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Operator: Good afternoon, and welcome to the Redwood Trust, Inc. Fourth Quarter 2025 Financial Results Conference Call. Today's conference is being recorded. I will now turn the call over to Kaitlyn Mauritz, Redwood's Head of Investor Relations. Please go ahead, ma'am. Kaitlyn Mauritz: Thank you, operator. Hello, everyone, and thank you for joining us today for Redwood's Fourth Quarter 2025 and Full Year 2025 Earnings Conference Call. With me on today's call are Chris Abate, Chief Executive Officer; Dash Robinson, President; and Brooke Carillo, Chief Financial Officer. Before we begin today, I want to remind you that certain statements made during management's presentation today with respect to future financial and business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts and assumptions include risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company's annual report on Form 10-K, which provides a description of some of the factors that could have a material impact on the company's performance and cause actual results to differ from those that may be expressed in forward-looking statements. On this call, we may also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures are provided in our fourth quarter Redwood review, which is available on our website, redwoodtrust.com. Also note that the content of today's conference call contains time-sensitive information that are accurate only as of today. We do not intend and undertake no obligation to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded. It will be available on our website later today. And with that, I'll turn the call over to Chris for opening remarks. Christopher Abate: Thank you, Kate, and thanks to everyone for joining our fourth quarter earnings call today. Before I turn the call over to Dash and Brooke, I'll share some thoughts on our recent performance and our outlook for 2026. Fourth quarter 2025 capped a year of meaningful progress for Redwood, marked by record mortgage banking activity, improved capital efficiency and a more durable earnings profile. We closed out the final quarter of the year delivering positive GAAP consolidated earnings and very strong earnings available for distribution across our core segments. For the full year, our 3 operating platforms, Sequoia, CoreVest and Aspire generated $23 billion of volume, the highest in our company's history. In hitting a new gear with production, we've also ensured that earnings have kept pace. Brooke will cover a few operating metrics that demonstrate how more revenue is making it to the bottom line than we have seen in a very long time. Tracking the operations-focused metrics as opposed to more traditional REIT investment portfolio metrics is something we'll be emphasizing in the quarters ahead. This also coincides with our strategic shift towards increasing capital to our mortgage banking platforms with over 80% now invested in core operating and related activities at year-end 2025, up from 57% in 2024. On the back of recent new product rollouts, the runway to continue profitably growing volume supports additional capital deployment to these platforms, capital both sourced internally and in tandem with a growing cohort of external partners. This shift also reflects our decision in the second quarter to accelerate the wind down of our legacy investment portfolio. We saw further progress on this front in the fourth quarter with resolutions and dispositions and more thus far in the first quarter. As we work to fully wind down this portfolio, we'll continue freeing up investment capital to redeploy while also simplifying the balance sheet. Turning to the broader economy. Housing affordability has been a key focus in Washington with a $200 billion agency MBS buying initiative recently announced in tandem with other efforts to lower borrowing costs. The announcement tightened spreads and pushed mortgage rates lower initially, but rates have since stabilized, leaving markets still looking for a broader revival of the refinance mortgage market, which in more accommodative times has represented 50% or more of total originations. Case for lower jumbo mortgage rates was recently bolstered by the long-awaited nomination of a new Fed chair, who, as anticipated, favors additional rate cuts in 2026. Mortgage rates currently sit meaningfully off their highs with 30-year fixed-rate prime jumbo mortgages hovering just above 6% in coupon. At levels modestly below 6%, we estimate between $200 billion and $300 billion of jumbo mortgages could become refinanceable. An important distinction here for Redwood, unlike many mortgage businesses, is that we don't maintain large holdings of mortgage servicing rights, whose values are reliant upon significant levels of customer recapture volume. In other words, the prospect of a new refinance wave is entirely good news for us, particularly for our Sequoia business, where higher refinance volume could significantly expand our volume expectations and further scale our operations. Complementing our Sequoia business in the consumer mortgage space is our Aspire non-QM business. In leveraging Redwood's best-in-class originator network, Aspire has already become a top non-QM correspondent platform. On the back of strong non-QM growth, we are pleased to launch our third branded securitization issuance platform under the moniker Aspire, which will speak for a large amount of our non-QM production going forward. We expect our inaugural Aspire securitization to launch in the coming weeks. Turning back to affordability initiatives in Washington. Institutional participation in housing has also drawn a renewed focus with proposals intended to limit the ownership of single-family homes by large institutional investors. We remind listeners that large investors continue to only own a small share of the country's single-family housing stock and that with respect to CoreVest, our business-purpose lending platform, the vast majority of our lending footprint remains focused on smaller and midsized housing investors. In serving this segment of the market, CoreVest continues to thrive, having recently been named IMN's Lender of the Year for 2025. Our team is positioned to deliver additional growth in 2026, especially as our small balance products have scaled to complement CoreVest's flagship term and bridge offerings. I'll close with some context for the year ahead. Redwood's market and structural positioning is now meaningfully stronger across all channels in which we operate. We're supported by a broader base of third-party capital partners, more flexible, simpler balance sheet and an infrastructure built to profitably scale volume as housing activity expands under our renewed focus in Washington and an evolving rate regime under a new Fed chair. As we look to grow earnings and market share in 2026, we are leveraging AI to enhance risk management, accelerate capital deployment and extract further gains in operating leverage. Based on the progress we have made to date, we expect core operating performance to drive consolidated earnings above our common dividend in 2026, enabling earnings retention and reinvestment to help fund organic growth. And with that, I will turn the call over to Dash to discuss our operating businesses and investments. Dashiell Robinson: Thank you, Chris. We exited 2025 with record production and strong margins, driven by operational efficiencies, accretive capital reallocation and continued progress in deepening distribution channels. Mortgage banking activity for the quarter was once again headlined by our Sequoia platform, which delivered a second consecutive quarter of record volumes amidst housing activity levels that remain well below historical norms. In all, Sequoia locked $5.3 billion of loans, a 5% increase from the third quarter and up 130% from the fourth quarter of 2024. Bulk activity, much of it with banks and a continued competitive moat for our platform, represented close to 60% of volume and included a $500 million pool sourced from a regional bank, housed under a new Sequoia loan program that we expect to contribute meaningfully to 2026 volumes. Flow volume, which represented just over 40% of fourth quarter production, remained well diversified with a notable pickup in closed-end second and adjustable rate loan volumes. Sequoia's competitive position continues to strengthen. Our network now spans over 210 originators across banks and independent mortgage bankers, or IMBs, and we estimate our full year 2025 jumbo market share at approximately 7%, up materially from prior years. Importantly, these gains are driven by market trends we have now observed for some time. We continue to actively engage with banks that are increasingly choosing distribution over balance sheet retention, a dynamic that continues to expand our addressable opportunity. While IMBs represented roughly 2/3 of fourth quarter production, we expect the mix to evolve further in 2026 as additional large bank relationships come online. Distribution also remains a core differentiator, driving fourth quarter margins up nearly 40% sequentially from Q3. During the quarter, Sequoia distributed approximately $3 billion through securitizations and over $1 billion through whole loan sales, supporting strong capital turnover and attractive returns. By design, we are running the platform to turn capital faster and the breadth of our distribution options has become a durable operating advantage. In 2026, opportunities to profitably scale volume without a robust refinance market remain compelling on a stand-alone basis. As a reminder, in 2025, we generated more volume than in 2021 when overall mortgage market was roughly 3x larger, driven by growth in our purchase money loan volume. But as Chris noted, the refinance market is once again contributing to Sequoia's volumes, representing approximately 35% of second half 2025 locks, up from 25% for the first half of the year. With our network, products and distribution, we are well positioned to benefit from a broader refinance wave should mortgage rates fall below 6%. As importantly, any increase in observed prepayment speeds is mitigated by the nature of the premium we carry on balance sheet, whose value is used largely to hedge a growing pipeline and is not contingent on significant recapture economics. Growth prospects also remain promising within Aspire, our nonqualified mortgage or non-QM platform that commenced activities 1 year ago. Aspire locked a record $1.5 billion of loans during the fourth quarter, a 20% sequential increase with strong contributions from both flow and bulk channels, establishing a run rate we expect to build upon. Fourth quarter volume brought total 2025 lock volume to over $3 billion with close to 70% sourced through our flow channel and 65% from sellers with whom we do business in Sequoia, validating the differentiated model we envisioned when launching the platform. On the distribution side, Aspire sold $648 million of loans through bulk loan sales to several counterparties, including the platform's first ever sale to a bank, bringing full year distribution near $1 billion. For both Sequoia and Aspire, we are making strong progress on third-party capital partnerships to further broaden distribution. And as Chris noted, are close to launching the first securitization under the Aspire shelf. CoreVest, our business purpose lending platform, closed out 2025 on a strong note, with full year volumes up 13% versus 2024 as we further reposition production towards smaller balance products, including residential transition loans or RTL and DSCR loans. RTL represented nearly 40% of fourth quarter production, the first time the product has headlined our quarterly funding mix and hit another high watermark for production. DSDR volumes increased 43% versus the third quarter, highlighted by momentum in cross-collateralized portfolio loans, a critical complement to our traditional term loan product. This shift in origination mix is improving the platform's overall efficiency and aligns well with continued institutional demand for CoreVest originated assets. Away from our core operating activities, we continue to make progress winding down the legacy investment portfolio. During the fourth quarter, we reduced the legacy bridge portfolio's principal balance by nearly 40%, completing multiple asset sales and executing loan resolutions and modifications, including a number of complex legacy bridge workouts and positioning of REO assets for sale. As a result, 90-day plus delinquencies declined to $82 million at year-end, down over 65% from earlier in the year as our asset management team continues to reduce risk throughout the portfolio. With the loan book now concentrated in a small number of assets, 31 loans with an unpaid principal balance of $309 million, we continue to execute on our plans for dispositions and unlocking of accretive capital to redeploy into core activities. The final theme I'll touch on is technology enablement across our platform. Through RWT Horizons, we are increasingly focused on applying AI and automation directly into our core operating workflows, both organically and in partnership with certain Horizons portfolio companies, activities that support scale, consistency of execution and risk management. This quarter's Redwood review highlights some early benefits from this work, including the elimination of more than 3,000 manual hours and a reduction in document review times by approximately 75%, with certain quality control reviews now achievable in under a minute. These capabilities are now embedded in areas such as data validation, analysis of borrower organizational structures, covenant tracking and due diligence standardization. Importantly, this technology enablement is a meaningful contributor to the operating leverage Brooke will discuss, including our 44% year-over-year reduction in operating cost per loan. Rather than relying on incremental staffing to support higher volumes, we're using automation to increase throughput, shorten turn times and maintain underwriting discipline as production scales. As a result, Horizons is evolving into a fully integrated driver of efficient growth across Sequoia, Aspire and CoreVest, increasingly embedded in how we operate these platforms day-to-day as we support higher volume. I'll now turn the call over to Brooke to discuss our financial results. Brooke Carillo: Thank you, Dash. For the fourth quarter, we reported GAAP net income of $18.3 million or $0.13 per share compared to a GAAP loss of $9.5 million or $0.08 per share in the third quarter. Book value per common share was $7.36 at December 31, up slightly from $7.35 at September 30, and our economic return on book value was 2.6% for the quarter, inclusive of the $0.04 of accretion from our share repurchases and the $0.18 per share common dividend. On a non-GAAP basis, consolidated earnings available for distribution, or EAD, increased from $0.01 in Q3 to $0.20 in Q4 and exceeded our common dividend. This reflects both a reduction in the earnings drag associated with legacy assets, which improved by $0.08 relative to Q3 as well as the initial redeployment of freed-up capital into our higher-return mortgage banking platforms. Core segment's EAD was $0.33 per share for the fourth quarter, up from $0.20 per share in Q3, demonstrating the earnings power of our operating businesses as capital is reallocated away from under-earning legacy investments. Combined mortgage banking returns remained strong, resulting in total return on capital of 26% for the full year 2025. In the fourth quarter, the Sequoia Mortgage Banking segment, which includes Aspire activity, generated segment net income of $43.8 million and a 29% return on capital, supported by record quarterly lock volumes. Gain on sale margins expanded to 127 basis points, exceeding our historical target range, reflecting strong execution and continued operating leverage as volumes scaled. CoreVest Mortgage Banking generated $7.5 million of segment net income, delivering a 30% GAAP return on capital and a 36% non-GAAP EAD return on capital. Earnings improved sequentially despite modestly lower funded volumes, driven by accretive distribution activity, improved net interest income and continued efficiency gains across the platform. As we've scaled our mortgage banking platform, volume and revenue growth has materially outpaced operating expense growth, reinforcing the operating leverage embedded in our model. In 2025, mortgage banking volumes grew roughly 6x faster than our total operating expenses, reducing total operating expense to approximately 0.9% of production volume from 1.6% in the prior year. This improvement reflects both structural cost efficiencies and disciplined execution. And because the majority of our cost base is variable or tied to production, we are increasingly focused on how effectively incremental volume converts into earnings once fixed costs are covered, supporting margin expansion as the model continues to scale. This operating leverage reflects our transition to a capital efficient originate-to-distribute model, where earnings power is driven by margin and capital velocity rather than balance sheet size. As production scales, operating expenses naturally rise with volume even as returns improve, which can make traditional mortgage REIT efficiency metrics anchored to assets or equity appear less indicative of performance when production is growing faster than common equity. In practice, this reflects the efficiency of pushing more production through our equity base without increasing our balance sheet risk. We have industry-leading capital velocity as our loans typically are on our balance sheet for approximately 35 days, meaning that incremental production continues to translate directly into earnings. Furthermore, recent organizational streamlining actions are expected to reduce annualized back-office run rate costs by approximately $10 million to $15 million in 2026. Redwood Investments delivered segment net income of $21 million and a 17% annualized return on capital. Results improved quarter-over-quarter due to positive fair value changes from spread tightening and higher net interest income from assets that we've created from our mortgage banking businesses. With nearly $1 billion of financing or roughly 50% of our financing in this segment callable within the next year, we see further upside to earnings from this segment as we take advantage of the potential to refinance at a lower cost of funds as the front end of the curve is expected to continue to decline. With respect to the balance sheet, recourse leverage increased sequentially, 85% of which was driven by higher warehouse utilization supporting record mortgage banking activity. Approximately 62% of recourse debt resides in our mortgage banking platforms, where capital turns quickly and borrowings are repaid as loans are sold or securitized Liquidity remained strong with $256 million of unrestricted cash at quarter end, providing us meaningful flexibility. And with that, I'll turn the call back to the operator for questions. Operator: [Operator Instructions] Our first question comes from the line of Crispin Love with Piper Sandler. Crispin Love: First, just on the recent move in mortgage rates, the rally earlier in the year and support from the administration. Can you just discuss how that's been impacting your businesses into the early part of 2026 from a volume perspective compared to the fourth quarter? Have you seen momentum continue or an acceleration into the new year? Christopher Abate: Sure. Crispin, maybe the easiest way to answer that directly is just to provide our January numbers. We were at $3.6 billion of volume for January. So we were $7 billion and change total for Q4. So obviously, the run rate has just continued to accelerate. So from our standpoint, the rally has helped, although our business has largely been about taking market share across non-agencies. So we've got high expectations for volume this year. But the jumbo business has been somewhat insulated from some of the things we're observing in agency. There's indirect impacts, but the rally hasn't been as steep. Jumbo mortgage rates are still maybe 0.25 point behind conforming. And a lot of that rally has since kind of leveled off as well. So obviously, we had today's job sprint. So we'll see where we go from here. But I think overall, we're pretty bullish on our volume potential based on how we started the year. Crispin Love: Great. I appreciate that. And then you've been leaning into the Aspire non-QM platform, and that's definitely showing up in your growth. Can you just discuss some of the opportunities there? And then how that business could be impacted from GSE reform, if anything happens over the next couple of quarters or even years? Would you see that as an additional opportunity for that business? Dashiell Robinson: Crispin, this is Dash. I can take that. In terms of the near-term opportunity, I think a lot of it is continuing to execute on what we've been doing. Obviously, the business has shown fantastic momentum in the second half of the year with close to $3 billion of locks alone in just Q3 and Q4. And I think that's a function of a couple of things. First of all, a huge competitive advantage we have is that the existing Sequoia network, folks we've been buying jumbos from for years and have real operational intimacy with. Over the past couple of years, they've really started to lean into non-QM products. A lot of that was a function of rates having been persistently high, notwithstanding this recent rally and just the desire to expand their product suite. But also,, I think a recognition that the non-QM market continues to grow and has a lot of really high-quality borrowers that are underserved. And we think about -- we have a slide on this in the review this quarter. I think we estimated the non-QM market for 2025 to be $130 billion, which was up significantly from 2024. I think a lot of market observers expect another 10% to 15% increase this year. And so there's a lot for us to lean into in this space. As you know, depositories have a much, much smaller footprint, if any, in non-QM. We did sell a non-QM pool to a bank last quarter, which was a great achievement for the business. But beyond that, it's largely nonbank competitors where we can really lean in and win share, as Chris articulated, with our service level and with our relationships. So that's a really, really big deal. The ability to securitize will be an important element for this business. As Chris articulated, we expect that in the coming weeks. So I think it's all very much going according to plan and there's a very long runway for growth in the business. We estimate we probably have last year a 2% market share of the volumes I just articulated. It should be higher than that in 2026 as the business rounds out. On GSE reform, specific to Aspire, anything could potentially happen. Obviously, there's been a lot of evolution in messaging out of DC. But specific to these types of products, in our view, it's unlikely to be impacted. The types of consumers that are being served through non-QM bank statement, borrowers, things of that nature have been outside of the GSE purview, and there's technology capabilities there that they don't particularly have. And so we think there's some probably insulation there. The other big thing, and who knows how this evolves, but with the administration's recent mandate around GSEs not supporting single-family ownership by investors, these are probably smaller investors that would be impacted by that, but that's an element that you need to take into account to in terms of the probability that the GSEs entered the DSCR market as it's currently contemplated with the non-QM. So our expectation is that private capital thankfully, will continue to really speak for these products, and we expect to lean into the opportunity a lot more this year. Operator: Our next question comes from the line of Don Fandetti with Wells Fargo. Donald Fandetti: With volumes being so strong on the origination side, how do you -- how are you thinking about third-party capital providers going forward? Brooke Carillo: I'm happy to take that, Don. Dash, I think, in his prepared remarks included a comment about really across both Aspire and CoreVest, increasingly, all of our loans are being spoken for. We are gearing up for securitization in Aspire. But to date, we sold to multiple handfuls of insurance companies and asset managers. The demand is just really strong for our production. And increasingly so, on the Sequoia side, especially given some of our success with seizing these seasoned pools out of banks. We've seen multiple levels of oversubscription on some of our seasoned securitizations that we've done, just really giving investors a different convexity profile than we have historically through our Sequoia program. So we are catching the eye of several third-party capital providers. We are in evolved discussions for both a capital partner for Aspire and Sequoia, which will really help launch the growth that Chris was mentioning to continue to scale these platforms this year and doing it outside of our corporate balance sheet is helpful given where capital options lie today. So that's really the numbers that you're seeing in terms of our capital efficiency, the amount of production that we've been able to really put through the system this year is a byproduct of those capital partners, and we expect it to continue to fuel growth in '26. Operator: Our next question comes from the line of Bose George with KBW. Bose George: So what are the margins like in the non-QM channel, the gain on sale margins currently? And how does that compare to margins currently in the jumbo channel? Dashiell Robinson: Bose, it's Dash. I can take that. We're targeting pretty much in line with the Sequoia 75 to 100 basis points that we've traditionally targeted. Obviously, it's a similar business model. I think the fact that we will be rolling out a securitization platform will be very accretive to that in terms of optimizing execution versus whole loan sale. But we're targeting something contextual to what we've historically targeted for Sequoia. Bose George: Okay. Great. And then can you just talk about the competitive landscape in non-QM. So the market is growing quite a bit, but there's different companies entering the space as well. Can you just talk broadly about that? Dashiell Robinson: Sure. Yes. I think the space is definitely competitive. I mean I think that's largely driven by what continues to be an increasing demand from large capital allocators for the asset class. There's -- the securitization market is extremely strong right now. There's a very, very deep bid from whole loan buyers. We see loan spreads in that space right now sort of at or very close to the tightest we've seen in years, frankly. I think what that speaks to is that overall, the asset class has performed well. I think the convexity story that a lot of investors have signed up for has played out. Frankly, a lot of the sort of challenges in private credit away from mortgage, I think what we've sort of anecdotally heard from our partners is that there's increasing capital allocation to this space, maybe away from some of the other sectors in private credit that have been a bit more challenging. So I think those are all real tailwinds for the space. It does lead to increased competition. As you know, for years in Sequoia, we've seen entrants, folks come and go. I think there's similar operational hurdles to running a non-QM business well as there is in jumbo. So the market is definitely competitive, but we feel we have a lot to lean into, frankly, in terms of continuing to grow our share and things of that nature. So we're still very, very excited about the runway in front of us, like I said. Operator: Our next question comes from the line of Rick Shane with JPMorgan. Richard Shane: I'm looking at Slide 15, and it's really interesting. And 2 questions here. One is if we compare the Sequoia volume in '21 versus '25. Historically, you guys were a little bit more of a purchase shop versus the market, and now your mix is much, much more aligned with the market mix. I'm curious if as your distribution -- as your bank -- as you have increased the number of partners, if that's really what's happening that you're going to mirror the market a little bit more closely? Or is it some function of the refi market being so small right now? And then the other part of the question is, when we think about margins for you, both in terms of gain on sale, but also expenses, is there anything that we should think about as the market eventually shifts to more of a refi market or more balance between purchase and refi? Christopher Abate: I'll take that one, Rick. The '21 comparison that we did was really to highlight that as much progress as we made with volumes and actually exceeding 2021 levels, in 2025, was substantially without significant refi business. And in '21, thanks to the Fed, mortgage rates were into the 3s or even the 2s and refi was huge. And so the real goal of the slide is to basically say, for jumbo, for Redwood, it's been largely purchased business up until very recently. And if we add refi business, it won't be at the expense of purchase, it will be in addition to purchase. And from a margin standpoint, that should continue to leverage the platform. So as we push more business through the same amount of capital or thereabouts and a similar work structure, we should continue to see more of that revenue make it to the bottom line. And that's why we really rolled out some new operating metrics this quarter. I think we sometimes get mixed in with more traditional REIT business models, which look at expenses to capital and other metrics. And for us, it's really capital turnover and then how much can we grow revenue without growing expenses. And so some of the metrics there comparing those, I think, will be really valuable. So jumbo has not experienced the same amount of refi business as conforming. Rates didn't snap in as quickly. I don't think the fourth quarter experience was the same. And so that's still a business that's potentially ahead of us. I think we mentioned there's a couple of hundred billion dollars of jumbo that could become "in the money" if rates dip meaningfully below 6%. So there's a lot of that ahead of us, and we think that just scales the platform further. Richard Shane: Understood. And Chris, I think the takeaway from this is that as you sort of achieve that normalized volume as markets normalize in terms of purchase and refi, you are indifferent from -- on the margin between an incremental $1 million origination on the purchase side and on the refi? Or is there anything we should think about in terms of profitability that's a little bit different between the 2? Christopher Abate: Well, generally, refis are a little bit quicker. So from that standpoint, refi business, you're dealing with an existing borrower with a home that's been appraised. From that standpoint, you could see some efficiencies. But with our, model largely, it's not big enough where we're substantially rooting for one or the other. I think what we're really trying to do is continue to be a great partner to our network of originators. And Dash made the point earlier, one of the reasons why we're entering non-QM and growing quickly is not because we really had a different take on the products. It's because the very, very large originators, particularly the IMBs, top 5, top 10 originators in the country have entered the space. And it's much easier for them to do business with somebody like us that has been a capital partner for, in some cases, decades than to kind of introduce themselves to a new counterparty. So really, we're just going to continue to leverage our network. And I hope that the refi business picks up, it would be great for us and for the industry. But as we saw today, rates are kind of still pretty volatile and a 4.17% or 4.20% 10-year isn't giving us a lot of indication on which way things are going to go. Richard Shane: Fair enough. I mean, look, it's a timing issue. It's when, not if, in my mind, but I agree with you. Who knows how soon that will happen. But I appreciate the answer, guys. Operator: Our next question comes from the line of Eric Hagen with BTIG. Eric Hagen: All right. So how do you think the focus on affordability and this like overwhelming support for home ownership and lower mortgage rates has an impact on the resi transition lending business. And would you say like there's a catalyst which would get you to allocate more capital over the near term to the CoreVest side of the business? Christopher Abate: I'll pick that up high level, and then I'm sure Dash will have some comments specifically focused on RTL and some of the affordability initiatives. But CoreVest is where our deepest JV partnerships are. And the way we're thinking about that business is primarily in terms of profitability for shareholders. So it's going to be less about how much can we raise volumes in x amount of time and more about continuing to scale it and generate high margins for shareholders. And the reason why I say that is much of CoreVest volume is spoken for by CPP and others. And so what that does is it generates asset management fees for us. And obviously, we're co-investing. So -- but ultimately, the goal is to -- with CoreVest is to really dial in the products. We certainly expect to grow volume this year, but we're very focused on margins back to shareholders. Dash, do you want to take the other? Dashiell Robinson: Yes. Thanks, Eric. I think it's a great question, and I think it's nuanced, right, because there's so many shades of gray as to what an affordability initiative or initiatives may look like. As you know, one of the big challenges with the overall housing picture in this country is just the disconnect between, I think, what's desired at the federal level and some of the reality of getting through like the local or municipal hurdles to actually create accessible housing for people. And by that, I mean price point, but also turnkey housing. Like, as you all know, consumers, whether they're buying their third or fourth house or their first, there's just very, very little interest in putting a bunch of CapEx into the home themselves. The desire really is to buy a home that they can move right into, right, which is a big reason why the RTL business has expanded so much. There's obsolescence in housing. And there's just been an evolution in the consumer over the last couple of decades where there's just a desire to have someone else get the home ready to move into. And so to the extent that these funds that are already allocated can be more efficiently dispersed and can open up opportunities for builders or developers, whether it's with subsidies or whether it's just easier to get through the red tape of developing or redeveloping a lot, lot meaning a piece of property. I think that could be a huge tailwind because there is a lot of pent-up demand for refurbished homes. There's existing homes that need to be refurbished. There's lots that could be used in more effective ways. And to the extent that some of these affordability initiatives at the federal level, obviously, Congress is one of the very few issues that there's significant bipartisan support on. The issues that we see in large part are really at the local and municipal level in terms of actually allowing some of these developers to get to work. And so to the extent that actually loosens up a bit. It could be a huge opportunity for our client base to serve more ultimate homebuyers by cheapening the cost and the time it currently takes to get through some of these project approvals. So I mean there's some other potential knock-on effects, but I think greasing the skids on that would be a very big deal. Eric Hagen: Really good color there. I appreciate that. Really quickly, I think we heard you say there was $10 million to $15 million of expense savings that you mentioned in the opening remarks. Can you say what that was again? Are you offering any broader guidance for expenses this year for the full year? Brooke Carillo: Yes. No, I think we -- that's really concentrated, I would say, I mentioned back office, but really across corporate and CoreVest segments. Of our $200 million or so of OpEx for the year, about 45% of that was fixed. And so just in terms of broader guidance on OpEx, a lot of what Chris made in terms of remarks around our efficiency we've done both through our process technology, but also our scaling our volumes and grabbing market share. We are pointing to some of the marginal cost on loans that we've seen this year just because outside of our fixed cost, it will really be variable OpEx tied to increased volumes this year. So we did about -- just for some context, our OpEx was up about $30 million on the year. All of that nearly was tied to the growth in Sequoia and Aspire, where we had very profitable volume on the year. So we generated an incremental $12 billion of volume with that $30 million of expense. So call it like a marginal cost per loan of about 25 basis points. We think we can continue to drive that down through added efficiencies with initiatives that we're focused on today that have been mentioned, but that can help you model the incremental G&A that we would have tied to additional volume. Operator: Our next question comes from the line of Mikhail Goberman with Citizens JMP. Mikhail Goberman: Just to follow up a little bit on Eric's question in CoreVest. What kind of -- what do the originations there look like? And if there's any sort of color you can give us on first quarter volumes and how margins are holding up there? Christopher Abate: Again, I'll start and kick it over to Dash. Across our businesses, including CoreVest, we're projecting higher volumes in the first quarter sequentially and pretty consistent margins. Again, with CoreVest, it's a little bit different because much of our production goes to our JV partners or the capital partners that are focused on that segment. So the volume to profitability dynamics are a little bit different. The math is a little bit different. But overall, we have metrics in the review. CoreVest had a very profitable year. And one of the reasons is because of capital efficiency. And we did take some further expense out of the business, as Brooke mentioned. So that's going to improve. That should improve margins, all things equal, in 2026. So high level, I think we're expecting higher volume in the first quarter. But as far as the makeup of the products, which has evolved over the past year, I'll let Dash answer that. Dashiell Robinson: Yes, Chris, thank you. I would say, Mikhail, we're still really tracking and making great progress with focusing production on the smaller balance RTL and DSCR products. So as I mentioned in the prepared remarks, RTL is our largest product type in the fourth quarter for the first time. And so I think it reflects some significant strategic progress in that business, which we expect to continue. CoreVest has always been unique with its relatively broad set of products, but the smaller balance products are particularly well bid right now, both in securitization and whole loan buyers. And so we're going to continue to push in that direction. Chris articulated it correctly, obviously, with our joint venture with CPP, that's a great way to not only turn capital quickly, but there's very reliable economics there where we are earning a very certain amount of economics on loans going into the JV, and then we obviously participate in the upside and the outcomes as a 20% stakeholder in that JV. So I would say those are tracking very consistently for a few reasons, including that one. The other point I would make, and Eric touched on this a little bit, but with the affordability piece is a big potential tailwind for production for CoreVest and we talked about this in the prepared remarks, was just with rental products. We're doing more on the DSCR side on a portfolio basis, cross-collateralized loans, which are starting to look a little bit similar to our traditional term loan product, which we've securitized and sold for years. And a tailwind there, depending on how some of these housing initiatives at a DC play out, is that smaller investors and more sort of mid-cap investors, which are really the target audience for CoreVest, could be winners to the extent that larger players are moved a bit to the sidelines. Obviously, a lot remains to be seen there. But leaning in on these rental products and continuing to fill what the market wants is something we're going to continue to do. And as Chris articulated, the ability to turn capital quickly and reliably into these joint ventures is very important. Brooke Carillo: Just one last -- on mix, we continue to see our term and portfolio DSCR product as an increasing mix of originations for CoreVest. Those are our 2 higher-margin products as well. You saw in the fourth quarter that despite volume being down, our gain on sale activity for CoreVest was up. So those are contributions to that dynamic. Mikhail Goberman: Just one more, I think, for me. Just kind of looking out over the space. Are there any other sort of real estate loan products that might interest you going forward? Or are you guys kind of in a grow what you have kind of situation and execute throughout this year? And with that in mind, I know you guys have your history with the FHLB. Is there any -- could there possibly be any value to owning a bank in order to get back in that system for funding? Christopher Abate: Well, I never say never, but it's not in our current plan. Although banks -- we're obviously doing a lot of partnering with banks. And I think with the capital partnerships comes ancillary opportunities, warehouse partnerships and otherwise. So I think we're still sort of extracting value from a lot of the bank partnerships, particularly the regional banks more recently that we've kind of brought online and they brought us online. From a product perspective, I think we're largely going to stick to our knitting. There's obviously been a lot of conjecture in Washington about some alternative products, whether it's 50-year term or otherwise. And for a lot of reasons. I think those are going to be hard, not technically eligible for delivery and many other reasons. So I think for Redwood, we're going to largely lean in on non-QM, which we've talked a lot about today. We've already got a fantastic business in the BPL space with CoreVest. And with Sequoia, I think we're underpenetrated in second lien mortgages. Certainly, HEI, other sort of interesting ways to really leverage our seller base. So all of those will be in the mix this year, but I think the core products are going to really carry the flag. Operator: We have reached the end of the question-and-answer session. I would like to turn the floor back to Kaitlyn Mauritz for closing remarks. Kaitlyn Mauritz: Great. Thank you, operator, and thank you, everyone, for joining today. We appreciate the sponsorship and your time, and we look forward to continued engagement across 2026. Thank you. Operator: Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a great day.
Operator: Good afternoon. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Vern Essi, Investor Relations at Basle. Please go ahead. Vernon Essi: Thank you, and welcome, everyone, to our fourth quarter 2025 earnings conference call. We have Fastly's CEO, Kip Compton, and CFO, Rich Wong with us today. The webcast of this call can be accessed through our website, fastly.com will be archived for 1 year. Also, a replay will be available by dialing (800) 770-2030 and referencing conference ID number 754-3239 shortly after the conclusion of today's call. A copy of today's earnings press release, related financial tables and supplements, all of which are furnished in our 8-K filing today, can be found in the Investor Relations portion of Fastly's website along with the investor presentation. During this call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, product sales, strategy, long-term growth and overall future prospects. These statements are subject to known and unknown risks, uncertainties and assumptions that could cause actual results to differ materially from those projected or implied during the call. For further information regarding risk factors for our business, please refer to our filings with the SEC, including our most recent annual report filed on Form 10-K and quarterly reports filed on Form 10-Q filed with the SEC and our fourth quarter 2025 earnings release and supplement for a discussion of the factors that could cause our results to differ. Please refer, in particular, to the sections entitled Risk Factors. We encourage you to read these documents. Also note that the forward-looking statements on this call are based on information available to us as of today. We undertake no obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Unless otherwise noted, all numbers we discuss today other than revenue will be on an adjusted non-GAAP basis. Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release and supplement on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Before we begin our prepared comments, please note that during the first quarter, we will be attending the Raymond James 47th Annual Institutional Investors Conference in Orlando on March 2. Now I'll turn the call over to Kip. Kip Compton: Thanks, Ferd. Hi, everyone, and thank you for joining us. When I became CEO 7 months ago, I shared a vision to accelerate our growth and drive towards profitability through disciplined execution. Thanks to our team's strong performance that vision is becoming a reality. Our exceptional Q4 results reflect this reality as we exceeded expectations across the board. We delivered our fourth consecutive quarter of revenue acceleration closing out the year with record revenue of $173 million in the fourth quarter. This represented 23% annual growth, the highest in over 3 years and exceeded the top end of our guidance. Our stronger-than-expected top line results drove strong incremental flow-through. This resulted in record gross margins of 64%, demonstrating the operating leverage and efficiency in our business. This enabled our operating margin and operating income to both reach all-time highs in absolute dollars and as a percentage of revenue, leading to our fourth straight quarter of positive free cash flow. . Our stellar Q4 results also capped off a strong 2025, marking our first profitable fiscal year. Our teams drove this success with discipline, focus and execution and we are excited to carry this momentum into 2026. In the fourth quarter, Network Services grew 19% year-over-year, outpacing market growth. This is attributable to stronger-than-expected event performance and larger customers directing traffic to our platform due to their prioritization of network stability, performance and resilience. Our go-to-market motion is operating with increased rigor and clarity. At the same time, our new product launches, especially in security, have allowed us to deliver more business outcomes for our customers, enabling us to grow faster than the market. Security revenue growth accelerated to 32% year-over-year, up from 30% in the third quarter and notching another record high. As we discussed on previous calls, we are focused on building a more comprehensive ever-growing suite of security products aligned with customer requirements. This enables a stronger security-led sales motion supplementing our well-established differentiation and performance and better positing Fastly to engage with customers on their critical security needs, all while providing an additional entry point into high-value, long-term customer relationships. In Q4, we continued investment in our platform strategy to drive multiproduct adoption and build upon our cross-sell momentum. We're investing heavily in security and resilience with the latter becoming top of mind for customers in recent months. These efforts drove meaningful feature launch momentum highlighted by several fourth quarter releases, including API inventory, enabling customers to review catalog and manage APIs to identify ownership prioritize proactive optimization and accelerate incident response. API inventory builds upon API discovery launched in Q3 of 2025 to expand Fastly's API security and management offerings. We're proud of the remarkable progress in building out our API suite. And in the fourth quarter, Gartner Peer Insights recognized fastly with a 2025 Customer's Choice Award for cloud web application and API protection. We are the only company to have earned this recognition 7 straight years. Also now available are custom dashboards and alerts, all customers across the Firstly platform can tailor at-a-glance insights that they need for intelligent execution and access the actual alerts that they need to accelerate incident response. We also launched AI assistant in beta this context to where in console agentic feature accelerates faster platform adoption by enterprise software engineering teams with step-by-step guidance and personalized recommendations. Our go-to-market team has focused on customers and verticals best aligned to our platform strength, particularly performance and resiliency. These efforts were reflected in balanced revenue growth across product lines, geographic regions and customer segments in 2025, positioning us to drive continued growth in 2026. Given this momentum, our go-to-market teams are focused on accelerating customer acquisition to further support our future growth. Our go-to-market focus also enabled us to accelerate upsell and cross-sell engagement, maximizing value with our largest customers. This is evidenced by several recent expansions and new customers where the Fastly platform address mission-critical performance and security requirements for our customers. For example, a Fortune 500 restaurant chain recently selected the Fastly platform to secure and deliver their application traffic by displacing a legacy provider, they simplified their architecture and reduced management overhead. This is also a case where performance mattered. After switching to Fastly, the customer experienced their best Digital Day on record. A Fortune 500 home retailer expanded their use of the Fastly platform, displacing their security incumbent after a rigorous review of our next-gen WAF and managed security service. In addition to a stronger security posture, because were offloaded complex traffic control management to Fastly platform, freeing their teams to focus on innovation. -- a leading cloud observability and security provider expanded their use of the Fastly platform to include fast compute as well as fast security portfolio. Our platform enables them to execute complex workloads and rapid product iterations while maintaining granular data protection. A leading print on-demand marketplace recently expanded its use of the Fastly platform to include fastly bought management and fastly compute. They required the high granularity visibility and control that our platform provides to manage complex traffic and security requirements. As the Internet moves into the age of a agentic AI, it's clear that the edge will play a pivotal role. Our infrastructure is designed to power this edge intelligent layer optimizing authorized AI agents and blocking abuse. As one of the leading edge cloud providers, Fastly is well positioned to capitalize on this transition. We see AI increasingly as a tailwind for our business with increasing agentic AI traffic, AI bot management opportunities and AI workloads running on our platform. As we look to our 2026 guidance, we are leaning into our momentum and see continued upside in the business. Our first quarter and 2026 revenue growth guidance of 18% and 14%, respectively, reflect confidence that our business will outpace market growth while maintaining a prudent approach to longer-term visibility, especially amid greater macroeconomic and geopolitical uncertainty. Rich will now walk through our financial results and 2026 guidance in more detail. Rich, over to you. Richard Wong: Thank you, Kip, and thank you, everyone, for joining us today. Before diving into the financials, I want to say that I'm really excited to wrap up my second quarter fastly and I to build our results. We continue to accelerate our revenue growth momentum while demonstrating strong incremental revenue flow-through to drive profitability. This is driven by our strong focus on our go-to-market execution, our broader product portfolio, especially in security and our fiscal discipline. In addition, we recapitalized our balance sheet to specifically improve our liquidity and prepare us for our next phase of growth. Now on to our Q4 and year-end results. I'd like to remind you that unless otherwise stated, all financial results of my discussion are non-GAAP based. Revenue for the fourth quarter increased 23% year-over-year to $172.6 million, coming in above the high end of our guidance range of $159 million to $163 million. This result was a record high for fast and also represented the largest sequential dollar growth in the company's history. These results were driven by balanced performance across our customer mix and expanded product platform, along with continued success in our go-to-market upsell and cross-sell motions. These drivers also contributed to accelerated revenue performance throughout 2025 and we are now at an inflection point where we believe we are a strong share gainer in our markets and demonstrating consistent profit expansion of scale. Our annual revenue was $624 million, representing 15% growth over 2024. Coming in above our original guidance range of $575 million to $585 million provided 1 year ago. In the fourth quarter, Network Services revenue of $130.8 million grew 19% year-over-year. We saw healthy traffic levels in the fourth quarter due to stronger market conditions and the success of our upsell motion. Security revenue of $35.4 million grew 32% year-over-year, comprising 21% of our total revenue. This was due to the expansion of our security portfolio over the past year, coupled with the success of our cross-sell motion. Our other products revenue of $6.4 million grew 78% year-over-year, driven primarily by sales of our compute products. In the fourth quarter, our top 10 customers represented 34% of revenue, a modest increase from 32% in the prior quarter. Revenue from customers outside of 10 grew 20% year-over-year, an acceleration from 17% annual growth from our prior quarter. We were pleased to see that both cohorts accelerated their annual growth compared to the third quarter, providing balanced outperformance in the quarter. Also, no single customer accounted for more than 10% of revenue in the fourth quarter. Affiliated customers that are business units of a single company generated an aggregate of 11% in the company's revenue for the quarter. Our fourth quarter total customer count was 3,092 customers. Our enterprise customer count, which represents customers with more than $100,000 in annualized revenue in the quarter with customers. Given that typically over 90% of our revenue has historically been generated by our enterprise customers we believe it is a much more meaningful metric to track our customer acquisition. For this revamp, start next quarter when we begin reporting our Ban26 results, we will no longer disclose our total customer count metric on a go-forward basis. Our trailing 12-month net retention rate was 110%, up from 106% in the prior quarter and up from 102% in the year ago quarter. The quarter-over-quarter and year-over-year increases were primarily due to revenue increases from our larger customers in prior quarters. Our last 12-month NRR closely follows our overall revenue growth rate trend. Our annual revenue retention rate, which we reported at fiscal year-end was 98.7% for 2025, a slight decline from 99.0% in 2024. We believe this metric is not as meanful as an indicator to the health of our business as LTM NRR, and it's once a year disclosure limits its value. As such, we will no longer report this annual revenue retention rate metric on a go-forward basis. We exited the fourth quarter with record RPO $353.8 million, growing 55% year-over-year. The current portion of RPO was 70% of total RPO and and that balance grew 37% year-over-year. Our improved RPO is benefiting from improved go-to-market discipline with our customer onboarding, which resulted in larger upfront commitments. I will now turn to the rest of our financial results for the fourth quarter. Our gross margin was 64% in the fourth quarter, a record high for Fastly, gross margin was 250 basis points above our guidance midpoint of 61.5% and up 650 basis points from 57.5% in Q4 2024. This outperformance was primarily due to gross margin flow-through on higher revenue due to a stronger balanced traffic mix with customers in delivery and security. Underscoring this impact, our incremental gross margin on a trailing basis calculation increased to 76% in the fourth quarter, up from 58% in the third quarter. Our gross margin for the 2025 full year was 60.9%, up from 58.8% in 2024 and also coming in 210 basis points above our original 2025 implied gross margin guidance of flat to 2024. This increase was due to better cost discipline and strategy and our cost of revenue, coupled with gross margin flow-through on higher revenue levels. Operating expenses were $89.2 million in the fourth quarter, coming in line with our guidance expectations. We are continuing our sharp focus on managing our OpEx spend while balancing our growth investments. We had an operating income of $21.2 million in the fourth quarter, coming in better than the $10 million midpoint of our operating guidance range of $8 million to $12 million. We intend to continue to drive greater leverage in our operating results as we scale our revenue. This is demonstrated by our operating margin expanding 500 basis points sequentially from 7.3% in the third quarter to 12.3% in the fourth quarter. In the fourth quarter, we reported a net profit of $20.1 million or $0.12 per diluted share compared to a net loss of $2.4 million or $0.02 per diluted share in Q4 2024. For the full year 2025, we reported a net profit of $19.7 million or $0.13 per diluted share compared to a net loss of $12.1 million or $0.09 per basic and diluted share in 2024. Our adjusted EBITDA was $35 million in the fourth quarter compared to $11.1 million in the fourth quarter of 2024. For the full year 2025, adjusted EBITDA was $77.4 million compared to $32.6 million in 2024. Turning to the balance sheet. We ended the quarter with approximately $362 million in cash, cash equivalents, marketable securities and investments, including those classified as long term. A sequential increase of $19 million over Q3 2025. In the fourth quarter, we raised $180 million in 0% notes due in 2030 that carry a 32.5% conversion premium. We also privately negotiated cap call transactions totaling $18 million, which represent a 100% conversion premium or a share price of $23.4. We believe these capital strategy measure significantly improve our liquidity and offers greater flexibility to manage our growth and bolster companies in our customers and shareholders. Our cash flow from operations was positive $22.4 million in the fourth quarter compared to positive $5.2 million in Q4 2024. Our free cash flow for the fourth quarter was positive $8.6 million representing a $16.5 million increase from negative $7.9 million in the Q4 2024 quarter. For full year 2025, cash flow from operations was $94.4 million compared to $16.4 million in 2024. Our free cash flow in 2025 was positive $45.8 million compared to negative $35.7 million in 2024. Coming in materially higher than our original guidance midpoint of negative $15 million established 1 year ago. Also, this represents an $81.6 million increase in free cash flow in 2025 underscoring our revenue outperformance and cost discipline, expanding our bottom line. As 1 of the world's leading distributed edge platforms, we continue to scale our global network to support Fastly growth. We are closely monitoring supply chain dynamics particularly regarding memory components and have taken strategic actions to mitigate potential impact. Our software-defined infrastructure is continuously improving, typically with Golar capital requirements for expansion of legacy providers -- this structural efficiency underpins our expanding gross margins, positioning us to stay ahead of global traffic trends while maintaining strict capital discipline. Our cash capital expenditures were approximately 8% of revenue in the fourth quarter and 9% for full year 2025. This annual spend was below our 10% to 11% expectation due to the timing of approximately $10 million in CapEx anticipated in the fourth quarter, which will now incur in 2026. Let me take a moment to update you on our CapEx plans and strategy. For starters, 2 quick housekeeping points. First, in the fourth quarter, we did not deploy any prepaid capital equipment as we work down the remaining balance. Also, our repayment and financial leases for equipment have terminated we anticipate no further payments will occur for either these categories for the foreseeable future. As a result, we wrapped up 2025 with a cleaner simplified CapEx profile. Second, -- as a reminder, our cash capital expenditures include capitalized internal use software. To recap 2025, we spent 9% of revenue on cash CapEx, which represented approximately 3% in capitalized internally used software purchases of infrastructure capital equipment and 1% was in prepaid to plans. Going forward, we will post only on the infrastructure capital expenditures with investors and removed capitalized internal use software, which is not a meaningful indicator of our capital spend. We believe this change will more accurately represent the inherent capital costs in growing our business and more aligns reporting to our peers. Note that our infrastructure CapEx is reported in our free cash flow bridge in our press release and supplement as property and equipment. For 2026, we anticipate our infrastructure capital spend will be in the range of 10% to 12% of revenue compared to 5% in 2025. As I said a moment ago, approximately $10 million of infrastructure CapEx will now incur in 2026 instead of the fourth quarter 2025. And which equates to roughly 1.5% of annual revenue, impacting 2026 instead of 2025. Normalizing this timing impact, we anticipate our 2026 infrastructure CapEx will be increasing approximately 65% over 2025 as we run our capacity to meet our growth objectives and perform upgrades to our fleet. This spend will be friend voted to ensure we have adequate equipment given recent supply chain constraints. I will now discuss our outlook for the first quarter and full year 2026. I'd like to remind everyone again that the following statements are based on current expectations as of today and include forward-looking statements. Actual results may differ materially, and we undertake no obligation to update these forward-looking statements in the future, except as required by law. Our revenue model is primarily based on customer consumption, which can lead to variability in our quarterly results. Our revenue guidance reflects these dynamics in our business and is based on the visibility that we have today. Note that in January, finalized the deal to restructure its U.S. business, the platform can continue operating in the United States. Our guidance going forward will incorporate by Dam's revenue unless specified otherwise. As Kip discussed, we saw revenue strength from successful upsell motions and share gains broadly across our customer base. A portion of this business was also driven by traffic strength that came in stronger than anticipated, and we are not anticipating seasonal strength in the first quarter. As a result, we expect revenue in the range of $168 million to $174 million in the first quarter, representing 18% annual growth at the midpoint. We anticipate our gross margins for the first quarter will be 64%, plus or minus 50 basis points. As a reminder, our gross margin performance is dependent upon incremental revenue increases or declines as demonstrated by our improving gross margin through 2025 on accelerating revenue growth. For the first quarter, we expect a non-GAAP operating profit of $14 million to $18 million. We expect a non-GAAP net earnings per diluted share of $0.07 to $0.10. Note that for the first quarter, fully diluted share count for positive EPS and will be approximately 175 million shares. As Kip mentioned, our 2026 guidance reflects confidence that our business will outpace market growth while maintaining prudence on our longer-term visibility amid greater macroeconomic and geopolitical uncertainty. For calendar year 2026, we expect our revenue to be in the range of $700 million to $720 million reflecting annual growth of 14% at the midpoint. We anticipate our 2026 gross margins will be 63%, plus or minus 50 basis points. We expect our non-GAAP operating profit to be in the range of $50 million to $60 million, reflecting an operating margin of 8% at the midpoint, a doubling in our profitability compared to 2025's operating margin of 4%. We expect our non-GAAP net earnings per diluted share to be in the range of $0.23 to $0.29, and we expect free cash flow to be in the range of $40 million to $50 million. And finally, as I mentioned earlier, we anticipate our infrastructure CapEx to be in the range of 10% to 12% of revenue for the full year. Before we open the line for questions, we would like to thank you for your interest in this morning Fastly. Operator? Operator: [Operator Instructions] Your first question comes from the line of Jeffrey Van Rhee with Craig Hallum. Jeff Van Rhee: Congrats -- Great numbers. Just a couple of questions. First, -- maybe you talked about the. Can you just expand on that a bit? What are you seeing at the edge right now at agentic AI? I mean I don't know, put some numbers on it, but just what are you seeing so far? . Kip Compton: Thanks. We're seeing a lot with respect to AI on our platform, and it really breaks into a number of categories. First of all, just we're seeing an increase in traffic related to agents. I think in the past, the saving called machine to machine. And as you -- if you've used AI tools, I think you would appreciate that they often check a lot more websites, for instance, than you might. And that's more traffic and all of that traffic is processed through the Fastly network for our Fastly customers. So we're seeing decreased activity there. And a quarter or 2 ago, we actually published a report outlining the statistics on that and actually going into which models we're seeing the most traffic from an interesting report on our website with lots of numbers. . We're also seeing AI workloads on our platform, and that can take a number of different forms. We've talked in the past about a use case starting an extremely large training data set. We also have customers using our compute edge for inference and other AI-related tasks. And then maybe a third example of where we're seeing AI as a tailwind for our business is AI specific offers. So I'm thinking of our AI bot mitigation. As we're processing all of that traffic for our customers, it's creating opportunities for us to help manage crawlers and other AI bots to ensure that the right ones get through because our customers want to be relevant in the AI world, but block the ones that are harmful. So we're seeing across the board in a number of different ways. AI inflating the business in a very positive way, and we think the edge will be very important for AI going forward. Jeff Van Rhee: And on the traffic routing, I think you called out you saw some very strong traffic flows as customers optimized or are optimizing their traffic and selected you based on performance. Just what drove the widening of the gap in respect of performance between you and the peers to attract more traffic this quarter versus maybe in the past? Kip Compton: Yes, it's a great question. I mean, we've maintained a performance edge. It's the namesake of our company. It's something our teams take very seriously. I think recent events in the industry that is called more attention to the value of resiliency in an edge platform. And we're very serious about that and have taken a number of architectural steps that we think enable us to deliver a more resilient platform. And I think some customers have directed traffic our way because of that. Jeff Van Rhee: Last 1 for me, and I'll let somebody else jump on. The just obviously exclusive. I think last quarter, you called out an 8-figure customer. But I'm just curious, if I look at the 12-month RPOs, to what degree is that concentrated? So if I looked at the absolute dollars of 12-month ARPU increase, from Q3 to Q4, how much of that is driven by, say, maybe your 3 largest customers that were signed or expanded in the quarter? . Richard Wong: Yes. With RPO, it's kind of broad-based across a number of our customers. What we do, do is we do focus on the variety of customers, our largest enterprise, of course, historically, had not wanted to make some commitments on to us. And I think that what you're seeing here is a change in mentality and a change in shift. So now the RPO that you see is kind of broad-based across our entire customer is much kind of smaller. Kip Compton: Yes. I'll just add, it's been a very deliberate and intentional part of our market strategy and in the way that we framed negotiations with all of our customers and the way that we thought about pricing and discounting across our entire customer base to encourage more revenue commitments to us. To help manage or mitigate the volatility that comes from a purely utility-based pricing model. Of course, we also, in the security side, have a lot of subscription revenue, which helps with that as well. But the driving RPO growth and really just committed revenue overall is a major part of our strategy in terms of managing and mitigating volatility on the top line. Jeff Van Rhee: I mean, great, you can capture that increased commit. I appreciate it. . Operator: Your next question comes from the line of Frank Louthan with Raymond James. Frank Louthan: Can you give us an idea of what's giving you the confidence with the nice increase in the guidance there. Is it a combination of some new customers or just some better commitments from them? And what kind of gives you the confidence in the guide going into next year? Kip Compton: Sure. I mean, I'll comment and then Rich has obviously put a tremendous amount of detailed thought into the guidance. You may have some additional things. I mean I think if we look at the momentum that we've established in 2025, and the customer contracts and relationships that we've established and obviously, the RPO number that we just discussed as well as the overall market trends and what we're seeing coming into the new year. we're very confident in terms of how we're positioned. And so we were able to issue guidance that reflects growth substantially above the market growth. As we continue to take more share -- the caution, and I think Rich mentioned this, and I alluded to it, too, in my commentary was we are in an era of what I would consider elevated geopolitical and macroeconomic dynamics. And there could be, for example, situations with our international customers around the world where their purchasing patterns are affected by that. . And we're also very wary of supply chain dynamics, although as we believe we have a very capital-efficient infrastructure, it's too early to tell, but that could play out in our favor. So we try to take a balanced approach on that guidance, but we were able to get to those numbers, and Rich can provide more detail. Richard Wong: Yes, Frank. It's a really good question just because if you look at the midpoint of our guidance, That's a year-over-year increase of $86 million at the midpoint, and that would be the largest kind of year-over-year increase that we would ever have. The reason we feel more comfortable and confident in the guidance is because we -- as you know, we went through a go-to-market transformation over the past kind of 12 to 18 months. Part of that go-to-market transformation has been around getting to know our customers better, really aligning our sales team to the customer accounts and really being more diligent in watching kind of the traffic and what they're buying and what they're doing. So I think it's really the closeness of the -- with the customers and that go-to-market transformation that gives us that confidence. Frank Louthan: Is there anything about the mix of that traffic that's maybe shifted a bit maybe away from traditional media and towards AI type traffic or something like that? How should we think about that? . Kip Compton: I think 1 development that I would point to that we discussed at some length on our last quarter call is we have seen material cross-sell activity in our large accounts. And that cross-sell activity brings in portfolios like security and compute. And that starts to transform the relationship in many ways, we believe, with those customers to one that's more strategic for them and covering more use cases. And that does give us some confidence. So we see different mixes of growth and there's a seasonal factor there as well. I think you appreciate in terms of media versus non-media. But I think one bigger trend is an increasing consumption of multiple services from us by those large customers. . Operator: Your next question comes from the line of Jonathan Ho with William Blair. Jonathan Ho: Let me congratulate you on quite an impressive quarter. Just wanted to maybe just build on sort of the AI question again. Can you help us understand -- and just given how early we are in a agentic adoption, like what are some of the indications that you're getting from your customers in terms of that rate of