive in its pricing actions at this point. And so you could call that maybe a little more competition or you could just say, kind of a decision to share kind of some of those benefits with the customer and not be as aggressive. And so that high 40s to us is really the market. So we're not if we move down from mid-low to mid-fifties to high 40s, I think that's consistent with what we're seeing in the market. And the reason that I still think we're in a very good position to deliver on that NIM walk are several factors contributing to that. But one is our confidence in our net interest, our non-interest-bearing balance growth which has stayed robust in the private bank and in the consumer bank in particular and stable in the commercial bank. And so we, I think, score well on that dimension. You know that we're also slightly asset sensitive and our view is that rates will come down, but maybe not as much feared initially. So I think that is a helpful fact for us as well. And then over time, we've continued to, I think, be very disciplined in our hedging actions. And so we've been adding in hedges at attractive rates. So I think it's a combination of those three things. That kind of non-interest or balances the higher little bit of asset sensitivity and a higher rate outlook. And then addition, these attractive hedging actions that we've taken would offset that beta dropping from where it was to the high forties. Ryan Nash: Thanks for the color, Bruce. Kristin Silberberg: Thank you. Operator: Our next question comes from Erika Najarian with UBS. Your line is open. Erika Najarian: Hi, good morning. Just wanted to ask about the puts and takes on the loan growth guide. It feels like a bit of a sort of best in class relative to peers. Maybe remind us, Bruce, in terms of where you are in your balance sheet optimization journey. And as we come to a point where rates may come down, talk to us about you know, the push-pull in terms of optimizing CRE versus taking advantage of potential refinancing opportunities? Bruce Van Saun: Yep. So I'd say our confidence in that loan outlook stems from actually what we're seeing and what we delivered the second half of the year. So we had we have an idiosyncratic growth drive in the private bank as they scale up their business. That's something our peer banks don't have. And so that continues at a good clip. And then I think the focus of the commercial bank in terms of the middle market and our expansion markets plus some of the kind of private capital and sponsor lines. Also has been an area of opportunity for us. And then kind of in the consumer bank, we have the market-leading HELOC product and also mortgage. And so we've seen growth across all three of those areas in Q3 and in Q4. And we think that will continue. In kind of prior years that growth was offset by the accelerated rundown of non-core, but now we have non-core kind of at a kind of almost at a stub at this point from $14 billion down to like $2.5 billion. And then we've done a lot of work already on the commercial BSO on the commercial real estate kind of run down after the investors acquisition. And so there's a slide in the back, Erica, which you may have seen or may not have seen, but kind of lays down some of the reductions in the drag from those efforts which also contributes to positive sentiment on loan growth. So those are the kind of big things. I'll just maybe flip it over first to Don to talk a little bit about commercial and then Brendan to talk about the private banking consumer. Don McCree: Yep. I'll start, Erica, by just talking about the environment. I mean, across the board, we're seeing positive sentiment from the client base. So Bruce mentioned the expansion markets, they're growing. So think New York, California, Florida, they're growing extremely quickly. Those are core middle market relationships with full wallet realization. So not only is loan growth materializing, but we're also seeing from an ROE standpoint being very attractive business. We're seeing remember for most of the last two or three years, the market has been really a refinancing market. I think Annoy mentioned that. We're seeing new money demand both in our core client base, which is translating into utilization growth, and we're seeing it powerfully in the sponsor business where the sponsors finally seem to be coming alive and that will impact not only our capital markets businesses but also our NBFI lending as we engage with the private capital community both on the PE capital call lines and private capital leveraging line. So across the board, a pretty strong environment to be operating in. That should drive higher levels of loan growth as we look into 2026 and beyond. We were probably running close to $1 billion of C&I BSO over the last few years. That really is down to BAU. We're pretty much done with that. If it was going to be $500 million, I'd be surprised, but it'll be just a continuous kind of rhythm of cleaning out, under-returning relationships and replacing them with new relationships. And then the change in real estate, we're going to continue to trim the real estate exposures, but we're beginning to turn on the origination engine, and that's both private private bank and commercial bank. And we will be replacing some of the BSO that's happening with some attractive opportunities as we see them in the marketplace. So what was a pure drag in the past will be a little bit less of a drag in the future, although we'll continue to kind of trend that down. But BSO will become less of a drag in the overall loan growth. Brendan Coughlin: On my side, maybe three points here. One, similar to Don, the headwind on non-core is reducing. So just give you some numbers around it. Yeah. Six, seven quarters ago, we were dealing with a billion, a billion 1 in quarter on quarter, rundown of non-core that exited Q4 at a half a billion. That's going to continue to minimize as we look forward into 2026. So that's a real positive to see that wrap it's through the cycle. It was seen really strong growth in private banking at point number two, and it's been really balanced across private equity, residential lending, and, multifamily granular high-quality commercial real estate where we have access to full relationships with wealth management. One of the dynamics we were facing early in 2025 is with rates high. There was a lot of cash out in the system with this client base and they were hesitant to go in and finance things with debt with rates as high as they were. That is starting to change. And as the rates ease a bit, we expect loan growth demand to pick up in the private bank and our run rate to improve further. So we've got confidence there that the pace of growth in the private bank will continue to accelerate as we look into 2026. And then in consumer, as Bruce mentioned, we're getting $700 to $800 million in quarter on quarter growth in HELOC. We're number one in net balance sheet growth in The United States, number one in originated originations in The United States and HELOC in a very high credit quality book. With 95% plus the customers coming with DDA and deep relationship-based banking. We expect that to continue. And candidly with rates pulling back, but not so far to crater through a 5% mortgage rate, at least in the forward outlook. It's really a perfect time period for HELOC where there's not gonna be a ton of mortgage refinancing. Refinancing activity, but huge amounts of equity built up with consumers who are very, very well positioned. To continue to monetize the HELOC capability we've put in place. And of course, in the second half of last year, launched a credit card portfolio, which we expect will start to pay some dividends as we get into twenty twenty-six first half and second half with higher yielding, quality balances. So for all those reasons, I feel really good about continued pickup in net loan growth. The other thing I just mentioned wrapping up here is it's important to look at the net loan growth number. But under the covers, there's a quality story that you need to pay attention to of the balance sheet remixing to deep relationship-based customer lending, higher yielding, higher profitability, both on the balance sheet, but also the net customers we're bringing in, moving away from single service to a really, really deep relationship-based bank. So, you know, I think we're we've got confidence on winning both dimensions, quantity plus quality. Erika Najarian: Thank you. I'll step aside and let my peers ask questions. Brendan Coughlin: Okay. Thank you. Operator: Our next question comes from Manan Gosalia with Morgan Stanley. Your line is open. Manan Gosalia: Hey, good morning all and welcome Hanoi. I wanted to start on the fee side. Can you expand a little bit on the underlying assumptions in the fees? I mean, it feels like the private bank is doing well, capital markets are doing well. Pipelines are strong. Had a survey out recently talking about M&A expanding on the middle market side. There's also been some push out from the fourth quarter into 2026. Just given all of that, it feels like the fee guide is a little conservative. So can you help us with some of the underlying assumptions there? Yes. So I'll start and others can chime in. But we had a very strong fee year in 2025. So we'll start with that. We were up 11%. And then to guide up next year 6% to percent is still kind of good growth on top of very strong growth that we had in 2025. I'd say the outlook for 'twenty six is led by the capital markets where not only do we have strong pipelines, we have several things going for us. One is the carryover, so we have about 20,000,000 of fees that carries over that will close in the first quarter. And then in the 2025, we had kind of soft comparisons I would say because of the uncertainty in liberation day tariffs. There's a lot of pent-up demand to do deals that started to flow again in the second half of the year. So again, I think capital markets should have a strong relative year. And again, who knows about the uncertainty and the tariffs and it seems like Groundhog Day, we might be in that same movie replaying, but I think that's one of the reasons why overall, it's good to have a little bit of caution in that guide of 6% to 8%. You just don't know. But at this point, like capital markets look like it'll have an extremely strong year. Wealth has been having record quarter after record quarter. And that's a twofold benefit. It's not only kinda getting the teams in place of recruiting these lift outs and then connecting them to the private bank relationships and the corporate bank which creates its own growth dynamic. But then also in the branch-based system, we've got great leadership there, great product set we're really hitting our stride. So I think wealth would be another shining star. Across the rest of the patch, we don't see significant growth in many of the other areas like service charges on deposit accounts, mortgage, you know, our other income was flattered. We had a like moon and the stars aligned for a couple quarters that might not repeat in 2026. So I think just having a level of conservatism there seems like the way to play it. Manan Gosalia: Very helpful. And then maybe pivoting over to the capital side, it looks like your buyback guide is a little more front-end loaded. And then you spoke about the fact that you're hopeful that the SCB will come down this year. I guess the question is how important is the stress test in terms of your comfort level in bringing the CET one ratio closer to your medium-term targets of like 10% to 10.5%? How quickly can you do that? And where would getting into that range put you in terms of buybacks as you get into the back half of the year? Bruce Van Saun: Sure. Again, I'll take this one. I've been living it on this SCP frustration for years. But we are reasonably optimistic that there's some changes afoot down in Washington with the Fed. And so based on what we know, think we'll get a better outcome remains to be seen the timing of that implementation. But to me, it's less of an impact directly on where we set our capital targets just been it's almost a scarlet letter that we have this outsized SCB when our business model is the same as most of our peers and that just has been mismodeled and I won't get into all of it, but we've made those points clear to the new folks that are gonna be in charge of the stress test. So in any case, just falling back into the pack is good for us reputationally even if it doesn't affect exactly how we're going to manage the capital. I would say the reason that we're still on the high end of that 10 to 10 and a half range is just still the amount of uncertainty that's in the environment. We have an upsurge in our profitability projected but making sure that we get there and that get the CRE worked out when we feel the environment is in a better place and we've accomplished some of those aspects then think we could be in a position to start to migrate down within that range. But anyway, that's how we think about it. Manan Gosalia: Great. Thank you. Operator: Our next question comes from John Pancari with Evercore ISI. Your line is open. Gerard Cassidy: Hi, this is Gerard Cassidy on for John. Want to revisit the private bank build-up specifically. In that $11 billion to $13 billion private bank related loans in 2026, can you break down what loan categories in the private bank you're seeing growth? Any puts and takes there? And then longer term, how should we think about the loan to deposit ratio trending in the private bank? Thank you. Brendan Coughlin: Yeah. It's Brenda. I can take that. If it's pretty balanced growth. So about a third of it, I'd say, is coming from C&I equity-based lending. We have, yeah, about half of the balance sheet is, I'd say, residential and real estate. So mortgage and, granular multi-commercial real estate, as I mentioned before, tied into deep wealth management-based clients. And then there's, a smaller portion in sort of other consumer. So our, you know, HELOC capabilities are making their way over to these clients, some small credit cards, some specialty unsecured lending, loans in the private banking portfolio. The PLP, partner loans that we're leveraging to convert our private equity community into personal private banking relationships. So it's pretty broad-based, but the largest categories are C&I, granular multifamily CRE, and residential lending mortgage. We expect that to continue as rates to pull back with the traditional personal private banking should pick up. That would that's, again, gonna the portfolio will benefit from HELOC and continued residential lending. And as our card portfolio picks up, we've optimism that that can be a more meaningful player in the private bank over time. Bruce Van Saun: Yeah. I would just add to that that we've been in business now for a couple of years. Haven't had one I'm gonna touch wood here when I say this. We haven't had $1 of credit losses, and that historically was the track record of these bankers when they operated on the First Republic platform. So very strong credit discipline, very deep relationships lending the people that we know well and getting good credit. The you asked about the LDR too. Sorry, I didn't answer that. Our 25% ROE is certainly benefiting from a you know, little bit wider loan to deposit ratio than we probably would expect in a steady state. And so but you can also see in our guide, we don't expect dramatic, meaningful changes in the short term. We're going to expect pretty balanced growth across deposits and lending. So we expect a self-funding mechanism here where the not only is the LDR, led with deposits, but the lendable deposits also fully self-fund the loan growth that we're getting. Having said that over the medium-term outlook, I would expect LDR to tighten, you know, maybe from in the sixties where we are today into the 80% range, potentially. But, you know, that if rates pull back. Right now, we're we still think it will be in this range of you know, 60 to 70% for the next, you know, year to six quarters. Gerard Cassidy: Thank you. That's very helpful. Operator: Our next question comes from Matt O'Connor Deutsche Bank. Your line is open. Matt O'Connor: Good morning. A bit of a follow-up to comments you just made. I want to ask about the deposit growth assumption. I found it interesting. I think it's what's driving the higher net II outlook, but your earning asset growth is actually a bit above the loan growth. On Slide 23. So just trying to get a sense of deposit growth assumptions and obviously you give us a private bank which is the one piece, but just the overall assumptions there and the confidence in that level. Bruce Van Saun: Yeah. Well, we don't have a deposit guide here, but I think the expectation is that the LDR will stay relatively stable. Over the course of the year. So we brought it down. You may recall, we were operating back in 'twenty-three kind of in the high 80s. We brought it down in 2024 into the low 80s. We now have it down into the high 70s. Which is a place that I think we can sustain that and feel good about kind of the liquidity position there. And so that's kind of the overall forecast. I don't know, Anoye, if you wanna add anything to that. Yeah. I think the only other thing to add would be probably lower non-interest-bearing deposit growth has been very steady as well. Both coming from the private bank and as well as the consumer bank. We expect that 22% to be in the zone as we go through. Brendan Coughlin: The two points I'd add on the non-interest bearing would be, you know, what we've gone through a period post-COVID three years of consistent headwinds on spending out the excess surplus. 2025 was a year of that kind of running its course and flattening out. We started to see some very modest DDA growth in most benchmarks in the consumer bank. We were number one in our peer set on relative DDA performance versus peer banks. We expect that relative position to continue and move from a flattening to starting to see some very modest DDA growth and then the private bank you can see our DDA percentage in the high thirties, but important to also look at checking with interest the entirety of the personal banking deposits in the private bank or in checking with interest which is de minimis interest. When you add that in our actual low-cost mix is in the mid-40s and we expect that range to continue the combination of DDA plus checking with interest. So healthy, healthy growth in the private bank and noninterest bearing or low-interest bearing and continued number one performance or top quartile performance in the consumer bank on relative DDA. Matt O'Connor: And then just on, the interest-earning asset growth, it's kind of 1% to 2% of both loan growth and maybe deposit growth. Anything else driving that? I think you've expanded your swap business for customers. I don't know if there's something with trading assets or a rethinking of how you hedge the balance sheet? I would say the spot loans is three to five and earning assets kind of four to five. So there may be a little build in liquidity. We may be adding to the securities books. Part of that is looking at the lended full deposits and the kind of what we see is growth in private bank deposits, which have a little lower lendability than the consumer deposits do. And so it's really probably just a little mix in where we're building a bit of our liquidity. To go match what we're doing in terms of the deposit composition growth. Matt O'Connor: Okay. Right. Thank you. Bruce Van Saun: Yep. Operator: Our next question comes from Ebrahim Poonawala Bank of America. Your line is open. Ebrahim Poonawala: Hey, good morning. I guess just a couple of quick follow-ups. As we think about the 16% to 18% return, raw C exiting twenty-seven, it implies the margin probably being somewhere between around that three forty to three fifty. Am I thinking about that correctly? Annoy Banerjee: Yes. I would say think of that, in that zone. Yep. Ebrahim Poonawala: And then beyond that, as we think about the new growth that's coming on the balance sheet, on Slide 19 for private bank, call out the 4.1% spread. On that growth. I'm just wondering if you had to have a similar number for the entire balance sheet in terms of growth where would you say that new growth is coming? Is it close to 4%, close to 3%? I would love any color there. Bruce Van Saun: Yeah. That's an interesting question. I guess I would say the spread in the private bank and the consumer bank are relatively higher. The spread in commercial is relatively lower. Commercial, you're extending credit to build relationships and do the cross-sell to your fee-based complex. So that's a little bit of the dynamics there. Ebrahim Poonawala: Got it. And just one more Bruce on the private bank seven offices, four more to go. Why is that number not larger? Like is it is there only so much that you can do from a management bandwidth standpoint? Or do you think once you have these 10 to 15 private bank offices, you saturated the opportunity. Bruce Van Saun: Well, I'll start and flip it to Brendan. But you know, I'd say from a bandwidth standpoint, you want to make sure that these offices are really premium locations and premium fit out and premium high-quality people staffing them. And so we've done a lot and we have another big agenda for this year, but we're certainly not done when you get to exhaust the list that we have in front of us for '27. We have a couple more in the pipeline that are straddling between 2627 and then we have densification some of our East Coast locations in Florida still in front of us when we look out into '27. So I think ultimately you could see this number get up to something like 25 or 30. And when we've kind of reached maturity with the private banking locations that we have before we would think about potentially other geographic expansion. But Brendan, I'll flip it to you. Brendan Coughlin: Yeah. Our confidence is clearly increasing every quarter that gets behind us on our ability to drive sustainable growth and high quality. But if you kinda rewind the clock back to you know, four quarters ago, we were very committed to make sure we deliver the profitability profile that we shared with you all before we got too far out of our over our skis. So we've been very thoughtful in terms of where to put these locations. It's a very connected business model. I call it 1st Floor, 2nd Floor. 1st Floor being kind of retail banking for private banking customers. 2nd Floor being senior RMs and wealth teams that are not necessarily working the retail branch, but they're bringing in clients. We've gotta grow that in a connected way. So and we're keeping a very, very high bar on quality. We don't want to grow so fast that we compromise on having a best-in-market team. So we've got aspirations for more sites. We'll continue to add them as we get the right teams, as we get the right locations. We're starting to think about geographic expansion. We also have to think about filling in the rest of our citizens' footprint. You've got plenty of markets that we have high net worth individuals in today where we don't yet offer the private the full private banking package. And so in addition to adding more sites, may see a handful of very targeted either conversions or dual-branded sites with retail and private banking coming online where we can offer the full service of the bank, the full one citizens in the same market. So with commercial partnering as well. So a lot to do. We expect a steady diet of continued openings and, opportunistically, we find talent in good locations. We'll our ambition. Ebrahim Poonawala: That's great. Thank you. Okay. Operator: Our next question comes from David Shibarini with Jefferies. Your line is open. David Shibarini: Hi, thanks for taking the question. So I wanted to ask about the efficiency ratio outlook. It looks very strong. Mid-50s medium term versus the 62% in the fourth quarter. Can you talk about what could drive the high end versus the low end of the mid-50s outlook? Bruce Van Saun: Yes. Well, there's a couple dynamics here that right off the bat, if you overlay the kind of termination of these swaps and look at some of the built-in kind of active swaps and fixed asset pricing that we think is pretty assured, you can get from 62 into the high 50s. And if you overlay the RGB, that can further take you down into the mid-fifties. And then all along we're trying to run with positive operating leverage even if you strip out the benefit of the NIM expansion. So those are really the three things that are driving you back down to something in the mid-fifty. So I think it's a very target. David Shibarini: Thanks for that. And my follow-up is on AI. You've been front-footed on AI some of your peers. Can you talk about your AI spend and some of the use cases you're seeing? Brendan Coughlin: Yes. Our AI spend has I would call it backwards looking in 2025 has been a combination of very small targeted pilots and learnings and building the right control infrastructure to get ourselves ready for this, including moving completely to the cloud, in, in '20 in 2025. And big investments in data. So to actually take the AI capabilities and commercialize it, a lot of foundational things need to be true. So of this happened in 2025. Candidly, of this started back in 2020, 2021 where we're really getting, some bigger investments. In broadening our data capabilities, modernizing the tech stack to put us in a position for this. So, enabling investments has been high, very specific kind of last mile AI investments, I think, have been very relatively modest. But as we turn the page to 2026, the dial turns a little bit. So a couple of the use cases, of course, we highlight them on page I guess, it's '21 in the deck, and you can you can look at that, but I'll maybe highlight two or three of them. The call center as an example, we think that combination of modernizing the tech stack for the call center front to back plus introducing voice AI and other mechanisms, we can get in the range over the medium-term outlook 50% of our call center calls out of a human answering them. That is something we're very excited about. It's not hopes and dreams. We've seen this in, development and it action in smaller firms, tech banks and otherwise. So we're leaning in heavily there. Technology development, productivity of an engineer is a use case that we also have high confidence in that through leveraging AI, we can have, you know, a five to 10 x of productivity with our engineers that the AI is taking the first crack at writing the code where developers are now QA, QC ing the code, adding the last mile and then ultimately having the AI also work on the first round of testing and quality assurance of the code. And then maybe lastly or just analytics, fraud, credit risk. These are tried and true AI use cases that with particularly in the consumer bank relative to fraud and credit analytics where you're underwriting and on a cohort basis, leveraging AI to reengineer front tobacco. We think about credit analytics, portfolio monitoring, fraud detection, model enhancement. These are all very real use cases that are practical. In our sites, and we've got, you know, reasonable confidence that we can we can go out them. So you'll start to see in the reimagine the bank, effort, there's an overlay of tech spend in addition to our run rate tech spend we're spending on the franchise that will be principally pointed at AI deployment, for reimagine the bank. So we're carving out a meaningful chunk of overlay for tech spend that will wind up in our depreciation line, over time. Which is incorporated in our guide relative to the net benefits of Reimagine the Bank. David Shibarini: Very helpful. Thank you. Brendan Coughlin: Okay. Operator: Our next question comes from Gerard Cassidy with RBC. Your line is open. Gerard Cassidy: Hi, Bruce. Bruce, since going public, you've done a very good job of delivering on growing this organization that you head up and clearly you've done it in this wealth management area, most recently the private bank. Can you guys share with us the growth that you're planning for this year, the $16 billion to $20 billion of client assets? How much is that coming from existing customers of their portfolios versus just new customers coming in with, you're going to maybe hire more teams, And then, I don't know if you can parse how much of a benefit has this three-year bull market been on this business? Bruce Van Saun: Yes. I'm going to flip this to Brendan. Quickly. But what I would say is that what you are seeing on that private bank slide is simply the growth of $6 billion to $10 billion in kind of this kind of lift-out venue that's serving their private bank partners. And some of that comes from the continued acquisition of new teams, but the majority is going to come from just the kind of people that are on the platform kind of getting their full book converted in and then growing as they start to serve the private bank and private wealth. So that's part of the story. Beyond that, not shown on this page, we have our branch-based business that is going exceptionally well and then we have Klarfeld which was a legacy RIA that we acquired, which is working closely with the private bank at this point. But when you add that all together, the kind of AUM kind of assets that we have in what we refer to as client assets, which includes transactional balances is about $60 billion and kind of core AUM of that is about half of that. And so that now is a number that's growing very nicely across kind of all those three sectors. So we have the private bank growing, we're finding an ability to rejuvenate Klarfeld growth and then the branch business is running very, very nice and achieving strong growth. So we're excited that that wealth fee line can continue to hit new records kind of quarter after quarter as it did in 2025. Brendan, you can provide more color. Brendan Coughlin: Yes, sounds good. On the private, I'll unpack both of them very quickly. On the private banking side, you just want a strategic point to make. It's hard to totally separate the adding of new talent from the referrals coming from the banking teams that we hired because you need them both in place for either of them to happen. And once you get the new talent in, it is true that 80 to 90% of their previous book will follow them over. And we have seen that, and we've actually seen better performance than that on most of our teams that we've lifted out. But they also have new productivity bringing in their own clients on the wealth side, but then they're referring them back to the bank. So this is a by direct referral model. On the banking side, we have seen an acceleration of referrals as we've got high-quality wealth teams on through 2025. We expect that to continue, into 2026. At a healthy clip. So as the business gets more granular, as we convert some of the business banking clients into personal banking at the right wealth teams, we expect to continue the acceleration of new business flow coming from that into these new wealth teams. And we expect, you know, we've been doing one to two teams a quarter of new lift-outs. I would expect us to be in that range over the course of 2026 as well. So a supplement of accelerating referrals adding new teams, new teams bringing their back books plus new teams bringing new business and hitting the market hard. On the mass affluent front, about 55% of our fee income or our AUM, I should say, is actually in the branch-based business. And about 60% of our fee income is from the mass affluent business. So that business grew in 2025 by 15% on the AUM side and 25 on the fee income side. And the effective rate of revenue on the mass affluent business is roughly twice of that of the private bank. So you're getting significant profitability jaws by growing that business well. We had record referrals coming from our retail bank. We've had an overhaul of talent in our advisors that sit in the branches. We've grown that advisor base by above 50 advisors in 2025. We expect that to continue. So we're seeing sort of, all those rise of the rising tide, the wealth brand that we're building and the capabilities that we're building are coming through in all the client sent segments. We're getting a real strong uptick from Don's business as the commercial team has more confidence in the teams that we bring on. Your comment about the bull market, it is true. Bull market helps. Market betas help. About a third of our private banking revenue uplift was driven by market betas. But you can't capture that market beta unless you acquire the customers to begin with. So there's a bit of a virtuous circle here that's happening here as we're getting outsized new customer growth, outsized talent growth, and catching the market beta as it moves from whatever firm they exited over to. So we feel really pleased with where we're at and we expect continued positive momentum. Across all segments. Have another question, Gerard? Gerard Cassidy: Yes. As a follow-up, taking a step back, Bruce, for a second. Obviously, you've grown the company and you've painted a very strong organic growth picture for this year. But you've grown successfully through timely acquisitions, whether it was investors in 2022 of the HSBC branches as well as JMP, With the regulatory environment being very supportive of consolidation, can you give us your big picture view of how you think shaping up in opportunities for citizens over the next couple of years? Bruce Van Saun: Yeah, I'd say, and I said this in my open prepared remarks that right now we have such great organic growth opportunities that that's our focus. And so we're not going to run out and knee jerk up the windows open, it might close, we should try to hunt around and find a deal to do. I think the better course of action here is to make sure that, you know, the private bank stays on its trajectory and we really make that as sustainable great business. That in effect was our acquisition. When you look at the accretion that's coming from it, we took a risk and took spend some startup capital and it's working out spectacularly well. And then reimagine the bank as another big effort that is involving many of our top talent across the bank to make that work. And so just from a pure bandwidth standpoint, we wanna make sure that these things are hardening and maturing and on their way to success before we kind of step back and think about anything that would be inorganic. There might still be opportunities to do kind of some of the little kind of business line ads that we've done in the past, such as an m and a boutique. We have these lift-outs that we're doing, but that's pretty much where our focus will be this year. Gerard Cassidy: Appreciate the insights. Thank you. Operator: Our next question comes from Chris McGratty with KBW. Your line is open. Chris McGratty: Great. Thanks for fitting me in. Good morning. The 16% to 18% back half of next year ROE guide, looking at our numbers of consensus, we're call it, a little bit closer to 15. I hear you on the 50 basis points, and I and the combination of revenues, credit expenses probably gets you to the low. Interested in kind of a gut check on our math and also to get firmly into the range, is it about the expense growth rate from Reimagine the bank? Moderating or is it something else? Thanks. Bruce Van Saun: No, I'd say, again, we think we can hit get into that low end of that range kind of by the end of the year. It's not a full-year forecast for '27, just to be clear. And then when we look out to the next year in '28, that's when we can fully deliver that. So we're on the journey. We think we made some strides this year. I think the acceleration again you know, do the math on what the EPS growth is and it's very significant based on this guide that'll make another big step forward in '26 in that ROTCE performance and then we tend to peak in the fourth quarter of every year, it tends to be a very seasonally high year. So our like just like this year, we were above the year average with a twelve two exit rate in '26, we'll end up the fourth quarter will be a higher number than our year average and then '27 kind of the same thing. So, see a path getting there, and I think it's really just driving these initiatives, having the NIM continue to expand everything that we put in our guide. Chris McGratty: Great. And then just a quick follow-up on reserves. I hear you on the moderating credit costs. If we compare the reserves adjusted for the balance sheet optimization, I guess, are we relative to CECL day one? Bruce Van Saun: Yeah. I you know, there's a number of things. We had know, the non-core rundown. We had some loan sales within student. And then we did the investors acquisition. So like there's a whole series and then a lot of BSO, but I think Annoy, correct me if I'm wrong, I think it's about one ten ish. Yeah. Would be the CECL day one. So it actually was one mid-40s, 45 or so. The CECL day one. But the things that we talk about is really having a very disciplined risk appetite and continuing to improve the overall credit risk profile. We brought that 145 back down to about 110. And so to have to be in the low 150s at this point still it shows a fair amount of conservatism and a very healthy level of reserves. Chris McGratty: Great. Very helpful. Thanks, Bruce. Okay. Operator: Our last question comes from Ken Usdin with Autonomous Research. Your line is open. Ken Usdin: Apologize for just one quick one. Just bringing everything together on the private bank, you guys continue to point out Slide 24, the impact of the private bank on overall expense growth. So 1.8% of the 4.5 ish this year. To your points about where growth is and where growth comes from, do we get through this year and get to kind of a lower natural growth incremental rate from the private bank? Or do you just kind of see what the opportunity set is as you look further out and potentially then move that to other potential investments? Thanks. Bruce Van Saun: I think there's still more build for the private bank. And the other thing I would say Ken is not only do we have a very robust total revenue growth outlook for 2026, we have a similarly robust output outlook for '27. So when you think about, if you're growing your top line around 10% and you grow your expenses at 4.5%, you're delivering massive positive operating leverage. And the good news there is these are very prudent targeted investments in terms of building a great private banking franchise continuing to strengthen and invest in the commercial bank in these expansion markets and how we're covering private capital. And so you know, that seems appropriate to us. That we can kind of have our cake and eat it too as long as this really strong revenue outlook continues and you can deliver big positive operating leverage, big growth in EPS every year, big improvement in ROADSY and you're not shorting the pot and playing small ball, you're actually continuing to think about ways to grow your business and grow your franchises so that you have a medium term that continues to have a very positive outlook. So that's how we think about it. Ken Usdin: Got it. Thanks, Bruce. Bruce Van Saun: Okay. All right. I think that's all the questions that we have in the queue. So thanks for dialing in today. We really appreciate your interest and your support. Go out and have a great day. Thank you. Operator: Thank you for your participation. Participants, you may disconnect at this time.
Operator: Good morning, ladies and gentlemen. Welcome to the Fourth Quarter Results Teleconference for The Travelers Companies, Inc. We ask that you hold all questions until the completion of formal remarks, at which time you will be given instructions. As a reminder, this conference is being recorded on January 21, 2026. At this time, I would like to turn the conference over to Ms. Abbe Goldstein, Senior Vice President of Investor Relations. Ms. Goldstein, you may begin. Abbe Goldstein: Thank you. Good morning, and welcome to 2025 results. We released our press release, financial supplement, and webcast presentation earlier this morning. All of these materials can be found on our website at travelers.com under the investors section. Speaking today will be Alan Schnitzer, Chairman and CEO; Dan Frey, CFO; and our three segment presidents, Greg Toczydlowski of Business Insurance, Jeffrey Klenk of Bond and Specialty Insurance, and Michael Klein of Personal Insurance. They will discuss the financial results of our business and the current market environment. They will refer to the webcast presentation as they go through prepared remarks, and then we will take your questions. Before I turn the call over to Alan, I'd like to draw your attention to the explanatory note included at the end of the webcast presentation. Our presentation today includes forward-looking statements. The company cautions investors that any forward-looking statement involves risks and is not a guarantee of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our earnings press release and in our most recent 10-Q and 10-Ks filed with the SEC. We do not undertake any obligation to update forward-looking statements. Also, in our remarks or responses, we may mention some non-GAAP financial measures. Reconciliations are included in our recent earnings press release, financial supplement, and other materials available in the Investors section on our website. And now I'd like to turn the call over to Alan Schnitzer. Alan Schnitzer: Thank you, Abbe. Good morning, everyone, and thank you for joining us today. We're pleased to report excellent fourth quarter and full-year results. A strong and broad-based performance across both underwriting and investments. For both periods, the bottom line results were driven by very strong underlying underwriting income. Particularly given their written margins remain attractive, this is a durable dynamic. For the quarter, we earned core income of $2.5 billion or $11.13 per diluted share, generating core return on equity of 29.6%. Underwriting income of $2.2 billion pretax increased 21% compared to the prior year quarter, benefiting from higher underlying underwriting income, higher favorable prior year reserve development, and a lower level of catastrophe losses. The underlying result was driven by strong net earned premiums and excellent margins. The underlying combined ratio improved nearly two points to 82.2%. Underwriting results were strong in all three segments. Our high-quality investment portfolio also continued to perform well, generating after-tax net investment income of $867 million for the quarter, up 10%, driven by strong and reliable returns from our growing fixed income portfolio. Our terrific underwriting and investment results, together with our strong balance sheet, enabled us to return $1.9 billion of capital to shareholders during the quarter, including $1.7 billion of share repurchases. Importantly, at the same time, we continue to make significant strategic investments in our business. Even after this deployment of capital, adjusted book value per share was up 14% compared to a year ago. Turning to the top line, through disciplined marketplace execution across all three segments, we grew net written premiums to $10.9 billion in the quarter. In business insurance, we grew net written premiums to $5.5 billion. Excluding the property line, we grew domestic net written premiums in the segment by 4%. As I shared last quarter, the declining property premium is a large account dynamic. We'll continue to be disciplined in terms of risk selection, pricing, and terms and conditions. Renewal premium change in business insurance was 6.1%. Renewal premium change in auto, CMP, and umbrella remained in the double digits. Excluding the property line, renewal premium change came in strong at just over 8%, including workers' comp, which continues to be low single digits positive. Given the attractive returns, we were pleased that retention in the segment remained strong at 85%. In bond and specialty insurance, we grew net written premiums to $1.1 billion with excellent retention of 87% and positive renewal premium change in our high-quality management liability. In our industry-leading surety business, we grew net written premiums from a very strong level in the prior year quarter. In personal insurance, net written premiums of $4.2 billion reflected continued strong renewal premium change in homeowners and higher new business in auto. You'll hear more shortly from Greg, Jeff, and Michael about our segment results. Before I turn the call over to Dan, I'd like to take a step back and talk about what's driving this performance and what's ahead. About ten years ago, we embarked on an innovation strategy designed to position our business to grow with industry-leading returns with low volatility. As you can see on Slide 18 of our webcast presentation, over the past decade, we've grown our top line at a compound annual rate of 7% while improving our underlying profitability by almost eight points. Notwithstanding a significant increase in our technology spending, that improvement in underlying profitability includes a three-point or 10% improvement in our expense ratio. As a consequence of all that, compared to ten years ago, underlying underwriting income was more than four times what it had been. Our cash flow from operations has more than doubled, and our investment portfolio has grown by 50% to more than $100 billion. As you can see on Slide 19, over that same period, core return on equity has averaged more than 1,000 basis points over the ten-year treasury at industry-low volatility, and we've grown earnings per share on average by 12%. In short, the execution of our strategy has been exceptional. We think about all we think about that chapter as innovation one point o. Our success with innovation one point o is the result of having done three difficult things very well. Identifying the initiatives that really matter, and passing on the merely good ideas that don't executing effectively, and capturing the value of what we built. Over the decade, we developed a competitive advantage of an innovation skill set. Now we're bringing all that hard-won know-how to innovation two point o at Travelers. Powered by AI, and not too far off quantum computing, the P&C industry is well-positioned to benefit from AI across the entire value chain. This generation of AI can understand and on the complex stakeholder interactions, well-defined processes, data-intensive workflows, and massive amounts of unstructured data that characterize our industry. It gains compound over many, many interactions. In that context, Travelers is particularly well-positioned. As an industry leader, we bring differentiating domain expertise. Because AI amplifies existing strength, leaders in the domain are best positioned to use it to drive improvement. In addition, we have decades of high-quality data from millions of transactions and interactions and the scale to invest at significant levels as AI and technology continue to segment the market. We have thousands of engineers, data scientists, and analysts building AI and other sophisticated technology solutions. Dozens of scale generative AI tools are already in production. Millions of transactions are now automated. Within 20,000 of our colleagues use AI tools on a regular basis. And AgenTik AI isn't a future aspiration. It's embedded in our business operations today. Last week, we at Anthropic announced a partnership to empower 10,000 of our engineers, data scientists, analysts, product owners with personalized context-aware and integrated AI assistance. This initiative will enhance and accelerate the development of software, analytics, and predictive models. In extensive testing, we achieved significantly improved engineering output, and meaningful productivity gains. We expect that this will result in faster and more cost-effective delivery of new capabilities across Travelers. Everything from product development, the new business prospecting, to underwriting speed and quality, agent and customer service, benefiting our business, our customers, and more, and our distribution partners. In our claim organization, more than half of all claims are now eligible for straight-through processing. With customers adopting straight-through processing about two-thirds of the time. Another 15% of all claims are processed with advanced digital tools. All of those percentages are growing. To accommodate customers who still prefer to call in to report a claim, just last week, we launched a natural language generative AI voice agent takes first notice of loss by phone. Early customer adoption is exceeding our expectation. The results are tangible. In our claim organization, investments we've made including in automation, straight-through processing, and analytics, refine indemnity payouts and drive operational efficiencies. It's worth pointing out that the efficiency gains in our claim organization come through loss adjustment expense benefiting the loss ratio. As just one example, our claim call center population is down by a third. And this year, we'll be consolidating four claim call centers down to two. And, of course, we're deploying AI broadly across the business. Other use cases enhance underwriting decision quality and efficiency, and improve the experience for customers, agents, brokers, and employees. You'll hear some examples from Greg, Jeff, and Michael. We're so early in this transformation, which means the benefits more effective underwriting, improved operating leverage, and profitable growth will continue to build. To sum it up, our results this year and over time reflect the power of our earnings engine. Fueled by the disciplined execution of our strategy. For the full year, core income was up 26% to $6.3 billion or $27.59 per diluted share. Generating core return on equity of 19.4%. And during the year, we grew adjusted book value per share by 414% after returning $4.2 billion of excess capital to shareholders and investing more than a billion and a half dollars in cutting-edge AI and other technology initiatives. Our operational and financial success in the face of another year of elevated catastrophe losses for the industry supports our ability to be there for our customers. In 2025, we handled a million and a half claims, that's about one every twenty seconds. And paid out more than $23 billion in claim payments. We also met our objective of closing 90% of claims arising out of catastrophes within thirty days. 2026 and in future years, we'll be there to help our customers and communities recover, and to enable individuals and businesses to thrive. Looking ahead, we're also very well positioned to continue generating substantial shareholder value. The durability of our strong underlying business performance provides a powerful foundation for continued strong bottom line results, leading returns, and strong cash flows. Operating from this position of strength, we remain highly confident in the outlook for Travelers in 2026 and beyond. And with that, I'm pleased to turn the call over to Dan. Dan Frey: Thank you, Alan. Core income for the fourth quarter was $2.5 billion and core return on equity was 29.6%. As we once again delivered excellent financial results on a consolidated basis and in all three segments. The full-year underwriting results were also excellent, on both an underlying and as-reported basis. And net investment income was once again higher than a year ago. The strong fourth-quarter finish brings full-year core income to $6.3 billion and full-year core ROE to 19.4%. In Q4, we generated higher levels of written and earned premiums compared to a year ago, while delivering excellent combined ratios on both the reported and underlying basis. At 82.2%, the underlying combined ratio marked its fifth consecutive quarter below eighty-five. The combination of higher premiums and the improved underlying combined ratio led to a 15% increase in after-tax underlying underwriting income. That brings the full-year after-tax underlying underwriting result to $5.5 billion, up 23% from the prior year. The growth in underlying underwriting income in recent years is worth an extra minute of commentary. In 2022, we reported a very strong $2.1 billion after tax. Through the successful and disciplined execution of our strategy, we grew that figure to $3.2 billion in 2023, and to $4.5 billion in 2024 and now to $5.5 billion for 2025. Those earnings are what drive strong cash flow from operations. Which, after averaging about $4 billion for the ten years from 2011 through 2020, surpassed $9 billion in 2024, and reached $10.6 billion in 2025. Expense ratio for the fourth quarter was 28.4%. Bringing the full-year expense ratio to 28.5% as expected. Continue to expect the expense ratio for 2026 to be right around 28.5%. Catastrophe losses in the quarter were $95 million pretax. Turning to prior year reserve development. We had total net favorable development of $321 million pre-tax in the quarter with all three segments contributing. In Business Insurance, net favorable PYD of $25 million was driven by favorability in workers' comp. In Bond and Specialty, net favorable PYD of $30 million was driven by better than expected results in Fidelity and Surety. Personal insurance had $86 million of net favorable PYD, with favorability in both auto and home. After-tax net investment income of $867 million increased by 10% from the prior year quarter. Fixed maturity NII was again the driver of the increase, reflecting both the benefit of higher invested assets and higher average yields. Driven by the strong cash flows I referenced earlier, during 2025, we grew our investment portfolio by approximately $7.5 billion to $106 billion. As of December 31, new money rates were about 70 basis points above the yield embedded in the portfolio. Terms of our outlook for fixed income NII for 2026, including earnings from short-term securities, we expect approximately $3.3 billion after tax. Beginning with about $800 million in the first quarter and growing to about $870 million in the fourth quarter. As with underwriting income, the growth in investment income over the past several years has been significant. Our 2026 outlook represents nearly twice as much fixed income NII as we delivered in 2021 just five years ago. Page 22 of the webcast presentation provides information about our January 1 catastrophe reinsurance renewal, and we're very pleased with the changes for 2026. Our long-standing CAT XOL treaty continues to provide coverage for both single cat events and the aggregation of losses from multiple cat events. The per occurrence loss deductible is unchanged at $100 million and for 2026 we dropped the attachment point to $3 billion compared to the $4 billion attachment point we had in 2025. We believe in all perils cat aggregate is the most efficient way to protect the balance sheet. And the combination of our industry outperformance refined reinsurance structures, and more favorable reinsurance pricing have allowed us to meaningfully improve our coverage with only a modest increase to our total ceded premium costs. We also renewed the enhanced casualty reinsurance program first introduced for 2025. We were once again able to purchase working layer coverage a roughly margin neutral basis. On page 23 of the webcast presentation, have again provided both a summary of the seasonality of our cat losses over the prior decade and a view of our cat plan by quarter for 2026. As you can see, the 2026 cat plan in terms of combined ratio points is higher than both the five and ten-year averages. As a reminder for your modeling in terms of seasonality, as you can see from the data, the second quarter has historically been our largest cat quarter. Also of interest for 2026, we continue to value our relationship with Fidelis. And are very pleased to have once again renewed our 20% quota share with them. The renewal includes the same loss ratio cap we've had in place since the quarter share began in 2023. Interest rates decreased during the quarter as a result, our net unrealized investment loss decreased. From $2 billion after tax at September 30 to $1.5 billion after tax at December 31. Adjusted book value per share, which excludes net unrealized investment gains and losses, was $158.1 at year-end, up 14% from a year ago. Turning to capital management. We returned $1.9 billion of capital to our shareholders this quarter. Comprising share repurchases of $1.65 billion and dividends of $244 million. In our prepared remarks last quarter, we indicated that we expected to execute roughly $1.6 billion of share repurchases in the 2026. Including the use of about $700 million from the sale of Canadian operations which did close as planned on January 2. Even with the increased level of share repurchases we just executed in Q4, given the strong finish to the 2025 year, we now expect repurchases of around $1.8 billion in Q1. Of course, the actual amount and timing of repurchases will depend on a number of factors, including cat events and other quarterly earnings impacts, as well as other factors we disclose in our SEC filings. I'd like to make one other comment on capital management to help with your models. Given the growth we've generated over the past several years, and the outlook for continued growth, we're now more likely to issue debt every year assuming we're comfortable with market conditions. Our recent history has been to issue debt every other year. Annual debt issuance allows us to maintain a more consistent debt capital ratio. Recapping our results for 2025, we're very pleased to have delivered net and core income of $6.3 billion and core return on equity of 19.4%. We ended the year with our all-time high in book value per share and with our largest investment portfolio ever. In short, we're extremely well-positioned for 2026 and beyond. And with that, I'll turn the call over to Greg for a discussion of business insurance. Greg Toczydlowski: Thanks, Dan. Business Insurance had another very strong quarter. Rounding out another terrific year in terms of financial results execution in the marketplace, and progress on our strategic initiatives. Segment income for the quarter was nearly $1.3 billion and up more than $100 million from the prior year quarter. Improvement from the prior year was driven by higher net investment income, higher favorable prior year reserve development, and lower catastrophes. The all-in combined ratio of 84.4% was a great result. About a point better than the prior year quarter. We're once again particularly pleased with our exceptional underlying combined ratio of 87%. The underlying loss ratio was the second-best quarterly result ever. Trailing only last year's fourth quarter record. Expense ratio remained excellent at 29.3%. Turning to the top line, net written premiums reached an all-time fourth-quarter high of more than $5.5 billion. We grew our leading select and middle market business by 43%, respectively. These two markets make up almost three-quarters of our net written premiums for business insurance in the quarter. We saw a decline in national property premiums reflecting our disciplined execution in terms of risk selection, pricing, and terms and conditions. Excluding the property line, domestic net written premiums were up 4%. As always, our focus is on writing business that meets our risk profile and underwriting standards. And where we can get an appropriate price with terms that reflect the exposures perils. As for production across the segment, pricing remained attractive with renewal premium change of just over 6%. Excluding the property line, RPC was strong at 8%. Renewal premium change was positive in all lines, including property. And double digits in CMP, umbrella, and auto. Retention remained excellent at 85% and new business of $675 million was up 6% from the prior year quarter. We're pleased with these production results and our field's execution of our proven segmentation strategy. Across the book, pricing and retention results this quarter reflect excellent execution, aligning price terms and conditions with environmental trends for each line. As for the individual businesses, in select, renewal premium change and renewal rate change both remain strong for the quarter and about flat with third-quarter levels. Retention was up two points from the fourth quarter of last year as we continue to wind down our CMP risk return optimization efforts. Lastly, new business was up 6% from the fourth quarter of last year to a healthy $139 million. In our core middle market business, renewal premium change remained attractive at 6.6%. Price increases remain broad-based as we achieved higher prices on about three-quarters of our middle market accounts. And at the same time, the granular execution was excellent. With meaningful spread from our best-performing accounts to our lower-performing accounts. To a large degree, the sequential decline in RPC was impacted by the property line. Where RPC remains positive healthy, and reflective of attractive returns. We're pleased that middle market retention remained exceptional at 87% and new business of $395 million was up 11% to an all-time fourth-quarter high. As we close out 2025, let me provide a little color on full-year results before turning the call over to Jeff. We're very pleased to report segment income of nearly $3.7 billion, an underlying combined ratio of 88%, and top line of $22.7 billion. This was the third year in a row where we delivered an underlying combined ratio of less than 90%. As for production, renewal premium change in retention both remained historically high. While new business premiums approaching $3 billion reached an all-time best. These sustained exceptional results are a direct reflection of our strong value proposition. As well as the successful execution of our thoughtful and deliberate strategies. Beyond our execution excellence, we're pleased with the contributions we're getting from our ongoing strategic initiatives. The decision support tools were put in the hands of our underwriters at the point of sale including models that derive risk characteristics, refined technical pricing, and summarize historical model loss experience results in better risk selection, pricing, and terms and conditions. In addition, we're encouraged by the impact we're seeing from our product and user experience initiatives. Including how well they've been received in the market. Our new BOP product is now fully rolled out and our new auto product is live in forty-six days. Both products contain industry-leading segmentation which contributes to profitable growth. We also continue to enhance the insights around our submissions based on quality and appetite that allow our underwriters to focus on those new business opportunities that we most want to add to the portfolio. We're pleased with our progress with GenAI. We're building and executing a robust portfolio of Gen AI initiatives that will enable enhanced risk assessment and selection ultimately improving loss experience as well as drive gains in productivity and efficiency and improve our industry-leading experience for our agents and brokers. As just one example, we've recently rolled out GenAI agents to efficiently mine both internal and external data sources to better understand and synthesize the risk characteristics and ensure appropriate business classification. This capability both accelerates the underwriting process and results in improved risk classification and segmented pricing. To sum up, we feel terrific about our performance and financial results in 2025. We're excited about what we're investing in for the future and we have the best people in the business. And they're not only executing with excellence in the market today, but they're also helping to shape the transformation of our industry. In short, we're well-positioned for continued profitable growth. With that, I'll turn the call over to Jeff. Jeffrey Klenk: Thank you, Greg, and good morning, everyone. Bond and Specialty ended the year with another strong quarter on both the top and bottom lines. In the fourth quarter, we generated segment income of $236 million and an excellent combined ratio of 83%. A strong underlying combined ratio of 85.7% was a little more than a point better than the prior year quarter. Turning to the top line, we grew net written premiums by 4% in the quarter to $1.1 billion. In our high-quality domestic management liability business, renewal premium change was 2.8%. While retention remained strong at 87%. We're very pleased with the progress we've achieved to improve pricing through our purposeful and segmented initiatives while continuing to deliver strong retention. As we expected, new business was lower than the '24. As a reminder, this is the final quarter of year-over-year new business impact from our Corvus acquisition. With most Corvus production now reported as renewal premium. Turning to our market-leading surety business, net written premiums increased from the very strong prior year quarter reflecting strong demand for our products and unparalleled value-added services. We're pleased to have once again delivered strong results in Bond and Specialty this quarter. Reflecting on the full year, we're also very pleased with the performance of our business in 2025. Our management liability business, we successfully navigated ongoing soft market conditions and were among the first carriers to drive higher pricing to improve product returns where needed. Despite market headwinds, we drove profitable account and premium growth by leveraging our investments in advanced analytics, including the automated delivery of next-generation sophisticated pricing models. Our AI investments to automate submission intake for new business, reduced our time to ingest submissions from hours to just minutes, and we recently extended automation capabilities to renewal workflows. We've also made important investments in sales effectiveness, and enhancements to our product offerings. In capitalizing on our Corvus acquisition, we've successfully extended cyber risk services to customers across our portfolio. This includes always-on threat monitoring with same-day alerts, continuous dark web surveillance, twenty-four seven to a tailored policyholder dashboard, and personalized security consultations from our in-house cyber experts. As we've expected, these capabilities are helping our customers to more effectively manage cyber risks and are mitigating our exposure to evolving cyber vulnerabilities. In our surety business, we drove solid growth by capitalizing on our industry-leading expertise, and premier value-added service offerings. We've entered into new and expanded distribution arrangements domestically and internationally, that position us for continued growth. We've more closely aligned and integrated our outstanding Canadian surety operation which contributes to our position as the leading surety in North America. And in our commercial surety flow business, we've leveraged AI to enhance distribution submission and fulfillment experiences, improving efficiency, and fueling growth. All of these investments and initiatives and the terrific execution by our outstanding team drove another strong year of profitable growth in Bond and Specialty and we're excited about the opportunities that lie ahead. And with that, I'll turn the call over to Mike. Michael Klein: Thanks, Jeff. I'm very pleased to share that personal insurance generated segment income of more than a billion dollars in the quarter, and a combined ratio of 74%. Both results reflect the strong underlying fundamentals of our business. For the full year, personal insurance generated over $2 billion of segment income and combined ratio of 89.5%. These results improved compared to the prior year, notwithstanding significant losses from the California wildfires. Reflecting the strength of our diversified book of business and our disciplined approach to selecting pricing and managing risk. Net written premiums in the fourth quarter were comparable to the prior year, reflecting strong renewal premium change in homeowners and other, and higher auto new business premiums. Full-year net written premium increased 2% to a record $17.4 billion. In auto, the fourth-quarter combined ratio was 89.4% reflecting a strong underlying combined ratio and favorable net prior year development. The underlying combined ratio of 92.2% improved just over four points compared to the prior year quarter. Driven by continued favorable frequency across coverages, with sustained moderation and severity partially offset by the impact of continued moderation in earned pricing. This quarter's underlying combined ratio included a three-point benefit related to the re-estimation of prior quarters in the current year. The full-year auto combined ratio of 85.7% represents improvement of over nine points compared to the prior year. As we experienced favorability in both frequency and severity. In homeowners and other, the fourth-quarter combined ratio of 60.3% improved by 7.5 points compared to the prior year quarter. Primarily as a result of improvement in the underlying combined ratio and lower catastrophe losses. The underlying combined ratio of 59.9% improved by 5.5 points compared to the prior year quarter, reflecting the impact of our actions to achieve target returns. The year-over-year favorability was primarily related to the benefit of property earned pricing as well as favorability in non-catastrophe weather, and non-weather losses. Stepping back, the 2025 full-year property combined ratio of 93% was a notable improvement compared to the prior year. This reflects our actions to manage exposures in high catastrophe risk geographies, along with favorable non-catastrophe weather losses. Turning to production. Our results reflect continued disciplined execution, to position our diversified portfolio to deliver long-term profitable growth. In domestic auto, retention of 82% increased slightly from recent quarters. Renewal premium change of 2.2% continued to moderate as expected. And will continue to do so in 2026. Reflecting our sustained profitability and our focus on generating growth. Auto new business premium was up year over year, as new business momentum continued in states less impacted by our property actions. In domestic homeowners and other, retention of 84% remained relatively consistent with recent quarters. Renewal premium change remained strong at 16.7%. As we concluded our efforts to align replacement cost with insured values. We continue to expect RPC to drop into the single digits beginning in early twenty twenty-six reflecting improved profitability, and values that have now largely aligned with replacement costs. Quarterly new business premium and policies enforced declined compared to the prior year. These production results reflected the deliberate choices we've made to improve profitability and manage volatility in property. Over the past few years, we've executed a granular strategy to reposition our portfolio to optimize our risk return profile. The results have been meaningful. We reduced property policies in force by 10% with most of that decrease coming from high cat geographies, reflecting disciplined risk selection, and concentrated actions to manage volatility and reduce local market aggregations of exposure. While these actions impacted auto policies in force, the impact was