growth and what that could look like in 2026. Kip Compton: Sure. Appreciate the question. We can see the rate of growth in the telemetry coming off of our infrastructure. And we can tell generally speaking, when it's in a agentic request versus a traditional user on a browser, for instance. So we can see that traffic growing each quarter. And that is driving volume on our platform. We can also see it in the conversations we have with our customers, particularly with our media customers. We have some of the most sophisticated media companies in the world as our customers. And this is a very top of mind topic for them. . And what I can share is that discussion has shifted from perhaps last summer, how do you block it to a much more nuanced and sophisticated conversation now about how do you optimize for it. We want to be relevant, but we want to manage how this works. We want to be able to enforce agreements with people that the media companies have agreed with -- so we've adapted our approach there, and we have, as I mentioned earlier, our AI bot mitigation technology, but we also have the -- we were the first in the industry to support a new protocol called RSL a really simple licensing that was an industry developed protocol to essentially enforce content rights agreements related to AI models. And so we're taking an industry-wide approach with our largest customers to manage this complex problem. And I appreciate your point that it's very early. We see it that way as well. And we're staying close to our customers and understanding how we can solve their problems in many cases, working with them as what we call as we call design partners for our new products in this area. Jonathan Ho: And then just in terms of the CapEx, I appreciate the additional disclosure and sort of the alignment with other industry players as well. when you talked a little bit about sort of higher cost and potentially shortages in terms of supply, can you help us understand how much of that increase in CapEx is maybe going to be eaten up by higher component costs as opposed to just pure capacity addition? . Richard Wong: Yes. I would say the increase in CapEx is going to be both of it, right? It's going to be -- we do need CapEx because of the growth that we're seeing. We saw this in Q4. And so at the last Q3 earnings call, we did talk about raising our CapEx spend to 10% to 11%. What you're seeing here is a function of both component prices going up. And so in some cases, especially with memory, we're seeing potentially 25% to 75% increases year-on-year on that pricing. But -- so you take the price increase and you take the additional upside in revenue that we're putting here, and it drives the CapEx increase year-on-year. Kip Compton: I would the 25% to 75%, Rich, you can correct me if I'm wrong, is on the memory component itself . Not the overall unit cost of infrastructure for us, for instance. Richard Wong: That's right. Operator: Your next question comes from the line of Fatima Boolani with Citi. Fatima Boolani: Super Rich, for both of you, actually. I wanted to zero in on the network services strength you called out that is quarter of acceleration in that business. You've identified a lot of quantity and volume level input. I wanted to understand and have you help us with what are some of the more durable inputs to traffic growth and then also relatedly, on the pricing front, I mean, all of this incremental growth is coming in very incrementally impressive margins and unit economics. So what is a little bit around the pricing side of the equation that allowing -- that is allowing you to deliver a lot more of this traffic a lot more profitable. . Richard Wong: Yes. So I think when we look at traffic trends and what we're seeing for the year, we are still -- for Q4, we're still seeing kind of in the mid-20s in terms of traffic growth. I think the traffic growth is kind of spread across the different types. And so it's not any 1 particular to call out. In terms of the price erosion, what we've seen is actually a very nice contraction on price erosion. We have historically talked about like mid-teens price erosion. For the quarter, I think we've been very focused on great discipline around maintain price, really selling where its performance really matters and where we really win. Our price erosion in kind of Q4 was in the mid-single digits this quarter. So definitely seeing less price erosion in the space. . Kip Compton: I'm sorry. I would note -- I would just add to Richard's comments. But in terms of the -- as you put it, very impressive profitability, we believe we have a very efficient infrastructure. And the #1 thing that drives our margins up is volume as we're able to get more economies of scale. So you're asking about things that are durable. We certainly think that's durable. . Richard Wong: Yes. And Tami, just for clarification, it's hard to hear the first part of your question. Did we answer both parts of your question, and we may limit . Fatima Boolani: Yes. So it was very clear. It was very clear -- and just a follow-up for you on the Surety business, nice to continue to see that acceleration there. And it does appear that these are the fruits of your own labor with respect to seeing the yield on the cross-sell motion and the rigor that you've introduced and matured into the organization. But I was hoping you could maybe opine on how much of that momentum in the security services franchise kind of riding on the coattails of the network services business having accelerated. So is there a little bit of a coupling happening whereby if we do see maybe a deceleration on the network services side, we should expect to see maybe a little bit more of a drop off on the security services side. I'd love to kind of understand the interplay and the coupling and the couple. Kip Compton: Sure. I mean we do -- we have a lot of customers who consume both Network Services and security from us. So at that level, there's probably some coupling. If those customers have less demand, we might see less demand across both. I will note though that I think the primary driver has been the expansion of our security portfolio over the last year and we are now landing customers who are essentially security first customers onto the platform and then expanding them into Network Services, in some cases, for instance. So I think there is some coupling as there is when you have a platform strategy and you have customers consuming multiple product lines, but we're seeing our security portfolio come into its own as a demand driver for us. Operator: Your next question comes from the line of Jackson Ader with KeyBanc Capital Markets. Jackson Ader: The first 1 is on the outlook for 2026. Just curious about maybe the balance of given kind of the upside to consensus or just how you're feeling about momentum into this coming year? The balance between security strength versus network strength and understanding the team as questions about coupling. But just give us a sense of which one of those line items really is going to be the lion's share of the growth next year. Richard Wong: Yes. I think when we look at kind of the guidance that we provided, we do believe that in all of our businesses, we should be growing faster than the market. And so when we think about Network Services, I think the market that we see is about 6% to 7% year-over-year growth. We -- our expectation fully is that we would be north of that. I would say that it's going to -- from an increased perspective, you're going to see increases in both Network Services and Security. I wouldn't say that 1 drives it more than the other. I would say it's going to be broad-based across Security and Network Security. We say 12% to 13% year-over-year growth. I mean we're going to -- we will be growing north of that as well. Jackson Ader: Rich, given that this is kind of your first full year guide for -- on the Fastly platform. Do you mind just giving us a sense for your kind of process, maybe your philosophy? Are you looking at a pipeline coverage ratio as you kind of look out? Just any sense in terms of what your initial guidance philosophy might look like? Richard Wong: Yes. So I think we do a very robust kind of planning process when we kind of plan for 2026. And when we do do that, we're looking at multiple angles. We have byproduct views. We also have perspectives around the different pods that our sales teams sell under we look at on a customer-by-customer basis. And so we know from a customer-by-customer basis, what our contracts are like, and we do a lot of traffic and kind of pricing and when pricing is up for renewal. So we really build a robust model. We do look at it and say, okay, what kind of macro environment are we in? And what kind of commitments do we have from an RPO perspective -- and then we layer in that kind of existing customer base with our expectations around new customer lands to kind of really build our model. And then we kind of stress test it around the macro environment around like what are the risks and opportunities that we potentially have I think my goal on the kind of guide is to hit the numbers that we say we're going to hit, right? I don't -- the expectation is that for me, I'd like to just be fully transparent. This is what we think and what we will do. And so we really go for what do we think is going to be risk adjusted for the macro environment that we're in? Kip Compton: Look, I mean that's a great answer from Rich, but I'll tell you it's been great working with him on this guy 1 point, I think you had 18 different calibrations from his team, and we're lining them up. So I mean I'm extremely comfortable that Rich has taken a very thorough approach here. nobody has a crystal ball, but I'm very confident in the quality of work that went into our guide. . Jackson Ader: Was going to say go to customer by customer. It's -- you're getting into the weeds. . Kip Compton: We take it very seriously in terms of what we project into the financial community. But frankly, it's also something that helps us run the business, obviously. So it's for this audience and the investors, obviously, but frankly, we view it as core to how we plan and build the business into the future. So it's a core part of what Richard's team does. . Richard Wong: That's right. I mean, literally, as we build a plan, we're looking week-by-week also just on traffic patterns, and we just have updated views throughout the kind of process. And so I just think that being close to the customer is so important to Fastly. The work that they do is so important to us. And so for us, the best thing we can do for them is to actually do the right forecast, make sure the capacity is there and make sure that the quality of service that we provide is high. Operator: Your next question comes from the line of Param Singh with Oppenheimer. Unknown Analyst: I think I really wanted to focus on the security side. Obviously, you talked about good attach rates here. Maybe you could give me some color on the current penetration of the newer products in DDoS and bot management. And maybe also talk about your API capabilities here. I know you expanded that. What's the adoption rate of API? And what are some of the technical capabilities you'd like to add on the API side, especially as you talk about an evolving traffic landscape with agentic AI? Richard Wong: Sure. From a Security perspective, we're really proud because we do have kind of the 5 products. Our WAF product is kind of the 1 that we started with and that we had I would say that a large portion of our security revenues is still kind of WAF. We are very happy with the kind of traction that we are seeing with bot management and API security. We haven't broken it out yet in terms of like specifically between the security products where it is, but I would say that the majority of our security revenues are still our world-class lab product. . Kip Compton: Yes. I would just add that some of our largest new deals are on API use cases. So we've got -- in the security business, certainly, the core business is the WAF, which is a phenomenal product. It continues to grow well. But we're seeing strong interest and demand on the API side of the equation. And we're excited about that because we're still, as we mentioned, building out the portfolio there. And so there's more to come. Sanjit Singh: I mean I really wanted to maybe drive a little bit more. I know you talked about your API discovery that you expanded with. So from a technical standpoint, where do you feel you stand now as a larger API platform that could help as you cross board not just with security, but even on the delivery side? And I guess it should be more important in agentic world. And please correct me if I'm wrong. Kip Compton: Yes, absolutely. I mean our approach to our security portfolio has been 1 that has agentic in mind. The features that we're building generally work, for example, for regular APIs as well as APIs. And that's based on some of the work we've been doing with our customers in this area, where they don't want a separate AI capability. They want a single edge platform that addresses all of their API needs across agenetic AI and traditional workloads as well. And so I think AI bot management is an area where we made a distinction there. There are some other features. But our security portfolio is designed with AI workloads in mind, and we are seeing those workloads on the platform. In terms of where we are, I feel like we may be about halfway through the journey. We are covering a lot of use cases, and we're seeing traction that we're very pleased with on API security and API use cases more broadly on the platform. And we're actually excited about the momentum we're seeing because -- as I mentioned earlier, we're planning to bring additional capabilities in the portfolio into this space that we think will expand the addressable TAM for us further. . Unknown Analyst: And then maybe just 1 last one, if I could. Just looking at your CapEx, I understand the incremental $10 million, but really if you could help me parse through what is maintenance CapEx in that level or posted especially in this higher memory environment versus what were expanding new POPs or adding more compute capabilities around accelerated servers. If you could just big that out and help me understand how you are thinking about your CapEx longer term. I'd really appreciate it. . Richard Wong: Yes. So the infrastructure CapEx, we talked about, which was 10% to 12% of 2026 revenue, I would say the majority of that CapEx is going to be for growth CapEx and not for the maintenance and replacement side. I would say that we are continuing to invest. I think 1 of the areas that we are investing is going to be kind of in the APJ area. And so we are opening up additional tops out there to support the business. And so I would say the vast majority of that infrastructure CapEx is not necessarily for the maintenance side but more for the kind of growth those. Operator: Your next question comes from the line of Rudy Kitzinger with D.A. Davison. . Rudy Kessinger: Congrats on the Verizon results. As we look to the 2026 guidance, top 10 customer as a percentage of revenue where is that estimated to fall for the year within that revenue guide? . Richard Wong: Yes. Right now, just as a background for those who are on the call. Right now, our top 10 customers is 34% of revenues. It was up from 32%. And -- the good news here is that we have been investing in our top 10 as well as outside of our top 10. So the top 10 customers grew their revenues by 30% year-over-year with the non-top 10 grew 20%. Both of those were acceleration. And so we're still making big investments on both cores to make sure that we are looking at all of our customers in aggregate. I would say that as we go further, we are doing a few things on our go-to-market transformation. One is that we're focusing our efforts on customers that really get the value that we want from our platform. And some of that happens to be the top 10. And I could see top 10 staying at 34%. I can see it going up just because they are. But I would say that the non-top 10 growth is still going to be high and should be continuing to grow as well. So it's hard for me to say it's going to be 34% 323 -- but I would say that we are very happy with the performance and additional 2 percentage points in the top 10 just because those top 10 customers are still super valuable to us and very profitable to us. Kip Compton: Yes. I would just add 2 things. And I mean, Rich hit 1 at the very end there. But if you see that we grew last quarter, our top 10 faster than our non-top 10, you saw the behavior of the business in terms of profitability, gross margin, et cetera, you can see that those top 10 customers are profitable business for us. We recognize the revenue concentration risk that they represent, but they are profitable -- a significant part of our business. I think the second thing I'd add is we've historically talked about that percentage of top 10 being in the low 30s to mid-30s and thinking that, that was likely to remain the case for some period of time. we don't provide that formally as part of our guidance, but I don't think our view on that has changed at this time. And as I mentioned earlier, we're excited about the cross-sell opportunities as well as the contribution to RPO that those top 10 customers can make. So we continue to drive profitable, higher quality revenue in that cohort. Rudy Kessinger: And then on gross margins, obviously, a very impressive trend here over the last year, getting up to 64%. But 6% to 4% in Q1, you've got the guide at 63% for the year. I understand that with some of this CapEx coming online and some that pushed out from last year. But just how should that trend seasonally? I mean should we see like a big step down in Q2? And then recovery throughout the year? Or just how should that trend on a quarter-to-quarter basis? . Richard Wong: Yes, Rudy, actually, really good call out. I do think that we did give the guide for Q1 gross margins to be up about 6% we will see kind of a drop into Q2 and Q3 as we have additional cost POPs kind of coming online. And then we would again see a bump up again in Q4. And so kind of that's the trend where Q1 and Q4 will be a bit higher in Q2 and Q3 should be a little bit of a drop. Operator: That concludes our question-and-answer session. I will now turn the call back over to Chief Executive Officer, Kip Compton, for closing remarks. Kip Compton: Thank you. We believe this quarter demonstrates tangible progress in our ongoing transformation. We are committed to building the world's most powerful and flexible edge platform. We're pleased with the strong momentum we saw this quarter and are focused on building sustainable, profitable growth. I want to thank our Fastly employees for all their contributions, our customers for their trust and partnership and investors for their continued support. Thank you for your interest in Pasley, and thank you for joining us today. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon, and welcome to Biotricity's Third Quarter Fiscal 2026 Financial Results and Business Update Conference Call. Today's conference is being recorded. As a reminder, this is Biotricity's Third Quarter fiscal 2026 ended on December 31, 2025. So all figures presented for this period will reflect that end date. Earlier, Biotricity issued its earnings press release for the period, which highlighted financial and operational results. A copy of the press release is available on the Investor Relations section of the Biotricity's website, and the full financials have been filed with the SEC on Form 10-Q and posted on EDGAR at www.sec.gov. Before beginning the company's formal remarks, I'd like to remind listeners that today's discussion may contain forward-looking statements that reflect management's current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements. Biotricity does not undertake to update any forward-looking statements, except as required. At this point, I'm pleased to turn the call over to Biotricity's Founder and CEO, Dr. Waqaas Al-Siddiq. Please go ahead, sir. Waqaas Al-Siddiq: I would like to first thank everybody for joining us today. This quarter marks another important step for Biotricity as we continue executing our proven strategy, evidenced by 3 consecutive quarters of positive net operating income and EBITDA. As we continue scaling revenue and improving margins, we are strengthening our leadership position in chronic care markets, starting with the #1 global cause of death, cardiovascular disease. This quarter continues our historic trend of expanding our trailing 12-month top line while setting up for another growth year as we have always done year after year. We are building a company designed for durable recurring growth, and our results this quarter reflect that discipline. Demand for remote patient management solutions continue to accelerate with the growing aging population and persistent resource and staffing shortages. Biotricity is uniquely positioned to lead the transition from reactive care to proactive management with clinically superior technology, favorable reimbursement economics, strategic partnerships and a highly scalable, efficient operating model, which has allowed us to make remarkable progress across multiple fronts. The cardiovascular and chronic disease management landscape is evolving rapidly, and long-term winners will be companies that combine clinical grade accuracy, reimbursement alignment and scalable infrastructure. Biotricity brings all 3 together. Unlike others that rely on high-cost service models or divert reimbursement away from providers, our platform is designed to expand patient access while simplifying clinical workflows. This allows providers to serve more patients using existing resources while increasing revenue for services physicians are already providing. That differentiated value proposition continues to drive strong customer retention and expansion within our existing and new accounts. One of our most significant achievements has been the expansion of our cardiac AI cloud platform. Our AI-driven platform is designed to enhance diagnostic accuracy, improve patient outcomes and increase clinical profitability. As we pursue FDA clearance for our groundbreaking AI clinical model, we are setting new standards in cardiac care, ensuring every patient receives the highest quality of care. We expect to see additional improvements in our operational expenses and margins with our next clearance. This quarter, we continue to pursue regulatory approvals internationally, preparing for future distribution. These approvals are in addition to the regulatory approvals we already have in the U.S., Canada, Saudi Arabia, Argentina and some other smaller markets. These approvals underpin our strategy to promote accessible high-quality care to improve patient outcomes. Our primary focus remains on the U.S. market expansion, but we are opportunistically expanding outside of the U.S. through distribution partnerships. We are also extending care beyond the clinic by putting clinical quality tools directly in the hands of consumers through Bioheart. Built with the same underlying technology trusted by providers, Bioheart enables users to identify meaningful changes earlier and make lifestyle adjustments sooner, supporting their long-term outcomes. Through a multichannel distribution approach through experienced partners to optimize these routes, we are making monitoring more continuous and integrated across the care journey. During the quarter, we continued to expand sales of Biocore Pro, our next-generation cardiac monitoring device, deepening penetration within current customers and extending our market footprint. Our momentum continues to build across the business. We launched multiple large-scale cardiac monitoring pilot programs within hospital networks and clinic groups, initiatives that are already contributing to improved utilization and accelerating our path towards breakeven. Based on the current demand and pipeline visibility, we expect continued strong adoption of Biocore Pro across existing and new customers. This expansion supports our broader commitment to deliver innovative health care technology solutions. In summary, our strategic initiatives, technological advancements and operational efficiencies have positioned Biotricity for sustained growth and profitability for calendar 2026. We expect to continue to increase top line revenue this year, shift to profitability and post another growth year. We remain focused on delivering innovative, high-quality cardiac care solutions and are confident in our ability to continue driving value for our shareholders and improving patient outcomes globally. With that, I will turn the call over to our CFO, John Ayanoglou, to provide more detailed financial insights. S. Ayanoglou: Thank you, Waqaas. Let's review the highlights of our third quarter fiscal 2026. Our recurring revenue reflects strong market adoption of our primary subscription model, which is a Technology-as-a-Service subscription model. Recurring revenues through our secondary usage-based subscription model also remain robust. Both are driven by the popularity of our FDA-cleared cardiac monitor devices, especially the next-generation Biocore Pro, which features cellular connectivity. Our rapidly expanding digital ecosystem reflects this growth with users of our digital health app growing from 4,500 to more than 44,000 in just 2 years and an expanding network of over 2,500 providers supporting 400,000 patients annually. Atrial fibrillation, a primary contributor to strokes, remains a significant focus of our business. Biotricity is providing early intervention opportunities and improving patient outcomes for patients with atrial fibrillation, providing them the opportunity for earlier medical intervention. This not only improves patient outcomes, it also has the propensity to deliver significant health care cost savings for both individuals and the broader health care system. For the third quarter of fiscal 2026 ended December 31, 2025, revenue increased by 10.2% compared to the corresponding prior year period to $4 million from $3.6 million in the prior year quarter. This growth is a testament to the efficacy of our strategic initiatives and our technological advancements. We anticipate further revenue growth in coming quarters as a result of the fact that our latest flagship device is a best-in-class device that is geared towards use in hospitals and large clinics, and we are continuing to penetrate effectively in that space. Technology fees accounted for 91.2% of the quarter's total revenue, reflecting our strong customer retention and the quality of our support services. Gross profit for the quarter totaled $3.3 million, up 17.6% from $2.8 million for the prior year period. Our gross profit percentage improved 516 basis points to 81.5% for this quarter, up from 76.4% in the corresponding prior year quarter. This increase is attributable to the expansion of our recurring technology fee revenue base as well as efficiencies gained through proprietary AI and improvements in our monitoring and cloud cost structures. As part of our sales initiatives, we continue to search for opportunities to expand our geographic footprint. We serve thousands of cardiologists across hundreds of centers. Our in-sourcing business model allows these cardiac medical professionals to have direct control over our services, thus enhancing efficiencies and enabling broader market penetration. Our business development initiatives include expansion into other verticals that are ancillary that fit naturally with our core business. Operating expenses for the third quarter were $2.8 million compared to $2.93 million in the same period last year, a 4.2% decrease. Our selling, general and admin expenses decreased by 8.2%, a comparative reduction in spending of over $195,000 for this quarter, but we added to our R&D expenses, increasing those by $72,000. As previously discussed, we have strategically transformed our sales force to increase efficiency. Our external sales team is focused on longer sales cycles on larger accounts, and these include independent hospitals and GPO networks. We continue to be contracted under 3 of the largest GPO networks, which give us coveted access to sell into more than 90% of hospitals in the U.S. All of these positive improvements in revenue growth and operating efficiencies through the use of AI and other automation as well as proactive cost management have allowed us to continue to achieve positive free cash flows, defined as the cash from operations that is available to pay interest and dividends for the last 6 consecutive quarters that has set us up on a path toward achieving profitability in the next quarter. In fact, we are pleased that this quarter, the third quarter of fiscal 2026 is the third consecutive quarter for Biotricity in which it has achieved a positive EBITDA. This is an important milestone and indicator that we're nearing full profitability. The company achieved EBITDA of $280,000 this quarter, which corresponds to $0.01 on a per share basis. A reconciliation of our EBITDA and adjusted EBITDA numbers is available in our 10-Q. We're pleased with the progress made in building our technology, obtaining FDA registrations and developing effective sales strategies as well as implementing cost-cutting measures. The result has been an improvement in operating results of nearly $1 million to achieve our third consecutive profitable quarter from operations, which was $441,000 for this quarter. Net loss attributable to common stockholders for the fiscal 3-month period ended December 31, 2025, was $1.1 million compared to $1.3 million during the corresponding prior year period. On a per share basis, we reported a loss per share of $0.042 compared to $0.054 for the corresponding prior year period. Looking ahead, we remain committed to advancing our business through the commercialization of our Biocore, Bioflux and Biocare products. Our tech is truly useful globally, and cardiac is the #1 chronic care condition in the entire world. The growing market interest and demand for our suite of products dedicated to chronic cardiac disease prevention and management reinforce our confidence in our market position. Importantly, our focus on innovation and development continues to yield significant advancements in remote monitoring solutions for both diagnostic and post-diagnostic products, bringing us ever closer to profitability. We are excited about the future and confident in our ability to deliver sustained growth and profitability for Biotricity. That concludes our prepared remarks for today. Operator, please open the line for questions. Operator: [Operator Instructions] There are no questions at this time. Gentlemen, we'll turn the conference back over to you for any additional or closing remarks. Waqaas Al-Siddiq: Thank you, and thank you, everybody, for joining us. We're very excited about this [indiscernible] about the prospects of 2026. We think that the top line of the company is going to continue to grow, and we expect to turn into net income positive this year. And we are looking forward to talking to all of you in our next quarterly call. Thank you. Operator: Thank you, sir. That does conclude today's teleconference. We thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. My name is Jordan, and I'll be your conference operator today. At time, I'd like to welcome Vanda Pharmaceuticals, Inc. Earnings Conference Call. [Operator Instructions] Thank you. I'd now like to turn the call over to Kevin Moran, Vanda's Chief Financial Officer. Please go ahead. Kevin Moran: Thank you, Jordan. Good afternoon, and thank you for joining us to discuss Vanda Pharmaceuticals' Fourth Quarter and Full Year 2025 performance. Our fourth quarter and full year 2025 results were released this afternoon and are available on the SEC's EDGAR system and on our website, www.vandapharma.com. In addition, we are providing live and archived versions of this conference call on our website. Joining me on today's call is Dr. Mihael Polymeropoulos, our President, Chief Executive Officer and Chairman of the Board; and Tim Williams, our General Counsel. Following my introductory remarks, Mihael will update you on our ongoing activities. I will then comment on our financial results before we open the lines for your questions. Before we proceed, I would like to remind everyone that various statements that we make on this call will be forward-looking statements within the meaning of federal securities laws. Our forward-looking statements are based upon current expectations and assumptions that involve risks, changes in circumstances and uncertainties. These risks are described in the cautionary note regarding forward-looking statements, risk factors and Management's Discussion and Analysis of Financial Condition and Results of Operations sections of our most recent annual report on Form 10-K as updated by our subsequent quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the SEC, which are available on the SEC's EDGAR system and on our website. We encourage all investors to read these reports and our other filings. The information we provide on this call is provided only as of today, and we undertake no obligation to update or revise publicly any forward-looking statements we may make on this call on account of new information, future events or otherwise, except as required by law. With that said, I would now like to turn the call over to our CEO, Dr. Mihael Polymeropoulos. Mihael Polymeropoulos: Thank you very much, Kevin. Good afternoon, everyone, and thank you for joining Vanda Pharmaceuticals Fourth Quarter and Full Year 2025 Financial Results Conference Call. 2025 was a year of strong commercial execution and significant regulatory and clinical advancements for Vanda. I will briefly address some of the key highlights. . Our lead product, Fanapt, drove impressive growth. Full year net product sales increased 24% to $117.3 million versus 2024, and supported by a 28% rise in total prescriptions and a remarkable 149% surge in new-to-brand prescriptions. This reflects accelerating momentum broader prescriber adoption and the impact of our target commercial investments, including direct-to-consumer campaigns that boosted brand awareness. Our full commercial franchise, Fanapt, HETLIOZ, HETLIO LQ and PONVORY generated total revenues of $216 million for the year, up 9% year-over-year, demonstrating solid performance across our marketed products. Clinical and regulatory milestone highlights, we achieved a major regulatory win with the FDA approval of [ Nereus ] tradipitant in late 2025, for the prevention of vomiting induced by motion. The first new oral pharmacologic option in this space in over 40 years. This approval offers a substantial market opportunity in motion signals. Most of sickness is a common condition with prevalence estimates indicating that approximately 25% to 30% of U.S. adults roughly 65 million to 78 million people experience symptoms during travel or motion in exposure. Tens of millions seek pharmacologic relief annually, yet current users are often limited by adverse events or inconsistent efficacy. [indiscernible] addresses this unmet need is well-tolerated, targeted neurokinineceptor antegrade and we're actively preparing for its commercial launch to bringing this common issue. Separately, we see strong adjunct potential for [ Nereus ] in the rapidly expanding GLP-1 agonist market. These therapies used for diabetes and obesity management have seen explosive growth with market projections in tens of millions annually and vomiting remains a frequent side effect, impacting up to 50% patients on agents like semaglutide. Nereus demonstrated positive clinical results in preventing vomiting induced by the GLP-1 analog semaglutide in our study. To capitalize on this, we plan to initiate a dedicated Phase III program in the first half of 2026, pursuing label expansion in this high potential area where better tolerability will significantly improve based on adherence and outcomes. The [indiscernible] NDA for bipolar 1 disorder in schizophrenia is under FDA review with a PDUFA target action date of February 21, 2026, a Approval would further strengthen our growing suite and franchise alongside Fanapt in the global and psychotic category. This category has a total addressable market estimated at approximately $20 billion in 2025. We submitted the imsidolimab BLA in the fourth quarter of 2025 for generalized pustular psoriasis, advancing us towards potential approval for this serious unmet need. Imsidolimab is a fully humanized ID4 monoclonal antibody that inhibits IL-36 receptor signaling and is being developed for GPP [indiscernible] indication. Regulatory and patent exclusivity for Imsidolimab is expected to extend into the late 2030s. Vanda hold an exclusive global license for the development and commercialization of imsidolimab from [ AnaptysBio. ] GPP flares involved painful [indiscernible] over large skin areas accompanied by redness, itching and systemic symptoms and can be life-threatening. Late-stage clinical development programs include a Phase III study of [ Visante ] as a once-a-day adjunct treatment for major depression which is ongoing and results expected by end of the year. Major depressive disorder is the most common psychiatric disorder in the United States, affecting more than 20 million American adults in any given year according to estimates from the usual into mental health and large-scale servers. It is characterized by persistent feelings of sadness, loss of interest or pleasure, fatigue, changes in appetite to sleep feelings of worthless and impaired concentration for decision-making, often leading to significant functional impairment in work, relationships and daily live. MTD exhibits highly variable clinical expression and natural course, ranging from single episodic events to recurrent or chronic forms with episodes varying the severity, duration and responsive triggers. Despite the availability of multiple evidence-based treatments, a substantial unmet medical need remains, approximately 30% to 50% of patients achieved only partial response or emission with first-line therapies, many experienced treatment resistant depression relapse rates are high even after initial improvement and side effects were delayed the onset of action, limit tolerability and appearance for a significant percent of individuals. This persistent gap underscores the need for novel, more effective and better-tolerated adjunctive or alternative treatments to address the full spectrum of MDD. The Phase III study of the long-acting injectable LAI formulation of [indiscernible] continues to enroll patients for schizophrenia in lapse prevention representing a key enhancement to Fanapt's long-term utility in psychiatric care. The long-acting injectable LAI and psychotics market represents a significant and growing opportunity within the broader antipsychotic and psychiatric treatment landscape driven by the need for improved adherence in chronic conditions like schizophrenia and bipolar 1 disorder, where nonadherence total meds contributes to high relapse rates, hospitalizations and costs. Estimates for the global LAI and psychotic specific market vary across reports, but consensus points to a 2025 size in the $6 billion to $7 billion range with strong growth projected. A Phase III study of VQW765 our alpha-7 nicotinic [indiscernible] parcel agonist in adults with social anxiety disorder has been initiated with results expected by end of 2026. Social anxiety disorder SAD affects approximately 30 million American adults according to the 2023, National Health and Wellness Survey with onset typically in the mid-teens or earlier and slightly higher diagnosis rates in females and males. It manifests as excessive fear of embarrassment, humiliation, scrutiny, evaluation or ejection social or performance situations leading to avoidance or intense distress a significantly bears daily routine portation functioning, social life and overall quality of life. Though individuals are generally asymptomatic, absent such triggers. Standard treatments include cognitive behavioral therapy, but many patients struggle to initiate or tolerate exposure due to the severity of anxiety. Off-label options like benzodiazepines offer rapid calming effects but carry risks of abuse, misuse, addiction and black box warnings for interactions and dependency. Beta blockers provide situational relief, but limited broader efficacy. This highlights the need for novel on-demand therapies like VQW765 to address acute episode more effectively. Our clinical development programs for PONVORY, ponesimod in psoriasis and ulcerative colitis are ongoing, building on its established profile as a selective S1 P1receptor modulator approved for relapsing multiple sclerosis. For psoriasis, PONVORY has already demonstrated strong efficacy in earlier studies, including a Phase II randomized double-blind placebo-controlled trial, so a significant [indiscernible] 75 responses, that is greater than 75% reduction in psoriasis area and severity index at week 16 across tested doses of 10, 20 and 40 milligrams with sustained improvements in symptoms of moderate to severe chronic plaque psoriasis in a favorable time course of response. [indiscernible] in updates indicate advancement toward Phase III evaluation positioning Poor as a potential oral option in this large inflammatory dermatology market. For ulcerative colitis, the S1P mechanism has been robustly validated by the successful commercialization and approvals of other modulators, symposia [indiscernible] have shown efficacy in Phase III trials for moderate-to-severe ulcerative colitis, achieving clinical remission and mucosal healing superior to placebo. PONVORY may be particularly well suited for this indication due to its pharmacological advantages of rapid onset of action faster lymphocyte sequestration compared to some [indiscernible] members and rapid lymphocyte recovery upon discontinuation. This profile offers greater flexibility for managing infections, vaccination, surgery [indiscernible] planning or therapy switches, key considerations in chronic IBD where treatment interruptions or adjustments are coming. This expansions which significantly broadened for PONVORY addressable patient population and leverage its differential-aided pharmacokinetics to address unmet need in autoimmune informatory diseases beyond multiple sclerosis. We look forward to progressing these programs and sharing updates as they advance. Looking forward, we expect 2026 total revenues of $230 million to $260 million from our current marketing products only that is FANAPT, HETLIOZ, HETLIO LQ and PONVORY establishing a strong baseline. We anticipate continued growth from this portfolio with further contributions from the Nereus launch and potential approvals of [indiscernible] and imsidolimab plus progress across our late sales programs. We believe that our growing psychiatry franchise is well positioned for expansion anchored by Fanapt on the market for schizophrenia and bipolar 1 disorder with is caped currently under FDA review for bipolar 1 in schizophrenia with a PDUFA February 21, and in 2026. And in ongoing Phase III clinical development as an adjunctive treatment for major depressive disorder. Long-acting injectable formulation of Alpert advanced in Phase III for schizophrenia relapse prevention and 765 in a Phase III study for social an disorder with results expected by the end of 2026, collectively strengthening our portfolio across key psychiatric indications. In summary, 2025 showcased our ability to drive revenue while building a diversified, high-potential pipeline. We remain committed to delivering innovative therapies and long-term value for patients and shareholders. With that, I'll turn it over to Kevin. Kevin? Kevin Moran: Thank you, Mihael. I'll begin by summarizing our financial results for the full year 2025 before turning to discuss the fourth quarter of 2025. Total revenues for the full year 2025 were $216.1 million, a 9% increase compared to $198.8 million for the full year 2024. The increase was primarily due to growth in Fanapt revenue as a result of the bipolar commercial launch, partially offset by decreased HETLIOZ revenue as a result of generic competition. Let me break this down now by product. Fanapt net product sales were $117.3 million for the 24% increase compared to $94.3 million for the full year 2024. This increase in net product sales relative to the full year 2024 was attributable to an increase in volume. Fanapt total prescriptions, or TRx, as reported by Equibia Exponent for the full year 2025 increased by 28% compared to the full year 2024. Fanapt new patient starts for the full year 2025, as reflected by new-to-brand prescriptions, or NBRx, increased by 149% compared to the full year 2024. Turning to HETLIOZ. HETLIOZ net product sales were $71.4 million for the full year 2025, a 7% decrease compared to $76.7 million in the out of continued generic competition in the U.S. The decrease to net product sales relative to the full year 2024 was attributable to a decrease in volume and price net of deductions. Of note, for the full year 2025, HETLIOZ continued to retain the majority of market share despite generic competition now for over 3 years. And finally, turning to PONVORY. PONVORY product sales were $27.4 million for the full year 2025, a 2% decrease compared to $27.8 million for the full year 2024. Of note, an amount of variable consideration related upon PONVORY net product sales is subject to dispute of which approximately $3 million was recognized for the 3 months ended December 31, 2024. For the full year 2025, Vanda recorded a net loss of $220.5 million compared to a net loss of $18.9 million for the full year 2024. The net loss for the full year 2025 included income tax expense of $81.8 million as compared to an income tax benefit of $4 million for the full year 2024, primarily driven by a onetime noncash income tax charge. The provision for income taxes for the full year 2025 includes the impact of the recording of a valuation allowance of $113.7 million against all of Vanda's deferred tax assets. To reiterate, the recording of this valuation allowance is onetime in nature and is a noncash charge. The company has its deferred tax asset each quarter through the review of all available positive and negative evidence. Deferred tax assets are reduced by a valuation allowance when in the opinion of management, it is more likely than not that some portion or all of those deferred tax assets will not be realized. This analysis is highly dependent upon historical and projected pretax income. Projected pretax income includes significant assumptions related to revenue, which could be affected by the trajectory of the commercial launches of Fanapt in bipolar disorder PONVORY multiple sclerosis and Nereus in the prevention of vomiting induced by motion, which was approved on December 30 of 2025 and HETLIOZ generic competition as well as commercial and research and development activities, including spend on our commercial launches and late-stage clinical activities and our ability to obtain regulatory approval from the FDA for products or new indications in development, among other factors. In the fourth quarter of 2025, after considering all available positive and negative evidence including, but not limited to, historical, current and future projected results, and significant risks and uncertainties related to forecast, the company concluded that it is more likely than not that substantially all of its deferred tax assets are realizable in future periods and recorded a valuation allowance against all net deferred tax assets. Resulting in a noncash income tax expense of $113.7 million for the year ended December 31, 2025. Operating expenses for the full year 2025 were $367.3 million compared to $239.4 million for the full year 2024. The $127.8 million increase was primarily driven by higher SG&A expenses related to spending on Vanda's commercial products as a result of the commercial launches of Fanapt in bipolar disorder and PONVORY in multiple sclerosis. Expenses associated with the preparation for future commercial launches and higher R&D expenses primarily related to the exclusive global license agreement with an Fanapt for the development and commercialization of imsidolimab, which was entered into during the first quarter of 2025 and our Fanapt long-acting injectable and [indiscernible] major depressive disorder clinical development programs. During 2024 and 2025, we commenced a host of activities as a result of the commercial launches of Fanapt by for disorder and PONVORY multiple sclerosis including an expansion of our sales force and the development of prescriber awareness and comprehensive marketing programs. Additionally, in the first quarter of 2025, we launched our direct-to-consumer campaign, which has driven meaningful gains in brand awareness for the company and our products in [indiscernible] We maintained strategic investments in our commercial infrastructure, including increased brand visibility through targeted sponsorships with the goal of supporting long-term market leadership and future commercial launches. Vanda's cash, cash equivalents and marketable securities referred to as cash as of December 31, 2025, was $263.8 million, representing a decrease of $110.8 million compared to December 31, 2024, and a decrease of $29.9 million compared to September 30, 2025. The changes in cash during the full year 2025 and the fourth quarter 2025 were driven by the net loss in those periods, excluding the impact of the onetime noncash charge related to the tax valuation allowance as well as timing of cash received from customers for revenue and related payments of rebates to payers and the timing of cash paid to third parties for services related to operating expenses. Turning now to our quarterly results. Total revenues were $57.2 million for the fourth quarter of 2025, an 8% increase compared to $53.2 million for the fourth quarter of 2024 and a 2% increase compared to $56.3 million in the third quarter of 2025. The increases as compared to the fourth quarter of 2024 and the third quarter of 2025 were primarily due to growth in Fanapt revenue as a result of the bipolar commercial launch. Let me break this down now by product. Fanapt net product sales were $33.2 million for the fourth quarter of 2025, a 25% increase compared to $26.6 million in the fourth quarter of 2024 and a 6% increase compared to $31.2 million in the third quarter of 2025. Fanapt total prescriptions, or TRx, as reported by Equibia Exponent in the fourth quarter of 2025, increased by 36% compared to the fourth quarter of 2024 and 8% compared to the third quarter of 2025. Fanapt new patient starts in the fourth quarter of 2025 as reflected by new-to-brand prescriptions, or NBRx, increased by 108% compared to the fourth quarter of 2024 and by 7% compared to the third quarter of 2025. The increase in Fanapt revenue between the fourth quarter of 2024 and the fourth quarter of 2025 was primarily attributable to an increase in volume. The increase in Fanapt revenue between the third quarter of 2025 and the fourth quarter of 2025 was also attributable to an increase in volume. These increases in volume were primarily driven by increased total prescription demand. Historically, Fanapt inventory at wholesalers has ranged between 3 and 4 weeks on hand as calculated based on trailing demand. As of the end of the fourth quarter of 2025, Fanapt inventory at wholesalers was slightly above 4 weeks on hand which was generally consistent with the level of inventory weeks on hand as of the fourth quarter of 2024 and the third quarter of 2025, but slightly above the historic range. Turning to HETLIOZ. HETLIOZ net product sales were $16.4 million for the fourth quarter of 2025, an 18% decrease compared to $20 million in the fourth quarter of 2024 and a 9% decrease compared to $18 million in the third quarter of 2025. The decrease in net product sales relative to the fourth quarter of 2024 was primarily attributable to a decrease in price net of deductions as well as a decrease in volumes sold. The decrease in net product sales relative to the third quarter of 2025 was primarily attributable to a decrease in price net deductions, partially offset by an increase in volume. HETLIOZ net product sales continue to be impacted by changes in inventory stocking at specialty pharmacy customers from period to period. Going forward, HETLIOZ net product sales may reflect lower unit sales as a result of the reduction of the elevated inventory levels at specialty pharmacy customers or maybe variable depending on when specialty pharmacy customers need to purchase again. Further, HETLIOZ net product sales may decline in future periods potentially significantly related to continued generic competition in the U.S. And finally, turning to PONVORY. PONVORY net product sales were $7.6 million for the fourth quarter of 2025, an increase of 17% compared to $6.5 million in the fourth quarter of 2024 and an increase of 8% compared to $7 million in the third quarter of 2025. The increase in net product sales as compared to the fourth quarter of 2024 was attributable to an increase in price net of deductions, partially offset by volume. The increase in net product sales as compared to the third quarter of 2025 was attributable to an increase in price net of deductions, partially offset by volume. The specialty distributor and specialty pharmacy inventory on hand levels during these periods were in line with normal ranges. Of note, underlying patient demand has increased, albeit modestly on a sequential quarter basis for the last 3 quarters. Additionally, as previously noted, an amount of variable consideration related PONVORY net product sales is subject to dispute of which approximately $3 million is recognized for the 3 months ended December 31, 2024. For the fourth quarter of 2025, Vanda recorded a net loss of $141.2 million compared to a net loss of $4.9 million for the fourth quarter of 2024. From an income tax perspective, the net loss for the fourth quarter of 2025 included an income tax expense of $103.2 million as compared to an income tax benefit of $1.6 million for the fourth quarter of 2024. Primarily driven again by the onetime noncash income tax charge of $113.7 million for the tax valuation allowance. Operating expenses in the fourth quarter of 2025 were $97.6 million compared to $63.5 million in the fourth quarter of 2024. The $34.1 million increase was primarily driven by higher SG&A expenses related to spending on Vanda's commercial products as a result of the commercial launches of Fanapt in bipolar disorder and or is associated with the preparation for future commercial launches and higher R&D expenses. During 2024 and 2025, we commenced the host of activities as a result of the commercial launches of Fanaptum bipolar 1 disorder and PONVORY multiple sclerosis, including expansions of our sales force and the development of prescriber awareness and comprehensive marketing programs. Additionally, in the first quarter of 2025, we launched our direct-to-consumer campaign, which has driven meaningful gains in brand awareness for the company and our products, Fanaptum PONVORY. We maintained strategic investments in our commercial infrastructure, including increased brand visibility through targeted sponsorships with the goal of supporting long-term market leadership and future commercial launches. With regards to the launches of fenaptin bipolar 1 disorder and PONVORY multiple sclerosis, as I mentioned, the launches were initiated in 2024, and we continue to enhance our commercial infrastructure in 2025, and with the impact of these commercial efforts contributing to revenue growth in 2025 and expected to continue to contribute to revenue growth in 2026 and beyond. We have already seen significant growth in our commercial activities. Several lead indicators suggest a strong market response to our commercial activities related to Fanapt. Total prescriptions increased by 36% in the fourth quarter of 2025 as compared to the fourth quarter of 2024, New patient starts or NBRx, increased by 108% in the fourth quarter of 2025 as compared to the fourth quarter of 2024. And of particular note, Fanapt was one of the fastest-growing atypical antipsychotics in the market throughout 2025 and based on numerous prescription metrics. Our Fanapt sales force numbered approximately 160 representatives at the end of 2024 and increased to approximately 300 representatives at the end of 2025. These sales force expansions have allowed us to significantly increase our reach and frequency with prescribers. To that end, the number of face-to-face calls in the fourth quarter of 2025 was more than twice the number of face calls in the fourth quarter of 2024. We've established a specialty sales force to market upon borates and neurology prescribers around the country. We've grown this sales force to approximately 50 representatives at the end of 2025. Fanapt performance remains the focus of our commercial initiatives and encourages us to content and, if approved, the franchise extending launch of Vasanti. Before turning to our financial guidance, I would like to remind folks that with Fanapt, HETLIOZ and PONVORY, already commercially available and with the nearest NDA recently approved for motion sickness, and the [indiscernible] NDA for biplan disorder and schizophrenia under review by the FDA and a biologics license application, BLA, for imsidolimab now submitted to the FDA, Vanda could have 6 products commercially available in 2026. Turning now to our financial guidance. Due to the recent and upcoming regulatory and commercial milestones, Vanda's 2026 financial guidance is limited to revenue guidance for currently commercialized products, which includes Fanapt, HETLIOZ and PONVORY. Vanda expects to achieve the following financial objectives in 2026. Total revenues from Fanapt HETLIOZ and PONVORY of between $230 million and $260 million. The midpoint of this revenue range would imply revenue growth in 2026 of approximately 13% as compared to full year 2025 revenue. Fanapt net product sales of between $150 million and $170 million. The midpoint of this revenue range would imply a revenue growth in 2026 of approximately 36% as compared to full year 2025 Fanapt revenue. Assuming consistent gross to net dynamics between 2025 and 2026, the bottom end of this range assumes mid- to high single-digit quarterly TRx growth for Fanapt in 2026. The top end of this range assumes low double-digit to mid-teen quarterly TRx growth for Fanapt in 2026. Other net product sales of between $80 million and $90 million. This range assumes a further decline of the HETLIOZ business due to the generic competition and modest growth in the PONVORY business, we are seeking to significantly improve market access to the product. Depending on our success in these efforts, we could see meaningful improvement in patients on therapy, prescriptions filled and prescriptions written by prescribers. It is worth commenting that the quarterization of revenue in 2026 will be impacted by several items, including insurance plan transitions as patients adjust to new insurance plans at the start of the year, there may be some disruptions in the first quarter. This is typical industry-wide occurrence and consistent with our own historical trends. As I previously mentioned, as of December 31, 2025, HETLIOZ inventory at specialty pharmacy customers was elevated, which may result in fewer specialty pharmacies customers ordering or specialty pharmacy customers ordering smaller amounts in the first quarter of 2026. Vanda is currently making conditional investments to facilitate future revenue growth. Both in the form of R&D investments, commercial inventory production and potentially outsized commercial investments, which could vary moving forward depending on the success of these commercial strategies. Vanda is not providing 2026 cash guidance at this time. However, it is likely that Vanda's 2026 cash burn will be greater than the cash burn in 2025. It is also worth noting that the quarterization of cash balances will be impacted by several items. The first quarter cash balance will be impacted by [indiscernible] in the first quarter of 2020 and for the approval of Nereus in the U.S., the $10 million was accrued in the fourth quarter of 2025 and capitalized as an intangible asset that was not paid as of year-end 2025. The impact of revenue quarterization previously noted, and the standard timing of certain items paid in the first quarter of each year. The full year cash balance will also be impacted by the potential of a $5 million milestone payment to [indiscernible] if the imsidolimab BLA is approved by the FDA and the timing of payments associated with commercial inventory production for our upcoming and potential commercial launches. With that, I'll now turn the call back to Mihael. Mihael Polymeropoulos: Thank you very much, Kevin. At this point, we'll be happy to address your questions. . Operator: [Operator Instructions] Your first question comes from the line of Madison El-Saadi from B. Riley Securities. Madison Wynne El-Saadi: Maybe I'll start with [indiscernible] pathway and the bioequivalent to Fanapt you've shown. I'm just curious if you could characterize any FDA communication on outstanding issues that came up during the review cycle, if there any requests related to CMC or labeling scope questions that you could discuss and then assuming approval, is there a day one commercial strategy you could walk us through? Just recognizing it's really about transition patients from Fanapt to [indiscernible] Mihael Polymeropoulos: Yes, sure. Thanks, Madison. So first of all, this is a NDA, and it is not a bioequivalents like a generic, while bioequivalence data are important. So think of it as a completely new drug application. In terms of the -- how the review is going -- of course, we don't give incrementals. But I would say, we remain optimistic for an on-time approval. Now your question on commercial plan. First of all, the commercialization, if approved later this month, will have to wait for some time in Q3 when commercial supplies will be ready. And between the sign and then we'll have more color we can give on the launch strategy of [indiscernible] and also the interplay with Fanapt. Operator: Your next question comes from the line of Raghuram Selvaraju Vera from HCW. Raghuram Selvaraju: I was wondering if you could comment on what you expect the commercial infrastructure size and scope to be for imsidolimab assuming timely approval? Mihael Polymeropoulos: Thank you very much. So as you know, GPP is quite rare that most likely would be addressed with a small sales force visiting dermatologists and any advocacy organizations around this disorder. And there is a better awareness than it used to be since the 2021 approval of specolimab from Berger Ingelheim. So we believe that a dedicated small specialty sales force will be the key commercial asset that is needed. Raghuram Selvaraju: Okay. Great. Is there any additional detail you can provide to us regarding promotional activities in support of Fanapt and [indiscernible] particularly as this pertains to any direct-to-consumer campaigns you may have planned over the course of 2026. Mihael Polymeropoulos: Yes. At this time, we don't have a Visante campaign plan, the direct to consumer campaigns that Kevin alluded to, is consisting of a brand awareness of Vanda overall through sponsorships and direct-to-consumer campaign on product that is Fanapt and PONVORY. We expect that to continue in similar cadence like the past year. And with the commercial launch of [indiscernible ] we expect to have a dedicated campaign for that, but no concrete plans at this time. . Unknown Analyst: And then with respect to Nereus and tradipitant as a whole, can you maybe offer us some additional contextual information on the following 3 aspects. Firstly, I'm not sure whether I may have missed this earlier. But can you just confirm to us when you expect Nereus to be commercially available the recently approved indication. Secondly, if you have any additional feedback or context to provide at this time regarding the regulatory outlook for tradipitant in [indiscernible] and then lastly, if you can give us a sense of what you expect the time line to be completion of enrollment in the envisaged Phase III trial assessing tradipitant and attenuation or prevention of nausea and vomiting associated with GLP-1 receptor agonist drugs. Mihael Polymeropoulos: Of course. On commercial availability, we're working in preparing now commercial materials. And we expect available commercial materials, either by late Q2 or beginning of Q3. In terms of the regulatory path in gastroparesis, we are now preparing for a hearing at the FDA. That was in the balance for a little while, but now we have resumed and we expect to hear from the FDA in the near future, whether or not they're going to grant a hearing, and we'll take it from there. In terms of the US study for GLP-1 analog, remind everyone, we had a very strong Phase II study in prevention of vomiting and we are now in the process of initiating a Phase III study, which we believe could produce results by late Q3, Q4 for this new Phase III study. Raghuram Selvaraju: And then very -- one last quick 1 for me. Regarding the iloperidone LAI. You mentioned, I think, in the prepared remarks and the press release. that the Phase III program for iloperidone LAI is currently enrolling patients. Do you anticipate completing enrollment in that Phase III program before the end of this year? Mihael Polymeropoulos: Yes, it is enrolling. However, we're not satisfied much with the speed. And that is primarily because of the delays in launching this study in Europe. And it's not delays the company can control it is more resistance in conducting placebo-controlled studies in Europe and other considerations. So that is definitely slowed down. the rate of recruitment we have now, it is encouraging that things are picking up and moving in the U.S. alone. But I would say I don't have good visibility where they will be able to reach the recruitment goals by year-end. Operator: Your next question comes from the line of Olivia Brayer from Cantor Fitzgerald. Unknown Analyst: This is Sam on for Olivia. A quick one from me. I may have missed this during the call, but could you provide some more color on the Fanapt GTN impacts given the increase in volume and the difference between that and the sales increase year-over-year? Kevin Moran: Yes. Thanks, Sam. Yes, so what we saw on a year-over-year basis, and I think what you're highlighting is that the script growth outpaced the overall revenue growth and wh1at we've seen on a year-over-year basis is a relatively small reduction in net price, and that's due to a couple of gross-to-net items, some of which we highlighted during last year's earnings call which was primarily related to the introduction of the Medicare benefit redesign as part of the IR -- so that began at the beginning of this year. So that was a gross to net differential between 2025 and 2024. And then additionally, in the Q3 call, we commented on that we've seen an increased gross to net item and unfavorable gross item related to commercial co-pay support which, to some extent, should be expected as with the bipolar indication, you would expect to see a higher proportion of commercial patients relative to port would then increases in terms of gross to net items. So that's the bridge kind of between the TRx growth and the revenue growth where there was a relatively small difference between the 2 percentage wise. Unknown Analyst: And is that expected to stabilize? Or is there a possibility that it could keep increasing moving forward? Kevin Moran: Well, so the Medicare piece has a phase in on there was a 1% fee in 2025 that increases to 2% this year. But in general, we would expect the gross to net to be consistent, absent there being some significant change in the underlying business or payer dynamics. The one thing that I would flag for you that we've highlighted previously, especially with the [indiscernible] PDUFA date right in front of us, is that the gross to net dynamics on [indiscernible] are significantly different and favorable relative to Fanapt. And that's because Vasanti will get a new Medicaid URA calculation, a reset there. And so as you might remember, 30% to 40% of our Fanapt business is Medicaid. And currently, that contributes negative revenue, meaning the gross to net adjustment exceeds the gross revenue for us. It's actually a negative revenue contribution. And with Vasanti, you'll get a complete reset on that so that you'll be subject to the statutory 23.1% discount, but none of the other adjustments that come with having a product on the market over time. . And so whereas our gross to net, we've previously communicated is in the neighborhood of 50% on Fanapt. We'd expect it to be more like in the mid-30s on Vasanti. Operator: Your final question comes from the line of Andrew Tsai from Jefferies. Lin Tsai: One more on the guidance [indiscernible] this year, $150 million to $170 million at the midpoint. Seems like that could be 35% to 40% year-over-year growth. And I believe you mentioned in the prepared remarks, maybe volume grows by 10%, give or take, at the midpoint. So is it -- do we imply that net price will be growing by 30%, if so, why? And then secondly, how much of that guidance range for 2026 seems cannibalization from the [indiscernible] launch in Q3 . Kevin Moran: Yes. So Andrew, first, on the first point there, so our revenue guidance range, the $150 million to $170 million, right? So midpoint of $160 million. I think what you're referencing is I, in the prepared remarks, commented that the lower end of the range would have mid- to high single-digit TRx growth and then the higher end of the range would have low double digit to mid-teens. Yes. So Andrew, first, on the first point there. engine a I think what you're referencing is in the prepared remarks commented that the lower end of the range would have mid- to high single-digit TRx growth and then the higher end of the range would have low double digit to mid-teens. That's sequential quarter growth, so quarterly growth of those numbers. So the revenue getting to $160 million would be almost entirely TRx driven, volume driven. With Medicaid and now the Medicare redesign as part of IRA, price increases are somewhat capped if your business is not significantly driven by commercial markets. And so yes, that revenue growth is almost entirely volume-driven. And then on your second question, on [indiscernible], again, we are very excited about the PDUFA date coming up very quickly here. But as Mihael mentioned, it will be in the back half of the year by the time that a launch would occur and there's $0 of revenue contribution in the revenue guidance that we've provided. Lin Tsai: Okay. And secondly, Nereus, how are you thinking about remind us list price, net price how fast can sales grow in the first 4 quarters when you launch also in Q3? Kevin Moran: Yes. Thanks, Andrew. So we haven't communicated a price on Nereus yet. But what we have noted is that in terms of some data points drawn in the market, the NK1 class, which you typically see there is that for a dose of one of the other NK1s that's approved in the market, those can range from between $200 to as high as $600 a dose. And what we also have commented on is that for the available treatments in the market for -- that are used for motion sickness, namely Dramamine or scopolamine patches, we expect our price to have a premium relative to those prices. . So hopefully, those are some data points that can kind of help frame the kind of pricing dynamic there. And then as Mihael mentioned, with the launch likely happening in late Q2 or early Q3, we didn't provide guidance at this time, but the numbers Mihael quoted in his prepared remarks around the prevalence of motion sickness and the proportion of those people seeking treatment. And so we're excited about the possibilities there, although we haven't provided specific guidance. . Lin Tsai: Very good. And then last one for me. study Phase III, where I think you said the data could be ready second half of this year. Is there going to be the same trial design in the Phase II? And are you expecting to see the same 50% relative reduction in vomiting? And then Secondly, my understanding is the trial is using a high upfront dose of WEGOVI. And so are there precedents of drugs that were approved the reference drug also use a relatively high upfront dose sale? Mihael Polymeropoulos: On the first question, Andrew. Yes, the design is going to be very similar to the prior study. And we will use, again, as the challenge a 1 milligram again we gave naive patient. I understood your second question, would you mind clarifying? Lin Tsai: Sure. Rather than titrating [indiscernible] over the course of weeks, your trial lines have been using a high 1 mg upfront dose. [indiscernible] is that have FDA buy in? Or is there some kind of precedent around that kind of unique trial design kind of thing. Mihael Polymeropoulos: Well, it is a logical design. If the drug works at a higher challenge than you expect it to work in the lower sales. And the selling patients are facing is usually with rapid titration in higher doses. You are correct if you are implying that we've got the guidance now on the label is to start low and go slow, you start with 0.25 milligrams, and you only reach the 1 milligram dose we're using at week 9. So while it is true that the titration is different. We don't expect that the drug will work. Operator: That concludes the question-and-answer session. I'd now like to turn the call back over to Vanda management for closing remarks. Mihael Polymeropoulos: Thank you very much all for joining us. We will see you at the next call. . Operator: That concludes today's meeting. You may now disconnect.
Operator: Hello, and welcome to McDonald's Fourth Quarter 2025 Investor Conference Call. At the request of McDonald's Corporation, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Dexter Congbalay, Vice President of Investor Relations for McDonald's Corporation. Mr. Congbalay, you may begin. Dexter Congbalay: Good afternoon, everyone, and thank you for joining us. With me on the call today are Chairman and Chief Executive Officer, Chris Kempczinski; Chief Financial Officer, Ian Borden; and Chief Restaurant Experience Officer, Jill McDonald. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website as are reconciliations of any non-GAAP financial measures mentioned on today's call, along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. Please limit yourself to one question and then reenter the queue for any additional questions. Today's conference call is being webcast and is also being recorded for replay on our website. And now I'll turn it over to Chris. Christopher Kempczinski: Good afternoon, everyone, and thank you for joining us today. I want to start by recognizing the resilience and commitment of the McDonald's system. Our franchisees, suppliers and employees showed up for our customers and supported communities to close the year with strong momentum and a solid foundation heading into 2026. In 2025, McDonald's delivered system-wide sales of nearly $140 billion, up 5.5% in constant currency for the full year. This reflects solid comp sales growth of more than 3% for the full year and over 5.5% in the fourth quarter with strong growth across all segments. Our system-wide sales growth also reflects the benefit of our accelerating pace of new restaurant openings. In 2025, we opened 2,275 restaurants on top of the more than 2,000 restaurants we opened in each of the prior 2 years. all while we've continued to see attractive returns from these new restaurants. Our pace of new store openings will accelerate further as we target approximately 2,600 gross restaurant openings in 2026, which keeps us on track to achieve 50,000 restaurants by the end of 2027. Despite a challenging industry backdrop, our system stayed agile throughout 2025 by concentrating on what we can control. As we look to 2026, success will again depend on going 3 for 3, compelling value that brings customers in the door, breakthrough marketing that creates meaningful moments for our fans and menu innovation that provides great tasting food for our customers. We believe this disciplined focus enables McDonald's to outperform in any environment. Let's start with value. We've listened to customers and adjusted along the way with a relentless focus on delivering leadership in value and affordability. And our efforts are working. In the U.S., we launched McValue at the start of the year, which drove immediate incrementality and then we relaunched extra value meals in September. As we've said before, we'll measure success of our EVM program in 2 ways: through our ability to gain share of low-income traffic; and by improving value and affordability experience scores. I am pleased to say that our EVM performance in the fourth quarter is exactly where we had hoped to be at this point. Together with McValue and marketing, we gained share with low-income consumers in December, and we've seen a meaningful increase in our value and affordability scores. Predictably, as U.S. franchisees provided these stronger value offerings throughout the year, their cash flow grew versus the prior year. In our big 5 international operated markets, we've offered everyday affordable price options or EDAP and menu bundles since early 2025. As awareness for these programs has grown, we've seen value and affordability scores steadily improve throughout the year, which also tell us they're resonating with customers. As I've said before and I will say again, McDonald's is not going to get beat on value and affordability. It's in our DNA, and we will remain agile to respond as appropriate to a dynamic competitive landscape. That takes us to marketing. We once again activated in ways that reached far beyond our restaurants and into global culture in 2025. The Minecraft movie collaboration was our largest global campaign ever, bringing together 2 iconic fandoms across more than 100 markets and 37,000 restaurants. And most recently, The Grinch returned after first debuting in Canada in 2024. The campaign, which came to life in several markets in 2025, drove extraordinary excitement, sparking sellouts and becoming a true holiday moment for millions of families. With the inclusion of Grinch's themed collectible socks in many markets, we were the largest seller of socks in the world for nearly a week. We sold about 50 million pairs globally across the first few days of the campaign. Both record-setting programs show how uniquely positioned McDonald's is to tap into culture at massive scale, reinforcing the power of a One McDonald's way of marketing and our ability to share creative excellence across the system. The last element of our trifecta is menu innovation. We saw strong performance from the return of Snack Wraps in the U.S., the debut of McWings in Australia and the introduction of the Big Arch in several markets, each resonating with different customer segments and bringing excitement to our menu. As we build what's next, we're grounding our work in a sharper focus on taste and quality, creating dishes that feel unmistakably McDonald's and resonate with customers around the world. There is so much exciting work happening in this space. In a few minutes, Jill McDonald, our Chief Restaurant Experience Officer, which includes leading the global category management teams, will share more of what's coming this year. I was recently in Australia and saw firsthand how they're going 3 for 3 with value, marketing and menu to win. Our close partnership with franchisees is driving strong momentum in the market. It's proof of what happens when you hit the mark on all 3, driving strong business momentum and market share gains. With that, I'll turn it over to Ian to talk through our 2025 results in more detail. Ian Borden: Thanks, Chris, and good afternoon, everyone. As Chris mentioned, I'm proud of what the McDonald's system accomplished amid a challenging year for the industry. In the fourth quarter, we delivered strong comp sales, revenue and earnings growth while also driving improvements in overall customer satisfaction scores across our top 10 markets in aggregate. Specifically, in the fourth quarter, global comparable sales were up 5.7% with positive comparable guest counts. In the U.S., comp sales for the quarter were up 6.8%, which was above our expectations and was driven by positive check and guest count growth. While some of the performance is attributable to easier prior year comparisons, it largely reflects the success of value menu and marketing initiatives that supported steady improvement in our baseline momentum. Together, these drove the highest quarterly comparable guest count gap to near-end competitors in recent history and set a solid foundation for 2026. Two marketing initiatives contributed to our strong performance. First, we kicked off the fourth quarter with MONOPOLY, which resulted in one of our largest digital customer acquisition events ever. Today, we have about 46 million 90-day active users in our U.S. loyalty app. And during the MONOPOLY event, we saw nearly 500 million games played. Second, we closed out the quarter with the Grinch Meal, which set new sales records, including the highest single sales day in our history. Overall, for the entire campaign, we sold nearly as many Grinch meals as our highly successful 2025 Minecraft movie meal and 2024 collector cups promotions combined. The Grinch meal captured fans attention, a true testament to the power of the McDonald's brand with the right marketing execution. In addition to these marketing events, as Chris mentioned, in early September, we relaunched extra value meals to address customer value perceptions of our core menu offerings. In the fourth quarter, we increasingly saw evidence that this was working as intended. In addition to the improving trends in low-income share and value and affordability experience scores, the program drove improvements in units sold for our top EVMs, supported by the nationally price pointed $5 sausage egg and cheese McGriddles meal and $8 10-piece Chicken McNuggets meal in November. The momentum has continued in January behind the support of the nationally price pointed $5 Sausage McMuffin with egg meal and $8 2 Snack Wrap meal, and we remain on track to achieve our targets for incremental traffic associated with the EVM relaunch. Turning to our international operated markets. Comp sales were up 5.2% in the segment, marking a third consecutive quarter of comp growth above 4% despite the challenging industry backdrop. Strong execution in the U.K., Germany and Australia drove performance with each market delivering comp sales growth in the mid- to high single digits. Momentum behind McDonald's U.K.'s turnaround continued in the fourth quarter with market share gains for the first time in over a year behind the execution of several exciting promotions. As in the U.S., the Grinch campaign also exceeded expectations and featured McShaker Fries and special edition socks. The Menu Heist campaign, which is the U.K.'s version of our popular Taste of the World promotion in other markets, showcased the global strength of the brand by offering customers a curated selection of international menu favorites at their local McDonald's restaurant. This promotion delivered sustained strong performance through its 6-week run. And given the success we've seen in the U.K. and other markets, we plan to expand it to even more markets in 2026. Germany and Australia also went 3 for 3 on executing value, menu and marketing initiatives, resulting in share gains in each market in the fourth quarter. Both markets leveraged solid foundations and value offerings and capitalized on strong marketing campaigns. Germany's strong performance reflected the annual return of the Big R?sti, a large-format burger as well as a Friends TV show themed marketing campaign that was similar to a successful promotion in Spain just over a year ago and which we also plan to expand to more international markets in 2026. And in Australia, the breakfast daypart drove performance through menu innovations such as Matcha lattes, the Brekkie Wrap and McGriddles, while the highly successful Grinch promotion highlighted innovative menu offerings such as the Chicken Big Mac and McWings and a special hot cake syrup sauce. Finally, in our international developmental license markets, comp sales for the quarter were up 4.5%, led by Japan with all geographic regions reflecting comp sales growth. Japan's performance has been consistently strong all year. It was supported in the fourth quarter by the launch of the My McDonald's Rewards loyalty program, marking a significant milestone in our global digital strategy. In China, although the market continued to face macroeconomic pressures, we maintained share in the quarter. In addition, we opened more than 1,000 restaurants in 2025 and now have a presence in every province. Turning to the P&L. Adjusted earnings per share was $3.12 for the quarter, which includes a $0.10 benefit from foreign currency translation. Adjusted earnings per share on a constant currency basis increased 7% versus the prior year quarter, reflecting sales-driven margin contribution. Our total adjusted operating margin for the full year was 46.9%, in line with our expectations and reflecting the strength of our business model and the resilience of our system. Total restaurant margin dollars were more than $15 billion for the year. As we look back on the full year, our capital expenditure spend was $3.4 billion, slightly above the high end of the range that we provided for the year as we invested more toward our future year development pipeline, setting us up for success as we continue to increase our pace of openings in our wholly owned markets. I'm proud of what McDonald's has been able to deliver in a challenging environment, and we believe that we are well positioned to deliver solid results in 2026. And with that, let me hand it over to Jill. Jill McDonald: Thanks, Ian, and good afternoon, everyone. I'm pleased to be here today to share more about the work of our restaurant experience teams and preview what's coming in 2026. It's been 9 months since we established the global restaurant experience team. And when we announced this change, we noted that it would be significant for 2 reasons. First, our new integrated structure sets us up to execute with greater pace, which means ideas can start showing up in our restaurants even sooner. We can develop and scale product innovations faster than ever before with menu supply chain and operations all in one team. And second, our new category structure with dedicated leaders for beef, beverages and chicken would give us better accountability and a sharper line of sight into what it takes to win in each of these large and growing verticals. We know that while value remains important for customers, delivering great taste and quality are their top needs, and that's at the center of everything we're doing across the restaurant experience. With that context, let me share more on each of the 3 categories. Starting with beef. We've continued rolling out Best Burger, which is now in more than 85 markets and on track to deliver on our commitment to be in nearly all markets by the end of 2026. Best Burger is the key to hotter, juicier and even tastier burgers, which improve customer satisfaction scores and streamline operations for restaurant crew. We also began to pilot Big Arch about 1.5 years ago, and it's shown strong traction across several markets. Customers are responding to this delicious, more satisfying burger that meets their demand for something heartier while still feeling distinctly McDonald's. Its strong performance helped it most recently earn a permanent spot on the U.K. menu, and we see potential to continue scaling this platform as we strengthen our position within this tier of the beef category. Now let's turn to beverages. We are excited about the global beverage opportunity of more than $100 billion. You can expect to see new offerings in the U.S. as well as select international markets in 2026. Designed to capture share of this large and fast-growing category, we're exploring energy, indulgent iced coffees, fruity refreshers and crafted sodas. We're thrilled to launch our new U.S. beverage lineup later this year under the McCafe brand. It builds on a highly successful test that exceeded expectations in the fourth quarter across more than 500 U.S. restaurants. As we've said before, the new beverage offerings drove incremental occasions across different dayparts as well as higher average check, including strong results from our Red Bull collaboration, which we plan to continue building in both the U.S. and beyond. We're applying learnings from the U.S. test as we expand offerings across the system. Australia, for example, ran a small beverage test at the end of 2025 and adapted those insights by refining some of the recipes and tailoring some of the flavor profiles to meet local preferences. Lastly, chicken. Just as a reminder, this global category is 2x the size of beef and faster growing. We grew our chicken category share across our top 10 markets in 2025 and believe we're well on our way to increasing our share by at least 1 percentage point by the end of 2026 versus where we were in December 2023. At the foundational level, we achieved our target of deploying the McCrispy Sandwich equity to nearly all major markets by the end of 2025. And on the innovation front, many of you have spotted something cooking at a few restaurants in the Chicago land area. We're in the early stages of testing new flavor combinations and new ways of cooking as we continue to explore great tasting recipes for customers to enjoy. While I've shared how speed and scale show up across the 3 menu categories, innovation at McDonald's doesn't stop there. The same disciplined approach is guiding the technology advancements coming to life in our restaurants, rounding out what it truly means to deliver the full McDonald's restaurant experience. The restaurant experience team is using these tests to learn quickly and apply those learnings to capabilities like voice ordering, shift management tools and other AI-enabled tools and digital enhancements that help make running great restaurants easier and more enjoyable for both crew and customers. Taken together, these efforts reflect how we are continuously innovating and improving the full scope of the McDonald's experience, bringing forward even more delicious food, smarter operations, thoughtful design and technology that meets customers and our restaurant teams where they are. It's all part of how we're modernizing the way McDonald's shows up every day. And now I'll turn it back over to Ian. Ian Borden: Thanks, Jill. As we look ahead to 2026, we remain confident in our strategy and our ability to outperform our competitors in any operating environment by focusing on what we can control and by leveraging our global scale and financial strength. We believe the underlying assumptions for our 2026 outlook are prudent and reflect our expectations that the QSR industry environments in the U.S. and across many markets will remain challenging. Should the environment improve beyond our expectations, we believe McDonald's is well positioned to benefit disproportionately relative to our competitors. We expect that net restaurant expansion in 2026, along with restaurants we opened in 2025, will contribute approximately 2.5% to system-wide sales growth. We expect our operating margin to be in the mid- to high 40% range and to expand from our 46.9% adjusted operating margin in 2025. We're targeting G&A as a percentage of system-wide sales for the full year to be about 2.2%, reflecting our ongoing investments in our strategic growth drivers like technology and digital and Global Business Services or GBS. These investments are designed to unlock efficiencies in running the business and to support long-term growth for our people and stakeholders. Below the operating line, we expect interest expense to increase between 4% to 6% from the prior year, primarily due to higher average interest rates and expect our full year effective tax rate to be between 21% and 23% with some volatility quarter-to-quarter that may cause the quarterly rate to be outside the annual range. We expect foreign currency to be a full year tailwind to 2026 EPS, totaling in the range of $0.20 to $0.30 based on current exchange rates. As always, this is directional guidance only as rates will likely change as we move through the remainder of the year. Turning to capital allocation. We're committed to maintaining financial discipline and creating value for our shareholders over the longer term. Our priorities remain unchanged. First, we look to invest in the business to drive growth, including capital expenditures to primarily support new restaurant openings as well as investments in technology, digital and GBS. Second, we prioritize our dividend, which has increased in each of the last 49 years. And third, we repurchased shares with remaining free cash flow over time. With respect to restaurant development and capital expenditures, as Chris mentioned, we continue to accelerate our pace of new unit openings and remain on track to achieve our target of 50,000 restaurants by the end of 2027. In 2025, we exceeded our openings plan for the year with gross openings of about 2,275 restaurants and net openings of 1,880. And in 2026, we're targeting approximately 2,600 gross restaurant openings with about 750 of these in our U.S. and IOM segments. We expect to open more than 1,800 restaurants in our IDL segment, including about 1,000 in China. Overall, we anticipate about 4.5% unit growth from the approximately 2,100 net restaurant additions in 2026. We expect our capital expenditure spend to be between $3.7 billion and $3.9 billion this year, with the majority invested in new unit openings across our U.S. and IOM segments. This increase in CapEx versus the prior year of $3.4 billion is in line with the targeted increase of about $300 million to $500 million that we outlined at our December '23 Investor Day. Lastly, we're targeting our net income to free cash flow conversion rate in 2026 to be in the low to mid-80% range, which is in line with the 84% in 2025. And with that, let me hand it back over to Chris. Christopher Kempczinski: Thanks, Ian. As we close the books in 2025, it's only natural to reflect not just on the year that was, but on how far we've come since announcing Accelerating the Arches in November 2020 and expanding our ambitions in December 2023. We made bold commitments to grow our business. We've made great progress on our accelerator priorities, and we've become a fundamentally different company. You heard from Jill how that transformation is coming to life across the restaurant experience from food to operations, design and technology. When we started this journey, from a company standpoint, we didn't have a global business services function. Today, we do. We didn't have revenue growth management function. Now we do. We didn't have a standardized global tech stack. Today, we're close. The early benefits from these new capabilities gives us a clear line of sight into how they'll unlock growth and productivity moving forward. Loyalty is another great example. In November 2020, the McDonald's loyalty app was just beginning to launch in the U.S. In 2023, we had about $20 billion in system-wide sales to loyalty members across 50 markets. In 2025, we almost doubled those sales with nearly 210 million 90-day active users across 70 markets. And we're on track to reach our target of 250 million 90-day active users by the end of 2027. This matters because we know that loyalty increases visit frequency and opens the door to new ways to engage with our fans like multi-visit bonus games such as the Snack Wraps campaign in the U.S. or exclusive partnerships available only through the app. Another critical proof is the connection between the app and the deployment of Ready on Arrival in our top 6 markets. It's already driving faster service, reducing wait times and improving customer satisfaction, and we expect those benefits to compound as adoption grows across the system. These touch points simply didn't exist a few years ago. When we execute, we know we can outperform the competition in any environment. What's clear is that we've earned the right to look forward. We're excited to share what's next with our system at our worldwide convention in Las Vegas in June, and we expect to share more details with all of you during an investor update sometime this fall. Stay tuned. Before we turn to your questions, I want to again thank our franchisees, suppliers, restaurant teams and everyone across the McDonald's system for the commitment, the partnership and the passion that you bring to this business. Your dedication is the driving force behind our achievements and what enables us to pursue this next chapter with confidence as we transform our long-term ambitions into tangible results. And with the new year well underway, we'll continue to lead, innovate and deliver for our customers, our people and our shareholders. Together, we will make 2026 a year that defines the future of McDonald's. With that, we'll take your questions. Operator: [Operator Instructions] Dexter Congbalay: Our first question today is from Dennis Geiger of UBS. Dennis Geiger: Appreciate the insights. And Jill, very helpful to get an update from you as well. Chris and Ian, following a strong end to 2025, you both talked about a solid foundation into 2026. Could you talk a bit more on how you're thinking about the U.S. sales trajectory in 2026, given some of those sales drivers you identified and perhaps how you think about going 3 for 3 across value, marketing and innovation to drive U.S. sales growth this year? Christopher Kempczinski: Sure. I'll start and Ian, if you have any additional thoughts. But let's start with value. And as I mentioned in the call, the U.S. put in place the McValue program. That has performed well for us. We added to that the EVM toward the back half of the year. And as we go into 2026, McValue for us is going to continue to be the foundation for our value program. It's going to be something that always continues to evolve. Jill has talked about that in the past. And there's real conversations, live conversations going on right now in the system. But I feel really good about where McValue is headed in this year. And then I think also we've seen the power of great marketing. We've seen how something like a Minecraft or MONOPOLY or Grinch when you have strong value with that can really be an accelerant for the business. And I'm feeling good about the lineup that the U.S. team has there. And then, of course, we've talked about beverages. Jill also mentioned some of the other things that we're doing with burgers and chicken. And so I think we've got a strong slate of menu news lined up for the year as well. So now it comes down to what I talked about also in the comments, which is it looks great on paper. We've just got to go execute. But I think Joe and the team are working well with the franchisees. I know there's a lot of energy and excitement around this. And so I'm confident we're going to go out and execute with excellence. Ian Borden: And maybe, Dennis, just a couple of small builds to what Chris teed up. I mean I think value and affordability, as we've talked about pretty consistently are the greens fees. I mean you've got to have it. It's core to our DNA as a business and brand, and it's certainly core to what consumers are expecting. And I think we would say we've done a pretty good job of kind of strengthening our value and affordability with the things that Chris talked about us putting in place. And that is certainly what we believe is one of kind of the underpinnings to the momentum that we're seeing in our U.S. business. We talked about the fact that in Q4, the U.S. had positive guest count growth, which is always a really strong indication that you're kind of getting to that sustainable top line growth that is going to drive both sales and more volume into the restaurants. And I think just maybe something to note that I think is another important proof point is our U.S. business had its strongest comp guest count gap to the nearing competitive set in Q4 in recent history. So I think those are all signs of encouragement to us. The key, though, is you've got to get the 3 for 3. It's not just about value and affordability or about menu or about marketing individually. It's how you bring those together and leverage them to kind of get that holistic output that you saw us, I believe, deliver in Q4. Dexter Congbalay: Our next question is from Sara Senatore of Bank of America. Sara Senatore: I guess maybe I wanted to sort of dig in a little further on that value. I know you kind of approached it 2 ways. One was sort of streamlining or systematizing the approach to the meals, kind of that 15% discount to a la carte prices. Then you also pulled some very sharp price points, as you said, the 5 and 8. So as you think about the pricing architecture, I guess, which of those do you think was more powerful? Because I'm asking in the context of restaurant level margins that were sort of flattish year-over-year. And so assuming maybe there's some kind of pressure from that on franchisee margins. And maybe just tacking on to that, are any of the technology solutions that Jill mentioned, are those some of the ways to kind of maybe support this sharper value? Christopher Kempczinski: Sure. Well, I guess I'd say I don't think it's one or the other. I think what we've seen and certainly what we're trying to execute is the customer absolutely wants predictable value. And having an EVM is, I think, the way historically, we have always delivered for that customer that predictable everyday value. So you need to have that and certainly pleased with where the system in the U.S. was able to get to on that. As you well know, it's something that has been well established on our international business for years. And so we're in a good shape there as well. But then also the customer is looking for in this environment, some price pointed items that are offering particular value on top of that. And so I think you've got to be able to have the predictable value, but the customer also needs to be excited around price pointed items that come in and out of the menu, and that's what we executed against. Ian Borden: Maybe, Sara, just to kind of hook on to Chris because I know you highlighted kind of margin pressure. I just -- I think if you kind of go back to what we've talked pretty consistently about what it takes to grow margins, obviously, is strong top line sales growth. We saw that in Q4. We grew margins in Q4, including in the U.S. on the back of that. Obviously, if you look back to earlier quarters, we had less top line growth in the U.S. combined with obviously higher levels of inflation, I think that put more pressure on that. I think the other data point is a little bit to what Chris highlighted, which is you got to do both. I mean, at the end of the day, our owner-operator average cash flow in the U.S. was up year-over-year. And I think as we've talked about historically, the way you get to sustainable profitability and profitability growth is you drive more volume, more customers into restaurants. And I think if we get that 3 for 3 formula right as we've done in Q4, I think you've seen that we're clearly capable to do that and do that well. Dexter Congbalay: Next question is from Brian Harbour, Morgan Stanley. Brian Harbour: I wanted to ask about just the capital budget. I think it's generally run kind of at the higher end of, I think, where you thought it would a couple of years ago. It will probably end up being up by $1.5 billion versus '23. Is that exclusively because you want to move faster on constructing new stores? Or is there some other piece of that we don't see? And I think it's interesting just even in markets with not much population growth, you're pushing pretty hard on unit growth. Is that a function of you think because the industry is under stress, this is the time when you should really be taking market share and trying to secure new sites to -- because you think the share opportunities are greater today? Is that the main driver? Ian Borden: Yes. Brian, it's Ian. Let me take that one. Well, I'd start just kind of going back to what we outlined in our December '23 Investor Day event. And we said there we expected our capital budget to go up basically $300 million to $500 million every year consistently as we got to our run rate of 1,000 gross openings in our wholly owned markets in 2027. And we've basically been fully on track to that every year. We were slightly above that range in 2025 at $3.4 billion of capital for the year. But that was driven by 2 things, some kind of FX headwinds from a weaker U.S. dollar and us being a little bit ahead of our future opening pipeline, so more spend related to '26 and '27 openings. So it was a healthy, let's call it, adjustment, as you would have seen in our guidance, again, in '26, we expect the capital to go up another $300 million to $500 million. So again, consistently in that range. We did, as we've talked about before, a lot of work before we kind of committed to where we thought we wanted to be at 50,000 units by end of '27 in '23 to really get deep on where we felt the gaps in trading areas, where we felt the opportunities were. And as you know, we've used the U.S. as an example before, which is one of our more mature, fairly penetrated markets, but a market where we hadn't grown net units since 2014, I think until basically '22, '23, a market where there's been a lot of population migration over time where our openings have not kept up. And so I think the ultimate measure is, are we getting the first year sales in those new sites? Are we getting the returns that we expect? And the answer to both of those questions is yes, and that is confirmatory to the fact that we're getting the right sites in the right places and building the brand in a very healthy way. Dexter Congbalay: Next question is from Dave Palmer at Evercore. David Palmer: I'm just trying to think about how I want to ask this question about what feels like picking up in momentum, but also a picking up in your pipeline of ideas that you have going at the same time. Beverages is one example where you've tested something, you're coming out and you're confident that you have it and it will work. It sounds like you're testing stuff with chicken. It sounds like maybe earlier days there. I'm not sure there. even on value, it feels like that's something where you're continuing to refine as you're getting momentum. So like a lot of companies coming out of COVID, there was a little bit of just a disruption during that period and adjustment. And now you're kind of getting your footing in terms of the pipeline. So maybe I don't know if that's an open-ended question, if maybe you want to comment on that. And then maybe even stuff that are more foundational beyond just even the tech stack, if you're thinking about things in terms of kitchen and other that might be things that we can think about for the future. Christopher Kempczinski: Yes. Thanks for the question. I would say if you think about the company today and frankly, the world that we're operating in, it's just -- it's a very -- we're at a very different starting point. And I went through a number of the things that we've done from a company standpoint with Accelerating the Arches that I think put us in a very different place today. When you have what will be 250 million consumers, 90-day actives on your loyalty platform, that opens up a whole different way of engagement with your customers than what we had when we began that journey back in 2020. When you have the ability to get every market onto a common tech stack, our ability to move with speed and to deploy solutions gets increased by factors of significant numbers. And so we've been trying to spend some time to just think about with these new capabilities, how do we actually start to bring those to market in a way that makes a meaningful difference on both the top line, but also on the productivity side. And I think at the same point, if you go back to where we were in 2020 or even 2023, nobody was talking really about AI. Certainly, we weren't talking a whole lot about AI. There was not some of the commentary and thoughts around what does GLP-1 do in the industry, what are the impacts of that. We're certainly leaning into all of those things and thinking about all those things and making sure that we're ahead of the curve that we're seeing around corners and keeping this brand position at front. So what Jill is laying out, we're testing a ton of ideas. And I would say also in the restaurants that we've got, they're different in each restaurant. It's not the same thing in each restaurant. And we're excited about sharing more of what we're learning with our system, which we'll do in Las Vegas. And then you'll hear more from us, as I mentioned, in the fall where we bring to life what we think is what's next for McDonald's. Jill McDonald: Just perhaps to build on that, we've introduced, as I said upfront, the new category management structure, which we're pleased with the progress that we've made in the first 9 months. And that really is helping to focus the organization. We're bringing together operations, supply chain, menu, marketing around the table together to work in concert to move at greater pace. And we can certainly see consumers are reacting well to new news as evidenced by the beverage test that we ran earlier in 2025 in the U.S. So we're seeing early benefits from moving with pace. And I think one part, but an important part has been the introduction of category management. Dexter Congbalay: Next question is from John Ivankoe of JPMorgan. John Ivankoe: So it's certainly an admirable goal to have taste and quality as metrics that you want to improve or at least kind of pursue for the McDonald's brand. But my question was really what kind of changes that might have to happen within the kitchen itself to maybe achieve some of these goals, both in the near term and the medium and longer term? In other words, is there equipment technology layout that may have to really be changed in a fairly significant way to maybe achieve some of the taste and quality goals. And I do ask this question in my travel, seeing some stores in France, for example, that had very different equipment and a very different layout than the McDonald's that I'm used to seeing. And what I'm really asking is, is there something like -- and I don't know what to call it, an Experience of the Future version 2 that might be part of the plan in the next couple of years? Christopher Kempczinski: Thanks for the question, John. One of the benefits of being in 115 different countries is we've got innovation going all over the system. And I'd say when we think about moving the needle on taste and quality, we're going in without any kind of preconceived notions. We're not going in with any constraints. We're just -- the challenge of the team is how do we continue to make further improvements around taste and quality, recognizing that the competitive set is raising the bar on that. And so that's some of what Jill and the team are testing. As to how that impacts the restaurants, we don't have the answer right now. But I think as you all are aware, we're heading into a remodel cycle. EOTF is as hard as it is to believe, the EOTF process in the U.S. is now almost a decade ago that we began on that. It was even longer in some of our IOM markets. And so we're in a natural cadence where our system historically does do remodels around every 10 years or so. And so let's just make sure as we go into this remodel cycle that we're doing it mindful of how do we continue to come up with ideas that are going to drive the business. And we think taste and quality is certainly one of the biggest opportunities for us. Jill, I pass it over to you. Jill McDonald: Sure. So Chris has outlined some of the sort of the early thinking on where can we innovate going forward to make sure that our restaurants are set up to grow where we've identified growth opportunities, chicken. There's plenty of growth still in beef as well as the new areas of beverage. But we are also thinking about improving taste and quality around how we renovate today as well. So how do we help the restaurants execute to the gold standards that we have today as well. So we're kind of really thinking about this in a couple of different time frames, what we can do today and how do we get ready for the future. Dexter Congbalay: Next question is from David Tarantino with Baird. David Tarantino: I had a couple of questions back on the U.S. value strategy, Chris. And I was wondering if you could comment on how franchisees in the U.S. are embracing the strategy and really 2 parts to that. One, some of the strategies you've had have required McDonald's to support that financially. What's the current sentiment in the system on extending that without McDonald's support? And then the second question, perhaps more importantly is, I think you've rolled out some new brand standards. And I was hoping you could comment on what that might mean for the pricing strategy on the core menu going forward. It seems like keeping price points low and price increases perhaps at or below inflation is important. So just wondering if you can provide some insights on how the system is thinking about that equation. Christopher Kempczinski: Sure. Well, I'd say, certainly, in my travels, and I was just with some operators in Dallas earlier this week that there's good enthusiasm for where the business is at. Certainly, finishing the year as they did in the U.S. is great kind of heading into the new year. And so when cash flow is up, when there's business momentum, I think all of those things work toward having positive sentiment, particularly in an environment right now where our performance relative to what we see from some others, I think our franchisees are understanding or appreciative of -- it's not easy out there, and we're certainly pleased with our performance. As to how that continues to evolve, you're right, our support for EVMs rolls off. In many cases, it's already rolled off. in some places. But I think our system generally looks at business results. And I think the numbers are pretty clear that the EVM strategy for us is working. And I would expect that anybody who's looking at the data, it's a pretty easy conclusion as to what you would do with that. But ultimately, our support, as we've talked about a number of times, it's timely, targeted and temporary. We don't subsidize pricing on a permanent basis. And so I think with how we've worked together as a system over the last quarter, now heading into 2 quarters, I think the pathway forward is pretty clear. But ultimately, that's going to be up to franchisees on that. And then to your question around brand standards, I mean, just to reiterate or state the obvious, franchisees set pricing. But at the end of the day, we are the custodians of the McDonald's brand. That is what we're selling. And one of the things that's core to our brand is our value positioning. And so we don't prescribe exactly how the franchisees have to go deliver value, but the franchisees need to protect the brand. And part of that brand DNA is our value leadership that we have there. And so there's lots of different ways. We provide support to franchisees through RGM, this revenue growth management on different ways to go do it. And the expectation is that however franchisees decide to align against it, they're going to continue to live up to what Ray Croc started with this brand, which was one of the world's great brands that also continues to lead on value. Dexter Congbalay: Next question is Greg Francfort over at Guggenheim. Gregory Francfort: I guess I had 2 questions. One, you made a comment about customers increasing their frequency on the loyalty program. Do you have a sense for how much of a needle mover that is? And then just the second part of that is, I think you also made a comment about accelerating the global tech stack and being kind of almost where you want to be. What are the remaining hurdles to getting that done? Christopher Kempczinski: I'll let Ian take both of those. And if he clubs it, I'll jump in. Ian Borden: Greg, let me try and take those. So I think on the loyalty program, I just -- I'd go back again to just emphasize that when we laid out in Investor Day in December '23, loyalty membership, you'll remember, we laid out a metric of getting to 250 million 90-day active users by end of '27. We said in our upfront remarks, we're now at 210 million 90-day active users, well on our way and confident to get to that 27 goal. And we have said that loyalty -- active loyalty membership is our single most important digital metric because it -- when we get consumers into our loyalty program, they visit more often and they spend more over time. And they interact with us more frequently. So they get more value in their interaction with us, and we get more value by them interacting with us. And I think we have a lineup of -- a pipeline of ideas of how we're going to continue to build and add capability that will add further value to our loyalty customers as we look forward. To kind of get to your question more specifically, and we gave this data point, I think, a quarter or 2 ago, if you look at our U.S. business as an example, a customer in the 12 months -- an average customer in the 12 months before they joined our loyalty program visited us 10.5x. In the 12 months after they became a loyalty member, they visited us 26x. So we increased their frequency of visit by more than 2.5x, and they also spend more with us over time. That's why loyalty is important, and that's why we're excited to kind of continue creating value so that consumers will be compelled to join and compelled to continue to interact with us on a more frequent basis. I think on the tech stack, I think we've been pretty open over time. I mean it to go from a fragmented decentralized kind of tech organization to common platforms. And you'll remember, again, in our Investor Day in '23, we laid out we want to get to 3 common platforms in our business that are tech-enabled through a common tech backbone, so to speak, that's our consumer platform, our restaurant platform and our company platform. We're making progress. against each of those 3. We've got a little more work to do, as Chris alluded to, but we feel really confident in where we're at and the pace of what's left to go to kind of get us to that overall outcome. Dexter Congbalay: Next question is Andy Barish with Jefferies. Andrew Barish: Wondering if we go back to the beverage efforts in the U.S. and kind of interesting that you did not mention CosMc's that seems to be a shift. And any color you're willing to provide just in terms of the rollout as we look towards the rest of this year? Jill McDonald: Sure. I'll take that question. So we are -- obviously, we're really excited about the beverage launch in the U.S. later this year, and we are going to do it under the McCaf? brand. So we obviously learned a lot through the CosMc's test, and those learnings have been applied to how we've decided to set up this new beverage range. but we are going to be launching under the McCaf? brand. And just to give you a little bit more color. The results did exceed expectations for the entirety of the program. It did drive incremental occasions. These were mostly snack, dinner and evening. And we also saw higher average check. So the financials are really playing out well. We learned a lot about the recipes. We offered a range of recipes across indulgent coffees, refreshers, energy and soda -- crafted sodas. All did well, particularly the crafted sodas, refreshers and energy. And we're going to do what we do best at McDonald's. We are going to offer great tasting products, great prices, with the speed and convenience that our customers want and expect. So more to come on that. We're not going to reveal too many more specifics of the timing, but you can expect to see news in the U.S. and outside of the U.S., too. Dexter Congbalay: Next question is from Lauren Silberman at Deutsche Bank. Lauren Silberman: Very much Great quarter, strong acceleration across segments on a 2-year basis. As we look to '26, we still have a lot of dynamics in the consumer environment. It sounds like you have a really strong playbook. Can you give any color on how we should be thinking about, I guess, Q1, knowing there's some weather there, still have a little bit of the E. coli lap? And then thoughts on the same-store sales progression as we move through '26. Ian Borden: Lauren, it's Ian. Let me take a crack at that, and I'm sure Chris will add on here. Look, I think as we've talked about already, we feel really good about the underlying momentum and kind of the consistency of that across each of the 3 operating segments. I think we expect that momentum to kind of continue in '26. And obviously, what we're focused on and we've talked about a lot is really going 3 for 3, focusing on the things that are within our control. I think we expect probably that the first half will be likely a little stronger than the second half, and that's just largely a reflection of kind of the benefit of the favorable year-over-year comparisons that we're up against. Maybe just to give a little color by segment. I think for the U.S., we've had a solid start in January. We had good kind of underlying momentum, as you've heard us talk about today, supported by, I think, what we've done with extra value meals, obviously, McValue more broadly. I think we would say we expect Q1 comp sales growth to decelerate sequentially from the 6.8% in Q4 that you saw. I think there are 2 key reasons for that. One is Q4 growth was particularly strong, obviously driven by 2 really strong activations in MONOPOLY and Grinch. And then as is well known, you've heard from many others, obviously, we had severe weather impacts in the U.S. kind of beginning in late January that pressured the industry traffic, pressured our traffic, obviously, and caused quite a few restaurants to close or reduce hours for a number of days. We estimate that weather impact to be about 100 basis points for the full quarter just when you look at kind of the drag that we saw in January. I think on international, kind of a similar story. I mean, we had a solid start in IOM in January. Again, we believe we've got kind of strong and consistent underlying momentum. But we do expect Q1 to decelerate sequentially from the 5.2% that we had in IOM in Q4. Again, we've got some weather, I would say, impacts in a number of markets in Europe through January that have put a little bit of pressure kind of on the underlying momentum. And then IDL, again, expect a sequential decrease from the 4.5% that we had in Q4. Again, we feel pretty good about the underlying momentum. It's really just driven by, I would say, the kind of continued macro pressures in markets like China and parts of Latin America. So I think we're really confident about what's within our control, really confident about the underlying momentum of the business and certainly feel good about our ability to continue to kind of execute well even though the environment remains challenging. Dexter Congbalay: Next question is from Jon Tower of Citi. Jon Tower: Maybe, Jill, one for you. I was hoping you went through a lot of the menu ideas coming in 2026 across the globe in the U.S. Specifically in the U.S., though, I was hoping you could drill a little bit more into how you're thinking around the GLP-1 adoption likely picking up this year with orals being available and how you're thinking through the menu operators across your system actually asking you how McDonald's is going to potentially address this shift in consumption? Christopher Kempczinski: Sure. Well, let me start, and then I'll let Jill fill in. But as I mentioned in my comments earlier, we're certainly spending a lot of time and paying close attention to it. I can tell you right now, we've looked pretty hard, and we don't yet see evidence of it really having a material impact on our business. Now that said, as you noted, pill form has just become available. We know the pill form has had pretty strong adoption in the early weeks. Lilly will come out with a pill form of their own sometime in probably Q1, Q2. And so certainly, our view is that adoption is going to continue to grow. And as adoption grows, we know that consumers' behavior changes. We know that in general, they eat fewer calories in the day, but also what they eat, the mix of that changes. Fortunately, for us, protein is one of the areas that this consumer, the GLP-1 consumer is still very much interested in, and we've got a great protein offering on our menu. So I think that's an area of strength for us. But we're also seeing changes around maybe less snacking, changes in some of the beverages that they drink, less sugary drinks. And so all of those things are factoring into some of what we're out there experimenting with and testing with. And ultimately, as we learn more about that and get feedback from our customers, those things could make their way on to the menu. But Jill, I'll let you kind of pick it up from there. Jill McDonald: Sure. We do have a history of staying close to customers and innovating and adapting our menu as required. So we are already pretty protein forward, fish, chicken strips, Snack Wraps, sausage biscuit. We have a number of items on the menu that customers who are on GLP-1 are enjoying. I think we can call out and just help customers a little bit more, understand what is high protein on our menu because there are a number of options. But we're also going to continue to learn, see what's going to interest them. We have a couple of ideas that we are already looking at for the longer term. So we will be led by the customers and what they want from us, but there's plenty for them to enjoy in our menu currently. Dexter Congbalay: Our last question today is from Jeff Bernstein at Barclays. Jeffrey Bernstein: Just trying to get a sense for the barbell strategy. We talked a lot about value. So I was hoping, at least in the U.S., you could share some color on the scores you're seeing, the -- maybe the share of value or mix of sales? Just trying to get a sense for where value sits and your comfort level there. And on the flip side, obviously, a lot less talk these days about the premium offer positioning. But how do we think about the balance there? Obviously, franchisees would love to push as would you, I'm sure, the upper end of that barbell. So what do we have on tack? Or how do you feel about your ability to push more premium product offerings as we move through '26 to balance with that value? Christopher Kempczinski: Sure. Well, we've talked about on prior calls the fact that industry-wide, we've seen traffic hold up pretty well with upper income consumers and traffic has been pressured with lower income consumers. And of course, lower income consumers are more value and affordability sensitive. We were pleased to see that we gained share with that low-income consumer in December, which was very much one of the criteria that we set around our value program. And so obviously, we've got to continue that. But I think we're in a better position certainly with that part of the consumer cohort. And then on the premium side, we're going to have menu innovation that I think is going to continue to appeal to the upper income consumers. I think some of the beverage items could clearly go in that category. I think some of what we might be able to do in chicken and burgers as well could fit under that. So we're a business where 90% of the customers are coming into our restaurant in the U.S. at least once a year. And we need to make sure that we've got a broad offering that appeals to all of them and recognizes that they have different needs. So I feel think we've got a good strategy on that. But certainly, the expectation for the balance of '26 is that, that low-income consumer is going to continue to be under pressure, and there should be, call it, mid-single-digit growth available with the upper income consumer. And so how do we make sure we're winning with both of them. Dexter Congbalay: Thanks, everybody, for joining the call. If you want any types of follow-up, please send me an e-mail. We can get something scheduled. Other than that, have a good evening, and we'll talk to you later. Operator: This concludes McDonald's Corporation Investor Call. You may now disconnect, and have a great day.
Operator: Hello, and welcome, everyone, joining today's Neurocrine Biosciences Fourth Quarter and Fiscal Year 2025 Earnings Call. [Operator Instructions] Please note, this call is being recorded. [Operator Instructions] And it is now my pleasure to turn the meeting over to Todd Tushla, Vice President of Investor Relations. Please go ahead. Todd Tushla: Happy Wednesday to everyone, and welcome to Neurocrine Biosciences Fourth Quarter and 2025 Year-end Earnings Call. With me today are Kyle Gano, Chief Executive Officer; Matt Abernethy, Chief Financial Officer; Eric Benevich, Chief Commercial Officer; Sanjay Keswani, Chief Medical Officer; and for the first time, we are very pleased to be joined by Samir Siddhanti, Vice President of Strategy and Corporate Development. During today's call, we will be making forward-looking statements. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to review the risk factors discussed in our latest SEC filings. After prepared remarks, we'll be happy to address any questions. With that, Kyle, take it away. Kyle Gano: Thanks, Todd. Good afternoon, everyone. A hallmark of a healthy company is the strength of the foundation beneath it. As Neurocrine enters 2026, our foundation is stronger than at any point in our more than 30-year history and it continues to strengthen, with growing enterprise-wide momentum and strategic and balanced diversification, Neurocrine has entered a new era of meaningful growth led by our first and best-in-class commercial brands. INGREZZA performance continues to impress, strategic investments in access and sales force expansion drove a record year for both new and total prescriptions. This momentum carries us into 2026, where despite 9 years post launch, we expect double-digit volume-driven growth supported by continued demand from the roughly 9 out of 10 TD or HD chorea patients not currently taking a VMAT2 inhibitor. Like INGREZZA, CRENESSITY's launch has also been exceptionally strong. By the end of the fourth quarter, our first full commercial year after its approval in December 2024, prescriptions covered over 10% of the classic and general adrenal hyperplasia patient population, underscoring the tremendous unmet need. What a great start, and I'd like to thank our team for making this all possible. This strong early adoption across patients, caregivers and prescribers reinforces our conviction that CRENESSITY will become Neurocrine's second blockbuster product. With an FDA-approved label supporting uncompromised efficacy, including an efficacious first dose with no requirement for titration, multiple formulations for pediatric and adult populations and a favorable safety and tolerability profile, CRENESSITY is rapidly becoming the standard of care for patients with classic CAH. This profile mirrors the attributes that supported the success of INGREZZA and underscores our confidence in CRENESSITY's impact for patients and Neurocrine moving forward. Turning to research and development. At our December R&D Day, we outlined three strategic pillars. First, we aim to lead the VMAT2 category by leveraging our deep INGREZZA experience and advancing next-generation VMAT2 inhibitors. By way of background, INGREZZA was the first approved treatment for tardive dyskinesia and Neurocrine paved the path for the development of new medicines in this space. Our nearly 20-year history provides a durable foundation for category leadership. This starts with NBI-'890, which recently entered into Phase II in tardive dyskinesia and with NBI-'675, which is falling close behind. Both of these products have the potential for long-acting injectable formulations. Second, we are delivering on the promise of CRF through a two-pronged approach: advancing next-generation CRF1 antagonist, such as NBIP-'1435 in CAH and expanding the platform with CRF2 agonist starting with NBIP-'2118 into adjacent areas, including metabolic diseases such as obesity. For more than 30 years, Neurocrine has been a pioneer in CRF biology, and this experience uniquely positions us to evolve and expand what CRF-based therapies can deliver. Third, we are maximizing and evolving the pipeline, which is stronger than ever. This is led by our late-stage industry-leading neuropsychiatry portfolio, including two Phase III programs, osavampator, major depressive disorder and direclidine in schizophrenia. Like INGREZZA and CRENESSITY before them, both represent potential first and best-in-class medicines. We expect top-line data from the osavampator studies in the first of 2 direclidine studies in 2027 which is shaping up to be the most data-rich year in Neurocrine's history. In 2025, we achieved our Phase I through Phase III objectives for the first time, making it the most productive clinical year in our history. We also have a clear line of sight to repeating this level of performance in 2026, accelerating us towards our goal of delivering one new medicine every 2 years at steady state. As I said from the outset, we entered 2026 with the strongest foundation in Neurocrine's history. It is incumbent upon me, our leadership team and the entire organization to continue executing and delivering for patients and shareholders. We appreciate your support. And with that, I'll turn the call over to Matt. Matthew Abernethy: Thank you, Kyle, and good afternoon, everyone. 2025 was a noteworthy year for Neurocrine as total product sales grew to more than $2.8 billion, representing 22% year-over-year growth. This performance reflects continued strength and durability from INGREZZA and the successful initial launch of CRENESSITY. Together, these products form the foundation of our growth and generate durable cash flows that support long-term shareholder value creation. INGREZZA generated just over $2.5 billion in revenue, up 9% year-over-year, driven by double-digit volume growth, partially offset by pricing concessions associated with formulary access investments to support long-term growth. Fourth quarter performance was in line with expectations outlined on our Q3 call. New prescriptions remain near record levels achieved in Q3, a strong result given the ongoing sales force expansion. Looking ahead, we are guiding to INGREZZA sales in the range of $2.7 billion to $2.8 billion in 2026, representing approximately 10% growth. This outlook reflects continued double-digit volume growth, including contributions from the expanded sales force in the second half of the year partially offset by price declines tied to formulary access improvements implemented in 2025. Overall, we expect net pricing in 2026 to be relatively consistent with levels exiting 2025. INGREZZA enters the year with strong NRx momentum, broad access and an expanded commercial team ready to execute. For CRENESSITY, we exited 2025 with over $300 million in net product sales and approximately 10% of addressable patients being prescribed CRENESSITY. As a first-in-disease launch, quarter-to-quarter enrollment form activity can be variable, but what gives us confidence is the number of patients on therapy, refill behavior and the speed of reimbursement. Feedback remains extremely positive and our first year on the market exceeded both internal and external expectations. Given that CRENESSITY is the first product approved for classic CAH in more than 70 years, with much still to learn around market dynamics, we are not providing specific sales guidance for 2026. Later in the call, Eric will discuss the initiatives underway to continue developing this attractive market. Turning to the financials. Our cash position increased by approximately $700 million from $1.8 billion at the end of 2024 to $2.5 billion at the end of 2025, reflecting strong operating performance and a healthy balance sheet. While maximizing near-term profitability is not our primary objective, we remain highly profitable, delivering approximately 30% non-GAAP operating margin or roughly $850 million of non-GAAP operating income for 2025, including $83 million of R&D milestones and IP R&D expense. In 2026, we expect another strong year of non-GAAP operating income, driven by increased product sales partially offset by investments across SG&A and R&D. These investments align with our top capital allocation priorities of driving revenue growth and advancing our pipeline. SG&A growth year-over-year primarily reflects investments related to our 2026 sales force expansion, which we expect to be completed by the end of the first quarter. At the midpoint of our guidance range, GAAP SG&A is expected to be in the low 40% of sales for 2026. R&D expense growth reflects a full year of investment in our Phase III programs for osavampator and direclidine with data expected in 2027 as well as the initiation of multiple Phase II and Phase I programs, including obesity. Overall, we expect GAAP R&D expense, excluding approximately $25 million in milestones to be in the mid-30% of sales range, consistent with our prior commentary. Overall, 2026 is shaping up to be another important year for Neurocrine as we continue to grow INGREZZA and CRENESSITY while advancing our pipeline. We entered the year with strong momentum and are well positioned for continued growth. With that, I'll turn the call over to Eric Benevich, our Chief Commercial Officer. Eric? Eric Benevich: Thanks, Matt. I'm very proud of our team's performance last year across both CRENESSITY and INGREZZA, and I'm equally enthusiastic about the significant opportunity ahead for both brands. Matt covered the financial highlights, so I'll add additional color and highlight key focus areas to drive continued growth for both brands. For the CRENESSITY launch, you've heard us say so far, so great, and 2025 certainly lived up to that mantra with over $300 million of net sales in the first full year on the market. Throughout 2025, we saw strong demand across pediatric and adult patients and across both genders with prescriptions now trending towards a majority of pediatric patients in female patients on therapy. Importantly, while new patient starts may vary from week-to-week and quarter-to-quarter, once the patient initiates treatment with CRENESSITY, they tend to stay on CRENESSITY. This real-world experience is consistent with our experience in the open-label extension studies. As we've said from the outset, as a first-in-disease medicine, CRENESSITY is a learning launch, very much aligned with our experience with INGREZZA in TD. In fact, the parallels between the two launches are remarkably similar. Both INGREZZA and CRENESSITY are first in disease therapies for conditions that previously lacked specifically FDA-approved treatment options and both achieved approximately $300 million in sales in their first 12 months. Being a first in disease launch, we still have much to learn about the patient population, the prescriber base and potential seasonal dynamics. And similar to INGREZZA, while we're not providing specific annual guidance in year 2, we remain highly confident that CRENESSITY will be Neurocrine's second blockbuster medicine as we establish it together with replacement of glucocorticoids as the standard of care treatment for patients with classic congenital adrenal hyperplasia. As we enter CRENESSITY's second full year on the market, the natural question is, so what's next? As I noted this time last year, long-term success CRENESSITY will be driven by our ability to reach, educate and activate the CAH community on this breakthrough medicine. To date, more than 1,000 prescribers have written a prescription for CRENESSITY, yet roughly 2/3 have treated only one patient so far, underscoring both the progress we've made and the opportunity ahead. To support continued growth, we're focused on several key priorities in 2026. As previously announced, we're expanding the CRENESSITY sales force with new representatives hitting the field in April. This is a rare disease team so the overall FTE numbers are still small. However, this expansion will allow us to go deeper within the existing endocrinology HCP base and allow us to expand our reach into additional potential prescribers. While endocrinologists remain central, we've learned some classic CAH patients are managed outside of endocrinology by primary care providers or OB-GYNs. We're excited to leverage AI and other technology tools to help identify and engage providers likely to be caring for classic CAH patients. We're also continuing to invest in medical education to improve the community's understanding of CAH, the limitations of GC monotherapy and reinforce CRENESSITY's compelling product profile. It remains the first and only new CAH specific treatment in 70 years. As a potent and selective CRF1 antagonist, CRENESSITY targets the source of dysregulation in CAH and directly prevents the surge of excess ACTH from the pituitary to restore downstream androgen control and enable physiologic steroid dosing. Furthermore, CRENESSITY has the largest data set in adults and children with classic CAH, which includes greater than 450 patient years of clinical trial exposure and greater than 550 patient years of real-world exposure. With a favorable long-term safety profile, robust efficacy and broad labeling, it's clear why uptake has been so strong after only 1 year on the market. In fact, we estimate that we've gotten approximately 10% of the classic CAH population on therapy in the first year of availability. This is an important milestone for us. We believe as the word continues to spread in the CAH community, as the endocrinology prescriber base expands and as they share their real-world clinical experiences, we'll see a continued peer-to-peer effect that will deepen disease understanding and drive broader adoption. Now turning to INGREZZA. We had a record number of new patient starts and a record number of total patients on therapy in 2025. Today, we estimate only about 10% of the prevalent TD population is currently taking a VMAT2 inhibitor. Even 9 years since our launch, there remains a substantial opportunity to grow the class, grow our market share and help more patients start and stay on therapy. With double-digit growth momentum, strong Formulary Access and an expanded and reorganized sales force set to hit the field in Q2, a class-leading and differentiated product profile and 12 more years of remaining exclusivity, INGREZZA is well poised to help many, many more TD and HD patients. So with that, I'll turn the call over to my colleague, Dr. Sanjay Keswani, to share our pipeline progress. Sanjay Keswani: Thanks, Eric, and good afternoon, everyone. In keeping with this year's focus on momentum and strategic diversification, our clinical organization will enroll and advance more studies than at any point in Neurocrine's history. While most of my future earnings remarks will center on enrollment progress and study initiations. Today, I'll highlight recently disclosed data for our 2 commercial assets, INGREZZA and CRENESSITY. An optimal way to compare therapies is through head-to-head studies. With that in mind, we recently published first of its kind head-to-head data comparing INGREZZA and AUSTEDO XR at the 64th Annual Meeting of the American College of Neuropharmacology. PET imaging results confirmed what we've long believed, not all VMAT2 inhibitors are equal. In this study, INGREZZA demonstrated a nearly twofold higher VMAT2 target occupancy compared with therapeutic doses of AUSTEDO XR, an important finding that indicates INGREZZA's superior efficacy in treating tardive dyskinesia. Turning to CRENESSITY. We recently shared data from our open-label extension study. While multiple analyses are still underway and will be presented at upcoming endocrinology meetings, including ENDO 2026, the main takeaway is clear. Across both adult and pediatric CAH patients, CRENESSITY continues to show robust sustained clinically meaningful benefits through 2 years of treatment. We see durable reductions in excess ACTH and androgens directly addressing the underlying pathophysiology of CAH and maintaining control over time. In pediatrics, CRENESSITY delivered sustained ACTH suppression while preserving normal physiological signaling, including the immune stress response. Hence, rates of adrenal insufficiency remained very low, 0 in the pediatric double-blind study and 1.6% in adults, identical between active and placebo patients. In a prepubertal subset, we also observed slowing of bone age advancement, translating to a predicted adult height increase of over 2 inches. In adults, approximately 70% of patients were brought into the physiological steroid range while maintaining androgen control and about 40% of overweight or obese patients achieved at least 5% weight loss over 2 years, reflecting CRENESSITY's beneficial cardiometabolic effects. Safety and tolerability remain excellent with approximately 80% retention at 2 years, no new safety signals and over 35,000 patient weeks of exposure. Overall, these data reinforce CRENESSITY's strong differentiation across efficacy, safety and tolerability and support our conviction that it will continue to be the standard of care treatment for patients with classical congenital adrenal hyperplasia. Regarding our industry-leading neuropsychiatry programs, the late-stage Phase III studies for osavampator in major depressive disorder and direclidine in schizophrenia are enrolling well. And just last month, we initiated a Phase II study of NBI-'890, our next-generation VMAT2 inhibitor for the treatment of tardive dyskinesia. All other studies in our portfolio are advancing as expected, and we look forward to keeping you apprised of our progress. With that, I will hand the call back to Kyle. Kyle Gano: Thanks, I think we can go ahead and take questions now. Operator: [Operator Instructions] Our first question comes from Paul Matteis with Stifel. Paul Matteis: Congrats. I appreciate that you're not guiding on CRENESSITY, but I was wondering if you could maybe give us either a window into the first 6 weeks of 2026 or just more broadly, the number on the revenue side, obviously way above consensus in 4Q. But as we look at start forms, there's a slight decline from 2Q to 3Q and 3Q to 4Q. Curious in your perspective on what you're seeing now and where you think this kind of patient add rate might plateau in, say, the near to midterm? Matthew Abernethy: Paul, so we're going to start giving weekly sales information out on the web. Just kidding. I mean it's been a tremendous year -- it's been a tremendous year for CRENESSITY over $300 million in the first year. Congratulations to the team. And we really look forward to year 2 being another strong, exciting year. We do anticipate meaningful steady new patient additions every single quarter that's going to lead to a very nice growth year. We still, of course, have a whole lot to learn associated with this launch. As you remember, with INGREZZA it took us about 4 years to get to a guide, but we will be providing insight every quarter as it relates to net sales, demand and overall reimbursement dynamics. I'd say looking around the table, we couldn't be more proud of the team and what's been accomplished this year and really feel good with how we're positioned for the years ahead. Operator: We'll take our next question from Cory Kasimov with Evercore ISI. Cory Kasimov: I wanted to ask about that receptor occupancy poster from late January regarding INGREZZA versus AUSTEDO. Curious how you might use this information? And what are the potential implications here with regard to your next-gen VMAT2 inhibitors? Sanjay Keswani: Yes. So we're quite excited by the data we showed, which is essentially a head-to-head PET study between AUSTEDO XR and INGREZZA. And as we articulated in our recent press release, we saw nearly double the target occupancy for INGREZZA after 1 dose versus AUSTEDO XR. And even when we measured at steady-state concentrations, we still had a markedly superior advantage in terms of VMAT2 target engagement. We think this underlines the efficacy that we see in INGREZZA in the community of patients with tardive dyskinesia as our belief is that the higher the rate of VMAT2 target occupancy, the greater the efficacy in terms of control of tardive dyskinesia. In terms of the second part of your question, we clearly have a lot of experience in terms of matching receptor occupancy with clinically efficacious doses. And we're utilizing that relationship with our 2 VMAT2 follow-ons. Indeed, we started a Phase II study of our first follow-on in tardive dyskinesia quite recently. Operator: We'll take our next question from Phil Nadeau with TD Cowen. Philip Nadeau: Congratulations on a productive year. I just want to follow up on Paul's question on patient dynamics with CRENESSITY. I think in your prepared remarks, you mentioned the possibility of seasonality in patient demand. And I think investors were all debating whether there could have been an early launch bolus to patient initiations. Appreciating that you still have a lot to learn, what have you learned about those 2 factors and patient dynamics, one in early launch bolus and two, whether there's any seasonality as you go through the year? Kyle Gano: Yes. Thanks, Phil. This is Kyle. Good question here on that. I think it's important to keep in mind that the similarities that Eric called out in his opening remarks here are quite true and accurate across the Board. In terms of the first year of launch, we've gone through our first Q1 through Q4. As we've learned in most orphan diseases and launches, whether it was INGREZZA or looking at others, there's always ebbs and flows in enrollment forms. And in particular, early in launch, it's typically a function of frequency of office visits when patients initially hear about the opportunity for a new medicine and physicians getting the word out. So I think it's too early to call whether or not there's any seasonality component. It takes a couple of quarters to draw those conclusions across multiple years. And it took us a while to get to that level of confidence with INGREZZA. So I think it's prudent right now to collect that information and make a more sound decision about guidance, enrollment forms, things of that sort as we get a little bit further in the launch. But rest assured, great feedback out there across all the stakeholders, prescribers, physicians and even payers out there. So nothing out there is saying that we're anywhere but moving towards changing the standard of care and achieving blockbuster status like we've done with INGREZZA. Operator: We'll take our next question from Brian Abrahams with RBC Capital Markets. Brian Abrahams: My congrats as well on a very productive year. Question on the expense side. It seems like you're expecting a little bit of an uptick in R&D expenses for this year relative to 2025. Can you talk a little bit more about the components of that? How much of that is some of the earlier-stage programs like obesity? And how quickly could some of those costs potentially roll off in 2027 once the Phase IIIs readout? Matthew Abernethy: Yes. Thank you for the question. The cost increase is really on the heels of the Phase III trials and pushing those forward for a full year this year in 2026. The obesity investment is actually quite minimal for 2026, but of course, is a really important program for us to be able to drive shareholder value creation, which we would expect some level of data in '27. But from an expense, when do expenses roll off, we would anticipate for the major Phase III programs. Those will carry on through 2027 with a big chunk falling off in 2028. Operator: We'll move next to Tazeen Ahmad with Bank of America. Tazeen Ahmad: I wanted to go back to CRENESSITY for a second. So I know it took, what is it, 3 or 4 years before you guys started giving guidance on INGREZZA. What kind of metrics did you need to collect in order to get confident in providing guidance? And do you have a sense of whether or not it would take that length of time before you get confident with CRENESSITY and providing sales guidance for that as well? Eric Benevich: Tazeen, maybe I'll tackle the second question first. It may not take as long to get to a point where we feel comfortable giving guidance with CRENESSITY as it did with INGREZZA. This is a rare disease. INGREZZA is not a rare disease, but it was at the time, a rarely diagnosed disease. We have a single -- essentially a single prescriber base in endocrinology versus multiple different specialties and different sites of care and so on, which made getting a handle on INGREZZA a little bit more challenging early on. As I mentioned in my prepared remarks, both are first-in-disease therapies, both are breakthrough medicines. But as Kyle stated, we've gone through one cycle so far with CRENESSITY in classic CAH and it has been a learning launch for us. There's a few factors that have been a little bit different than what we expected, but different in the positive. The adoption rate was greater than what we had expected coming into this launch, which is awesome. Certainly, the reimbursement has been favorable, and we've been very pleased with the persistency that we've seen when patients start treatment, they tend to stay on it. So as we get more experience in this community in the CAH community and as we learn more about how we're able to reach sort of beyond that first 10% of the population that I talked about, then I think we'll get to a point down the road where we feel more comfortable providing specific guidance. Matthew Abernethy: Let's not confuse not providing guidance with not expecting significant growth this year. Everything that we see from steady enrollments of new patients along with patients staying on therapy, everything points to there continuing to be strong growth. It's just a company decision that we made to not provide a guide here. Operator: We'll move next to Corinne Johnson with Goldman Sachs. Corinne Jenkins: I guess beyond the pricing discussion with respect to INGREZZA and AUSTEDO, which I guess is now better understood, how are you thinking about volume impact to INGREZZA next year with AUSTEDO becoming a negotiated product? And how do you think formularies are going to handle here in products in the context of maybe more like relatively competitive pricing than we could have expected? Eric Benevich: Yes. I mean, obviously, we've been thinking and preparing for the 2027 formulary year and the impact of deuterated tetrabenazine having an MFP negotiated price. But certainly, we're very focused on 2026 as we kind of prepare to go into that next phase. We're in a position now, and Kyle talked about it with his prepared remarks of carrying a lot of momentum into 2026 in terms of our volume growth and new patient starts, having favorable coverage, especially in the Medicare formularies and being able to leverage all of that as we enter into the formulary negotiations for 2027. So we feel good about our strategy for 2027. We believe we'll be able to maintain formulary coverage to enable continued growth. And this is a market that has been growing at a double-digit clip for the last several years, which is pretty amazing, especially for a category that's coming into year 9, year 10. So we feel good about 2026, expect to have another really strong year for INGREZZA, and we feel good about our strategy for maintaining that growth in 2027 and beyond. Kyle Gano: And the only thing I would add to that, this is Kyle, by the way, is that on the 2026, we have our contracting done that we pulled through in 2025. So we expect that to be stable this year, no midyear adds like we saw in 2025. So entering '26, we expect the net revenue per prescription to be roughly similar throughout the course of the year. So revenue growth should also track nicely volume growth this year. That's our expectation. So a strong year here like in 2025, we expect good double-digit volume growth and to increase our market share throughout the course of the year. Operator: We'll take our next question from Jay Olson with Oppenheimer. Jay Olson: Congrats on all the progress. We're curious about the 569 study in Alzheimer's psychosis and any potential lessons learned from the ADEPT-2 study of Cobenfy, especially in terms of managing trial conduct across the study sites and any strategies you can use to mitigate operational risks for that study? Sanjay Keswani: Yes. We are watching the progress of Cobenfy in AD psychosis quite carefully. But just as an aside, psychiatry studies deserve specific attention. And we are fortunate to have a very experienced team who've successfully executed psychiatry studies. So for both our Phase III studies, we spent a lot of time carefully selecting sites and ensuring that the patients enrolled in our studies are real patients rather than professional patients who may inflate a placebo response. And indeed, with respect to placebo mitigation, we have a multifold strategy with respect to design of the study, 1:1 randomization, keeping the study sites relatively small. So for example, we only have 20 sites per Phase III study for direclidine in our schizophrenia studies. And also a great deal of hands-on monitoring of sites and site investigators by our internal team. So I think the BMS data were invited some caution with respect to ensuring that we adequately monitor these sites, but we feel in a pretty good position in terms of doing that already. Operator: We'll take our next question from Anupam Rama with JPMorgan. Joyce Zhou: This is Joyce on for Anupam. Could you discuss the feedback you've been getting from KOLs about your 2-year CRENESSITY data, specifically as it relates to durability of benefit and just how you see this data continuing to support and drive strong persistence of patients on drug? Sanjay Keswani: Yes. So we've been getting a lot of positive support from clinicians who have been prescribing CRENESSITY, as you say, for some time now. And we recently showed that 2-year data and again, listed a lot of positive feedback. I think what's important for these patients and often their parents is showing that androgens are reduced in a chronic fashion. And by doing so, reducing doses of glucocorticoids to physiological levels. And that's a huge deal for this patient population who are essentially plagued by the side effects of chronic glucocorticoid use. So in our 2-year data set, we saw reductions in weight for those individuals who are obese, improved insulin tolerance. And with respect to androgen suppression, we also saw attenuation of bone age advancement and that's a big deal for these patients. And again, their parents because often these individuals have precocious puberty and don't attain the potential with respect to adult height. So really pleased to see that data and also the positive impact on the community. Lastly, I'll say that the drug is actually really well tolerated, very important, particularly in a pediatric population. So no surprises at all despite collecting over 35,000 patient weeks of exposure. Of note, we do preserve the vasopressin-induced ACTH stimulus. I mentioned that because adrenal insufficiency is always a worry, particularly as you reduce glucocorticoids. And we're very happy with that adrenal insufficiency data. Indeed, no cases in the pediatric population and an active versus placebo rate that was equivalent in the adult population. So hopefully, that addressed your question. Kyle Gano: Yes. This is Kyle. Maybe just to add 2 quick comments on there. I think the pieces that are really important is if you think about safety and tolerability, the open-label extension, 90% of subjects rolled over and then 80% out to 2 years. Just an amazing safety and tolerability profile. In CAH, although you could say this about many disease states more so than ever for CAH, efficacy gets your foot in the door, but safety and tolerability wins the day. I think the other piece is on the efficacy that we see at 2 years, it really describes the benefits of long-term treatment. You can really bend the course of the disease in terms of progression. The earlier you treat, the younger you are and the longer you stay on treatment. So all good things to think about when we continue to accumulate this longer-term data. Operator: We'll move next to Mohit Bansal with Wells Fargo. Mohit Bansal: So one is regarding the expenses on the SG&A side. It seems like the sales and marketing increase is more than what we have seen last year. Can you just help us understand is it more towards CRENESSITY or INGREZZA? And then I would also love to understand how you're thinking about INGREZZA given that you are guiding for a 10% growth, which is higher than last year. So do you expect volumes to continue to grow at the rate of last year? Or it's just like you're not seeing price decline this year. So that's probably what is driving it? Matthew Abernethy: So SG&A expense is really the sales force expansion that we mentioned on the last call is a significant part of that. And we also have other ancillary initiatives surrounding CRENESSITY as well as INGREZZA to ultimately drive sales. But this coming year, we do expect double -- or this year, we expect double-digit growth, as we've said. That's partially offset by price, call it, negative 4% based upon the pricing that we -- the contracting that we had entered into in the first half of last year. So you're talking about volume growth at the midpoint of our guidance range for INGREZZA to be in the mid-teens. So we feel really good with where the team is positioned. And of course, with the sales force expansion going to be in place at the end of Q1, we'd expect to see more benefit in the second half of the year. Operator: We'll take our next question from Myles Minter with William Blair. Myles Minter: I just had a question on the number of Tuesdays in each quarter. I'm actually going to ask about the sales force expansion for CRENESSITY onboard in April. Is that required to keep this steady new patient flow in for the product? Or would you expect sometime in the second half of the year maybe that, that sales force expansion helps inflect the product? Eric Benevich: Yes. The way I would characterize it is that we're investing in growth. We're very optimistic about the opportunity with CRENESSITY in classic CAH. And we made our sales force size and structure decisions prior to the launch without the sort of, I'll call it, the Monday morning quarterback opportunity of having more data to work with. So obviously, we have been executing this expansion on a relative basis. It's not a large number of FTEs that we're adding into the CRENESSITY team, but we do think it will allow us to do a couple of things. One is to go deeper within the existing prescriber base. And in my prepared remarks, I talked about how we now have over 1,000 doctors that have prescribed CRENESSITY and yet 2/3 of them have only treated one patient thus far. So we know that there's more patients in those practices. And given the very large territory sizes, this will allow us to get in and follow up with the existing prescribers a little bit more frequently. Secondly, we also recognize that there are some patients out there that we haven't been able to reach through the existing sales team. So we can go deeper into endocrinology, and we recognize that some patients are not cared for by an endocrinologist. They might be seeing an internal medicine or a family medicine physician or even an OB/GYN. So we have the opportunity now to explore that a little bit with the expanded sales team. Last thing I'll say is that we're excited about the reputation that we've created within the endocrinology community. We're able to attract some really high potential and I think people with great track records onto the team. We've actually completed the expansion of that group. They're going through training now and we'll be ready to deploy into the new organizational structure at the beginning of Q2. So full steam ahead with the expansion and certainly very excited about the additional bandwidth that we'll have created as we execute against it. Matthew Abernethy: So Myles, I'll be holding a webinar about the calendar and how it lays out the rest of the year. Just kidding, but I did want to go back to a question that Phil had regarding CRENESSITY seasonality, and I think Kyle and Eric addressed it nicely in terms of not having enough experience with CRENESSITY demand side. I meant to mention there is a gross to net impact in the first quarter. It's about 5%, and it's associated with the commercial co-pay reset. So that's one thing I wanted to make sure as you're developing your models and expectations for Q1 for CRENESSITY, that would be something that you take into consideration. Operator: We'll move next to Yigal Nochomovitz with Citigroup. Yigal Nochomovitz: Congrats on all the progress. I just wanted to probe a little further on the 10% share in CAH. Is it correct that that's all endos? Are you seeing any early share from some of the other categories you mentioned like PCPs and OB/GYN. And I'm wondering to what extent at this point you can use some of the AI database inferencing to sort of tease out which PCPs and OB/GYNs may be the best candidates for CRENESSITY? Eric Benevich: Yes. So yes, I just want to clarify when -- in my prepared remarks, I talked about the fact that we estimate that we've reached and gotten on board treatment of approximately 10% of the prevalent CAH population. So taking a step back, in the U.S., we estimate it's around 20,000 people with classic CAH. And obviously, in year 1 to get to about 10% of them and get them on treatment is a really important milestone for us. Virtually all of those new patient starts have been originated within endocrinology. And we recognize that for us to be able to continue to expand the use of CRENESSITY and get broader within that patient population, we're going to have to be able to reach patients beyond the prescriber base that we've reached thus far. And you mentioned patient finding. I talked about that a little bit in my prepared remarks. So we are leveraging different technology platforms and different data sets that will allow us to identify where are patients that look similar, at least in the data to the patients that we've already gotten on treatment and then allow our field sales organization to follow up and to confirm whether those patients exist at this or that practice. Using that information and feeding it back makes the system smarter and allows us to improve our targeting. So this is a rare disease, and there isn't a specific diagnosis code for classic CAH. And so for us to continue to grow and to have that steady growth that we expect, we have to leverage technology, and we also have to leverage the team. Operator: We'll move next to David Amsellem with Piper Sandler. David Amsellem: Maybe I'll ask another CRENESSITY question, but a different way. As you think about furthering penetration, are you getting any kind of pushback from endocrinologists? Or maybe I'll ask differently, what -- are there any barriers to further adoption that you're seeing? And also, as you think about the competitor that's in development, the ACTH antagonist, do you have a sense that doctors are waiting out the availability of that drug to put patients on that modality as opposed to CRENESSITY. Maybe you can talk about that dynamic as well. Eric Benevich: Yes. Maybe I'll tackle the second question first. The answer is no. I don't think that community endocrinologists are for the most part, aware of an investigational drug or are warehousing or holding back treatment of patients for a drug that may or may not be available several years down the road. In terms of what's the biggest barrier, I would say it's lack of knowledge. And the reason I say that is that, yes, there are some endocrinologists that are quite familiar with and skilled in managing these patients. But the vast majority of community endocrinologists have little experience with classic CAH. And if they have CAH patients in their practice, they might have a couple of them. And so a big part of our educational effort, I mentioned this in my prepared remarks, is really continuing to educate around classic CAH, the inadequacies of high-dose glucocorticoid treatments, the consequences of patients being either over or undertreated and then tying that back to the clinical profile that's emerged for CRENESSITY, especially the very strong safety and tolerability that we've seen both in the trials and in the real-world experience. So it's really getting physicians past this sort of, I'll call it, pre-CRENESSITY belief that they're treating their patients with these steroids. They think they're doing fine. But when they look closer, they realize that they're having a lot of comorbidities and a lot of complications from either their disease or from their GCs. And as we continue to make that education more broad, certainly, we're seeing that doctors are realizing that, hey, CRENESSITY is a whole new way of treating CAH. It's a paradigm shift. And I think that, that's been borne out in the adoption. The other thing that I'll say is that we've been working really closely with the patient advocacy group, the CARES Foundation. They've been a wonderful partner in terms of educating their membership. And certainly, coming into this launch, we recognize that a lot of patients with CAH or families with CAH didn't fully understand the consequences of either uncontrolled androgens and/or excess glucocorticoid exposure. And so we continue to direct our educational efforts, not just towards HCPs, but also towards the patient community, and I think it's really a benefit to both groups. Operator: We'll move next to Brian Skorney with Baird. Luke Herrmann: This is Luke on for Brian. So on CRENESSITY, with regard to the remaining estimated 90% untreated prevalent market, can you remind us what proportion is managed at an endocrinologist compared to primary care or other settings? Eric Benevich: Yes. I think we're learning that. And so it's difficult to give you an exact proportion of what proportion are under the care of an endo versus a PCP. And one of the things that we've seen at least in the cohort of patients that have been started already on CRENESSITY is that some of them appear to be co-managed by endocrinologists and primary care. And it may be that they see their endocrinologists once a year, but they may be seeing their primary care physician more frequently in the questions who's managing their CAH and refilling their prescriptions and so on. So as we go forward, teasing that out of the data, I think, is really important. And I think that, as I mentioned earlier, being able to identify those primary care or OB practices that appear to have multiple CAH patients and having our sales team go in there and follow up, that creates the mechanism or the feedback loop that allows us to understand where these patients are and the best way to educate, motivate and activate these patients. Operator: We'll take our next question from Marc Goodman with Leerink Partners. Marc Goodman: Matt, just a clarification. You mentioned negative 4% price thoughts for 2026. Is that off the $5,500 that was, I think, previously guided for the full year of '25? And then I just actually have another follow-on on the conversation about ACTH antagonist and just how you guys view that drug to be used eventually if it ever comes out with everyone hopefully on CRENESSITY by then? Like is it an add-on? Do you think it will be a competitive product? Or how do you even view it at that point? Matthew Abernethy: We haven't disclosed what the net price was for 2025, but you can think about the 4% being year-on-year, more heavily concentrated year-on-year in the first half of this year based upon the timing of when we entered into contracting. But importantly, and Kyle mentioned this earlier, is that exiting 2025, our net revenue per script is going to be very similar throughout all of 2026. So we did take a bit of price through 2025, but do expect a lot of stability on the net price side as well as and most importantly, on the access side to continue to allow us to build this market. Kyle Gano: And then Marc, on your competitor question, I've learned a lot over the course of my first full year as CEO, and one of them is how to talk about competition. When it comes to CRENESSITY, we're really talking about 2 different programs, 2 different medicines at 2 different states. CRENESSITY is an approved medicine. It's had a great launch, and we have a multiple year head start. I think we've got a medicine that's changing the standard of care across the efficacy, the safety, tolerability, the formulations, and we're generating a lot of data over time. I think it leaves us in a really good position. And I think that you all listening on the phone, certainly, I've been doing that here, looking at orphan drug launches, I'm really hard-pressed to see any medicine that delivers on the profile of CRENESSITY and is displaced at all by any future medicine. So I'm really excited about what we have with CRENESSITY. It's a 2 variable positive year for us. We've got a great medicine and a great team that's out there doing great things with prescribers and patients that are there, and we're going to focus on building this brand into a great medicine for patients in the company. Operator: We'll move next to Akash Tewari with Jefferies. Phoebe Tan: This Phoebe on for Akash. My question is on CRENESSITY as well, but more so on the pipeline. We saw that there's a Phase II study being initiated for patients under 4 years old, which we know is not currently on the label. Can you talk about kind of the importance of the study and when we should expect an update here? And could we expect this to be sort of a growth opportunity when and if on market for this population? Sanjay Keswani: Yes. So as indicated, we are soon initiating 2032, which is a pediatric study. These are individuals less than 4 years of age, the youngest age being 3 months. And the intent is to expand our label, which currently is 4 years and above. So again, we're excited about this opportunity. We should have some data next year on that study. Operator: We'll move next to Sumant Kulkarni with Canaccord. Sumant Kulkarni: Bigger picture one here. It looks like you sold your U.K. and European rare commercial business recently. What does this mean for your plans to develop crinecerfont in U.K. and the rest of Europe? And does that decision mean Neurocrine is going to remain U.S. focused? And how much did the potential enforcement of most favored nations pricing have to do that decision? Kyle Gano: Yes. This is Kyle. I appreciate the question. I think when it comes to the EU business, the programs that we're working on over there weren't necessarily a good alignment for what we have for our own portfolio today. So we found a good place for those programs to go with the new team there. In terms of our own interest, obviously, we're focusing on the U.S. market now and making sure that we have a really good launch here with CRENESSITY and so far, so good there, and we want to keep focusing our attention there. And look at ways we can potentially bring CRENESSITY and other future medicines to Europe. Right now, we're not really looking at considerations and variables that play in most favored nation per se as much as we are focusing on the U.S. market. But it is an area that is evolving. And before we make any decisions definitively outside the U.S., we'll want to get clarity on where that's going here in terms of a policy standpoint. Operator: We'll take our next question from Sean Laaman with Morgan Stanley. Sean Laaman: I have a pipeline question on 890. Just going back to the recent data you showed for INGREZZA and the 80% receptor occupancy, it seems like a pretty high hurdle. So do you think you can beat that with 890? Or is it really with 890 more about just expanding the population base through that long-acting profile? Sanjay Keswani: Yes. Really good question because with INGREZZA, as you mentioned, we're actually doing really well from a receptor occupancy point of view. So with respect to 890, we're expecting at least the same receptor occupancy. But to your point, the potential for long-acting injectable formulations, that's because of reduced clearance and also reduced aqueous solubility. So it's a molecule that really is designed to be both oral but administered relatively infrequently. And we think that could capture patients who are not doing so well or not so compliant on their current treatment. Kyle Gano: Yes. Just to add to that, we've certainly looked at that potential with INGREZZA over time, and it's not a well-suited molecule for that as well as other follow-on molecules that we've had over time. So we're quite excited what we have with 890 and 675. Those are the next-generation VMAT2 inhibitors. And it's taken us a while to get a molecule that actually has a profile that we think is competitive or if not better than INGREZZA. So we're excited about getting this Phase II study up and running and looking to have data sometime towards the end of next year. Operator: And we'll take our last question from Danielle Brill with Truist. Danielle Brill Bongero: So I know we talked a lot about general barriers to prescribing CRENESSITY and mentioned a few times that 2/3 of your prescribers have written a single prescription. I guess I'm just trying to understand what's driving that pattern specifically. Like how many CAH patients do these physicians typically manage? What feedback are you hearing regarding barriers or hesitations to expand adoption more broadly for these specific prescribers, patient bases at this point? Eric Benevich: Yes. I think the circumstances are going to be different from physician to physician. But generally speaking, I think the 2 biggest factors here that are guiding the pace of adoption, especially with those that have written one prescription is really just the flow of patients into the practice. As I mentioned earlier, a lot of these community endocrinologists that are treating adult patients, they may only see their patient once a year. So that is a factor. And then the second one is, and this is not unique to CRENESSITY. A lot of these physicians also when they start a patient, they want to see how it does and get some clinical experience. A few months into treatment typically is when they would be starting the GC tapering. And anecdotally, what I'm hearing is that many of them are taking it easy in terms of just slowly bringing down the GC doses. So it's not sort of a forced down titration. So I think those 2 factors together kind of get at what might be inhibiting some of these doctors from getting their second or their third patient on treatment. But like I mentioned earlier, most community, adult endocrinologists, if they have classic CAH in their practice, only have a few patients. So this is a market that is -- has a small number of what I'd call KOLs or experts and then a large number out in the community that have very few patients. And so it's an inch deep and a mile wide, so to speak. But in order for us to really optimize this opportunity, we have to reach and educate everyone, and that's what we're doing. And obviously, we're very pleased with the first year, and we expect to have a lot of success in 2026 and beyond. Operator: That does end the Q&A session for today's call. I would now like to hand the call back to Kyle for any additional or closing remarks. Kyle Gano: Thanks, Clay. I want to thank you all for joining today and for the constructive discussion. During the call, we shared updates on our commercial performance and development programs as well as the outlook for the business. I want to be clear, our focus remains on disciplined execution as we think about 2026, which means a couple of things: driving revenue growth and diversification with INGREZZA and CRENESSITY, advancing the pipeline and the process of delivering meaningful -- and in this process, delivering meaningful long-term value for patients and shareholders. We've got a lot of momentum that we're building this year for a data-rich 2027. That's just going to be the tip of the iceberg. The way that the pipeline is set up will deliver a constant flow of data starting from '27 and in future years. So in close, please don't hesitate to reach out on any of the topics that we discussed today. We look forward to continuing the dialogue and meeting with many of you as we progress throughout the year. So thanks again, and talk to you soon. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Welcome to Cisco's Second Quarter Fiscal Year 2026 Financial Results Conference Call. At the request of Cisco, today's conference is being recorded. If you have any objections, you may disconnect. Now I would like to introduce Sami Badri, Head of Investor Relations. Sir, you may begin. Ahmed Sami Badri: Good afternoon, everyone. This is Sami Badri, Cisco's Head of Investor Relations. I'm joined by Chuck Robbins, our Chair and CEO; and Mark Patterson, our CFO. Cisco's earnings press release and supplemental information, including GAAP to non-GAAP reconciliations, are available on our Investor Relations website. Following this call, we will also make the recorded webcast and slides available on the website. Throughout today's call, we'll be referencing both GAAP and non-GAAP financial results. We will discuss product results in terms of revenue and geographic and customer results in terms of product orders unless stated otherwise. All comparisons will be made on a year-over-year basis. Please note that our discussion today will include forward-looking statements, including our guidance for the third quarter and fiscal year 2026. These statements are subject to risks and uncertainties detailed in our SEC filings, particularly our most recent 10-K and 10-Q reports, which identify important risk factors that could cause actual results to differ materially from those contained in our forward-looking statements. With respect to guidance, please also see the slides and press release that accompany this call for further details. Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. Now I'll turn it over to Chuck. Charles Robbins: Thanks, Sami, and thank you all for joining us today. Q2 was a very strong quarter with revenue and earnings per share both growing double digits and coming in above the high end of our guidance ranges. We delivered record revenue in Q2, putting Cisco on track to deliver our strongest year yet as indicated in our guidance for the full year. In Q2, total revenue growth accelerated to 10% year-over-year with product revenue up 14%, driven by robust demand for AI infrastructure and Campus networking solutions. Our strong top line performance, combined with operating efficiencies and solid execution by our teams contributed to non-GAAP EPS growth of 11%, which continued to grow faster than revenue. This strong performance allowed us to return $3 billion in capital to shareholders in the quarter, bringing the total value returned year-to-date to $6.6 billion. Today, we also announced an increase to Cisco's dividend, demonstrating our commitment to returning value to shareholders through consistent capital returns. Our innovation engine is firing on all cylinders, and our commitment to customers has never been stronger. Last week, Cisco hosted its AI Summit, gathering AI visionaries and geopolitical experts to explore the economic, societal and business impacts of AI. While it was clear that expectations for adoption and execution are high, one major challenge still exists. Legacy infrastructure was not designed for the performance, speed and security needs of AI. Our strong first half of FY '26 demonstrates both the power of our portfolio and the fundamental role we play in this once-in-a-generation transition. With our industry-leading networking portfolio powered by Silicon One, AI native security solutions and operating systems, Cisco is well positioned to provide the critical infrastructure needed for the AI era. I'd also like to address the recent significant increases in memory prices across the market. Leveraging our industry-leading supply chain team, we are proactively implementing 3 key strategies: First, we have already announced price increases, and we'll continue to monitor market trends and make additional adjustments as necessary. Second, we are revising contractual terms with channel partners and customers to address evolving component prices. Third, Cisco's operating scale and industry-leading position help us negotiate favorable terms and secure supply to fulfill current and future demand. Overall, we feel confident in our ability to manage this industry-wide dynamic better than our peers. Now let me comment on the strong demand we saw in Q2. Overall, total product orders grew 18% year-over-year, even on top of double-digit growth in Q2 fiscal year '25. Excluding hyperscalers, product orders were up 10% year-over-year, demonstrating the broad-based demand we see for our technology globally. Enterprise product orders were up 8% year-over-year in Q2 with strength across our entire networking portfolio. Public sector orders were up 11% year-over-year with double-digit growth across all geographies. Product orders from service provider and cloud customers accelerated in Q2, growing 65%, driven by triple-digit order growth across hyperscalers. We also saw continued growth from telco and cable customers in Q2 with orders up almost 20% on a combined basis. Now some color on demand from a product perspective. Growth in networking product orders continued to accelerate, reaching more than 20% in Q2 and marking the sixth consecutive quarter of double-digit growth driven by service provider routing, data center switching, campus switching, wireless, servers and industrial IoT products. Within our Campus networking portfolio, we are seeing strong demand for our next-generation switching, routing and wireless products, which continue to ramp faster than prior product launches. We are delivering AI native capabilities across these products, including weaving security into the fabric of the network and modernizing the operational stack of Campus networks. These new capabilities, combined with an installed base representing tens of billions of dollars across early catalyst generations nearing end of support, underpin the multiyear, multibillion-dollar refresh opportunity for Cisco. We continue to see strong demand for our industrial IoT portfolio, which has now grown double digits for 7 consecutive quarters. This demand is driven by onshoring of manufacturing to the United States, the increase of AI workloads at the network edge and the emergence of physical AI. AI infrastructure orders taken from hyperscalers totaled $2.1 billion in Q2 compared to $1.3 billion just last quarter and equal to the total orders taken in all of fiscal year '25, marking another significant acceleration in growth across our silicon, systems and optics. We shipped our 1 millionth Silicon One chip in Q2 and plan to deploy our Silicon One architecture across our high-performance networking systems by fiscal year '29. Just this week at Cisco Live Amsterdam, we introduced our 102.4 terabit per second G300 chip, positioning Cisco in an exclusive group of silicon providers delivering over 100 terabits per second switching speeds. In addition, we launched 4 new systems powered by G300. The Cisco 8000 and Nexus 9000 102.4 terabit systems offer flexible air-cooled options for traditional data center architectures as well as liquid cooled option designed for the latest ground-up facilities. Silicon One's programmability puts Cisco silicon in a class of its own, capable of adapting to a wide range of use cases and network infrastructure designs. We also announced 2 new pluggable optics, a 1.6 terabit per second OSFP and an 800-gig LPO, both built with Cisco silicon photonics technology, delivering greater efficiency and reliability in high-performance AI infrastructure. Acacia reported its strongest quarter to date with triple-digit growth in bookings. All major hyperscalers are deploying its market-leading coherent pluggable optics for data center interconnect and scale across use cases. We see growth in both 400-gig and 800-gig coherent optics and transponder shipments with 800-gig pluggables ramping significantly. Given the strong demand for our Silicon One systems and optics, we now expect to take AI orders in excess of $5 billion and to recognize over $3 billion in AI infrastructure revenue from hyperscalers in FY '26. Beyond hyperscalers, we have a separate AI opportunity across neocloud, sovereign and enterprise customers. We took $350 million in AI orders from these customers in Q2 and have a growing pipeline in excess of $2.5 billion for our high-performance AI infrastructure portfolio. We continue to develop our strategic partnerships to capture this opportunity. In Q2, we announced plans to form a joint venture with AMD and HUMAIN to deliver up to 1 gigawatt of AI infrastructure by 2030. This joint venture expects to begin operations this calendar year with a plan to build out 100 megawatts in Saudi Arabia as Phase 1 of the project. We are seeing strong interest from European customers in our sovereign critical infrastructure portfolio designed to operate in air-gapped on-prem environments, giving organizations control over sensitive data and critical infrastructure. As AI adoption accelerates, concerns over privacy, data governance and regulatory compliance are top of mind for our customers, making sovereign solutions an essential foundation for building digital trust. Now shifting to Security. In Q2, we continued to see order growth across our new and refreshed products, which represent roughly 1/3 of our security portfolio and include Secure Access, XDR, Hypershield, AI Defense and refreshed firewalls. Excluding the refreshed firewalls, over 1,000 new customers purchased these products in Q2, representing more than 100% growth quarter-over-quarter and bringing the total of net new customers since launch to roughly 4,000. We have also seen 3 consecutive quarters of double-digit growth in the number of firewalls ordered. For Secure Access specifically, we booked over 2.5 million users in Q2 and more than 50% of added customers were new logos. As the adoption of AI tools grow and Agentic AI increases at the network edge, we expect to see continued momentum in our SASE business, including Secure Access and SD-WAN. As mentioned in prior quarters, growth in our new and refreshed portfolio continues to be offset by a decline in our prior generation portfolio. Turning to Splunk. We saw a similar trend in Q2 as seen in Q1 with continued acceleration to cloud subscriptions and fewer on-premise deals. While this shift is creating a drag on revenue growth, which we expect to continue in the second half of fiscal year '26, cloud subscriptions enable greater adoption, expansion and faster delivery of innovation to customers. So overall, we are pleased with this transition. Splunk also continued to win new customers in Q2, reaching 500 new logos for the first half of fiscal year '26 and is on track to add 1,000 new logos for the year. We are accelerating our innovation across our offerings, both for and with AI. At Cisco Live Amsterdam this week, we unveiled major AI defense and SASE advancements to help secure organizations as AI agents enter the workforce. AI Defense can now scan models and repositories for vulnerabilities and provide an AI bill of materials for centralized governance. In Cisco SASE, we launched a new semantic inspection engine that can evaluate the intent of Agentic interactions and block sophisticated context-dependent threats. We are also making AgenticOps the operating model for AI-driven IT to enable autonomous troubleshooting, continuous optimization and trusted validation. We are deploying AI agents to work hand-in-hand with human administrators within our product dashboards, AI assistant and AI Canvas. We continue to make AI advancements internally with expanded use cases in Q2 across nearly every organization. Today, the majority of our product developers are using AI coding assistant and working alongside agents, which help us innovate faster across our portfolio. Currently, over 90% of customer experience support cases are touched by AI and automation, enabling us to resolve a greater proportion of complex cases within 1 day and contributing to our highest ever customer satisfaction scores. Additional use cases across sales, security and trust, supply chain and corporate functions are also providing significant cost savings and efficiency gains. To summarize, we see strong demand for our solutions across all customer markets and geographies, solidifying Cisco's role in providing the critical infrastructure needed for this once-in-a-generation transition. The value of our innovation is exemplified by Silicon One, which positions Cisco for the broadest range of AI deployments, even the most technologically challenging. And with over 40 years of customer trust and global scale, Cisco is committed to leading in the AI era to drive breakthrough innovation, manage complexity and risk and deliver faster business outcomes to customers globally. Now I'll turn it over to Mark for more detail on the quarter and our outlook. Mark Patterson: Thanks, Chuck. We delivered another strong quarter with record revenue in Q2 and both operating margin and earnings per share coming in above the high end of our guidance. For the quarter, total revenue was $15.3 billion, up 10% year-over-year. Non-GAAP net income was $4.1 billion, up 10% and non-GAAP earnings per share was $1.04, up 11%, demonstrating continuing operating leverage with non-GAAP earnings per share growing faster than revenue. Looking at our Q2 revenue in more detail. Total product revenue was $11.6 billion, up 14% and services revenue was $3.7 billion, down 1% year-over-year. Networking was again the standout with growth of 21%, driven by AI infrastructure and campus refresh. We saw double-digit growth in campus switching, data center switching, wireless, service provider routing, enterprise routing and compute. Security was down 4%, reflecting similar dynamics discussed last quarter with declines in prior generation products and the transition in our Splunk business from an on-prem deal to cloud subscriptions, partially offset by growth in new and refreshed products. Collaboration posted solid growth of 6%, led by double-digit growth in devices as well as growth in CPaaS, Webex and Cloud Contact Center. Looking at our recurring metrics. Total RPO was $43.4 billion, up 5%. Product RPO grew 8%, of which the long-term portion was $11.8 billion, up 11%. Total ARR ended the quarter at $31 billion, an increase of 3% with product ARR growth of 6%. The subscription revenue -- total subscription revenue was $7.8 billion and represented 51% of Cisco's total revenue. Total software revenue was $5.7 billion, up 2%. Q2 product orders were up 18% year-over-year. Product orders were up double digits across all geographic segments with the Americas up 23%, EMEA up 11% and APJC up 15% Product orders were also up across all customer markets with service provider and cloud up 65%, public sector up 11% and enterprise up 8%. Total non-GAAP gross margin came in at 67.5%, down 120 basis points year-over-year. Non-GAAP product gross margin was 66.4%, down 130 basis points, primarily driven by negative impacts from mix and higher memory costs, partially offset by productivity improvements. Non-GAAP services gross margin was 70.9%, down 70 basis points. We continue our focus on enhancing profitability and driving financial discipline with non-GAAP operating margin at 34.6%, above the high end of our guidance range. Our non-GAAP tax rate was 19% for the quarter. Shifting to the balance sheet. We ended Q2 with total cash, cash equivalents and investments of $15.8 billion. Operating cash flow was $1.8 billion, down 19% due to the final transition tax payment of $2.3 billion from the 2017 Tax Cuts and Jobs Act and continued investments to meet growing overall demand as well as specifically for AI infrastructure. From a capital allocation perspective, we returned $3 billion to our shareholders during the quarter, comprised of $1.6 billion for our quarterly cash dividend and $1.4 billion of share repurchases with $10.8 billion remaining under our share repurchase program. Given the confidence we have in our business and the strength of our ongoing cash flows, today, we announced that we are raising our dividend by $0.01 to $0.42 per quarter. This dividend increase demonstrates our commitment to returning a minimum of 50% of free cash flow annually to our shareholders. To summarize, we had another quarter with top and bottom line performance exceeding our expectations, driven by strong order growth and robust margins, all demonstrating the power of our innovation engine to drive strong top line growth as well as operating leverage to fuel profitability. We remain focused on making strategic investments in innovation to capitalize on the significant growth opportunities that we see ahead. This will continue to be underpinned by our commitment to disciplined spend management and this powerful combination that continues to fuel strong cash flow and our ability to return significant value to our shareholders. Turning to guidance. Please note, our Q3 and fiscal year 2026 guide assumes current tariffs and exemptions remain in place through the end of fiscal 2026. These assumptions remain unchanged from prior guidance. Looking ahead, you can expect us to continue our focus on durable growth with financial discipline driving operating leverage and continued capital returns. For fiscal Q3, our guidance is as follows: we expect revenue to be in the range of $15.4 billion to $15.6 billion. We anticipate non-GAAP gross margin to be in the range of 65.5% to 66.5%. Non-GAAP operating margin is expected to be in the range of 33.5% to 34.5%. Non-GAAP earnings per share is expected to range from $1.02 to $1.04. We are assuming a non-GAAP effective tax rate of approximately 19%. Cisco is positioned for its strongest year ever as indicated in our guidance for fiscal year 2026, which is as follows: we expect revenue to be in the range of $61.2 billion to $61.7 billion. Non-GAAP earnings per share is expected to range from $4.13 to $4.17. Sami, let's now move into the Q&A. Ahmed Sami Badri: Thank you, Mark. [Operator Instructions]. Operator, can we move to the first analyst in the queue? Operator: Amit Daryanani with Evercore ISI. Amit Daryanani: I guess my 2 questions, maybe the first one, you folks obviously have very solid momentum on the AI side with a $5 billion AI target for fiscal '26. Can you just help us think about the mix between Silicon One versus Optics in the book? And then really, as you think about some of the newer products like the G300 and the P200 on the Silicon One side, do you see these opening up incremental markets or workloads for Cisco? Or is it more about deepening your existing relationship? I'd love to just kind of understand that side. And then maybe on a follow-up, Mark, you just touched on the gross margin decline in April. I assume it's all memory related, but would love to just understand what's happening there. And if you feel like that's a trough on the gross margin and memory issues or not. Charles Robbins: Amit, thank you very much for the question. So on the AI infrastructure side, the $5 billion that we now have raised our estimates to during fiscal 2026 does not include any of the recently announced P200 products, nor G300, also neither of the Optics solutions that we announced this week at Cisco Live EMEA. We talked about this past quarter, the mix was 60% systems, 40% optics. And I think that's been reasonably consistent over the last few quarters. Your final question about whether these open up new markets, I think these will allow us to continue to sell next-generation solutions across our existing customer base, and I think it will continue to help us gain traction with the neoclouds, the sovereign clouds, et cetera, help us get the scale across technologies out and continue to sell these solutions to existing customers as well as new customers. But just to reiterate, P200 and G300 are not in the $5 billion expected for fiscal '26. Mark? Mark Patterson: Yes. Thanks, Amit. And I'll take the gross margin question. So really, as you look at the Q3 guide, there's 2 primary things at work. One is mix and the other is memory prices, as you mentioned. First off, I just want to acknowledge the significant growth in hardware that we're seeing across our existing and new platforms that have been introduced and the fact that they're accelerating much faster than previous launches. Secondly, in terms of memory, we're going to control what we can control. And Chuck talked a little bit about the fact that we've already announced price increases. We're going to stay very close to that and adjust as needed going forward. Secondly, there's some Ts and Cs with partners and customers that we're going to adjust to really bolster our position there. Thirdly, it's really leaning into our financial strength and our world-class supply chain. If you look at it, it's evidenced by our advanced purchase commitments that just in the last 90 days are up $1.8 billion. If you look at it on a year-over-year basis, they're up about 73%. A big chunk of that is around memory. And then lastly, I think in terms of focusing on what we can control, we're focused on financial discipline and profitability. And we're focused on growing EPS faster than revenue. You saw that in Q1. You saw it in Q2. And it's also in our full year FY '26 guide. And if you -- we don't guide Q4, but if you go sort of back into the implied guide for Q4, you see it there as well. Operator: Tal Liani with Bank of America Securities. Tal Liani: I have 2 questions. The first one is, when I look at product revenue growth, the entire outperformance came from networking, which grew 21.1%. Can you drill down and tell us -- you spoke about orders in the prepared remarks. Can you speak about revenue growth? How did the various segments of networking grew? And where did the outperformance came from? The second one is I can back out your 4Q guidance. And when I look at the sequential growth from Q3 to Q4, it's only 1.4%. So normally, it's 5%, 6%. This is a seasonally strong quarter. So why is it so low? Is it just conservatism? Or is it -- is there a growth concentration in the next 2 quarters? Mark Patterson: Yes. So thanks, Tal. Really, across networking, we're seeing strength, frankly, across the entire portfolio from the Campus to the data center, to the manufacturing floor in terms of our IoT offerings as well. So you're seeing very strong growth. Again, we talked about data center switching being 6 out of the last 8 quarters, double-digit growth. It was double-digit growth this quarter. You're seeing strengthening again in the campus and a move to these new platforms that's faster than previous launches. And I think your second part of the question was really just around seasonality. Is that right? Tal Liani: Yes, sequential seasonality. Mark Patterson: Yes, sequential. So if you look at it, the product revenue typically is kind of down mid-single digits quarter-over-quarter, and we were up 5%. And as you look at Q3, really the typical seasonality is kind of low single digits. And that's right where we are despite the fact that we had a huge Q2 in terms of year-over-year growth, 14% and also seasonally a very strong quarter in Q2 as well. So we feel pretty good about the Q3. Charles Robbins: Yes. One other comment, Tal, I'd make on that is that I think with the nonlinear nature of the hyperscaler business, it creates a little bit of uncertainty relative to our historical numbers that you're so used to seeing. Operator: Ben Reitzes with Melius Research. Benjamin Reitzes: I want to ask the gross margin in a different way. Backing into the EPS guidance, it seems like EPS is a little higher than where the Street is in the fourth quarter, maybe a couple of pennies. And that would imply that the gross margin is expected to trough and get better? Or is that just due to operating margin? And then I was wondering if you could address that. I think the first question talked about the trough. But if I look at the guidance that way, something is getting a little better on the operating margin line. Is that from cost cutting or gross margin in the fourth quarter? And then I have a follow-up. Mark Patterson: Yes. Thanks, Ben. So on gross margin, certainly, a lot of what we talked about relative to what we can control and some of the memory price increases that we've seen, some of that is just timing. So we think that, that will improve as we move forward. And then certainly, we're not here to talk about FY '27. But as you get into FY '27, we think that software growth will improve as well, and that will certainly help us. Charles Robbins: You had a second question, I think, Ben. Okay. Ahmed Sami Badri: Ben, we can catch up with you afterward. Operator: Aaron Rakers with Wells Fargo. Aaron Rakers: I guess I want to go more into the architecture stuff, Chuck. As we think about the AI networking opportunity and the traction that you've been seeing, I'm curious of your updated thoughts on how you view scale up as an opportunity for Cisco. What have you been doing? When does that start to maybe materialize if you see that as a large opportunity? And as my second question, I'm curious, given the traction you're seeing in the neoclouds and the sovereign opportunities, just maybe an update of the relationship, the engagement you've had with NVIDIA and how much that started to become maybe a driver outside of the hyperscalers? Charles Robbins: Yes. Thanks, Aaron. So we haven't made any announcements on scale up. I think in the past, I've said we do plan to participate in it, and we expect in the future to have products and revenue from scale-up, but haven't announced anything. So I would say stay tuned on that front. On the enterprise, sovereign and neocloud space, the first thing I would say is that the sovereign side, there's really no real need nor expectation for meaningful impact in FY '26. And so we don't need that to actually accelerate for the guide that we've provided. It's purely upside. And then the neoclouds, I'd say, are generally the same. We expect the ramp to begin in the second half, but really be FY '27. As it relates to NVIDIA, I think we had a quarter where we really began to see the acceleration of the engagements. We track the number of engagements we have in the field with NVIDIA. And while it was not a massive number leading up, we increased it by 70% from -- sequentially. And so we see those engagements continue to increase. We had -- obviously, Jensen was recently with us at our AI Summit and talked about the power of their GPU and compute with our networking and security, which was emblematic of the relationship and why we're doing it. So we're starting to see some early, early success there, and I think it will only ramp from here. Operator: Meta Marshall with Morgan Stanley. Meta Marshall: Maybe building on that last question, just kind of the -- coming out of that AI Summit, clearly talking to a lot of customers. Just where are you seeing or how evolved is that enterprise appetite for investment? Or when do you think that, that kind of enterprise AI story takes off more? And then maybe just a second question, just in terms of the price increases, any demonstrable kind of change to demand or forward ordering that you saw as a result of that? Charles Robbins: I'll take the first. You take the second. Okay. So on the AI front, I think, first of all, on the AI Summit, I think if you looked at the lineup of representation that we have there, I think it speaks to the partnerships that we've built and the role that the entire ecosystem thinks that we're going to play across that ecosystem. So we were really excited about that and got a lot of positive feedback. On the enterprise side, what we're seeing is early use cases around things like quant, fraud detection, video analytics. We're seeing it across financials, manufacturing, pharmaceuticals. I also see examples in retail where you have -- they're leveraging agents on mobile devices in retail to help their staff do a better job engaging with their customers. And I think you can see the way this is playing out, we're seeing a combination of both investment in cloud-based architectures as well as on-prem. I think if you look at our data center switching business, which is enterprise focused, we've had double-digit order growth 6 out of the last 8 quarters, and we still had positive growth in the other 2. So we continue to see meaningful investment in private data centers to support these applications. Mark Patterson: Yes. Meta, on the second part of your question, around pull forwards, we really didn't see anything in the quarter that would point us to evidence that there were any significant pull forwards there at all. We looked at the typical things in terms of linearity in the quarter. We had -- frankly, we had good double-digit growth as we move through the entire quarter. We looked at whether we had any pipeline pull forwards from future quarters, didn't really see that, looked at software activations, as you'd expect, channel checks and whatnot. And we actually saw the pipeline begin to build really in the out quarters rather than being pulled forward. So feel good about that. And in terms of the price increase and whether or not it sort of lands with customers, I would say as you talk to customers, I think they understand it. They understand this is industry-wide. And I don't -- I haven't talked to any customers that are really willing to delay or defer any sort of strategic investments that they're making in technology. And I think there's no concern that we've seen there yet whatsoever. Charles Robbins: I would just add to that, Mark. Mark and I had lunch with one of our absolute biggest customers yesterday here on our campus, and we had a very detailed discussion about the different dynamics that are happening in this space and the pricing pressure. And they completely understood and are going to work with us to actually make sure that the entire partnership actually continues to work for both of us. So I think customers -- it's an industry-wide issue. Customers get it. And while they may not like it, they understand that it's a dynamic that we're all dealing with. Mark Patterson: I think, frankly, also a lot of them understand that we'll probably be able to manage this a lot better than some of our peers, too. So we'll get through this together. Operator: Our next caller is David Vogt with UBS. David Vogt: I have a 2-parter around the order numbers. So one, I appreciate the strength that you guys reported in AI orders. But it certainly sounds like the over $5 billion of order numbers sounds a bit conservative given the momentum that you're seeing in sort of the CapEx programs that have been announced over the last couple of weeks. So maybe if you could talk to why that number is only moving up to in excess of $5 billion. I think you said in the past it would double the prior year. And then along those lines, I think you also mentioned that you're only going to recognize over $3 billion in AI-related revenue this year. And I think previously, you had said about $3 billion. So does that suggest that the timing from a revenue recognition perspective shifts into fiscal '27 and gives you more visibility from an AI infrastructure revenue perspective next year on top of the growth that you're seeing here in '26? Charles Robbins: Mark, I'll take the orders and you take the revenue one. I think -- thanks, David, for the questions. On the AI orders and the $5 billion, I think the thing to really remember about these customers is they're nonlinear. So -- and you just have to -- it's quite lumpy. There's only -- there's less than a handful of these major customers that are placing these orders. So we're giving you that number based on the pipeline we see. Clearly, our teams will be working to make that number as big as they possibly can, but that's what we see today. And we just wanted to give you as close to a real number as we could see today. I didn't mention earlier, but I would also call out that during Q2, we actually won 3 new use cases. across these major players. So we won 1 Optics and 2 on the system side. And so we continue to see new opportunity. And hopefully, that will result in us giving you a better number at some point, David. Mark Patterson: Yes. And David, just on the revenue question, these customers plan well in advance, which has its advantages to it. You're seeing orders converting to revenue. I think that you're seeing a continued ramp as we move through the year. And you're spot on in terms of giving us better visibility on some of the revenue rec that we would look at into '27 that will continue to follow on. Operator: Samik Chatterjee with JPMorgan. Samik Chatterjee: Maybe one on AI Optics and one on non-AI. For the AI part, Chuck, you talked about the new products you're launching in Optics or the pluggable optics that you've launched recently. Particularly a big focus this year is CPO and sort of support for that in the infrastructure. So any thoughts or insights in terms of how Cisco plans around sort of addressing the CPO functionality, particularly, are you seeing customers sort of look at that as part of your road map? Are they looking for Cisco to have that as part of their road map in optics? And then for my non-AI part, just trying to get a sense of what you're seeing on the order front for campus in the sense that we see your networking orders did accelerate, but when we strip out AI from it, what are the trends you're seeing on that order front for ex AI in networking and whether the end of life of Cat4K and 6K just to put that in context in terms of how much of a tailwind that is to your campus orders? Charles Robbins: Thanks, Samik. I would say on the CPO, it's -- we absolutely believe it's going to happen. We don't believe it's actually imminent right now. If you recall, we actually demonstrated this technology, I think, 2 years ago or more. And so we have the technology to build it, and we will as customers want it. But today, they want choice. And I think in many cases, customers want the differentiation between Optics and silicon so they have choice and they don't get locked in. It reduces their multi-vendor choice. But we did announce the 800-gig LPO, which is -- gives customers huge power savings, greater efficiency for AI scale out, and we'll continue to innovate as well on that front. I'd say on the Campus, basically on the enterprise networking side, let me just give you some color. And then, Mark, you may want to expand on the order rates. But the first thing I'd say is that when you look at the enterprise switching, enterprise routing, the wireless and the industrial IoT platforms, all 4 of them, the transition is ramping faster in all 4 of those areas than the prior transitions that we've seen historically at Cisco. So they're all ramping faster. That being said, we're in the top of the first inning. So this thing is just getting started. So there's a lot of runway. We talked about the network products being up double digits now for 6 consecutive quarters. Data center switching was up double digits, 6 of the last 8 quarters. All these things are ramping faster. I think Wi-Fi 7 was up 80% sequentially. I think our campus switching business was up close to double digits on orders. So we're seeing a fair amount of momentum and a lot of energy around customers that want to actually move on these upgrades. Mark Patterson: Yes. And I would just -- maybe just to add to that, Chuck, I mean, to reiterate, if you look at that 18% bookings growth, excluding web scale, we were still at double digits, 10% year-over-year growth. So really, really strong quarter from an order standpoint. And when you look at the 3 geographies that we look at, all 3 grew in the double digits. All 3 accelerated their growth from Q1 just 90 days ago. So a really strong quarter overall. Operator: Our next caller is Karl Ackerman with BNP Paribas. Karl Ackerman: Yes, I have 2 as well, please. First, of the roughly -- or excuse me, I understand that security was weaker as Splunk transitioned from perpetual licenses to SaaS. However, could you speak to the order rates and new product demand traction of your security portfolio that could augur well for recovery in your security offerings for the balance of '26? And just as my follow-up, please, Chuck, I noticed you indicated that your $5 billion of AI orders does not include your G300 or the 100 terabit switch portfolio. But more broadly, can you talk about the order rates you are seeing for your 51 terabit and 100 terabit data center switch portfolio because demand seems to be accelerating there. Charles Robbins: Yes. Thanks, Karl. So on the security update, Here's what I would say. There's really 3 key points. Number one, we talked about the Splunk transition that has a short-term revenue headwind with the accounting treatment of on-prem versus cloud. The second thing is that we -- on the new products, and these are products that largely didn't exist 3 years ago. This is everything from Secure Access to XDR to AI Defense to Hypershield. We had 1,000 new customers of those products during the past quarter, and it was up 100% sequentially. So we're seeing the ramp now where customers are adopting these new products, which is a really good sign. And there's 4,000 customers who have bought one of those products since we built them. And these are -- again, these did not exist. So that's positive. We -- on the refreshed firewalls, we had our third consecutive quarter of double-digit unit growth, and we just launched our new high-end refresh firewalls in the last 120 days. So we expect that to continue. And where that would lead us is as we exit Q4 this year, the organic Cisco security portfolio will be growing revenue close to double digits as we exit. So the teams are a little -- they're a little behind where we -- not the teams, but this portfolio is a little behind where we thought we'd be exiting the year, but it's still performing relatively well. It's just masked right now with the Splunk situation on the accounting treatment. On the $5 billion and the 51.2 product, I think we're selling as much as we can build at this point. We see demand across a couple of major customers that are literally asking for as much as they can get. And we're seeing huge acceleration in the 800-gig optics. We're seeing huge acceleration, obviously, in the Acacia portfolio. So I think the demand is there, and we just need to continue to build capacity. Mark Patterson: Yes. I think -- and just to add to that, it's not only the demand, but also continuing to make inroads with each of these hyperscalers across the portfolio, but also additional design wins that we saw this quarter as well. Operator: Michael Ng with Goldman Sachs. Michael Ng: I have 2 as well. First, I was wondering if you could just talk a little bit about the EBIT margin outperformance in the quarter. Was that driven by cost savings? Is that a mix benefit as you do more with hyperscale customers? And then second, I wanted to just revisit the comments around the April quarter gross margins. And I know you talked a little bit about that just being timing. Is the implication that you'll just take more pricing over the coming quarters to kind of recover a lot of that commodity cost inflation? Or is that a timing comment around just the mix of AI revenue perhaps? Just would love your general thoughts on that. Mark Patterson: Yes. So thanks, Michael. So I'll take the first one just on the op inc percentage. As you pointed out, 34.6% for us is actually the highest in 4 quarters. So even though you saw a little bit of margin decline on a quarter-over-quarter basis and certainly year-over-year, we're just continuing to execute very well. And you're seeing us be very financially prudent in our expenditures and just really determined to drive profitability, and you saw that in the fact that EPS and top line both grew double digits, but the EPS line actually exceeded the top line. And then in terms of the timing, I think the measures that we talked about in terms of price increases and then some of the Ts and Cs that we're going to be modifying with our partners and customers, those just take a little bit of time to run through. So you'll start to see that over time. Operator: Our next caller is Pierre Ferragu with New Street. Ahmed Sami Badri: You might be on mute, Pierre. Pierre Ferragu: Apologies, I was on mute. Yes. So Chuck, can you give us a sense of how your commercial momentum is evolving on the cloud, like on the AI front? So you mentioned a couple of use cases you won with large customers on hyperscale. So I guess it's really like the kind of use case game. So what can you tell us about a typical use case where you make a difference where really you beat your main competition? So what's your -- how do you win there? And then as you're expanding into the new cloud opportunities, the broader market, what do the dynamics look there? Is that a similar like use case focused kind of competitive game? And are you like second source for your clients? Or do you see actually clients to go for like Cisco as a primary source for networking for AI? Charles Robbins: Thanks, Pierre. So on the first one, I would say, how do we win? First of all, our Optics portfolio is really just well received and is, I'd say, #1 in the world. I mean we have the best Optics portfolio that our customers want. And we just need -- we need to increase capacity to actually continue to deal with more and more demand there. I'd say on the system side and the silicon side, we've talked a lot over the years about their desire to have silicon diversity. So that's a starting point for why they're interested in us being successful. But then our systems when we build these, I think there's 2 big differentiators for us. There's programmability of the silicon and then there's just the power efficiency that we're building into it. And those generally -- and I think the way we do business and the commercial relationship that we have, the team -- the partnership that we have with them, I think they just -- they appreciate that. And I think it contributes to their desire for us to be able to do more with them. The second was neocloud, right? Mark Patterson: Enterprise. Charles Robbins: Enterprise. Yes, on the enterprise side, there's opportunity across AI factory with NVIDIA, so with GPUs. But what we really focus on and what we're most interested in is networking and security in addition to strategically where we need to position the GPUs. But by and large, we are the network standard, particularly when we're partnering with NVIDIA in the enterprise right now. So that's what we see happening. And again, we think bundling our security solutions like AI Defense and those sorts of technologies in these AI factory solutions is a good opportunity for us as we go forward. Operator: James Fish with Piper Sandler. James Fish: Just on the campus side, going back to a couple of questions here and trying to bridge it all together. You guys have talked about the refresh opportunity historically as more your fiscal '27, but now you're starting to say it's ongoing. I get it, Chuck, first inning of a Braves game for you, right? But what's changed? And then why wouldn't they start -- why wouldn't customers, especially in the enterprise, start pulling in their orders here given the pricing increases that they know are coming. These are smart buyers. And it kind of reminds a lot of enterprise out there of the supply chain issues a few years ago where we did start to see a pull-in of orders. Charles Robbins: Yes. Okay. Thanks, Jim. So first of all, I think we are seeing a ramp in an acceleration. I wasn't sure if this is what you asked, but I'll make a couple of comments just to be clear. Many of these customers learned from COVID and they recognize that in these major times of transition, they don't want to ever be stuck with technology that's not modern. And as they look at the architectures that are required for Agentic AI, the security architecture, the network architecture, the latency requirements, all of that is leading them to look at making sure that their infrastructure is modernized. So that, combined with the fact that there's been a lot of learnings over the last couple of years about equipment that's past last day of support and the cybersecurity risks that are associated with that. I think those are well documented. And that's another thing that's leading them to do so. I would say that on the core networking side, the memory content is not quite as high as what you'd see in compute platforms. And so the price increases are more nominal than they are in sort of the compute systems that you see some of our competitors talking about and the things that are a larger percentage of their portfolio. So do I think customers will try to buy ahead in some cases, perhaps, but I don't think it's going to be a big trend in the networking side of our business. And UCS for us is just -- it's not as big a percentage as it represents for some of our peers. Ahmed Sami Badri: All right. Thank you, Jim. I want to hand it over to Chuck for some closing remarks following the Q&A. Charles Robbins: First, I want to thank all of you for being with us today. And I also want to thank our team. I'm very proud of what they've done and the hard work that they put in. And this -- the results today are like -- they're coming together after multiple years of effort to get here. And we want to continue to deliver this innovation to our customers, and our teams are dedicated to do so. We're proud of the performance, especially in the core. I think it's important to really think about 2 big areas of momentum opportunity for us, and we're very early in all of these. First of all, with the hyperscalers and the AI build-outs, the Silicon One architecture, the new innovation that we announced this week, the new use cases that we won during the quarter. We obviously see a growing opportunity with enterprise sovereign and the neoclouds in AI. And then this beginning of this campus refresh, as I said, feels like the top of the first inning. It's a multiyear, multibillion-dollar opportunity for us. So I have a high degree of confidence that we're going to deliver our strongest fiscal year yet. And again, I want to thank our teams, and I want to thank all of you for joining us. And Sami, I'll hand it back to you. Ahmed Sami Badri: Thank you, Chuck. Cisco's next quarterly call, which will outline our third quarter fiscal year 2026 results will be on Wednesday, May 13, 2026, at 1:30 p.m. Pacific Time, 4:30 p.m. Eastern Time. This concludes today's call. If you have any further questions, please feel free to contact the Cisco Investor Relations department, and we thank you very much for joining the call today. Operator: Thank you for participating on today's conference call. If you would like to listen to the call in its entirety, you may call 1 (800) 839-2232. For participants dialing from outside the U.S., please dial (203) 369-3662. This concludes today's call. You may disconnect at this time.
Operator: Good day, and welcome to QuantumScape Corporation's 2025Q4 Earnings Conference Call. Sam Kamra, QuantumScape Corporation's Senior Director, Investor Relations, you may begin the conference. Thank you, Operator. Good afternoon, and thank you to everyone for joining Sam Kamra: QuantumScape Corporation's Fourth Quarter 2025 Earnings Call. To supplement today's discussion, please go to our IR website at investors.quantumscape.com to view our shareholder letter. Before we begin, I want to call your attention to the safe harbor provision for forward-looking statements that is posted on our website as part of our quarterly update. Forward-looking statements generally relate to future events, or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize, and results may differ materially from those projected. Results in financial periods are subject to risks and uncertainties that could cause actual results to differ materially from the content of our forward-looking statements for the reasons that we cite in our shareholder letter, Form 10-K, and SEC filings, including uncertainties caused by the difficulty in speaking to outcomes. Joining us today will be Siva Sivaram, CEO, and Kevin Hettrich, CFO. With that, I would like to turn the call over to Siva. Thank you, Sam. I would like to begin by reviewing our progress over the course of 2025. It was an extraordinary year on all fronts for QuantumScape Corporation. At the beginning of Siva Sivaram: the year. Siva Sivaram: We set aggressive goals for ourselves to basically grow the COBRA process, ship COBRA-based QSE-5, install equipment for our Eagle Line, and expand our commercial engagements. We are proud to report that we succeeded on all four key goals. In June, we announced that our breakthrough COBRA process has been integrated into our cell production baseline. This groundbreaking process enables gigawatt-hour-scale product and is a catalyst for our capital-light development and licensing business model. With respect to commercial engagements, in 2025, we expanded our collaboration and licensing agreement with PowerCo, the battery manufacturer of the Volkswagen Group. We also added two major global automotive OEMs to our portfolio customers, announcing new joint development and technology evaluation agreements. Additionally, in 2025, we issued our first customer billing. In 2025, we added two globally renowned ceramic production experts to our U.S. ecosystem: Murata Manufacturing and Corning. We capped the year with our second annual Solid-State Battery Symposium in Kyoto, where we brought together ecosystem partners, automotive OEM customers, and government officials. 2025 also saw milestones in our technology and industrialization roadmap. COBRA-enabled QSE-5 cells shipped to the Volkswagen Group. In September, we made headlines as the Ducati V21L race bike powered by QSE-5 cells rode across the stage at IAA Mobility in Munich. Siva Sivaram: This exciting event Siva Sivaram: was the world debut of our solid-state lithium-metal battery technology in a real-world electric vehicle. Finally, over the course of 2025, we installed our pilot cell production line, the Eagle Line. On 2026-02-04, we held an inauguration event for the Eagle Line with attendance from automotive OEM customers, technology partners, and local and state government officials. Incorporating the innovative COBRA process, the Eagle Line is a suite of equipment, materials, and highly automated processes forming the blueprint for production of QSE-5 technology. This leads me to our four key goals for 2026. Firstly, we will demonstrate scalable production of the Eagle Line. The purpose of the Eagle Line is threefold. First, it will produce QSE-5 cells to support customer sampling and testing, technology demonstrations, and product integration efforts. Second, the Eagle Line will show scalable process steps for production of our battery technology to enable licensing partners to bring our technology to gigawatt-hour scale in their own facility. Third, the Eagle Line gives us a platform to develop and test further enhancements and refinements at meaningful scale, allowing us to accelerate our advanced development efforts. In 2026, we will demonstrate the scalability of the Eagle Line through increasingly efficient cell output. Secondly, we will advance automotive commercialization. The automotive market remains our core focus, and in 2026, we aim to advance our automotive customers through the stages of our technology development licensing business model. Working with multiple global auto OEMs, we will use our technology platform to tailor product solutions for vehicle programs, undertake pre-testing, customer-specific industrialization strategy, and implement high-value markets. Thirdly, we will expand into new markets. Our solid-state battery technology offers a step-change improvement over conventional lithium-ion technology. Batteries are becoming a disruptive force across the entire economy, and we see the opportunity set for advanced energy storage expanding across existing and new applications. In 2026, with differentiated solid-state technology, we aim to seize opportunities where our technology encapsulates significant value. And finally, as a technology innovation company, we will go beyond QSE-5. Siva Sivaram: battery performance. Siva Sivaram: As we ramp production of our current QSE-5 platform, in 2026, we are focused on further advancements to meet the ever-growing need for energy storage in existing and emerging applications. And this year, we will announce progress along our technology roadmap. To conclude, I would like to say a word about our strategic outlook. 2025 was a remarkable year, and it would not have been possible without the tireless effort of our outstanding employees. Our ambitious goals for 2026 will require continued disciplined execution on the part of the team. Looking at the broader landscape, the world at large faces important challenges around technology and secure supply chain. We view this as a golden opportunity. Our mission to revolutionize energy storage has positioned us to offer solutions to these exact challenges. For industry partners who need better batteries, we seek to offer a future-proof technology platform that delivers better performance across the board and continuously improves over time. For players across the automotive, data center, robotics, aviation, and defense spaces, who are in need of next-generation energy storage to power demanding applications, our technology represents a compelling and unique solution. We believe we have a diverse group of customer and application opportunities, and a differentiated technology platform and growing partner ecosystem Siva Sivaram: continuously improving. Siva Sivaram: And capturing benefits of increasing scale. Even as we face the many challenges still ahead, we are establishing a strong foundation to build the future of energy storage. As a final note, we would like to express our sincere gratitude to Professor Dr. Fritz Prinz, one of the cofounders of QuantumScape Corporation, who is retiring from our board of directors after more than fifteen years of service. We thank Fritz for his leadership, guidance, and friendship through this remarkable period of QuantumScape Corporation’s history. Thank you. With that, I will turn things over to Kevin for a word on our financial outlook. Kevin Hettrich: Tila. Kevin Hettrich: GAAP operating expenses and GAAP net loss in Q4 were $110,500,000 and $100,100,000. And for full year 2025, Kevin Hettrich: were $472,600,000 and $435,100,000, respectively. Adjusted EBITDA loss was $63,300,000 in Q4, in line with expectations, and for full year 2025, was $252,300,000 within guidance. A table reconciling GAAP net loss and adjusted EBITDA is available in the financial statements at the end of the shareholder letter. For 2026, we expect full year adjusted EBITDA loss to be between $250,000,000 and $275,000,000 as we work towards our goals while continuing to drive greater operational efficiency across the company. For 2026, Q4 CapEx primarily supported facilities and equipment purchases for the Eagle Line. Capital expenditures in the fourth quarter were $12,300,000, and for full year 2025 were $36,300,000, within guidance. We expect full year 2026 CapEx to be between $40,000,000 and $60,000,000, the majority of which we plan to invest into the next generation of our technology. Customer billings for full year 2025 were $19,500,000. Kevin Hettrich: As a reminder, Kevin Hettrich: customer billings may vary from quarter to quarter due to fluctuations in activity as we progress through various phases of an agreed scope of work. Customer billings is a key operational metric meant to give insight into customer activity and future cash flows. The metric is not a substitute for revenue under U.S. GAAP. During the quarter, we received $19,500,000 in cash from 2025 customer billings. As noted on our Q3 call, due to the related party nature, U.S. GAAP required this amount to be reported directly to shareholders’ equity once certain requirements were met. We ended 2025 with $970,800,000 in liquidity, and we will remain prudent with our strong balance sheet going forward. As always, we encourage investors to read more on our financial information, business outlook, and risk factors in our quarterly and annual SEC filings on our Investor Relations website. Siva Sivaram: Thanks, Kevin. We will begin today’s Q&A portion with a few questions we have received from investors or that I believe investors would be interested in. Siva, can you expand further on why the inauguration of the Eagle Line was such a significant milestone and a notable event on QuantumScape Corporation’s commercialization pathway? Also, how will we use this line to demonstrate scalable production? And the Eagle Line is an extremely important catalyst for our technology commercialization goals. Kevin Hettrich: At the beginning of 2025, Siva Sivaram: we set out the goal of increasing our output of QSE-5 cells. When we were ramping volumes for the Munich IAA show, we had a stable baseline to make cells for the Ducati bike. We decided that the processes were sufficiently mature, and it was time to significantly increase the automation of the line to better match the productivity of the COBRA process. In the subsequent ten months, we designed the line, prototyped it, formed partners for equipment, built the tools, installed the tools at QuantumScape Corporation, qualified the processes on the tools, and released the equipment to the baseline. This was an incredible effort on the part of the team to get it done in such a short time. Siva Sivaram: As we said in the letter, Siva Sivaram: the Eagle Line enables pilot production of cells for sampling and is a platform to develop technologies for future generations. But the most important outcome is to have a blueprint for production. This is what we intend to transfer to our customers so that they can ramp to gigawatt-hour scale in their factory. Success on the Eagle Line is to have a blueprint for scale, cost, quality, and cycle time that a customer can deploy into their manufacturing line. This is about demonstrating the technology to our licensing partners for them to take the next step up in scale. Thanks, Siva. You have highlighted growing interest beyond automotive. How are you thinking about those opportunities while maintaining focus on automotive commercialization? Siva: Automotive customers remain our core focus. It is still the biggest and most valuable market for batteries. Nothing has changed on that front. The long-term global trend towards electrification is going to continue. If you think about autonomous vehicles really starting to become mainstream, those fleets make the economic logic for EVs even more compelling. We have a cell and a design that is unique. It is capable of being safer, performing better across a wide temperature range, combining high power and high energy density. These characteristics are highly valuable across other applications. For example, in a data center, you have high ambient temperatures but you absolutely cannot have a fire Kevin Hettrich: racks. It is a million-dollar GPUs. Siva Sivaram: In a drone, you need better energy density, but also extremely high discharge power. In addition, our architecture can work with different cathode chemistry, which makes our technology even more versatile. We can offer a differentiated and no-compromise solution to these emerging applications. These markets are growing rapidly. It is a logical step for us to pursue these markets. Kevin Hettrich: Thanks, Siva. Siva Sivaram: Kevin, would you assess QuantumScape Corporation’s performance in 2025? And how are you thinking about achieving the company’s 2026 objectives while maintaining operational and capital efficiency? Kevin Hettrich: I characterized 2025 as a strong year for QuantumScape Corporation. We executed on our key objectives for the year, and just as importantly, we did so with a high degree of financial discipline. We delivered approximately a 10% year-over-year improvement in adjusted EBITDA loss, narrowing from $285,000,000 to approximately $252,000,000. That improvement reflects a sustained company-wide focus on cost effectiveness. We made deliberate choices that improved our cost structure, for example, advancing value engineering efforts across the Eagle Line, as well as optimizing our real estate footprint. These actions allowed us to make meaningful technical progress while improving capital efficiency. 2025 was also an important validation year for our development and licensing model. Under this structure, we said we could generate customer-related cash inflows ahead of earning licensing royalties. During the year, we demonstrated that capability by achieving our first customer billings, totaling $19,500,000. Finally, we exited 2025 with $970,800,000 of liquidity, leaving us with a strong balance sheet for this next phase of execution. Looking ahead to 2026, we believe our plan is well aligned with the goals we have laid out, and importantly, it allows us to advance those objectives while we further improve and monetize the platform we have built. Regarding efficiency, our plan is to continue to systematically, methodically, and iteratively drive efficiency gains across the organization via the activities you would expect: ongoing value engineering, higher equipment uptime and throughput, and further improvements in yield and reliability. We are well along in deploying machine learning and AI tools to accelerate development cycles and improve engineering productivity. On monetization, we expect customer billings in 2026 to increase relative to 2025 levels as we deepen and expand customer engagements. Siva Sivaram: Okay. Thanks so much, Kevin. We are now ready to begin the live portion of today’s call. Operator, please open up the line for questions. Operator: Thank you so much. And as a reminder to our tele-audience, if you do have a question, press 1-1 and wait for your name to be announced. To remove yourself, press 1-1 again. One moment for our first question. It comes from Mark Haywood Shooter with William Blair. Please proceed. Mark Haywood Shooter: Hi, Siva. Thanks for taking my question, and congrats on commissioning the Eagle Line. Aman S. Gupta: And my question here is, with this new manufacturing technology, I know there is a lot of improvement in throughput and yield, but I am wondering if there is an ability to increase the surface area of your ceramic separator, and therefore maybe increase the cell size. Is this possible, or is this on your technology roadmap? Siva Sivaram: Mark, thank you. Thanks for the question. Kevin Hettrich: The Eagle Line clearly Siva Sivaram: enables us to do all the things you just said: improving yield, improving uptime, improving operational efficiency, improving materials utilization, so that we can show our customers the efficiency with which we can make. Equally importantly, the Eagle Line and the COBRA line are set up to be adaptable to making the line useful for every customer for their specific needs. Our aim is to use the Eagle Line as the backbone so that when we industrialize for a specific customer for specific needs, we can adapt the line to make that happen. That is exactly what we are using as this transfer platform. So the Eagle Line acts as the scalable blueprint for us to take a core technology platform and adapt it to every one of our Kevin Hettrich: customers, Siva Sivaram: specific needs. Kevin Hettrich: Yeah. Mark, as you mentioned, those are probably the three vectors we would expect our automotive customers to work with: either the choice of cathode, capacity of the cell, and assortment of cell format. Our COBRA process is capable of those and as is the Eagle Line. And that exactly fits into that first of our two phases of our business model, working together with customers to customize our technology platform to their product solutions, earning the first line of cash flow and longer term setting up that much larger licensing opportunity. Aman S. Gupta: Yeah. Thank you, gentlemen. I appreciate the color there. Just as a follow-up, maybe a bit of a finer point. And the reason why I asked about this surface area increase and maybe larger cells Kevin Hettrich: is Aman S. Gupta: what I thought I heard from the PowerCo arrangement is that the QuantumScape Corporation cells need to fit into the unified cell architecture. And I am wondering if that can be done with the current size, the QSE-5, or is that a larger cell that you need to develop? Siva Sivaram: Yeah. As you just said, the QSE-5 cell is a certain aspect ratio, providing us with about 5.6 amp-hour Kevin Hettrich: and about 21 watt-hour Operator: cell. Kevin Hettrich: The UFC is a largest form factor, and every customer has their specific need for what they need for their application. Siva Sivaram: And fully knowing that, we use this as the adaptable baseline. The Eagle Line will show that the platform is from which we can adapt it to make it bigger, smaller, whatever we need to. And that is the whole point of establishing one stable baseline from which we can build for different customers. Aman S. Gupta: Very helpful. Thank you. Siva Sivaram: Thank you. Our next question comes from Winnie Dong with Deutsche Bank. Please proceed. Winnie Dong: Hi. Thank you so much for taking my questions. In your prepared remarks, you alluded to various verticals, including data centers and robotics, aviation, as potential applications outside of automotive. And I think in the past, consumer electronics was also a potential application as well. I was wondering if you can help us understand, is there one vertical where your technology is more suitable than the other ones? For instance, I am just trying to understand, in, for example, stationary storage, a lot of companies that are seeking out that, they are still trying to use LFP. So just curious, why is lithium metal just as good or even better for some of these applications? Thank you. Yeah. So, Winnie, I will start out, and then Kevin has some strong views on the subject. Siva Sivaram: he will continue on. Clearly, the architecture that we have developed with the ceramic separator provides you what we call a no-compromise solution. Meaning, concurrently, at the same time, we can deliver high energy density, high power density in both charge and discharge, better safety capability, cycle life, and because we eliminate the anode, we have better—and because the formation is so short, we can deliver a better cost profile. Each of these markets that we just talked about have unique needs. For example, as you add, the consumer electronics product is very big on volumetric energy density. We are trying to make sure that we size the opportunity, work with customers, move rapidly so that we can take our no-compromise cell and fit it into the appropriate platform, appropriate form factor, and quickly get to market. That is the idea behind it. As you would expect, the automotive market still is the larger market, and we remain focused, and logically, the automotive market also takes the longest time to develop, qualify, and deploy into larger fleets. These are just facts of the marketplace that we work with, but the cell itself is so useful across different markets that we do think it is logical for us to take that leap. Kevin Hettrich: Yeah. As Siva mentioned, we are starting from a good place with that no-compromise battery advantages laid out. We see opportunities over the fullness of time across the broad set of energy storage applications. I believe you listed several potential applications. Consumer electronics tends to get excited about the volumetric energy density advantage. AI-dense data centers value safety. Drones, and anything that flies, love the gravimetric savings and the power, and the grid, at least for the major load shifting application, values cost per round-trip cycle. So we believe we can offer compelling solutions to all these spaces, and as a management team, it is our job to decide how many of these do we do in parallel, and in what order do we sequence them, to both delight our customers and to optimize returns for our shareholders. Siva Sivaram: And everything we just discussed about, we are intending in goal number three that we laid out Kevin Hettrich: in our letter today, expand into high-value markets. Siva Sivaram: And the whole thing is enabled by the Eagle Line. The Eagle Line allows us the flexibility of going and trying this out because we have the ability to make more samples for more customers. And that is what makes this whole thing possible. Got it. Thank you. My second question is on the year’s Operator: EBITDA guidance. I was wondering if you can help us flesh it out in terms of the OpEx and also in the context of some of the billable help that you can get from your partner as a result of partnership. Thank you. Kevin Hettrich: So, and then, Winnie, can you help me with the color around which aspect? And then you were asking about color on billings. Is that a correct rephrasing of your question? Winnie Dong: Yeah. Essentially, you are guiding to—you have the year’s EBITDA guidance. I am just curious, in the context of existing partnership, I think in the past you have been getting operational help from some of these partners. Is it being considered within the outlook? And yeah. Kevin Hettrich: Yeah. So, that is a great question. So to answer what you just mentioned first: Yes, our EBITDA guidance is inclusive of help, either from OEM partners or ecosystem partners. That is all baked in. And by the way, there is significant resource being put in by all of those three. In terms of just some color, the EBITDA guidance is relatively flat year over year, but I would point out that the team is seeking to take on a lot more with expanding and deepening the automotive partnerships, as well as expanding into new high-value markets. There are all sorts of activities behind that as well as pushing the frontier of battery development. So our goal is to deliver much more with the same resource base, improving efficiency to shareholders. But we need just to be clear, for this year, Kevin just announced $19,500,000 of billings and cash received. And that, as he has pointed out, has gone directly into Siva Sivaram: equity, and that is not part of Aman S. Gupta: the Siva Sivaram: EBITDA loss that we just announced. Kevin Hettrich: Correct. And as I mentioned in the comments, please expect that to be lumpy quarter to quarter as we do this type of agreed development work with customers and ecosystem partners, as well as our desire to improve on that 2026 versus 2025. Winnie Dong: Got it. That is very helpful. I will pass along. Thank you. Thank you so much. Our next question comes from the line of Joseph Spak with UBS. Please proceed. Aman S. Gupta: Thank you. Good afternoon. First question is just, if I compare Kevin Hettrich: the slides that you put out today versus prior, it looks like that Aman S. Gupta: conditional cash inflows is now $150,000,000. Last time, it was $261,000,000. Can you detail what changed there? Kevin Hettrich: If you—just to rephrase or maybe to clarify, when we expanded the VW development and collaboration and licensing agreement with Volkswagen last summer, there is an opportunity to earn up to $131,000,000 worth of those development Siva Sivaram: payments. Kevin Hettrich: Is that what you are referring to? Aman S. Gupta: Joe: Yeah. Like, if I—you put on, like, on Gabriel Alexander Gonzales: slide 16, you have on the slide detailing your relationship with Joseph Spak: PowerCo. It says $150,000,000-plus of conditional cash inflows. If I look at the last quarter slide, that $150 was $261. Siva Sivaram: Let me Kevin Hettrich: let me pull that up and revert with you in a few minutes. I do not have Aman S. Gupta: it in front of me. I will revert with you on that. Kevin Hettrich: Okay. Joseph Spak: The next question then, just, you know, obviously, PowerCo is a deep and important partner here. There had been some reports that Volkswagen sort of slashed the funding there. Just curious if that, sort of, you felt that at all, if that sort of impacted your business or your work with them. If it has even increased some of your urgency to diversify to other customers. Kevin Hettrich: Yeah. So, Joe, our work with PowerCo is continuing on unchanged. Siva Sivaram: Their commitment to us is very, very good. Our relationship with them and the focus with which we are working together is as good as ever. We are both working towards a set of agreed-upon scope of work that has not changed, and we are continuing to bill them the way we have agreed in that $131,000,000 deal that Kevin just talked about. So in July, we agreed on a scope of work, and our partnership is as strong as ever. And the work itself is lumpy, as in the way it is planned, up and down. But we are doing very well with respect to worksite. That does not mean we are not working with other customers. As we announced in the letter, we have added two new large global auto OEMs to our portfolio, with whom we are working. And we have also announced additional technology development and technology evaluation agreements with them together. So this is in a good place. The customer interest has been very strong, and the Volkswagen and PowerCo relationship still remains very, very strong. Joseph Spak: Okay. Last question for me. And you touched on some of this, and I just sort of want to better understand how you are thinking about it because you talked about new end-market opportunities, energy storage, robotics. Exciting stuff. But, you know, if I look at what you have done with the auto business, you have effectively, right, left the commercialization industrialization to PowerCo and other partners. So as you move to these other end markets, like, how is it—you know, if you are not making a sort of a standard cell, and I understand the Eagle Line sort of helps you sort of do different form factors or different cells—but, like, are you not going to need to sort of reach out individually to help sort of scale these different form factors for these opportunities? It just seems maybe a little bit more difficult as you go to some of these other end markets where there might be some more bespoke use cases versus, you know, the old strategy, which was doing it yourself. But maybe I misunderstood that sort of stuff. Siva Sivaram: Very perceptive question. I am glad you asked. The licensing and the capital-light business model is not a single flavor. There are a lot of different ways of doing the same thing: having manufacturing rights, having contract manufacturing, having our partners manufacture for others, Kevin Hettrich: having Siva Sivaram: customer-provided manufacturing abilities. There are many different ways of doing it. As long as we are not spending the capital to build it, we can do this very well. And these markets are fully amenable to these business models. So we are exploring those with our new customers. I am not saying that we rule anything out, but our preference has always been a license and capital-light business model. So I am glad you asked this question. Even in these markets, such different variations on the theme are very possible. Aman S. Gupta: Thank you, sir. I appreciate it. Siva Sivaram: We did—I did have a chance to look at the Kevin Hettrich: the slide you referenced. The prior reference to 02/06 or February is when you sum both parts of the economics with Volkswagen together: the $130,000,000 prepay and the up to $131,000,000 of development payments. That is the former number you referenced. In this latest round, as footnoted, what we are doing is we are only—we are having more of a backwards-looking view where we are only counting the billings to date plus the $130. So it is a different cut at the same two numbers. There is nothing changed contractually. Joseph Spak: Okay. So nothing changed with that other—with that delta—that is sort of more Kevin Hettrich: Correct. Joseph Spak: potentially to come. Kevin Hettrich: Okay. Correct. It is more looking at the bird in the hand relative Joseph Spak: to billings as opposed to the bird in the bush with the up to. Kevin Hettrich: Thank you for that. I appreciate it. Siva Sivaram: Yep. Operator: Thank you. Siva Sivaram: Our next question comes from Mark Delaney with Goldman Sachs. Operator: Please proceed. Kevin Hettrich: Hi, good evening. Thank you for taking the Aman S. Gupta: questions. I have Aman on for Mark. Maybe kind of starting on your goal for the Eagle Line and scaling that. And congrats on getting that installed. Can you maybe help what key metrics for that line are today? Like, provide some context for where some of the yields and production time and things like that are, and how you see that scaling over the course of the year, and what is needed to then, you know, exiting the year, get to commercial transfer to your licensing partners. Joseph Spak: Thank you. Siva Sivaram: Yeah. Aman, thank you for the question. So last year, we had a manual line with which we were producing cells for applications such as the IAA Munich demonstration and the Ducati bike. We developed a very stable baseline, and we decided that was a good time to convert it to be a much more highly automated line so that we can match the output of the highly productive COBRA line to the cell-making line. And so in the ten months since March, we have literally conceived the line, designed it, found the build partners for the equipment, built the equipment and brought them over here, installed them, qualified them, developed the process, transferred the process, and then integrated it into the baseline, and we are running it. And that is what we inaugurated last week this time. Kevin Hettrich: Now Siva Sivaram: this is a manufacturing prototype pilot line. So this is what we are using to convince and work with our partners who are going to be working with us hand in glove, watching how this is done. So all of the metrics that we normally use in a pilot production facility—such as uptime, mean time between failure, mean time to assist, mean time to repair, yields, reliability, quality, cycle time, cost—all of these kinds of metrics have to be made efficient so that our customers come and work with us and say, okay, I am ready to go take this line and convert it to all of my own factory for scalability. So these are the things that you just asked and what we will be very, very closely monitoring as we ramp it up. We are in a good place, and we will continue to work with our customers, and we need to show this to our customers who are here with us watching this. And when we inaugurated the line here, the customers were actually here with us as we got the start. Kevin Hettrich: And just some other dots to connect. The Eagle Line is certainly called out in our first corporate goal for 2026: demonstrate scalable production with Eagle Line. As Siva was mentioning, it is central to the other three. Without that type of prototype and sampling and demo volume, that is the currency with which we can advance automotive commercialization, new and existing, as well as gives us the currency to expand into new high-value markets. And it also gives us other parts for internal use to do development on, to support that beyond QSE-5 roadmap. So that Eagle Line demonstrated last week is really important to set up a successful 2026. Now, having said all that, Siva Sivaram: Aman, this is the unsexy part of the work. This will be systematic, methodical, iterative improvement of every one of those so that the customers see and work with us to see the data progress on all of them. So this is not a new thing. I have done this many times in the past, and the employees know what it is that we need to do here at QuantumScape Corporation. We will get that done. Aman S. Gupta: Appreciate the color there. Thank you. And maybe tying that to my follow-up here, Kevin, you talked about $40,000,000 to $60,000,000 of CapEx. Can you maybe help dimension that across some of the spending you have kind of outlined in your goals, whether that is for the Eagle Line and scaling that versus expanding some of the QSE-5 technology and potential incremental spend related to expanding to some of these other end markets? And how should we think about that level then being sustained beyond 2026 in terms of further continuing to explore those opportunities? Thank you. Kevin Hettrich: It is a good question, Aman. The bulk of the spend goes towards the fourth goal of going beyond the QSE-5, and the bulk of the CapEx spend from $40,000,000 to $60,000,000, as you referenced. There is CapEx in the other categories, but with the maturity of the QSE-5 platform, for example, in the case of expanding into new high-value markets or doing custom development for OEMs, it is more incremental on choice of cathode or dimensions or form factor. That is more of an incremental spend as opposed to core development spend. As a technology licensing company, it is our core job to develop and pilot and transfer high-performance battery technology to our customers and partners. Capital is required to push that frontier, and this is the type of magnitude we think investors should expect going forward for that steady-state advanced runway development. And I would also like to draw a contrast with this type of spend under a technology licensing model versus that of a full-blown manufacturing company, which requires billions of dollars of investment for gigawatt-hour scale done years before that factory even comes online. So we think that our choice of business model is in the best interest of our shareholders. Aman S. Gupta: Thank you. And maybe just on that point, too, quickly, can you kind of dimension what are the goals you are trying to hit for the QSE-5, like, beyond the QSE-5 platform that you are spending on? I apologize if you have discussed it before. I do not have it off the top of my head. Siva Sivaram: No. Aman, last year, we put out our blueprint on how we move forward as a technology company. The QSE-5 is our first minimum viable product. Clearly, as we move up the S-curve rapidly, we need to make the performance metrics better on every aspect of it and keep moving this up. And every eighteen to twenty-four months, we will be coming up with new upgrades on this that we need to come and show you all, show our customers, and show our shareholders where we are spending the money and to move the technology frontier forward. That is where the business is headed from the QSE-5 moving Aman S. Gupta: Thank you very much. Siva Sivaram: Thank you. Operator: Our next question comes from the line of Ben Kallo with Baird. Please proceed. Ben Kallo: Hey, Aman S. Gupta: good evening, guys. It was great to see you last week. One thing I noticed when I was visiting is your supply partners Ben Kallo: there. I just want to get a sense of how they are thinking about your future or potential customers outside of Volkswagen. I know you guys have done a lot of work with supply chain, so if you could talk about that and just how that helps you with new potential customers. Siva Sivaram: Ben, great to see you last week. Thank you for being here. You are 100% correct. The QuantumScape Corporation ecosystem is very important to us. This level of technology change cannot be done by a single company. It requires a whole ecosystem to move this forward. Whether it be in capital equipment, whether it be in advanced materials, whether it be in things like software and AI systems, there are places where we need help. Murata and Corning being able to take over and run the manufacturing for the ceramic separator is a big step forward for last year. Ben Kallo: In our Siva Sivaram: solid-state symposium that we hosted in Kyoto, we brought together, similarly, our tool vendors from across the world to be there. And you saw some of these suppliers here in the U.S. who helped us build the Eagle Line. These folks are very excited about the possibility of us expanding further into other form factors, into other markets, into new customers both in the automotive and non-automotive space. We are counting on their support, and we will be expanding the ecosystem continuously to make sure that we can bring this along. Kevin Hettrich: And again, Kevin is very passionate about our secure supply chain, and let him Siva Sivaram: talk about that. Yes. So Kevin Hettrich: as Siva mentioned, in the ecosystem we are building where there are customers, there are cell manufacturers, certain suppliers of materials and equipment. As you add more activity to it, it makes the whole stronger. Certainly from the view of some manufacturer or supplier of equipment or materials, more additional end markets and expanding and deepening automotive relationships is a good place to sell their goods and services into. But then from the flip side, if you are a QSE-5 customer or manufacturer themselves, having a ready supply chain with the world’s leading examples in their respective spots only strengthens the value proposition as well. So we are very excited with the progress that we made in 2025, and our goal is to continue that moving forward into 2026. Siva Sivaram: And, Ben, equally important is the people you did not see in that group. You did not see a graphite supplier. You did not see an anode supplier. So securing the supply chain is as much for us about making sure that the suppliers that we need are there as much as making sure that we are not unduly dependent on any one material from any one place. So that also helps us in securing our supply chain. Ben Kallo: Thank you. You know, we see OEMs retrenching or retreating, however you want to characterize it, and, you know, there is excess cell capacity out there. And I just wonder how that impacts your discussions with new potential customers. Yeah. I will leave it there, and thank you, guys. Siva Sivaram: Ben, thank you. Yes. So, clearly, there is turbulence in the marketplace, at least in the U.S. However, the folks, especially at the senior levels in these companies as we talk to, Operator: consistently are Siva Sivaram: more optimistic about the long term. We see the fact that electrification as a longer term is still the right way to do it. The more we see about, for example, self-driving vehicles, navigation systems, you start to see there are other vectors that are forcing the EV conversion. So every customer we talk to is upbeat about two things: application, but in particular, solid-state batteries. Both are things that they come to talk to us about, and we sense that excitement with our partners. Kevin Hettrich: And we hope you can see that some of these themes were certainly playing out in 2025. And against that backdrop, we expanded the VW/PowerCo collaboration agreement. We signed two new joint development agreements. We added a new technology evaluation agreement. We think that is consistent with the excitement that Siva mentioned. And while you used the word retrenchment, the automotive industry still is growing. It still is very much a growth sector. So the short, medium, and long-term prospects we think are still of growth. Ben Kallo: Great. Thank you, guys. Appreciate it. Siva Sivaram: Thank you. Operator: Our last question comes from Leisha Satt with HSBC. Hi, Siva. Hi, Kevin. How are you? Thanks for having us last week. I just have one question because my brief answer was already answered. But I wanted to know if you have any KPIs that you can share with us on how you will measure the goals that you set for 2026? Siva Sivaram: Leisha, it was great to see you last week. Thank you. Thank you for being here. Clearly, the four goals that we have outlined are all very quantitative for us inside the company. Kevin Hettrich: Whether it is Siva Sivaram: about the Eagle Line demonstrating the efficiency and scaling of the Eagle Line for the purpose that we just talked about, whether it is about making sure that we expand, Kevin Hettrich: advance our partnerships with the automotive Siva Sivaram: markets, whether it is to go beyond the QSE-5 and expand into high-value markets. Each of those is an extremely important vector for the company to continue to progress on. Kevin Hettrich: We will Siva Sivaram: continue to update you as we progress on each of those, and you will see this progress as we give you updates. And our job is to make sure that, just like we did last year, tell you what we are going to do, and then do as we say and on time, and give you the updates. Operator: Okay. That makes a lot of sense. And just one last thing. I know you mentioned that your focus is still automotive, but when you eventually start looking at other applications, does the Eagle Line require major adjustments depending on the segment that you cater to? And will this imply a higher CapEx also, like, you know, for the customers? You said that the blueprint is easily adjustable to each customer’s needs, but does this imply that they need to invest more to adjust to whatever they want to create because it is depending on the market or segment that the customer is in? Siva Sivaram: Yeah. This is the dilemma. This is the reason we chose the licensing business model. In the battery business, every customer wants their unique form factor. If we try to set up a line for everyone else, it becomes untenable. What we have done is a foundational technology, a scalable blueprint that we can do it. But any change that we do for any specific customer, clearly, we expect that as part of the earlier payment we would be working with them on financial arrangements to make sure it is done, that we stay capital light. And when we take our technology roadmap and show it to our customers, we clearly set the expectation that we intend to be a capital-light licensing company. Okay. Operator: Well, thank you so much, Siva. And congrats again on the inauguration. Siva Sivaram: Thank you, Leisha. Operator: Thank you, ladies and gentlemen. This concludes our Q&A session for today, and I will pass it back to Siva Sivaram for closing comments. Kevin Hettrich: Thank you, Operator. Finally, today, I want to recognize the entire Siva Sivaram: QuantumScape Corporation team for their execution in Q4 and throughout 2025. Aman S. Gupta: And I want to thank our shareholders for their continuous support. Siva Sivaram: We look forward to updating you on our progress in the months ahead. Thank you. Operator: This concludes our conference. Thank you all for participating, and you may now disconnect.