muted. As we grew auto in many of the markets less affected by our property actions, demonstrating our ability to sustain a competitive position where portfolio economics remain favorable. Overall, the net impact of our actions is shifting the portfolio back toward a better balance between auto and property. Looking ahead to 2026, as we wind down many of our actions in property, we're focused on maintaining this progress by deploying property capacity in support of writing package business. The strength of our 2025 results reflects years of disciplined execution and strategic investment. Since year-end 2020, net written premiums grew $6 billion to $17.4 billion while we generated an average combined ratio of 98%. Over that same period, our domestic auto grew both in terms of PIF and premium. And in our homeowners portfolio, our actions to address profitability, geographic distribution, and terms and conditions have meaningfully improved risk-adjusted returns. In addition, we continue to invest in and deploy strategic capabilities. As just one example, we're leveraging artificial intelligence to make our renewal underwriting process more effective and efficient. We start with a proprietary AI-enabled predictive model that scores every account in the property portfolio. Based on this score, accounts with the highest probability of loss are presented to underwriters for review. From there, our renewal underwriting platform leverages generative AI to consolidate data into summaries of relevant actionable information for our underwriters to evaluate. With early results showing more than a 30% reduction in average handle time. Net result is that our underwriters focus their efforts on decisions most likely to improve profitability, and do so more efficiently. To sum up, to the continued diligent efforts of our team and with support from our distribution partners, personal insurance continues to deliver on a long track record profitably growing our business over time. Now I'll turn the call back over to Abbe. Abbe Goldstein: Thanks, Michael, we are ready to open up for Q&A. Thank you. We will now begin the question and answer session. We also ask that you limit yourself to one question and one follow-up. For any additional questions, please re-queue. And your first question comes from Gregory Peters with Raymond James. Please go ahead. Gregory Peters: Good morning, everyone, and as you said in your comments, you did have a great year, so congratulations. Alan Schnitzer: Thanks, Chris. Gregory Peters: I wanted to thank you for the commentary around the technology. You know, I've been asking you about this off and on. Like others have for a couple of years now. In Dan's guidance for the expense ratio, I think he said it's gonna be flat in twenty twenty-eight point five versus what it was in '25 versus the same in '24. So I guess what I'm trying to reconcile is you know, the emphasis on growing the strategic investments. You're harvesting efficiencies, with these technology investments. Just wondering when the structural shift in the expense ratio might materialize. And maybe know, I was looking at you know, the responsible artificial intelligence framework section of your website, maybe you could talk about some of the regulatory and other considerations that might delay some of the expected benefits from your technology spend? Alan Schnitzer: Greg, thanks for the question. I appreciate it. In terms of the expense, I mean, we give you a sort of a year outlook of where we'd like it to be, and that's not something that happens to us. That's something we manage. And we talk a lot about trying to optimize operating leverage. So, you know, in other words, we want the gains from the efficiencies that we're generating and that just gives us a lot of flexibility in the way we run the business. We can let it fall to the bottom line if we want through lower expense ratio, we can continue to invest it in other capabilities. Just gives us the flexibility to manage the business. And as I shared in my remarks, the extent that some of these productivity and efficiency benefits are in the claim organization, you know, those come through loss adjustment expense in the loss ratio. Again, we've got the flexibility there to think about that as an operating leverage component. But just in terms of where those benefits are or where they might arise in the future. In terms of the regulatory environment, from our perspective, it's constructive. We know, we try to make sure that we're using the technology in ways that are thoughtful and careful. And, you know, frankly, we as a company and we through our trade association are on a regular basis working with policymakers to make sure that we're achieving, you know, smart public policy and regulations as it comes to the development and implementation of technology. Gregory Peters: I guess and thanks for the answer. I guess related on the regulatory front, you know, there are an increased example of more examples of regulators becoming more focused on the profitability of the insurance business and particularly the personal lines business. And I'm just curious if you have a view on any regulatory pushback you might be getting on the profit levels in your business and if you think there's anything, you know, bigger issues at play that's gonna spread throughout the country as it relates to that. Alan Schnitzer: Yeah. You know, Greg, we certainly understand the affordability issue and think it's an important one for all of us to be focused on and we are on it. Let me just put the profitability of our personal insurance business into some perspective. We had a good year in '25. We had a good year in 2024, but the two years prior to that our combined ratio was over a 100. And if you look at the last five years, you know, it was 98, I think. So, you know, that would be below our target returns. And so this really is a business that you need to look at and manage over a period of time. And I think when you think about personal insurance results over a period of time, I mean, certainly, in our case, you wouldn't say that we're over-earning. So we, you know, we are trying to get the right price on the risk and earn a fair return for helping customers manage their risk. Abbe Goldstein: Your next question comes from the line of Ryan Tunis with Cantor Fitzgerald. Please go ahead. Ryan Tunis: Hey. Thanks. Good morning. Alan, in your prepared remarks, I think you mentioned that in business insurance, renewal premium change ex property was a little over 8%. I think that number was 9% last quarter. Just curious how much of that one-point deceleration is attributable to rate versus exposure? Alan Schnitzer: Yeah. So we're looking for the exact breakout, Ryan. It's a little bit of both. Dan Frey: Yeah. I mean, Ryan, if you look at the middle market webcast, you can see exposure was down. You can do the math between rate and RPC. It's not perfect math. So to Alan's point, a little bit of an exposure and a little bit of rate. Got it. Ryan Tunis: And then, I guess, just on the property side, clearly, it was a bit of a challenging year in the large account space. Just from a trading standpoint. Just curious how you guys are thinking about overall rate adequacy in national property headed into 2026. Alan Schnitzer: Yeah. Ryan, it's a challenging year. I mean, you know, the pricing dynamic is what the pricing dynamic is, but to a very large degree, that's where reflective of the profitability of that business. I mean, that business has been achieving, you know, rate gains over a very long period of time and it's gotten to a point where the profitability was strong. So we don't really look at a macro level and look at it and say it was challenging and appropriate. It's you know, it's not you can certainly find examples of accounts and we'll scratch our head and say, gee, we're surprised that got priced that way or and, honestly, more than price, we're surprised sometimes with the terms and conditions that we see given away in the marketplace that we're not willing to do. But, you know, so writ large, we look at it and we say, like, it's not so crazy when you think about where the returns are. Abbe Goldstein: Your next question comes from the line of David Motemaden with Evercore. Please go ahead. David Motemaden: Hey. Thanks. Good morning. Dan, just had a follow-up just on the capital return. So hear you loud and clear on the $1.8 billion that's expected in the first quarter. But just given what sounds like a change in terms of just how you guys are managing the debt load, and what looks like, you know, a billion dollars of excess at the holding company now before the Canada proceeds and pretty healthy statutory capital levels. Any sort of thought in terms of how we can think about the buybacks throughout the rest of this year outside of 1Q into 'twenty-seven just given the current growth environment? Dan Frey: David, so I'd say not really. I mean, we can't really sit here at the very beginning of the year and give much guidance on what we think buybacks are going to look like in the second, third, and fourth quarters of this year? There's no change in our capital management strategy, and we made these comments, you know, last quarter when we alerted you to the fact that we did expect higher levels of buybacks in at least Q4 and Q1 because we had, as you recognize, reached a point where we're probably carrying a little more capital on the balance sheet than we needed to. But no change in the overall capital management strategy and the rest of the year is gonna be impacted by all the usual things that would impact buybacks. What do cat losses look like? What does overall profitability look like? How do we feel about the growth environment? And we're gonna responsibly manage the capital. Right? We're not looking to hoard capital. We're looking to hold the right amount. And when we have excess, it's not ours, and we're gonna give it back to the shareholders. Alan Schnitzer: The only thing I would add to that, David, is our first objective for every dollar of capital that we generate is to invest it back into the business. David Motemaden: Got it. No. Thanks. That makes sense. And then just as my follow-up, just looking at Slide 23 and the 7.8% expectation for catastrophe losses in 2026. If I just sort of do rough math on the 2025 premium levels, that implies, you know, a little bit above, I think, $3.435 billion, which is above, you know, where you guys have the retention at your XOL, your aggregate. So could you help me understand a little better the moving pieces there then just relatedly, just the cost of that, how much of a drag that might be on BI premium growth in 2026? Dan Frey: Sure, David. Thanks for the question. So I guess I'll start with the second part of it and say, we don't expect it to be much of a drag. In my prepared remarks, we talked about improvements in pricing in the reinsurance environment. And a couple of other things we're doing around the edges that, you know, we don't think the year-over-year impact of ceded premium is gonna be that big a deal in '26. It really importantly, though, what you were getting to in terms of cat load on a percentage point basis and what that might translate into dollars. The thing you gotta remember when you think about the attachment point of the treaty is the first $100 million of every event is ours. So you can't just say if we thought we were gonna have three-point x million dollar billion dollars of cat losses next quarter. Anything over three goes to the treaty. The first $100 million of every event is ours. We said with this treaty, historically, this is really where buy-in tail protection for the balance sheet. That's still true. Clearly, with the $3 billion retention compared to a $4 billion retention, we're a lot closer in on the tail of possibly being able to hit that book. But if we looked at if you look, for example, at if we had that treaty in 2025, we would not have attached that treaty. Abbe Goldstein: Your next question comes from the line of Michael Zaremski with BMO. Please go ahead. Michael Zaremski: Hi. Good morning. My question is around all the great color you gave on technology initiatives. Would you be able to share what you maybe roughly expect your organic headcount growth or shrinkage to be on a percentage basis this year versus, I mean, last year or so? Alan Schnitzer: Yeah, Mike. Yeah. We gave you an example of a narrow view of that in our claim organization in our call centers. We're not gonna get into projecting headcount beyond that. But what I would say is premium per employee is up, thanks to some productivity and efficiency initiatives. And we expect premium per employee to continue to go up. Michael Zaremski: Okay. Got it. That's helpful. Switching gears for my follow-up to you commercial lines. I think we can tease it out based on the comments in the prepared remarks, so maybe you can just tell us in casualty commercial, maybe non-workers' comp, was the change in pricing kind of sequentially? Or what's the trend line looking there? Thanks. Greg Toczydlowski: Yes, Mike. Good morning. That would predominantly be the GL line in the umbrella. And in my prepared comments, shared with you umbrella at double-digit in terms of renewal premium change. What I didn't include was GL. GL, I think, has been running in the mid-single digits in terms of renewal premium change. Those would be the two components outside of the comp. Abbe Goldstein: Your next question comes from the line of Katie with Autonomous Research. Please go ahead. Katie: Yeah. Thank you. Good morning. Alan, you mentioned in your prepared remarks that the strengths seen in underlying underwriting this quarter is a durable dynamic. Guess with pricing momentum seeming to continue to slow down here, can you map out for us what's driving your confidence that those underlying results hold in, in 2026? Alan Schnitzer: Yeah, good morning, Katie. So Dan shared and I shared the trajectory of underlying underwriting income in our prepared remarks, and you can see it in the slides in the webcast. We are a larger and more profitable company today than we have been historically. And thanks to investments that we've made in products, services, experience, capabilities, and so on, we are very confident in our ability to continue writing premium at substantial levels, and we're very happy with the business that we're putting on the book. So when you combine those premium levels with reasonably strong profitability, you get high levels of underlying underwriting income. And if you look at the trajectory, you get a sense of what it's done over the last several years and we're confident it'll continue to be a strong foundation for strong results in the years to come. Katie: And then as a follow-up, I think last year in the fourth quarter, the business insurance underlying loss results included some additional IBNR for casualty lines. Guess, with the net favorable reserve development results this year, that probably seems to be holding in fairly well. But could you give us any additional color there? And let us know if there were any similar additions to IBNR this quarter? Dan Frey: Hey, Katie. It's Dan. So we did say, as you recall from last year, that we were including in the accident year loss pick for 2024, you know, what we called sort of the load for uncertainty related to the casualty lines. I'm pretty sure we said we were doing that again in 2025, and we did do that again in 2025. And just to get the question out of the way, as we head into 2026, our planned loss ratio for 2026 once again includes an uncertainty provision in the casualty space. I would say the casualty loss is generally performed about as we expected, not really better than we had expected. You know, the business insurance workers' comp favorability has really been driven by workers' comp. But long-tail line still in the casualty space, a little bit of uncertainty, so we're gonna stay prudent and stick with that load again in twenty-six. Abbe Goldstein: Your next question comes from the line of Meyer Shields with KBW. Please go ahead. Meyer Shields: Great. Thanks so much, and good morning. I think this is probably for Dan. I know you talked about not having much of an overall margin impact from lowering the catastrophe reinsurance attachment point. Should there be any impact on a seasonal basis? In other words, is there any pressure on first-quarter combined ratio components? Dan Frey: Yeah. I don't think so, Meyer, again, because when we look at our reinsurance program in the aggregate in terms of what we're going to pay out for ceded premium given the pricing dynamic in the reinsurance space and, again, some other changes we made around the margins in a reinsurance program. We think it's gonna have much of an impact. Meyer Shields: Okay. Perfect. Thanks. And just a question for Michael. When you look forward to 2026 and beyond, are you comfortable growing the more capstone state policy counts in line with the overall book, or are we still constraining growth? Michael Klein: Yes. Thanks, Meyer. I think my point in my prepared remarks about deploying property capacity to support package growth but maintaining the progress that we've made implies that certainly at most we would grow pet-prone states in line with the rest of the portfolio, but we do still have some spots where we'll be constrained. So I'd expect in aggregate, the property PIF growth will continue to trail auto as it has been, but both the growth trajectories of both lines should improve. Abbe Goldstein: Your next question comes from the line of Alex Scott with Barclays. Please go ahead. Alex Scott: Hi. Thanks for taking the question. First one is on just capital deployment, maybe a little bit of a follow-up off the question earlier. How are you viewing prospects for M&A relative to organic growth at this point? I mean, the profitability seems really attractive, but the growth obviously, a bit lower. So I'm just trying to gauge if your organic growth isn't quite as attractive to you. Could M&A be a way that you go? Alan Schnitzer: Alex, I'm gonna give you the same answer I've given like, for ten years. I'm sorry for I'm not gonna be the satisfying answer you're looking for. But the answer to that for us is we're always looking for M&A opportunities. And, you know, we've got the capital and we've got the expertise to diligence the deals and find the deals and execute the deals. And we are always looking for attractive inorganic opportunities. But I would have answered that question the same way at any point in the last decade. Alex Scott: Okay. Understood. I guess second one for you on tariffs and just all of a sudden, it seems like maybe a wider range of outcomes again. How does that affect the way that you go about pricing maybe across all your businesses? But be particularly interested in personal auto. Alan Schnitzer: You know, a couple of quarters ago when we first started talking about tariffs, we shared our view that we thought that the impact was gonna be relatively mild for us. And you go back and look at the and we shared a fair amount of commentary about how we got there. And at the time, you know, for lines that are potentially impacted, we did provide a little bit of a little bit of in the loss pick for that. What we've seen so far hasn't even been the relatively modest amount that we expected. Now as the world changes and as the tariff are out there longer, certainly that dynamic could change, but we feel like the provisions that we've made in the loss picks for potentially impacted lines are there to cover it. Abbe Goldstein: Your next question comes from the line of Brian Meredith with UBS. Please go ahead. Brian Meredith: Yeah. Thanks. First one for Michael. I'm just curious, Michael, the personal auto insurance space is getting increasingly more competitive. Some new entrants in the agency space. Maybe you could talk a little bit about those competitive dynamics. And what is gonna enable, you know, Travelers to actually maybe recoup some of the market share you've lost over the last couple of years in personal auto? Given the competitive dynamics in that market? Michael Klein: Yes. Thanks, Brian. I would start with, you know, the marketplace is always competitive. And certainly, you know, I think a lot of the news that you see is around competition in the IA space. The first thing I'd say about that is I think it's a great validation of our strategy to be largely an independent agent carrier for personal lines. And the value of choice and advice in this type of a marketplace. The second thing I would say is we've competed successfully in the independent agent channel for years. We remain confident in our ability to compete successfully in that channel. And I think it really comes down to, you know, a handful of competitive advantages in the space. Certainly, and durability of our relationships with independent agents, our investments in digitization and ease of doing business, and then lastly, and again, I've been talking about this for the last several quarters, the value of our package value proposition for both agents and our ability to deliver balance sheet protection for consumers. Is another key advantage that we have in that space. And again, we're confident in our ability to compete going forward. Dan Frey: Yeah, Brian. It's Dan. I'll just add one more comment in there on the auto space particular. So, you know, last couple of years, we've seen policy count down, you know, but if you looked at the business now compared to what it was, say, five years ago, we're up one of only a very small number of carriers. It's actually got a higher PIF count now than we did five years ago. And our view always again on growth is how you think about growth over time, right? We're not really looking to influence a growth number in the next quarter or even necessarily the next year. What's the right balance of returns? And are you sure that you're growing over time? Brian Meredith: Great. That's helpful. And then Alan, just curious. I'll always welcome your thoughts on the tort environment and casualty trend and what you see here going forward. Anything positive that's developing here that maybe curves that kind of loss trend on tort inflation? Alan Schnitzer: Yeah, Brian. I mean, it continues to be a very challenging environment, and I wish I could say that we saw improvement. It continues to be a pretty challenging environment. What may be a little bit of a bright light is we do see more states reacting to a difficult tort environment. And, you know, certainly, the impact of tort cost is impacting affordability for businesses and consumers. And I think we're seeing that in some states. And so that's, you know, potential positive. The other thing we are seeing more of is disclosure requirements when it comes to third-party with litigation financing, and that's also a very good thing. So we are, you know, continue to put our shoulder into it, and there's more work to do. Brian Meredith: Thank you. Abbe Goldstein: That's all the time that we have for questions. I would now like to turn the conference back over to Ms. Abbe Goldstein for closing comments. Abbe Goldstein: Thanks, everyone, for joining. I know we left several analysts in the queue, but as always, please feel free to follow up with Investor Relations. Thanks, everyone, and have a good day. Operator: This concludes today's conference call. Thank you for participation, and you may now disconnect.
Operator: Welcome to the Old National Bancorp fourth quarter and full year 2025 earnings conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived there for twelve months. Management would like to remind everyone that certain statements on today's call may be forward-looking in nature and are subject to certain risks, uncertainties, and other factors that could cause actual results or outcomes to differ from those discussed. The company refers you to its forward-looking statement legend in the earnings release and presentation slides. The company's risk factors are fully disclosed and discussed within its SEC filings. In addition, certain slides contain non-GAAP measures, which management believes provide more appropriate comparisons. These non-GAAP measures are intended to assist investors' understanding of performance trends. Reconciliations for those numbers are contained within the appendix of the presentation. I'd now like to turn the call over to Old National's Chairman and CEO, Jim Ryan, for opening remarks. Mr. Ryan? Good morning. Jim Ryan: Before we get started, I want to congratulate the Indiana Hoosiers for a perfect season in winning the National College Football Championship. You've made our state incredibly proud. Earlier today, Old National announced strong fourth quarter earnings, marking an exceptional year that set new organizational records for adjusted earnings per share, net income, and the efficiency ratio. Our 2025 results were driven by a focus on the fundamentals: core deposit growth to support loan expansion, positive operating leverage, disciplined credit management, and healthy liquidity and capital ratios. Once again, we showed our unwavering commitment to shareholders, clients, team members, and communities. Our peer-leading fourth quarter profitability was highlighted by an adjusted return on average tangible common equity of nearly 20%, an adjusted ROA of 1.37%, and an adjusted efficiency ratio of 46%. These outstanding quarterly results further reinforce the momentum behind our 2025 record performance that John will discuss later in the call. In 2025, we successfully completed the systems conversion and integration related to our Bremer Bank partnership. This was a major effort executed exceptionally well. I want to thank our team members once again for their relentless focus and hard work throughout this. The conversion reaffirmed the strength of our disciplined integration framework, which truly sets Old National apart. As we have stated, driving tangible value per share growth is a key priority. This past year, we grew tangible book value per share by 15% despite the impact of closing our Bremer partnership, the associated one-time charges, and repurchasing 2.2 million shares in the back half of the year. We remain committed to strengthening tangible book value per share while continuing to drive peer-leading profitability. Looking ahead to 2026, we will maintain the right balance between building capital organically and returning capital through share repurchases supported by our peer-leading return on average tangible common equity. As I mentioned last quarter, the best investment we can make is in ourselves. Our focus remains on organic growth and disciplined capital returns to maximize shareholder value. We started 2026 with strong momentum, and we will continue to strengthen our core fundamentals by investing in talent, technology, and client-facing capabilities. These efforts will ensure we remain strong, scalable, and positioned for long-term success. Thank you. I will now hand the call over to John to read the financial results in more detail. John Moran: Thanks. On slide five, as Jim mentioned, fourth quarter 2025 was a strong finish to a highly successful year marked by records in adjusted EPS and efficiency with peer-leading profitability improvement in already durable credit metrics, and significant capital generation despite closing Bremer, which solidified our position in Minnesota while adding attractive funding in North Dakota. Speaking of our latest partnership, I'd be remiss if I didn't mention that conversion of Bremer was one of our smoothest and most successful integrations ever. For the quarterly details on slide six, we reported GAAP 4Q earnings per share of $0.55. Excluding $0.07 of merger-related expenses, Bremer pension plan termination charges, and the reduction in our FDIC special assessment accrual, adjusted earnings per share were $0.62. A 5% increase over the prior quarter and a 27% increase year over year. Results were driven by stable margin, better than expected growth in fee income, and well-controlled expenses. Importantly, credit improved with an 8% reduction in total criticized and classified loans and low levels of non-PCD charge-offs. Our profitability profile as measured by return on assets and on tangible common equity remain top decile against our peers. Lastly, our capital position has rebuilt quickly with CET one over 11% and we grew tangible book value per share over 17% annualized. On Slide seven, you can see our quarterly balance sheet trends highlighting our strong liquidity and capital. Our deposit growth over the last year has continued to keep pace with asset growth and the loan to deposit ratio is now 89%. We grew tangible book value per share by 4% from 3Q and 15% over the last year even with the impact of the Bremer close absorbing approximately $140 million of merger charges year to date while repurchasing 2.2 million shares since we restarted the buyback in 2025. These liquidity and capital levels continue to provide a strong foundation as we head into 2026. On Slide eight, we show trends in earning assets. Total loans grew 6.4% annualized from last quarter. Production was up 25% and was strong throughout our commercial book. Despite strong production, our pipeline is up nearly 15% from the prior quarter. Higher production levels were again partly offset by strategic portfolio management as evidenced by our lower criticized and classified levels due to payoffs. The investment portfolio was essentially unchanged from the prior quarter with portfolio purchases offset by changes in fair values. We expect approximately $2.9 billion in cash flow over the next twelve months. Today, new money yields are running about 94 basis points above back book yields on securities. The repricing dynamics for both loans and combined with loan growth continued to support stable to improving net interest income and net interest margin over the course of 2026, with the first quarter impacted by two fewer days. Moving to slide nine, we show trends in deposits. Total deposits increased 0.6% annualized in core deposits ex brokered decreased about 3% annualized primarily driven by seasonally lower public funds balances. Noninterest bearing deposits grew to 26% of core deposits from 24% in the prior quarter. Our use of broker deposits increased in alignment with the aforementioned public funds seasonality. Even with that increase, our brokered levels remain below peer levels at 6.7% of total deposits. The 17 basis point linked quarter decrease in our cost of total deposits played out as we expected with Fed cuts in our offensive posture with respect to client acquisition. We achieved an approximate 87% beta on rates in our exception price book in conjunction with the Fed cuts in the quarter. These actions resulted in a spot rate of 1.68% on total deposits at December 31. Overall, we remain confident in the execution of our deposit strategy and we are prepared to proactively respond to the evolving rate environment. Slide 10 shows our quarterly income statement trends. As I mentioned earlier, adjusted earnings per share were $0.62 for the quarter, with all key line items in line or better than our prior guidance. Moving on to slide 11, we present details of our net interest income and margin. Both of which increased as we had expected and guided. Modest margin expansion was supported by deposit repricing. Slide 12 shows trends in adjusted noninterest which was $126 million for the quarter, exceeding our guidance. While most of our fee businesses performed in line with our expectations, we again saw better than expected performance within mortgage and capital markets. In both cases, this was driven by a somewhat more favorable rate backdrop for these businesses. Continuing to Slide 13, show the trend in adjusted non-interest expenses of $365 million for the quarter. Run rate expenses remain well controlled, and we generated positive operating leverage on an adjusted basis year over year with a record low of 46% adjusted efficiency ratio. We realized approximately 28% of the anticipated Bremer cost saves in the fourth quarter. And as a reminder, the saves from Bremer are expected to be fully realized in the first quarter. This is reflected in our 2026 guidance, which I'll get to in a few slides. On slide 14, we present our credit trends. Total net charge-offs were 27 basis points and were 16 basis points, excluding charge-offs on PCD loans. Criticized and classified loans decreased $278 million or approximately 8%, and nonaccrual loans decreased $70 million or approximately 12%. This improvement is reflective of the continued focus on active portfolio management. Notably, in our commercial real estate portfolios, we saw upgrades and payoffs exceed downgrades by a two to one ratio. The fourth quarter allowance for credit losses to total loans, including the reserve for unfunded commitments, was 124 basis points. Down two basis points from the prior quarter, primarily driven by the in criticized and classified loans. Consistent with the third quarter, our qualitative reserves incorporate a 100% weighting on the Moody's s two scenario with additional qualitative factors to capture global economic uncertainty. Lastly, given the increased focus on loans to nondepository financial institutions, we'd like to emphasize as we did last quarter that our exposure is de minimis. Slide 15 presents key credit metrics relative to peers. As discussed in past calls, we have historically experienced a lower conversion rate of NPLs to NCOs as compared to our peers driven by our approach to credit and client selection. That continues to be the case, and we remain comfortable around the credit outlook. On Slide 16, we review our capital position at the end of the quarter. All regulatory ratios increased linked quarter due to strong retained earnings partly offset by robust quarterly loan growth and Bremer merger-related charges. On the GAAP capital front, TCE was up about 20 basis points and tangible book value per share was up 4% linked quarter and 15% year over year. We expect AOCI to improve approximately 11% or $55 million by year-end. Our strong profitability profile continues to generate significant capital which opened the door for capital return earlier this year. As previously mentioned, late in the quarter, we repurchased an additional 1.1 million shares of common stock, taking our total to 2.2 million shares for the year. We don't view growing capital and returning capital as mutually exclusive in 2026. Slide 17 includes updated details on our rate position and net interest income guidance. NII is expected to increase with the benefit of fixed asset repricing and continued growth. Our assumptions are listed on the slide, but as we do each quarter, we would highlight a few of the primary drivers. First, we assume two additional rate cuts of 25 basis points each in 2026 which aligns with the current forward curve. Second, we assume the five-year treasury rate at 375 basis points. Third, we anticipate our total down rate deposit beta to be approximately 40%. Which is in line with our terminal up rate betas and our 4Q experience. And fourth, we expect noninterest bearing deposits to remain relatively stable. Importantly, our balance sheet remains neutrally positioned to short-term interest rates. As such, the path of NIM and NII in 2026 will depend on growth dynamics and the shape of the yield curve the absolute level of the belly of the curve, and continued deposit data management more than the absolute level of short-term rates. Slide 18 includes our outlook for the first quarter and full year 2026. We believe our current pipeline supports 1Q growth of 3% to 5% and full year loan growth of four to 6%. We anticipate continued success in the execution of our deposit strategy and expect to meet or exceed industry growth in 2026 and generally in line with our asset growth. We expect fee income to remain strong given a supportive rate backdrop for mortgage and capital markets as well as continued progress in wealth management and brokerage. Expense guidance incorporates a full quarter run rate on Bremer cost savings and typical seasonal factors in the first quarter. Other key line items are highlighted on the slide. You'll note that we expect full year results that yield significant growth in earnings per share and, again, feature positive operating leverage with a peer-leading return profile good growth in fees, controlled expenses, and normalized credit. In summary, echoing Jim's opening comments, 2025 was exceptionally strong. We completed the core systems conversion and integration associated with our Bremer partnership. That partnership created a leading bank franchise in Minnesota and added valuable funding with good market share in several markets in North Dakota. We compounded tangible book value per share despite closing that deal and advanced our peer-leading return on tangible common equity and efficiency. And we funded our loan growth with deposit growth while improving our already resilient credit metrics. In 2026, we remain focused on organic growth and returning capital to shareholders. Investing in ourselves to drive excellence in talent, operations, sales execution, and client-facing capabilities. This will ensure that we will remain strong, scalable, and positioned for long-term success. With those comments, I'd like to open the call for your questions. Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press you would like to withdraw your question, simply press star 1 again. Your first question today comes from the line of Scott Siefers from Piper Sandler. Your line is open. Scott Siefers: Good morning, Scott. Thanks, hey. Thank you for taking the questions. Let's see. I guess, John, maybe first question for you was something you can maybe help with how you see the margin trajecting through the year. Just noticed on the sort of the NII walk on slide 17, you've got a, you know, much bigger step up in NII in the second half versus what we see here in the next couple of quarters. Is that a function of sort of timing of asset repricing or your expectations for rate cuts? Just curious as to the nuance in there. Yeah. I think I think the bigger factor there, Scott, is actually day count. Right? So just remember the the first two quarters of next year, we got we got a couple less days in in each of those quarters. You know, I think I think when we think about the trajectory of margin in 2026, we're It's really four big factors on that. I think it's growth is number one, so we're we're sort of guiding four to 6% on on that side. The second would be steepness of the curve. And how that plays out. So knock on wood, the forwards actually come true. Number three would be belly of curve, on fixed asset repricing. And then number four would be our our continued ability to manage beta, on the on the downside. Which so far has gone really, really well. And so I think those are those are the big swings on on the margin. Okay. Perfect. Perfect. And then, you know, great to see the the strong kinda end to the year just in terms of proactiveness of of capital management. You know, maybe just sort of thoughts on pace of share repurchase throughout the year vis a vis the 1.1 million that you did in the kind of late in the fourth quarter? John Moran: Yeah, Scott. I I would say this year, we plan to be more active than we were last year. You know, we we obviously wanna make sure we have enough capital to support growth. And then, I think our next priority is making sure that we return it back to our shareholders. So, we're gonna see how the year plays out a little bit, but it would be a definitely more active year in 2026 versus versus last. Scott Siefers: Gotcha. Perfect. Thank you guys very much. Appreciate it. Thanks for the call, Scott. Your next question comes from the line of Brendan Nosal from Hoagroup. Your line is open. Brendan Nosal: Hey. Good morning, folks. Hope you're doing well. Good morning, Brendan. Maybe just to circle back to to the margin. Know, John totally get your your comments on on day count. I mean, if we strip out day count factors from margin, because I think you guys use a simple, you know, multiply by four to get to your margin presentation. Is it fair to say that like a day count adjusted margin is stable, if not a bit grinding as we move through the year? Very fair. I think you captured it. Okay. Okay. Then maybe moving to the the credit side of things. I think if I interpolate the kind of the the various pieces on the guide for loan growth, charge offs and provision, I think it implies a bit a reduction in your reserve coverage ratio versus loans. So I guess, just what are you seeing either in your own portfolio or the macro inputs that would let you slightly under provide for both gross growth plus lost content? John Moran: Yeah. It's really the migration in criticized and classified book and and improvement on those measures, you know, two or three now quarters of really, really solid improvement there. Close to $70 million lower on NPLs. In this quarter. And and when you've got that kind of fundamental improvement, it it's just you know, the model just spits out what it spits out. It kinda math math math. Right? And so, you know, clearly, I think we're we're through the peak. In in that, in those in those categories of of classification. Brendan Nosal: Okay. Perfect. Thank you for taking the questions. Your next question comes from the line of Jared Shaw from Barclays. Your line is open. Jared Shaw: Hey. Good morning. Good morning, Jerry. Hey. Just circling back on on the capital and hearing what you're saying about the buyback, how should we think about sort of a good core target CET1 for you as we move through 2026 with sort of all those assumptions? Behind it? Yeah. Yeah, Jared. Very comfortable with where we are in CET one today. You know? And Jim said it well. You know, first, first priority is ensure we got powder for organic growth. Right? But left unchecked, this is gonna grow quickly, arguably too quickly, and and we're not gonna let it go unchecked. But not a on shouldn't assume that you're trying to target back down to, like, a 10 and a half percent from from where we are right now. No. I I I don't think I don't think so. Not at this time. I I and, again, I think we we said we don't view it as mutually to grow a little bit of capital and return capital in 2026. Okay. And then, I guess shifting to deposits, you had really good growth in DDA on on average. And end of period, but then you call out sort of a relatively stable balance for '26. How should we think about sort of seasonality? And is that stable as a percentage of deposits? Or is that stable as sort of dollars of deposits from here? Yeah. I'm I'm thinking that it's stable as a as a percentage, We've got some seasonality, in the public funds book, but that other than that, to really talk about on the on the deposit side in terms of seasonality. Great. Thank you. Operator: Your next question comes from the line of Ben Gerlinger from Citi. Your line is open. Ben Gerlinger: Hey. Good morning. Good morning, Ben. Wondering if you could talk to the growth a little bit I know that some of your larger competitors in the area acquisitions pending, and maybe they're taking their eye off the ball or different markets. Or is it just hiring or potentially just kinda deepening relationships with kind of the new Bremer customers? I was just kinda curious where is the the growth coming from, like, existing or or new areas. Just kinda unpack that a little bit would be helpful. Jim Ryan: Sure. Good morning, Ben. This is Tim. You know, we're seeing broad-based growth from the C and I middle markets standpoint. We're also seeing enhancements from CRE demand drivers. And we're gonna continue to be opportunistic and and aggressive from a town perspective. So we think as the year unfolds and we continue to add talent that will also help drive consumer sentiment is showing that demand is growing. Ben Gerlinger: Gotcha. That's helpful. And then you could think about kind of the pricing. Is that is there any areas where it's become a little bit more overly competitive or any geographies where it's just like you're not getting the ROTCE adjusted, so rather not play? Or do you think I mean, it's always competitive, so I'm just kinda layering that in. And then you thoughts on just pricing within the phone categories or geographies? Jim Ryan: Yeah. You know, we continue to be very disciplined in our our pricing model. You know, obviously, where you see disruption, I think there is opportunity as banks are playing defense. With the disruption, but we're being opportunistic in certain high growth markets. But across the board, a very disciplined approach, to pricing as we look to grow loans. Ben Gerlinger: Got it. Okay. Thank you. Ben, I just I reiterate the point that Tim made earlier, and and we try to highlight that in our remarks. You know, our plan is to invest heavily in talent. You know, Tim's been around, you know, about six months now, got his feet wet, thinking about, you know, how do we how do we best organize for success and really get after it And I think you know, I think it will be like some of our past years where we're gonna highlight some real growth and talent. And so we're excited about what that what that might bring for us. Thank you. Operator: Your next question comes from the line of Terry McEvoy from Stephens. Your line is open. Thanks. Good morning, everybody. Good morning. Hey. Maybe start with just a question on fees. If I annualize the fourth quarter, it's kind of at the high end of your 2026 outlook. And I'm wondering, is there a bit of conservatism built into your outlook or maybe mortgage returns to more more normal levels? I was hoping to get your thoughts there. Terry McEvoy: Yeah. I think Terry, there's a little bit of seasonality, obviously, in first quarter on the on the mortgage line. Mortgage was good. Last year. I wouldn't say great, but good. We've got a constructive or more constructive anyway rate backdrop, on that line of business. So what I'd say we're cautiously optimistic on mortgage for twenty six. But, but what you see in the guide is, you know, if I were gonna pick on two places where where maybe we've got some upside, it it would be mortgage and cap markets. Both of which have been have been really good in the 2025. Yep. Agreed. And then as a follow-up, new production yields were 6% last quarter, I think, in the presentation. Could you just run through what's the incremental kind of repricing benefit that you're seeing? And John, can you run through the securities repricing as well? I couldn't get all those couldn't write everything down you were going through your prepared remarks. John Moran: Yeah. No problem. In total, there's there's, you know, on the loan side, 70 basis points. In in terms of spread to new yields against the against the portfolio, about $5 billion of, of that over the next twelve months. And then on the investment portfolio, $2.9 billion of cash flow, over the next twelve months. And those new money yields are 94 basis points above the, the back book yield. Terry McEvoy: Perfect. Thanks for taking my questions. Operator: Thanks, Terry. Your next question comes from the line of Jeanette Lee from TD Cowen. Line is open. Good morning. Jeanette Lee: Good morning, Jim. For your securities portfolio, the new money yields of 5%, it seems pretty solid. What's underlying the what's the underlying drivers behind the the security yields that you're earning? And is it fair to assume the securities investment portfolio is stays around this level or running down as your expectation for deposit growth appears to be in line with your loan growth for 2026? Jim Ryan: Yeah. I think securities as a percentage of earning assets or the way that we kinda look at it is cash and securities as a percentage of total assets. And and I think that that's gonna be pretty stable over 2020 So we we don't really intend to grow it nor shrink it. I think we'll just continue to invest cash flow. And in terms of where where we're going, it it's really plain vanilla stuff. I mean, we're we're we're targeting kind of a four duration and and Mike and his team do a good job managing that for us. So I I don't think there's gonna be big changes in our in our securities book. Jeanette Lee: Got it. Thank you. And just to follow-up on deposit cost. In your expectation for your NIM of stable to moving higher throughout 2026, So the spot rate of 1.60%, that seems I mean, given the strength of your deposit franchise, it seems lower than here's it. And it looks low or on an absolute basis. Is your expectation that the total deposit cost could creep down more from from the current level given the amount of exception pricing deposits that you have on your balance sheet, or is more of the benefit coming from the fixed rate asset repricing? Jim Ryan: I I think it's both. You know, look. Where where we manage all of our up beta in the deposit book was via that exception price book. That book today is 36% of total deposits, It's about 45% of our transactional accounts. And that price we think we still have room, to to pull down. And, you know, we're we're continuing to work that book really hard we've re realized almost a 90% beta on that one. Kind of point to point, and and we're ready to move proactively with Reg's. Thank you. Your next question comes from the line of Chris McGratty from KBW. Chris McGratty: Your line is open. Good morning. Thanks for the question. Good morning, Chris. Jim or John, one of your peers is made a comment recently that that said deposit pricing in particularly Chicago was was actually pretty reasonable, which is something I haven't really heard in my career. Any comments on deposit repricing by your markets, which span the Midwest? Jim Ryan: Yeah. Look. I I would I would suggest that, it's still competitive. But I think almost everywhere, it is it it has been very, very rational. There there are a handful of markets out there that are a little bit spicier, but, I I think for for the vast majority of our footprint, and certainly any place where we've got meaningful deposits and meaningful share, things have been very practical. Okay. And then just quickly on the ex on the expenses. Technology spend's gotten a lot of attention this quarter. I'm not sure if I've seen a number from you of what what piece of the expenses are going into tech investments, but any color there either percent of revenues, rate of growth, any kind of color to kinda give us a context there? Thanks. Jim Ryan: You know, maybe just let me give you a 50,000 foot view. I think we're spending as much time at this point in time. We're not underfunding new investments. We're thinking about, you know, innovation, you know, in the payment space, innovation in the the client facing capabilities. And and we're really good at self funding a lot of that. Even though we keep grinding on the efficiency ratio, we're really good about self funding those new investments. If there's anything that I think we're gonna continue to put pressure on, it's probably that salaries line item. As I said earlier, I wanna make John with the amount of people that we plan to hire, to really grow the the front line. So I'm very comfortable with our technology spend, and I'm I'm even more comfortable that we couldn't spend anymore really and handle the organizational change that comes out of that. So I I think we're at the right level and we're certainly not underfunding any opportunities that are in front of us. Alright. Great. Thank you. Operator: Your next question comes from the line of David Schiavirini from Jefferies. Line is open. Hi, thanks for taking the question. Good So wanted circle back to loan growth, the 4% to 6% guide. Can you talk about what could lead to the high end versus the low end and also talk about borrower sentiment on the commercial side. Sure thing. Good morning, David. This is Tim. Yeah. I'll start with the sentiment side. You know, we think customers are feeling more optimistic about 2026 than the prior few years. Know, part of the contributing factors would be lower rates you know, more experience dealing with, tariffs. Clarity on the tax bill, and certainly m and a heating up. So we think from a demand perspective, you know, things are sentiment is driving that higher. As far as some of the factors that could drive the higher end of that, you know, we're we're seeing middle market C and I picking up. We think our message of being a community bank, very client centric is one that that plays very well in that space. They continue to build on Jim's comment. Talent is a big factor in continuing to add bankers strategically. In high growth markets will help drive that. And I think our expansion markets continue to show really good loan growth and opportunity as we continue to build out those teams. Great. Thanks for that. And then on the outlook for M and A, so the Bremer integration has has gone well. Can you give us your latest thoughts on your appetite for M and A going forward? Jim Ryan: Yes. I think it's like we said last quarter, we're really focused in on investing in ourselves, being a better version of ourselves. I think the best the best return we can provide for our shareholders today is continue to to work on ourselves and and, grow organically. And, it's just not it's not a focus. It's not something we're spending a lot of time on today. And, you know, will make me happier if we finish the year. Just by by being a better version of ourselves. Helpful. Thank you. Operator: Thank you. Your next question comes from the line of Jon Arfstrom from RBC. Your line is open. Jon Arfstrom: Hey, thanks. Good morning. Good morning. Good to hear from you. Yep. John, the strategic portfolio management that you referenced earlier, how much is left to do there? John Moran: I think it's I think it's kinda constant ongoing John. It's it's just, like, the the, the inflow into the classified buckets that we saw starting kinda eighteen months ago. Really feel like we got our arms around that. I I you know, obviously, the lost content there has been de minimis, and, you know, I think we're we're through the worst of it. But ongoing active portfolio management like we always do, Yep. Okay. But maybe, Jim, can can you talk a little bit more about the wealth strategy and outlook and what kind of expectations you have for that business? Jim Ryan: Yeah. I think we're doing really well there. But again, I also I would reiterate my comments around the talent. That's really a talent play. You know, Tim's spending a lot of time with our wealth team In fact, he's meeting with the sales team here next week. Really trying to to ramp up expectations around ongoing hiring in that space. We've been successful and and probably more successful than than many of our peers you know, have been in that space, but I think we can do even better. I really see great opportunities for us there. So I think we've built the product capabilities to to be successful. We've got the right business model. I think we're organized for success. Really, what we can do is I think we're underpenetrated in some of our biggest markets with talent. I think if we can pull that part off, which which I believe we can, I think we can even see higher growth coming out of that business line? And one thing I would add, this is Tim. I think our partnership and collaboration with the commercial bank, you know, there's continues to be opportunities to to more fully deliver the entire bank. Into our wealth, clients and into our commercial clients. And we're seeing partnerships in those referral activities really drive good results there. Yeah. Okay. Fair enough. And, Jim, congratulations to the Hoosiers I I know you're pushing Moran on expenses, but hopefully, there's room for some Hoosier game day water. In the budget. I like it. I like it. We're we're very excited. And we're so proud of him. What what a great story, and can't wait for them movie Hoosiers two to come out soon. Great story. Thank you. Operator: Thanks. And there are no further questions at this time. I'd like to turn the call back over to Jim Ryan for closing remarks. Jim Ryan: Thank you all for your support and participation. The team will be available for calls all day today. Thanks so much. Exposures. Operator: This concludes Old National's call. Once again, a replay along with the presentation slides will be available for twelve months on the Investor Relations page of Old National's website oldnational.com. A replay of the call will also be available by dialing 807702030 Access code 939-4540. This replay will be available through February 4. If anyone has any additional questions, please contact Lynell Durkol at (812) 464-1366. Thank you for your participation in today's conference call.
Operator: Good day, and welcome to the BankUnited, Inc. Fourth Quarter and Fiscal Year 2025 Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Jacqueline Bravo, Corporate Secretary. Please go ahead. Jacqueline Bravo: Thank you, Nick. Good morning, and thank you, everyone, for joining us today for BankUnited, Inc.'s Fourth Quarter and Fiscal Year 2025 Results Conference Call. On the call this morning are Rajinder P. Singh, Chairman, President, and CEO; Jim Mackie, Chief Financial Officer; and Thomas M. Cornish, Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that reflect the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries, or on the company's current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates, or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks, uncertainties, and assumptions, including those relating to the company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside the company's direct control, such as adverse events impacting the financial services industry. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors should not be construed as exhaustive. Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31, 2024, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website. With that, I'd like to turn the call over to Mr. Rajinder P. Singh. Rajinder P. Singh: Thank you, Jackie. Good morning, everyone, and welcome to our earnings call. Before I walked in here, I was looking at, I think, CNN or CNBC and realized that we're competing with President Trump's speech at Davos. So for those of you who are listening in, a special thank you because I know we have stiff competition this morning for your attention. Honestly, if it is up to me, I'd probably be listening to this speech as well more than our earnings call. But nevertheless, thank you, and I'm going to walk quickly through the earnings for the quarter. But before we get into the quarter, just a couple of minutes on how the year turned out to be. I'll talk about the year, talk about the quarter, give you some guidance for next year. And then I'll turn it over to Tom, who will then turn it over to Jim. By the way, Leslie sends regards from the beach. I believe she's on the call listening in. But coming back to our 2025, this was a great year for us. I mean, there is no other way to describe it. If I was to summarize everything in one sentence, I would say, double-digit EPS growth came from double-digit earnings growth, which came from double-digit PPNR growth, which came from double-digit NIDDA growth, which caused the margin to expand by, like, 22 basis points. I mean, there's a lot more nuance to it. There's fee income, this, that, and the other. But, you know, if I had to summarize it in twenty seconds, that's how I would. We pretty much hit everything we were trying to hit, and it just turned out to be an awesome year. Turning to the fourth quarter, again, this is a very strong quarter for us on just about every metric. Earnings came in at $69.3 million, $0.90 a share. There were some one-times, which Jim will walk you through. Some software write-downs that we took at the end of the year. But adjusted for that, I think our EPS would have been $0.94. I think consensus I checked last week was $0.89. PPNR for the quarter was $115 million compared to $109.5 million last quarter. I think it was $104 million in the fourth quarter of last year. Margin, you know, continued to expand, which has been a story with us. Last quarter, we were at 3%. Now we're at 3.06%. If you compare it to the fourth quarter of last year, we're up 22 basis points. Annualized ROA came in at 78 basis points. But if you adjust for that software write-down, it was about 81 basis points. Deposits and loans, this is, like, a really strong quarter on both sides of the balance sheet. NIDDA grew on a spot basis by $485 million, and for the year, it was up $1.5 billion. But to be honest, the right way to look at our balance, especially deposits, is always on an average basis because there's a lot of noise that comes seasonality. There's a lot of noise that comes in from just the last couple of days of the quarter. Our average NIDDA for the quarter was up about $500 million, about $505 million. And for the year, average NIDDA was up $844 million. Those are pretty solid numbers, and we're very proud of it. Now this quarter, we had guided to you that this is a seasonally slow quarter for us. And, you know, your question might be, so did the seasonality not show up? The answer is no. The seasonality very much showed up. NTS, which is our title business, was down as it always is in December. So that happened. What really made up for that and then some was all the other business lines came in very strong on deposit growth, especially on NIDDA growth. And we ended up where we did. So very happy with that performance. NIDDA now stands at 31% of total deposits. Last quarter, we were at 30%. And we want to recapture that peak that we hit during COVID years of 34%, and we are more and more confident of getting there soon. There was obviously a Fed rate move this quarter. Spot cost of deposits came down. Spot cost of deposits declined by 21 basis points to 2.10% at the end of the year, which was 2.31% in September. So just, you know, compared to December, spot cost of deposits is down 53 basis points. Quickly turning to loans. The last couple of quarters, we've been seeing a lot of payoffs, and some expected, some unexpected. But this quarter, we've made up a lot on the loan growth side. Core loans grew by $769 million. By core, I mean commercial and CRE and small business and all that stuff, excluding residential and, you know, that we've been running off. So the core loans growing $759 million, this is a very big quarter for us. We were very busy all through the end of the year. We're very happy about that, and Tom will talk a little more in detail about where that growth came from. Quickly turning to credit. Criticized classified loans were down a little bit by $27 million. NPLs were down a little by $7 million. We did see slightly elevated provision and charge-offs. We are in a lumpy business when these, you know, credit hit costs hit us. They do come in, you know, in large chunks. As an example, of the $25 million loan, which was a fraud that we got hit by in the fourth quarter, was $10 million. It's very hard to predict these things. It's very hard to protect yourself against fraud, but it did happen. And we had a complete write-off on a $10 million loan, and that's in the numbers. So, but overall, we're feeling good about credit and expect NPLs to continue to decline into the year. Capital CET1 was a little lower at 12.3%, partly because of growth, partially because of a little bit of buyback that we did in the fourth quarter. And on a pro forma basis, including AOCI, CET1 is 11.6%. Tangible common equity to tangible assets got to 8.5%. And tangible book value per share is now over $40 at $40.14. I think that's a 10% growth year over year. So the board met just yesterday, looked at our plan, looked at our numbers, and authorized us for an additional $200 million share buyback. Of the $100 million that they had authorized a few months ago, we've already used up about half that. So we will have about, you know, $50 million left over roughly from the previously announced buyback authorization and another $200 million to it. So we'll have $250 million or so of dry powder. Also, they increased dividends by 2¢ as they often do at this time. In terms of philosophy on buybacks, you know, I think you heard me say that in the past. We, you know, we want to stay in the middle of the pack of our peers. We think our middle of the pack is somewhere in the mid-eleventh. And that's what we're shooting for. Now that you know, where the herd moves, only time will tell. That number could go lower, and we will address it if it does. But right now, it feels like mid-eleventh is the middle of the pack. And we'll, you know, end of mid to low twelves and we're at the top of the end of that range. And the buyback will bring us in line. So before I hand it over to Tom, let me quickly talk about guidance. And you know, we put a deck out so you can look at it at your leisure. But I would just for guidance, I would ask you to look at page 14 and then page 15. Page 14 is sort of a look back of what guidance we gave last year. And what were we able to deliver in actual results. We gave you guidance about deposits and NIDDA and loans and expenses and net interest margin and so on. We pretty much got there on everything and did better. On most things, and I was up 8%. Margin, you know, we got it to ending the year at three. We ended at 3.06. Deposits, we said mid-single digits. We did mid-single digits. NIDDA, we said low double digits. We did, you know, period end, we did 20%. On the average, we did about 12%. The only one that we missed was core loan growth. We thought we would be in high single digits, but we ended up at 5%. And expenses, said, they'll be controlled or be mid-single digits, and we ended up at 3%. So very happy with what the guidance last year worked out to be. So with that in, you know, keeping that in perspective, our guidance for next year is on page 15. It might look like, you know, almost, you know, we were being too lazy or this is a little, you know, it's almost the same guidance that we gave you last year. You know? It's so boring that we think loan growth, deposit growth, the, you know, between NIDDA and total revenue growth, everything will be very similar to last year. The loan should grow, core loan should grow about 6%. Resi and others will shrink at about 8%. Total loan growth will be in the 2-3% range. Deposits NIDDA will continue to grow at the 12% rate that it has been growing at. Total deposits, excluding broker, will be at about six. Revenue, which grew last year at 8%, should grow again at 8%. Margin slightly more, fee income slightly less simply there's lease financing income and fee income that is coming down, which has dragged it down a little bit. And expenses will stay controlled. For provision, we're using an assumption that the provision will be similar to last year. Though it's a little hard to, you know, all to pinpoint that. But our best assumption is it will be the same. The difference this year is we're announcing capital actions, which we did not announce last year, like I just mentioned, the $200 million additional buyback, that's different this year. And all of our assumptions that everything was built on, you know, the economic environment staying pretty much what it is. And, spreads are tight. And tightening. So we did take that into account, which is why you see margin improvement only going from 3.06 to 3.20. It's largely because we're seeing much tighter spreads this time than we did twelve months ago. And two Fed rate cuts, but, you know, our numbers aren't very sensitive whether it's one cut or two cuts or three cuts. The balance sheet is fairly hedged. So with that, did I miss anything? Sure. Turn it over. Alright. Let's turn it over to Tom. Great. Thank you, Raj. Thomas M. Cornish: Just to follow-up on Raj's earlier comments on deposit growth. Total deposits increased by $735 million during the quarter. $1.5 billion for the year and NIDDA was up this quarter by $485 million and $1.5 billion for the year. As Raj mentioned, despite the normal seasonality, we have numerous business lines that contributed to strong growth in the fourth quarter, which was really good to see. Now I would also say if you look at the lending business that we did in the quarter, which was also up strong, the treasury pipeline, operating account pipeline going into the early part of the year, is very good because you tend to fund loans first, and then you tend to migrate the deposits afterward. So given the strength that we had in the lending teams, at the end of Q4 or during Q4, we'll see some lag time in the development of those operating account businesses. So we remain really optimistic about that. And as Raj said, core loans grew by net $769 million for the quarter. If you break that down, CRE was up by $276 million. The C&I segments were up by $474 million and mortgage warehouse was up by $19 million. We talked in the last few quarters about the fact that production throughout the year remained relatively strong, but we did have, you know, these headwinds of, you know, strategic exits and payoffs and sales of companies and whatnot. One of you asked me on the last call, you know, what inning we were in of the exit process. And I said we were kind of in the bottom of the ninth inning. I think if you look at the walk-through that Jim did on page nine of the deck, you know, you'll see that the production was very strong. And the level of exits was, you know, fairly minor compared to what it had been in previous quarters. So as we move into this year, you know, while there certainly will be, you know, one or two things we exit from for various reasons, overall, I think we're in a year where production will continue to be strong, and we've kind of finished the game of looking at things that we want to get out of. Overall, RESI was down by $148 million. While franchise equipment and municipal finance were down a combined $50 million. In aggregate, that gets you to your $571 million of total growth. The loan to deposit ratio finished the quarter at 2.7%. A few comments on the commercial real estate portfolio. It was a good year for CRE. We grew by 9%. On the team. Overall exposure totaled $6.8 billion or 28% of total loans. And as you can see from the supplemental deck, pretty well diversified across all major asset classes. Again, consistent with last quarter, at December 31, the weighted average LTV of the CRE portfolio was 55%. And the weighted average debt service coverage ratio was 1.82. So both very strong metrics. 48% of the portfolio was in Florida. 