Operator: Good afternoon, and welcome to the Equinix, Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. All lines will be in a listen-only mode until we open for questions. Also, today's conference is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Phillip Konieczny, Senior Vice President of Finance. You may begin. Good afternoon, and welcome to our fourth quarter conference call. Before we get started, I would like to remind everyone that some of the Phillip Konieczny: statements that we will be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we identified in today's press release, as well as those identified in our filings with the SEC, including our most recent Form 10-Ks filed on February 11, 2026 and our most recent Form 10-Q. Equinix, Inc. assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of Regulation Fair Disclosure, it is our policy not to comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. On today's conference call, we will provide non-GAAP measures. We provide a reconciliation of those measures to the most directly comparable GAAP measures in today's press release on the Equinix Investor page at www.equinix.com. We have made available on the IR page of our website a presentation designed to accompany this discussion, along with certain supplemental financial information and other data. With us today are Adaire Fox-Martin, CEO and President, and Keith D. Taylor, Chief Financial Officer. At this time, I will turn the call over to Adaire. Adaire Fox-Martin: Thanks so much, Phillip. Hello, and a warm welcome to our call today. Adaire Fox-Martin: I will start by saying on a personal level how deeply pleased I am with our performance in 2025 and particularly in Q4. Demand for our solutions has never been higher, and our teams have stepped up exceptionally well to capitalize on it. To our employees around the world, I would like to say a huge thank you for all you are doing to achieve our goals. I also want to thank our customers and partners for the trust they have placed in Equinix, Inc. as we intensified our investment in growth—investment that is already paying off. Our bookings have accelerated dramatically. Our recurring revenue growth rate continues to climb, and we are managing our spend with great discipline. All of these factors are combining to fuel an expansion pipeline and growth in AFFO per share materially ahead of expectations. Given our momentum exiting 2025, our confidence in our 2026 plan has grown. This is reflected in both our revenue and our AFFO per share outlook. Our performance and our outlook demonstrate two things. The first is that Equinix, Inc. is connecting the fastest growing segments of technology infrastructure, and the value of our platform is increasing with every connection. The second is that our execution continues to improve. This winning combination delivers superior customer outcomes and stronger shareholder returns. Not only are we on the right track, we are moving far faster along it. Now our momentum is clear across several key metrics. Monthly recurring revenue, the most powerful driver of long-term value creation, grew 10% in Q4 and 8% for the full year on a normalized and constant currency basis. And for bookings, the leading indicator for revenue performance, the story is even stronger. We delivered annualized gross bookings of $1,600,000,000 in 2025, up 27% year over year. Our Q4 bookings were $474,000,000, up 42% year over year and 20% from Q3, well ahead of our plan. We delivered record capacity to meet growing demand, including 23,250 cabinets in our retail footprint and more than 19 megawatts in our xScale business in 2025. We delivered more than 30% of this retail capacity ahead of schedule, which we believe will accelerate our growth in 2026 and beyond. Now Keith will go deeper into our metrics shortly, including recommendations on how to model the Hampton transaction. As you saw in our release, the expected timing of this transaction shifted from Q4 to Q1, which, as we have shared in the past, simply reflects the fluid nature of xScale lease signings. Before I turn the call over to Keith, I would like to provide some additional perspective on why our business is performing so well. For starters, we are building on the strength of our fundamentally differentiated value proposition. Our decision to double down on the digital infrastructure and connectivity requirements of enterprise customers is fueling our success, particularly as they implement AI across their operations. In Q4, approximately 60% of our largest deals were driven by AI workloads. That is up from approximately 50% earlier this year, a trend line that we believe will continue, as we are really only at the beginning of this journey. Equinix, Inc. is the neutral ground Operator: where enterprise infrastructure converges, Adaire Fox-Martin: and we provide the essential layer of connectivity that make it all work at scale to unlock real business value. This is a long-term tailwind for our business, particularly as AI inferencing expands across industries. With market-leading native cloud on-ramps, the largest global footprint across the most critical markets, and the broadest enterprise customer base, we deliver what AI inference demands: network diversity, cloud proximity, AI-ready interconnection, and low latency. These are structural advantages we have built over decades and we believe will continue to set us apart. In 2025, we completed over 17,200 transactions, up 6% year over year with over 6,100 unique customers. Our Q4 transaction volume was the highest ever at over 4,500 deals with more than 3,400 unique customers. We saw an uptick in volumes for all workload sizes, from single cabinet requirements up to our largest cage configurations. And more than 60% of our existing customers added new services last year. Now let me share some recent customer wins and use cases that really showcase what is driving this demand. Salesforce chose Equinix, Inc. to create a private multi-cloud networking layer for the engine inside their data and AI foundation. This is our largest global Fabric Cloud Router sale to date. By deploying Equinix Fabric Cloud Router across 14 countries and 21 metros, we are enabling private network connectivity between Salesforce's presence in AWS, Azure, and other cloud service providers. Alimbic, an AI-powered marketing analytics platform, selected Equinix, Inc. for the scale and consistency of our global operations and the richness of our interconnection ecosystem. We are working with Alimbic as they deploy the NVIDIA DGX SuperPOD with NVIDIA Grace Blackwell Systems to expand their addressable market through distributed AI. BigMate, a leader in AI-powered workplace safety and operational intelligence, chose us because Equinix Fabric securely connects their edge devices, cloud providers, and customer networks. This enables them to deliver real-time AI-driven quality control for industries ranging from food processing to manufacturing. Leading quantitative trading firm Hudson River Trading selected Equinix, Inc. because our global footprint and our advanced cooling solution enable them to achieve the latency and the density requirements they need to power their next-gen AI trading workloads. And Fortune 500 multinational Honeywell Corporation expanded its relationship with Equinix, Inc. because of the secure, flexible solutions and global Fabric connectivity we provide, including for key metros such as Shanghai, Tokyo, and London. This is the first of many projects driving the integration of internal AI applications and the wider transformation at Honeywell. These are just some of the use cases underpinning our momentum. Our progress is a direct result of the changes we have made through our Start Better, Solve Smarter, and Build Bolder initiatives. Starting with Start Better, customers continued to secure both near-term and long-term capacity across our global platform. Our $474,000,000 in annualized gross bookings in Q4 were supported by an incremental pre-sales balance of $170,000,000, with more than $60,000,000 occurring in the quarter. Larger footprint requirements from enterprises and service providers contributed to this performance. Our pipeline is strong, and we have already booked approximately 45% of our Q1 2026 target, and signed an additional $100,000,000-plus of pre-sales as of today—already our largest pre-sales quarter ever. As we accelerate growth, we are committed to a disciplined pricing strategy that is commensurate with both the strong and durable demand patterns we see and the differentiated value our solutions provide. This translates into our strong cash and cash return profile and the premium yields we secure. We continue to underwrite our newest projects with these principles in mind. With Solve Smarter, we are helping customers connect and simplify their infrastructure. Interconnection revenue grew 9% year over year on a normalized and constant currency basis. We added 7,800 net interconnections in the quarter, including our adjustments. We also crossed an extraordinary milestone in Q4, surpassing 500,000 interconnections worldwide. To put this into context, that is more than double our nearest competitor. As AI amplifies the need for massive real-time data movement, Equinix, Inc. is delivering the connectivity infrastructure that enterprises depend on the most. As part of our Build Bolder initiative, the work we are doing across our global development portfolio is strengthening our competitive advantage. In Q4, we delivered more than 12,000 cabinets to our retail business across key metros. Our development engine remains exceptionally active with 52 major projects underway across 35 markets, including nine xScale projects. Since October, we have added 10 new expansion projects. We also closed on a number of strategic land acquisitions last year, adding approximately one gigawatt to our powered land under control balance. This positions us well to meet long-term demand from both enterprise and hyperscale customers. Our xScale business achieved a key milestone in recent weeks. In January, we contributed our Hampton asset to the Americas JV, an important first step towards deploying $15,000,000,000 of capital across major metros in the U.S. The Hampton facility will support approximately 240 megawatts of IT capacity when fully built out. The signing of the lease for half of this facility to a hyperscale customer is expected in Q1, and we expect the site to be fully leased later this year. In addition, we have established a healthy leasing pipeline, demonstrating the value of our xScale strategy. Of the approximate three gigawatts of capacity that can be developed, close to one gigawatt is currently earmarked for our xScale business. Further, our land acquisition pipeline continues to grow, as we maintain our focus on major metro expansion opportunities where we are confident of significant long-term demand. As such, we expect xScale will continue to contribute to NRR over the next several years as we execute our strategy. Overall, we are winning where it matters most by connecting the infrastructure that powers the AI build-out happening across industries. And we are laser-focused on extending our category leadership through disciplined execution that drives healthy revenue growth, margin expansion, and superior shareholder returns. I will now turn it over to Keith to take a closer look at the numbers behind the quarter and our outlook. Keith D. Taylor: Thanks, Adaire. And a very good afternoon to everyone. First and foremost, I will start by briefly building on Adaire's comments. Simply, it was an outstanding close to 2025. From my perspective, Equinix, Inc. delivered its best quarter ever by far, closing the last quarter of the year with over $470,000,000 of annualized gross bookings, and more than $60,000,000 of pre-sales activity—well ahead of our expectations and certainly any prior quarter. The magnitude of our quarterly activity, across the substantial number of diverse deals but also with over 3,400 customers, underscores that our strategy is working and meeting the opportunity in front of us. Keith D. Taylor: Also, Keith D. Taylor: I would say that it is our retail business that is the standout, delivering record bookings across each of our small, medium, and large size-of-deal categories. And alongside our strong sales execution, Keith D. Taylor: the teams continue to operate the business with great focus and discipline. And we are only getting started. This created better-than-expected margins. We raised our capital more efficiently than planned and invested or utilized the cash more effectively, creating better-than-planned cash flows. Suffice it to say, our performance is creating momentum in the business to drive attractive recurring revenue growth and the scaling of healthy AFFO per share performance. Now, I will cover some of the highlights for the quarter as depicted on Slide 7. Note, all growth rates in this section are on a normalized and constant currency basis. First, as we indicated last quarter, our Q4 guide assumed the execution of a large xScale lease for two of the four buildings on the Hampton campus. As Adaire noted, this transaction is now expected to close in the first quarter. We also had some one-time planned benefits which will not repeat themselves in Q1. That being said, our fundamental underlying performance was meaningfully better than our expectations from top to bottom. Please refer to Slide 15 that bridges our quarterly revenues from Q4 2025 to Q1 2026. Now let me move specifically to revenues. Q4 revenues were $2,400,000,000, up 7% over the same quarter last year, fueled by continued strength in our monthly recurring revenues, which was up 10% over last year, and, as you likely noted, a steady quarterly improvement throughout 2025. Q4 revenues, net of our hedges, included an $8,000,000 currency headwind when compared to our prior guidance rates. Global Q4 MRR churn was 2.2%, lower than planned, and for the full year, our average quarterly MRR churn was 2.4%. Looking forward, our teams remain highly focused on reducing MRR churn, which includes the development of AI predictive tools to help identify opportunities to eliminate or defer any MRR churn. Global Q4 adjusted EBITDA was $1,200,000,000, or approximately 49% of revenues, up 15% over the same quarter last year. Q4 adjusted EBITDA, net of our FX hedges, included a $4,000,000 FX headwind when compared to our prior guidance rates. Our 2025 margin improvements reflect our continued focus on delivering higher operating leverage across the business while also investing in growth. As it relates to 2026, we expect to continue to deliver improved adjusted EBITDA margins while also absorbing both accelerated and increased expansion drag, the byproduct from our growth investments. Keith D. Taylor: Global Q4 was $877,000,000 or up 13% over Keith D. Taylor: the same quarter last year, including the seasonally higher recurring CapEx spend. Q4 AFFO included a $2,000,000 FX headwind when compared to our prior guidance rates. Keith D. Taylor: And Keith D. Taylor: our non-financial metrics continue to demonstrate strong momentum across our core or key metrics of net interconnection additions, net new cabinets billing, and MRR per cabinet pricing. Our net interconnection additions increased by 7,800, including both physical and virtual connections and also include our adjustments. As Adaire highlighted, we have now surpassed the half-million interconnection milestone across our ecosystem—an unmatched competitive advantage, which has been curated over 25 years of history. Turning to our cabinets billing, we added 4,300 net cabinets billing in the quarter, including cabinets from our MainOne portfolio. Our underlying net cabinets billing increased by the highest level in three years, driven by strong bookings performance across each of our three regions. Our backlog of cabinets sold but not yet installed stands at a record, given the bookings performance, especially in 2025. And finally, we continue to drive attractive MRR per cabinet yields, stepping up $65 quarter over quarter on a normalized and constant currency basis, driven by very favorable pricing backdrops, increasing power densities, and strong interconnection attach rates. Turning to our capital structure, please refer to Slide 10. As of year-end, our balance sheet increased to approximately $40,000,000,000, including cash and short-term investment totaling about $3,200,000,000. Our net leverage was 3.8 times our annualized adjusted EBITDA. During the quarter, we issued $1,800,000,000 of senior notes at an effective rate of about 3.2%. Throughout 2025, our diversified capital raising program allowed us to raise debt at very attractive rates, which helped us optimize our 2025 net interest expense. Looking at 2026, we plan to continue to raise debt in lower-cost locations either directly or synthetically, including Canada, Singapore, and Europe. And now looking at our capital expenditures for the quarter, please refer to Slide 11. Capital expenditures were approximately $1,400,000,000, including our planned seasonally higher recurring CapEx of about $140,000,000. We have opened 16 major projects across 14 markets since our last earnings call, adding important retail capacity to several of our key undersupplied metros. And we announced 10 new projects, which will be added to our global portfolio over the next few years. Revenues from owned assets are 70% of our recurring revenues. Our capital investments delivered strong returns as shown on Slide 12. Related to our now 187 stabilized assets, revenues increased by 6% year over year on a constant currency basis. These stabilized assets are collectively 82% utilized and generated a 27% cash-on-cash return on the gross PP&E invested on a constant currency basis. Keith D. Taylor: Now Keith D. Taylor: given our strong underlying Q4 results, our 2026 outlook is expected to be meaningfully ahead of our expectations that we shared with you at our June 2025 Analyst Day. Our strong pricing discipline, coupled with our best-in-class capital allocation efforts, should allow us to generate industry-leading durable cash flows with attractive cash yields, thereby delivering revenue growth and long-term value for our shareholders. Please refer to Slides 13 through 17 for our summary of 2026 guidance and bridges. Do note all growth rates are on a normalized and constant currency basis. Starting with revenues for the full year 2026, we expect total revenues to grow between 9–10%, which includes a modest 40 bps attributed to the NRR from the xScale lease timing. We expect our monthly recurring revenues to grow between 8–10%, driven by strong 2025 bookings performance, including pre-sales momentum. MRR churn is anticipated to remain comfortably within our targeted range of 2% to 2.5% per quarter. We expect 2026 adjusted EBITDA margins to be approximately 51%, an expected 200 basis point improvement over 2025, reflecting anticipated revenue growth and focused expense management. 2026 AFFO is expected to grow between 9–11% compared to the previous year. AFFO per share is expected to grow between 8–10%, which, after adjusting for 100 basis points of xScale lease timing, is 300 basis points higher at midpoint relative to our prior expectations from past summer. 2026 CapEx is anticipated to range between $3,700,000,000 and $4,200,000,000, including about $280,000,000 of recurring CapEx spend. We have not included any on-balance sheet xScale spend, as we do expect to be reimbursed for these costs as we transfer these assets into the xScale JVs. And finally, we expect our quarterly cash dividend to increase by 10% over 2025 on a per-share basis. As a result, our total 2026 cash dividends paid will approximate $2,000,000,000. So let me stop here. I will turn the call back to Adaire. Adaire Fox-Martin: Thanks very much, Keith. As this is my first opportunity to address all of you since Keith's retirement announcement, I wanted to take a moment to acknowledge his tremendous impact on Equinix, Inc. over the past 27 years. His leadership has been integral to our success and has helped us lay the foundation for our future. I am particularly grateful for Keith's partnership since I joined the company, and I look forward to his continued support as a special adviser over the next year. Our process for selecting Keith's successor is well underway, and we look forward to updating you when we have news to share. Before we turn to questions, I want to leave you with a final thought. Equinix, Inc. is at the center of a historic multiyear infrastructure investment cycle. To deploy AI at scale, enterprises need to connect and manage increasingly complex and distributed technology ecosystems. Equinix, Inc. is the neutral connector that unlocks business value for our customers. It is what we do best. It is where we have continued to focus, and our focus is paying off. We were built for this moment. But execution is everything, and we will continue to prioritize doing the most important things exceptionally well so that we delight our customers whilst delivering structurally higher returns and AFFO per share growth for our shareholders. That is exactly what we did last quarter, and it is what you should expect from us going forward. So with that, we will open the line for questions. Operator: Thank you. We will now begin the Q&A session, and we would like to ask analysts to limit their questions and reenter the queue. Our first question comes from Eric Thomas Luebchow with Wells Fargo. You may go ahead. Eric Thomas Luebchow: Great. Thank you for taking the question. Adaire, maybe you could touch a little bit on kind of the bookings momentum that you talked about that came through in Q4 and it sounds like you are off to a really good start in Q1. I think you said 60% plus of the largest deal came from AI workloads. Are you seeing more of these, you know, kind of coming from traditional enterprise companies adopting AI? Is it coming more from the hyperscalers putting edge nodes in your facility? And as you kind of look out, do you think that 60% is going to continue to rise throughout the course of the year? Thank you. Adaire Fox-Martin: Thanks very much for the question, Eric. Let me perhaps unpack a little of that AI 60% stat for you. And I think the value that we provide is obviously something that is been amplified thanks to the continued investment in this sector overall and the excitement around it. I think for us, the breadth and scale of our product continuum, they are very, it is very uniquely aligned to meet this demand. As I mentioned in my prepared remarks and you just repeated there, 60% of our largest deals were driven by AI workloads. Now, over the course of the quarter, when I look at that 60% related to AI, interestingly enough, nearly half of them were deployed by non-cloud and IT companies, but they were deployed by companies in the retail, e-commerce, manufacturing, financial services, and content sectors. So I think this demonstrates increasing enterprise AI adoptions outside of the service provider community. We also had 11 liquid cool deployments in Q4, five of which were in our New York City facilities, underpinning the requirements of our FSI customers to support elements, use cases like algorithm training in that sector. I think this also demonstrates continuing strong diversity. And from an interconnection lens, we see a very healthy growth in the AI service provider ecosystem, although it is still early days given, you know, I think the breadth and depth of our established ecosystem density. So interesting to see that it was of the 60, 50% driven by non-cloud and IT providers, really demonstrating the growth in enterprise application of AI processes to business, and we see this as a continued positive tailwind for our company. Operator: Thank you. Our next question comes from Jonathan Atkin with RBC. You may go ahead. Jonathan Atkin: Thanks. I was interested if there was any update to your multiyear guidance provided at the Capital Markets Day last June. And are those targets still relevant? Or should we be thinking about 9% as being the new baseline for AFFO per share growth? Thanks. Keith D. Taylor: Jonathan, first and foremost, thank you very much for the question. I think what is most important is to understand just the underlying momentum of the business. As Adaire highlighted both in her prepared remarks and certainly in the commentary around our booking activity, the business is performing well. I sort of said it over the last two quarters, and we sort of will talk about it this quarter. It is the execution on the top line, it is the management of the cost, as well as efficiently raising capital and deploying it appropriately. So I think we are on the right trajectory. We are delighted with what we have delivered for 2026. I just feel it is a little premature to talk about 2027 and beyond, but as you can appreciate, the momentum is wind at our back. And I would add to that, I think currencies are to continue to be wind at our back as an organization. So the combination of really strong performance, the ability to maybe invest faster than we were anticipating as Ralph sort of brings forward as many of the assets as possible, I just think we are in a really good spot. And I think it is just a bit early to talk about 2027 and beyond, but I know you can do math very, very well. And so I am going to leave it to you to sort of interpret both how we are performing this quarter being Q1 2026 and what that really implies exiting 2026. So again, feel good about our position, but let us defer the 2027 discussion till later. Jonathan Atkin: Thank you. Operator: Our next caller is Aryeh Klein with BMO Capital Markets. You may go ahead. Aryeh Klein: Thanks. First, I guess, Keith, congrats on your career and wish you the best moving forward. I guess, Adaire, just going back to the previous question around AI and that 60%, do those deals look different than some of your more traditional deals, be it from a size or location standpoint? Then I guess from an underlying demand standpoint, it seems like things have meaningfully accelerated since the Investor Day back in June. Can you just unpack that? What specifically has, I guess, driven that acceleration momentum? Adaire Fox-Martin: Yes. So let me comment on that accelerated momentum first and then I will address the second part of your question, which is around the characteristics of some of those AI deals that we saw in the first quarter. I think when I look at the, you know, the gross booking outcome that we saw in Q4, in fact, was an acceleration from Q3 all the way through to Q4 very much across the second half of the year. And as we have mentioned, in Q1 we already see some early acceleration in the current quarter. So when I look at the characteristics of what is driving that, I think it is in large part two very specific, very different themes. The first is the external one, and I will speak to that in a moment, and the second is the internal one. So if I think about the external one, we are seeing robust demand right across all workload types. And what was extremely interesting about the demand profile more generally across our Q4 performance was that it was right across the different segments that we serve. We saw all segments and all verticals grow. So it was a very robust, broad-based demand across numerous different types of workloads. We, of course, saw, you know, specificity around AI Adaire Fox-Martin: opportunity. Adaire Fox-Martin: Where there was connectivity requirements for near-metro connectivity requirements to unlock the value in that process. So very robust demand across workloads, across all industries, across all regions, and across all of the segments that we serve. Then there is the internal piece, which is the execution of the team against this particular opportunity that we saw in the market. First of all, we did accelerate some capacity into the year, and that was a helpful element in terms of our output and our performance. But we also had a phenomenal pipeline conversion rate, so the team converted at around 49% in Q4, which speaks, I think, to the quality of the pipeline that we had coming into the quarter. And as I have mentioned previously, we have been putting a lot of focus on ensuring that we are forecasting the future pipeline with the same intensity that we are forecasting the current booking pipeline, and really building our footprint strongly as we enter each quarter so that we know that we are executing on very highly qualified opportunities. Interestingly, it was also great to see some very firm pricing right across all of those segments and across all of those regions in Q4. So great disciplined internal execution that kind of met the market moment the market was at. And as it relates to the characteristics of the transactions that sat in that 60% contingent, it was, of course, some of our larger transactions were related to our AI opportunity. And I think one characteristic of all of them—I have shared with you some of the use cases already across the different segments that we facilitated this functionality into—but one characteristic was that we saw a 33% increase in density compared to the non-AI deals, so an average of about 10 kVA per cab for these transactions. Our next question comes from Michael Ian Rollins with Citi. Operator: You may go ahead. Michael Ian Rollins: Thanks. Good afternoon. Keith, I also want to Michael Ian Rollins: extend my congratulations and best wishes on your upcoming retirement. Maybe going back to some of the comments from earlier in the call, I think you were discussing the opportunity to improve churn, Keith D. Taylor: and curious as you are preparing these new tools, Michael Ian Rollins: to help get that churn down, how much of this is in the company's control versus how much of it is just simply customer optimization of workloads that the churn will happen, you know, Equinix tries to get in front of it. And then just a secondary clarification on the 6% stabilized revenue growth. Can you unpack that a little bit in terms of delivering that incremental strength relative to the recent history? Thanks. Adaire Fox-Martin: Mike, this is Adaire. I might take the churn question and then Keith answer the question around the 6% stabilized growth for you. Let me unpack the churn commentary. So over the course of the past two quarters, we saw that our churn has sat more at the lower end of the range that we guide to than at the higher end. And this is a combination of access to data and unpacking the data, the tool that, you know, we are working on and have some early pilots in place that Keith alluded to in his prepared remarks, the fact that we identify much earlier in the process what we call ATR, or available to renew. So much earlier in the process, the cohort of customers that fit in that ATR category, and then being able to deploy our customer success team onto that ATR cohort of customers in order to make phone calls much earlier in the process than we have been doing in the past, and to facilitate not just a renewal but even potentially an upsell opportunity. One of the things that we saw in Q4 was that 60% of our existing customers added additional services from Equinix, Inc. to their portfolio, and every time you have a call with a customer, you have an opportunity to share what we are doing around new services. I think it is the combination of those elements—ATR, telemetry, and visibility into our data, the customer success team focused on this, and tools that help us predict more accurately. And there is, of course, as you quite rightly point out, a proportion of churn that is not addressable by us. And, you know, that is now something that we have visibility into, and it means we focus our resources, our efforts, on the proportion where we can actually address an outcome for the customer and for the business. Keith D. Taylor: And Michael, first, thank you for the nice comment. I appreciate it. To respond to the question on stabilized assets and the growth rate, the beauty of what we shared, number one, is that there is more and more volume going through basically the stabilized assets that is not necessarily cabinet-related because our utilization is 82%. So that is number one. Number two, you have higher density per average cabinet. And so that is working in our favor. Number three, which I think is really important and then also refers back to one of the comments I made in my prepared remarks, where we have sort of one-off benefits that do not necessarily repeat themselves, at least over quarter, and that is basically price increases—price increases relating to the fourth quarter. And so it is a combination of all those that really delivered a strong stabilized growth rate on an asset base that is really quite substantial. And so feel very good about what we delivered. I probably would say, though, and to try and give you some steer, if you will, as you look forward, we still generally feel good about the stabilized assets growing 3% to 5%. That is the typical range. We are going to have these periods where we are slightly higher, and sometimes we might be a bit lower just based on the timing. But overall, feel really good about the 3% to 5% growth rate attributed to stabilized assets. Michael Ian Rollins: Very helpful. Thank you. Our next Operator: caller is Frank Garrett Louthan with Raymond James. You may go ahead. Frank Garrett Louthan: Great. Thank you. So part of your footprint expansion was to be able to capture some of the increased power demands from enterprises. We have definitely seen the demand ramp up. So where are you today with regards to your ability to meet that customer demand for folks needing incrementally new levels of power from enterprises? Have you caught back up on that? Where are you in that process? Thanks. Adaire Fox-Martin: I will answer that for you. Thanks for the question, Frank. So, obviously, you know, power and the sourcing of power is, you know, a very significant factor for us as a data center operator. Having power means that we are able to secure the compute and energy future of our customers. As we indicated, you know, we currently have three gigawatts of developable land under control. And it is not developable land full stop. It is powered land, or land that we are close to securing the power on. And so, yes, we are not in the business of, you know, surreptitiously buying a block of land if we are not sure that we can power that asset. And so that means that as we look at our capacity and our build profile moving out, we are building against powered land portfolios, which therefore will enable us to continue to advance and evolve our footprints and our facilities to meet the density requirements of our customers. As I mentioned, we saw already in the AI workloads that we enjoyed in Q4, being 33% more dense than non-AI workloads, and we can certainly see that density increasing across our footprint. So we believe that we are very well positioned to address those requirements of our customers. Keith D. Taylor: And maybe just adding on to what Adaire said, because I think it is important, is we have 52 projects currently underway. They are energized projects, and I am talking about generally the retail space. And as we shared with you at Analyst Day, whether you look at a DC-17 or a new Dallas build, they are coming with scale and size, but they are not so big that maybe there is excess focus on it. So feel really good. We talked about the one with 67 megawatts, and so it gives you a sense of where we are building capacity—in markets Keith D. Taylor: where Keith D. Taylor: there is a sort of broad need for that capacity, and they are the important markets: the Chicago, the New York, the Dallas, the Washington, and you go around the world and think about all those critical markets and that we are trying as hard as we can to build on that capacity. And so with the 52 projects currently underway, it sort of just adds to what Adaire is saying, that we have the current and then we also are creating the future opportunity for ourselves as well. Frank Garrett Louthan: Great. Thank you very much. Operator: Our next caller is Michael J. Funk with Bank of America. You may go ahead. Michael J. Funk: Yes. Keith, first, congratulations and thank you again for all the help over Michael J. Funk: over the years. So in prepared remarks, mentioned a disciplined pricing Michael J. Funk: strategy. Keith, just curious, kind of the magnitude of how much higher you can take pricing. Then you mentioned a minute ago that 3% to 5% projected range for growth with some variance. Any more comments around what would cause the variance, whether seasonality, Michael J. Funk: timing? The final part of my question would be, are you seeing ability to change contract terms on renewal, whether increased escalators or other factors? Adaire Fox-Martin: Okay. Hi. I will take the question and Keith can add some components to it as needed. As I mentioned, we experienced very firm pricing throughout Q4 across all segments and for all regions, and we are very disciplined around the approvals and the approach that we take with our customers. We recognize that in the platform that is Equinix, Inc., there is a range of differentiated value that allows us to accelerate, you know, the pricing opportunity—our pricing commanding yields as a result of our interconnection density, a result of our cloud on-ramps, and, of course, the metro locations, which becomes even more important when we look in a low-latency world around certain applications of AI workloads. So, I think from a pricing perspective, we are very disciplined. We are very focused on that, and we know that we have opportunity to accelerate that in that regard. The vast majority of our contracts auto-renew, and they renew, you know, with a particular pricing increment applied to them. But this is also an opportunity for us to have a conversation with our customers. And that is why the ATR program is an extremely important one for us because it does allow us to look at customer usage, not just of the space and power within our footprint, but some of the additional and incremental services that Equinix, Inc. offers, and then allows us to enjoy the price points that those services represent in terms of value for our customers. Operator: Our next caller is David Guarino with Green Street. You may go ahead. David Guarino: Thanks. Your stabilized cash gross profit growth has been excellent all year, I guess, in 2025. And part of that, I know, is due to shrinking expenses. So wondering, do you think that trend of reducing costs will continue? Or at some point, are you going to have to increase staffing levels if this outsized pace of bookings continues? Keith D. Taylor: David, let me take that one. Adaire, jump in as needed. So one of the comments we made is that we are just getting started. I think when you step back and look at the organization, we are driving the top line. Ralph and his organization is doing a great job of managing the IBXs to the gross profit line. And then you have the rest of the organization, and today, you know, for round numbers, you are 18–19% SG&A as a percent of revenue, right? We have a stated goal that we really would like to get—we would like to improve that. And that is through bending the cost curve. It is not always about eliminating costs, it is bending the cost curve and becoming more efficient. Our goal is to get to 15% over some period of time. And so the combination of managing into the different markets and also managing the spend while also investing behind Harman and her efforts to, I guess, to create efficiency in our organization through processes, through systems, tooling—it is a combination of all these things that I think can make a difference over the years. And still early, but we are offering up this year a guide of roughly 200 basis points improvement. It is coming from the top line, it is coming certainly from Ralph's organization. And we are still investing in the business to develop future opportunity for us. So I am not necessarily sort of subscribing to what you said that we need to throw more bodies at it. We tend to be a little bit more headcount-dense than almost anybody else out in the marketplace, and I would argue that we get more leverage from that as we introduce more assets into our environment. If you build another—put up another building in Dallas, as an example, you do not need to necessarily go hire more SG&A to support that asset. And so I feel very comfortable that when you look out that we can become an increasingly more efficient business. And consistent with the comments we made at Analyst Day, that we are surely on a nice trajectory. We said 52% plus, and there is a very good reason why we put the plus at the end of the 52. So a journey that we are going to be on together, and I am excited— David Guarino: Helpful. Thanks. Operator: Our next caller is Michael Elias with TD Cowen. You may go ahead. Michael Elias: Great. Thanks for taking the question and congrats on the Michael Elias: results. Question for you regarding the bookings. Michael Elias: Obviously, great to see big bookings quarter in 4Q. What I would like to get a sense of is, you know, how would you rank order the contributions to the bookings from the cabinets that you have coming online in capacity-constrained markets, obviously brought on cabs in Northern Virginia as well as Frankfurt, both of which were capacity constrained, versus it being a structural acceleration in demand. And really what I am trying to get at is how sustainable is the 4Q bookings level because that obviously has implications for forward revenue growth. Thank you. Adaire Fox-Martin: Okay. Hi, Michael. I will have a go at the question and then Keith can jump in if we need additional clarification on a couple of points. I, you know, I guess, you know, over the course of the last year, we began to show our annualized gross bookings to you as a metric. And the reason for doing that was to give you, with the combination of the pre-sales number, to give you a sense of the momentum that we see inside the business in any given quarter. And since we have done that, we have seen our annualized gross bookings moving upwards every quarter. And certainly, you know, Q4 was no exception to that particular outcome. We have a very strong pipeline going into Q1. We have already closed 45% of our Q1 target, and we have had a meaningful pre-sales experience in Q1 to date that has given us our largest pre-sales quarter even though we are just halfway through. So I think looking forward, you know, our bookings growth will continue to be a very strong indicator of underlying health. I think the best line of best fit is up and to the right, but that is where we see the demand. Obviously, there will be some variability quarter to quarter as seasonality and other elements kick in. So that is something that we will manage as we look at it on a quarterly basis. But as it relates to the cabinets, Keith, do you want to— Keith D. Taylor: Right. Michael, I will just add a little bit to what Adaire said as well. I think our expansion tracking sheet gives all the people on the call a pretty good sense of where we are making our investments. We need more capacity and we are going to continue to invest in more capacity. And as Adaire alluded to, we have roughly three gigawatts that we are considering over a period of time while we are still building currently. I think the combination of continuing to make the current investments while thinking longer term, while at the same time demand-shaping to markets—and you have always heard us talk about the right customer with the right application going into the right data center—and that will continue to hold true. But particularly in markets where they are constrained, not just for us but for the industry, we feel that we can demand-shape that opportunity into other markets that are proximate or within the fiber route sort of environment that would make it suitable for our customer to consume. And so I will just say that there is a lot of things that are going into it. Different markets are going to have different sets of circumstances. But this is what we are focusing on as an organization—not only increasing the density but making sure that we demand-shape to the right markets in support of the customers' needs. And that also plays into that a little bit to the pricing as well. So hopefully that gives you a bit of a sense that, yeah, we understand that some markets are more constrained than others, but we are also going to build in adjacency such that we can maybe continue to enjoy the opportunity that is in the marketplace. Michael Elias: Great. Thank you both for the color. Operator: Our next caller is Nick Del Deo with MoffettNathanson. You may go ahead. Nick Del Deo: Hi, thanks for taking my question. And Keith, congratulations on your upcoming retirement and thanks for all your help over the years. Keith D. Taylor: Adaire, earlier in the call, you noted Nick Del Deo: the strength in the interconnection franchise. Some of the big cloud service providers that you work with have announced and are developing, you know, products to help customers go the multi-cloud, multi-cloud route. Was wondering if you could talk a bit about the puts and takes of those efforts as it relates to the interconnection franchise. Adaire Fox-Martin: Thank you for the question. I guess, at Equinix, Inc., we have always understood and always appreciated the importance of the network. And I think some of the announcements that we have seen around connectivity is a validation of connectivity and the importance of the network as part of the broader AI ecosystem and landscape. And, of course, we have continued to invest in our network products, in our interconnection product portfolio, and it is a significant part of our—and a significant part of our global revenue. You know, we recognize that, you know, many of the clouds have made a cloud-to-cloud connectivity announcement. But this is a very simple use case. Cloud to cloud is a simple connectivity use case. In reality, the reality of our customers is much more complex than this. We have always, always believed in a multi-cloud hybrid world, and that requires much more complex consideration around connectivity and networking strategies for our customers. And the interesting element for us, of course, is that many of these clouds, they are very valued partners of Equinix, Inc. And they use a large part of our infrastructure to help create their value proposition in terms of networking positions and network topologies. We are always evaluating our strategy here and always looking at, you know, what is emerging around the ecosystem. And that is why for us, you know, we recognize the inherent value of our interconnection franchise. And the role of Fabric continues to evolve within that franchise as we see provisioned VC capacity stepping up quarter over quarter. And we have a range of very exciting developments around our footprint here, our product footprint here—developments that will simplify the networking journey for our customers, developments that will support MCP as it relates to, you know, the augmentation of AI agents and AI workloads, and developments that will really enhance the observability—sorry, Martin, I am stumbling over that word—that our customers enjoy on our network. So a lot happening in this space for us, that we really see that many of the announcements really validate the role that the network plays in any AI ecosystem. And it is really, I think, a validation of the connective opportunity that we see ahead of us. It is one of the reasons why we have continued to invest in this space. Nick Del Deo: Right. Thank you, Adaire. Operator: And our last question comes from Cameron McVeigh with Morgan Stanley. Cameron McVeigh: Hi, thanks. Just wanted to echo my congratulations to Keith. And secondly, you have spoken in the past about the shift from Cameron McVeigh: AI training to AI inference workloads. And curious if you have any updated views on the timing you have seen. And then secondly, this may be a follow-up to the last question, but just how important interconnection offerings are to drawing AI inference workloads from enterprises? Thanks. Adaire Fox-Martin: The first part of your question, I think when you look at how our deal profile has moved through the course of 2025 into 2026, an uptick of 50% to 60%, we can see this tailwind of opportunities perhaps emerging earlier, you know, as an enterprise footprint than we originally thought when we presented in summer of last year. And so I think that is really good news because it is taking the promise of AI and putting it into the hands of consumers, of citizens, and customers all the way around the world. As it relates to the role of interconnection in AI workloads, I think there is a very significant element here for us to consider. And in some ways, the Salesforce example that I shared in prepared remarks is a really great example of where our connectivity capability was able to deliver a very unique service to Salesforce around creating private network connectivity. And so we are very excited about the opportunity to serve our customers' evolving needs in a complex hybrid multi-cloud world. We think it is a very fast-growing space. We think it is something that would be additive to our colo capabilities because it will broaden the range of customers and that it will continue to strengthen our platform and our ecosystem. So this is something, as I have mentioned before, that we are very excited about the opportunity and see that we have a very strong competitive differentiation when it relates to others in the segment with this interconnection footprint. Keith D. Taylor: Okay, great. Well, thanks everybody for joining our conference call today and have a great afternoon. Thank you all. Operator: Goodbye. Adaire Fox-Martin: And this concludes today's conference. Operator: Thank you for participating. You may disconnect at this time and have a great rest of your day.
Operator: Hello, and welcome to the McGraw Hill Fiscal Third Quarter 2026 Earnings Conference Call for the quarter ended December 31, 2025. [Operator Instructions] As a reminder, today's call is being recorded, and a written transcript will be made available in the Events and Presentations section of the company's Investor Relations website. A webcast replay of today's call will also be made available on the company's Investor Relations website. [Operator Instructions] I would now like to turn the call over to your host, Danielle Kloeblen, Treasurer and Senior Vice President, Investor Relations. Please go ahead, Danielle. Danielle Kloeblen: Good evening, and welcome to McGraw Hills Fiscal third quarter 2026 earnings call. Joining me today are Simon Allen, Chair of the Board of Directors; Philip Moyer, President and Chief Executive Officer; and Bob Sallmann, Executive Vice President and Chief Financial Officer. As announced on January 6, 2026, Simon retired as President and CEO on February 9 and remains Chair of the Board. During today's call, we'll be making forward-looking statements about the company. These statements are based on our current expectations and the current economic environment. Forward-looking statements, estimates and projections are inherently subject to significant economic, competitive, regulatory and other uncertainties and contingencies, many of which are beyond the control of management. These forward-looking statements are also subject to the cautionary statement that is included in our fiscal third quarter 2026 earnings release, the accompanying investor presentation and our Form 10-Q for the fiscal third quarter 2026 and other filings with the SEC. Important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release issued day as well as in our SEC filings. We will also refer to certain non-GAAP measures today. We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow for greater transparency in the review of our financial and operational performance. In the earnings press release, the appendix of the accompanying investor presentation and as a supplemental file on our Investor Relations website, you can find a definition of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures. For those who listen to the recording of this call, we remind you that the remarks made herein are as of today, February 11, 2026, and have not been subsequently updated. With that, I'll turn the call over to the Chair of the Board of Directors, Simon Allen. Simon Allen: Thank you, Danielle, and good morning, everyone. It's an exciting time for McGraw Hill as we continue to build momentum, deliver strong quarterly results and position ourselves for a return to growth in fiscal year 2027. Revenue for the third quarter increased 4.2% year-over-year, driven by our higher education business, which continues to outperform the market. Reoccurring revenue grew 14.8% over prior year, representing 82% of total revenue, while digital revenue expanded 11%, representing 84% of total revenue. Adjusted EBITDA increased 7.7% versus prior year, yielding a margin of 31.3%. These fiscal Q3 results reflect strong execution and ongoing momentum, giving us the confidence to raise fiscal year 2026 guidance, which Bob will discuss shortly. Education is fundamental to society and our mission serves as our foundation fueling our resilient high-margin, cash-generative business model. Our trusted content and innovative technology doesn't just deliver information, it empowers educators to engage learners with personalized experiences that enrich understanding and growth. Our multilayered mode built on intellectual property, first-party data fueled by billions of learning interactions each year and domain expertise across the learning life cycle creates what we believe is a distinct competitive advantage at scale. Unlike generic AI, McGraw applies AI thoughtfully to improve learning outcomes, leveraging our multilayered moat to deliver evidence-based impact while saving educators valuable time. This approach is resonating A recent study conducted by Morning Consult ranked us as the top education company for effectively utilizing AI recognized by both students and instructors. Before moving forward, I want to acknowledge my decision to retire as CEO and President. Leading this team of over 4,000 mission-driven employees to transform a legacy publisher into a market-leading digital education solutions provider powered by the trust, innovation and strong financial profile that you'll hear more about today has been the greatest honor of my career. I will continue as Chair of the Board and will remain deeply engaged to ensure a smooth transition to Philip Moyer, who will lead the next chapter of McGraw Hill's proud history. When the Board and I began our search for my successor, we were looking for a seasoned CEO and technology leader who could not only appreciate our strong foundation financial profile and trusted brand, but also harness these strengths to fully capitalize on the enormous opportunities ahead from McGraw Hill. We led a comprehensive search, and I can say with absolute confidence that we found the right leader in Philip. Philip brings a wealth of experience from senior technology-focused roles at Google, Amazon, Microsoft and most recently the CEO of Vimeo. One of the many attributes that set him apart with his early career passion for using technology to envision the future of education. From his creation of the digital software solution to modernize the management of individualized education plans to the growth he led in the education sector, while at Vimeo, we believe that Philip brings the perfect blend of operational excellence, strategic vision and customer-centric technology expertise to honor the commitments we have made to grow profitably, to expand margins and to achieve our 2 to 2.5x net leverage target. Philip, I'm extremely excited about our partnership. Welcome to McGraw Hill. Philip Moyer: Thank you, Simon. I have to thank you and acknowledge the incredible foundation that you and the team have built. It's a privilege to take the baton at a time that McGraw Hill is expanding market share, executing on its financial commitments and positioning itself for long-term growth. What attracted me to this role wasn't just McGraw Hill's strong financial profile. It's the mission of the company, and it's the trusted position in the industry. Throughout my career, I've seen how technology can transform industries but education is where technology can transform lives. We're at an important juncture in the education industry. Technology can be both a distraction or an accelerant to learning. It is essential to support teachers and school administrators in engaging this generation of students with new and more effective technologies. The experience I have in building enterprise-grade AI platforms and global video distribution technologies provides a unique vantage point into the opportunity ahead. While AI adoption grows, it's not a one-size-fits-all model that will be solved by large AI model companies. Instead, personalized learning and personalized AI is essential for the student and the educator. McGraw Hill is well positioned to lead in this next generation of learning. We're harnessing one of the most trusted curriculum libraries in the world. We're building new learning technologies, leveraging billions of proprietary data points about what does and does not make learning effective. And importantly, we have one of the most respected global distribution and customer service teams in the world that connects directly with educators and students to make sure that they are successful in using our tools. My focus will be on accelerating growth scaling our business and maintaining our brand trust and academic integrity, while we build some of the most engaging and exciting learning tools in the world. I admire the financial rigor that Bob and Simon have instilled, and I look forward to progressing further on our goals, as we reinvest in growth opportunities and expand margins, reducing our debt and leveraging McGraw Hill's strong brand and seasoned talent. I'm eager to partner with Simon, Bob and the rest of the leadership team and our Board to drive shareholder value. I look forward to meeting many of you in the coming months ahead and to speaking with you again in June when we report fiscal year end of 2026 results. Simon Allen: Thank you, Philip. Let's dive into some more details underpinning our exceptional third quarter performance. In higher education, we continued to significantly outperform the market with 24% year-over-year revenue growth supported by our record high 30% market share according to MPI, our go-to-market execution, first mover advantage in product innovation and portfolio expansion. Building on this momentum, our Evergreen platform now boasts a growing library of over 700 telatuals. Evergreen streamlines workflow management for educators and enhances sales rep productivity, allowing an increased focus on takeaways. Additionally, our new ALEKS for calculus solution supports a more comprehensive STEM offering that unlocks approximately $100 million in market opportunity globally. AI-powered solutions are driving deeper engagement, improving efficiency and fostering academic success all while boosting platform utilization and reinforcing our position as a leader in education innovation. For example, AI Reader reached over 1 million higher education students in Q3, generating 16 million learning interactions, up from 11 million in Q2 for a total of 27 million since inception. We recently expanded AI Reader into our First Aid Forward and access medicine offerings within our global professional segment. Enhancing the learning experience with alternative explanations summaries and personalized quizzes. Building on this AI innovation, clinical reasoning is also gaining recognition from medical professionals for its ability to foster critical thinking and real-world application. We are experiencing promising momentum in institutional pilots and are advancing its impact by introducing new modules and virtual cases in the months ahead. As we scale, we are pursuing a greater institutional focus and deeper integration among our offerings. Sharpen Advantage, a new AI-powered enterprise solution exemplifies this through an attractive TAM extension that leverages our existing content and capability to offer unique content. Redefining our traditional professor focused high registration approach sharpened advantage deepens penetration by selling institution-wide with solutions for administrators, professors and students alike which all work together to improve student outcomes. Integrating Sharpen with ALEKS, this fall should drive incremental upsell. In K-12, we've gained market share in a smaller year, building on strong prior year performance. We are ranked first or second in 10 of the top 11 adoption opportunities with success in science as well as ELA. As we've said before, we've not experienced any material impact from proposed federal education policy changes. Fiscal year 2027 marks a larger market opportunity driven by purchasing cycles in California Math, Florida ELA and Texas Math. Active pilots in the California math market are progressing, and we have secured some early wins. In Florida ELA, we secured a leadership position this year, which we believe should position us well moving forward. And we are optimistic for Texas math where our offering will integrate with McGraw Hill Plus, a platform that has seen district access up 86% year-over-year and a 40% increase in average time spent on the platform since the start of the school year. We believe that our investments in innovation and portfolio breadth provide more integrated end-to-end solutions moving forward. Supplemental and intervention solutions like ALEKS Adventure with 4x more monthly student users than last year, McGraw Hill Plus and AI capabilities like teacher assistant and writing assistance, enhance our capabilities to fuel growth beyond the core. To this end, we have secured an early win with our K-5 literacy curriculum emerge and launched Summit and saw for grades 6 to 12. These programs deliver cohesive personalized literacy solutions integrated with tools like teacher assistant and writing assistant, which integrate Essaypop, which we acquired in March of 2025. We're strengthening our competitive edge by delivering more integrated end-to-end solutions positioning ourselves to drive growth beyond our core offerings. Now I'll turn the call over to Bob to discuss the financials. Robert Sallmann: Thank you, Simon. I'll review the fiscal third quarter results shortly, but first, I want to express my deepest gratitude for your mentorship and friendship during my tenure at McGraw Hill. You have been a transformative leader who has driven an exceptional financial turnaround that positions McGraw Hill as the global leader in education solutions. Under your guidance, the company has developed a unique culture that combines passion, excellence and innovation, empowering teams to achieve exceptional results and laying the foundation for continued success in the years to come. You lapped an indelible mark on this organization, and we are all better for it. I've already spent significant time with Philip, and I'm energized by our partnership as we focus on scaling the business, expanding margins reinvesting in growth and achieving our net leverage target. Now on to the results, which demonstrate our strong earnings quality our resilient business model and unwavering dedication to meet our commitments even in a seasonally small quarter for the business. In the quarter, total revenue reached $434 million growth of 4.2% year-over-year, while fiscal year-to-date revenue increased 0.7% versus prior year. Reoccurring revenue grew 14.8% year-over-year to $357 million, representing 82% of total revenue, showcasing a robust digital mix. Digital revenue grew 11% versus last year to $364 million. Growth in higher-margin digital subscriptions continues to strengthen our financial profile. -- adding a layer of predictability that is reflected in our remaining performance obligation, which stood at $1.7 billion at the end of the quarter and will move higher as we begin to capture the first wave of larger K-12 opportunities. Gross profit margin expanded nearly 100 basis points year-over-year to 85.3% due to efficient operations and favorable digital mix with no impact from tariffs on our business. Adjusted EBITDA rose to $136 million in the quarter, achieving a 31.3% margin, up nearly 100 basis points year-over-year, reflecting strong operating leverage amid ongoing reinvestment. Internally, we continue to infuse technology to streamline processes and enhance operations. In Q3, we launched an offer management system to strengthen our go-to-market by simplifying the sales process, compressing time to close deals and improving pricing visibility. We also expanded AI use cases across product development and operations to enhance efficiencies and unlock incremental margin opportunities over time. Now moving on to the segments. Higher education revenue grew an impressive 24% year-over-year to $225 million in the quarter, with reoccurring revenue growing 33.5% and digital revenue expanding 24.8%. This strong performance was fueled by market share gains, increased demand for our innovative portfolio offerings, enrollment growth and strategic value-based pricing. Inclusive Access now represents 60% of higher education revenue with nearly 2/3 of fall 2025 growth driven by new course adoptions from existing customers, highlighting strong cross-selling efforts. Onboarding approximately 100 new campuses annually further supports multiyear growth visibility as accounts typically scale within 2 to 3 years. And we expect the activations for accounts landed in fiscal year 2026 to increase by 15 to 20x in the next few years. 70% of Higher Education revenue now comes through Evergreen, exceeding our initial expectations. Professors are increasingly adopting the latest releases without sales rep intervention, allowing our sales team to focus on new opportunities, which positions us well for retention and market share takeaways heading into fiscal year 2027. Our exposure to resilient enrollment pockets also remains favorable. 1/3 of our higher education business is tied to 2-year colleges and our portfolio overindexes to disciplines like business management, which continues to demonstrate relative strength. K-12 revenue was $128 million, a decline of 14.6%, in line with our expectations, given the impact of the smaller market this year and the lapping of exceptional capture rates in the prior year. In Q3, reoccurring revenue only declined 1.6%, benefiting from strong prior year sales. As Simon mentioned, this year, we continued to gain market share, and we took a lead in Florida ELA. We also continue to show momentum in science adoptions in Alabama and Tennessee. We are actively preparing for the fiscal year 2027 [indiscernible] cycle. California math pilots continue as we enter the key selling season. In addition, we have seen initial success in ELA with an early K-5 emerge when in open territory ahead of the California ELA adoption in fiscal year 2028. We bring forward a competitive value proposition leveraging integrated solutions like McGraw Hill Plus and a broader portfolio to drive growth beyond the core. Global Professional revenue increased by 2%, and its recurring revenue grew by 3.5% in the quarter. Growth in digital medical and engineering solutions has successfully offset the impact of our noncore print exit. Additionally, early momentum from our AI-powered clinical reasoning solution further strengthens our confidence in future opportunities. International revenue declined narrowed sequentially to 1.8% year-over-year in the quarter. While higher education headwinds persist, we are gaining market share and remain optimistic about growth opportunities driven by new innovative solutions like ALEKS Calculus. We ended the quarter with $514 million in cash and $964 million in liquidity with our revolving credit facility remaining undrawn. Net leverage was 2.9x as of December 31. We generated $309 million in cash flow from operating activities in the quarter, an increase of 12% year-over-year. Our attractive cash flow profile enabled us to prepay an additional $50 million in term loan principal in December, for a total of $200 million in the quarter. Year-to-date, we prepaid $596 million in term loan debt, generating over $41 million in annualized cash interest savings. Our disciplined capital allocation strategy continues to prioritize reinvestment and debt reduction while maintaining flexibility to optimize our capital structure. We remain committed to a net leverage target of 2 to 2.5x and pursuing strategic tuck-in M&A. Looking ahead, based on our strong performance, RPO visibility sustained share gains and favorable enrollment trends, we are raising our full year fiscal 2026 financial guidance. We now anticipate total revenue for fiscal year 2026 in a range of $2.067 billion to $2.087 billion. Reoccurring revenue ranging from $1.516 billion to $1.526 billion and adjusted EBITDA between $729 million to $739 million. We continue to expect unlevered free cash flow to slightly exceed the low end of the 50% to 100% adjusted EBITDA conversion range, while CapEx and product development as a percentage of revenue remains unchanged at 8% to 9% of total revenue. Finally, a couple of modeling items for Q4. Stock-based compensation is expected to be in the range of $1 million to $2 million and tax expense is expected to breakeven in the quarter. We will share our fiscal year 2027 financial guidance during the fiscal year-end earnings call in June. We remain confident in fiscal year 2026 and the foundation for fiscal year 2027, with a return to revenue growth and continued margin expansion. Now we will open the call up for your questions. Operator: [Operator Instructions] Your first question comes from the line of George Tong with Goldman Sachs. Unknown Analyst: Can you help unpack the growth drivers that you're seeing in higher ed and how you're thinking about fiscal 4Q perhaps talk a bit about Evergreen as a differentiator? Simon Allen: George, it's Simon. Thank you. It's a great question. I feel like I'm a broken record when I talk about our higher education business because every quarter I explained to you all that -- we are so proud of the growth we've had, our continuing ability to take market share, significant market share really. And you look at the growth rates, and we're just extremely pleased with where we've landed this quarter. And there's a lot of reasons why we've had this growth, but primarily, I think you mentioned Evergreen, that's a wonderful innovation that we have that is unique to McGraw Hill in providing continual updates to faculty, making sure that they no longer need to think about new additions and ensuring that they have most up-to-date information, meeting our reps need to spend really far less time working with the faculty and making much more -- paying much more attention to growing market share by working new adoptions. That's been very successful for us. And our faculty tell us our customers how much they really enjoy Evergreen because it just gives them the immediacy and the knowledge that they've got the most current and engaging information for their students, and that's really very important. I think our go-to-market teams have done incredibly well, our customer success groups, our representatives that we have a learning specialists, you name it. ALEKS specials we've done so well across all of our go-to-market. It really is very, very pleasing for us. And I think the last thing I'd say, and there is a lot, George, I could say about higher ed than the growth that we've had. But -- when I think about the Morning Consult survey that we referenced in our script a little earlier, we're very proud that they cited us McGraw Hill as the company that uses AI most effectively and that, of course, is told to us by our educator customers and our student customers. And that gives us great pride. And I think you put all those together, the value proposition that we've explained so carefully the ability to innovate with so many different tools now with AI Reader really coming on stream, making a big difference to higher education students in pretty much every discipline. Evergreen now 70% of our revenue even more than we expected. It's just a very pleasing picture, George. Philip Moyer: And Simon, maybe let me quantify some of that George, I'll quantify some of that for you and lean into a little bit of Q4 how we're thinking about it. On the 24% growth, 17% year-to-date, 3% to 4% of that is coming from enrollment. You may have seen enrollments quoted at a lower number from the National Student Clearinghouse. Obviously, as we over-index into 2-year colleges as well as business management that allowed us to have a little bit stronger growth there. In addition, and I mentioned in the past, we continue to realize price. And so we go out with inflationary price, it sticks. But you have to offset that with some of the mix as it's associated with inclusive access. So on a net basis, we're getting over 1% of price in higher education. We also benefited in the quarter related to a sales return release. And that's really a result of a couple of factors. But first being lower level of returns coming in, in the quarter. And this is a mechanical exercise we do every quarter. You could read about it more in our disclosures. But the other part I do want to highlight is we continue to move to more concentration of inclusive access, that higher quality revenue tends to show a lower level of return. So again, it positions us well as we think about the future. And then when we think about the fourth quarter, we think about sort of how to think about the full year, I would just get you to think about double-digit growth in billings and on a revenue basis. So when you do that math, you're still seeing that 4% to 5% growth from share gains. And you can tie that back to some of the MPI data that Simon had referenced before. So those are the areas. And you're probably coming on to the fourth quarter question around, hey, what that change or why are we seeing the growth rates slightly decline. As we highlighted before, we come to a difficult comp in the fourth quarter. And again, as we think about the full year, we're going to still experience that double-digit growth, but we are facing a more difficult comp in the fourth quarter. Operator: Your next question comes from the line of Ryan MacDonald with Needham & Company. Ryan MacDonald: Congrats on a great quarter, and welcome to Philip. Maybe just to start, first question for me is around the K-12 business. Obviously, continuing to benefit from the strong market share gains, obviously, from last quarter. But as we look ahead to fiscal '27, can you just unpack a little bit more about what gives you that confidence in sort of the return to growth and magnitude of growth for that business? And as you look across the 3 sort of large state opportunities, with California, Florida and Texas. I'm curious to get your thoughts on sort of the trajectory for the Texas opportunity we've been hearing more and more about how -- as they've changed their adoption cycle and some of the mechanics there. There's just a lot more material -- instructional materials that they have to review ahead of the sort of purchasing cycle. Any concerns that, that could delay decisions at all ahead of fiscal '27? Simon Allen: Ryan. That's a lot of questions in that one. And let me take them piece by piece, if I may. And you're quite right. We're very pleased with our K-12 performance as well. And you know that FY '26 was -- is a smaller market size and yet we've continued to grow market share. And that's what's important to us. We've got to keep outperforming our competitors at every level. And we're very pleased that we've ranked #1 or #2 in the top -- and really in 10 of the top 11 adoption opportunities this year. And that's driven a lot by our ongoing success in science and ELA and as Bob indicated in our earlier comments. And in states like Alabama and Tennessee, we're very, very pleased with our performance there. I would -- and also looking ahead, I mean, to your question, Florida ELA, we've got a good start there in year 0. We're feeling very good about what that could mean for us going forward. We will make sure that we recognize the market growth opportunity and what that means for us in FY '27. I think we've mentioned before, Ryan, that we're looking at about a $300 million increase in the term for next year. So we're obviously optimistic about what that means for us. It's very early in the adoption process. As you know, the selling season really begins January and doesn't conclude until Memorial Day or even slightly after. So we're in the stages right now in the battle, which we love. And we'll know a lot more about how things are when we get to the end of May, early June, and we can update you at that stage then. But we're very pleased with the pilots we're offering. We've had some good wins with Emerge our K-6 literacy program. As you know, we've launched also our 6 to 9, 9 to 12 Summits products, which are very exciting. We had a wonderful sales meeting in New Orleans. I won't give you all the details, but I will say that we had a great launch with that product. And about 6 or so 100 reps very excited about what they're seeing, which is marvelous. So we feel very good about that. Very briefly on Texas. Your point is a good one. I mean they're changing the style in a way, but we've got great relationships. They're really great market and a fine knowledge of how that state operates. We welcome new competitors. It may change. You mentioned the delay. We're not sure about that. The way decisions are made are extremely effective. They're very strong as they always have been. And really, we really feel that the end-to-end offerings that we have through all of our content technology, you name it, that's something that other companies cannot provide. And they usually lack in the technology development that really integrates with a lot of the content. That's the key strength of McGraw Hill, as you know, which is why we feel good about how that's going to develop for us. Ryan MacDonald: Really appreciate all the color there, Simon. And maybe as a follow-up, I would love to propose one to Philip. obviously, early on in your tenure, but just curious as you evaluate the opportunity coming in, would love to get your view, particularly as a technologist, sort of McGraw's AI strategy and how you think you can continue to evolve that in the role moving forward? Philip Moyer: Ryan, thank you very much for the question. I would -- I have to start by saying AI is only good as the data and the quality of the training. And coming in, it's one of the things that attracted me most to McGraw Hill. As you think about building a next-generation company, just any company. You're going to need data. You're going to need experience with workflows. You're going to need integrations, you're going to need to go-to-market, you're going to need a whole variety of things. And ultimately, you're going to build a system that has experience in answering questions or taking action. We're coming into this next generation with simply unmatched assets in the education industry. We've got one of the largest vetted localized content platform or tones in the world, with literally tens of thousands of specific AI or images and assessment specific to -- specific learning pathways. We also have mapped out these learning pathways that developed tens of -- tens of thousands of discrete skills along the way at every single age. We have billions of data points an algorithm that understands when somebody is on the pathway and someone is off the pathway. And we can serve the teacher and also the student in really unique ways with that knowledge. And then we have go-to-market and service teams that have deep enterprise relationships and they understand the regulatory environment down to a ZIP code level. And over the past 5 years, I have to say, coming in, what was so evident to me is in the past 5 years, there's been a really significant investment in technology and AI and you're seeing that. I don't think what's been talked about and what you're not seeing underneath the iceberg is all the tools that have been released over the past 12 to 24 months, ALEKS Calculus, an AI Reader, Teacher and Writing Assistant. Sharpen as an example, we just released within 9 months, and we already have 1 million active users on that platform. And so I'm excited about the pace at which we're innovating. I'm excited about the assets and I'm really, really excited about all the opportunities ahead. So I feel very, very good as someone that's lived in tech my whole life about what we're going to do. Operator: Your next question comes from the line of Stephen Sheldon with William Blair. Stephen Sheldon: Maybe I wanted to start with Philip as well. I guess you started the new role this week. I guess if you think about the coming months, what are some of your early priorities where do you envision spending your time across the organization as you think about the coming months? Philip Moyer: Sure. First, obviously, I'm learning the organization, I'm learning the products, but most importantly for me is getting out with the customers. Already, the customers that I've been spending a little bit of time with, I hear very firsthand from customers already. Many are really concerned about AI. Many are confused around technology. Many are unsure whether or not their students are engaged and whether or not they're comprehending when they're using AI. And so most importantly for me is getting out with our higher ed customers with our K-12 customers with our global professional customers with our international customers. And I think that a lot of them want to know that there's going to be a trusted partner as they go into this next generation. So for me, it's going to be listening and it's also going to be assuring them that we're going to be a partner every step of the way. The second thing I would tell you that's very important to me as well is just what I -- a little bit of what I was just talking about. We've got a great pace of innovation, and I really want to spend time to make sure that we've got a really solid vision for the customer, for the student, for the teacher, for the administrator of where we're going in McGraw Hill with our technology and do -- are we executing as quickly as we can. I'm really looking forward as well to spending time with our go-to-market teams. They're world-class. They're world renowned. They have incredible relationships. And so I also want to hear to them how we can empower them more to serve that customer base. Stephen Sheldon: That's great. I appreciate that. And then maybe one for Bob as a follow-up. It sounds like the team is confident about the return to growth in K-12 for next year, and you gave some hopeful commentary on the factors driving growth in the higher ed segment. So just curious, if you look at higher ed and thinking about fiscal 2027, how much visibility do you have at this point on the potential growth heading into next year. So it seems like some of the factors that are supporting growth like broader adoption of inclusive access. Some of those things should have some legs. So just at the high level, I know you're not giving guidance or anything at this point, but just -- yes, how are you thinking about growth heading into next year? And how much visibility do you have into it at this point? Robert Sallmann: Yes, sure. And as you're aware, we'll provide guidance in our June call. And at that point, I'll be leaning into some of those early indicators which we watch would be fast applications, high school graduation rates, information like that. But some of the things that give us confidence, we look at the RPO, we see activations in January in the spring. Some of that will carry into next year. So all of those things -- and I'd say the thing that we are most confident about is our ability to continue to take share. We've demonstrated that. We're seeing takeaways as we walk into next year already. So all of those things bode really well for us as we think about next year. Operator: Your next question comes from the line of Steven Koenig with Macquarie Group. Steven Koenig: It's Steven Koenig with Macquarie. Nice to be on the call. Congratulations is due to Simon, I want to echo previous comments by others on your contribution financially, operationally and certainly culturally to McGraw Hill. So you leave a really -- really good position here for Philip to build on and welcome to Philip. Philip Moyer: Let me just say thank you. Steven Koenig: Yes. You're quite welcome. Good. Yes, it's pretty clear what your contributions have been and it puts you in great [indiscernible]. On the -- I wanted to ask Yes, I wanted to ask maybe kind of a 2-part question it's related. So one part of the question maybe for you, Simon, is -- you mentioned that Sharpen Advantage expands your TAM by providing the institution-wide solutions not only for professors, but for administrators and students. Can you expand on that, and then I'm going to put the related question out there as well. And Philip, feel free to give us your thoughts on this as well. I think something that a lot of investors miss certainly about my software coverage is like the competitive moat isn't just from the IP. It's from kind of the customer lock-in that happens when you integrate the solutions, you deploy them, you integrate them with the data, processes, workflows, et cetera. And you're clearly doing that at McGraw Hill, and I'm not talking about just the technology solutions, but also your go-to-market and what you're doing to make yourself irreplaceable in the institutions. I'd love to hear your thoughts on how your technology, your go-to-market, your content all influence that? And then I'll leave it there. Simon Allen: Thank you very much, Steve. And again, thank you very much for your very kind comments. And I'll kick off a little on Sharpen and thank you for asking. It's -- we're very proud of Sharpen the kind of product that we have there, as you may remember, is very much focused on how students learn today. That lovely quote that -- it's like my textbook and TikTok had a baby. And that's how so many of students learn in their first and second year, particularly at University and ecologist. What we've done with Sharpen and we've got a proven model with students. We know that it works well. We know that they really appreciate the type of video-based learning and quiz focused activity, really a lot of gamification tools in there. And then what we discovered is that the market increasingly asked us to look at this in a more broader sense on what can we provide for the institution. So over time, what we've done is make sure that we can focus on a broader coverage, allowing the educator to include their own content, for example, making the institution at that level, use