22% in New York, and, obviously, the remainder in other areas where we've emphasized growth in the Southeast and Texas over the last couple of years. Our exposure to CRE office was down $98 million or about 6% from the prior quarter end. Criticized and classified CRE loans declined by $36 million in the fourth quarter primarily as a result of payoffs and paydowns. I think at this point, we continue to see generally positive trends in the overall office book. Obviously, it's down significantly over the last few years. I think this will be a year where we see a lot of rent abatement improvements. And in most of the markets that we're in, when we kind of break it down submarket by submarket, we're seeing continued improvement in each of the submarkets. Page eight of the investor deck provides greater detail on the CRE portfolio. So with that, I'll turn it over to Jim. Jim Mackie: Thanks, Tom. Gonna tick through a couple of things for the quarter, try not to repeat too much what Raj and Tom mentioned, but I do want to highlight a few things. So as reported, $69 million, a little north of $69 million of net income for the quarter, $0.90 a share. We did call out for you a one-time write-down of previously capitalized software as we were going through our tech stack during our strategic planning. Determined to go in a different direction, so we took that charge during the quarter. If we adjust that net income, it would be $72 million or $0.94 a share. So that's roughly consistent with the prior quarter. Up about $3 million from a year ago. And importantly, we're seeing PPNR grow about 14% year over year. On NII and NIM, you know, where NII is up 3% from the prior quarter, 7% from a year ago. The NIM expansion story that Raj mentioned, six basis points up to 3.06%. It's really a pretty simple story. It's our cost of deposits is declining by more than our loan yields are declining. You know, we talked about the NIDDA growth of average balances of $505 million during the quarter. Interest-bearing deposits were down. Average bearing deposits were down about $347 million. So that brings our NIDDA mix up to about 31%. We were successful as we've been all year long passing along rate cuts timely. So that certainly helped margin. And our loan growth, timing of the loan growth during the quarter was helping us as loans were put on throughout the quarter. And then we're also helped by the RESI loans that paid down. We did see a favorable mix in the lower coupons, maturing. So all of that combined for the six basis point improvement. Just a reminder, NIM was up 22 basis points for the full year. NIDDA up a billion and a half. So our mix is, you know, up from 27 to 31 at the end of the year. Couple comments on credit provision and reserving. So our charge-offs were just shy of $25 million or 30 basis points for the quarter, slightly elevated from where we'd like to see it. You know, we sort of underwrite to about a 25 basis point charge-off rate over time. So a little elevated. You know, we remind you constantly, we are a little bit episodic. Raj talked about a couple of items during the quarter. Provision was $25.6 million for the quarter. Again, a little bit elevated, but it was really a function of the specific reserves that we booked and to a lesser extent, the previously reserved charge-offs. We provide a walk for you in the deck. Allowance for credit losses, roughly flat. Right around $220 million. The coverage ratio is slightly down, but it's really just a bunch of model noise and rounding. So it's, you know, I'm gonna call the coverage ratio flat as well. Again, on page 10, we lay out all the moving parts in a walk. As Raj mentioned, non-performing loans are down and criticizing classified loans are also down. On non-interest income and expenses, again, non-interest income is a very positive story for us. You know, we're up $30 million. I mean, we're up to $34 million growth quarter over quarter and over year. And, you know, that is despite our leasing income falling. Capital markets related revenue is continuing to steadily improve over time. So if we exclude that $13 million of leasing income that we saw in 2025, we had full year non-interest income grew by about 28%. So while the numbers are still small, it's definitely a positive growth area for us that'll continue to help us moving into the next year. On the non-interest expense side, we were up $6.6 million from the prior quarter. The majority of that was two things. One was the capitalized software charge that I mentioned earlier. And an employee compensation expense, the impact of the stock price movements, that impact on equity-based compensation. Makes up the other portion. For the full year, non-interest expense was up 3%. It's largely comp and bennies up as we've been hiring revenue-producing people, technology expenses as we continue to invest and grow our business. We also had a credit in '24 just to remind you of that that didn't repeat. Deposit costs are growing as we grow our deposit base. And that's being offset by lower FDIC premiums and lower leasing costs. So, sorry. Before I turn it back to Raj for some concluding remarks, I just want to make a quick comment on '26 guidance in addition to what Raj mentioned. Again, all that guidance is on page 15. It's a full-year view. Just want to remind you that we do have some seasonality in our results during the year. For example, loan volume is typically seasonally low for us early in the year. And our non-interest-bearing deposit balances are typically highest in the second and third quarter. You know, while we do think provision is gonna be flat year over year, you know, the timing of which in what and where, you know, will be determined as everything is a little bit episodic. That, I'll turn it back to Raj. Rajinder P. Singh: Yeah. You know, the one part that I usually talk about, and I forgot this time, is generally, you know, how's the economy and how's the stuff that we don't control. Right? So that's economy, that's rates. And the sort of the regulatory environment. So the regulatory environment is constructive. There's no surprising news over there. In terms of the economy, it feels very good. But at the same time, you know, if you watch the news too much, it can scare you a little bit. That's what has been the case for the entirety of 2025. You know? A lot happened, but it didn't really impact the economy. In fact, the economy is doing reasonably well. And we're gonna stay optimistic until proven otherwise. But it feels really good both in New York and over here. Business in New York also is doing very well. And it's not just Florida. So the economy is doing well. And as far as we can see it, it will continue to. Despite, you know, heightened geopolitical risk and noise. And rates, again, you know, the monetary policy looks pretty straightforward what'll happen this year. But you know, it's hard to predict too far out in the future what will happen with rates. We think two rate cuts might be one, might be two, might be three. Nobody's predicting, you know, eight rate cuts or anything crazy like that or for that matter, the rate start to go the other direction. We have hedged ourselves as best as we can and we're not worried about, you know, rate cuts being a little bit more, a little bit less. But if there's something crazy, if there are, you know, if it's let's go back to zero or something. Something like that. That'll impact our earnings and everyone's earnings. But outside of that, you know, the environment feels fairly straightforward. And we're running the business with those assumptions in mind. So with that, let me turn it over, and take some questions. Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And the first question will come from Wood Neblett Lay with KBW. Please go ahead. Wood Neblett Lay: Good morning. Wanted to start on the fourth quarter non-interest-bearing deposit growth. As you mentioned, in your comments, you know, it's pretty remarkable to see the growth when you also saw the downward seasonality in the title business. I was just wondering if there were any specifics on what drove that growth and, you know, and what you would attribute it to. Rajinder P. Singh: So first, I will say, actually, just before this call, we might get this question. Tom and I were discussing this. I look at business line by business line, you know, where the growth came from. And to see if there were any outliers. Happy to report there are no outliers. Every business line contributed. It's pretty even. Small business, middle market, corporate, even CRE, everything brought in deposits. HOA, every, you know, the only one with the negative number was title, which we knew. Right? This is a seasonal time when NTS slows down, and then they pick back up, you know, in late first quarter. So it's not concentrated in any one place. However, we do see from time to time like, you know, last day of the quarter, some deposits may come in, which may leave, then a couple of weeks later. And I wouldn't call that core growth, which is why, you know, $1.5 billion of NIDDA growth for the year is probably not the way to look at it. I think the right way, the honest way to look at it is what happened to our average NIDDA. Our average NIDDA was up $844 million for the year. And our average for the quarter was $505 million. I'm very happy. Like, listen. I'm very happy that, you know, we ended the year where we did. But, average is the right way to look at this, not period end. Wood Neblett Lay: I would also add that when we look at this, we tend to think of dividing the world into two segments. One, I would call new wallets and one, I would call expanded wallets. So if we look at the quarter from a, you know, core operating account growth, I would probably say just roughly about two-thirds of the growth were new wallets, meaning new relationships. And about a third were expanded wallets in terms of deeper cross-selling across relationships that we're already in. So we thought that was a pretty healthy mix. Wood Neblett Lay: Got it. That's helpful color. And then embedded in the NII guide, could you just walk through some of the loan and deposit beta assumptions y'all are assuming there? Rajinder P. Singh: The beta assumptions for deposits are the same betas that we've realized so far. It's about 80%. So the two rate cuts that we have baked in here, we will achieve 80% just like we have been achieving. On loans, it's really a matter of which business line you're talking about. You know, we do a lot of fixed-rate, sorry, floating-rate loans. So we're more of a floating-rate shop than a fixed-rate shop. Even our CRE business has become predominantly floating rate. So, you know, it depends on if the floating rate, the beta is 100%. And if it's fixed, it's zero. So you'll be able to find in our disclosure the mix of floating and fixed. Jim Mackie: Yeah. You know, it's not until you see a significant number of rate cuts before you really start to see betas materially drop before repricing. You know, we talked about this before. We're modestly asset sensitive. So, you know, if you, you know, a few rate cuts up or down really doesn't move the needle for NII. And you know, I know there's a lot of talk now of, you know, is there gonna be less Fed rate cuts than what the Fords are. And so, again, we're pretty neutral, so we would be slightly benefited, but not much at all. Yes. Yes. Rajinder P. Singh: And always remember, a positively sloping yield curve is good for bank earnings, especially our bank earnings. Which is where we find ourselves today, and we have been over the last few, you know, few months. So we're happy about an upward sloping curve. Wood Neblett Lay: Got it. And then last for me, you know, it's positive to see the buybacks in the fourth quarter. You upped the authorization at, you know, I would expect the stock to react pretty well to the quarter. How do you balance sort of price sensitivity of the buybacks with wanting to get capital levels down to more peer-like numbers? Rajinder P. Singh: Yeah. I think there is still, we're still living in pretty volatile times. Stock prices can move for nothing that you do. Though something might happen in the market and prices can move a lot. I mean, I remember the day the administration said they were gonna cap credit card interest rates by 10% or to 10%. And our stock took it on the chin even though we're not even a credit card company. So on days like that, when you see, you know, overreaction, we'll lean in a little bit more. Other days, we'll lean in a little less. So we'll stay opportunistic like that. I do expect volatility to continue because this twenty-four-hour news cycle, you know, just stuff comes at you and then it distorts prices for a period of time, and then it gets better after a couple of days. People forget about it, life goes on. But it'll create those opportunities, which we will take advantage of. Wood Neblett Lay: Alright. That's all for me. Thanks for taking my questions, and congrats on the good quarter. Jim Mackie: Yep. Thank you. Thank you. Operator: The next question will come from Jared Shaw with Barclays. Please go ahead. Jared Shaw: Hey, guys. Good morning. Rajinder P. Singh: Morning. Morning. Jared Shaw: Hey, just following up on the deposit side, with the 80% beta. It's great that you think that you can maintain that. Can you just walk us through what percentage of the non-DDA are indexed or brokered and how, you know, I guess, how you feel that you can still keep that 80% beta? Rajinder P. Singh: I think the broker, we will have in our disclosures probably around 15% of our deposit. I don't have that number in front of me exactly. But in terms of index, I don't think we have disclosed that, and it's actually very hard to disclose because some of the indexing might be just contractual, but a lot of it is just handshakes. So I'm not sure we could actually give you an exact number. It does come down to, you know, pushing our salespeople who then push our clients. And sometimes it's just, you know, client to client sort of how much you can push. Overall, we feel we can get to 80%. We have been getting there. Without much trouble, and over the next couple of cuts, we'll do the same. Like Jim said, if, you know, if it's, you know, eight cuts, then this is a very different story. And while nobody's expecting that, we do run sensitivities along that as well. And while margin, you know, in an extreme scenario like that will be hurt, it's not like, crazy. We can manage even some pretty dramatic cuts if it comes to that. Jim Mackie: 16.6% for the fourth quarter. Rajinder P. Singh: Yeah. Broker to 16.6%. Actually, broker was up this quarter a little bit because we were, ourselves, not expecting this level of deposit growth. So we had expected deposits to be not as good, and we had bought some brokered. Which, you know, December turned out to be better than we expected. Jared Shaw: Then maybe shifting to CRE. You know, good to see, you know, that CRE growth, and you've spoken in the past about having a lot of capacity under the capital concentration. How should we think about CRE growth as a percentage of overall growth? Where you'd like to bring that? And maybe just comment a little bit about the competitive market on the CRE side. Rajinder P. Singh: I don't think we're constrained in CRE by, you know, room in the bucket. There's lots of room to grow. What we're constrained by is our assessment of, you know, the kind of business we want to do. We're still not doing much in office or any in office. We're contracting that. We're not doing much any in hospitality. But we are focused on, you know, we have room on the other asset classes, which is where the growth is coming from. So, Tom, you want to add to that? Thomas M. Cornish: Yeah. I would say if you look at the breakdowns in the supplemental package, you can see that virtually all of our asset classes today are kind of in the low 20% range. And I would get there by if you take the multifamily number at 14%, and add in the construction book. The construction book is almost entirely multifamily. You know, we kind of like to look at the major asset class as being under 25%. It's important for us from a risk perspective to keep the portfolio, a, to keep CRE, well balanced within the context of the total portfolio and risk-based capital and b, to keep the individual asset segmentation within the book, you know, at relatively reasonable and equal proportions. So you'll see their office or retail or industrial or multifamily, including construction, are all kind of in the low twenties. So, you know, we think we'll grow CRE mid-single digits in 2026, and it will be balanced, you know, across all asset classes to make sure we kind of stay any individual asset class is not above 25%. We do expect a more competitive market. Some of our folks from the CRE teams recently attended the Big CRE conference that was in Miami Beach last week, and we saw some of the notes from that. It's clear more banks are back involved in CRE. Some that may have been sitting on the sidelines due to asset concentrations and whatnot, you know, are back, and there will be probably more competition on the private credit side as well. So look. Every, you know, I was Raj and I talk about this all the time. We're always in search of a great market that's not competitive, and we can never find one. So there will be competition in every market, but I think we, you know, we have the balance sheet to be able to continue to work in the CRE space. I think we have the expertise and the teams to execute, and we're in a well-balanced position that allows us to be a consistent lender in the marketplace. Jared Shaw: Okay. And if I could just ask one more, just the final one on credit. You called out a fraud. Can you just give any, you know, what category of C&I, I guess, that was in? And as we look at the provision guidance, does that assume reduction in the ALL ratio as we move through the year? Or is that more a reflection of the growth in the portfolio? Rajinder P. Singh: No. I would expect ACL to stay, you know, fairly consistent. To give you any more color on that one loan, it was in New York. It was a contractor. And, you know, literally, the place shuttered, fired all those employees, and is out of business in a matter of days. You know? And there is no collateral to go after. So it was a complete write-off. Jim Mackie: As with most of the trends in non-performing and whatnot, I mean, we're just not seeing any, you know, broad systemic risk that, you know, everything is uncorrelated, unrelated industries, unrelated geographies. Rajinder P. Singh: Yeah. The only correlation is office, and which is getting better. Jared Shaw: Thank you. Again, if you have a question, please press 1. And the next question will come from Michael Rose with Raymond James. Please go ahead. Michael Rose: Hey, good morning, guys. Thanks for taking my questions. Good morning. Maybe we could just start on the deposit growth. I think you guys had previously talked about getting the DDA mix up to 34%. You're expecting pretty good average growth this year. It seems like a lot of the story is coming together here. Is that something that you think you can hit this year? Or is it kind of a multiyear trajectory? And then kind of what needs to, in your mind, happen to kind of get to that 34% level? Rajinder P. Singh: I think there's a good chance we'll get there this year. I mean, we're expecting, again, double-digit NIDDA growth. So if you just do the math, we're not expecting deposits, total deposits to grow that much. So the ratio should get there. Jim Mackie: 33-ish percent. Yeah. Maybe 33% is sort of our looking at our budget here in detail. So we're getting close to it. I mean, what's more important is that we keep driving NIDDA growth. Which we feel fairly good about. Michael Rose: Okay. Perfect. And then maybe just one follow-up. Clearly good core loan growth expected as we move through the year. How much of that is coming from some of the newer markets that you've more recently expanded into, and then it looks like you did have a bump up in NDFI exposure of about $200 million this quarter. How should we think about that growth as we contemplate the core growth guidance? Thomas M. Cornish: Yes. I would say if you look at growth across the franchise, a good portion of it came from the new markets we're in. I mean, we're continuing to invest more in the Atlanta market. We're investing more in the Texas market. We're investing in the North Carolina market. So we saw good growth across all of those markets. It was an important part of the growth of the portfolio, you know, for the year. So I think that's an integral portion of how we're gonna continue to grow. Florida will continue to grow as well. We've also just completed a major investment in the Tampa market. We're actually opening up our new office in Tampa next Monday in the downtown area and hiring more producers in that market. So it played, you know, a key role overall. Rajinder P. Singh: Just mathematically speaking, new markets always tend to show more growth because there's not much runoff. Right? Mature markets where you've been in for a long time, there's always runoff that is happening. So just mathematically, they'll contribute a little bit more. But we're very happy with the investments we've made and how they're paying off. So we want to invest more. We want to hire more people in Texas. We're expanding our office space there. In Atlanta, we actually already have doubled our capacity there in terms of our physical footprint. So we're happy with how these new expansions have worked out. We don't have any new market on the horizon because we think we can really double, triple the bets that we've already made. That's probably the best thing to do over the next couple of years. Thomas M. Cornish: Yeah. Michael, in response to your question about the finance and insurance category, probably the largest segment of that would be what we would call investment-grade subscription-type credit facilities. We, you know, we are opportunistic in that. You know, it's a good space to be in. But the quality and rate kind of has to be right. And when it is, we'll move a little bit more into it. When it's not, we tend to move away from it. There's also a fair amount of, there's a kind of a convergence between what is insurance and what is healthcare. We have a lot of, you know, reasonably large credit relationships that are healthcare insurance-related. That fills up a little bit of that bucket as well. Those would probably be, you know, kind of the two larger segments within it. I think there was a $200 million increase quarter over quarter, hundred-ish was the subscription lines that Tom referred to. And to be honest, the other 100 is just refining the methodology. You know, that last quarter was the first time we pulled this information together for you, and so it's just cleaning up data and getting it organized. But the 100 being an increase in the subscription amount is a big change. Jim Mackie: Yeah. We're not very active. It's kind of the often talk about lending to debt funds. World. That's really a small piece of the overall finance and insurance bucket for us. I do want to reiterate a comment Raj just made related to our investments. You know, we're leaning into the markets that we previously announced, not, you know, in our projections for next year. It's not new markets. It's not new things. It's our existing footprint. Rajinder P. Singh: Yep. Michael Rose: Yep. Totally got it. If I could squeeze in just one last one, is there any reason to think that you wouldn't use most of, if not all, of the remaining buyback authorization this year just given where the stock is and earned back on the buyback? Rajinder P. Singh: Not really. I'm a PC. Okay. Some massive opportunity for growth that we're not thinking about today, you know, we always want to use capital for growth first if we can deliver it safely. But based on the numbers we put in front of you, you know, that's what we end up doing. There is room for buyback and to fund that growth. But you know, I wish we'd be lucky enough to come back to you and say, oh, the growth is twice as much as we thought, and we needed capital. That would be a very happy problem to have. We have a philosophy. We want to be sort of middle of the pack in capital ratio CET1 ratios with the peer group. And we're, you know, generally targeting 11.5% CET1. And so we'll hit that through buybacks, dividends, and growth opportunities. Operator: Perfect. Appreciate you guys taking my questions. The next question will come from David Bishop with Hovde Group. Please go ahead. David Bishop: Hey. Good morning. Tom, quick question circling back to the loan waterfall. Just curious in terms of payoffs this quarter versus last. Were these sort of in line with last quarter? And just curious if you have a lot of sight, maybe what could be looming maybe into the first or second quarter of this year? Thomas M. Cornish: You know, it's that's always tough to say early, David. Because right now, a lot of the payoff activity that we are expecting would be unexpected. I'll say it that way. In terms of, you know, companies selling, is predominantly what I would expect to see if I look at 2026. I think I would say, you know, companies selling would be probably the number one exposure that we have to payoffs. I think number two would likely be relationships that may be exiting the standard commercial banking world and opting into the private credit world because terms and conditions are different. And then lastly would be what I would call strategic exit. So in 2025, kind of the order of that would have been reversed. We had more strategic exits and things from a pricing, deposit perspective, or, you know, type of lending that we exited those were easier to plan because you kind of knew what they were. You knew when the facilities matured, or you knew when they were gonna redial, you know, based upon the timing of the line of credit. So they were a bit easier to predict. This year, that number will be substantially reduced as you saw in the fourth quarter. It was a lot less than it was the previous three quarters. I would say strategic exits were probably triple what it was in the last quarter each of the three previous quarters. So I would expect that that number will probably be around what it was in the fourth quarter, the $80 million type number, maybe a little bit less. A bit harder to predict what's gonna happen in the M&A and refinance market. But when I put all of those together, our kind of base forecast is we'll still see continued quality production across all of the lines of business that we have. Rajinder P. Singh: And we will see less payoffs within the upper part of the C&I market. David Bishop: Got it. Appreciate that color. And then I don't know if it's Tom or Raj who said the preamble sounds like spreads are tightening. Just curious maybe what you saw in terms of average origination yields. This quarter? Thanks. Jim Mackie: Do we have that, Tim? Rajinder P. Singh: Yeah. Give us a sec. David Bishop: That's fine. I can... Thomas M. Cornish: Yeah. We look. Yeah. In the interest of time, we'll follow-up with you after. It'll be somewhere in our disclosure, but it's not popping up too early. Rajinder P. Singh: It was right now. I could certainly tell you from looking at volume that spreads did tighten. In Q4. If we looked at it, it didn't necessarily impact the total book greatly. If we looked at spreads in the total book for the entire year, it remained fairly stable. We did see more pressure kind of late third quarter early fourth quarter across the lines of business, I would will give you the exact number, but yeah. Or Jim will give me the exact number. Was this C&I was 617? And CRE was 570. Thomas M. Cornish: So that's new. That's new on production coming online. I would ballpark to probably say we saw 15 to 20 basis point compression in new production in Q4. It's different for different types of deals, but a bit more in Q4, and we'll probably see that going into the year. Jim Mackie: As we built our plans next year, we certainly assumed it would continue to tighten throughout the year. David Bishop: Got it. Thank you. Operator: The next question will come from Jon Glenn Arfstrom with RBC Capital Markets. Please go ahead. Jon Glenn Arfstrom: Thanks. Good morning. Jim Mackie: Good morning. Jon Glenn Arfstrom: Jim, maybe a question for you. Most of my questions have been asked, but just puts and takes on the expense outlook. You guys are flagging some investments in '26, but also talking about limiting growth. Just, you know, where are you spending? Where are you trimming? Jim Mackie: Yeah. I mean, honestly, the way we set our plan is I kind of think about it as sort of run the bank, grow the bank. You know, with our existing cost base, we're always looking to, you know, keep within inflation and generate operating leverage. And then we want to use that expense discipline to invest in the things that we want to invest in. The types of things that we're investing in are continuing to hire revenue-producing staff and the various support staff to support that growth. We also are focusing on technology modernization, you know, especially, you know, our payment systems and, you know, AI workflows. You know, all the things that continue to help us improve and grow our business. And as Raj mentioned, you know, in our existing footprint, you know, we are looking to expand in, you know, in Dallas, Tampa here, and in Florida, etcetera. So that's really, you know, really bread and butter using operational discipline to pay for, you know, as much of the expand and growth areas that we can. Jon Glenn Arfstrom: Raj, a bigger picture question for you. Can you touch a little bit more on your New York comments? I think, you know, it sounds like it's doing fine and it's, you know, maybe similar size to Florida in terms of C&I, a little smaller in CRE, but, you know, I think the narrative is New York is difficult and Florida's on fire and sounds like maybe you wouldn't agree with that. Rajinder P. Singh: Our Florida business is bigger than New York. So let me start by just saying that. Having said that, I just look at production numbers by geography, by division, and at least this quarter, sort of our lower-end middle market business, they had the best quarter ever in New York. Almost to the tune of that, look at the numbers, and my first reaction was I think there's a typo here. And they came back and said to me, no. That's not a typo. That is actually what we did this quarter. So but that's a quarter. Every, you know, over time, but they had a great year also. But our business is still very much Florida is the center of gravity. And New York is a, you know, a nice hedge, a nice sort of risk mitigation geography for us. But this notion that, you know, New York is just in a downward spiral and as an economy, and that's not true. New York is doing fine. New York CRE is doing more than fine. New York C&I, you know, there's business to be done in New York. So we're optimistic, and more than optimistic about both geographies that we're in. And then Dallas and Atlanta, they're, you know, you know those markets doing really well. So we're not pulling back on any geography. But having said all that, you know, the center of gravity of the company is and will remain South Florida. Thomas M. Cornish: Yeah. I would add we've invested in a new team in New Jersey. We're, you know, we have invested in resources in the Long Island market both on the C&I and on the CRE side. And although people, you know, sometimes when they talk about New York Point or the Tri-State area, you know, point to differences in growth rates, that's true, but you're also starting from a $2 trillion base. You know? It is a very, very large economy, and we're, you know, we're not the market share leader there. So regardless of really whether it's up 2% or down 2%, there's still a lot of great opportunities in the Greater New York area. It separately would be one of the largest economies in the world if it were a separate country. So you can't walk away from that. There's still a tremendous amount of opportunities for us to grow in a market where our model of high-quality service personalized business stands out among the competition in that market. So we have growth plans for that market as well. Rajinder P. Singh: Yep. Jon Glenn Arfstrom: Okay. Thank you very much. Appreciate it. Operator: This concludes our question and answer session. I would like to turn the conference back over to Mr. Rajinder P. Singh for any closing remarks. Rajinder P. Singh: I almost thought Leslie would ask a question. But now listen, guys. Thank you so much for dialing in and listening to our story. And, you know, we'll talk to you again in ninety days. And before that, we'll probably see some of you on the road. Thank you so much. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings. Welcome to the Prologis Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note that this conference is being recorded. And I will now turn the conference over to Justin May, Senior Vice President, Head of Investor Relations. Thank you, Justin. You may begin. Justin May: Thank you, operator, and good morning, everyone. Welcome to our fourth quarter 2025 earnings conference call. Joining us today are Dan Letter, CEO, Tim Arndt, CFO, and Chris Caton, Managing Director. I'd like to note that this call will contain forward-looking statements within the meaning of the Federal securities laws, including statements regarding our outlook, expectations, and future performance. These statements are based on current assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for a discussion of these risks. We undertake no obligation to update any forward-looking statements. Additionally, during this call, we will discuss certain financial measures such as FFO and EBITDA that are non-GAAP. And in accordance with Reg G, we have provided a reconciliation to the most directly comparable GAAP measures in our fourth quarter earnings press release and supplemental. Both are available on our website at www.prologis.com. And with that, I'll hand the call over to Dan. Dan Letter: Thanks, Justin. Good morning, and thank you all for joining us. We delivered a strong fourth quarter and closed the year with solid financial and operational momentum driven by disciplined execution and deep engagement with our customers across our markets. As we build on this momentum, I want to start by recognizing our teams around the world. Their dedication, creativity, and customer focus are central to Prologis' success. In a few minutes, Tim will walk you through the details of our results. Before that, I'd like to share a few observations about the business. Across conversations with customers, investors, business partners, and our teams, a consistent theme comes through. Prologis' leadership goes well beyond scale. It's about how we operate. Our commitment to excellence, the strength of our long-term relationships, and our ability to anticipate what's next. That mindset defines our culture and continues to guide how we lead. Looking ahead, we're building on that with a clear focus on three priorities. First, extending our leadership as a best-in-class operator. Whether it's using data analytics to drive better decisions, deploying site-specific energy solutions, or advancing venture initiatives that enhance our platform, our objective is straightforward. To continue widening the moat that differentiates Prologis. Do that through unmatched service, innovative solutions, and the mission-critical reliability our customers depend on. Second, capturing the significant value creation opportunities ahead of us in both logistics real estate and data centers. Our track record in warehouse development is well established. And we're positioned to deliver the next generation of modern, strategically located facilities. At the same time, advantage today is defined by location, power, and scale. With a growing power pipeline, deep customer relationships, and multidisciplinary expertise, we are well equipped to develop critical infrastructure few can match. We will approach data centers with the same discipline and long-term perspective that has defined our success over time. And third, enhancing shareholder returns through continued growth in assets under management. Our private capital partners are increasingly seeking fewer managers who can deliver consistent performance across geographies and strategies. And we are perfectly suited to serve as that partner of choice. We are developing new vehicles and strategies that build on our track record of performance, transparency, and partnership. And we're making strong progress. As we enter 2026, we do so from a position of strength, and with the strategic initiatives in place to extend our leadership and compound value for our shareholders. With that, I'll turn the call over to Tim to walk you through our results and outlook. Tim Arndt: Thanks, Dan. As mentioned, we are very pleased with our results and closed the year with strong momentum. Our teams performed exceptionally well, signing 57 million square feet of leases in the quarter and driving occupancy toward 96%, further widening our outperformance versus the market. Improved customer sentiment together with better than expected market conditions reinforces our view that vacancy has peaked and rents are beginning to inflect across many markets. Momentum extended across the growth areas of our business as well. Our development platform, particularly in build-to-suits, continues to outperform, exceeding expectations and capturing meaningful market share. In Strategic Capital, we formed two new investment vehicles in the U.S. and China. In our data center business, the power pipeline continues to grow and we expect a solid year of starts. Turning to our results, fourth quarter core FFO was $1.44 per share including net promote expense and $1.46 per share, excluding net promote expense. Finishing the year at the top end of both our most recent and inaugural guidance ranges. On an owned and managed basis, average occupancy was 95.3% for the quarter and 95% for the full year with period end finishing the year at 95.8%. Results were driven by strong new leasing and healthy retention of 78%. And in the U.S., we expanded our outperformance versus the broader market to 300 basis points reflecting the quality of both our portfolio and operating platform. Net effective rent change was 44% for the quarter, contributing approximately $60 million of annualized NOI and driving net effective rent change for the year to more than 50%. Our net effective lease mark to market ended at 18%, representing nearly $800 million of embedded NOI yet to be realized without any increase in market rents. The rate of decline in our lease mark to market has slowed considerably and many markets including several in the U.S. and most across LatAm and Europe are once again seeing expansion as market rent growth begins to outpace portfolio churn. Finally, same-store NOI growth was 4.7% on a net effective basis and 5.7% on a cash basis, each ahead of the midpoint of guidance. And for the full year, net effective same-store growth was 4.8%, hitting the top end of our range. Turning to capital deployment, it was another active quarter. We sold approximately $900 million of value-maximized assets and acquired $625 million at attractive discounts to replacement costs generating between them a positive 150 basis points spread in expected IRR. On the development front, we started $1.1 billion in new buildings in the quarter, which were all logistics projects and over 48% build-to-suit. For the year, we started $3.1 billion where build-to represented an impressive 61%. It's worth reemphasizing that this success is driven by a deliberate and differentiated strategy matching well-located entitled land with a strong customer franchise allowing us to generate attractive returns despite the derisked nature of the In our energy business, we delivered another strong quarter with lifting total installed capacity to 1.1 gigawatts achieving and surpassing our one gigawatt goal set four years ago. We will build on this progress adding additional capacity given the significant untapped potential across the portfolio. Before turning to market conditions, I'd like to highlight that recently led the creation of an industry snapshot developed in partnership with JLL, Cushman and Wakefield, and Colliers. This collaborative effort combines our proprietary research with timely and transparent brokerage data across 34 U.S. markets. You can find the report in the research section of our website. Overall, we are progressing through three stages of inflection we outlined last quarter. Evidence of enduring demand, resulting build in occupancy followed by an inflection in rents. We are now seeing all three at varying stages and paces across our geographies setting up a constructive 2026. Fourth quarter net absorption was 59 million square feet in the U.S., a strong finish to the year and further evidence that demand is both visible and building. Higher absorption levels, exceeded completions for the first time since 2022, resulted in a decline in U.S. vacancy to 7.4%. The result is that market rents declined at their slowest rates in 2023 with many markets posting positive growth. Across our portfolio, demand remained the strongest in large space formats but it's encouraging that occupancy increased across all of our size categories. The tone of our conversations with customers is increasingly forward-looking. While uncertainty is always top of mind, including tariff policy, it is now treated more as a planning assumption rather than an impediment. E-commerce remains a meaningful driver of this demand representing approximately 20% of our new leasing activity over the last year making 2025 its best year since 2021. Large retailers with significant e-commerce operations continue to expand and diversify their networks to shorten delivery times and improve efficiency. Their ongoing innovation and growth combined with the threefold multiplier in the space required for e-commerce continues to provide a powerful tailwind for our business. Finally, outside of the U.S., our international markets continue to outperform. In Latin America, consumption trends in both Mexico and Brazil remain robust supporting high occupancy and ongoing rent growth. Europe delivered another solid quarter maintaining strong occupancy and posting its first quarter of positive rental growth in two years. Japan also performed exceptionally well with occupancy above 97% and outperformance relative to the market of nearly 600 basis points. Together, these results highlight that our global footprint is not only strategic and valued by our customers, but also a key driver of the diversity and resilience of our platform. Turning to capital raising, we achieved two important milestones in strategic capital. First, the IPO of the China AMC Prologis Logistics REIT as we call it the CREIT on the Shenzhen Stock Exchange marking our third publicly listed vehicle. Similar to NPR in Japan and fever prologists in Mexico, the CRE broadens our access to capital diversifies our investor base, and strengthens our presence in one of the world's most dynamic logistics markets. Second, we added a new vehicle focused on development, redevelopment and value add opportunities a strategic complement to our open-ended funds focused on stabilized investments. In the fourth quarter, we held the anchor closing for the U.S. Agility Fund yet another endorsement of the Prologis platform in a competitive capital raising environment. We have a deep pipeline of capital raising strategies in various stages of formation for this foundational business line. We look forward to sharing additional updates with you as the year progresses. Moving on to data centers. At its core, this business is centered on four priorities. Procuring power, securing build-to-suit lease transactions delivering world-class facilities for our customers and harvesting value through asset sales. We continue to make clear progress on each front, During the quarter, we expanded our power access to 5.7 gigawatts, stabilized 72 megawatts of projects, and sold a state-of-the-art turnkey facility at compelling economics. In terms of leasing, demand is exceptional and every megawatt in our pipeline is in some stage of discussion. Including 1.2 gigawatts currently in LOI or pending lease execution. Our data center team and capabilities are expanding and executing at a very high level and we are extremely excited by the significant value creation opportunity ahead. Turning to guidance, which I'll review at our share. We are forecasting average occupancy to range between 94.75% and 95.75% which includes the expectation for a seasonal drop in occupancy in the first quarter before rebuilding over the year. Net effective same-store growth is forecasted to be in a range of 4.25% to 5.25% and cash in a range of 5.75% to 6.75% with rent change being the predominant and enduring component of this growth. Our G&A forecast is for $500 million to $520 million and our strategic capital revenue forecast calls for $650 to $670 million. As for deployment, we are forecasting development starts to range between $4 billion and $5 billion on an owned and managed basis. As mentioned earlier, we have increased visibility and confidence around new starts in our data center business we've included those volumes in this guidance at approximately 40% of the activity. Acquisitions will range between $1 billion and $1.5 billion and our combined contribution and disposition activity will range between $3.25 and $4.25 billion. In total, we are establishing our initial GAAP earnings guidance in a range of $3.7 to $4 per share. Core FFO, including net promote expense, will range between $6 and $6.2 per share while core FFO excluding net promote expense will range between $6.05 and $6.25 per share. In closing, 2025 brought unexpected challenges and periods of uncertainty. And we're very pleased with how the company performed throughout the year. Our teams once again demonstrated the strength and resilience of our platform and the discipline of our world-class operations delivering strong operational and financial results. Equally important, we used the year to strengthen the foundation of our business by advancing development entitlements expanding strategic capital, and accelerating our progress in data centers and energy. As a result, we entered 2026 from a position of strength with operating momentum and a setup that supports durable long-term growth. With that, I'll turn the call back to the operator for your questions. Operator? Operator: Thank you. We will now be conducting a question and answer session. We ask that you please One moment please while we poll for questions. And the first question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question. Blaine Heck: Great, thanks. Good morning, everyone. Dan, can you speak about any changes in strategic initiatives that may come with your leadership at Prologis? And specifically, any thoughts around the strategic capital side of the business and when you might expect to add additional strategies including a potential data center focused fund? Any information on the scope, potential timing, and earnings impact would be really helpful. Dan Letter: Yes. Thanks, Blaine. I highlighted our strategy pretty clearly in my opening remarks here. And what did I say there? First, our focus is centered on compounding the core logistics business. While continuing to broaden and strengthen the platform. Logistics is and will remain the foundation here. Serving the consumption centers around the world, capturing the embedded rent growth and lifting rents as markets recover. And then we'll start leaning more into development where supply is constrained. Data centers and energy high return adjacent businesses here. Where our land positions, our power access, and our customer relationships really give us that edge. We have a very strong customer franchise. And yes, I expect to grow the strategic capital AUM significantly both through existing vehicles and new vehicles And really, you know, at the end of the day, it it's it's all about hyper focus on execution for this team. Tim, maybe you want add on something on the new vehicles? Tim Arndt: Yeah. Hey, Blaine. On the, on the data center fund and its prospects, as you know, over the past weeks and months now, we've been dialoguing with some of world's larger investors and they are ones who would have interest in co in this business. And we've we've had a very productive couple of months in that regard. There definitely is a lot of interest such that we see capital isn't necessarily the constraint here. And what we're really after is determining what capital structure makes sense for this business that allows us to take full advantage of all the development opportunities in the portfolio, diversifying projects, but growing the AUM that we're talking about here and enhancing it with fee streams, etcetera, driving ROE. I'd say we're meaningfully through that process at this point. We expect to know more in the coming weeks and months. But it's something at the same time, I'll say we're taking care to get right given the scale of the opportunity. So in the meantime, the balance sheet has been comfortably carrying out the program that we have. It's been very profitable. So we'll compare these alternatives to that status quo. And, as we have more, more news for you, we will share it out in the coming months. Dan Letter: Thank you, Blaine. Operator, next question. Operator: The next question comes from the line of Michael Griffin with Evercore ISI. Please proceed. Michael Griffin: Great, thanks. Tim, I appreciated your comments kind of walking through puts and takes of your expectations in 2026. Wondering if you can dive a little bit deeper into your assumption around market rent growth and maybe if you're able to kind of quantify it for us in terms of what you're forecasting for the year ahead. It seemed like some markets are hitting an inflection point. You still got a healthy mark to market. So is this a scenario where maybe market rents are down in the first half of the year and then improve as we get to the second half? Just maybe walk us through some commentary there, that'd be great. Thank you. Tim Arndt: Yes. Let me pass that over to Chris. Michael, let me give you the full fundamental forecast for 2026. So that you have all the context you need to make that judgment. The key message here is market vacancies are poised to improve over the course of the year. Now that already began in the fourth quarter when net absorption outperformed completions and I anticipate '26 will play out the same way. New demand is a key variable here and we expect net absorption to approach 200 million square feet in 2026, versus 155 last year. Decline in supply is helping. Deliveries are on pace to be 185 million, 180 million square feet in 2026, down from 200 million square feet last So that'll take vacancies, were at 7.4% at the end of last year. Towards 7.1, 7.2% at the end of this year. And so you're right, markets are advancing at different rates. Tim described rent demand improving, occupancy levels beginning to improve across our rent a greater range of markets and ultimately rents. So we expect positive rent growth in aggregate to begin to emerge in a more clear way over the course of the year. Thank you, Michael. Dan Letter: Operator, next question. Operator: The next question comes from the line of Craig Mailman with Citi. Please proceed. Craig Mailman: Hey, good afternoon guys. Just want to hit on the data center piece real quick. I think Tim, you said that you have 1.2 gigawatts in LOI or advanced negotiations. Can you just walk through kind of how many projects that would be? And how that's reflected in the development start guidance? I noticed you guys for the first time aggregated warehouse and data center. So give us sense of, like, how much of that start guide into data centers versus warehouses? And if this 1.2 gigawatts is sort of a near term opportunity or twenty seven and twenty eight too? Tim Arndt: Yes. I won't break it down by project for you, Craig, but we have a small handful, I'll describe it that way, of starts that feel relatively imminent given the stage of leasing I just described. Them in. So I expect you'll see something this quarter in starts and certainly in the first half, maybe a couple there. In the guidance, I described that 40% of our overall owned and managed range of $4 billion to $5 billion we expect 40% of that roughly to be in data center. So you can unpack that understand the logistics piece. And I think, I will say I think there's we left some opportunity outperform this in a few ways, both in logistics and in the data centers. The logistics side, you know, I would say that what you infer there on logistics starts is still below what a very strong run rate would be for us. We could see that the environment for spec starts continues to improve and that would be a means for outperformance on those starts. And on the data center side, I would bear in mind that it's not only going to be in a project count, if you will, that we execute on, but also format. We have a mix that we think about between Powered Show and Turnkey and the appetite for Turnkey projects is quite high from our customers. And if we choose to execute to more in that format the aggregate dollars would rise as well. Dan Letter: Let me just pile on here We've often talked about a wide range of deployment that we can do throughout the year. We own land and over 70 markets around the world. And as we talked about $42 billion worth of opportunity in that land bank. Of which nearly 40% of that is ready to go. So we can really make a decision a moment's notice as it relates to starting So we have a lot of opportunity, as Tim mentioned. Thank you, Craig. Operator, next question. Operator: The next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed. Caitlin Burrows: Maybe another data center question. So just a year ago on the 4Q24 call, you guys mentioned that you could 10 gigawatts of power in ten years. I guess now we're one year later and you're already at almost six gigawatts. So I was just wondering if there was any update on that kind of 10 gigawatt outlook or trajectory? And do you think the pace of increase could keep going? Might it slow down because future increases in power or increase increasingly more difficult? Or just how do you expect that to trend? Dan Letter: Caitlin, I would say when we talk about the 10 gigawatts of power, what we talked about is just the universe of opportunity that we have. We own 6,000 buildings adjacent to the world's most dynamic consumption centers. We own or control 14,000 acres of land And it's it's really lumpy as to when the sites will be ready, will be energized. And that's why we're updating you as soon as we know what's coming. But I'm very comfortable stating that 10 gigawatt of pipeline and there's just a lot behind that. That is further down the road, but no update further from that number. Thank you, Caitlin. Operator, next question. Operator: The next question comes from the line Vikram Malhotra with Mizuho. Please proceed with your question. Vikram Malhotra: Good morning. I wanted to just clarify two things. Just based on your comments, which seem like we're moving from this bottoming to an inflection phase. So one, guess it's been hard over the last three years to predict sort of this inflection in occupancy. So what gives you strength as you see this downtick in the first quarter to build a fair amount of occupancy to hit your guide? And then related to that, as you get this strong core growth, what can you walk through some of the offsets that limit the FFO growth this year? Thanks. Tim Arndt: Hey, Vikram. Well, look, on occupancy, I think the first thing that is worthy of remembering is that the past few years now of absorption is what has been the outlier. We've had very low years of annual absorption in our markets. So even with Chris's forecast of approaching 200, we'd still call that not fully normal normal or or robust. So I think that's useful context perhaps. The remainder is look, I think our guide is for about 25 basis points increase in average, also maybe not as extreme as you might be reading into. But finishing the year at 95.8% and building occupancy over the course of the year To answer your direct question is what gives us a good amount of confidence in the forecast. That we have here. Thank you, Vikram. Operator, next question. Operator: The next question comes from the line of Sameer Khanal with Bank of America. Please proceed. Sameer Khanal: I guess, Tim, occupancy had a nice pickup in in Europe and Asia in 4Q. I think you talked a little bit about Japan, but maybe can you provide some color on kind of the big pickup there in occupancy and sort of what's driving that? Thanks. Tim Arndt: Hey, Sameer. I would say, I would look back across the year probably 2025. The Europe story and definitely the Japan story are not new. We've tried to highlight that few times, in recent quarters. Occupancies there in the market have been pretty strong, in Europe at least. Japan is a different story at the market level. But our portfolio in both cases has been quite high and has been that way for for quite a while now. Anything you would add, Chris? Chris Caton: No. That's right. I'd say momentum is building. Around the world. Ex US has has more momentum healthy demand, lower vacancies. Thank you, Sameer. Operator, next question. Operator: The next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed. Ronald Kamdem: Great. Just had a broader question on capital deployment both on the data center and the traditional sort of industrial side. If you could just walk us through just what that potential pipeline looks like in terms of the ramp and what you need to see to sort of increase the run rate specifically on the industrial side? Thanks. Dan Letter: Yes. Ron, I'll start and maybe Tim will chime in here. But as I mentioned, we have significant number of opportunities Good news is we saw this real estate cycle continue in the fourth quarter as as Chris mentioned in his prior remarks, we're seeing really starting to see better activity and really all size ranges. It's not just the big box story or at least fourth quarter wasn't just a big box story. So we can watch these markets literally by the week and month and and make decisions on the fly and and and ramp accordingly. Tim Arndt: Yes. I would only say, Dan, that's precisely right. And Ron, maybe I would to give a different context, it really is built up week by week at investment committee as teams are deciding conditions in their respective markets are appropriate. It's not something that we govern top down. Thank you, Ron. Operator, next question. Operator: The next question comes from the line of Nick Thillman with Baird. Please proceed. Nick Thillman: Hey, good morning. Maybe touching still on the development starts on the industrial side. Is it fair to assume that you still have a little bit more bias ex U.S. in that market? And then as we think of the land bank overall, you guys have alluded to the mark to market upside, but then replacement cost rents. I guess as we look at the bank, land bank overall, what percent of that bank do you think in the money when it comes to new construction, like barring or if the demand is there, like, how what percentage of that would you say is in the money at this point? Tim Arndt: On on new starts here? Well, I'll take the second part and Dan can pick up the the geographic mix maybe after. It's a challenging question to unpack the way you're phrasing. I guess what I would tell you is that we have value evaluate the valuation of the land bank every quarter and we continually read out you how we see that. Presently, we see that around 110% fair market value to book value. So that is going to be a mix of of projects that are more deeply in the money than others, but, I can only provide you the information on that aggregate basis. Dan Letter: And then as it relates to geographies, about two-thirds of the starts that we're assuming for the year on the logistics side are in the U.S. For 2026. That's that's up, about 10-15% year over year. And then we're seeing strong markets in Latin America between Sao Paulo, Mexico, I'd say not the border markets of Mexico, but Mexico City and And then if you go over to Europe, we're seeing we'll some starts in Germany, Netherlands, Northern Europe mostly. Thank you, Nick. Operator, next question. Operator: The next question comes from the line of Vince Tibone with Green Street. Proceed with your question. Vince Tibone: Hi, good morning. I have a few more questions on the data center opportunity. On the 1.2 gigawatts you mentioned are under LOI, would those be mostly powered shell or turnkey? I'm I'm just trying to get a sense of the total investment for that. And then could you also clarify just what exactly it means to be kind of an advanced stages of procurement for power? I mean, it's just everything we hear, the taking longer and longer to get power from the utility. So I'm curious, like, how far out that stuff that's in advanced stages may take before, you know, power could be delivered? Like, is it you know, because you have commitments for that power, but it may be, you know, three to five years, if not more, until it's actually delivered? Just trying to get a sense of both those points. Tim Arndt: Hey, Vince. I would I'm gonna answer your first question in a more generic way that we think of the program overall as likely being on the order of 60% to 70% powered shell. Having some amount in our forecast reserved for full turnkey. The deals that are in the near future are still working through those discussions. And we've seen it it may be surprising, but we've seen even in late stages or mid build customers decide to transition from powered shell to full turnkey. So that's why it's a little squishy right now. But to widen you out to think about the entire initiative, think about 60% to 70% power shell. Dan Letter: And, Vince, to your question around what defines advanced stages, what's secured, Advanced stages it 's the point when a project has a preliminary utility agreement that really signals progress towards a firm power agreement. It's really just pending the final design and construction with the utility. There's significant capital that's been outlaid at that point. And it's definitely a defined path to securing that from power. That often happens after many, twelve, eighteen, twenty four months of negotiations with these utilities. And then it typically takes another year to two to get to that secured stage. And then we consider secured power is when the data center project has a binding agreement through the form of an energy service agreement with the utility, and that's guaranteeing power delivery and committing to build that necessary infrastructure. Thank you, Vince. Operator, next question. Operator: The next question comes from the line of Michael Goldsmith with UBS. Please proceed. Michael Goldsmith: Good morning. Thanks a lot for taking my question. Despite what was a particularly volatile year in 2025, you still ended up at the high end of your initial core FFO like promote guidance, which suggests stability in the algorithm, but the spread for the outlook in 2026 is even wider. So there anything that would add more sensitivity or a wider range of outcomes this year? And then as well, Southern California lease percentage picked up a 140 basis points. So if you could touch on the health of that market, that would be appreciated. Tim Arndt: Hey, Michael, it's Tim. On your first question, I would think of it more as math, to be honest. We're just getting to earnings per share, FFO per share here. That's quite quite a high number crossing over $6 now. And if you just think of very variability in percentage terms, the penny range that we provide needs to move with that growth and widens out. It's just just natural. Chris Caton: Hey, Michael, it's Chris. On Southern California, great pickup. There has been a tone shift in Southern California worth discussing. So look, let's acknowledge Southern California has been a soft market and market vacancies are elevated there. But there is a new direction in customer customer demand and it's giving us confidence in the call that we've been consistent in making in terms of the opportunity for cyclical recovery to emerge. What I'm specifically looking at is in the back half of the year and so both in the third and fourth quarters, gross absorption and net absorption went in a different direction in an improved direction. Customers are engaging earlier in renewals There's broader discussion of new lease requirements across all submarkets from a wider range of customers. And as it relates to submarkets, we often get asked that question and there is still some nuances we pass as we approach this inflection point. Inland Empire is is clearly outperforming Los Angeles. There's great improving absorption in that geography. Class A over Class B is outperforming. That's a positive for our portfolio. And in fact, there are a couple of pockets where there's some scarcity and healthy customer demand that's that's leading to firming and improving pricing. So I'm thinking really big box in in Land Empire. Putting it together, the cycle is progressing and short term weakness is dissipating. Thank you, Michael. Operator, next question. Operator: The next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question. Mike Mueller: Yes. Hi, thanks. Do you have fund contribution expectations 2026 reflect just ongoing development activities for warehouses? Or does it factor in any contributions for the new vehicles? Tim Arndt: The only thing included in the contribution guidance is that we contemplate for the year is that the Agility Fund that I mentioned in my prepared remarks, before it starts some of the development activity it will undertake in the year, it will take some contributions of land from Prologis, marked up to fair value is the way that will operate. And that is reflected in the guidance. Thank you, Michael. Operator, next question. Operator: The next question comes from the line of Nicholas Yulico with Scotiabank. Please proceed. Nicholas Yulico: Thanks. Tim, in terms of the guidance on same store growth this year, I was hoping you could just unpack that a little bit. In terms of the acceleration in same store growth this year. Is that is that just being driven by easier occupancy comps? Or are you also expecting some improvement in mark to market that you can capture? Tim Arndt: Yeah. It's going to be let's break it apart. On the rent change piece or the mark to market, as you mentioned, that will be decreasing factor as rent change amounts get a little bit more normalized. We had 50% rent change in 2025, as I mentioned, and you can unpack and infer by looking through the supplemental will be in the high 30s. Or roughly 40% in 2026. As you evaluate market rents for our discussion of where they sit in our in our lease mark to market. So that'll be a smaller contributor, long way of saying occupancy drag will be a little bit less One of the predominant factors is just lighter FPLA. Really, from the Duke acquisition. That does have a long tail, I'll say that is still dragging net effective same store growth by 75 to 100 basis points. And it'll be with us for a few more years, but it does slowly reduce over time. Thank you, Nick. Operator, next question. Operator: The next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed. Todd Thomas: Hi, thanks. I wanted to go back to the capital deployment ask about something at a little bit of a higher level. You previously talked about deployment drag in '26 just given lighter levels of start and 2024 and 2025, which has impacted FFO growth to some extent in the near term? Can you talk about the cadence of stabilizations during the year? And comment on whether you see that accelerating or increasing as the year progresses. I'm just wondering if you can talk about the magnitude and impact of that drag within the '26 guidance and whether you expect that to begin alleviating as '27 approaches? Tim Arndt: Yes, Todd, I think the best disclosure on this is present in the sup with regard to the pipeline overall and we do demark what years of stabilization the projects fall into. We don't provide it out by quarter, That's just a lot of detail for one. But on the speculative side, that's going to be subject to when leasing is being achieved. Perhaps just to help you, if you wanted to unpack know, some breadcrumbs from, prior year starts, which we give you quarterly. I'd say our spec business is typically leasing up between seven and nine months. Long term average would be seven. Our recent years have been a little bit a little bit longer. I expect to see that tighten as market conditions do. And then build to suits, of course, come online immediately at project completion. Thank you, Todd. Operator, next question. Operator: The next question comes from the line of Brendan Lynch with Barclays. Please proceed. Brendan Lynch: Great. Thank you for taking my question. Another follow-up on the data center side. Can you discuss the five plus gigawatts of power that you have access to How fragmented that power is dispersed either geographically or even conceivably by asset? And where the largest blocks are that you have? Dan Letter: Yes, sure. So our our land and and the the power the the bank, if you will, it is distributed across Tier one and Tier two markets across The U.S. and Europe. That's Northern Virginia, That's Silicon Valley, Chicago, New Jersey, Dallas, Portland, in the in The US is tier one. It's it's the flap d. Markets. Literally, we've got Amsterdam, London, Paris, Frankfurt, Dublin, that we're working. And then Tier two, we've got a number of sites as well, Austin, Las Vegas, Phoenix, Salt Lake City, Boston, Denver. And then and then Madrid, Milan, and Berlin in in in Europe. So very dispersed, a wide range of opportunities here. Thank you, Brendan. Operator, next question. Operator: Our final question comes from the line of John Kim with BMO Capital Markets. Please proceed. John Kim: Thank you for squeezing me in. Wanted to follow-up on what's incorporated in same store guidance in terms of the occupancy growth of U.S. versus international market will that international outperformance continue? And also what we're expecting from solar contribution given there wasn't much contribution last year, but we're one year closer to the billion dollar Essentials revenue target that you're expecting by 2030. Tim Arndt: Yes, John. The occupancy gains that I would see in same store are relatively dispersed across our geographies. There's, more weight coming out of The US generally, of course, but, the levels of improvement even at the market level as we think about Chris' absorption, our kinda uniform in basis point terms between those geographies. Solar revenues, I'm glad you highlight It is It in NOI. We're very proud to have, surpassed that one gigawatt goal. By the way, I like to mention again, the growth you see there while in on its own, is just at a nominal level, to be frank, that it kind of pales in comparison to the $6.7 billion dollars of NOI from rental operations we have now, but that will continue to grow from here and become a much more meaningful contributor in future years. Operator: This now concludes our question and answer session. Now I'd like to turn the floor back over to management for any closing comments. Dan Letter: Thank you for joining us today. We appreciate your interest in the company. We look forward to connecting throughout the quarter or during next quarter's call. Take care. Operator: And ladies and gentlemen, thank you for your participation. That does conclude today's teleconference. Please disconnect your lines and have a wonderful day.
Operator: Thank you for your continued patience. Our meeting will begin shortly. Please standby. Your meeting is about to begin. Welcome to Metropolitan Commercial Bank Fourth Quarter 2025 Earnings Call. Hosting the call today from Metropolitan Commercial Bank, are Mark DeFazio, President and Chief Executive Officer and Daniel Dougherty, Executive Vice President and Chief Financial Officer. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the prepared remarks. Lastly, if you require operator assistance, during today's presentation, reference will be made to the company's earnings release and investor presentation, copies of which are available at mcbankny.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to the company's notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release and investor presentation. It is now my pleasure to turn the floor over to Mark DeFazio, President and Chief Executive Officer. You may begin. Mark DeFazio: Thank you, and good morning, and thank you for joining our quarterly earnings report. We are pleased with our fourth quarter and full year 2025 performance. Sustained growth in net interest margin, net interest income, deposits, and loans, combined with continued improvement in our efficiency ratio, positioned us to close the year on a strong note. The momentum we generated in the fourth quarter sets a solid foundation for meaningful progress in 2026 and beyond. Our disciplined underwriting and our franchise-wide risk management culture continue to anchor our safety and soundness approach. For the year, we expanded our loan portfolio by $775 million, representing a growth of nearly 13%. Total loan originations reached approximately $1.9 billion. Loan growth was funded by deposits, which increased by roughly $1.4 billion or about 23%, supported by our strategic funding initiatives. These initiatives included deepening existing deposit verticals and identifying new opportunities to diversify and strengthen our funding base. In the fourth quarter, we opened a full-service branch in Lakewood, New Jersey, as a conversion of an existing administrative office. Additionally, we expect to open two new branches in Florida in 2026, one in Miami and one in West Palm Beach, all of which will enhance our presence in these key growth markets. Asset quality remained solid with no broad-based negative trends across loan segments, geographies, or sectors. We continue to engage closely with our clients to assess evolving market conditions, and feedback to date has not indicated any areas of concern. This is a reflection of our disciplined underwriting and proactive portfolio management. Looking ahead, we remain focused on managing asset quality, optimizing profitability, and expanding our presence in New York and other complementary markets. Our strategy for 2026 and beyond centers on capturing additional market share through traditional channels while positioning the franchise to capitalize on opportunities that enhance long-term shareholder value. Several new initiatives will enter the market in 2026, and we expect to see early returns in the form of low-cost deposits and growth in increased fee income. These efforts reflect our commitment to build a more diversified, efficient, and resilient institution. I want to express my sincere appreciation to our employees and directors for their dedication and contribution throughout the year. Their commitment to excellence has been instrumental in Metropolitan Bank Holding Corp.'s sustained performance and will continue to drive our success in years ahead. I will now turn the call over to Dan Dougherty, our CFO. Daniel Dougherty: Thank you, Mark. Good morning, everyone. And again, thanks for joining our call. This morning, we will cover the strong results of the fourth quarter and conclude with 2026 guidance, focused on the continuation and importantly, the leveraging of the foundational financial strength evidenced in our fourth quarter results. Let's begin with a few comments on the balance sheet. The loan book was essentially flat in the fourth quarter; however, we did achieve our annual target growth. In 2025, the loan book increased by $776 million or about 13%. The reason for the limited loan growth in the fourth quarter was related to prepayments of approximately $317 million, which is about $150 million above the trailing three-quarter run rate. Fourth quarter total originations and draws were approximately $599 million, printed at a weighted average coupon or WACC net of fees of 7.28%. The new volume origination mix was in line with historical performance at about 70% fixed and 30% float. Over the next six months, we have about $1.1 billion inventories with a WACC of 6.94%. We assume that we will retain about 75% to 80% of those cash flows. In our forecast model, we assume that renewals will reprice at about 25 to 50 basis points below our new volume origination rate. As the treasury curve three years and out has not moved very much since the Fed began its most recent easing campaign, our loan spread guidance price guidance continues to drive coupons well above 7%. Our loan pipelines remain strong. I will provide 2026 guidance for the loan growth and other related metrics at the end of this narrative. In the fourth quarter, we grew deposits by $34 million or approximately 4.3%. As noted in the press release, for the year deposits grew by $1.4 billion or about 23%. On a spot basis, quarter over quarter, the cost of interest-bearing deposits declined by 43 basis points. As our balance sheet remains modestly liability sensitive, and more than $2 billion of our indexed deposits repriced on the first business day of the month following a rate change, the benefit of the mid-December reduction in the Fed funds target rate will only become apparent in the first quarter. We have $1 billion of hedged indexed deposits, which just display positive carry downs with Fed funds effective rate of approximately 3.5%. In our forecast model, we are using a generic cost of funds of the Fed funds target rate minus 50 basis points. Comments on the net interest margin? The margin was 4.1% in the fourth quarter, up 22 basis points from the prior quarter. As you know, the Fed began the recent easing campaign mid-September last year. Over the course of the 75 basis point easing cycle to date, our deposit beta for unhedged interest-bearing deposits has been about 75%. Expect that we will be able to replicate this performance for the next 50 basis points of rate cuts at the minimum. Supported by our deposit growth, we were able to pay off all wholesale funding totaling $450 million during the course of 2025. Now let's move on to some high-level comments on our income statement. Our methodical balance sheet growth and NIM expansion continue to drive impressive top-line results. For the fourth quarter, net interest income was $85.3 million, up more than 10% on a linked quarter basis and up almost 20% for the year. Now let's talk briefly about the diluted EPS print of $2.77. As mentioned previously, we experienced elevated loan prepayments in the fourth quarter. As such, our prepay penalty and deferred fee income was about $1.7 million above our normal run rate. In addition, in the first quarter, we've sold bonds and realized a gain of about $675,000. As well, in the quarter, we had an insurance claim recovery related to a discontinued business line and a compensation accrual adjustment that totaled to about $2 million. All told, I estimate that non-core credits put it to about $4.6 million or about $0.30 per share. Our fourth quarter NIM adjusted for above-normal prepayment penalty and fee income was approximately 4.02%. Our fourth quarter ROTCE adjusted for all of the income items that I just listed was just north of 14%. Our noninterest income for the fourth quarter was $3.1 million. I touched on the securities gain earlier. We do not expect to recognize further gains going forward. We do, however, continue to seek new business initiatives, as Mark mentioned, to drive growth in noninterest income. Noninterest expense for the quarter was $44.4 million, down $1.4 million versus the prior quarter. The major movements in operating expenses quarter over quarter were as follows: a decrease of $1.3 million in comp and benefits primarily related to a reduction in the bonus accrual and restricted stock expense. A decline in professional fees of $649,000 primarily related to a reduction in legal and other fees. As mentioned, a portion of the decline in legal fees was related to the receipt of an insurance claim. And finally, a $668,000 increase in technology costs. The primary driver of this increase was related to the digital transformation project. In the aggregate, for the fourth quarter, digital project costs were about $3.1 million. The effective tax rate for the quarter was about 30%. Now, let's take a look at what we are laser-focused on today. The outlook for 2026. To start, some thoughts on our interest rate assumptions and the balance sheet. We have penciled in two 25 basis point rate cuts, one in June and one in September. Clearly, the timing of our rate cut assumptions reduces their financial impact on our forecast. Similar to 2025, we expect to grow loans by about $800 million or approximately 12%. We expect the new volume loan mix to be consistent with recent experience. We expect to fund all planned loan growth with deposits. The securities portfolio will be maintained at about 10% to 12% of balance sheet footings. Now some thoughts on earnings and other financial metrics. We expect the NIM to expand modestly over the course of 2026. The number and timing of additional rate cuts are a primary driver of new performance. As well, the slope of the yield curve is an important variable. In our forecast model, we do assume some modest loan spread tightening throughout the year as a reflection of our loan growth demand. Based on our current forecast, we expect to print an annual NIM of about 4.1% for the year. Importantly, we expect that our business model is well equipped to defend or even expand the NIM with or without additional rate cuts. As for the provision, I note that the current consensus is generally aligned with our thinking. I do note that we are progressing through the workout process on many of the credits for which we booked specific reserves in 2025. The final disposition of these credits could result in allowance adjustments that are outside of our business-as-usual planning. For non-interest income, I suggest a 5% to 10% growth assumption is reasonable. We do aspire, as I mentioned, to rebuild the fee income line through time, generally in line with our 2024 results as a benchmark. Now some thoughts on the outlook for operating expenses. We expect the annual operating expense line total to about $189 million to $191 million. The OpEx forecast includes a number of unique items. The first item relates to the Modern Banking in Motion project. Our annual expense guidance includes $3 million of first-quarter spend primarily related to the extension of the timeline for conversion. The second item relates to the premises expense line item. In 2026, we will be expanding our real estate footprint both at our New York City headquarters and in West Palm Beach, Florida. The associated new expense run rate is about $2.2 million annually. Due to timing, the increase for 2026 will total to about $1 million. Finally, our plan includes growth in deposit verticals that are expensed below the line. The annual run rate of these fees is expected to increase by about $6 million in 2026. Putting this all together, our forecasted ROTCE approaches 16% by 2026. Finally, before we open the floor for questions, I want to mention that Metropolitan Bank Holding Corp. is hosting an Investor Day at our headquarters in New York on Tuesday, March 3. In addition to Mark and myself, a number of our other senior leaders will be presenting. More information is posted on the Events page of our Investor Relations website. A limited number of seats are still available for in-person attendance. If you have questions or would like to attend in person, please contact our Investor Relations team at ir@mcbankny.com. I will now turn the call back to our operator for questions. Operator: Thank you. The floor is now open for questions. Our first question is coming from Feddie Strickland with Hovde Group. Please go ahead. Your line is open. Feddie Strickland: Hey, good morning. Just wanted to start on the loan mix. Appreciate the comments. Opening comments and good to see momentum on owner-occupied CRE last couple of quarters. But I'm just curious if we could start to see C&I start to grow again after a couple of quarters of decline here. Mark DeFazio: I don't think so, Feddie. Core C&I you're going to see grow substantially. You'll see C&I that has a medical implication to it. So we continue to expand our healthcare practices and how we lean into healthcare. But Core C&I, I think we continue to manage that risk at our existing pace or slightly higher or even potentially slightly lower. Feddie Strickland: Understood. That's helpful. And just sort of along that same line, obviously, CRE concentrations come up a little bit just as you've done some repurchases and whatnot over the last couple of quarters, even as owner-occupied has gone up. Do you expect that it will be kind of stable from here just as you continue to grow owner-occupied CRE going forward? Mark DeFazio: Yes, I think so. I think our concentration increase to risk-based capital will be fairly stable going forward for sure. Feddie Strickland: And one last one for me before I step back in the queue. I know you've opened some new branches in New Jersey and South Florida. It sounds like you got more in the pipeline there. And I was just curious how much of a contributor those were to the municipal deposit growth we've seen over the last couple of quarters? Mark DeFazio: With New Jersey, yes. Because they had a little bit of a head start with the branch, the administrative office being converted. Florida has really not yet contributed. We just converted the Miami office and we're under construction in West Palm Beach. So I would expect significant contributions in the future from Florida and even more so from New Jersey as we go forward. Feddie Strickland: Right, great. Thanks, Mark. I'll step back in the queue. Operator: Our next question comes from David Conrad of KBW. Please go ahead. Your line is open. David Conrad: Yes, good morning. Want to talk a little bit about asset quality. I know NPAs went up around $5 million, not pretty stable this quarter, but maybe talk about the two credits there and maybe just update us from last quarter on the bigger relationship, what any movement there, what's happening with that relationship on NPAs? Mark DeFazio: Yeah. The two loans were in-market multifamily loans that properties were up for sale. And we expect to have little or no loss associated upon the sale of those assets. As far as last quarter's specific reserves, we're still working through the workouts. I'm still cautiously optimistic. As I said last quarter, I think we'll have a resolution to those loans by the end of this quarter, and we are engaging with the owners and workouts take time. You need to have patience and maturity. And I think we're going to come out on the right end of this, hoping to report that in the first quarter. David Conrad: Great. Thank you. And then just a follow-up question on capital. I think your CET1 ratio is about 10.7% right now. Maybe walk us through maybe your targets there in the range where you'd want that to be as you grow the balance sheet kind of double digits? Daniel Dougherty: Yes, David. As I when I think about that, I kind of focus on TCE. And we expect to see that kind of trend from the current high eight, 8.8 or so to about low nine. And that's kind of where we feel comfortable running the institution. David Conrad: Okay. So you get back Thank you. You get back in back into CET1 from there. Daniel Dougherty: Yeah. Yep. Yep. Perfect. Thank you. Yep. Operator: Thank you. We will move next with Mark Fitzgibbon with Piper Sandler. Please go ahead. Your line is open. Mark Fitzgibbon: Hey guys, nice quarter. Daniel Dougherty: Nice first question I had, Dan, wondering if you could share with us when you expect the digital transformation cost to be fully done and that transformation to be completed. Is that in the first quarter? Daniel Dougherty: The conversion is anticipated still in the first quarter. In fact, Presidents' Day weekend. That's the big day. Okay. So when that's complete, most of the you know, that's when the explicit expense terminates, but know, then the run rate going forward and takes shape. And there's always trailing stuff, but that's when the end of that $3 million spend will be finalized. Mark Fitzgibbon: Okay. Great. And then I was curious, was there any interest recovery? I know you mentioned some prepayment penalty income in the fourth quarter, but any interest recovery in NII this quarter? Daniel Dougherty: No. Mark Fitzgibbon: Okay. And then I wondered if you could share with us which verticals really drove the demand deposit growth this quarter. I couldn't quite tell from the tables. Daniel Dougherty: Total growth for the quarter largest contributors were munis. And it really was across the board, really, really nice distribution. But munis and property managers. And then customers. Both borrowing customers and new deposits. We're the biggies. And of course, EB5 pitched in a bit as well. So, it really crossed the board. Communities would be outstanding. Bit of the stuff. Mark Fitzgibbon: Okay. And then lastly, maybe for Mark, Mark, your currency's improved somewhat. I know you still think it's it's inexpensive. But do you feel like M&A is more possible now likely given what's going on in the environment out there? Mark DeFazio: At this point, we don't see a lot of value there in the franchises that are in our markets. So we're going to stay very close to the best here. We have some very exciting rollout of new opportunities that you'll read about. Hopefully by the end of the first quarter. So we're going to just keep doing our blocking and tackling and materially outperform our peers here and let these other M&A transactions just sit out there and let them work themselves out. But for now, we're just our head is down and we're focused on organic growth. Mark Fitzgibbon: Great. Thank you. Operator: Thank you. Do have a follow-up from Feddie Strickland with Hovde Group. Please go ahead. Your line is open. Feddie Strickland: Hey, just one quick follow-up kind of along that same vein. I wanted to ask on overall growth strategy. I mean, is something like a team lift out in the new geographic area a possibility? Absent any sort of M&A, if you have the opportunity to bring on a good team in a new geography or in an adjacent geography? Would that be something that's more likely? Mark DeFazio: Likely not. It's really not part of our culture or DNA here. We've been acquiring a really good talent in the markets that we operate in without taking the risk, the financial risk and the burden of teams and the cultural challenges of integrating. So we're not a big fan of the team lift outs. Doesn't say that if one presented itself that was unique and could fit in. We would consider it. But there's a lot of independent talent out there, in the markets that we're in. So far, it has worked for us for twenty-seven years. I think we're going to stick to the growth strategy that we have. Feddie Strickland: Great. Thanks. Operator: Thank you. And this concludes the allotted time for questions. I would like to turn the call over to Mark DeFazio, for additional or closing remarks. Mark DeFazio: Thank you. Just want to end on suggesting that our results continue to show the foundational strength and stability of our business model. Metropolitan Bank Holding Corp.'s business strategy, which is based on strong underwriting, conservative risk management, and the leveraging of our market standing positions us well to continue to deliver prudent growth outstanding financial performance. We remain steadfast in our support of our clients and communities while achieving appropriate returns for our shareholders. Thank you again for attending the call, and we look forward to seeing and speaking to you at our Investor Day. Thank you very much. Operator: This does conclude today's conference call and webcast. A webcast archive of this call can be found at www.mcbankny.com. Please disconnect your line at this time. Have a wonderful day.
Operator: Certain statements made during today's event may be considered forward-looking statements within the meaning of the safe harbor provision of The US Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are subject to inherent uncertainties, and actual results may differ materially. Any forward-looking information relayed during this event speaks only as of this date, and the company undertakes no obligation to update the information to reflect changed circumstances. Additional information concerning these statements is contained in the risk factors and forward-looking statements section of the company's annual report on Form 20-F filed with the SEC on 06/16/2025. Copies of these filings are available from the SEC or from the company's investor relations department. I would like to now turn over the call to Rajesh. Over to you, Rajesh. Rajesh Magow: Thank you, Vipul. Welcome, everyone, to our third quarter call for fiscal 2026. At the outset, I am pleased to share that Q3, which traditionally represents the high season for leisure travel in India, witnessed strong demand recovery, barring temporary disruption in December caused by new and stricter flight duty time limitation rules (FDTL) for pilots. The festive season and a series of long weekends fueled this demand momentum, reinforcing our belief in the emerging trend of Indian travelers' desire to spend more on travel. Our diversified product portfolio and market leadership continue to act as mitigating factors in case there is any macro disruption that happens in one of the segments. For instance, while domestic air was impacted in December, we were able to capture some of this demand on other means of transport like bus and cabs. We continue to believe the Indian travel market is poised to expand, driven by a confluence of economic, social, and technological factors. Our focus remains on delivering superior value and a seamless booking experience and support to our customers with constant product innovations leveraging AI. We see AI as a very welcome and positive tech evolution, opening up many new opportunities in our business. Leveraging AI, we are aiming to improve all aspects of the customer journey, right from inspiration, discovery, search, booking, and post-sales. One of the most significant impacts of AI is the ability to offer a highly personalized experience. We have developed AI models using LLMs and vast amounts of in-house proprietary data to power Myra, helping customers interact with it from planning to eventually booking their trips. We believe over time, our product will be more relevant and effective because of our own proprietary data for travelers. Myra has now scaled to over 50,000 conversations daily, with over 72% of conversations being termed as good conversations. Around 15% of the conversations happen during the early stage of trip planning, enabling us to influence destination and product choice earlier in the customer life cycle. Myra is also helping us drive penetration into smaller cities, whether it's vernacular voice capabilities, with over 45% of Myra users coming from tier two cities and beyond. Voice-led interactions are 50% higher in non-metro cities. AI is also helping us improve post-sales customer experience through a virtual assistant providing instant 24/7 support to travelers. Our AI voice and chatbots are now autonomously resolving about half of the customer queries across flights and hotels, significantly improving service scalability and efficiency in the system. We are also using AI to augment our data intelligence support to our supply partners. For example, to empower our hotel and host partners, we have introduced a Geni-powered digital performance analytics summary in audio playbook format in Hindi and English, significantly improving partners' engagement. Besides following our one-stop-shop strategy with a view to meet all travel and travel-related needs on our platform, we have now expanded our product offerings with the recent launch of tours and activities, giving Indian travelers access to over 200,000 bookable activities across 1,100 cities in 130 countries worldwide. Indian outbound tourists often struggle with dispersed information, foreign currency pricing, and disjointed planning tools when booking activities and experiences. By stitching all of it together, we aim to remove friction and make it convenient for travelers to book in-destination experiences also in advance before they start their travel. Let me now turn to business segments, starting with the air ticketing business. The air market supply and growth bounced back on the back of robust seasonal demand in October and November, with domestic daily departures growth of 25% year-on-year, respectively, from a degrowth of minus 4% in Q2. However, new flight duty rules caused disruption in December, leading to daily departures degrowing in December at minus 5% year-on-year as against the expected 5% growth year-on-year. Despite this disruption in the domestic market, we were able to deliver good performance aided by robust growth in international travel and our diverse portfolio of all modes of transport as some of the seasonal demand moved to other modes of transport. International outbound travel from India presents a significant growth opportunity. We remain focused on growing this segment. We have launched a new feature in the international flights funnel that provides users with end-to-end visa guidance for their destination. It covers visa types, processing timelines, permitted length of stay, required documents, and applicable fees. Users can also initiate their visa application directly on MakeMyTrip through this feature as well. Early results show strong engagement on the listing page, along with a positive impact on both conversions and visa attach rates. Our accommodation business, which includes hotels, homestays, and holiday packages, delivered a strong 20.3% volume growth year-on-year. Growth was driven by strong demand for leisure travel with the highest-ever check-ins recorded on December 25th, with wedding season demand and MICE events. The reduction of GST on hotel rooms under the rupees 7,500 category has also been a catalyst for the growth. We have seen a surge in booking volumes in this segment as customers responded to attractive pricing. It is important to note that this has led to a divergence between volume growth and gross booking value growth. The gross booking growth is more moderate as it reflects the lower tax component in the final price paid by the customer. Lower GBV growth is an arithmetic consequence of the tax change and not a sign of any weakness in the segment. We continue to drive deeper penetration into India. We now have 97,000 plus accommodation options available on the platform covering 2,050 plus cities in the country. We are also driving online penetration in this segment with strong demand coming from tier two cities and beyond. During the quarter, we sold properties in over 1,950 plus cities across the country, with almost 100 plus new cities selling for the first time in the last twelve months. On the product side, we have made GenAI-led interventions across the top 25 international cities, including prominent international beach destinations, to power beachfront discovery for beach holiday-seeking travelers. We are also using this knowledge graph information to determine and introduce clear beach proximity tags, like on the beach, beachfront, short walk to the beach, on listing pages, thus improving discovery and conversion. In addition, for women travelers, we now feature women-specific ratings, AI-generated review summaries, and safety scores derived from female travelers to support deep information-seeking behavior. By adding specific safety indicators and top-rated by women filters, we are building a confidence-driven ecosystem for a segment that travels 25% more in groups. These features are already live across 100 plus cities and 33,000 plus properties. This comprehensive approach ensures that the growing number of women travelers can explore with predictability and trust. Our holiday packages business witnessed strong seasonal performance as well. During the quarter, we successfully operated MakeMyTrip chartered flight packages to Phu Quoc in Vietnam, thereby unlocking the potential in an unexplored destination for our outbound travelers. This reinforces our belief that direct connection along with a simplified visa process helps open new destinations very well. The Philippines, for instance, is another such recent example. Our homestay business continues to scale well. During the quarter, we sold 27,600 plus unique properties covering over 1,050 plus cities. This business now contributes early double digits to the overall hotel volume. Our bus ticketing business witnessed strong growth in Q3, aided by festive and holiday travel with all regions growing in double digits. Inventory addition remained buoyant throughout Q3 fiscal year 2026, with private inventory crossing 45,000 daily schedules by the end of the quarter compared to 40,000 daily schedules during the same quarter last year. During the quarter, we strengthened our cross-sell strategy by introducing unified inventory on the rail search page, enabling rail users to discover available buses on their search routes. On our Southeast Asia Red Bus platform, we partnered with Grab to integrate intercity bus and ferry bookings into its platform, providing more options and making travel more convenient for users. Our corporate travel business, where both our platforms, MyBiz and Quest2Travel, are witnessing strong growth on the back of new customer acquisition. Our active corporate customer count on MyBiz is now over 77,500 plus, compared to 64,000 customers during the same quarter last year. And for Quest2Travel, the active customer count has reached 539 large corporates compared to 493 customers in the same quarter last year. You would recall that we had acquired the travel expense management platform, Happay, at the start of the year. I am happy to report that our integration with Happay is now complete, with flights and hotels resulting in Happay becoming a complete travel and expense management solution now. With this, let me now hand over the call to Mohit for the financial highlights of the quarter. Mohit Kabra: Thanks, Rajesh, and hello, everyone. The highlight of the quarter was our strong performance in October and November, wherein we capitalized on the improved sentiment by launching a first-of-a-kind festival travel sale called Travel Kamhurat Seed. It saw the widest travel participation from our suppliers across travel services as well as our non-trade partners. It helped us engage with our 75 million users during this same period of about thirty-three days. It also helped us build significant advanced purchase behavior, particularly for the upcoming peak holiday travel in December. It also helped us mitigate the impact from the low light of the quarter, which was the disruption of flight operations, particularly during the first fortnight of the December month. This significantly impacted travel plans and bookings during that period. While the situation has now stabilized, complete supply recovery is likely to get pushed out into the next fiscal year. We are pleased to report that despite the disruption in the month of peak seasonality, we were able to drive strong performance overall for the quarter. Moving on to our segment results, our air ticketing adjusted margin is $207.9 million, registering a year-on-year growth of 20.4% in constant currency. Robust performance was driven by strong growth in the international air ticketing business, which now accounts for about 43% of the existing margin within the ticketing segment. In the domestic air market, while the industry grew by just 0.9% year-on-year, we were able to deliver 2.2% year-on-year growth. On a flown basis, we saw slight market share gains, with our share now increasing to just over 31% during the quarter. On the hotels and packages segment, we recorded strong volume growth of 20.3% year-on-year, with standard hotels growing even faster at 20.6%. This was largely on the back of strong demand aided by the recent rationalization of GST rates for hotels priced under 7,500, where the GST rate has been reduced from 12% to 5%. This has resulted in strong room night growth of over 23% in the non-premium price segment. As a result of this mix shift, as explained by Rajesh, we saw slightly neutral gross booking growth year-on-year at about 15.9%. The adjusted margin in the standalone business was in line with the GMV growth. It is encouraging, this tax rationalization initiative of the government of India has had a positive impact on driving up volumes in the hotel segment. The mix of international hotels and packages revenue has also increased to about 24.2% in the quarter compared to about 23% during the same quarter last year. In our bus ticketing business, the consistent margin stood at $42.4 million, registering a strong year-on-year growth of over 26.1% in constant currency. Our ancillaries business, which is part of the other segment, is scaling up well. This is helping us get a larger share of the wallet of our customers by building the attach of a variety of ancillary services. As a result, the adjusted margin from the other segment came in at $27.5 million, witnessing a strong growth of 45.5% year-on-year in constant currency. Moving on to the expenses side, most expenses have come in line. Marketing and sales promotion expense for the quarter was at 5.6% of gross bookings, again, in line with high seasonality and improving mix coming in on the back of strong growth in higher-margin segments like hotels and packages, bus ticketing, and ancillaries. This improvement of the mix is also translating into marginally better profitability overall. The adjusted operating margin has improved from 1.76% of gross bookings during the same quarter last year to 1.82% of gross bookings during the current reported quarter. We are glad to report our first $50 million plus adjusted operating profit updates in the quarter, with the actual number standing at $50.7 million. The non-cash interest cost on our zero-coupon convertible bonds for the quarter was recorded at $28.3 million, and the translation-related foreign currency losses in view of the rupee depreciation stood at about $5.3 million. Our reported net profit for the quarter was $7.3 million. The adjusted net profit came in at about $51.4 million, with adjusted diluted EPS growing by about 33% year-on-year. You would recall that as part of our capital allocation strategy last quarter, we had increased the size of our buyback plan to $200 million and also included the recently issued 2030 convertible notes in the repurchase plan. We have repurchased 550,000 shares for an aggregate amount of approximately $41.5 million during the quarter. We also repurchased 2030 notes with a principal amount of $5 million for an aggregate amount of approximately $4.6 million. Accordingly, the total utilization for the buyback program was about $46.1 million, which has been our highest in-market buyback to date. We ended the quarter with cash equivalents of over $100 million. We continue to dial up investments in core growth capabilities like AI and other organic initiatives while scouting for potential strategic investment opportunities. With that, I'd like to turn the call over to Vipul