sharpened materials across the entire network, every single class, every single sector and department where we operate, which is pretty much everywhere. So the breadth of coverage at the institutional level really opens up a significant market for us, new market, if you like, beyond just that student and of course, the faculty relationships that are so near and dear to our company. And I think with Sharpen, we're just really excited about how quickly, as Philip said earlier, we've really developed some serious revenue and customer base and now we're looking forward very much to seeing that expand exponentially at the institutional level. And I'll pass it over to Philip now for the additional questions that you had on AI. Philip Moyer: Sure. I get asked a lot about LLMs in the context of education. And I'd like to say that every generation of technology, whether or not it was a PC, PC, the Internet, the cloud, every one -- every one of those needs deep domain expertise to bridge the last mile for the big tech platforms. I lived in that for a long time. And I know that, that we -- it was a very vibrant ecosystem of software companies, services companies. It's become a massive industry to bridge that last mile. This error is no different in artificial intelligence. And I think that our moat is going to be really clear. A couple of things, as I mentioned, we have -- we understand local education requirements down to the ZIP code, and today, more than ever, educational requirements are becoming down to the ZIP code level. We have these specific age appropriate learning pathways. I'd like to say that LLM may know what you're asking, but we know why you're asking it. We are able to build security and trust and psychological safety into what we're building. We have the ability of building personalization for every student, for every teacher. We can enter new curriculum markets in a way that we've never been able to before, with fine grain supplemental work. And we're able to do really engaging learning experiences that just a standard LOM is not going to do. And then also just the ability to understand whether or not someone's comprehending what the answers are that they're giving to the teacher and then also the teacher to understand their students. We think there's all these fantastic opportunities to build great moats with artificial intelligence and LOM technology. Steven Koenig: That's super helpful. Operator: Your next question comes from the line of Marvin Fong with BTIG. Marvin Fong: Congratulations on the great results as well as Philip for the new role and Simon I didn't have that long a time to work with you, but certainly hope to continue the relationship there and best of luck. Just a couple of questions. Again, on AI, biopic, maybe a different angle for either Simon or Philip to answer. But from the outside as investors, how would you suggest we measure the impact of AI on your business? And I know you also [indiscernible] some internal metrics on time to development and costs that AI has benefited you from maybe on both sides of that coin, how can we measure AI and how it's impacting your business? Simon Allen: Thank you very much, Marvin. It's Allen. I'll kick off and then pass it over to our new CEO, Philip and I think what I would say, first of all, is that with everything that we do with AI, we've done a ton. We've released some tremendous products, all that we focus on is ensuring that we use a human in the loop approach to make sure that everything that is delivered, we know has efficacious value to the teacher and the focus of a lot of our AI tools, if I think of writing a system, teaching assistant. The focus there is providing the educator more time to spend face-to-face with the student. That's got to be really emphasized all the time. And you will have read a great deal recently about the need for that human interaction for the teacher and student to really bond and spend significant time together. So a lot of the AI tools that we've innovated in the last few months allow that. And they allow it because we're increasing the efficiency levels. You think about AI Reader and higher education we're allowing the students to really understand more complicated materials in ways, repetitive ways, in fact, it really help them grasp difficult concepts and enable them to then have more meaningful conversations with their professor. I think at the K-12 level, again, writing instruction tools, how the students begin to think about creating sentences, paragraph structure, you name it, again, allowing for that formative discussion with the teacher at every stage. And then as I look at our medical business, clinical reasoning another great new innovation that we've provided for medical students that are looking at how they can diagnose what they can think about utilizing as they look at the patient interactive evaluation tool that we provided, so they can start to immediately relate to a patient's situation that they may need help within. And I think all of our tools that we've created, I know all of the tools that we created are very valuable. We test them incessantly before we release anything to make sure that we're adding value to what we provide. So it's a very thoughtful process, Marvin will -- shall continue to be but it's wonderful to have the opportunity to do this with the technology now that and the advancements in AI, we've been operating with machine learning, as you know, for over 20 years with ALEKS. But now we really can stretch your head with AI. But I'll pass it over to Philip. He may have other comments as well. Philip Moyer: Coming at this as technologies, I always look at user engagement. So I want to know how many users are using it, how many are using it daily and how long are they spending on the tool. So internally, we'll be tracking that. We're also going to be tracking outcomes. And we're seeing some pretty extraordinary outcomes already on our tools in terms of like grade level improvements and kind of engaged and improvements overall in comprehension. So that's the second one. So really the learning outcome. But then a few other areas that you should really -- that you're going to be able to watch us focus on I've heard a statistic, I think it was just today that the average district has as many as 1,000 learning tools that are inside of their organization. And that's going to become even more complex. Imagine AI tools sitting inside of a local district or a local university. And so enterprise adoption is going to be a really good focus. We're going to try and simplify for the institution the use of AI, whether or not it's from a cost perspective, whether or not it's from a content perspective, whether it's not from a safety or security perspective. So enterprise adoption is important. And the last thing, the way that we use AI is accelerating our own development and entry into new markets. And so I also expect that our ability to be able to do more supplemental work to be able to do hyper localization, so these markets, entering new markets. When you look at the overall education industry on a worldwide basis is about $7.3 trillion, and it's growing to about $10 trillion by 2030. And so how big can we think and how many markets can we be in and how many educators and students can we serve. I think it's really going to be driven by our harnessing of AI. Marvin Fong: Got it. That's terrific. And second question, maybe Bob can [indiscernible] here as well. In terms of like -- and I know you mentioned we'll be discussing your outlook for next fiscal year in the upcoming quarter. But just as in terms of spending priorities now and where you're focusing your incremental dollars, anything you can kind of help us out there as you balance both product development and obviously maintaining all the great field sales. Just kind of elaborate a little bit more on what your pending clarity [indiscernible]? Robert Sallmann: Yes. And thanks. We definitely have our road map laid out. And as we execute against that road map, we know where we're deploying the product development and technology spend. So we're just adhering to that. There's been no meaningful change. And over time, we expect that to remain to be the 8% to 9%. We don't really see a change in that. Now it may mix shift in where we spend those dollars over time. But as we've gone through our strategic plans and understood sort of where we're spending dollars on that road map, we expect it to remain between 8% and 9%. All of that why we continue to expand margins. So that's the other key point that we want to reiterate is that as we make those investments back into the business, we'll continue to be able to leverage and scale and expand our margins. Marvin Fong: That's great. Operator: Your next question comes from the line of Jeff Silber with BMO Capital Markets. Jeffrey Silber: I know it's late. I'll just ask one. I know you don't give specific guidance for the quarter. but obviously, results were better than expected. Were there any timing issues either in terms of revenue recognition or maybe deferring some expenses into the fourth quarter that we should be aware about? Simon Allen: No, I'd just come back to as we think about the comp that we have in [indiscernible], I just want to reiterate that, that we do have a difficult comp as we think about the fourth quarter. But we're all doing this while we're taking share, and we've seen share gains in all of our businesses. And so as I think about the fourth quarter, really leaning into the RPO, also looking at the early activations that we saw on higher ad positions us to increase our guide, and that's sort of the drivers for us. Jeffrey Silber: So there was nothing specific in the third quarter to call out one time? Simon Allen: Well, let me come back to that reserve. I mentioned it in higher ed. I didn't mention it was about 400 basis points of benefit to us in the quarter. I just want to come back, that is not onetime, if that's what you're alluding to. I mean, we have a mechanical process that we do every quarter, and we disclosed that in the Q. But it was slightly larger than we've experienced in the past. That's why I wanted to call that out. The reason for it being higher is just because of the smaller reserves that we -- returns we experienced in the quarter. And that's why it was notable for us this quarter, and I wanted to call it out. Jeffrey Silber: Really appreciate that. Simon Allen: You bet. Operator: Your next question comes from the line of Henry Hayden with Rothschild & Co Redburn. Henry Hayden: I'd like to add to the congratulations, Simon, on your retirement. I guess to start off, it's great to see leverage continuing to come down towards the target range. Could you please give us an update on capital allocation and how you're thinking about leverage progression from here? And since you commented on it, how are you thinking about M&A in that context? And what sort of assets would be of most interest. Simon Allen: Sure. Thanks, Henry, and thanks for staying up late. First -- our first priority is always the organic opportunities, right? So as we look at where we deploy capital we see organic opportunities to generate the greatest ROI. We'll continue to do those. Those have always been fully funded both in our budget, which -- our guidance for next year as well as our strategic plans. So we'll continue to put our dollars there first. Secondly, it comes back to our commitment to deleveraging. And so you saw that we were at 2.9x leverage at the end of the quarter. And we have a seasonal cash flow, which will result, and that's slightly picking up as we think about both the fourth quarter into Q1. And then ultimately, as we enter the fall, you'll see that, that cash continues to build. However, we're really excited about where we sit in cash, our cash position as well. So we anticipate paying down another $50 million in the fourth quarter. So in addition to the $200 million we paid down in the third quarter, we will be paying down another $50 million here in the fourth quarter, given just the strength of our cash position. And then lastly, around M&A. We're looking at some bolt-on tuck-ins. We have a very active funnel. And I would tell you that they sit in all of our BUs. We're looking at things internationally in the global professional space, higher ad in K-12, both as technology advancements as well as other small tuck-ins. There's nothing transformative in the funnel today, but we'll continue to look at things. And opportunistically, we'll execute when it makes sense, utilizing cash on the balance sheet. But again, we have -- we're excited about where we sit, the investments that we're making, continue to pay down and delever. And just as a reminder, I think it for modeling purposes, as a reminder, Q4 and Q1 represent our cash trough, and then it will continue to cycle back up as we build the RPO in Q2. Henry Hayden: That's very helpful. And then just as a quick follow-up. What sort of appetite are you seeing in the market for Teacher Assistant from the customer side -- and how should we think about the relative growth uplift from that product as it gets a broader rollout kind of in the next year? Robert Sallmann: That's a good one. And it's an encouraging answer. I think, Henry. We Teacher Assistance is designed for exactly what is described -- and it really has been well received to just enable the K-12 teaching community that they're feeling pretty beat enough in many situations. It's been a pretty tumultuous time for a lot of the teachers that particularly since COVID, they're looking for tools that whatever we can provide them that allow them the chance to do classroom preparation activities in a far more straightforward way and a more enthusiastic way for their students. And just a chance to really build course material that they can teach with and utilize external materials as well that we can link towards just helping them find the right use of their time. And it's really important that for us, it's a very competitive tool for us. No one else has anything like this. We're very proud of how it integrates with our materials, our content. And we're very, very pleased with how it's been launched. As you say, it's only recently launched, but the early signals are extremely encouraging for us. Henry Hayden: That's very clear. Operator: Your next question comes from the line of Jeff Meuler with Baird. Jeffrey Meuler: Simon. Welcome, Philip. This question is for Philip. So I hear you on being well positioned with a lot of assets to leverage for the AI opportunity and hear you a lot of clear on the related boats. Just on the comments about continued margin expansion for the enterprise I just want to gauge what gives you confidence that you're spending at the appropriate level to fully harness the AI opportunities? Philip Moyer: Well, I've been here for 3 days. This is my third day. So I got the confidence of 3 days. So I officially started on Monday. But what I would say to you is that already my exposure around the efficiency and also the effectiveness of the development teams. I mentioned before, we've been able to release a record number of AI tools over about the past 12 to 24 months. And these are good tools. They're tackling really difficult problems. And so I'm excited, first and foremost, around the talent that's inside of the organization. The second thing is that we're not just talking about building AI. We're also using AI ourself, and we're also using cutting-edge tools. We're using processes -- we are educating ourselves and we have a culture of learning internally around the use of these tools. And I could not be more happy to be following Simon and Bob and the work that's been done over these past 5 years to really get, I'll say, the cost structure in line with where it should be. This is -- when you really look at our gross margins, and you also look at our overall margins. We are set up to be a next-generation company, probably better than most of our peers in the industry based on the cost that we've taken out and also the innovation and the increases in the development teams and also the improvements in development processes that we've already built, and really evident to me that we've got a technology and digital-first culture here. Jeffrey Meuler: Appreciate the perspective 3 days in. And then just there was a comment about no material impact from proposed federal education policy changes. There's also been some government shutdowns and there's been some headlines around like federal student at disbursement around those things. Just, I guess, what are you still watching for potential impact? Or I guess, similar question, level of confidence that the risks related to that and risk related to the changes around Department of Education are not going to impact you? Simon Allen: Yes, it's a good one. I mean without being naive, it really is true that we've seen no damage to our business. We obviously look with great interest of what's happening and that you mentioned the formative [indiscernible], that is a good example. But honestly, it's made no difference to our business whatsoever because how we operate is very much directly with the school districts or with the states in the case of K-12, directly with instructors and institutions in higher education, and this is true around the world. And clearly, there is no desire for any government or any federal or governmental institutions to want to remove the focus on education, they would never get reelected again. So we don't see the effect on our business whatsoever. Where we describe ourselves, as you remember, it's a very defensible company because the resiliency that we have. So the defense that we have is simply that our products are needed by school, by students, by universities and colleges globally, medical schools and while that happens, there is no government intervention that will damage our business because the core of what we offer is so important to every aspect of society. Robert Sallmann: And as a reminder, Jeff, there's a very small amount of strict budgets come from the federal government as well. Operator: Your next question comes from the line of Josh Chan with UBS. Joshua Chan: Congrats, Simon and welcome Philip. I'll just ask one to Simon. I guess, historically, in your experience as you gain share in higher ed, does it become easier or harder to keep gaining share? I guess I'm just asking kind of a momentum question. And then what does it take to kind of keep up the momentum? Simon Allen: That's a good question. What I would say is -- and I've done this for 40 years in August, actually, Josh, 40 years on August [ 16 ], if you want to be precise. And I can tell you that since I've been in higher education and the momentum that you get is a joyful situation because you -- it really does success breeds success. And the reason is that you have, for example, the growth we've seen in inclusive access. And you heard Bob earlier talk about continued growth well beyond 20% yet again this quarter. You look at what that does, as you realize that the land-and-expand strategy with inclusive access gives you a far greater number in the second and third year of the institution's use of Inclusive Access. That momentum just continues and continues in a wonderful way. when you provide products like Evergreen or solutions like Evergreen that allow our professors to immediately continue with our product. It frees up time for our reps to go after new business. that, again, creates momentum, and we're seeing that already when we look at the pipeline very early in the selling season, but we see that already as we think about the year ahead. And then with higher education, when you start to get a greater presence on the college campus in any discipline in any department, it just grows and you find that you almost flower as you go through the selling season and you get to a level of maturity that's quite joyful to see. And really success breeds success. It's why we've had continued market share growth every quarter I've spoken to you and why that will continue. And we're very proud of our higher ed business, and we're taking substantial market share as you've seen. Joshua Chan: Congrats on your accomplishments, Simon. Simon Allen: Thank you very much, Josh. That's very kind. Operator: Your next question comes from the line of Toni Kaplan with Morgan Stanley. Toni Kaplan: Congrats on the quarter and also on Simon, on your retirement. It's been great working with you. You mentioned the strong stats on McGraw Hill plus with the 86% increase in district access and 40% increase in average time spent. Just to get maybe a little bit of additional context. Hoping to understand what the penetration rate is across the business from the school districts for that and how the forward pipeline looks for the platform? And is it -- I know in the past, like when you're signing new K-12 districts and trying to retain old ones, I think largely, the retention hasn't necessarily been a big thing, but could this change that dynamic where you do start to see more retention of old districts because they like that personalization. Simon Allen: That's a very thoughtful question, Toni. And let me start -- the latter statement, I think, is what you've hit on is so crucial for us. When you think about why we created McGraw Hill Plus initially in mathematics, as you know, and now extending into ELA and other disciplines quickly and going from just a handful of states now to more than -- getting on for dozen, I think going forward. The reason that we're so excited about this product and you touched on it, is that once you get integrated with McGraw Hill Plus and you utilize the data and you can see just how your students in the classroom are performing, and you can look at that knowledge graph and recognize every component of the education system that the students have succeeded with and where there may be gaps that data becomes very -- in a positive way, very addictive. And the only way that you continue to -- you can continue to understand how your class is performing is by continuing to use our products and particularly with McGraw Hill Plus, the integration with that data-driven tool alongside our core product alongside our supplemental, if you think of math, you've got reveal map or everyday math, and then you've got ALEKS as a supplementary product. And then you've got all of the data provided with those tools on McGraw Hill Plus then you start to utilize that year-on-year. It's very difficult to leave because you rely on the data, you rely on what it tells you about your students performing. And as you move a student from second grade to third grade to fourth grade, you can track their progress in a wonderful way, this longitudinal student record is very attractive to the schools themselves. So you hit the nail on the head. It is that ability for us to truly integrate the products that will increase retention because the products and the solutions we provided will really be very difficult to live without once you've integrated them in. Toni Kaplan: Great. And then just as my follow-up, I think in past quarters, we've sort of talked a lot about the ability to use AI across the business through scribe I sort of noticed that scribe hasn't really been mentioned. I know you've talked about margin expansion, so not trying to sort of imply that you're not seeing margin expansion. But I guess, trying to understand if Scribe is going to be a big driver? Is it still -- like any update on it? Should we not be thinking about Scribe as sort of 1 of the biggest levers for margin expansion? Or maybe we're just talking about it in a different way. So just want to understand that. Simon Allen: Yes. And Tony, yes, so we didn't specifically call it out. We continue to lean in to Scribe. We continue to find new use cases every day. And so we were gathered today and meeting Scribe as a big portion of our discussion. So we see it as a meaningful opportunity for us to continue to reduce cost and accelerate time to market. It will be something you'll continue to hear us talk about as we move forward. But we're still in the early days of the use cases and actually seeing the cost savings. But we still are very excited about that opportunity, and we'll continue to talk about it going forward because it is a meaningful opportunity for the business. Toni Kaplan: Perfect. Congrats gain. Simon Allen: Thank you. Operator: Your next question comes from the line of David Karnovsky with JPM. David Karnovsky: Maybe just following up on supplemental within K-12. Can you just update on the ongoing crossing opportunity there? And what the uptake has looked like recently for products like ALEKS? Simon Allen: Yes. It's a good one. I mean, David, again, ALEKS is a very good example for the supplemental intervention sector. I mean, for us, ALEKS, is we've owned it since 2013. It's been around since year 2000 and it is a tremendous tool that provides students in math and now chemistry, the ability to either with their teacher or really self-directed, understand how they're progressing as they learn math having directive question-and-answer processes to really enhance their learning and focus them in ways that's very personal because it can tell you exactly where you've made a mistake as you go through the workings of any answer. And ALEKS, for us, not just in K-12, but also very much in higher education, that the placement tool that we use, the placement program it allows instructors to understand the level of performance they can expect out of their students. And it really is the -- it's the backbone, frankly, of our supplemental business for that. But -- let's not forget what we've accomplished with Achieve3000 for literacy and the reason that we made that acquisition some 5 years ago now, was really to augment our position in the supplemental there. and give us strength, not just in math, but then also in literacy and with Achieve3000 and actively loan, we've done exactly that, and we're very pleased with the growth that we've seen. And the ability to serve all of our customers, it's not just about being the leading core provider as in K-12, as you know, McGraw Hill already is. But it's also about providing supplemental material to help students beyond the core. And that's something that we focused a lot of attention on. We see a lot of growth coming from that sector, David. And I think it's exciting for us. Core is still the majority of our K-12 business. but we definitely see serious growth opportunities ahead in supplemental and intervention. Robert Sallmann: And I'll add, that's where we saw us expanding our portfolio ahead of the larger market opportunities in Math. So we have a full portfolio to address that opportunity, which is exciting for us. I think we're very well positioned as we think about the coming years. Operator: Your next question comes from the line of Faiza Alwy with Deutsche Bank. Faiza Alwy: I was also going to ask actually about the supplemental. And I think you addressed it on the prior question, but -- just specifically, I was curious, you mentioned the stat around 1,000 different tools that sit inside the average district. And I was curious, like, what do you think the real limitation is to kind of moving that or integrating that within the McGraw Hill offering. And I guess I'm just surprised that we still have that many tools. So I'm just curious if there is a limiting factor that the opportunity seems quite compelling. Simon Allen: Yes. That's -- you're exactly right. We too, frankly, Pfizer, we were also surprised. I mean, it's a bit of an outrageous statistic to be honest. And you imagine for schools, just how do they cope with that level of supplementary material or tools that they are expected to review? I mean, it's impossible to think about. I think like we do with a lot of the AI material that we've provided and you know this, the focus is on providing teacher relief. It support for the teacher, giving them more time to be with their students directly and that's never more evident than right now when you look at the number of applications they have to work through. It's become unwieldy. I think you could say that the core market in K-12, Pfizer, you know this, the moats that we have is very deep and very wide. And it's a very difficult segment for any company just to enter. When you look at supplemental intervention, there are dozens and dozens and frankly, hundreds of different companies. And I think that's where you get the overload of applications that may be where the school districts are going to struggle. There's just too much to review. Our job is to make sense of the chaos quite frankly, and I think we can do that very effectively because no one understands the teaching community, the community better than McGraw Hill, no one understands the product needs that they have that are genuinely helpful in how they teach and, it's all about the efficacious delivery of materials in a simplified way to help the teacher get through the day and really flourish with their students. That's why we're very optimistic as we think about simplifying the choices and making them better and easier for the teachers going forward. Faiza Alwy: Great. That makes sense. And just -- I wanted to also ask about higher ed, right? I'm trying to reconcile some of your comments. And I know, Bob, you talked about a decline in revenue because of the tough comp. So -- but if I look at the numbers and not to get into the modeling details, but -- if I look at what you did in 4Q last year and what you did this quarter, it's not that different, you're still growing 24-something percent. So -- and I know you sound really good about the higher ed opportunity. So really just trying to reconcile sort of your optimism around the ability to continue to gain share versus sort of you talking about tougher comps. Simon Allen: Sure. And I think we are very confident about the takeaways that we've seen, our ability to continue to take share. So that we're unwavering around that. There is some nuances as you think about our billings versus our revenue. You have contract duration and some mix. All of those things sort of result in some of these different comps that you're seeing. That's why I think it's important when you reflect on the full year when we're sitting having this conversation in June, and you'll reflect on that and said, okay, it's double-digit growth both in the billing and in revenue, which will -- reflect more of a normalized basis, right? And I'll take some of that noise of the contract duration out of that equation. But again, we feel very confident in our ability to continue to take share and our ability to continue to grow regardless of enrollment. Robert Sallmann: I think -- Faiza, I think just to be clear, I think some of the confusion may be we look at all of our business on an annual perspective, as you know. And I think when you try and analyze quarter-by-quarter, it can be unhelpful, frankly. And I think Bob is saying we're not going to end the year at 24% up. I don't think that would surprise anybody. But we look at our annual performance, it's how we operate. The quarter is important for you to understand, and that's why we try and explain the way issues as Bob has in their reserve case in this situation right now. But in terms of our higher performance, we will continually outperform our competitors, and we will absolutely show growth far higher than any other competitor once again. Operator: There are no further questions at this time. I'll now pass it back to Simon Allen, Chair of the Board of Directors for closing remarks. Simon Allen: Thank you very much, and thank you all for dialing and I know it's very late for some of you. And I appreciate very much you so many kind comments. And retirement is going to be interesting for me. I've got 3 -- I just had my third grandchild a couple of months ago, I've got a fourth coming in May. I am swimming in grandchildren. So I need an escape path. And many of you that have young children know that, but any [indiscernible] grandchildren. And my escape part is going to be a joyful Chair of this wonderful company. I will look forward very much to working very closely to Philip ongoing. I've got so much invested in this company, and I'm looking forward very much to being -- having the honor, frankly, of being Chair of the Board. And I look forward to further interactions. But if I may, I'm going to pass over to Philip Moyer, our CEO, to close this out. Philip Moyer: Thank you, Simon. And before you're completely comfortable with that chair seat. I have to just say a very, very big thank you to you. you have impacted hundreds of millions of students and teachers lives over your career, and we're incredibly grateful for that. You've impacted tens of thousands of McGraw Hill employees, your friendship, your leadership is just simply stellar. And finally, on behalf of shareholders and the Board, I want to thank you for being such an incredible steward of the red cube and of this company and setting us up for the next generation. It can be more honored to be following you, and thank you for staying on as Chair. Simon Allen: Thank you, Moyer. Philip Moyer: And thank you, everyone. Back to you, moderator. Thank you. Operator: Thank you. That concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.
Operator: At this time, participants are in listen-only mode. Thank you for standing by, and welcome to the Ascendis Pharma A/S Fourth Quarter 2025 Earnings Conference Call. After the speakers’ presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star 11 on your telephone. If your question has been answered and you would like to remove yourself from the queue, simply press star 11 again. As a reminder, today’s program is being recorded. And now I would like to introduce your host for today’s program, Chad Fugier, Vice President, Investor Relations. Please go ahead, sir. Thank you, operator, and thank you, everyone, for joining our full-year 2025 financial results conference call. I am Chad Fugier, Chad Fugier: Vice President, Investor Relations at Ascendis Pharma A/S. Joining me on the call today are Jan Moller Mikkelsen, President and Chief Executive Officer; Scott T. Smith, Chief Financial Officer; Sherrie Glass, Chief Business Officer; Jay Donovan Wu, Executive Vice President and President, Ascendis US; and Aimee Shu, Chief Medical Officer. Before we begin, I would like to remind you that this conference call will contain forward-looking statements that are intended to be covered under the safe harbor provided by the Private Securities Litigation Reform Act. Examples of such statements may include, but are not limited to, statements regarding our commercialization and continued development of Skytrofa and Yorvipath, as well as certain expectations regarding patient access and financial outcomes; our pipeline candidates and our expectations with respect to their continued progress; our strategic plans, partnerships, and investments; potential commercialization; our goals regarding our clinical pipeline, including the timing of clinical results and trials; our ongoing and planned regulatory filings; and our expectations regarding the timing of regulatory decisions and the result. These statements are based on information that is available to us as of today. Actual results may differ materially from those in our forward-looking statements, and you should not place undue reliance on these statements. We assume no obligation to update these statements as circumstances change, except as required by law. For additional information concerning the factors that could cause actual results to differ materially, please see our forward-looking section in today’s press release and the Risk Factors section of our most recent annual report on Form 20-F filed with the SEC on 02/11/2026. TransCon Growth Hormone or TransCon hGH is now approved in the US by the FDA for the replacement of endogenous growth hormone in adults with growth hormone deficiency, in addition to the treatment of pediatric growth hormone deficiency, and in the EU has received MAA authorization from the European Commission for the treatment of pediatric growth hormone deficiency. TransCon PTH is approved in the US by the FDA for treatment of hypoparathyroidism in adults, and the European Commission and the United Kingdom’s Medicines and Healthcare Products Regulatory Agency have granted marketing authorization for TransCon PTH as a replacement therapy indicated for the treatment of adults with chronic hypoparathyroidism. Otherwise, please note that our product candidates are investigational and not approved for commercial use. As investigational products, the safety and effectiveness of product candidates have not been reviewed or approved by any regulatory agency. None of the statements during this conference call regarding our product candidates shall be viewed as promotional. On the call today, we will discuss our full-year 2025 financial results and we will provide further business updates. Following some prepared remarks, we will then open up the call for your questions. With that, let me turn the call over to Jan. Thanks, Chad. Good afternoon, everyone. With strong execution across our business, and continued progress to delivering on our Vision 2030. Jan Moller Mikkelsen: Ascendis is transforming into a leading global biopharma company. We believe this progression demonstrates the power Chad Fugier: platform. Jan Moller Mikkelsen: And our R&D capabilities to deliver a sustainable pipeline. While our global commercial infrastructure and financial profile continue to strengthen, we believe we are now at the base of a steep growth, where we expect to achieve operating cash flow of around €500,000,000 in 2026 and where we aspire to achieve at least €5,000,000,000 in annual product revenue by 2030. At the same time, we are building an expanded pipeline of blockbuster product opportunities. We saw multiple achievements across the organization in the fourth quarter, starting with Yorvipath. The fourth quarter was another period of strong execution for the global launch of Yorvipath. Revenue for the quarter was €187,000,000, bringing full-year 2025 Yorvipath revenue to €477,000,000. In the US, access continued to expand. To year end, more than 5,300 patients were prescribed Yorvipath by nearly 2,400 unique healthcare providers, Chad Fugier: highlighting continued Jan Moller Mikkelsen: strong and steady demand. To date, less than 5% of US patients are currently on Yorvipath treatment, highlighting the significant long-term growth opportunity ahead. The overall insurance approval rate is about 70% of total enrollment, and we continue to see this figure moving higher over time. In addition, we continue to see a majority of approvals within eight weeks. This provides a strong foundation for expected additional growth in 2026 and beyond as more patients initiate Yorvipath in line with treatment guidelines that support its use. Outside the US, we continue to reach more patients. As a reminder, Yorvipath is now available commercially or through named patient programs in more than 30 countries. We have full commercial reimbursement in four countries in our Europe direct markets and two countries in our international markets. In Japan, our partner Taisho launched Yorvipath commercially last November. In 2026, we expect full commercial launches in 10 additional new countries. We also advanced development activity to broaden Yorvipath’s label in a number of areas. In the US, we are working to expand the range of doses toward PATHway-6 trial, and globally we continue to advance clinical trials to expand Yorvipath to patients under the age of 18. Our work is progressing rapidly on once-weekly TransCon PTH for patients who have been titrated with daily Yorvipath for conventional therapy and have achieved a stable daily dose for a well-defined period. Last month, at the annual J.P. Morgan Healthcare Conference, we shared preclinical data that support the target product profile for a once-weekly TransCon PTH candidate matching the release PK/PD as seen with daily Yorvipath treatment over the entire week, thus providing a comparable efficacy and safety profile. Overall, we remain confident that Yorvipath has the potential to be a durable long-term growth driver for Ascendis globally. Turning now to growth disorders, comprising our once-weekly growth hormone Skytrofa, or TransCon Growth Hormone, and our once-weekly TransCon CNP. Skytrofa delivered another solid quarter with Q4 revenue of €53,000,000, bringing full-year Skytrofa revenue to €206,000,000. This performance reflects the strength and value of the brand. As a reminder, Skytrofa is now approved in pediatric growth hormone deficiency in the US and adult growth hormone deficiency. Today, Skytrofa has an overall market share of around 7% in the US. During the fourth quarter, we initiated our Phase III basket trial evaluating TransCon Growth Hormone in additional established growth hormone indications, including ISS, SHOX deficiency, Turner syndrome, and SGA, which comprise up to half of the growth hormone market. Over the long term, these indications represent meaningful opportunity to expand the role of Skytrofa as a treatment of choice in additional growth disorders. We also see an opportunity to potentially expand Skytrofa’s use to novel indications where growth hormone has not previously been approved for use, such as achondroplasia, in combination with TransCon CNP. TransCon CNP is expected to be the first and only once-weekly treatment with monotherapies addressing the overactive FGFR3 tyrosine Chad Fugier: kinase. Jan Moller Mikkelsen: In addition, in our pivotal trial, TransCon CNP achieved a significant improvement profile compared to placebo, with a very low rate of injection-site reaction, spinal canal dimension, and a similar safety and tolerability and no cases of symptomatic hypertension. In the US, in leg bowing compared to placebo, our NDA for children with achondroplasia remains under review with a PDUFA date of February 28. In the EU, the MAA review is underway, Chad Fugier: last October with a regulatory decision expected in the fourth quarter Jay Donovan Wu: tried in infants. Jan Moller Mikkelsen: with achondroplasia ages 0 to 2 is going well, and we anticipate complete enrollment later this year. Turning to the combination therapy, our 52-week data in achondroplasia underscore the potential power of dual treatment with TransCon CNP and TransCon Growth Hormone. Continuous exposure to CNP enables the benefit of sustained exposure to unmodified growth hormone. In comparison, Operator: Monotape Jan Moller Mikkelsen: trials of daily growth hormone in achondroplasia delivered only a limited effect on growth and no group-reported benefit on linear growth. Our 52-week data from the Phase II combination trial support our vision to significantly raise the bar for treatment of achondroplasia, with linear growth improvements in achondroplasia-specific height score that were three to four times what has been shown with CNP or daily growth hormone monotherapy in the same Operator: Focused development programs in both our monotherapy and combination therapy programs. Importantly, all children completed fifty two weeks of treatment and remain in the trial. Reinforcing the benefit of treatment and acceptable treatment burden of the once weekly machine. These phase two results demonstrate the effect of these complementary therapies. Supporting that TransCon CNP act in synergy with growth promoting effect of TransCon growth hormone. And has positive effect beyond linear growth. We believe over time the standard of care in achondroplasia and other growth disorder long term will include dual therapy as a treatment option. Building on the potential road of TransCon CNP as an essential fundamental therapy. We recently had a successful end of phase two FDA Meeting And Scientific Advice Meeting In EU to align on our phase three trial for this novel combination approach for treatment children with achondroplasia. We also remain on track for additional Cokes trial updates including 78 by mid year and 104 by year end. And plan to explore further opportunity in other group disorders. To sustain doable long term growth for Ascendis. Well into the next decade. We plan to continue to invest in label expansion. Of our current products in rare endocrine diseases. In addition, we have a strong focus on the development of new blood product opportunities, both inside and outside rare endocrine diseases. To food significant product revenue growth in the future. Looking at our partnerships. TransCon Technologies support a continuous flow of highly differentiated product opportunity across multiple therapeutic areas, more than we can develop and commercialize ourselves. For this reason, our Vision 2,030, includes a focus on creating additional value through partnership and collaboration. Our collaboration with Novo Nordisk for once monthly transconcemic glutide continue to advance towards the clinic. Adarconis TransCon anti VEGF is on track to enter the clinic this year. In Japan, Talypian received approval for Europatch in August 25, and commercial launched it in November 2025. In addition, vision approval of Skytrova in China in late. January twenty six. In summary, 2025 was another positive and transformative year for the SETIs. With two commercial TransCon products, continue to scale, the potential approval of the third high value TransCon product in the coming weeks. And a growing pipeline of highly differentiated programs. We believe we have the fundamentals in place to deliver global long term growth. A rapidly strengthening financial profile gives us confidence to achieve an expected operating cash flow of around €500,000,000, in 2026 and our aspiration to achieve at least €5,000,000,000 in annual product revenue by twenty twenty third. All consistent with our Vision 2030 strategy. I will now turn the call over to Scott. Thank you, Yan, and thank you, Chad, for a well read FLS. Chad Fugier: The significant achievements we made in 2025 provide us with substantial financial strength to drive our strategic priorities and goals in 2026, which include achieve blockbuster status for Yorvipath, solidify our leadership in hypoparathyroidism through rapid while advancing development of our once weekly PTH candidate progress of our label expanding clinical trials of TransCon PTH, successfully launched TransCon CNP if approved in the US and other countries around the world, and expand our leadership in growth disorders through clinical and regulatory progress with once-weekly Skytrofa, including in combination with once-weekly TransCon CNP. With that, I will touch on some key points surrounding our fourth quarter results. Quarter and full-year financial results which we mostly already announced at J.P. Morgan. But for further details, please refer refer to our annual report on Form 20-F filed today. As previously announced in January, Yorvipath delivered strong global performance in Q4 2025, revenue increasing to €187,000,000, up from €140,000,000 in Q3. Foreign currency had a negligible impact compared to the previous quarter. Total Yorvipath revenue for 2025 was €477,000,000. For the full year, the weaker US dollar negatively impacted Yorvipath revenue by approximately €27,000,000. Skytrofa contributed €53,000,000 in Q4 with negligible foreign currency impact compared to Q3 2025. Total Skytrofa revenue for 2025 was €206,000,000. For the full year, the weaker US dollar negatively impacted Skytrofa revenue by approximately €9,000,000. Including €7,000,000 in collaboration revenue, total Q4 2025 revenue amounted to €248,000,000, and total revenue for full-year 2025 was €720,000,000. Continuing on to expenses. As previously announced, total operating expenses for Q4 were €214,000,000, and total operating Jan Moller Mikkelsen: total Chad Fugier: operating expenses for the full year 2025 were €761,000,000. As we previously noted, Jan Moller Mikkelsen: profit for Q4 2025 was €10,000,000 with Chad Fugier: Q4 operating cash flow of €73,000,000. As we have discussed for some time, below operating profit, the drivers include the noncash accounting related to our convertible notes. Net finance expense, which was primarily driven by noncash items, including remeasurement loss of financial liabilities of €106,000,000, was €93,000,000 net. Net cash finance financial expense, however, for the full year 2025 was about €8,000,000. In future periods, we may introduce a non-IFRS EPS measure adjusting for the impact of certain items to increase the comparability of period-to-period results. We ended 2025 with €616,000,000 in cash and cash equivalents, as previously reported, up from €560,000,000 as of December 31, 2024. Turning to our commercial outlook and to help inform your revenue modeling for the coming year. For Yorvipath, we expect continued strong revenue growth in 2026 based on steady patient uptake with some expected seasonality in reported revenue throughout the year. For Skytrofa, we expect to follow a similar seasonal pattern to 2025 with full-year revenue growth expected to track growth in prescriptions. Longer term, Skytrofa revenue is expected to come through geographic Jan Moller Mikkelsen: Epic and label expansion. Chad Fugier: As always, we continue to watch the euro-US dollar exchange rate for any potential impact. And finally, we also look forward to the potential US approval of TransCon CNP later this month, which, as a reminder, has been excluded from this 2026 outlook. With that, operator, we are now ready to Jan Moller Mikkelsen: Certainly. And once again, ladies and gentlemen, we ask that you please limit yourself to one question each. Our first question comes from the line of Jessica Macomber Fye from J.P. Morgan. Your question please. Jessica Macomber Fye: Hey, guys. Good afternoon. Thanks so much for taking my question. What is your confidence level heading into the TransCon CNP PDUFA? Are you comfortable that the issue leading to the review Operator: Yes. Can you remember Jessica Macomber Fye: extension has been resolved to the FDA’s satisfaction? Thank you. Operator: your Jan Moller Mikkelsen: Ask me a question one time, and the conference Operator: And can you remember my answer? Jessica Macomber Fye: I do remember the answer. Operator: And what was your question? You can ask the same question. Jan Moller Mikkelsen: The hey. Jessica Macomber Fye: I remember your answer, but it was about a different product, if I recall, but your answer was yes. Jan Moller Mikkelsen: Yes. Operator: So this is the same. You asked me, will TransCon PTH be approved? And I said yes. And you can ask me the same question today. Will TransCon CNP be approved? And I would say yes. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Tazeen Ahmad from Bank of America. Your question please. Tazeen Ahmad: Hi. Good afternoon. Thanks for taking my question. You mentioned that 70% Jan Moller Mikkelsen: Insurance approval rate in the US so far for Yorvipath. Where is that relative to where you thought it would be at this stage of the launch? And what is it going to take to expand that to a higher number, where do you think long do you think it is going to be before you get to 100%, basically? Thank you. I think it will be infinity, because Operator: because I have never seen a product hitting 100%. Scott T. Smith: So Operator: I think the highest bar for seen is something like 85% or something like that, perhaps up to 90. The element of where we are today, I am really highly satisfied with it because it is also a compromise about how aggressive you are going into contracting and other things like that. So I think it is a balance between the two things where in the end Tazeen Ahmad: The overall Operator: and ultimate goal is basically to provide most value back to our shareholders and others, and at the same time help the patient to as fast as possible to come on treatment. I do not know, Jay, if you have additional comments to my I will now say pre-prepared remarks. Jan Moller Mikkelsen: Yeah. Operator: One is that I would say two things. Scott T. Smith: We are very happy with the overall approval rate that we are seeing, and I think the speed in which you are seeing this product be covered again Operator: It is a testament Jan Moller Mikkelsen: to the strong clinical value proposition that we are Tazeen Ahmad: Seeing in hypoparathyroidism. It is the first and only approved Scott T. Smith: therapy in this category. So, again, this approval rating is something that we are very encouraged by. Based on where we are today, I think to your second part of the Jan Moller Mikkelsen: question, Tazeen, which is, you know, when might Scott T. Smith: you get to 100%? I Jan Moller Mikkelsen: echo what Jan said earlier as Scott T. Smith: well, which is I do not know that many drug analogs will get to 100%, and that actually has less to do with Jan Moller Mikkelsen: coverage, and Operator: also has to just to do with Jan Moller Mikkelsen: every single enrollment that comes in. Not Tazeen Ahmad: single one of Scott T. Smith: them will be eligible relative to the label. Jan Moller Mikkelsen: So there is some element of just natural filtering that comes that way. But more importantly, what I would say is that there are state Medicaid plans, for example, that review things on a staggered Gavin Clark-Gartner: cycle. So you will anticipate that some of this will creep up over time. But it will take some time before it continues to inch upwards. Operator: We need to some way, this is a Yeah. Okay. But but I think I think still low. all approvals in enrollment. US discussion. The US discussion is built on 70% of Gavin Clark-Gartner: We are not there. Operator: So when you go in and look on an old cohort that perhaps have been six months through it, your actual will get NMOS higher number on it. Just to clarify that 70% on it, that is when you take everyone accumulated. If you take an old cohort, it is much higher. And when you go ex-US, the system is quite different. When you get a prescription, you nearly in every other country, you are axiom approved. So you can say the 100% yes is basic when you get a prescription outside US in traditional countries, you will be 100% electable and already approved for reimbursement. Tazeen Ahmad: Got it. Thank you for the color. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Gavin Clark-Gartner from Evercore ISI. Your question please. Gavin Clark-Gartner: Hey, guys, thanks for taking the question. Just on your Yorvipath pricing, so there was an 8% WAC increase in January. Maybe you could just discuss how net pricing will trend this year, including how to quantify the magnitude of the Q1 seasonality here. Operator: I do not think we really are discussing net prices. We would love to do it, but we have never done it, and I do not think we ever will discuss net prices. Gavin Clark-Gartner: Maybe if I could just ask a follow-up then. Just on patient enrollment, are you planning to still report those forms going forward for Yorvipath or maybe just focus more on revenue? Operator: I think it, Gavin, is 100% right. We will focus on revenue because now we basically have been in the market now in the US. We are on the market for about four quarters now, when we come to here the fifth quarter, I think you have seen a steady state development from 2025 where we basically got an increase in basic revenue from both US and ex-US, about €40,000,000 to €50,000,000 net every quarter. I think you will somewhat see a stability in how we are executing in it. We still have ex-US. We will expect 10 additional countries being fully reimbursed next year. I am sure that is always improving what we call the net revenue we will generate outside the US. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Yaron Benjamin Werber from TD Cowen. Your question please. Great. Thanks so much. I have sort of two not really related, but I am going to try to link them to keep it as one question. Scott T. Smith: Maybe the first one, can you give us a little bit of a sense for Yorvipath? How it is being used out there? I mean, it is almost like when you look at this 2,400 unique prescribers and 5,300 unique patient enrollment, so is it that each physician just has one or two patients in the practice, are they prescribing it there and then they are going deeper? And then Gavin Clark-Gartner: secondly, just at the end of Jan Moller Mikkelsen: Phase II meeting with FDA relating to CNP and growth hormone for achondroplasia, maybe just can you give us a little bit of an update, what was the outcome and when will you start the Phase III? Operator: Thanks. Okay. That is perfect. I think, Jay, you can give some about how we are both expanding the physician prescriber base, but also go in more in the deep of the different patient, but still are far away to reach delivery where we want to be. Jay, Gavin Clark-Gartner: Yep. So in the US, I think the question is really around segmentation and what types of patients are being treated. So if you think about the prescriber base, this is where you first started your question from. We are seeing broad uptake across the entire range of prescribers. So to your point, there are some physicians that might only see a couple patients, but there are also some physicians that might see upwards of 10 patients. More importantly, because we are seeing broad uptake across both high-decile and low-decile providers, we are not seeing a major discrepancy as to the type of prescriber that would prescribe, but we are seeing that breadth continue to increase. As it relates to the number of patients per physician, we are also seeing the depth of prescribing per physician also increase over time, which again is encouraging. That is both a testament to positive experience that they have with Yorvipath as well as increased awareness of the hypoparathyroidism condition and option for it amongst patients. I think the last Jessica Macomber Fye: Now they are being an up thing I would say is Gavin Clark-Gartner: when you think about the types of patients that come Jessica Macomber Fye: through, Gavin Clark-Gartner: you can look at it in two ways. One, the vast majority of them are postsurgical, so about 70%. The remaining 30% perhaps due to other factors, whether it is genetic, autoimmune, etc. We are seeing broad across both of those segments, so that is not a major driver. Really where you are seeing some of the earlier uptake is patients that are self-aware of the condition that they have, and therefore, are linking the symptoms that they have to the underlying condition that they have, Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Operator: Okay. Joseph Schwartz. Gavin Clark-Gartner: a combination of them advocating for themselves as well as providers having conviction in the product as well. So all in all, we are seeing broad uptake across provider groups as well as patient segments as well. Operator: Before you the question start, perhaps I can answer the last part of related to the COACH trial. Yes. We had extremely positive meetings both US right and from the EU side, it was really impressive feedback to the data. There Jessica Macomber Fye: have never seen Operator: data before that basically are providing this kind of benefit to an achondroplasia treatment. I am not only talking about the linear Jan Moller Mikkelsen: growth where we basically on Operator: z-score got a three to fourfold more than you can see with monotherapy in the same time period, but also unique elements like such an improvement in body proportionality. What was really what really they have never really seen in such a meaningful manner was a really important element, the arm span, where we also saw in the combination trial a unique improvement in arm span. And Aimee is sitting here with the sales team, and she is really doing everything to get this trial recruited as fast, be ready to go. Protocol is finished and everything. Be open site. Just remember that our pivotal trial in monotherapy, we recruited it just in three or four months, just because of the interest of the patient. Therefore, the bar for Aimee is very, very, very hard if she needs to do that faster. Sorry for coming in. Jan Moller Mikkelsen: Absolutely. Not a problem. Our next question comes from the line of Joseph Schwartz from Leerink Partners. Your question please. Joseph Schwartz: Hi. This is Heidi Jacobson on for Joe Schwartz. Thanks so much for taking our question. Can you help us understand how the TransCon CNP launch could factor into your $500,000,000 operating cash flow target for 2026, Li Watsek: particularly with respect to launch investment and early revenue contribution? Jan Moller Mikkelsen: Thanks. It is pretty simple. It is not incorporated. When we are coming into the launch, we see the initial uptake, which we believe will be pretty high, not only in the US but also outside US because we can utilize the US approval to go to countries outside US, specifically in the international market. From that perspective, we will come and provide you a better guidance and improved guidance when we have seen that. Scott is smiling, are you counting money or Scott T. Smith: taxes and money. Jan Moller Mikkelsen: If you will come back after that. Joseph Schwartz: Great. Thanks. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Derek Christian Archila from Wells Fargo. Your question please. Derek Christian Archila: Hey, good afternoon. Thanks for taking the questions. I just wanted to understand your confidence level around Yorvipath growth ex-US. Obviously, the launch in Germany and Austria, is that a good proxy? Or is it going to be more depth in those types of countries than just kind of expansion in, you know, I guess, I think you said 10 additional countries. So how will that be sequenced through the year? Thanks. Operator: That is an extremely complicated answer because the heterogeneity of the ex-US is so heterogeneous that we cannot really compare to what we, for example, see in Spain now, what we see in France, what we see in Germany, what we see in Austria. It is really different things because we see different speed of penetration. For example, Germany has less endos, so the bottleneck is really more tight. It takes longer time to get them on therapy because there are fewer in the general population. If we go to Spain, there are more. There are more in France, and we also see, therefore, a faster uptake because we basically have a pipe that is larger. When we get 10 more additional countries on full commercial, we will see different uptake, but what we are doing is everything will be accumulated in the way where we now see from 30 to 35 countries named patient programs. When we go full commercial, what we see every place is basically an acceleration of patient uptake, because of the burdensome nature of a named patient program. It takes so much effort to get every single patient on it, and every patient deserves to be under treatment. So when you come to 2026, we will see initial speeding up in all these countries. When we come to 2027, 2028, you will continue to do it because, just by nature, we just got approval now in Canada, and we are basically taking one country after the country, first going in and getting approval, and then we are going to put reimbursement. Jan Moller Mikkelsen: Our next question comes from the line of Li Watsek from Cantor. Your question please. Li Watsek: Hey, thank you so much for taking our question. It is Daniel Brondo on for Li. Can you give us a little bit of color on how you expect your TransCon CNP launch to go? It seems like there are a few patients who Jan Moller Mikkelsen: currently are on treatment. Where do you think you will capture the majority of patients Aimee Shu: initially? Operator: Pretty clear. The improvement that we see with TransCon CNP to what we can provide. Not only related to when we look on tolerability, injection-site reaction, having one in 20 injection-site reaction compared to one every second year. Being in a position to look on no risk of hypertension. The element of just having the improvement on the once-weekly product and then show the data package that we have generated with TransCon CNP, for first time ever shown in a well-controlled trial against placebo, benefit beyond linear growth. For example, the leg bowing, which we have shown multiple times, we have shown improvement in muscle strength. We have improved quality of life. I think this is obvious. Li Watsek: Every Operator: patient that decides to be on treatment should have the opportunity to have the best possible treatment option, and I think there is a public interest in the US to ensure that it always will happen. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Eliana Rachel Merle from Barclays. Your question please. Eliana Rachel Merle: Hey, guys. Thanks so much for taking my question. Curious if you can elaborate on your strategy for commercializing TransCon CNP ex-US. Just given the majority of vosoritide sales are ex-US, could you elaborate on your strategy for the commercial launches globally and the degree of investment that that will take? And then just a second question on TransCon CNP in the US, can you talk a little bit more about how you are thinking about the cadence of uptake and which segments do you expect the most uptake from between, say, treatment naive versus switches? Thanks. Jan Moller Mikkelsen: Yeah. I will dial a little bit back now because what we did Operator: global when we said that we want to have commercial Aimee Shu: effort. Operator: We actually started all our infrastructure building to Yorvipath. And now you see what we have done with Yorvipath recognized their fast revenue, commercial revenue for more than 30 countries. We are penetrating them exactly as we can do. We will reach 60 to 70 countries in less than two to three years. So what we have done, we already have built up the infrastructure to be ready that we can take our integrated pipeline of rare disease endocrine product into all these different countries in already the setup via step links around Yorvipath. So this is the positive element that we are not, you can say, a company that needs first to take up an infrastructure to support a globalization. We have already established that. So I feel really confident that all the success we see now with Yorvipath on a global scale we will just take it in. Do not forget, for example, even in Japan, the collaboration we have with Taisho is for all three products, the same thing in China and other places. So when we make this agreement, we are not making single product, single country. We make it as a pipeline product. And this is why we do not need to go out and make new agreements or anything. It is just going to be done extremely fast from that perspective. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Leland James Gershell from Oppenheimer. Your question please. Leland James Gershell: Great. I want to ask, as we look at the €5,000,000,000 number you have put out there for product sales by 2030. I know you are not giving specific product guidance here, but if you could share with us how you think about the relative contributions of your presumably three products by that point in time in terms of how they will weigh into that total sum. Obviously, you have much more expansion opportunity in hypoparathyroid, you have TransCon CNP potentially launching soon, and Skytrofa perhaps getting additional indications in combination. I would love to just hear maybe just philosophically how your outlook adds up with those three parts. Thank you. Operator: Yeah. That is an element where we always in our forecasting are operating under different assumptions, where we are basically building up models for each single country and then we accumulate that on a global setup. We first take 2026, we take 2027, 2028, and 2029. Then what we are doing, you always will go in and look on the risk balance. Where do we have potential extra upside that we can explore. What are we going to do with this fountainhead? But I think what makes Ascendis unique today is that we are not a single product in a single region. We will have three approved products in perhaps 20 different indications in about 30 to 40 countries. Meaning that what we really want to do, we will not be dependent on one single product in one single region. This is how we build up a sustainable company that has a continued stable revenue flow for multiple years. Do not forget these product opportunities we have. When I look on the pipeline for each of them, I definitely do not have sleepless nights. I can guarantee that. There is no doubt that when I see the profile and how we design it to be best in class, we also see that realized. Out from that perspective, it is a combination product with lifespan of IP extremely long. This is where you have the durable durability of it. This is why we take the value perspective of each single product opportunity instead of fast revenue. This is not how we operate. We go for value, and because the element of that is this is the product really to serve this treatment because we are providing not only a unique benefit for the patient but also for the society and everyone. Aimee Shu: Great. Thanks very much. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Paul Choi from Goldman Sachs. Your question please. Paul Choi: Hi, good afternoon. Thanks for taking our question. I think your Phase II REACH IN study is scheduled to reach primary completion next month. Will you be in a position to file an sNDA for the newborn infant population this year? And in terms of the newborn infant population, in your discussions with the FDA and EMA for your Phase III combination study, does your study design allow for those newborn patients to be included in this study population, or will that require a separate study? Thank you. Operator: I think when you discuss a label discussion, that typically is different between, now I just take the two main regulatory areas because we can also take Japan into it, but if you take, for example, US, it is much harder some way to be coming to a situation where they will accept a label expansion to the infant without having the data in hand. In Europe, it is much more flexible because you have a discussion with them, and you can have what I call partly rolling of data that is being generated to our Gavin Clark-Gartner: trial. Operator: So there will likely be a difference between the three geographic regions. Now simplified, Japan is mostly perhaps the easiest way to get it down to infant immediately. What we are doing now is to ensure we generate the right data and we are doing that in a trial. It is a placebo-controlled trial, and what we see is everything we hoped for. It is living up to our expectation. Why I can say that? Because in the enrollment we have six patients on a, what I call, physical treatment on it. You take them in, and there is no randomization. You can follow them, and Aimee can tell a few words about the benefit we have seen from that perspective. Aimee Shu: So Jan is talking about the sentinel kids who are not part of the randomized piece of the study, and they are doing well, tolerating the medicine as well as we would expect, growing and starting to see early signals of the other benefits as well, particularly radiology. Jan Moller Mikkelsen: Yeah. So we are really so pleased with the progress we are doing in helping patients with achondroplasia, not only on linear growth, but also benefit beyond linear growth. Jan Moller Mikkelsen: Thank you. Our next question comes from the line of Yun Zhong from Wedbush. Your question please. Yun Zhong: Hi, good afternoon. Thank you very much for taking the question. My question is on the weekly TransCon PTH. Is it reasonable to expect that the program could potentially enter the clinic in 2026, or do you think that there is no such need to rush? Also, you mentioned matching PK to the daily product. With data from Yorvipath available, what would you see as the most efficient clinical pathway to maybe take the weekly PTH to approval? Operator: I think what you are addressing is two things that are interconnected. Because if you, for example, can show the PK profile, and it can even be healthy volunteers or patients with hypopara, that over the entire Yun Zhong: week, Operator: of treatment, you basically are bioequivalent to Yorvipath. That is the aspiration how we designed it, that you basically will always be in an excellent PTH level compared to your Yorvipath daily dose for the entire week. Then we know you basically will get the expected safety, the durability from that perspective, and this will make a much more simplified, easy way to conduct the clinical trial. It was why we designed it exactly in this manner. Yun Zhong: Okay. Thank you very much. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Luca Issi from RBC. Your question please. Luca Issi: Great. Thanks so much for taking my question. Congrats on the progress. Maybe, Jan, kind of big picture, I think one of the goals for 2030, as you articulated at J.P. Morgan, is to remain an independent and profitable biotech company, and we have seen many examples of that in our industry recently. However, how are you thinking about maybe continuing that same vision under the broader umbrella of a larger pharmaceutical company? I guess the question is how are you thinking about strategic path A versus strategic path B at this point? Any color there much appreciated. And then maybe, Jay, quickly, I think BioMarin has announced that they will file vosoritide for full approval versus I believe you will initially get approved on an accelerated approval basis for TransCon CNP. How should we think about that difference? Will that have implications for formulary access and reimbursement? Do you not view that difference as material for adoption given you obviously have a less frequent dosing versus— Operator: I think I will liberate Jay for answering the last Jan Moller Mikkelsen: question. I think when I look on this discussion on accelerated approval that BioMarin filing for, that has no Yun Zhong: impact Jan Moller Mikkelsen: on our regulatory pathway and approval and other things like that. Totally independent. It is not any way how you can build up any barrier or any way in this way. The second thing, yes, in our vision there is independent, and I believe that is a great word because we want to be independent like a teenager growing up. One of the things, at least I have four children, I am teaching them when they are going to be aging, you need to be financially independent as the first element in their life. I think that is a great thing to see Ascendis Pharma now moving away from being a teenager, but basically can go up to a more adult life. We have shown now we are completely independent on Scott T. Smith: asking Jan Moller Mikkelsen: investors and others for any kind of revenue, and I think this is how we see independency. Luca Issi: Super helpful. Thank you. Jan Moller Mikkelsen: And as a reminder, ladies and gentlemen, we ask you to please limit yourselves to one question. You may get back in Maxwell Nathan Skor: Our next question comes from the line of Maxwell Nathan Skor from Morgan Stanley. Your question please. Great. Thank you very much. My question was asked, but I will take a shot at this. Could you give any color on the once-monthly TransCon semaglutide program? Any gating factors, when we should expect an update? Any additional color would be helpful. Thank you. Operator: Yeah. Let me go back to all the element and all the IP we have done, files and data and everything like that before we went into this extremely productive collaboration with our neighbor in Copenhagen, Novo Nordisk. What was really the idea behind once-monthly semaglutide? The idea was to be sure that you can get fast weight loss and at the same time have a high level of tolerability. Just think about, I can define it, you have a naked GLP-1 molecule that when you give it weekly or potentially want to use a weekly product in a once-monthly, you need to add much more compound to compensate for the half-life to have a large AUC. By doing this, you add a high Cmax dose. Because it is naked, you will have a very short Tmax, meaning that you will have a steep curve from the lowest level just before you start to give a dose up to the maximum concentration. That is basically what often gives the tolerability issue where you get the element that basically limits people to stay on treatment and what you can achieve. This is what I call the naked product. This is like metacresol and everything. This is a naked protein. What we are doing now is defining what we call packed-in semaglutide. Even if you give it high dose, you liberate it slowly, slowly, slowly, so you are getting a very long Tmax. By doing that, you basically have a slope that is not as steep at all as you see with a naked molecule, then you can see you still have a big AUC because you provide so much compound, give it over the entire month, and at the same time, you do not have this steepness in the slope. By that, you do not have that. It was designed to have maximal weight loss as fast as possible with the best tolerability profile, and it was how we designed it at that time. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Alexander Thompson from Stifel. Your question please. Alexander Thompson: Hey, great. Thanks for taking our question. Maybe for Scott, could you talk a little bit about OpEx trajectory in 2026 in the context of the CNP launch and then the schedule of the label expansion both with mono and the combo pivotal studies? Thanks. Scott T. Smith: No problem. We talked a little bit about this at the J.P. Morgan conference event. Using Q4 OpEx as a run rate for the full year is not a bad way to think about it. If things change, we will come in and update you. Overall, everything related to CNP, as we said before, we will come out and discuss more following approval. Yeah. But that is mainly related to the revenue, because Operator: what we have now, we have a really mature company. It is not like we take something in a pipeline, actually take product out of the pipeline all the time. So R&D is basically constant for the last three or four years. Our global commercialization, specifically the direct market that we have built up already now, adding a few more people there, not major impact on anything like that. This is the benefit of a pipeline in the same therapeutic area and scale that we have now. Alexander Thompson: Thanks. Appreciate it. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Joori Park from Wolfe Research. Your question please. Joori Park: Hey. Thanks for taking the question. I have one on the competitive landscape. Wondering how you are thinking about this internally as other agents like encaleret are looking to expand into the chronic hypoparathyroidism landscape, and then does your longer-term outlook for Yorvipath include that potential impact from such emerging agents? Thank you. Jessica Macomber Fye: So Operator: I could be polite, or I can be a straight shooter. I have seen a lot of idiotic ideas. This one is really one of the most idiotic ideas I heard about. Yun Zhong: You have patient Operator: that is missing a hormone, PTH, and giving encaleret is not increasing and providing any hormone to this. We are talking about a hormone replacement therapy where you are helping multiple organs, the brain, so you have greater cognitive effects. The bone needs to have the right metabolic system. The kidney needs to have the right phosphate elimination. It needs to have the right calcium absorption. I can continue one organ after the other organ. Then you believe you can take a compound incubator that basically is a calcium sensitizing compound, take it into a person that does not have the hormone, and then you think you have a treatment. It is really one of the most unscientific ideas where I cannot see any meaningful effect that it will help the patient. You can increase the element of one single thing, absorption of calcium, but that is not in any way coming in as a hormone replacement therapy. So no. We have not calculated that in. There is an idea in the ADH1 patient, which have a mutation in the calcium sensitizer 1, it makes sense for this small amount of patients. It makes sense but not for a person that misses PTH. Jan Moller Mikkelsen: Got it. Thank you. Thank you. And our next question comes from the line of Dingding Shi from Jefferies. Your question please. Dingding Shi: Hey guys, thanks for taking the question. Just wanted to ask, Jan, maybe because you are giving some open thoughts on competitive landscape. Can you discuss your latest thoughts on the CNP competitive landscape, including upcoming FGFR data from BridgeBio and also the earlier-stage long-acting CNP from BioMarin. Jan Moller Mikkelsen: I think that is an interesting Yun Zhong: aspect cause Operator: we have seen the benefit of CNP therapy for multiple years now. We are seeing it in large patient populations, and one of the things I am 100% aligned with BioMarin on is that the CNP therapy has shown to be extremely safe and well tolerated, except that you have elements like if you take too high concentration, you can get hypotension, you can get injection-site Jan Moller Mikkelsen: right. If you are not really encapsulated. When I see the CNP therapy, I understand why BioMarin are trying to copy us and trying to develop a product that is providing a sustained liberation of CNP over one week, because they have seen out from our data how we are highly differentiated compared to vosoritide. That is a completely different case about do we really have a once-weekly product or not. You cannot just take out from AUC. You need to see the profile over one week and other things like that. As I am not seeing these data or anything on the long-acting product for BioMarin, I do not know if anyone can judge that it is a viable product opportunity in any way. We need to see the PK fold, get the half-life, and all the different things, then we can take a judgment about it. The element of tyrosine kinase is a completely different element for me, because that is using a nonspecific action of a compound that is addressing the tyrosine kinase. If you go to the BridgeBio, it is a nonspecific tyrosine kinase that inhibits the three different receptors FGFR1, FGFR2, and FGFR3. This is why it is called nonspecific. I am not worried that you will not see a treatment effect, because when you address the tyrosine kinase, you see an improvement in linear growth because you are inhibiting the superactive pathway. Will we see the same kind of benefit that we see beyond linear growth? That is up to them to show. Can we see an improvement in muscle strength? Can we see an improvement in leg bowing? Can we see all the elements of improved quality of life with that? Yun Zhong: But what worries me is the nonspecific thing, Operator: and I really do not care about phosphate. People say, oh, Jan, are you worried about if they have elevated phosphate? First of all, elevated phosphate, you cannot go in and grade it 1, 2, or 3, 4. You need to see on the patient what is the phosphate level before treatment and after treatment, because then you see do the treatment on each single subject have an impact on the phosphate level. If it has impact on the phosphate level, we know it is a nonspecific inhibition Jan Moller Mikkelsen: of FGFR1. When you have a nonspecific inhibition of FGFR1, you also have nonspecific inhibition of FGFR2. When you know that FGFR2 is one of the key receptors that is part of the CNS development of the brain, I am extremely worried because it is not something you really see easily in a preclinical model. You do not see it in short-term clinical trials. You see it after three, perhaps four or five years of treatment. That worries me from our patient focus. How can you accept that any patient should take this risk without being extremely well informed about it. Dingding Shi: Got it. Thank you for your insight. Yun Zhong: Thank you. Jan Moller Mikkelsen: This does conclude the question-and-answer session as well as today’s program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day. Thank you for standing by, and welcome to the Ascendis Pharma A/S Fourth Quarter 2025 Earnings Conference Call. At this time, participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star 11 on your telephone. If your question has been answered and you would like to remove yourself from the queue, simply press star 11 again. As a reminder, today’s program is being recorded. And now I would like to introduce your host for today’s program, Chad Fugier, Vice President, Investor Relations. Please go ahead, sir. Gavin Clark-Gartner: Thank you, operator, and thank you, everyone, for joining our full-year 2025 financial results conference call. I am Chad Fugier, Vice President, Investor Relations at Ascendis Pharma A/S. Joining me on the call today are Jan Moller Mikkelsen, President and Chief Executive Officer; Scott T. Smith, Chief Financial Officer; Sherrie Glass, Chief Business Officer; Jay Donovan Wu, Executive Vice President and President, Ascendis US; and Aimee Shu, Chief Medical Officer. Before we begin, I would like to remind you that this conference call will contain forward-looking statements that are intended to be covered under the Safe Harbor provided by the Private Securities Litigation Reform Act. Examples of such statements may include, but are not limited to, statements regarding our commercialization and continued development of Skytrofa and Yorvipath, as well as certain expectations regarding patient access and financial outcomes; our pipeline candidates and our expectations with respect to their continued progress in potential commercialization; our strategic plans, partnerships, and investments; our goals regarding our clinical pipeline, including the timing of clinical results and trials; our ongoing and planned regulatory filings; and our expectations regarding the timing and the results of regulatory decisions. These statements are based on information that is available to us as of today. Actual results may differ materially from those in our forward-looking statements, and you should not place undue reliance on these statements. We assume no obligation to update these statements as circumstances change, except as required by law. For additional information concerning the factors that could cause actual results to differ materially, please see our forward-looking statements section in today’s press release and the Risk Factors section of our most recent annual report on Form 20-F filed with the SEC on February 11, 2026. TransCon Growth Hormone or TransCon hGH is now approved in the US by the FDA for the replacement of endogenous growth hormone in adults with growth hormone deficiency, in addition to the treatment of pediatric growth hormone deficiency, and in the EU has received MAA authorization from the European Commission for the treatment of pediatric growth hormone deficiency. TransCon PTH is approved in the US by the FDA for the treatment of hypoparathyroidism in adults, and the European Commission and the United Kingdom’s Medicines and Healthcare Products Regulatory Agency have granted marketing authorization for TransCon PTH as a replacement therapy indicated for the treatment of adults with chronic hypoparathyroidism. Otherwise, please note that our product candidates are investigational and not approved for commercial use. As investigational products, the safety and effectiveness of product candidates have not been reviewed or approved by any regulatory agencies. None of the statements during this conference call regarding our product candidates shall be viewed as promotional. On the call today, we will discuss our full-year 2025 financial results and we will provide further business updates. Following some prepared remarks, we will then open up the call for your questions. With that, let me turn the call over to Jan. Yun Zhong: Thanks, Chad. Operator: Good afternoon, everyone. With strong execution across our business and continued progress Dingding Shi: to Operator: delivering on our Vision 2030, Ascendis is transforming into a leading global biopharma company. We believe this progression demonstrates the power of our TransCon Yun Zhong: platform. Operator: And our R&D capabilities to deliver a sustainable pipeline, while our global commercial infrastructure and financial profile continue to strengthen. We believe we are now at the base of a steep curve, where we expect to achieve operating cash flow of around €500,000,000 in 2026 and where we aspire to achieve at least €5,000,000,000 in annual product revenue by 2030. At the same time, we are building an expanded pipeline of blockbuster product opportunities. In the fourth quarter, we saw multiple achievements across the organization, starting with Yorvipath. The fourth quarter was another period of strong execution for the global launch of Yorvipath. Revenue for the quarter was €187,000,000, bringing full-year 2025 Yorvipath revenue to €477,000,000. In the US, access continued to expand. To year end, more than 5,300 patients were prescribed Yorvipath by nearly 2,400 unique healthcare providers, highlighting continued strong and steady demand. To date, less than 5% of US patients are currently on Yorvipath treatment, highlighting the significant long-term growth opportunity ahead. The overall insurance approval rate is about 70% of the total enrollment, and we continue to see this figure moving higher over time. In addition, we continue to see a majority of approvals within eight weeks. This provides a strong foundation for expected additional growth in 2026 and beyond as more patients initiate Yorvipath in line with treatment guidelines that support its use. Outside the US, we continue to reach more patients. As a reminder, Yorvipath is now available commercially or through named patient programs in more than 30 countries. We have full commercial reimbursement in four countries in our Europe direct markets and two countries in our international markets. In Japan, our partner Taisho launched Yorvipath commercially last November. In 2026, we expect full commercial launches in 10 additional new countries. We also advanced development activity to broaden Yorvipath’s label in a number of areas. In the US, we are working to expand and globally, the range of doses to our PATHway-6 trial, and we continue to advance clinical trials to expand Yorvipath to patients under the age of 18. Our work is progressing rapidly on once-weekly TransCon PTH for patients who have been titrated with daily Yorvipath or conventional therapy and have achieved a stable daily dose for a well-defined period. Last month, at the annual J.P. Morgan Healthcare Conference, we shared preclinical data that support the target product profile for a once-weekly TransCon PTH candidate matching the release PK/PD as seen with daily Yorvipath treatment over the entire week, thus providing a comparable efficacy and safety profile. Yun Zhong: Overall, we would we remain confident. Operator: That Yorvipath has the potential to be a durable long-term growth driver for Ascendis globally. Turning now to growth disorders. Comprising our once-weekly growth hormone, Skytrofa, or TransCon Growth Hormone, or once-weekly TransCon CNP. Skytrofa delivered another solid quarter with Q4 revenue of €53,000,000, bringing full-year Skytrofa revenue to €206,000,000. This performance reflects the strength and value of the brand. As a reminder, Skytrofa is now approved in growth hormone deficiency in the US and adult growth hormone deficiency. Today, Skytrofa has an overall market share of around 7% in the US. During the fourth quarter, we initiated our Phase III basket trial evaluating TransCon Growth Hormone in additional established growth hormone indications, including ISS, SHOX deficiency, Turner syndrome, and SGA, which comprise up to half of the growth hormone market. Over the long term, these indications represent meaningful opportunity to expand the role of Skytrofa as a treatment of choice in additional growth disorders. We also see an opportunity to potentially expand Skytrofa’s use to novel indications where growth hormone has not previously been approved for use, such as achondroplasia, in combination with TransCon CNP. TransCon CNP is expected to be the first and only once-weekly treatment for children with achondroplasia, providing the full linear growth outcome that can be achieved with monotherapies addressing the overactive FGFR3 tyrosine can. Kinase. In addition, in our pivotal trial, TransCon CNP achieved significant improvement in leg bowing compared to placebo, increasing spinal canal and a similar safety and tolerability profile compared to placebo, with a very low rate of injection-site reaction, and no cases of symptomatic hypertension. In the US, our NDA for children with achondroplasia remains under review with a PDUFA date of February 28. In the EU, the MAA review is underway following our submission last October with a regulatory decision expected in Q4 2026. Recruitment of our ongoing trials in infants with achondroplasia ages 0 to 2 is going well, and we anticipate complete enrollment later this year. Turning to the combination therapy, our 52-week data in achondroplasia underscore the potential power of dual treatment with TransCon CNP and TransCon Growth Hormone. Continuous exposure to CNP enables the benefit of sustained exposure to unmodified growth hormone. In comparison, monotherapy trials of daily growth hormone in achondroplasia delivered only a limited effect on growth and no group-reported benefit on linear growth. Our 52-week data from the Phase II combination trial support our vision to significantly raise the bar for treatment of achondroplasia with linear growth improvements in achondroplasia-specific height score that were three to four times what has been shown with CNP or daily growth hormone monotherapies in the same time period. In addition, the combination trial demonstrated accelerated improvement in body proportionality, and for the first time, a meaningful improvement in arm span has been reported, without compromising safety or tolerability. Importantly, these benefits are meaningful to the achondroplasia community and have been a core objective of our patient-focused development program in both our monotherapy and combination therapy programs. Importantly, all children completed 52 weeks of treatment and remain in the trial, reinforcing the benefit of treatment and acceptable treatment burden of the once-weekly regimen. These Phase II results demonstrate the effect of these complementary therapies, supporting that TransCon CNP acts in synergy with the growth-promoting effect of TransCon Growth Hormone and has positive effects beyond linear growth. We believe over time the standard of care in achondroplasia and other growth disorders long term will include dual therapy as a treatment option. Building on the potential role of TransCon CNP as an essential fundamental therapy, we recently had a successful end-of-Phase II FDA meeting and Scientific Advice Meeting in the EU to align on our Phase III trial for this novel combination approach for treating children with achondroplasia. We also remain on track for additional COACH trial updates including week 78 by midyear and week 104 by year end, and plan to explore further opportunity in other growth disorders. Yun Zhong: To sustain doable Operator: long-term growth for Ascendis well into the next decade, we plan to continue to invest in label expansion of our current products in rare endocrine diseases. In addition, we have a strong focus on the development of new blockbuster product opportunities, both inside and outside rare endocrine diseases, to fuel significant product revenue growth in the future. Looking at our partnerships, TransCon technologies support a continuous flow of highly differentiated product opportunities across multiple therapeutic areas, more than we can develop and commercialize ourselves. For this reason, our Vision 2030 includes a focus on creating additional value through partnership and collaboration. Our collaboration with Novo Nordisk for once-monthly TransCon semaglutide continues to advance towards the clinic. Adarx’s TransCon anti-VEGF is on track to enter the clinic this year. In Japan, Taisho received approval for Yorvipath in August 2025, and launched it commercially in November 2025. In addition, VISEN received approval of Skytrofa in China in late January 2026. In summary, 2025 was another positive and transformative year for Ascendis, with two commercial TransCon products continuing to scale, the potential approval of the third high-value TransCon product in the coming weeks, and a growing pipeline of highly differentiated programs. We believe we have the fundamentals in place to deliver global long-term growth. A rapidly strengthening financial profile gives us confidence to achieve an expected operating cash flow of around €500,000,000 in 2026 and our aspiration to achieve at least €5,000,000,000 in annual product revenue by 2030, all consistent with our Vision 2030 strategy. I will now turn the call over to Scott. Scott T. Smith: Thank you, Jan, and thank you, Chad, for a well-read FLS. The significant achievements we made in 2025 provide us with substantial financial strength to drive our strategic priorities and goals in 2026, which include achieve blockbuster status for Yorvipath, solidify our leadership in hypoparathyroidism through rapid progress of our label clinical trials of TransCon PTH while advancing development of our once-weekly PTH candidate, successfully launch TransCon CNP if approved in the US and other countries around the world, and expand our leadership in growth disorders through clinical and regulatory progress with once-weekly Skytrofa, including in combination with once-weekly TransCon CNP. With that, I will touch on some key points surrounding our fourth quarter and full-year financial results, which we mostly already announced at J.P. Morgan. For further details, please refer to our annual report on Form 20-F filed today. As previously announced in January, Yorvipath delivered strong global performance in Q4 2025, with revenue increasing to €187,000,000, up from €140,000,000 in Q3. Foreign currency had a negligible impact compared to the previous quarter. Total Yorvipath revenue for 2025 was €477,000,000. For the full year, the weaker US dollar negatively impacted Yorvipath revenue by approximately €27,000,000. Skytrofa contributed €53,000,000 in Q4 with negligible foreign currency impact compared to Q3 2025. Total Skytrofa revenue for 2025 was €206,000,000. For the full year, the weaker US dollar negatively impacted Skytrofa revenue by approximately €9,000,000. Including €7,000,000 in collaboration revenue, total Q4 2025 revenue amounted to €248,000,000, and total revenue for full-year 2025 was €720,000,000. Continuing on to expenses, as previously announced, total operating expenses for Q4 were €214,000,000, and total operating expenses for the full year 2025 were €761,000,000, as we previously noted. Operating profit for Q4 2025 was €10,000,000, with Q4 operating cash flow of €73,000,000. As we have discussed for some time, below operating profit the drivers include the noncash accounting related to our convertible notes. Noncash net finance expense, which was primarily driven by noncash items including remeasurement loss of financial liabilities of €106,000,000, was €93,000,000 net. Net cash finance expense, however, for the full year 2025 was about €8,000,000. In future periods, we may introduce a non-IFRS EPS measure adjusting for the impact of certain items to increase the comparability of period-to-period results. We ended 2025 with €616,000,000 in cash and cash equivalents as previously reported, up from €560,000,000 as of December 31, 2024. Turning to our commercial outlook to help inform your revenue modeling for the coming year, for Yorvipath we expect continued strong revenue growth in 2026 based on steady patient uptake with some expected seasonality in reported revenue throughout the year. For Skytrofa, we expect to follow a similar seasonal pattern to 2025 with full-year revenue growth expected to track growth in prescriptions. Longer term, Skytrofa revenue is expected to come through geographic and label expansion. As always, we continue to watch the euro-US dollar exchange rate for any potential impact. Finally, we also look forward to the potential US approval of TransCon CNP later this month, which, as a reminder, has been excluded from this 2026 outlook. With that, operator, we are now ready to take questions. Jan Moller Mikkelsen: Certainly. And once again, ladies and gentlemen, we ask that you please limit yourself to one question each. Our first question comes from the line of Jessica Macomber Fye from J.P. Morgan. Your question please. Jessica Macomber Fye: Hey, guys. Good afternoon. Thanks so much for taking my question. What is your confidence level heading into the TransCon CNP PDUFA? Are you comfortable that the issue leading to the review extension has been resolved to the FDA’s satisfaction? Thank you. Operator: Yes. Can you remember you asked me a question one time, and the J.P. Morgan conference. Can you remember my answer? Jessica Macomber Fye: I do remember the answer. Operator: And what was your question? You can ask the same question. Jessica Macomber Fye: I remember your answer, but it was about a different product if I recall, but your answer was yes. Operator: Yes. So this is the same. You asked me, will TransCon PTH be approved, and I said yes. You can ask me the same question today. Will TransCon CNP be approved, and I will say yes. Jessica Macomber Fye: Okay. Thank you. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Tazeen Ahmad from Bank of America. Your question please. Tazeen Ahmad: Hi. Good afternoon. Thanks for taking my question. You mentioned a 70% insurance approval rate in the US so far for Yorvipath. When might you get to 100%, basically? Operator: I think it would be infinity, because I have never seen a product hitting 100%. I think the highest bar I have seen is something like 85%, perhaps up to 90. Where we are today, I am highly satisfied because it is also a compromise about how aggressive you are going into contracting and other things. It is a balance between the two things where in the end, the overall and ultimate goal is to provide most value back to our shareholders and others, and at the same time help the patient to come on treatment as fast as possible. I do not know, Jay, if you have additional comments to my I would not say, pre-prepared remarks. Gavin Clark-Gartner: Yeah. I would say two things. One is that we are very happy with the overall approval rate that we are seeing. I think the speed in which you are seeing this product be covered, again, is a testament to the strong clinical value proposition that we are seeing in hypoparathyroidism. It is the first and only approved therapy in this category. So, again, this approval rating based on where we are today is something that we are very encouraged by. I think to your second part of the question, Tazeen, which is when might you get to 100%, I echo what Jan said earlier as well, which is I do not know that many drug analogs will get to 100%, and that actually has less to do with coverage and also has to do with every single enrollment that comes in. Not every single one of them will be eligible relative to the label. So there is some element of natural filtering that comes that way. More importantly, what I would say is that there are state Medicaid plans, for example, that review things on a staggered cycle. So you will anticipate that some of this will creep up over time, but it will take some time before it continues to inch upwards. Yun Zhong: Yeah. Okay. But I think Operator: I think still we need to, some way, this is a US discussion. The US discussion is built on 70% of all approvals in enrollment are there. When you look at an old cohort that perhaps has been six months through it, your actual will get an almost higher number on it. Just to clarify that 70%, that is when you take everyone accumulated. If you take an old cohort, it is much higher. When you go ex-US, the system is quite different. When you get a prescription, in nearly every other country, you are axiom approved. So you can say the 100% yes is basic. When you get a prescription outside US in traditional countries, you will be 100% eligible and already approved for reimbursement. Tazeen Ahmad: Got it. Thank you for the color. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Gavin Clark-Gartner from Evercore ISI. Your question please. Gavin Clark-Gartner: Hey, guys, thanks for taking the question. Just on your 8% WAC increase in January. Maybe you could discuss how net pricing will trend this year? Scott T. Smith: Including how to quantify the magnitude of the Q1 seasonality here. Operator: I do not think we really are discussing net prices. We would love to do it, but we have never done it, and I do not think we ever will discuss net prices. Maybe if I could just ask a follow-up then. Just on Kelly Shi: patient enrollment, are you planning to still report those forms going forward for Yorvipath, or maybe just focus more on revenue? Operator: I think in the end, Gavin, is 100% right. We will focus on revenue because now we have been in the market in the US for about four quarters now. When we come to the fifth quarter, I think you have seen a steady state development from 2025 where we basically got an increase in revenue from both US and ex-US of about €40,000,000 to €50,000,000 net every quarter. I think you will see a stability in how we are executing. We still have ex-US. We expect 10 additional countries being fully reimbursed next year. I am sure that is always improving what we call the net revenue we will generate outside the US. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Yaron Benjamin Werber from TD Cowen. Your question please. Yaron Benjamin Werber: Great. Thanks so much. I have a sort of two not really related, but I am going to try to link them to keep it as one question. Scott T. Smith: Maybe the first one, can you give us a little bit of a sense for Yorvipath? How it is being used out there? When you look at 2,400 unique prescribers and 5,300 unique patient enrollment, is it that each physician has one or two patients in the practice, or are they prescribing it and then going deeper? And then secondly, just at the end-of-Phase II meeting with FDA relating to CNP and growth hormone for achondroplasia, can you give us an update on the outcome and when will you start the Phase III? Thanks. Operator: Okay. That is perfect. I think, Jay, you can give some about how we are expanding the physician prescriber team base, but also go deeper on the different patient, but still are far away to reach the level where we want to be. Jay. Yep. So in the US, I think the question is really around Gavin Clark-Gartner: segmentation and what types of patients are being treated. If you think about the prescriber base, this is where you started your question. We are seeing broad uptake across the entire range of prescribers. To your point, there are some physicians that might only see a couple patients, but there are also some physicians that might see upwards of 10 patients. More importantly, because we are seeing broad uptake across both high-decile and low-decile providers, we are not seeing a major discrepancy as to the type of prescriber that would prescribe, but we are seeing that breadth continue to increase. As it relates to the number of patients per physician, we are also seeing the depth of prescribing per physician increase over time, which again is encouraging. That is both a testament to positive experience with Yorvipath as well as increased awareness of hypoparathyroidism and now there being an option for it amongst patients. The last thing I would say is, when you think about the types of patients that come through, you can look at it in two ways. The vast majority of them are postsurgical, about 70%. The remaining 30% perhaps due to other factors, whether it is genetic, autoimmune, etc., and we are seeing broad uptake across both of those segments, so that is not a major driver. Really where you are seeing some of the earlier uptake is patients that are self-aware of the condition that they have, are linking the symptoms that they have to the underlying condition that they have, and therefore, a combination of them advocating for themselves as well as providers having conviction in the product as well. So all in all, we are seeing broad uptake across provider groups as well as patient segments. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Yaron Benjamin Werber: Joseph Schwartz. Operator: Before you start, perhaps I can answer the last part of the question related to the COACH trial. Yes. We had extremely positive meetings from the US side and from the EU side. It was really impressive feedback because of the data. They have never seen data before that are providing this kind of benefit to an achondroplasia treatment. I am not only talking about the linear growth where we basically on z-score got a three to fourfold more than you can see with monotherapies in the same time period, but also unique elements like such an improvement in body proportionality. What really they have never seen in such a meaningful manner was a really important element, the arm span, where we also saw in the combination trial a unique improvement in arm span. Aimee is sitting here, and she is really doing everything to get this trial recruited as fast. We are ready to go. Protocol is finished and everything. Be open site. Just remember that our pivotal trial in monotherapy, we recruited it just in three or four months, just because of the interest of the patient. Therefore, the bar for Aimee is very hard if she needs to do that faster. Sorry for coming in. Jan Moller Mikkelsen: Absolutely. Not a problem. Our next question comes from the line of Joseph Schwartz from Leerink Partners. Your question please. Li Watsek: Hi. This is Heidi Jacobson on for Joe Schwartz. Thanks so much for taking our question. Can you help us understand how the TransCon CNP launch could factor into your $500,000,000 operating cash flow target for 2026, particularly with respect to launch investment and early revenue contribution? Yun Zhong: Thanks. Operator: It is pretty simple. It is not incorporated. When we are coming into the launch, we see the initial uptake, which we believe will be pretty high, not only in the US but also outside US because we can utilize the US approval to go to countries outside US, especially in the international market. From that perspective, we will come and provide you a better guidance and improved guidance when we have seen that. Scott is smiling, are you counting money or what are you doing? Kelly Shi: Taxes and money. Operator: If you will come back after that. Eliana Rachel Merle: Great. Thanks. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Derek Christian Archila from Wells Fargo. Your question please. Derek Christian Archila: Hey, good afternoon. Thanks for taking the questions. I wanted to understand your confidence level around Yorvipath growth ex-US. Obviously, the launch in Germany and Austria, is that a good proxy? Or is it going to be more depth in those types of countries than just expansion in, I think you said, 10 additional countries. How will that be sequenced through the year? Thanks. Operator: That is extremely complicated because the heterogeneity of ex-US is so heterogeneous that we cannot compare what we see in Spain now, what we see in France, what we see in Germany, what we see in Austria. It is different because we see different speed of penetration. For example, Germany has fewer endos, so the bottleneck is tighter. It takes longer to get them on therapy because there are fewer in the general population. If we go to Spain, there are more. There are more in France, and we also see a faster uptake because the pipe is larger. When we get 10 more additional countries on full commercial, we will see different uptake, but what we are doing is everything will be accumulated in the way where we now see from 30 to 35 countries named patient programs. When we go full commercial, everywhere we see an acceleration of patient uptake because of the burdensome nature of a named patient program. It takes so much effort to get every single patient on it, and every patient deserves to be under treatment. In 2026 we will see initial speeding up in all these countries. In 2027, 2028, you will continue to do it because by nature, we just got approval now in Canada, and we are taking one country after the country, first getting approval, and then putting reimbursement. Jan Moller Mikkelsen: Our next question comes from the line of Li Watsek from Cantor. Your question please. Li Watsek: Hey, thank you so much for taking our Kelly Shi: question. It is Daniel Brondo on for Li. Can you give us a little bit of color on how you expect your TransCon CNP launch to go? It seems like there are a few patients who are not currently on treatment. Where do you think you will capture the majority of patients initially? Yun Zhong: Pretty clear. Operator: Improvement that we see with TransCon CNP to what we can provide. Not only related to tolerability injection-site reaction, having one in 20 injection-site reaction compared to one every second year, being in a position to look at no risk of hypertension, the element of improvement on the once-weekly product, and then show the data package that we have generated with TransCon CNP, for first time ever shown in a well-controlled trial against placebo, benefit beyond linear growth. For example, the leg bowing, which we have shown multiple times, we have shown improvement in muscle strength. We have improved quality of life. I think this is obvious. Every patient that decides to be on treatment should have the opportunity to have the best possible treatment option, and I think there is a public interest in the US to ensure that this always will happen. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Eliana Rachel Merle from Barclays. Your question please. Eliana Rachel Merle: Hey, guys. Thanks so much for taking my question. Curious if you can elaborate on your strategy for commercializing TransCon CNP ex-US. Given the majority of vosoritide sales are ex-US, could you elaborate on your strategy for the commercial launches globally and the degree of investment that will take? And second, on TransCon CNP in the US, can you talk about cadence of uptake and which segments do you expect the most uptake from between treatment naive versus switches? Thanks. Kelly Shi: Yeah. I will dive a little bit back now because Operator: what we did when we said that we want to have global commercial Yun Zhong: effort. Operator: We actually started all our infrastructure building to Yorvipath. Now you see what we have done with Yorvipath. We recognized their fast revenue, commercial revenue for more than 30 countries. We are penetrating them exactly as we can do. We will reach 60 to 70 countries in less than two to three years. We already have built up the infrastructure to be ready that we can take our integrated pipeline of rare disease endocrine products into all these different countries in the setup via step links around Yorvipath. This is the positive element that we are not a company that needs first to build infrastructure to support globalization. We have already established that. So I feel really confident all the success we see now with Jan Moller Mikkelsen: Yorvipath on a global scale, Operator: we will just take it in. Do not forget, for example, even in Japan, the collaboration we have with Taisho is for all three products, the same in China and other places. When we make these agreements, we are not making single product, single country. We make it as a pipeline Yun Zhong: product. And this is why we do not need to go out and make new agreements or anything. Operator: It is just going to be done extremely fast from that perspective. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Leland James Gershell from Oppenheimer. Your question please. Leland James Gershell: Great. I want to ask, as we look at the €5,000,000,000 number you have put out there for product sales by 2030, you are not giving specific product guidance, but if you could share how you think about the relative contributions of your presumably three products by that point in time, in terms of how they will weigh into that total sum. Obviously, you have much more expansion opportunity in hypoparathyroid, you have TransCon CNP potentially launching soon, and Skytrofa perhaps getting additional indications in combination. I would love to hear Yun Zhong: with those three parts. Thank you. Leland James Gershell: maybe just philosophically how your outlook adds up Operator: Yeah. That is an element where we always in our forecasting are operating under different assumptions, where we are building models for each country and then aggregate globally. We first take 2026, then 2027, 2028, and 2029. Then you always look at the risk balance. Where do we have potential extra upside that we can explore? But what makes Ascendis unique today is that we are not a single product in a single region. We will have three approved products in perhaps 20 different indications in about 30 to 40 countries. We will not be dependent on one single product in one single region. This is how we build a sustainable company that has a continued stable revenue flow for multiple years. Do not forget these product opportunities. When I look at the pipeline for each of them, I definitely do not have sleepless nights. There is no doubt that when I see the profile and how we design it to be best in class, we also see that realized. From that perspective, it is a combination of products with IP lifespan extremely long. This is where you have the durability of it. This is why we take the value perspective of each single product opportunity instead of fast revenue. This is not how we operate. We go for value, because this is the product really deserved as treatment because we are providing not only a unique benefit for the patient, but also for the society and everyone. Kelly Shi: Great. Thanks very much. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Paul Choi from Goldman Sachs. Your question please. Paul Choi: Hi, good afternoon. Thanks for taking our question. I think your Phase II REACH IN study is scheduled to reach primary completion next month. Will you be in a position to file an sNDA for the newborn infant population this year? In terms of the newborn infant population, in your discussions with the FDA and EMA for your Phase III combination study, does your study design allow for those newborn patients to be included in the study population, or will that require a separate study? Thank you. Operator: I think when you discuss a label discussion, that typically is different between the main regulatory areas. If you take, for example, US, it is much harder to come to a situation where they will Yun Zhong: accept Operator: a label expansion to the infant without having the data in hand. In Europe, it is more flexible because you have a discussion with them, and you can have what I call rolling addition of data that is being generated to our trial. There will likely be a difference between the three geographic regions. Simplified, Japan is perhaps the easiest way to get it down to infant immediately. What we are doing now is to ensure we generate the right data, and we are doing that in a trial. It is a placebo-controlled trial, and what we see is everything we hope for. It is living up to our expectation. Why I can say that? Because in the enrollment, we have six patients on a, what I call, visible treatment. You take them in, and there is no randomization. You can follow them, and Aimee can tell a few words about the benefit we have seen from that perspective. Aimee Shu: So, Jan is talking about the sentinel kids who are not part of the randomized piece of the study. They are doing well, tolerating the medicine as well as we would expect, growing, and starting to see early signals of other benefits as well, particularly radiology. Jan Moller Mikkelsen: Yeah. So we are really so pleased with the progress we are doing in helping patients with achondroplasia, not only on linear growth, but also benefit beyond linear growth. Jan Moller Mikkelsen: Thank you. Our next question comes from the line of Yun Zhong from Wedbush. Your question please. Yun Zhong: Hi, good afternoon. Thank you very much for taking the question. My question is on the weekly TransCon PTH. Is it reasonable to expect that the program could potentially enter the clinic in 2026, or do you think that there is no such need to rush? Also, you mentioned matching PK to the daily product. With data from Yorvipath available, what do you see as the most efficient clinical pathway to maybe take the weekly PTH to approval? Operator: I think what you are addressing is two things that are interconnected. If you can show the PK profile, and it can even be healthy volunteers or patients with hypopara, that over the entire week of treatment you are bioequivalent to Yorvipath, that is the aspiration how we designed it. You will always be in an excellent PTH level compared to your Yorvipath daily dose for the entire week. Then we know you will get the expected safety, the expected tolerability from that perspective. This will make a much more simplified, easy way to conduct the clinical trial. It is why we designed it in this manner. Yun Zhong: Okay. Thank you very much. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Luca Issi from RBC. Your question please. Luca Issi: Great. Thanks so much for taking my question. Congrats on the progress. Maybe, Jan, big picture, one of the goals for 2030, as you articulated at J.P. Morgan, is to remain an independent and profitable biotech company, and we have seen many successful examples of that recently. However, how do you think about continuing that same vision under the broader umbrella of a larger pharmaceutical company? How are you thinking about strategic path A versus strategic path B at this point? Any color appreciated. And then maybe, Jay, quickly, I think BioMarin has announced that they will file vosoritide for full approval versus I believe you will initially get approved on an accelerated approval basis Kelly Shi: for TransCon CNP. How should we think about that difference? Will that have implications for formulary access and reimbursement? Do you not view that difference as material for adoption given you have a less frequent dosing versus—thoughts about that? Excellent. I think I have been I think I will liberate Jay for answering the last Operator: question. I think when I look at this discussion on accelerated approval that BioMarin is filing for, that has no Dingding Shi: impact Jan Moller Mikkelsen: on our regulatory pathway and approvals and other things like that. Totally independent. It is not any way how you can build up any barrier. The second thing, yes, in our vision there is independent, and I believe that is a great word because we want to be independent like a teenager growing up. I have four children. I am teaching them when they are going to be 18, you need to be financially independent as the first element in their life. I think that is a great thing to see Ascendis Pharma now moving away from being a teenager but basically can go up to a more adult life, because we have shown now we are completely independent on asking investors and others for any kind of revenue. I think this is how we see independency. Kelly Shi: Super helpful. Thank you. Jan Moller Mikkelsen: Thank you. And as a reminder, ladies and gentlemen, we ask you to please limit yourselves to one question. You may get back in queue as time allows. Our next question comes from the line of Maxwell Nathan Skor from Morgan Stanley. Your question please. Maxwell Nathan Skor: Great. Thank you very much. My question was asked, but I will take a shot at this. Could you give any color on the once-monthly TransCon semaglutide program? Any gating factors? When should we expect an update? Any additional color would be helpful. Thank you. Operator: Yeah. Let me go back to all the elements and all the IP we have done, files and data and everything like that before we went into this extremely productive collaboration with our neighbor in Copenhagen, Novo Nordisk. What was the idea behind once-monthly semaglutide? The idea was to be sure that you can get fast weight loss and at the same time have a high level of tolerability. Think about a naked GLP-1 molecule. When you give it weekly or potentially want to use a weekly product once monthly, you need to add much more compound to compensate for the half-life to have a large AUC. By doing this, you add a high Cmax. Because it is naked, you will have a very short Tmax, meaning that you will have a steep curve from the lowest level just before you start to give a dose up to the maximum concentration. That often gives the tolerability issue where you get the element that limits people to stay on treatment and what you can achieve. This is what I call the naked product. This is like metacresol and everything. It is a naked protein. What we are doing now is defining what we call packed-in semaglutide. Even if you give it high dose, you liberate it slowly, slowly, slowly, so you are getting a very long Tmax. By doing that, you have a slope that is not as steep at all as you see with a naked molecule. You still have a big AUC because you provide so much compound, give it over the entire month, and at the same time you do not have this steepness in the slope. It was designed to have maximal weight loss as fast as possible with the best tolerability profile, and it was how we designed it at that time. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Alexander Thompson from Stifel. Your question please. Alexander Thompson: Hey, great. Thanks for taking our question. Maybe for Scott, could you talk a little bit about OpEx trajectory in 2026 in the context of the CNP launch and then the schedule for label expansion both with mono and the combo pivotal studies? Thanks. Scott T. Smith: No problem. We talked a little bit about this at the J.P. Morgan conference event. Using Q4 OpEx as a run rate for the full year is not a bad way to think about it. If things change, we will update you. Overall, everything related to CNP, as we said before, we will come out and discuss more following approval. Yeah. But that is mainly related Operator: to the revenue because what we have now, we have a really mature company. It is not like we take something in a pipeline, actually take product out of the pipeline all the time. So R&D is basically constant for the last three or four years. Our global commercialization, specifically the direct market that we have built up already now, adding a few more people there, not major impact on anything like that. This is the benefit of a pipeline in the same therapeutic area and scale that we have now. Alexander Thompson: Thanks. Appreciate it. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Joori Park from Wolfe Research. Your question please. Joori Park: Yeah. Hey. Thanks for taking the question. Kelly Shi: I had one on the competitive landscape. Joori Park: Wondering how you are thinking about this internally as Kelly Shi: other agents like Joori Park: encaleret are looking to expand into the Kelly Shi: chronic hypoparathyroidism landscape. And then does your longer-term outlook for Yorvipath include that potential impact from such emerging agents? Thank you. Jessica Macomber Fye: So Operator: I could be polite, or I can be a straight shooter. I have seen a lot of idiotic ideas. This one is really one of the most idiotic ideas I heard about. You have patient that is missing a hormone, PTH, and giving encaleret is not increasing and providing any hormone to this. We are talking about a hormone replacement therapy where you are helping multiple organs, the brain so you have greater cognitive effects. The bone needs to have the right metabolic system. The kidney needs to have the right phosphate elimination. It needs to have the right calcium absorption. I can continue one organ after the other organ. Then you believe you can take a compound, incubate, that basically calcium-sensitizing compound, take it into a person that does not have the hormone and then you think you have a treatment. It is really one of the most unscientific ideas where I cannot see any meaningful effect that it will help the patient. You can increase the element of one single thing, absorption of calcium, but that is not anyway coming in as a hormone replacement therapy. So no. We have not calculated that in. There is an idea in the ADH1 patient which has a mutation in the calcium sensitizer 1. It makes sense for this small amount of patients. It makes sense but not for a person that misses PTH. Kelly Shi: Got it. Thank you. Jan Moller Mikkelsen: Thank you. And our next question comes from the line of Dingding Shi from Jefferies. Your question please. Dingding Shi: Hey guys, thanks for taking the question. Just wanted to ask, Jan, maybe because you are giving some open thoughts on competitive landscape. Can you discuss your latest thoughts on the CNP competitive landscape, including upcoming FGFR data from BridgeBio and also the earlier-stage long-acting CNP from BioMarin. Operator: Yeah. I think that is Dingding Shi: an interesting Kelly Shi: aspect Operator: because we have seen the benefit of CNP therapy for multiple years now. We are seeing it in large patient population, and one of the things I am 100% aligned with BioMarin on is that the CNP therapy has shown to be extremely safe and well tolerated, except that if you take too high concentration, you can get hypotension, you can get injection-site Yun Zhong: right. Operator: If you are not really encapsulated. When I see the CNP therapy, I understand why BioMarin are trying to copy us and trying to develop a product that is providing a sustained liberation of CNP over one week, because we have seen from our data how we are highly differentiated compared to vosoritide. That is a completely different Yun Zhong: case about Operator: do we really have a once-weekly product or not? You cannot just take out from AUC. You need to see the profile over one week and other things like that. As I am not seeing these data or anything on the long-acting product for BioMarin, I do not know if anyone can judge that it is a viable product opportunity in any way. We need to see the PK profile, get the half-life, and all the different things. Then we can take a judgment about it. The element of tyrosine kinase is a completely different element for me, because that is using a nonspecific action of a compound that is addressing the tyrosine kinase. If you go to the BridgeBio, it is a nonspecific tyrosine kinase that inhibits the three different receptors FGFR1, FGFR2, and FGFR3. This is why it is called nonspecific. I am not worried that you will not see a treatment effect, because when you address the tyrosine kinase, you see an improvement in linear growth because you are inhibiting the superactive pathway. Will we see the same kind of benefit that we see beyond linear growth? Kelly Shi: That is up to them to show, can we see an improvement in muscle strength? Operator: Can we see an improvement in leg bowing? Can we see all the elements of improved quality of life with that? But what worries me is the nonspecific thing, and I really do not care about phosphate. People say, oh, Jan, are you worried that they have elevated phosphate? First of all, elevated phosphate, you cannot grade it 1, 2, or 3, 4. You need to see on the patient what is the phosphate level before treatment and after treatment, because then you see, does the treatment on each subject Yun Zhong: have an Operator: impact on the phosphate level. If it has impact on the phosphate level, we know it is a nonspecific inhibition Kelly Shi: of FGFR1. Operator: When you have a nonspecific inhibition of FGFR1, you also have nonspecific inhibition of FGFR2. When you know that FGFR2 is one of the key receptors that is part of the CNS development of the brain, I am extremely worried because it is not something you see easily in a preclinical model. You do not see it in short-term clinical trials. You see it after three, perhaps four or five years of treatment. That worries me from our patient focus. How can you accept that any patient should take this risk without being extremely well informed about it. Dingding Shi: Got it. Thank you for your insight. Yun Zhong: Thank you. Jan Moller Mikkelsen: This does conclude the question-and-answer session as well as today’s program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.
Operator: Good afternoon my name is Kevin, and I will be your conference operator today. At this time, I would like to welcome to the Q2 Holdings, Inc. Fourth Quarter and Full Year 2025 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press 9 to raise your hand and 6 to unmute when called upon. I will now hand the conference over to Josh Yankovich, Investor Relations. Sir, please begin. Josh Yankovich: Thank you, operator. Good afternoon, everyone, and thank you for joining for our fourth quarter and full year 2025 conference call. With me on the call today are Matt Flake, our CEO, and Jonathan Price, our CFO. This call contains forward-looking statements that are subject to significant risks and uncertainties, including, among other things, with respect to our expectations for the future operating and financial performance of Q2 Holdings, Inc. for the financial services industry. Actual results may differ materially from those contemplated by these forward-looking statements, and we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those reflected in the forward statements are included in our periodic reports filed with the SEC, copies of which may be found on the Investor Relations section of our website, including our Annual Report on Form 10-K for the full year 2025 and the press release distributed this afternoon and filed in our Form 8-Ks with the SEC regarding the financial results we will discuss today. Forward-looking statements that we make on the call are based on assumptions only as of the date discussed. Investors should not assume that these statements will remain operative at a later time, and we undertake no obligation to update any such forward-looking statements discussed in this call. Also, unless otherwise stated, all financial measures discussed on this call other than revenue will be on a non-GAAP basis. A discussion of why we use non-GAAP financial measures and a reconciliation of the non-GAAP measures to the most comparable GAAP measures is included in our press release, which is available on the Investor Relations section of our website and in our Form 8-Ks filed today with the SEC. We have also published additional materials related to today's results on our Investor Relations website. Let me now turn the call over to Matt. Matthew Flake: Thanks, Josh, and good afternoon, everyone. Thank you for joining us today. I will start by walking through our fourth quarter results and highlights, then step back and recap full year 2025 performance before sharing the key themes that define our strategy as we enter 2026. I will then hand the call over to Jonathan who will cover our financial performance, provide guidance for 2026, and share our new financial framework. Starting with the fourth quarter, we delivered a strong finish to the year with performance that reflects solid execution across bookings, revenue, and profitability. In the fourth quarter, we generated strong year-over-year subscription revenue growth of 16%, expanded our adjusted EBITDA margins by over 400 basis points year over year, and produced meaningful free cash flow of $56,600,000. While Jonathan will walk through the numbers in more detail, the headline is that we closed the year with strong results across all of our key financial metrics. We had an outstanding quarter on the bookings front. The fourth quarter was our second largest bookings quarter in company history and came directly on the heels of a record third quarter. This performance underscores both the strength of demand and our ability to execute, particularly in the larger, more complex deals. As we said at the start of 2025, we expected our larger deals to be weighted toward the back half of the year, and that expectation continued to play out in the fourth quarter with eight total Tier 1 and enterprise deals. Notable wins included the Tier 1 institution that bought relationship pricing and commercial digital banking, a $40,000,000,000 digital banking customer that expanded its commercial and new fraud products, and a Helix deal with a top five credit union. Within our sales execution during the quarter, we continued to see a healthy balance of net new and expansion activity remains a defining characteristic of our bookings performance. Stepping back to the full year, 2025 was our strongest year as a company across bookings, revenue, and profitability. On the sales front, we executed well in a strong demand environment. We saw consistent activity upmarket throughout the year with a total of 26 enterprise and Tier 1 deals. Expansion continued to play a critical role in our bookings profile with half of those Tier 1 and enterprise deals coming from expansion with existing customers and the other half driven by new logos. Those wins came from across the portfolio, and we feel good about the momentum in each of our major product areas. Our digital banking platform provided a strong foundation for our booking success, contributing a diverse range of deals across banks and credit unions, large and small, retail and commercial, demonstrating the competitive strength of our platform approach. Relationship pricing delivered solid performance throughout the year, highlighted by strong net new execution in the Tier 1 space, the successful go-live of a top five bank, and the long-term renewals with multiple top 10 U.S. bank customers. Risk and fraud remained one of our fastest-growing product lines in 2025 as well. Financial institutions are increasingly prioritizing investment in fraud mitigation solutions, and as a result, our risk and fraud solutions consistently performed as stand-alone products helping new customers for Q2 and regularly showed up as our top cross-sold product as well. They also contributed meaningfully to our success upmarket throughout the year, including the largest fraud deal in company history with a $200,000,000,000 bank. Lastly, as bank M&A activity began to pick back up in 2025, that contributed positively to our business as institutions continued to overwhelmingly choose Q2 solutions post-transaction. Of the M&A deals involving a Q2 customer in 2025, 93% of them chose Q2 as the go-forward solution. We believe our experience in effectively executing post-technology conversions is a competitive advantage for us and one that helps our customers de-risk their transactions and realize value in their M&A deals. Looking beyond sales and product success, 2025 was also a year we successfully executed against our profitable growth strategy. We will unveil a new financial outlook, which Jonathan will share shortly. With that in mind, I want to take a minute to share our product strategy and why we are confident in our ability to execute against our long-term vision. At the core of our business is digital banking, where our single-platform approach continues to resonate. With a heightened focus on deposit growth and retention, our platform gives financial institutions the ability to streamline their technology environments while also providing best-in-class experiences that help them compete for, win, and retain critical relationships across retail, small business, and commercial customers. Within the single platform, our commercial banking solutions remain a particularly important growth driver. We believe the maturity of our commercial solutions combined with the usability of our modern interface gives us a durable competitive advantage. To demonstrate the scale of our commercial solutions, in 2025, we processed over $4,000,000,000,000 in transactions representing 21% year-over-year growth, with December being our first month ever to break $400,000,000,000 in transaction volume. As customers continue to invest in modernizing their commercial capabilities to support deposit growth, improve profitability, and compete more effectively upmarket, our scale and continued investment translated directly into both new wins and meaningful expansion opportunities. Rounding out the digital banking story, Innovation Studio has become a foundational component of our strategy. In 2025, nearly every net new digital banking deal included Innovation Studio, and we continue to see deepened relationships with existing customers. It is enabling faster product delivery, better economics, and stronger engagement. And as new priorities like AI emerge in financial services, we believe Innovation Studio puts Q2, our partners, and our customers in position to adapt swiftly, reinforcing Q2's role at the center of innovation in the banking industry. Relationship pricing is another area where we continue to see strong demand. Customers are using these solutions across loans, deposits, and fee-based products to enhance profitability and improve consistency across their organization. We believe this is a best-in-class solution in an area of growing demand, and it remains a key entry point into some of the largest financial institutions in the country. Lastly, as we look ahead to 2026, risk and fraud has emerged as one of the most strategically important areas in our portfolio. And as financial institutions elevate their focus on fraud mitigation, fraud is no longer episodic or confined to a single channel. It is continuous, cross-channel, and embedded in nearly every digital interaction across retail, small business, and commercial. Thank you. As a result, financial institutions are placing greater emphasis on greater investment on modernizing how they manage fraud. At the same time, the traditional approach of relying on fragmented point solutions is becoming increasingly complex and costly. While these tools can be effective in isolation, managing fraud across a growing number of channels and threats requires faster coordination, visibility, and the ability to respond in real time, something that can be difficult to achieve with disconnected systems. We believe Q2 is uniquely well positioned to meet this moment. Our stand-alone risk and fraud solutions continue to be strong land-and-expand products for the business, including with some of the largest enterprise and Tier 1 institutions. Customers frequently adopt multiple fraud solutions over time, and fraud-led relationships often expand into broader partnerships across the Q2 portfolio. In addition, because of the central role our digital banking platform plays in customers' operations and data flows, we have earned access to the data, signals, and real-time context that are increasingly critical to fighting fraud more holistically. Looking into 2026, we believe this combination of proven stand-alone solutions and a platform-level approach positions us well to capitalize on growing demand and help financial institutions address fraud more effectively. Before I hand it over to Jonathan, I want to spend a moment discussing our approach to AI, which we view as an important enabler of our long-term strategy for a few key Operator: First, Matthew Flake: we believe our single platform puts us in the best position of any financial institution partner to deliver meaningful AI innovation. We occupy the center of our customers' digital experiences in retail, small business, and commercial relationships. This allows us to deliver AI solutions that execute high-value banking operations for both bankers and end users across a wide range of use cases. Second, because of that privileged position, the data that powers our platform makes us the system of context for our customers. For financial institutions, the core processor serves as the transactional system of record. At Q2, however, we sit in the flow of every digital interaction and see every login, transaction, alert, message, and user decision—coveted data that gives us the real-time signals needed to understand what is happening and what should happen next. The most effective AI solutions rely on specific context to create value, and we believe that the rich data we generate in the platform gives us a tremendous amount of banking-specific context that can be additive to value generation and differentiated from other solutions. And finally, after many conversations with customers over the past few years, we firmly believe that our regional and community financial institutions will depend on us as a trusted partner as they go on this journey with AI. Because of our strategic role and experience in supporting digital innovation for our customers, we believe it is our duty to help our customers navigate AI, just like we did with internet banking, mobile, and cloud. Our customer base and established ecosystem model opens a valuable channel to other AI innovators looking to serve this market efficiently. The combination of these factors is why we believe AI innovation within financial services will flow through Q2, not around us, and we believe we are well positioned to translate that into tangible outcomes for our business over time. We intend to continue to use AI to enhance existing products and build new ones more efficiently, unlocking new bookings and revenue potential over the long term. We have also identified several important areas where we can help deliver value with AI to our customers, including fraud, personalization, back office, banker-facing operations, and tasks across the Q2 portfolio. We have several products across these areas that are live or in early adopter stage today. Over time, we believe our product innovation can create monetization that we will continue to evaluate as part of our long-term operating model. Next, we believe that in the near future, embedded AI capabilities will be integral to delivering digital banking. This is where we believe our platform approach and our deep integration set give us a competitive advantage. And today, we are building platform-level AI innovation like AI-assisted coding capabilities for developers on our platform and AI-enhanced Q2 support tools to even further improve the customer experience. Lastly, we believe AI will play a meaningful role in providing operating efficiency back to our business over the long term. We are already using AI to improve how Q2 operates across core functions like support, delivery, and engineering, improving efficiency and scalability that we believe can support long-term margin expansion while making our teams faster, more skilled, and more productive. Let me now shift to what we are seeing in our pipeline as we head into 2026. We exited 2025 with a very strong back-half bookings performance, and at a macro level, fundamentals of our end market remain solid: improving credit quality, stable margins, and reaccelerating M&A activity, supporting a constructive demand environment as we enter 2026. And from a pipeline perspective, we continue to see healthy pipeline activity across both net new and expansion opportunities with particular strength in larger deals where our platform approach and product portfolio differentiate us. As was the case last year, we do expect Tier 1 enterprise activity to be weighted toward the back half of the year. Overall, we feel great about our momentum and pipeline, and we are confident in our ability to continue executing in 2026 and beyond. With that, I will turn the call over to Jonathan to walk through our updated guidance and long-term outlook. Thanks, Matt. Jonathan Price: We are pleased to announce fourth quarter and full year results that outperformed the high end of our guidance as we delivered strong results across several metrics which demonstrated continued execution of our profitable growth strategy. We saw growth in our subscription-based revenues, advanced our operational efficiency, and exceeded our free cash flow conversion target of at least 90%, enabling us to improve capital allocation. We believe our record backlog and installed subscription ARR growth positions us well for continued success in 2026 and beyond. With that, let me start by discussing our financial results in more detail. I will finish with our 2026 guidance as well as our longer-term financial framework. Total revenue for the fourth quarter was $208,200,000, an increase of 14% year over year and 3% sequentially, driven by subscription-based revenues resulting largely from the delivery of new customer go-lives and expansions with existing customers. Total revenue for the full year was $794,800,000, up 14% from the prior year, representing our highest annual growth rate since 2021. Subscription revenue growth for the full year was 17% and represented 82% of total revenue. Based on the strength in subscription-based bookings we observed throughout 2025, we expect the mix of this high-margin revenue stream to continue increasing as a percentage of our overall revenue mix in 2026. Total non-subscription revenues increased by 2% for the full year in 2025, partially driven by an increase in services revenue, benefited from an easier comparison versus the prior year as well as higher professional services revenues, primarily driven by M&A-related core conversions. Total annualized recurring revenue, or total ARR, grew to $921,000,000, up 12% year over year from $824,000,000 at the end of 2024. Our subscription ARR grew to $780,000,000, up 14% from $682,000,000 in the prior-year period. Our year-over-year subscription ARR growth was largely driven by bookings from new customer wins as well as expansions with existing customers. Our total ARR growth remains below subscription ARR growth, driven by the recent trends we have discussed in non-subscription-based revenue over the last few years. Our ending backlog of $2,700,000,000 increased by $175,000,000 sequentially, or 7%, and $472,000,000 year over year, representing 21% growth. The year-over-year and sequential increases were supported by bookings success across new, expansion, and renewal activity. While we continue to see ample opportunity ahead, we have mentioned previously, the sequential change in backlog may fluctuate quarter to quarter based on the number of renewal opportunities available within that quarter. Our trailing twelve-month total net revenue retention rate for 2025 was 113%, up from 109% in 2024. When looking at only subscription-based revenues, our subscription net revenue retention rate ended the year at approximately 115% compared to 114% in 2024. Our revenue churn for 2025 was 5.2%, compared to 4.4% in 2024, reflecting an increase in overall M&A activity year over year. As a reminder, heading into the year, we expected a higher level of M&A activity relative to prior years. As Matt mentioned, we continue to be selected as the go-forward solution in the vast majority of M&A transactions within our customer base. While this activity can influence churn trends in a given period, M&A has consistently been a net positive, as we have largely retained and expanded our relationships as a result of those transactions. Gross margins were 58.6% for the fourth quarter, up from 57.4% in the prior-year period and 57.9% in the previous quarter. Both the year-over-year and sequential increase in gross margin were driven by an increasing mix of higher-margin subscription-based revenue. Gross margins were 58% for the full year, up from 56% in the prior year, representing approximately 200 basis points of improvement. This margin expansion was driven by an increasing portion of subscription revenue in our overall mix, coupled with enhanced operational efficiencies from our global workforce and partially offset by increased costs related to our cloud migration, which we completed in January 2026. Total operating expenses for the fourth quarter were $78,900,000, or 37.9% of revenue, compared to $75,400,000, or 41.2% of revenue, in 2024 and $76,100,000, or 37.7% of revenue, in the previous quarter. The year-over-year improvement in operating expenses as a percent of revenue was largely derived from continued scaling across G&A and sales and marketing, while the modest sequential increase was driven by higher research and development costs as we continue to invest across the areas Matt discussed earlier. Full year operating expenses of $306,700,000 represented 38.6% of revenue in 2025, down from 42.3% of revenue in the prior-year period. The improvement in operating expenses as a percent of revenue for the full year was driven by higher revenues and a focus on operational efficiency, primarily manifested within G&A and sales and marketing. We ended the year with 2,549 total employees, up from 2,476 at the end of 2024, with the majority of additional resources onboarded within R&D. Total adjusted EBITDA was a record $51,200,000 in the fourth quarter, up 36% from $37,600,000 in the prior-year period, and up 5% from $48,800,000 in the previous quarter. Full year adjusted EBITDA was $186,500,000, up 49% from $125,300,000 in the prior year, with adjusted EBITDA margins up by approximately 550 basis points, as we continue to mix towards higher-margin revenue streams and drive operational efficiencies across the business. We ended the quarter with cash, cash equivalents, and investments of $433,000,000, down from $569,000,000 at the end of the previous quarter, driven by the retirement of $191,000,000 of 2025 convertible notes that matured in November, as well as the repurchase of $5,000,000 of our stock in the open market. We generated cash flow from operations of $64,000,000 in the fourth quarter, driven by new bookings, larger annual invoices, and seasonal strength in working capital. We also generated free cash flow of $57,000,000 in the quarter, resulting in free cash flow for the year of $173,000,000, representing a 93% free cash flow conversion rate as a percentage of adjusted EBITDA. This better-than-expected conversion rate was attributable to increased focus on profitability across the business, streamlined operational processes, and effective working capital management. Let me finish by sharing our first quarter and full-year 2026 guidance. We forecast first quarter revenue in the range of $212,500,000 to $216,500,000 and full-year revenue in the range of $871,000,000 to $878,000,000, representing year-over-year growth of approximately 10% for the full year. We previously communicated the expectation for full-year 2026 subscription revenue growth of approximately 13.5%, and we are now raising that outlook to at least 14%. We forecast first quarter adjusted EBITDA in the range of $52,500,000 to $55,500,000 and full-year 2026 adjusted EBITDA in the range of $225,000,000 to $230,000,000, representing approximately 26% of revenue for the full year. We are now in the final year of the three-year framework we introduced in February 2024, and we have meaningfully outperformed those initial goals. Those targets call for average subscription revenue growth of approximately 14%, average annual adjusted EBITDA margin expansion of 300 to 400 basis points, and free cash flow conversion greater than 70% of adjusted EBITDA. For that three-year period, we are now expecting average subscription revenue growth of approximately 16%, average annual adjusted EBITDA margin expansion of at least 450 basis points, and free cash flow conversion continuing to exceed 90%. This represents meaningful outperformance relative to our initial three-year framework and reflects the consistency of our execution, the strength of our business model, and the discipline of our team. As we enter the final year of our previous framework, we are taking the opportunity to provide additional clarity on how we think about the business beyond 2026. This includes both our initial expectations for 2027 and a longer-term financial framework that reflects the operating leverage of our business model. Starting with initial expectations for full year 2027, we are targeting annual subscription revenue growth between 12.5%–13% and adjusted EBITDA margin expansion between 150 and 200 basis points. We are also introducing longer-term profitability targets of where we expect the business to operate over approximately the next five years. By the end of 2030, we believe the business will achieve non-GAAP gross margins of at least 65% and adjusted EBITDA margins of at least 35%. These are not near-term objectives, nor will we necessarily have a linear progression over this time period, but these targets reflect our longer-term expectations as operating leverage continues to build in the business. In summary, we delivered strong results in 2025, finishing the year ahead of expectations and above the high end of our guidance, also driving meaningful expansion in profitability and cash flow conversion. As we enter 2026, we are raising our subscription revenue outlook for the year and providing a clearer view of how we believe the business can perform as it scales. We intend to continue to execute on our profitable growth strategy by balancing investments to sustain durable subscription revenue growth and drive operating leverage over time, while prioritizing effective capital allocation. With that, I will turn the call back over to Matt for his closing remarks. Matthew Flake: Thanks, Jonathan. I will close by stepping back and putting the year into perspective. 2025 was a defining year for Q2. We have delivered strong execution across bookings, revenue, and profitability. We are seeing demand across our major product lines—digital banking, relationship pricing, and risk and fraud—and we are seeing that demand show up in larger deals with both new and existing customers. Expansion continues to be a defining characteristic of our business, and our customers are choosing to deepen their partnerships with Q2 because our platform is delivering real value across their most critical priorities. As we move into 2026, we do so with a strong pipeline, a clear strategy for profitable growth, and a platform that we believe positions us at the center of the next phase of innovation in banking. Whether it be deposit growth, fraud management, or AI, we are confident in our ability to continue executing, investing thoughtfully, and delivering value for our customers and our shareholders. With that, operator, let us open the call up for questions. Operator: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. A reminder that if you would like to ask a question, please raise your hand now. If you have dialed in to today's call, please press 9 to raise your hand and 6 to unmute. And our first question comes from Alex Sklar of Raymond James. Your line is open. Please go ahead. Great. Thank you. Matt, first one for you. Just with some of the growing expectations around Jonathan Price: core modernization within your FI base over the next years. Can you just talk about what you typically see in terms of demand for your own Alex Sklar: solutions when an FI decides to migrate its core to the cloud or switch core vendors? How often does that create an at-bat for you, and any change in terms of what you are seeing there in the pipeline related to those opportunities? Operator: Yeah. Thanks, Alex. Matthew Flake: You know, anytime a bank or credit union has decided to make a change to their technology, whether it is in the core area in particular, it opens up an opportunity for us. And we are expecting to get some opportunities from that. I have found money. I have not had it—I do not have it built into the numbers this year. But I think we are well positioned to get a lot of at-bats for those that happen. I do not know the timing on those, and there are some natural conversions that happen every year. But as you know, some of the core providers are forcing conversions, so it should create some opportunity. It is just hard to quantify it. But I like how we are positioned, and I think it should create opportunities for us. Alex Sklar: Alright. Great. And then, Jonathan, maybe one for you. I appreciate the early view, and you are already giving a little bit of an above-2027 subscription growth outlook. Can you help us understand the right way to think about your underlying visibility into that growth? Is it just on the strength and the strong Q4 bookings? Is anything embedded in terms of what you need to go get still in 2026? And maybe where could there still be areas of upside to that early outlook? Jonathan Price: Yeah. Thanks, Alex. No, we feel good about the early look into 2027 and the range we provided. I think you should definitely look to the 2026 bookings execution as having an impact potentially on 2027 that could drive upside to that. But we feel good about what we are putting out there based on the strength of not just the fourth quarter, but all of 2025. When you look at the mix of deals in the year, especially in the back half, Matt talked about just how much we skew towards larger deals in the back half. And because of the time to revenue on those larger deals, the full brunt of those that will hit revenue really give us visibility into 2027 from that perspective. So we are very comfortable with the range we provided, and I would just look to once you get to the back half of 2026, the likelihood of it having a big impact in 2027 is smaller. So it is really our first-half bookings execution that could theoretically drive upside to that range. Alex Sklar: Alright. Great. Thank you both. Operator: Thanks, Alex. Thanks, Alex. Operator: And your next question comes from Eleanor Smith of JPMorgan. Your line is open. Please go ahead. Eleanor Smith: Good evening. Thank you for taking my question. So first for Matt, you cited very good transaction traction with cross-sell in the quarter, particularly fraud tech. Can you please update us on the latest metrics as to how much room there is to still expand within your existing customer base for all the auxiliary products you sell outside digital banking? Jonathan Price: Yeah. Well, I can take that. I mean, one of the ways I would quantify it is if you just look at our Tier 1 customer base, so every financial institution above $5,000,000,000, only 10% of them have all three of our retail, commercial, and relationship pricing and fraud solutions. If you look at just the fraud opportunity, it is a little tricky because we have so many fraud solutions that are in the hands of clients stand-alone, meaning they are just on fraud products, and we can use that opportunity to cross-sell into digital. If you look at the digital banking customer base and say, how much opportunity could we resell fraud products into that base, we still think there is a huge opportunity, maybe to the tune of 25%–30% penetrated in totality. But there is a significant penetration opportunity when you think about not just the Q2 set of products, but also the Innovation Studio partner ecosystem in the fraud tech space. So it is very early days from our standpoint when we think about the opportunity to monetize fraud products within the digital banking customer base. Eleanor Smith: Great. Thank you. Very clear. And for a follow-up, given the strength of your free cash flow conversion, how do you weigh using your cash for share repurchases versus M&A versus anything else? Jonathan Price: Yeah. Well, what I would say there is the performance on the free cash flow generation side kind of gives us the flexibility to be thoughtful around what is the right answer at any point in time. You heard that in the fourth quarter, we started the repurchase activity associated with the authorization that we called out on the last earnings call. And you can assume with where the share price has been that we have continued down that path throughout January and into February here. But that does not preclude us from the other capital allocation alternatives that are out there. Our cash balance, I think, gives us the freedom to still explore M&A actively, but the other thing I will point to is as you look at the operating leverage in the business implied in our 2026–2027 outlook, you can see less expansion than what we have shown in 2023, 2024, and 2025 in the next two years, and a big chunk of that is reinvesting into areas like R&D that are going to drive an elongated growth trajectory for the business. So we are very focused on balancing that idea of generating more free cash flow, but also reinvesting it prudently into the business to drive long-term growth. Eleanor Smith: Great. Thanks so much. Jonathan Price: Thanks, Ella. Operator: And your next question comes from Terrell Tillman of Truist. Your line is open. Please go ahead. Alex Sklar: Yeah. Hopefully you can hear me okay. And congratulations on the fourth quarter strong bookings finish. The first question is going to be double-clicking into just digital banking holistically. I am curious if we take a step back, where do you think we are in terms of a baseball analogy on innings of just dynamism and kind of replacement opportunities for retail? Matthew Flake: Small business, and then commercial. And then I had a follow-up for Jonathan. Yeah, Terry. I think if you think about the vast majority of banks and credit unions are using legacy core processor systems for digital banking, which in some cases are in desperate need of an upgrade. And we just seem to operate at a pace different than they do. They are great companies. They will be around for a long time. But the demand environment kind of tells you that we are differentiated in this for retail, small business, and corporate with a single platform. Jonathan talked about the expansion opportunities, which you have seen for the last probably eight quarters. So whether it is an existing customer where we can go sell retail, small business, commercial, or even relationship pricing, or a net new customer, the customers—our customers—are doing very well. You look at it, stocks are up. They are operating in this environment pretty well. They got through the 2022–2023 period of time. And they are focused on what we have been talking about all the time: deposit acquisition, retention, and growth. They are looking for operating efficiencies. They are looking for ways to generate revenue, which comes from commercial deposits largely. And I just think there is a significant amount of runway for us. And if I look at the pipeline, the ASPs, our win rates, it lays out really well for a great 2026 and hopefully 2027. So I do not know what inning that is. Let us just say the beginning of the fourth. Terrell Tillman: Okay. Alright. Fine. That is a good answer there. Appreciate that. I guess for Jonathan, you know, risk and fraud, could you remind us again? I am sure you have an aggressive pipeline for 2026, but I am just curious, like, how quickly is that a go win it and be able to implement it and start recognizing revenue? Is that a faster time-to-revenue type product? And said another way, is that potentially a kind of a meaningful swing factor if you do upside your sub revenue? Would it come from, like, risk and fraud, those products going faster? Thank you. Jonathan Price: Thanks, Terry. I mean, I hate to say it really depends, but it does from the standpoint of are you selling it stand-alone to a customer, in which case we can typically see implementation timelines that are faster than traditional digital banking. But if it is in the context of a digital banking net new, often it will follow the timeline of the go-live on digital. For an existing customer that is already live on digital, though, that is where you can see fast time-to-revenue because if we are cross-selling a Centrix solution or an Innovation Studio partner on the fraud and risk side, that is where you can see much, much faster time-to-revenue outcomes. So it is a little bit of both, but in general, I would say that the timelines for going live on the fraud side are going to be faster outside of the very large net new deals that are associated with the digital banking implementation. Terrell Tillman: Thank you. Operator: Thanks, Terry. Thanks, Terry. Operator: And your next question comes from Andrew Schmidt of KeyBanc. Your line is open. Please go ahead. Operator: Hey, Matt. Hey, Jonathan. Andrew Schmidt: Good results here. Thanks for taking the question. Wanted to start off just on the commercial side. Clearly, the solution has been resonating very well in market. No surprise since the commercial side has gotten more competitive with F5s, and I think you are hitting that pretty well. Maybe talk about just how demand has evolved for the last couple years and the demand into 2026 is trending on the commercial side. And then maybe just an overarching question on just overall pipeline and composition would be helpful. I know you mentioned that in prepared remarks, but if we could drill down on that, that would be super helpful. Thanks so much. Matthew Flake: Yeah. The real driver for the demand was the change in rates and the access to deposits and the importance of deposits. And as I have said many times, commercial deposits are the stickiest, the largest, and the most profitable because they are able to charge for services around that, whether it is wires, ACH, information reporting. And so you are seeing a significant amount of demand for these products so that they can go get those commercial accounts and the operating accounts on the customers that they have lines of credit with. And so that demand environment, as long as rates are going to be in the vicinity—I do not think we are ever going to get back, not in my lifetime, back to the zero rate or 1% rate. I think that demand is going to continue because that is the lifeblood of these businesses. They have got to have the deposits. And I feel very good about that opportunity for us as we move forward. As far as the shape of the pipeline, I think it will be similar to last year. I think you will see Operator: larger Matthew Flake: larger deals kind of come through in the second half of the year. We do have some nice deals in the first half. I think you will see more out of PrecisionLender in the first half and more fraud in the first half just because of the momentum we have there. But we have got a really healthy digital banking pipeline with some significant Tier 2s and Tier 3s and a couple Tier 1s that are working for the first half. I feel very good about the pipe for the first half. You know, you are closer to it until you can see it. And then the coverage ratios for the back half of the year are really good as well. So coming off a really strong third quarter and the second best quarter in the of the company, to feel that way, we feel really blessed. Andrew Schmidt: Yeah. I know. It all sounds great. Thank you, Matt. And then maybe I could just ask on the 2030 targets, the margin targets, and understanding those are longer term in nature and they could fluctuate between now and then. But maybe just talk about some of the assumptions that go into that. Is there tech modernization in there? Is it just scale, cost optimization? If you could unpack that a little bit, that would be helpful. Thanks so much. Yeah. Thanks, Andrew. It is really a combination of all the things you mentioned as well as Jonathan Price: the continued mix shift on the subscription side. So, in 2025, full year 2025 subscription revenue mix was 82%. As you get out to 2030, I would expect that to continue to mix up into the mid-80s, if not higher. That is going to be a contributor. From a cost of sales perspective, we see efficiency opportunities throughout those line items. And we are still optimizing from a global offshoring perspective. We are later in stage in that one, but there is still some execution there that will drive opportunity over the next five years. And then as we think about the OpEx opportunities, sales and marketing and G&A are going to be the biggest areas of leverage as you look out to 2030. And R&D, while maybe not as much—you could see that in the 2026 and 2027 numbers specifically—by the time you get out to 2030, we expect there will be efficiency that is driven from that line item as well. Andrew Schmidt: Super. Appreciate it, Jonathan. Jonathan Price: Thank you. Thanks, Andrew. Operator: And your next question comes from Matthew VanVliet of Cantor Fitzgerald. Your line is open. Please go ahead. Matthew VanVliet: You know, I guess as we look at AI, you mentioned a number of Operator: opportunities. Matthew VanVliet: So one, obviously, the efficiencies internally are seemingly already showing up. But maybe as we think about Innovation Studio and some of the other monetization efforts, how are you guys thinking about that between having very discrete sort of charges to use that? How does that mix in? And then what is the sort of counter to that of just saying, here is more value of the platform that should help us win customers and maybe more slowly monetizing it over time, understanding that maybe some of these processes are not the most compute-intensive like we might see in other areas. Matthew Flake: Yeah, Matt. You know, the beauty of the Innovation Studio is we have a revenue-sharing model already in place. And we firmly believe we are the gateway for these AI products and features that could be coming to us, and our customers are asking us Operator: to help Matthew Flake: with AI and how we are going to work together to do that. And then what is interesting is a lot of the companies that go to these banks directly Terrell Tillman: are Matthew Flake: the banks are steering them to us. And so it just reiterates the point that we think there is an opportunity to partner with people, to build our own products. And, you know, we are well down the path of building AI products, using AI to help us become more efficient, helping our customers use AI products to become more efficient. So it really sets up well for us with the overhang on our customers in a highly regulated environment, security, compliance, and the integrations and the trust we have built with these customers over the last twenty-plus years puts us in a great position to capitalize on it, and we are very excited about it. Matthew VanVliet: And then I guess as we look towards the framework you outlined, so this is for Jonathan, but, you know, I guess how much of the yet-to-be-released sort of in-process R&D components are you including in some of that? Or should we think about some of the moving pieces potentially adding additional top-line growth that could materialize and maybe give you some upside or at least some cushion in the targets you laid out? Jonathan Price: Yeah. I would say they would be upside to the targets. I think we have conviction in this model, in this framework, in the paradigm we are operating in today. Not to say that from an efficiency standpoint we are not already seeing and expect to see more benefits throughout that 2030 time period. But if you are talking about specific monetization opportunities and the benefits from what Matt talked about, that would be upside to this framework. Matthew VanVliet: Alright. Great. Thank you. Operator: Thanks, Matt. Thanks, Matt. Operator: And your next question comes from Peter Karos of Stifel. Your line is open. Please go ahead. Matthew Kikkert: This is Matthew Tricker on for Parker. Thank you for taking my questions. To start, what is your view on kind of the banking M&A landscape right now? And what impact does that have on your 2026 guidance compared to historical trends? Matthew Flake: Well, clearly, it is picking up. And, you know, as we said in the prepared remarks and we have said historically, last year, we were, 93% of the time, we are the surviving entity. We tend to have customers that are inclined to acquire other banks to grow. If you look at the number of customers we have over $5,000,000,000, I think it is up to 200 now—50% of the top 100. So we feel very well positioned in the M&A environment. And, Jonathan, do you want to talk about—and I think it is going to continue, obviously. And, Jonathan, do you want to talk about in the plan? Jonathan Price: Yeah. And what we know in terms of deals that have been announced and where we have either booked a contract with regards to an M&A deal that is now closed, or we have visibility into it, that would be captured. What we do not do is model hypothetical M&A that may be coming or that we do not know about as some sort of plug into the forecast, where, again, in most of these cases, that would lead to upside. And to the extent in the 5% to 7% of time historically it has not gone in our favor, typically that takes some time to roll off, including potentially being mitigated by buyout. So we feel good about it. I think we have a lot of conviction in the 2026 guide we are giving. And most of the time, we would expect there to be upside from the M&A outcome. And if there is anything that happened the other way, I think we could absorb it within the context of that framework anyway. Matthew Kikkert: Okay. Thank you. And then my second question—sorry. Go ahead. Second question is, on internal AI efficiencies. I am just wondering what you are working on there and how does that play into the EBITDA expansion target for 2026? Matthew Flake: Yes, as we talked about in the November call, we structured the business in a way to where we could maximize our engineering team working with our hosting team, our support team, and our delivery teams to make sure we are using all the AI tools that are available. Our go-to-market team is using AI tools. HR, finance, accounting—every single department of this company is using AI tools to drive efficiencies in their business. And how we layer it in, we are going to be cautious with that because there is an expense to get all these tools, and then it takes a little time to do that. But we are seeing some early signs of some real positive outcomes. Jonathan Price: What I would just add to that is as you think about the 2026 and 2027 margin expansion commentary we provided and the ranges we gave, we have conviction in those regardless of AI efficiency, and we do already see some early returns that are coming from internal use cases with AI. As you look out beyond 2027 and the path to that 35% target, I think that is where you can assume that AI efficiencies will have a meaningful impact. But, again, we feel confident in the ability to hit those numbers no matter how it plays out. But the early returns are strong enough that we certainly think by the third through fifth year of that framework, we are going to be seeing some meaningful leverage when it comes to AI across this company. Operator: Okay. Thank you. Thanks, Patrick. Thank you. Operator: And your next question comes from James Faucette of Morgan Stanley. Your line is open. Please go ahead. Operator: Hey, guys. It is Mike Enfante. Any interesting trends in the actual tech Chris Kennedy: spend of your customers and how they are reallocating dollars right now? In particular, I am curious if you are seeing vendor consolidation to fund AI-related spend and if that would represent a sustained tailwind to more platform consolidation RFPs that would combine digital with fraud, commercial, etcetera. Operator: Thanks. Yeah. I do not Matthew Flake: I have not seen it for AI purposes, but if you go back to 2022 and 2023 when rates went up so rapidly, you began to see vendor consolidation occur, and it was the vendor consolidation of the back-office providers and then front-office providers, and we were obviously a net beneficiary of that if you look at bookings from the back half of 2023 through 2025. So I think that that is where they started to drive the efficiency to be able to spend more on digital experiences as opposed to kind of run-the-bank stuff. We consider ourselves change-the-bank. And I think that trend will continue, and I think AI will be a tailwind to that as well that we are certainly in a position to capitalize on in talking with our customers. Chris Kennedy: That is helpful, Matt. And then maybe just on your agentic strategy broadly, like, what is the push and pull right now from customers? Do they want you to—do they want agents to sort of operate within a Q2-governed framework? And if so, do you think that could represent a tailwind to Innovation Studio just given its ability to sort of stitch together a variety of different point solutions? Thanks, guys. Matthew Flake: Yeah. I think you have to remember these are probably the most conservative group of business people in the country, and compliance is where they start, and the regulatory environment is obviously something that is something that they start with when they start looking at technology solutions. So as I said earlier, all of our customers that we have talked with are coming to us and asking about how they should think about it. We are still teaching them about agentic AI and the opportunities and how we can get ahead of other people by building these solutions with our customers and talking to them about how it works. And so that is one of the reasons we talked about the system of context and that we have data that we think is really important—transaction flows, user behavior signals, integrations, real-time decision making—and allows you to not only know what they just did, but what they may do next, which is really where agentic comes into play. So we think there is a lot of opportunity there, and we are working with our customers. But we have tried some things and some have worked and some have not, but we definitely think that is going to be a pretty big tailwind for us as we get deeper with our customers. Operator: Thanks, Scott. Thanks, Michael. Operator: And your next question comes from Charles Nabhan of Stephens. Your line is open. Please go ahead. Matthew Flake: Good afternoon, and thank you for taking my question. I know it is becoming a smaller piece of the revenue pie, but can you talk about the outlook for non-subscription revenue? And given that it is dilutive, to the degree to which any recovery is assumed in the 2027 or longer-term framework? Jonathan Price: Yeah. So from a non-subscription standpoint, I sort of commented on this briefly in the prepared remarks. Despite the strength we saw in 2025 in totality, we expect the combined services and transactional line items to decline in both years, and as far as we can see for the foreseeable future, in the mid-single-digit range. So you are right, those are margin-dilutive line items, but we also do not expect a recovery based on what we see. And the big drivers to that are really continued weakness when it comes to discretionary spending on services engagements as well as legacy bill pay. Those continue to be the drivers. And the upswing we saw in 2025 was really driven by a significant pickup from a really low base in M&A core conversions. And while we expect that to remain high, we do not expect that to grow off of the elevated levels of 2025. So you really do not see the opportunity to grow those line items to the extent we did in 2025 as we look forward. So did that answer your question, Chuck? In general, we expect the profile to be in mid-single-digit degradation in those line items, and they are margin dilutive, but they are also shrinking in scale. Terrell Tillman: Got it. That is super helpful. And as a follow-up, and apologies if Matthew Flake: I missed this, but could you give us an update on the Innovation Studio from the standpoint of your monetization effort, how big it could become potentially as a revenue contributor, as well as the role it plays Josh Yankovich: in your overall AI initiatives. Jonathan Price: Yeah. I mean, it has become a core part of what we are calling our platform from a digital banking perspective. When you think about the revenue model of that business where we are getting net revenue from our clients, and so the margin profile is very high, the adoption of both our FIs and their adoption of these products is increasing. 