for the Q&A. Vipul Garg: Thanks, Mohit. All the participants will now have the opportunity to ask a question from the management. Anyone who's looking to ask a question can click on the raise hand button on their screen, and we will take the questions one by one. The first question is from the line of Aditi Suresh of Macquarie. Aditi, you may please ask your question now. Aditi Suresh: Well, thank you for the opportunity. So two questions. The first is on the standalone hotels segment. There's clearly been a very strong acceleration in your number of hotel room nights booked. Could you further break down that by maybe a premium segment, the budget segment, and also in terms of the growth you're seeing there? And then in relation to that, are there any changes to the online take rate you're seeing as this mix is changing? Mohit Kabra: Thank you. Maybe I can take that. Like I just called out, the whole GST rationalization, which came in September, was expected to be a tailwind for growth in the hotel segment. And we have actually seen this coming through. While our overall standalone hotel room nights have grown at about 20.6%, the room night growth in the non-premium segment, which is the budget to mid-pricing, has been much stronger at about 23% year-on-year. So we clearly saw that benefit coming through. In terms of overall margins, I think our margins have largely stayed in line at about 17.7%. So there's no real significant change in the margin structure per se. Like we've been calling out, we want to keep the margins in the high teens category, and we're pretty comfortable in having a stable regime on the margin side. Aditi Suresh: Thanks, Mohit. And then the second piece is on ancillary services. Here you're seeing really strong revenue growth. Is it now possible for you to quantify the underlying margin you're seeing here? Because I assume that a lot of this is just a lockdown to EBITDA. Please, talk through and give us any color on the underlying margin for the growth you're seeing in ancillary services. Thanks. Mohit Kabra: Sure. The growth in the other segment or ancillaries has been a continuing trend if you look at it over the last few years. It is also coming in from the fact that we have been adding a lot of new services on the platform over the last few years. Over a period of time, each one of them is scaling up well. Just to give you an example, a couple of years back, we were running the capacity cap segment, dialing up the input transfers. We have started dialing up rail ticketing, particularly for the high-speed air-conditioned trains. There, our market share has gone up closer to about 4-5%. Apart from this, we've also been adding a lot of non-transport ancillaries, whether it is buy-side insurance, forex, sponsorships, and ad tech on the platform. Visa service is something that I just called out. All of these put together, we believe, and this year, we also added a new segment of tours and activities. This is interesting because a lot of these travel customers book their core travel bookings with us, but there is a requirement for in-destination services as well, largely on tours and activities. Building that on the platform helps us retain them even for these services. With this increasing spread of other travel or travel-related services, which we are going on adding, we do believe that the other segment will keep delivering good growth for us. At some point in time, maybe five to seven years down the line, some of these segments could become meaningful to be reported on their own basis. There are some segments that are more transport-related, and there the margins are in line with the industry. For some of the others, there's a significant fall down to profitability. When we look at profitability, we largely look at it at a platform level and therefore report margins at a segment level but report expenses and profitability at a platform level. Vipul Garg: Thanks, Mohit. Thanks, Aditi. The next question is from the line of Sachin Salgaonkar of Bank of America. Sachin, you may please ask your question now. Sachin Salgaonkar: Thanks, Hi, management. I have three questions. First question, a follow-up to Aditi's question. Mohit, when we look at the year-on-year growth in the hotel business, it was 17% last quarter. It's now 9%, which has gone below 10% this quarter. I understand the impact of GST. Also understand the impact of rupee depreciation. But how to think about it? Is there some kind of a one-off out here? How should one think about a normalized growth from this business? This business was growing at 20 odd percent plus in previous quarters. So, do we see the growth resuming back to that number? Should I say all three questions, or should I take one by one? Mohit Kabra: Yeah. Sorry. Let me just explain this a little better. Because there's something which is more like a one-off starting in this particular quarter onwards. Right? Because the GST rationalization almost happened at the end of the previous quarter. It's important to explain this. At a very high level, if you really look at it, we have reported more than 20% growth on the volume side. Now if you look at the price segment, which is below 7,500 rupees, there's been a GST reduction of almost 7%. And almost two-thirds or 70% plus of our volumes come from this particular price segment. So roughly about a blended impact of about 5% plus goes through purely on account of the GST-related impact on the gross booking value. Therefore, like I said, gross booking growth year-on-year in constant currency has actually come in at about 15.8%. If you factor in this additional 5% impact, which came in on the GST side, then our growth actually remains in line with the volume growth. So I thought I'd just share the overall impact with the GST rationalization. Otherwise, there's no real one-off impact. It's just going to be a different GST rate in the previous year. On a year-on-year basis, this looks slightly different. Sachin Salgaonkar: Sorry. Mohit, if I may just ask you to clarify. I heard you saying 9% number somewhere. Which number are you referring to? Sachin Salgaonkar: So, Rajesh, I was referring to the reported hotels and packages revenue, which is $133.2 million. In Q3 2025, it was $121.9 million. So it sort of implies a 9% year-on-year growth. Mohit Kabra: No. That's true. Therefore, I was just trying to bake in the currency impact as well. In calling out the constant currency growth. Sachin Salgaonkar: So no. I get it. Mohit, now that we end up seeing numbers on a reported currency basis, going ahead, we should sort of look at a similar kind of growth, sliding from these levels. Right? Mohit Kabra: Absolutely. Absolutely. At least for the four quarters, now, beginning this quarter that we reported, this GST impact would be there. Constant currency impact would largely be dependent on how the currency plays out in the coming quarters. The GST impact would largely remain on these lines. Sachin Salgaonkar: Got it. Second question on Indigo. We all know they've been asked to cut 10% of capacity. General checks in the market indicate that, till date, other airlines have not been able to fully offset that capacity impact. So as we head into calendar '26, how should we look at the domestic air traffic growth for the industry? Do we see that normalizing, or do we still have a bit of an out there for the full year '26? Rajesh Magow: So maybe I can take that, Sachin. Yeah. This particular disruption was not even factored in. It came from nowhere, to be honest. Because these rules were always there. But I don't think anyone anticipated that this would cause this kind of a disruption. Therefore, the reduction of supply will happen and largely happen with Indigo because that's the largest airline in the market. Now our sense is that at least the estimates that we see basis our conversations, while things might have just from a disruption standpoint stabilized, in this running quarter, JFM quarter, it should come back to, again, the positive territory. I'm talking about daily departures getting back to, because December, it was negative growth of minus 5% on daily departures on an overall basis. The estimates are now suggesting that it should be back to the positive zone, albeit at a flat or a one or 2% year-on-year positive growth. As things progress and more we get out of this particular issue where the rules settle down, the pilots come on board, etcetera, slowly and gradually, this will continue to keep improving. Outside of this, nothing else changes. Because the new plane schedules, whichever were coming, the supply that will continue to keep coming. We also learned that even with Air India, the refurbishment of the planes is also happening at an accelerated pace. Along with the fact that they also keep getting new planes on a regular basis as well. That is likely to continue. So I think the overall picture, in all fairness, will be more clear, I would say maybe the next seasonal quarter. Which is April, May, June quarter, when the summer schedules are filed. I think we will be in a better position to see overall what kind of supply schedules are being filed factoring in this temporary issue because of the new rules on flight duty travel for pilots. The new infusion or the refurbished planes that are coming in. So I think we'll have to wait net net one more quarter, and I've already given you this quarter's sort of estimates that the industry is talking about. Sachin Salgaonkar: Thanks, Rajesh. And my third question is on generative AI, maybe two parts to the question. One would love to understand the feedback on Myra since you guys launched. Yeah. And second, in a market like the US, we're actually seeing Google and ChatGPT launch their generative AI on travel. Now, hopefully, and subsequently, perhaps at some point, it might come into India. So as and when that comes, how should we think that from a MakeMyTrip perspective? Is it a new competition for MakeMyTrip where consumers now have an option to go towards these LLMs and book their ticket? Despite the fact that at the back end, fulfillment perhaps could be done by, let's say, MakeMyTrip only. Rajesh Magow: Yeah. So let's talk about that. Firstly, progress on Myra. Very encouraging, I must say. In fact, some of that I was sort of mentioned in the script as well, but I'll give you more color. There are a few metrics that we've been tracking. One is how the interactions, the number of interactions are growing. So from, let's say, a couple of months ago, about 20,000, 25,000 a day, we have now touched about 50,000 interactions a day, not transactions a day, but interactions a day on Myra. Which is two times growth in two months. We are seeing pretty much day-on-day, week-on-week growth on that. So clearly good traction coming up. On the quality metrics side, we also measure what we call good conversation and also the quality score of the interaction. That is also progressively improving. We now have a quality score of about 3.9 on a scale of one to five, and about 72% of the conversations are good quality conversations. Just to give you a sense of what the good quality conversation is, the interaction is happening with more and more back-and-forth question-answer rather than just asking a 30,000 feet level query and then just going off the interface. That number is about 72%. The other two very important and encouraging metrics that we are tracking, one is, and that was one of our hypotheses as well, one is about the new users. We are seeing out of these 50,000 interactions about 20% interactions are happening from the new users never transacted before. That is largely coming from tier three, tier four cities, which is exactly what we were aiming to get. Where the voice bot is being largely used in vernacular language or the spoken language that consumers prefer. Coming in from whichever city, whichever state that they're coming from. Last but not least, I would say, which will be a perfect segue to your second part of the question, the trip planning part, because that was another thing that the OTAs had not really been globally focusing on the top end of the funnel, which is the trip planning piece. On Myra, we have seen at least about 23 or 24% of the interactions are related to more trip planning and not necessarily immediate travel. All these metrics are pointing towards quite promising, encouraging trends, and we will continue to keep monitoring. In parallel, obviously, we are working very hard to further improve the product as well. That journey is also in progress. Now coming to your point on what Google might have launched in North America, and when it comes to India, etcetera. Our take is as follows. What is happening is, like I just mentioned earlier, that as far as transactions and fulfillment and the kind of traveler who's willing to, who's made up his mind or her mind and coming to just to book the transaction and get done with it. I don't think that is going to get anyway potentially disrupted. Trip planning was the piece which was not being done by OTAs in any case. Then it remains to be seen. If they launch, let's say, their own GenAI tool for trip planning, whether they will attract more traction. In all probability, there is a possibility that they will attract traction and that the customers from conventional search will move to using AI tools for doing trip planning. To my mind, a large part of that is going to be share shift happening from a conventional search to AI tools. Our counter to that to an extent will also be our own GenAI tool for trip planning as well. The thing to watch out for will be how do we continue to keep protecting our direct traffic, which is the majority of that is on our app, as you know. That they continue to keep coming to us directly. Or we end up sort of keep growing that direct traffic as a percentage of the overall traffic. The share of the paid traffic from any of these new avatars of the search engines, we don't end up sort of increasing the share of the paid traffic from there. I don't really see, at least at this point in time, this is our conversation and this is the kind of development that has happened, including the development that is in progress. That there is anyone who is trying to talk about getting really deep in the funnel and also looking at even the fulfillment, post-sales activities, etcetera. Because those are the modes that will continue to stay with the OTAs. I think trip planning is the only piece where there is definitely a possibility given the richness of the data that they will have based on the LLMs. They might get more traction. But the counter to that for that will be our live-to-date customer base and the direct traffic contribution that we already have. How powerful and popular is the brand that MakeMyTrip and RedBus are. I'll be able to protect that progressively or not. Our energies, investments, resources are channelized towards that as we continue to watch this space and then accordingly sort of tweak our strategies as we go along. We are seeing this as more of an opportunity than a threat. I don't think, even in the conventional search space, this debate was always that whether Google is our competition or Google is the competition for OTAs and all, OTAs or not. I don't think, and that debate might still come back. But the reality is that, like in the past, I think there are clear distinct modes and their advantages that the OTAs bring to the table. I think they have a very clear and distinct objective and the business model that the horizontals or the generic search engines have. I'm not sure that even with this evolution of new technology, there's going to be a significant overlap going forward either. Sachin Salgaonkar: Okay, Travis. Thanks for the detailed answer. Very clarification, Mohit. We saw the NCLT approval for MakeMyTrip and the RedBus merger, which in a way sort of removes any legal or overhang from a potential India IPO point of view. So any revised timelines should look from an IPO point of view? That's it from me. Thanks. Mohit Kabra: Not really. I think, should we think of that? We'll come back separately. As you know, we have been in this restructuring process. A couple of years back, we had done a legal entity restructuring wherein we got the OTA businesses to come together. Now all the key operating businesses have been brought under a single legal entity. But, yeah, it does facilitate an eventual IPO at some point in time. To that extent. But no real change in thought process over there. Vipul Garg: Thanks, Sachin. The next question is from the line of Manish Adukia of Goldman. Manish, you may please ask your question. Manish Adukia: Thank you, Vipul. Hi. Good evening, team. So wanted to just go back to the growth discussion we were having in the early part of the call. I understand, Mohit, what you explained and then the volume being strong, 20% plus, and GBV, 15% because of GST. Why should revenue growth get impacted? Do you get paid from the hotels based on the GBV or the actual revenue that they recognize? I would have imagined that if growth is faster in mid to premium, sorry, mid to budget hotels, technically, your take rate should expand because you typically would have higher take rates in mid to budget compared to premium hotels. So I'm unable to reconcile the revenue slowdown. I understand GBV slowdown there, but I'm unable to understand the revenue bit. So if you can just explain that, that'll be helpful. That's my first question. Mohit Kabra: Yeah. No. Just to repeat it, Manish. The idea, if you really look at our margins largely coming on the booking value. Right? Therefore, the impact in a manner of sort flows both into the booking value as well as into the overall margin absolute margin that we get. So the percentage doesn't change, but the absolute margin that we get gets impacted as well. But like we have been calling this out even last quarter, when this change had come in, we were calling it out as a significant positive because this just helps unlock volumes or demand particularly at the price point, which is very sensitive. Right? Customers are pretty price sensitive in the mid to budget segment. Therefore, this is an important unlock. Therefore, if you really look at it, the growth has actually accelerated very nicely through this quarter. In fact, not just only in hotels, but across segments. Despite domestic air being at a very marginal growth for us. And for the industry. Our overall segment growth across all segments that we report also stood at about 22%. I think I'm more taking encouragement from the fact that this segment growth or the volume line growth continues to be strong. The rest is largely a play out of the changes in the landscape. They will get normalized over a four-quarter period. Manish Adukia: Very helpful. And your air growth, of course, in the quarter was impacted by what happened with Indigo. Hotels were extremely strong, partly driven by the GST cut on volume. But would the hotel volume growth, in your opinion, have been even faster without the Indigo disruption? Like, I mean, I'm just trying to think that here on, even on volume, is there room to accelerate in the foreseeable future? Mohit Kabra: Needless to mention, Manish, actually, flights are a lead indicator. Right? It kind of, if you look at the entire travel plans, for most Indians, they start with a flight booking. And then everything else follows. Right? So I think what we are trying to do is that whatever is the significant adverse impact coming in from the disruption on the flight side, to a large extent, we are trying to mitigate it through modes of transport. Therefore, if you see, we have been dialing up or seeing good growth on the bus ticketing side, also on intercity cabs, etcetera. Clearly, we could have benefited with the only description on the flight side. If I really look at it, very briefly, in terms of how the growth has panned out between the months during the quarter, clearly, December was a month of much slower growth for us. Therefore, again, it indicates the same. It would have helped, but I think given the circumstances, the hotel growth was very, very encouraging. Manish Adukia: No. Absolutely. And just a couple of other follow-up questions from earlier. On the overall spend on marketing and promotion at 5.6%, one of the highest we've seen in recent periods. Is there some bit of a one-off there? I mean, should it go back to the sub-five number you in the past indicated? And, again, is that a function of the fact that, again, when budget or mid hotels grow faster and they probably have a higher component of promotion that impacted us. So I just want to understand the outlook also on that number, and then just have one last follow-up question after that. Mohit Kabra: Yeah. Yeah. Absolutely. No one-offs. In fact, two parts to it. One, I would say, is the very fact that low-margin businesses like air ticketing have seen an adverse impact on growth. Therefore, the growth has come in predominantly from higher-margin businesses. Now what that means is clearly, you're getting a much better improvement in the blended margin for the business as a whole. If you were to look at adjusted margins across segments, and then look at it probably as a percentage of gross bookings, then it would look much healthier. The customer acquisition cost also. So it's completely linked to the mix shift. Then within that mix shift, there's also the fact that there's slightly more accentuation towards the mid to mid segment of hotels, where, again, the customer acquisition cost tends to be slightly higher. I think purely reflective of the mix, and therefore, if you really see despite the 5.6%, there's no impact. In terms of the adjusted operating number. That continues to be 1.8% plus as a percentage of gross booking. So wanted to call that out. It's very difficult. Like I said, the mix and the blended margins were very different, say, until about a year back. Which were very different in this one-year period. Due to these one-offs that have got paid out. Manish Adukia: Thank you. And maybe just my last question, taking a step back and looking at the overall business, 20% constant currency revenue growth in the quarter, which was a fairly noisy quarter, which in my opinion, is a very good outcome. When we think about, let's say, over a one to three-year outlook, is it fair to say that to deliver 20% growth you have to continue to reinvest in business and margins don't expand, which means over a period of time, your EBITDA growth broadly tracks revenue growth. Because I would have thought that in a country like India, if revenues are growing at 20%, operating costs probably grow at a lower pace. Is that something that may not play out? I mean, is it not an operating leverage story anymore? And margins will largely be in line with where they are? Or how should we think about the growth outlook versus the EBITDA growth outlook, revenue growth versus EBITDA growth? That's my last question. Mohit Kabra: Sure. If you look at it over the last five, ten years, we've clearly called out a substantial portion of the margin improvement that was supposed to come in leveraging volumes and leveraging penetration, building in a market leadership in each of the segments of the business, that's largely played out by 2024. Thereafter, we have been calling out that in our customer acquisition costs are actually pretty efficient right now. We don't really look at dialing them down. We'd rather keep focusing on dialing up growth. Looking at growing in the twenties. That opportunity is getting delivered despite the market growth coming down very significantly. At least in this year, across quarters. I think the last part of our objectives in setting the mix where we are. For instance, where the accommodation mix is still in the forties. Till the time we remain in the forties and closer or the sub-50% mark, we do believe our adjusted operating margins are pretty healthy. I've always given the example of the global players and how their best-in-class margins play out. If you just superimpose our mix over there, this margin percentage looks very healthy. I think we will really need now the mix going beyond the 50% mark. For any significant improvement on the adjusted operating margins to play out. Until then, I think the operating leverage will likely come in more from the more fixed than variable cost. Which again is very small. In our case, the fixed costs are just about 20, 25% of the overall expenses. Therefore, the improvements are going to be much smaller in nature. In line with what we have seen in the last two years or so compared to what we have seen in the five years before that. Manish Adukia: Very helpful. Thank you, Mohit, for answering my questions. All the best. Mohit Kabra: Thank you. Vipul Garg: Thanks, Manish. The next question is from the line of Vijit Jain. Vijit, you may please ask your question now. Vijit Jain: Yeah. Hi. Thank you. So my question, in the hotel segment, with the GST cut, did demand somewhat shift also from higher ticket size to sub 7,500 category? Within that, given that you even called out that growth did accelerate here. Is that because, in general, you have better selection in that and therefore some market share shift might have happened from others or from offline or other channels to you? Is that something that happened here? Mohit Kabra: We, as you know, on the premium side, we pretty much have all the hotels that are available in the country on the platform. Most of our expansion actually keeps happening more in the mid to premium or more in the mid to budget or more in the budget segment. Right, from a price point of view. Where we keep adding more and more hotels on the platform. Because there's a much larger number of hotels in that particular price point, which still need to be contacted and put on the platform. For maybe new hotels which come across all price points. So that improvement in the booking of offerings in the budget segment will keep increasing. No doubt about that. But this is more, I think, what we saw during the quarter was more on account of the significant price differential, which is now emerged. The sub 7,500 versus, say, the 7,500 to 9,000 or 10,000 price range because there's suddenly a significant impact coming in from the steep change in the GST rates. So that's seeing a lot more of the volume coming through in the sub 7,500 price range. In fact, a lot of the hotels who were on the marginal side, just about the $7,500 price, would have also wanted to bring the prices in line for the overall customer benefit to play out. So that's what's playing out, and that's what we've seen. Largely on expected lines. Like I said, there has been a little bit of a share shift from a volume point of view we've seen roughly about 2 to 3% shift happening from premium, super premium to maybe more like the mid to budget segment. Again, on the overall mix also, roughly about four to 5%, whether in terms of gross booking value or in terms of adjusted margins. So yes. But this is very much on expected lines. Like I was saying, the real underlying benefit of it is it's really helped unlock demand in the overall hotel schedule. Vijit Jain: Got it. Thanks, Mohit. My second question, just reflecting on your comment earlier, Rajesh, on generative AI and LLMs and those things. I'm just wondering if trip planning is what moves to LLM. Trip planning is arguably on search versus LLM. LLM offers much better. Does that mean that it could accelerate further your online shift in categories like international or other packages and stuff where traditionally, people have used agents because it's complex and make it easier? Could that conversely actually help online shift in India? Rajesh Magow: No. I think it's an interesting take, Vijit, I must say. Quite possible. See, listen. In any case, overall, across the categories, not necessarily on travel and within travel also, all segments directionally going in that direction only, from offline to online. Can we say that the digital agents tomorrow or even on the trip planning when it is becoming more popular, I don't know whether the trip planning per se because, I could also argue that even historically, people were going to Google and searching and doing some bit of trip planning there, right, or going to TripAdvisor to do some trip planning. Specifically or coming to OTAs to do some part of trip planning, etcetera. I'm not sure whether that per se will trigger this shift. But I think what is potentially what can potentially trigger is actually what we have built. Which is Myra is a digital agent because you can ask the question in your own language that you are comfortable. You can look for complex itineraries, ask as many questions as you want, and you will get accurate answers. Then along with that, the booking will also be stitched. In a very smooth manner. That might actually help. Because the hypothesis is that you're going to a travel agent or human travel agent to ask for help specifically for customization. Right? Now you can achieve that customization on the digital agent as well. Almost as effectively, if not better, as you would do it with the other alternative, right, so that you were doing it or you were it earlier. I think that might actually help do the shift or accelerate the shift better. I'm not sure. Only trip planning. The only trip planning where trip planning could help is that where overall inspiration for travel goers, because if that, in any case, is the consumer behavior is changing and spending more and more on travel in any case. So you go on your preferred either the social media channel for inspiration and then come to, let's say, horizontal search or and or an OTA like MakeMyTrip to do trip planning and you find it easier and smoother, domestic or an easy travel use case or a complex travel use case. That potentially can definitely help. But specific to international travel, I think unlock might be the digital agent mode, which is answering all the and also stitching the booking experience together. Put and also post-sales and in-trip in a single interface, that might actually help trigger that shift. Vijit Jain: Alright. Thanks, Rajesh. And my last question, on the total marketing spend, which I think to Manish's question earlier, you mentioned how mix shift has contributed to it rising to 5.6. So as air recovers maybe from the summer season onwards or maybe even marginal recovery in the March, does it trend? Does your total spend trend back towards what you've previously said, five to 5.5%? Mohit Kabra: Most likely, Vijit. It should start reflecting the mix. Because, like I said, there's nothing in terms of a one-off over here. Therefore, it should start to play in the mix depending upon what kind of changes we see over there. Vijit Jain: Got it. Thanks, Mohit. Those are my questions. Vipul Garg: Thanks, Vijit. The last question we will take from the line of Gaurav Rateria of WFM. Gaurav, you may please ask your question now. Gaurav Rateria: Hi. Thanks for taking my question. So just a couple of questions. One is the net take rate on air is about 7% this quarter, 7.2% last quarter. Is that a normal number, or is it running higher than a normal range of, like, six and a half or so? Mohit Kabra: Yeah. I think we generally tend to range around this mark. It can be about half a percentage point lower or higher depending upon what kind of phase of prevailing, depending upon the kind of lag between booking versus flown, etcetera. So nothing exceptional over here, Gaurav. Gaurav Rateria: Okay. Got it. And then the second question is going back to the hotels and packages business. So when we think of the constant currency bookings growth of fifteen, I think you explained it as volume growth of 20 and then five points of impact from GST. But then apart from volume and GST impact, there's also pricing. With all these hotel companies reporting pretty decent ADR growth. So for you, the price net pricing growth is like zero almost. Right? So I guess there is some price growth and then negative mix impact. Which is canceling each other. But if I just think about going forward, let's say, next one year where you mentioned for the next four quarters, this GST impact will hit you. Are we thinking of broadly an algorithm where your constant currency GBV growth will be like five percentage points below your volume growth like it was this quarter, or does that gap sequentially keep reducing? Maybe if I can share a one-year view as well as a two, three-year view. That'll be helpful. Mohit Kabra: Directionally, it is only just a one-year impact because the comparable number for the previous year is at a different GST rate. Therefore, it's just more of an optical thing than anything actually impacting the business. So this is more optical and don't see any real impact as such over here. Sorry. I missed the first part of the call. Question, what was that? Gaurav Rateria: Yeah. I got that, Mohit. Maybe I'll just quickly address that. Then just Gaurav, to your point on hotel companies reporting higher price rise and all, you should just be mindful of one thing. See, what you are looking at, it is only a few data points. Like, let's say listed companies reporting some, and, again, their ADRs have also not significantly gone high. On our platform across the segments we are selling hotels. Right? On a blended basis where there is a possibility in one particular segment in certain cities, some because of the demand-supply gap, etcetera, some price movement would have happened. But as a general trend, on a blended basis, the segments, if we do and even if we sort of look at different segment hotels, whether it's a budget hotel segment or a mid-segment or a premium and then super premium kind of segment, we haven't really seen any price increase which is extraordinary or out of the ordinary now happening. So it's actually that era is over. It is actually pretty stable now, and you would only see either because of seasonality, there will be some movement or there will be an inflationary increase year on year. Right? So I don't think we should jump to the conclusion that the average selling price for a room night across the board, the rates have only gone up in pretty much every segment. I thought I'd just clarify that because, on our platform, we also have, out of our hotel and packages business, about 10% homestays. Now homestays pricing and year on year, and across segments, and therefore, on a blended basis, on a pan-India basis, if you would see, there is no significant price increase except for the seasonality impact that we've seen. Gaurav Rateria: Got it. Maybe just one last follow-up on the domestic hotels business. So at least among the listed OTA players, we don't see anyone else having any meaningful hotel business right now. So at least in the domestic segment, is that a fair conclusion that there is not really much competition? When we look at the broader industry data, hotel, domestic plus international, there we see I guess you have competition from these global players. But let's say, at least on the domestic segment, would it be fair to conclude that? You would be the one dominating and not one competition? Mohit Kabra: Reasonably fair to say, but just keep in mind that the overall online penetration in the segment is still in the early stages. So there's a long headroom over there. But fairly in the right direction. Gaurav Rateria: Thank you. Thank you. Vipul Garg: Thank you, Gaurav. In the interest of time, this was our last question. We'll now hand over to Rajesh for his closing comments. Rajesh Magow: Thank you, Vipul, and thank you, everyone, for your patience. We look forward to seeing you next quarter. Vipul Garg: Take care, everyone. You may now disconnect the call.