2025 was a very big year in uptick on all of our internal KPI indicators. And then to your point, in an AI-first world, we just see that the value of our data and our distribution are something that the best technologies, whether it is existing products that develop an AI-driven value proposition that modernizes their offering, or a new AI-first product that wants to enter financial services, that, as Matt said, we are the gateway to do it. And without the scale and security and maturity of the Innovation Studio, I do not think we would be in nearly as good a position to capitalize on this opportunity. So we feel strategically this is a huge opportunity for this business and continue to see it as a revenue contributor, a margin contributor, and a key element of both winning net new deals and retaining our existing customers, and being that path to capturing AI opportunities in financial services that we do not necessarily build. Operator: Got it. Appreciate all the color. Thank you. Matthew Flake: Thanks, Josh. Operator: And your next question comes from Alexander Sklar of RBC Capital Markets. Your line is open. Please go ahead. Hey there. This is Matthew on for Dan Perlin at RBC. I was wondering if you guys could update us on the Matthew Kikkert: cadence and magnitude of the cost savings in 2026 as you exit data centers as part of the completion of the cloud migration. Jonathan Price: Yeah. Definitely. So you sort of see it in our framework when you look at 2026 guide. We have included in that framework for 2026 gross margin expectation of north of 60%. When you look at it, whether you look at the Q4 or the full year of 2025, we are expecting a significant step up in that gross margin metric. And then as you think about, you know, now sitting here in mid-February, complete from a cloud migration standpoint when it comes to customer migrations, and fully complete, certainly in all facets as we exit Q1 if not sooner, we are in a great position to capitalize from seeing all of those data center-related costs roll off the P&L. So that is really the biggest driver of that step up in the 2026 gross margin guidance that you are seeing. And then as you see that evolve to the target we put out for 2030, it is some of the levers I talked about earlier. And one of them includes, once we have had a chance to operate in the cloud environment, there are opportunities to optimize elasticity and cost for the new environment, and it probably just takes us a little bit of time in the cloud, in AWS, to understand how to do that with conviction and safety for our customers. But as we get into 2027 and beyond, we think there is another step-function opportunity from a gross margin perspective within that cloud spend bucket. Matthew Kikkert: That sounds great. Thanks, guys. Thank you. Thanks, Matthew. Operator: And your next question comes from Cris Kennedy of William Blair. Your line is open. Please go ahead. Chris Kennedy: Hey, guys. Thanks for taking the question. There have been a lot of changes in the regulatory environment. Can you just give us an update on Helix and kind of the prospects for that business going forward? Jonathan Price: Yeah. I mean, I think from a regulatory perspective, I would not say there is anything up in the last three months that has changed our outlook for the Helix business. I think we are continuing to see opportunities. You know, we talked about one in the quarter. A very large credit union that chose Helix for one of their strategic product offerings. And we continue to see banks and credit unions exploring what I will call what we call fabric or core modernization opportunities that are really about bringing together a retail strategy that makes more economic sense relative to the legacy infrastructure that is out there for a certain cohort of their customers. That continues to be the big opportunity for Helix going forward. From an existing customer perspective, we have executed well in renewing our large number of—or our large existing client base, and especially the ones that drive the majority of the revenue in that business. And then we feel good about the way that those businesses are investing and making their programs more profitable. And we are seeing the benefit of that. So no real change. Clearly, the demand environment that we saw back in 2020 through 2022, but nothing in the last three months that has pivoted our outlook on the Helix business at large. Chris Kennedy: Great. Thanks for that. And then we noticed the 50 SMB customers on the digital banking platform. Can you just talk about the opportunity to expand that metric? Thank you. Operator: Yeah. I mean, Jonathan Price: when we think about SMB and commercial still, and you think about the total of about 500 digital banking customers, that is a huge area of opportunity. I mean, we think that SMB is an area of focus for a lot of these institutions and, in some ways, a gateway to larger commercial. So we feel really good about that. And as Matt talks about, the demand for commercial is extraordinarily high, and we think our positioning and our differentiation on the commercial side are helping us win a lot in the market. So I think Matthew Flake: banks can—as the bigger banks get bigger, they kind of abandon businesses that are $2,500,000,000 in revenue, and these customers need to expand their offering to go get a larger customer for the operating accounts. And that drives more revenue for us through utilization. So it is another tailwind for us. Chris Kennedy: Got it. Thank you, guys. Appreciate it. Thanks, Chris. Appreciate it. Operator: There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good afternoon, and welcome to HubSpot, Inc. Q4 2025 earnings call. My name is Gigi, and I will be your operator today. At this time, all participant lines are in a listen-only mode, and there will be an opportunity for questions and answers after management’s prepared remarks. If you would like to enter the queue for questions, you may do so by dialing 11 on your telephone keypad. I would now like to hand the conference over to Head Director of Investor Relations, Charles MacGlashing. Please go ahead. Charles MacGlashing: Thanks, operator. Good afternoon, and welcome to HubSpot, Inc.’s fourth quarter and full year 2025 earnings conference call. Today, we are discussing the results announced in the press release that was issued after the market closed. With me on the call this afternoon are Yamini Rangan, Chief Executive Officer; Dharmesh Shah, our Co-founder and CTO; and Kathryn A. Bueker, our Chief Financial Officer. Before we start, I would like to draw your attention to the safe harbor statement included in today’s press release. During this call, we will make statements related to our business that may be considered forward-looking within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are forward-looking statements, including those regarding management’s expectations of future financial and operational performance, operational expenditures, expected growth, FX movement, business outlook, including our financial guidance for the first fiscal quarter and full year 2026. Forward-looking statements reflect our views only as of today, and, except as required by law, we undertake no obligation to update or revise these forward-looking statements. Please refer to the cautionary language in today’s press release and our Form 10-Ks, which will be filed with the SEC this afternoon, for discussion of the risks and uncertainties that could cause actual results to differ materially from expectations. During the course of today’s call, we will refer to certain non-GAAP financial measures as defined by Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed, and a reconciliation of the differences between such measures, can be found within our fourth quarter and fiscal year 2025 earnings press release in the Investor Relations section of our website. Now it is my pleasure to turn the call over to HubSpot, Inc. Chief Executive Officer, Yamini Rangan. Yamini? Yamini Rangan: Thank you, Chuck, and welcome everyone to the call. I will start with our Q4 and full year 2025 results, and the consistent themes driving those results. Then I will highlight our 2026 strategy, how we are positioned to lead and win with AI, and the specific levers we are activating to drive growth. Let’s dive in. We had a solid finish to 2025. Q4 revenue grew 18.2% year over year in constant currency, and full year 2025 revenue grew 18.2% to $3.1 billion. We delivered another quarter of standout operating profit growth, with operating margin of 22.6% in Q4, and 18.6% for the full year. We now serve more than 288,000 customers globally. We added 9,800 net new customers in Q4, and more than 40,000 customers for the year. That growth at our scale says something important. Customers trust HubSpot, Inc. during a time of transformative change in the industry driven by AI. I am also pleased to announce that our board of directors has authorized a share repurchase program of up to $1,000,000,000, a clear signal of the confidence we have in our business and the growth opportunity ahead. Two themes drove our performance in 2025: strong core fundamentals and momentum with our agentic customer platform. First, our core fundamentals are solid. Upmarket momentum was consistent all year, with a strong finish in December. Large companies are consolidating on HubSpot, Inc. because we deliver the power they want with the ease of use they need. In 2025, deals over $5,000 in monthly recurring revenue grew 33% and deals over $10,000 grew 41%. The number of customers with 500 or more seats grew fivefold, making it one of the strongest upmarket years. This is the direct result of years of focused product investment, the moat we have built with our partner ecosystem, and our growing brand credibility with larger companies. Rentokil Initial, a global leader in pest control, used Marketing Hub to increase leads by 76% and deliver a 671% ROI. That success led them to expand HubSpot, Inc. Now they use HubSpot, Inc.’s enterprise product suite across more than 100 teams to scale their go-to-market strategy. Mercantile Bank, a financial institution with over 700 employees, consolidated six separate solutions onto Marketing Hub and saw an immediate improvement in efficiency and personalization capabilities. This success prompted them to expand to Sales Hub, Service Hub, and Content Hub, and replace their legacy CRM, giving them a unified view of the customer while lowering costs. Multihub adoption accelerated again this year. In 2025, 62% of new Pro Plus customers landed with multiple hubs. We saw two common patterns with new customers: they landed with Marketing and Sales Hub, or with Marketing, Sales, Service, Content, and Operations—five hubs operating as one go-to-market platform. Multihub expansion is also showing up across our install base, with 40% of Pro Plus installed base by ARR owning four or more hubs, up six points year over year. We are the agentic customer platform of choice for scaling companies, and multihub adoption is the new norm. Our pricing changes also created meaningful tailwind in 2025. As a reminder, we lowered the price point to get started, removed seat minimums to make upgrades easy, and added Core Seats that deliver platform value. That shift is largely complete. Approximately 90% of our legacy customers have moved into the new pricing model, and almost 50% of our ARR has gone through their first renewal. The impact is showing up clearly in the data. We continue to see strength in net customer additions aided by the changes. Despite the questions we get on seat compression, we saw customers buy more Sales Hub seats, Service Hub seats, and Core Seats throughout the year. All of this reinforces our confidence that our core fundamentals are strong, and built to drive durable growth. Strong fundamentals matter, but what defined 2025 was our momentum in AI. We are clear about who we serve: growing companies with two to 2,000 employees. That is where we win, and that is who we build for. Our AI strategy is simple and focused on helping those companies grow. We embed AI across the platform. We deliver agents that do real work, and we give teams tools like Brief Assistant and LLM connectors to turn their data into action. That strategy is resonating. AI natives like Lovable, Browserbase, and Squint.ai are choosing HubSpot, Inc. as their platform to drive growth. Now let us talk about AI adoption. Our agents gained real traction last year. Customer Agent handles support tickets and answers questions across the full customer journey. More than 8,000 customers activated it last year and are seeing mid-60s resolution rates, driven by product innovation. Prospecting Agent helps sales teams research accounts, personalize outreach, and engage prospects. Over 10,000 customers have activated it, up 57% quarter over quarter. This is a clear use case with strong pull. Customers using it are booking nearly twice as many meetings compared to last year. At INBOUND, we launched Data Agent, which automatically enriches customer data. More than 2,500 customers have already activated it, a clear signal that customers want AI to take on the manual work that slows teams down. And while it is still early, our usage-based credits model is starting to scale. In Q4, Customer Agent accounted for about 60% of credits consumed. Data Agent, Prospecting Agent, and intent monitoring each contribute between 10% to 15% of credits consumed. All of this reinforces the clear point: AI is becoming a core driver of how our customers grow and, therefore, how we grow. Okay. Let us look ahead to 2026. Our strategy is clear, and focused on three things: making AI work for growth companies; reimagining marketing with a new playbook and products; and accelerating upmarket growth with a platform that delivers both power and simplicity. First, we are focused on making AI work for growth companies. While there is no shortage of AI solutions in the market, there is a real gap between generating AI output and driving growth outcomes. Closing that gap is what will unlock broad AI adoption. And that requires context—having the right information at the right time with the judgment to know what to do with it. And that is where HubSpot, Inc. has a clear advantage. Most AI tools ask customers to bring their own context—upload brand guidelines, teach the system who their customer is and how their business works—then do it again for the next agent or LLM, and again. That is backwards. With HubSpot, Inc., context is shared and powers everything. Our AI vision is to lead with our agentic customer platform, where unified customer data, business context, peer benchmarks across more than 288,000 customers, and deep domain expertise power workflows and agents. To do this, we are bringing together three interconnected layers: context layer, where customer understanding lives; action layer with our hubs and agents where they help do work; and a coordination layer to connect everything. You will see us accelerate this vision throughout this year. It will show up in powerful use cases where AI does real work for teams and drives measurable growth. That is our AI strategy. At the same time, marketing is going through the biggest shift we have seen in decades. Search traffic is declining as AI-generated answers become the starting point for product and brand discovery. Customers are spending time across more channels, and AI is creating new ways for companies to be found. We saw these changes coming and have deliberately diversified our marketing channels. Last year, YouTube leads grew 68%. Newsletter leads grew 53%. And HubSpot, Inc. became the most visible CRM in LLM-generated answers. And now we are turning what we have learned into a playbook and products for our customers. We launched The Loop, a new growth playbook for the AI era, along with AI-powered solutions to help teams put it into action. Data Hub gives customers a clean, unified data foundation, essential for marketing in the AI era. And Marketing Studio provides an AI-powered workspace to plan and create campaigns faster. And our AEO tools give marketers a real opportunity to offset declines in traditional search. Customers are already seeing results. Decibel, an AI-powered learning platform with over 1,000 employees, shifted towards AEO as organic traffic declined. Using HubSpot, Inc., they improved their visibility in LLMs and saw 13% of their leads come from new AI-driven sources. And Crunch Fitness, a global brand with over 200 employees and 500 locations, used HubSpot, Inc. to deliver personalized, on-brand messages at scale, sending more than 15,000,000 targeted emails a month and generating 2,000,000 leads in a year. HubSpot, Inc. helped define the inbound marketing era, and we are uniquely positioned to lead what comes next. The third pillar of our strategy is to keep winning upmarket. Last year was one of our strongest upmarket years. That was driven by product innovation that delivered real results for larger customers. Within their first year on HubSpot, Inc., upmarket customers generated more leads, closed more deals, and improved ticket close rates. In 2026, we are doubling down on that momentum. We are aligning dedicated product to the needs of this segment and increasing sales capacity to drive growth. This is a large market where we have clear product-market fit and significant room to grow, a strong and energized partner ecosystem. Our strategy shows up clearly in our growth levers. Our core drivers remain strong and durable: upmarket momentum, multihub adoption, and pricing tailwinds. These are working consistently, and we expect them to continue to scale. As we enter a more transformational phase with AI, we see two emerging growth levers: Core Seat adoption and credits. We have significantly expanded the value of the Core Seat by including Brief Assistant, enriched company data with buying intent signals, and platform features that bring teams together. As a result, adoption of enriched data jumped from 51% to nearly 70% in Q4, a clear signal of the value customers are seeing with Core Seat. Our goal is to make the Core Seat the foundation for every go-to-market employee and to drive broad adoption across teams. And as customers rely on agents to do more work on their behalf, we will scale credits consumption. Together, these levers expand how customers get value from HubSpot, Inc. and how we accelerate growth. With that, I will hand it over to our CFO, Kathryn A. Bueker, to walk you through our financial and operating results. Thanks, Yamini. Kathryn A. Bueker: Let us turn to our fourth quarter and full year 2025 financial results. Q4 revenue grew 18% year over year in constant currency, and 20% on an as-reported basis. Q4 subscription revenue grew 21% year over year, while services and other revenue increased 12% on an as-reported basis. Q4 domestic revenue grew 17% year over year, and international revenue growth was 19% in constant currency and 24% as reported, representing 49% of total revenue. For the full year of 2025, revenue grew 18% year over year in constant currency and 19% as reported. Full-year subscription revenue grew 18% year over year in constant currency, and 19% as reported. Services and other revenue grew 16% on an as-reported basis. We added 9,800 net new customers in Q4, bringing our total customer count to over 288,000, growing 16% year over year, with particular strength in Pro Plus customer additions in the quarter. Average subscription revenue per customer was $11,700 in Q4, up a point year over year in constant currency and up three points on an as-reported basis. Moving into 2026, we continue to expect net additions in the 9,000 to 10,000 range, with low- to mid-single-digit ASRPC growth in constant currency. Customer dollar retention remained in the high 80s in Q4. While net revenue retention increased sequentially, as expected, to 105%. For the full year of 2025, net revenue retention was 103.5%, up from 101.8% in 2024, reflecting continued momentum in seat expansion and the benefit from our pricing change. Looking ahead to 2026, we expect to grow net revenue retention by another one to two points year over year, driven by a combination of continued seat expansion and ramping credit adoption. As a reminder, we tend to see a seasonal downtick in net revenue retention in Q1, followed by expansion as we move through the year. Q4 calculated billings were $971,000,000, growing 20% year over year in constant currency, 27% on an as-reported basis. Q4 billings benefited from strong upmarket performance, resulting in a modest increase in overall billings duration in the quarter. For the full year of 2025, calculated billings were $3,400,000,000, growing 19% year over year in constant currency, and 23% on an as-reported basis. The remainder of my comments will refer to non-GAAP measures. Q4 operating margin was 23%, up four points compared to the year-ago period and three points sequentially. Full-year 2025 operating margin was 18.6%, up one point year over year. We delivered operating leverage as a result of disciplined hiring, as well as the ongoing benefits of our partner commissions changes. Net income was $163,000,000, or $3.09 in Q4, and $516,000,000, or $9.70 per fully diluted share for the full year of 2025. Free cash flow was $209,000,000, or 25% of revenue in Q4, and $595,000,000, or 19% of revenue for the full year of 2025. Our cash and marketable securities totaled $1,800,000,000 at December. As Yamini shared, our board has authorized a new $1,000,000,000 share repurchase program. While we remain focused on investing in organic product innovation and selective M&A, we also see the opportunity to return capital to shareholders through an additional share repurchase program. This reflects our continued confidence in the long-term opportunity ahead. I want to highlight several factors shaping our 2026 growth outlook and the underlying strength of our business performance. In 2025, net new ARR growth exceeded constant currency revenue growth in every quarter, with full-year net new ARR growing 24% year over year, six points above constant currency revenue growth. Looking ahead, we expect full-year 2026 net new ARR growth to outpace constant currency revenue growth, supported by the underlying trends Yamini outlined: continued upmarket momentum, multihub adoption, and pricing benefits, and the emerging impact of Core Seat adoption and credits. Going forward, we plan to share net new ARR growth on an annual basis as part of our Q4 earnings. With that, let us dive into our guidance for the first quarter and full year of 2026. For the first quarter, total as-reported revenue is expected to be in the range of $862,000,000 to $863,000,000, up 16% year over year in constant currency and 21% on an as-reported basis. Non-GAAP operating profit is expected to be between $144,000,000 and $145,000,000, representing a 17% operating profit margin. Non-GAAP diluted net income per share is expected to be between $2.46 and $2.48. This assumes 52,500,000 fully diluted shares outstanding. And for the full year of 2026, total as-reported revenue is expected to be in the range of $3.69 to $3.70 billion, up 16% year over year in constant currency, and 18% on an as-reported basis, modestly above our guidance for Q1 constant currency revenue growth. Non-GAAP operating profit is expected to be in the range of $736,000,000 to $740,000,000, representing a 20% operating profit margin. Non-GAAP diluted net income per share is expected to be between $12.38 and $12.46. This assumes 51,800,000 fully diluted shares outstanding. As you adjust your models, please keep in mind the following. We expect our legacy Clearbit business to be a 40 basis point headwind to full-year 2026 revenue growth, moderating slightly from the 60 basis point headwind for 2025. Our EPS guidance for Q1 and full year 2026 includes the expected impact from our share repurchase program. And we expect CapEx as a percentage of revenue to be 5% to 6% for the full year of 2026 and free cash flow to be about $740,000,000. With that, I will turn the call back over to Yamini for her closing remarks. Okay. In closing, I am energized by our position. Yamini Rangan: Heading into 2026, we are moving with urgency and focus, innovating quickly to help our customers grow with AI, and evolving how we operate to support that pace. We have transformed how we build products and how we serve customers with AI. And we are turning those learnings into real value for our customers. We enter 2026 with clear momentum. Our core growth drivers remain strong, and our emerging AI levers are gaining traction. Together, they give us confidence in our ability to deliver durable growth. I want to thank our customers, partners, and investors for your continued trust and support. And a heartfelt thank you to HubSpotters around the world for staying focused on solving for our customers every single day. With that, operator, please open up the call for questions. Thank you. If you would like to ask a question, please dial star followed by 11 on your telephone keypad now. If you change your mind, please dial and limit yourself to one question per person. Please standby for our first question. Our first question comes from the line of Samad Saleem Samana from Jefferies. Samad Saleem Samana: So Yamini, I thought I would kick off with just ripping off the Band-Aid that everybody is focused on. The software complex is under a ton of pressure on AI disruption fears. It is asked on every earnings call of every company. And you spoke a lot in your prepared remarks about context and moats. But can you dig deeper into how defensible HubSpot, Inc.’s role is as a system of record, maybe what your fear on LLM disruption is? And related to that, how would you respond to investors that fear that more data will be sucked into and be retained in third-party agents, that this could threaten the role of a system of record itself? I know there is a lot to unpack there. I think that is what we get asked the most every day now. Yamini Rangan: Alright, Samad. Let us start with ripping off the Band-Aid. I will probably start with disruption threat and, specifically, our moat to address that. Then I will take the second part of your question, which is about value getting captured outside of SaaS as data gets sucked out of solutions. Alright. First off, in terms of disruption, there is a big difference between point SaaS solutions and platforms, and that difference matters even more in the AI era. In the last decade, HubSpot, Inc. won as a platform because we were the source for customer data. With AI, we will win because we are the source of customer context, and that matters. As I talk to customers right now, the biggest challenge we see with AI adoption, particularly in mid-market companies, is not access to more AI tools, more LLMs, more agents. There are plenty of those. The biggest challenge that I see is that there is a huge gap between AI output and AI outcomes. And when I say outcomes, I mean more leads, more deals, more growth. And, by the way, that is all our customers want to talk to us about. Mid-market companies do not care about AI for the sake of AI, do not want to just adopt it. They care about driving growth. And if AI can help with that, they will adopt it. And in order for AI and agents to drive outcomes, you need customer context. This is the context that was in the heads of people, but now you need the patterns of what works, what does not work in your business, in your industry, your particular function. And then you need to be able to take an action on it. And that is what a platform like HubSpot, Inc. delivers. I will give you a practical example. You can ask an LLM to generate outreach for 100 prospects, and then do the same thing in a platform, with a history of interactions, with the prioritization of what sales cares about, with how your best reps handle competitive objections within your industry, and then ask it to generate outreach. The difference is one will be AI output, and the other will be AI outcomes. One produces words, the other wins deals. One knows a lot about the external world. The platform knows specifically about the customer’s world and what is happening today. There is this whole idea that AI is like a magic wand, and you can abstract away all of this problem and expect agents to work. It just will not. Context has to come from somewhere. It has to be trusted. It needs to be real time, and it needs to be actionable. And that is what a platform like HubSpot, Inc. delivers. Our strategy, as I just articulated, is to be that intelligence of customer context. And we have the data, but more importantly, we have the business context, the industry context, and the domain context to deliver it. And that is why customers come to us. They rely on us for that context, want to use more of our APIs. Partners want to customize and build on top of us. And as AI adoption accelerates, the value of our agentic platform increases. Okay. Now going to your second part of the question, which is can all the data just be completely sucked out such that there is no value captured by SaaS? Well, first of all, that assumes that, you know, we will not build agents rapidly ourselves. We are building agents on top of that customer context, and it is working, and we are seeing that adoption. Second, it assumes that SaaS platforms are data. SaaS platforms are more than data. It is the logic. Right? You can certainly get a nondeterministic output for a sales email, but try taking a nondeterministic output for your sales forecast. That is not possible. It is workflows like forecasting, routing, approvals, permissions. That is logic. It is not data to be sucked away. And ownership, accountability, and governance, all of those live inside applications, and it is much easier to bring AI into these applications rather than try to abstract all of this away as if it is just data. It is not. And then the last thing I will say is that we serve companies that have two to 2,000 employees. That mid-market segment is what we care about. They are focused on growing business. They are not managing model complexity. They are not looking at the latest LLM version, stitching together AI infrastructure. They want AI that just works and drives measurable growth. And that is our focus, making AI simple, practical, and actionable, and driving outcomes for scaling companies. That is our strategy, and we think it is very defensible for the segment of customers that we are delivering value for. Operator: One moment for our next question. Our next question comes from the line of Jackson Edmund Ader from KeyBanc Capital Markets. Jackson Edmund Ader: Great. Thanks for taking our questions, guys. The question I had was on acceleration. You know, the guidance for 16% constant currency growth this year, you know, it is certainly not an acceleration, but all the breadcrumbs that you are giving us on kind of net new ARR would mathematically just lead to acceleration. So I am curious what the disconnect is there between guidance of slowing growth and net new ARR, which would hint at accelerating growth. Thank you. Kathryn A. Bueker: Yeah, Jackson. Thanks for the question. I will just start by saying that we remain confident that we can reaccelerate and hit our 20% revenue growth goal. You are right. All of the leading indicators are pointing in the right direction. Net new ARR is an important forward indicator of growth for us. And we have delivered net new ARR growth in excess of revenue growth now over the last six quarters. Our revenue guidance implies a modest acceleration throughout 2026. As I shared in my prepared remarks, net revenue retention is expected to expand by another one to two points this year. And we are also expecting that 2026 net new ARR growth is also going to outpace constant currency revenue growth. And that is supported by all of those underlying trends that Yamini talked about: continued upmarket momentum, continued multihub adoption, continued benefit from our ongoing pricing changes, and then those emerging growth levers of Core Seat adoption and credits. The momentum that we are seeing with net new ARR is what gives us the confidence that we will be able to deliver 20% revenue growth in the future. Operator: Thank you. One moment for our next question. Our next question comes from the line of Keith Frances Bachman from BMO. Mark Ronald Murphy: Hi. Thank you very much. It is a good follow-on question to the previous one. Kate, I was hoping to dig a little more into the context of guidance. In particular, a few things I wanted to flush out. You talked about pricing, and I just wanted to try to understand, a) how much pricing help was in 2025 versus 2026, and b) if you could comment a little bit about any guidance, so to speak, on how much Core Seat growth may add and/or credits as we think about what is embedded in guidance, as you articulated. And then the final one, I know a multipart question here, sorry, is could you give any color on what like-for-like seat growth was in 2025 and how you think that may be different or the same in 2026? So sort of three engines within the context of guidance of CY 2026. Thank you. Kathryn A. Bueker: Yeah. Maybe I am going to just start by giving a high-level view of how we set guidance for 2026. And the short answer there is that we set guidance in a way that is very consistent with how we have always set guidance. And that is we, you know, it is early in the year, we want to set guidance that we feel comfortable that we can meet or exceed throughout the year under a set of outcomes across economic and execution outcomes that capture a range. Again, it is early in the year and we want to establish a set of guidance that we are comfortable that we can deliver against. That said, our starting point guidance for 2026 is higher than our starting point guidance for 2025. It is up about a half a point from last year. Our full-year guidance this year is higher than our Q1 guidance. And so that would indicate that Q1 is going to be the low point for growth this year, and that we are going to accelerate growth throughout the year. So it is early. We wanted to put forward guidance that is consistent in terms of methodology, that we are comfortable we can deliver against, and that shows that we can reaccelerate revenue over time. Thank you. Operator: One moment for our next question. Our next question comes from the line of Gabriela Borges from Goldman Sachs. Hey, good afternoon. Thank you for taking my question. Gabriela Borges: Yamini, I remembered your Dario keynote from INBOUND. And, Dharmesh, I know you spent a lot of time in the core ecosystem. Maybe talk to us about how you see your leading-edge customers using a tool like Claude CoWork alongside HubSpot, Inc. to get to better and complementary outcomes with both tools working side by side. Thank you. Dharmesh Shah: Hi. Thanks for the question. So, you know, Anthropic’s Claude CoWork is still very early, and it is solving for consumer-oriented use cases. So it is still very early to kind of see our customers using it. What we do see customers using is our Claude connector that connects an individual’s account on Claude to HubSpot, Inc. via our connector, and that is getting increased usage. And what gives us a lot of optimism is around what that is really doing: it is extending the customer platform that Yamini has been talking about and providing it via a new channel, which is these kind of AI applications like Claude and ChatGPT. So we are not seeing Claude CoWork’s core use yet, but we are seeing the classic Claude connector and the ChatGPT connector being used. Operator: Thank you. One moment for our next question. Our next question comes from the line of Aleksandr J. Zukin from Wolfe Research. Yeah. Hey, guys. Aleksandr J. Zukin: Thanks for taking the question. And maybe following on the previous question, to the extent that the modality develops around third-party agents and agent networks that continuously have to access both to read and to action information within HubSpot, Inc., can you just give us a framework for how you are thinking about monetization in that type of environment? And then to some extent, how should we think about the, to keep this to four questions, kind of the potential for consumption tailwinds on ARR growth, net new ARR growth for the credit side for 2026 and maybe beyond? Yamini Rangan: Alex, thanks a lot for the question. So I will start with the first one, then talk about the credit consumption. So on the first part, the way we think about ourselves is we are an open platform. That is how we won in the last decade. That is how we will win in the next decade. And we want customers to bring in and use as much data as possible. So we are very open about that. We do not charge for customers bringing in the data. The more complete the customer context, the better outcomes that we can deliver. We do not try to restrict that, and we try to enable that. The second thing I would say is we also want partners building on top of HubSpot, Inc. And this could be workflows, this could be agents, this could be custom apps. And we want that to happen. And we have always been partner-friendly. We will continue to operate that way. The part that we will say we are very disciplined is around platform access at scale. If other agents or other platforms that are emerging are relying on our customer context, that access we will monitor it, we will meter it, and we will monetize it. And, specifically, if it is high-frequency extraction at scale, if it is like bulk export of data or content or context, we will govern it and monetize that accordingly. So the way to think about our platform is we are open by design, but we are not a free data pipeline for everybody to take that information out. An intelligent customer platform—access to that context is valuable. We will price it in a way that is fair, scalable, and aligned to the value that we create for customers, which means we will also share that value. So that is in terms of our posture. The second question you asked is around monetization, specifically of credits, and how we think about that as a tailwind now and maybe in the future. And I will start by saying that we are beginning to see real usage beyond included credits. And that is again happening because customers are getting clearer, measurable value. And the biggest driver today that we see is Customer Agent. I talked about this. This has got clear product-market fit and clear value. And customers are using it to resolve support tickets, but they are also using it to answer tickets in terms of marketing as well as sales. And it represents nearly 60% of the credits that are getting consumed right now. We are also seeing very strong adoption in three other use cases. Prospecting Agent has found really clear fit. And think about this agent: it can do account research. It can monitor your contacts. And then it can drive outreach based on the signal that you get about a company or a particular contact. And given how much disruption is happening in terms of the leads, this has got more pull. I talk to customers day in and day out about Prospecting Agent. Now what is interesting is how customers are buying credits. They are not just thinking of this as an experiment. They are beginning to scale it. They are starting with what is included, then they replace real work, and then they allocate more budget. And that is a real positive green shoot. One of our customers, SkyTrak and Vault-Tec, they piloted this Customer Agent and started with 10,000 support chats a month. That agent was so effective that it used up all of the included credits in four hours. Then they allocated another $50,000 of their budget for credits, and treated it more like a work replacement. So where we are is we have the scaffolding in place. Agents are clearly adding value. They are being adopted. The credit mechanisms are in place. We are beginning to deliver value, and we see this as a tailwind and an emerging lever both in 2026 as well as many years to come. Operator: Thank you. One moment for our next question. Our next question comes from the line of Parker Lane from Stifel. Jack (for Parker Lane): Yes. Hi, good afternoon. This is Jack on for Parker. Thanks for taking my question. Yamini, with the agentic ecosystem buildout seemingly accelerating throughout the quarter, whether it be through Frontier, Claude Code, Opus, etc., how did deal velocity trend in the quarter relative to prior periods? Are the weekly announcements of the next use case-specific agent or a new model that specializes in coding causing any sort of confusion or slowdown in the pipeline? Maybe a better way of asking it is, how are customers and prospects digesting these announcements in real time? Yamini Rangan: I actually really like this question. I will tell you there is a huge disconnect between what is happening in terms of announcements and how investors are processing it and the actual conversations that we are having with customers in terms of AI adoption and use cases. And, again, I will remind that the segment that we serve, they are two to 2,000 employee companies. They have a business to run, and they are not chasing every announcement that is happening out there. And if you look at the pipeline and what we are talking about, the first conversation that we have is how can it drive innovation and growth. It is not how can I adopt, you know, name the announcement of this week. It is really how can I drive adoption and growth for ourselves, and we deliver that. We deliver our platform. We deliver solutions that are easy to use, that have fast time to implement, and they look to us to drive it. So, we talked about, you know, Q4. In Q4, specifically, upmarket was very strong. If you look at the nature of the conversations we had, it was consolidating multiple applications, driving growth through innovation, and then making sure that there is clear data and clean context to be able to get them to grow. That is the kind of conversation that we have. Again, huge disconnect and thank you. You know, we had a very robust Q4. One moment for our next question. Our next question comes from the line of Taylor Anne McGinnis from UBS. Yes. Hi. Thanks so much for— Taylor Anne McGinnis: Kate, maybe just on the acceleration that we could see throughout this year. You mentioned a lot of growth drivers earlier, but could you just break out how much price is contributing to that versus some of the other growth drivers around seats and credit adoption? Like, could we be getting to the point that you mentioned earlier that credits are scaling? Could that start to add a point to growth this year? We would just love to hear a little bit more about the breakout of this. Kathryn A. Bueker: Yeah. Thanks so much for the question. I actually think, Taylor, the easiest way to talk about it is through the trends that we are seeing in net revenue retention. As you know, revenue retention was up this year to 105 in Q4. It was up to 103 for the full year, and that is about 1.7 points up from last year. The components of that, if you think about what was actually driving the expansion, it was very much all of the benefits of the seats pricing model change. Now that is not pricing. The biggest impact actually is that we saw higher upgrade rates for seats across Sales seats, Service seats, and Core Seats. As you remember, one of the things that happened with the pricing model change is that we lowered the barrier to entry to get started with HubSpot, Inc. So people bought the seats that they needed, and there was a much more natural upgrade path from there. The other contributor was what you are talking about, which is, as customers migrated and came up for a renewal, they would see up to a 5% pricing increase, and that did help support net revenue retention in 2025. It will support net revenue retention in 2026 again to a similar amount. But the bigger driver of the expansion this year and into next year were the other factors associated with the pricing change. Operator: Thank you. One moment for our next question. Our next question comes from the line of Kirk Materne from Evercore ISI. Kirk Materne: Yeah. Thanks very much, and thanks for taking the question. I was wondering, Yamini, if you could just talk about the benefits you are seeing from AI internally, just in terms of your own R&D and maybe sales and marketing efficiency, where you are seeing some real levers there? Just any anecdotal comments would be great. Thanks. Yamini Rangan: Yeah. Thanks a lot, Kirk. Look. We have been transforming HubSpot, Inc. completely through AI. And I will start with coding. The way we build products has transformed completely. 97% of the code that was committed last year was done with AI assist. And, you know, if you look at our top engineers, they are living and breathing in agentic coding, with Claude Code, and that is how we build. And that has certainly changed the pace of innovation, but also the types of innovation that we are able to bring to the customers. So that is number one. It has changed dramatically. And then when you think about how we serve, we have been on this path of transforming with AI. Support, you know, completely done. Our first-tier support—nearly 60% of our support—is handled by AI, which means our teams are spending time on much more complex cases. We have been using AI to transform marketing as well as prospecting. Our prospecting approach internally has changed the level of meetings and the level of pipeline that we bring. And in a given quarter, 10,000 to 15,000 meetings are being set up internally through prospecting. And almost everything that we do from sales in terms of note capture, in terms of deal progression, in terms of smart guidance for getting deals, all of that has grown, which means at the end of the day, our efficiency in terms of support, our efficiency in terms of sales, and our efficiency in terms of building pipeline has increased. And overall, as a company, we are leaning very hard into AI. We set ourselves a target last year to say we want every HubSpotter to be inspired and work in this new AI-first manner, and we put out targets. We blew through it. At the end of the year, almost every HubSpotter is using AI every day of their week. And so we are transformed, and that helps us, of course, to move faster and operate at speed. But more importantly, everything that we learn of what works and what does not, we are building it into the product, and we are sharing it as best practices for the customer. And so, you know, really good story that we are happy with that, and, you know, we are going to continue to do that. Now it is like we are on to the second phase of AI transformation internally to scale up our efforts even more. Thank you. One moment for our next question. Operator: Our next question comes from the line of Rishi Jaluria from RBC. Rishi Jaluria: Hi, wonderful. This is Rishi Jaluria. Thanks so much for taking my questions. Maybe I wanted to drill into one thing. So, Yamini, I was struck by you mentioning Lovable as a customer during the prepared remarks. But without talking specifically about a single customer, it is definitely striking that the market clearly is not worried that AI coding is going to replace incumbent platforms, but one of the leaders in AI coding is using your intelligence to power that. So my question is really this. As you think about your own adoption amongst AI natives, especially the cutting-edge ones that have become household names over the past year, in many cases, over the past six months, can you talk about why you might feel HubSpot, Inc. is uniquely positioned for those companies and why they are choosing to use you instead of leveraging all the AI coding tools and Claude Code and Codex, etc., to try to build their own? Thank you. Yamini Rangan: I mean, coding has gotten easier, but domain expertise and platform value has not just gone away. Right? So people just equate coding to your ability to build everything. Look. I just said that internally, in terms of how we build products, it is completely transformed. And we are building products completely. And, of course, everybody within the company knows AI coding. Our product managers do it, our UX managers do it, our marketers do AI coding. But it does not mean that we are turning around and replacing our core platform. A core HR platform, ERP platform. We are not building any of that code. And so I think there is a lot that is getting lost in terms of ability to code versus value of a platform. And that is what I would come back to, which is what we deliver is a platform, and it used to be that that platform had unified data. That is why customers came to us. We built something organically. People came to us because there was value in unifying Marketing, Sales, and Service. But what has fundamentally changed now is that it is not just about the data. It is the context. Because context is what you need to make decisions, whether you are an agent or you are a team member that is making decisions on behalf of that agent, and that is what we deliver. And that is why all AI-native companies, including the ones that you mentioned, are starting with HubSpot, Inc. as their platform of choice in terms of go-to-market. Dharmesh, go ahead. Dharmesh Shah: Yeah. Once again, as someone that spends hours a day using agentic coding tools, both AI-native companies and non-AI companies, the best companies spend the most amount of calories in adding value to their customers. They do not spend their engineering calories going off and AI coding a CRM or an ERP or an HR whatever. That just makes sense. So just because it is possible—so we have, as Yamini mentioned, a large engineering team that knows what they are doing, spending 95% to 97% of their calories using agentic coding tools. They are not doing it to replace internal platforms. So we think the best companies, both AI and non-AI, will not be using AI coding to replace core systems. They will be doing it to add value to their customer. That is what Lovable is doing. I think that is what some of the best companies in the world will continue to do. Operator: Thank you. One moment for our next question. Our next question comes from the line of Raimo Lenschow from Barclays. Damian Koggan (for Raimo Lenschow): Hi, guys. This is Damian Koggan on for Raimo. Thanks for taking the question. Great to hear that YouTube and newsletter leads are driving to differentiation with LLM-generated answers. Given the challenges that the SEO channel faced throughout 2025, should we think about that as a tailwind to top line throughout 2026? Yamini Rangan: I will be brief and talk about the TOFU trends, the top-of-the-funnel trends. And look, yes, there has been overall decline in terms of content-generated traffic, traffic that comes to the website. But that is something that we have seen coming. We have diversified the channels. We have talked about our playbook. And that playbook is working. Right? And, specifically, you mentioned a couple of channels for us. YouTube has grown. Newsletters—leads from newsletters have increased more than 50%, and AEO is increasing. And I think part of the way you should think about it is that the diversification strategy, as well as our ability to lead with AI, is going to help us continue to drive top of the funnel, which is why you are seeing us double down on our guidance of net customer additions of 9,000 to 10,000 every quarter going forward. Last year, we added, you know, 40,000 customers, and this year, we will continue to do it at that pace. And a lot of what we have done in terms of the playbook is what helps us drive customer additions even in a very challenging environment when marketing is completely changing. Thank you. One moment for our next question. Our next question comes from the line of Siti Panigrahi from Mizuho. Great. Thanks for taking my question. Siti Panigrahi: Yamini, I just want to ask about the early adopters of AI agents who are using it. What kind of trends are you seeing in terms of them talking about their user expansion or seat expansion? Where is that actually getting funded? All the AI investment they are doing right now? Also, are you seeing any trend differently from your small segment versus scaling mid-market companies? Yamini Rangan: Okay. Great question, Siti. So I will start with what are we seeing, and then is there any difference between segments. In terms of the AI use cases, use cases that are getting resonance are the ones that show clear, measurable value and clear outcomes. So it is really about delivering value and showing clear outcomes that is driving the usage. I would say the strongest traction is Customer Agent. And I would also say Prospecting Agent. We talked about both of these agents. Data Agent that we launched at INBOUND is another one. So all three agents are seeing really good traction and adoption. And in terms of what customers look for: Is it easy to implement and get started? And is it clear enough to see value? And can they get confidence that the credit consumption is somewhat predictable? And I think it checks the box in each of those areas. The one thing I will talk about is Core Seats. Right? Because when we think about AI monetization, it is both Core Seats as well as credits. And we have talked a lot about the credits. On the Core Seat side, as you remember, Siti, last year, we included Brief Assistant into the Core Seat. And now 50% of Core Seat users have tried and are using Brief Assistant. So we know that AI is adding value there. Similarly, we added all of the company enrichment data into Core Seat. Again, the level of adoption for that Core Seat has really increased in the last couple of quarters. So our strategy to add a lot of AI and data value into the Core Seat is working. And the combination of Core Seat plus credits is what we think of as durable emerging levers in terms of AI tailwinds. And, in terms of what you mentioned in terms of upmarket and downmarket, look, broadly speaking, very similar trends. I think upmarket customers care a little bit more about data security. In fact, a lot of them talk to me about which prompts are encrypted, which prompts are retained, and so on. So there is a little bit more sensitivity towards data security and prompt usage versus the downmarket segment. But use cases are about the same. Thank you. Operator: One moment for our next question. Our next question comes from the line of Brian Christopher Peterson from Raymond James. Brian Christopher Peterson: Thanks for taking the question. Yamini, I wanted to follow up on the unified data model. I am curious where you think the near-term cross-sell opportunity is most significant. Historically, I think we have heard a lot about building on Marketing Hub with Sales Hub. But as you have kind of broadened out the portfolio, where do you see that incremental product adoption really ramping up in 2026? Thank you. Yamini Rangan: Maybe clarify the question a little bit when you said unified data model. Are you just talking about multihub adoption, or are you talking about something else? Brian Christopher Peterson: Yeah. Multihub adoption, more from a cross-sell perspective. So as you are looking to kind of go back into your base, where do you see the biggest opportunity for cross-sell in 2026? Yeah. Yamini Rangan: That is a great question. Look. I think, in terms of where our customers land, they mostly land with Marketing plus Sales Hub. That is a common land pattern. Or they land with all five hubs. Right? Those are the two common patterns. If they land with Marketing Hub and Sales Hub, then what happens is that in a few months, they begin to see the need for Data Hub. Because in almost everything that you do with Loop, or in almost everything that you are doing with sales automation, you need better quality data, ability to ingest more data, ability to, in real time, bring data through AI prompts, and that is what Data Hub provides. And so the next combination we see is Data Hub. Service Hub is another one where there is a ton of cross-sell opportunity. Especially with the advancements that we have made with Customer Agent, but also across the full platform—embedding summarization of tickets, sentiment analysis, as well as being able to respond quickly—we are beginning to see Service Hub adoption. So the patterns are: land with Marketing Hub and Sales Hub; expand to Service Hub, Data Hub, and Content Hub. And we are continuing to invest across the platform, and that is the motion that we want to continue to build. Thank you. Operator: One moment for our next question. Our next question will be from the line of Arjun Rohit Bhatia from William Blair. Arjun Rohit Bhatia: Perfect. Thank you so much. I just want to touch on maybe the other side of the net retention rate dynamics. I am curious where sort of upsell and upgrades—basically, the non-seat-based expansion levers—how those are playing out and whether we have seen sort of an uptick there at all. And maybe as a part of that, would just love to hear from you on how the broader SMB macro environment is evolving, given we have heard a little bit of noise there. Kathryn A. Bueker: Yeah. Thanks, Arjun. We have been talking about the dynamics with net revenue retention for a number of quarters now, so I think that you are familiar. But we always start the conversation on NRR with customer dollar retention, and dollar retention has remained really strong and consistent for us in the high 80s. It ticked up a little bit this year, and we expect the same next year. Where we have seen really strong upgrade motions is in the seats upgrade motion—adding Service Hub seats, adding Sales Hub seats, adding Core Seats—and we are starting to see a building trend around credit adoption. The other upgrade motions that we have been talking about—contact tier upgrades, some of the cross-sell motions—they have sort of been in this holding pattern for a while. That is the conversation we have been having over time. And, you know, people are adding contacts. They are just not doing it at a rate and pace that is increasing. And our expectation is that those trends are going to continue here for some time. That said, as I shared, we do expect net revenue retention to be up one to two points next year, and that is going to be driven by the continued success in seat upgrade rates as well as building momentum around Core Seats and credits. Operator: Thank you. This concludes the HubSpot, Inc. Q4 2025 earnings call. Thank you to everyone who was able to join us today. You may now disconnect your lines.
Barbara Amaya: Good morning, everyone. Welcome to Alpek's Fourth Quarter 2025 Earnings Webcast. I am Barbara Amaya, Alpek's IRO, and I am pleased to be here today with Jorge Young, our CEO; and Jose Carlos Pons, our CFO, who will be presenting today's material. Today, we'll be covering the following topics. First, Jorge will walk us through the key highlights for 2025. Second, Jose Carlos will cover the financial results for the quarter. Third, Jorge will discuss our outlook for 2026, followed by Jose Carlos, who will delve into our guidance figures. Then Jorge will outline our strategic priorities for 2026. And finally, we will conclude with a Q&A session. Please note that the information discussed today may include forward-looking statements regarding the company's future financial performance and prospects, which are subject to certain risks and uncertainties. Actual results may differ materially, and the company cautions the market not to rely unduly on these forward-looking statements. Alpek undertakes no obligation to publicly update or revise any forward-looking statements, whether it is as a result of new information, future events or otherwise. We express our financial results in U.S. dollars unless otherwise specified. For your convenience, this webcast is being recorded and will be available on our website. Jorge, I'll turn the call over to you. Jorge P. Young Cerecedo: Good morning, everyone. Thank you for joining us today. Throughout 2025, amid the continuation of a challenging environment for the chemical industry, our teams worked diligently on actions within our control to strengthen our financial position and solidify our global operations. Alpek's financial and operating results were largely impacted by global overcapacity, resulting in a difficult year, particularly for our Polyester business. We also executed several planned but longer-than-expected maintenance outages. By contrast, our Plastics & Chemicals businesses delivered a more stable performance. As a result, our full year comparable EBITDA totaled $489 million, down 30% from last year. I would like to emphasize that our focus on strengthening our financial position has led to a sequential improvement in our operating free cash flow, which was $163 million, a considerable improvement of 57% from previous year, demonstrating the company's resilience and financial discipline. We continue to execute our previously outlined 4 strategic pillars, which play a key role in reinforcing the company's competitiveness. First, strengthen our core business. We advanced on our targeted footprint optimization by ceasing PET operations at the Cedar Creek facility and relocating that capacity to more competitive larger assets. As a result of this initiative, we expect to realize a benefit of approximately $20 million in 2026, which will partially offset broader macroeconomic headwinds. Second, financial flexibility. We maintained disciplined capital allocation, optimized our net working capital and executed debt refinancing. These actions strengthened our liquidity and extended our maturity profile. Additionally, we also suspended the dividend and made progress in the monetization of nonstrategic assets, which are expected to materialize in 2026. Third, boosting growth. We advanced the development of high-margin solutions in our PET thermoform and EPS businesses and continued expanding our specialty products in our polypropylene businesses. This supports portfolio differentiation while providing incremental EBITDA over time. And fourth, capitalizing on opportunities. Beyond the developments already discussed, we have been selectively expanding outside the petrochemical industry, mainly through our energy commercialization business, particularly by expanding recently to the power sector, which we expect will support growth over the coming years. Finally, a major milestone in 2025 was the successful spin-off and merger with Controladora Alpek, fully establishing Alpek as an independent entity with a streamlined corporate structure. Now I will turn the call over to Jose Carlos to provide our financial performance in greater detail. José Pons: Good morning, everyone. Let me walk you through our quarterly results. Starting with our Polyester segment, volume was 836,000 tons, down 10% both sequentially and year-over-year, reflecting softer demand and longer-than-expected planned maintenance outages at several of our sites. These operational factors weighed in on production in the short term. However, we have since resumed most of our operations. On an annual basis, seasonal effects were stronger alongside the strategic decision to exit low-margin PTA and PET exports. Polyester comparable EBITDA totaled $41 million, a 53% decrease versus the third quarter, pressured by lower volumes, weaker margins and historically low ocean freights. On a year-over-year basis, oversupply, trade-related dynamics and global freight costs impacted performance. By contrast, the Plastics & Chemicals segment continued to deliver stable results. Volume was 184,000 tons, decreasing 6% quarter-over-quarter and 7% year-over-year, reflecting softer demand in both periods. Plastics & Chemicals comparable EBITDA totaled $55 million, up 17% sequentially and 50% lower year-over-year as steady margins helped offset softer volumes and typical seasonal effects. Together, our segment resulted in a volume of 1.02 million tons, decreasing 9% versus the previous quarter and year-over-year. Our reported EBITDA totaled $70 million, a 40% decrease quarter-on-quarter as a reduction in commodity prices and feedstocks resulted in a $29 million inventory adjustment, primarily in the Polyester segment as paraxylene saw a 7% sequential decrease. Relevant reference margins for our Polyester segment saw more stability compared to last quarter, yet remained pressure. For our Plastics & Chemicals segments, reference margins were steady. Finally, comparable EBITDA was $100 million, a 27% decline versus the previous quarter. Looking at our full year free cash flow and capital allocation, we saw a net working capital recovery of $50 million, supported by optimizations and lower volatility in raw material prices. These efforts are aligned with our cash generation goals. CapEx for the quarter totaled $51 million, consisting of $41 million in maintenance and $10 million in strategic CapEx, aligned with our priority and planned maintenance across multiple sites. This resulted in an annual CapEx of $170 million. Full year operational free cash flow totaled $163 million, a significant improvement of 57% on an annual basis, demonstrating solid cash generation and Alpek resilience amidst a challenging environment. Moving to our balance sheet and financial position. Leverage ended at 4.4x net debt to EBITDA, reflecting lower last 12 months reported EBITDA amid sustained low margin levels. The company is implementing additional measures to strengthen its balance sheet as a prolonged cycle recovery is expected and deleveraging continues to be a top priority. Notably, pro forma leverage would have resulted in 3.9x, adjusting for footprint optimization and restructuring costs. Net debt was $1.8 billion, flat versus the previous quarter, yet we were able to decrease it by $44 million versus 2024, a solid accomplishment in the current market context. We remain financially flexible entering 2026, given the successful debt refinancing, solid cash generation, available committed credit lines and disciplined CapEx management. I'll turn the call back to Jorge to discuss our 2026 outlook. Jorge P. Young Cerecedo: We approach 2026 with a cautious outlook as we expect macroeconomic conditions from last year to persist. Global oversupply continues to weigh on the industry. Although recent years have seen the initial progress towards capacity rationalization, further actions will be needed to improve the market balance. In parallel, we expect demand to remain soft. We also anticipate ocean freight costs to remain at relatively low levels, consistent with the significant reductions observed towards the end of 2025. Notably, we expect greater operational and financial stability in our polyester business in 2026, forecasting a modest improvement and relative stability in reference margins. Turning to our Plastics & Chemicals businesses. We expect profitability in this segment to be somewhat constrained in 2026. This is primarily due to capacity additions in North America, particularly tied to polypropylene, coupled with continued softness in EPS demand as construction markets have yet to show meaningful signs of recovery. Lastly, we expect our emerging business to remain on a growth trajectory with continued expansion and additional contribution to EBITDA in 2026. We remain confident in this segment's potential and we're targeting a doubling of its size over the next 3 years. With that in context, Jose Carlos will walk you through the detailed assumptions and guidance ranges for 2026. José Pons: Our base case projects comparable EBITDA in the range of $450 million to $500 million based on the following assumptions: PET reference margins averaged $145 per ton, a 2% increase over last year's average. Ocean freight costs for South America at $75 per ton, a 40% reduction from 2025. Polypropylene reference margins at $0.13 per pound, a 7% margin compression and an exchange rate of MXN 18 per dollar, a 6% appreciation and minimal benefits from U.S. PET reciprocal tariffs. It is also worth noting that our base case assumes minimal contribution from nonstrategic asset monetization. The acceleration of successful closing of any of these transactions will represent offset to our expectations. Moving to the rest of the metrics. CapEx is set at $130 million, following our disciplined approach and commitment to operational efficiency. For the first time ever, we are now introducing a guidance figure for operating free cash flow, which is expected to be between $100 million and $150 million. This figure is further supported by our continuous efforts in cost control, capital allocation and net working capital optimization. And volume is expected to reach around 4.5 million tons. Given the prolonged industry low cycle, we expect our leverage ratio to stabilize around 3.5x over the next 12 to 18 months, subject to market conditions. Our long-term target remains at 2.5x, and we will continue executing our deleveraging strategy to reach it. Now in addition to the base case, there are potential drivers that could improve performance if they materialize. This include PET reference margins stabilizing at $155 per ton. I'd like to highlight that in January, the spreads averaged $171 per ton, recently reaching up to $190 per ton. While we view the current price discipline in China as a supportive factor, it is still early to assess whether it will hold. We will continue to track market dynamics and provide updates as appropriate. Ocean freight costs at or above $85 per ton for South America and exchange rate closer to MXN 19 per dollar, the successful monetization of nonstrategic asset sales and greater capitalization from U.S. pet reciprocal tariffs. Together, this represents a potential estimated upside of approximately $50 million to comparable EBITDA. It is important to highlight that these factors are not meant to be additive, and they will not occur simultaneously. Instead, they represent key variables that we recommend you track and they could contribute incremental value if conditions evolve in our favor. We will continue monitoring these elements throughout the year, and we'll update our expectations accordingly as visibility. Now Jorge will continue with our priorities for 2026. Jorge P. Young Cerecedo: With our 2026 guidance now established, I'd like to wrap up by sharing how we will plan to execute. We're building on the same strategic foundations that serve us well in 2025 and remain firmly aligned with our long-term strategy. In our polyester business we're taking a differentiated approach across the portfolio. In the commodity segment, which includes PTA and PET resins, our focus is on integrated scalable assets serving attractive domestic markets, primarily in the United States, Brazil and Mexico. As such, we will continue to work on footprint optimization. A clear example this year is our decision to suspend operations and the Reading recycling facility. Following the shift in demand towards virgin materials, we are allocating capacity to our Richmond facility, which offers a more cost-competitive network. The higher other value polyester, which includes PET sheet and thermoform, we're advancing targeted low CapEx investment to the bottleneck operations in the Middle East and strengthening our product development capabilities. Second we're scaling our position in a fast-growing segment and increasing our exposure to higher margin application. Turning to our Plastics & Chemicals segment. Our strategy is to fully leverage our most competitive regional assets while expanding into higher performance and specialty solutions. We will start ramping up investments made last year, particularly for EPS specialties. And we will also start a multiyear growth project focused on differentiated polypropylene. We believe this opportunity will become key EBITDA contributors moving forward. Emerging business continues to improve, particularly in energy commercialization. We view this as a promising path to diversify our portfolio and reduce exposure to the petrochemical cycle. Financial flexibility remains the core enabler of our strategy. We remain committed to disciplined capital allocation, rigorous working capital management and the monetization of nonstrategic assets. Over the past year, we made meaningful progress on this front, and we expect to finalize the first phase of sales during the first half of 2026. We have identified additional properties in our region for potential sales. We will share further updates as we advance. In summary, 2026 will be a year of focused execution, delivering on near-term priorities while continuing to invest in long-term value creation. I would like to conclude by mentioning that Alpek has experienced difficult cycles over the past 50 years, and we have been successful at adapting and evolving the business as required. A good example of this is how we were able to exit the fiber businesses while moving into PET sheet business, which reflects a more attractive margin profile and value creation potential. We are confident that we will emerge from this low cycle successfully and that our focus on higher value-added products and specialty products will bring greater opportunities and growth over the following years. Barbara, I'll turn the call back to you. Barbara Amaya: Before we start the Q&A, a brief reminder, materials and the webcast recording will be available on our website. [Operator Instructions] Our first question comes from Leonardo Marcondes. Leonardo Marcondes: I have 2 from my side. The first one is regarding your guidance. Correct if I'm wrong, but I believe there was extraordinary OpEx spend in 2025 to improve operational efficiency that we should not see in 2026, right? So if you could walk us through your expectations in terms of OpEx for this year and if the lower expectation for freight rates have fully offset these lower OpEx that we were -- that we here we're expecting for this year. Also, there is a discussion regarding the [ hake ] benefit in Brazil that is going on right now, right? So if you could also help us to understand a bit better of how much it could impact your guidance for this year, this potential improvement in [ hake]. My second question is regarding the supply and demand balance in China. I think it was in November when the Chinese government organized a meeting with PET and PTA companies to understand the issues of the market, right? So my question is what have you heard from the Chinese market and companies regarding this meeting? And if there was any change of the government's approach toward the segment -- I mean, the Chinese government, right? Jorge P. Young Cerecedo: Thank you, Leonardo. Thank you for your questions. Yes, regarding guidance in 2026, we're factoring some improvement in our operations. As we explained in 2025, we have some extended maintenance and some operational issues earlier in the year in 2025. But as you mentioned, some of that recovery is partially offset by our assumption of much lower freight costs that are very important to set the import parity prices. So that's the -- that, in general, would answer your first question. Part B of your first question regarding the rake benefits in Brazil. I think that's an important development. First and foremost, recently, those incentives for the chemical industry, especially for those companies consuming basic petrochemicals and which in our case, our polyester business applies. Those benefits were confirmed for the period 2027 and through 2031. So that's a significant accomplishment. Our support and participation in the ABIQUIM, the Chemical Industry Association was very meaningful. And we are very happy to that those were confirmed and those are important and meaningful. 2026 was not initially included in the package of benefits. But right now, there is an effort that might result in 2026 also receiving benefits for the chemical industry. We don't have those incorporated in the guidance. And as you know, these programs of [ rate and persist ] have a combination of support on the acquisition of raw materials through reduced taxation and also support on selected capital investments. And the second question on China and yes, the efforts from the Chinese government and in general to adapt from this, what we call [ cutthroat ] competition that are driving margins to unsustainable levels. I think the positive thing that we get at this moment is that there is more acknowledgment of the issue. And as Jose Carlos explained, some actions are already happening to begin 2026. We're not counting on those yet to be sustained. And that's where we are. So on the positive there is acknowledgment actions on the overcapacity needs to be taken. And again, this is not only in our industry, right, in the industries that we participate like polyester and plastics & chemicals of Alpek. This is in general a petrochemical and polymer situation that applies to many products. Leonardo Marcondes: Yes. Just one follow-up regarding the [ hake]. Do you have any estimate on how much your EBITDA could improve for this year in case they approve the benefit of $5.8 million to the PIS/COFINS payment? José Pons: We are still working on those calculations because I mean, it could be perhaps I'm not rounding maybe another $10 million to that guidance for 2026. And hopefully, it's a little bit more than that. We're just working on the calculations to make sure the final percentages are defined. And then if you know the details, there is also an overriding cap on how much of the benefit applies for the whole industry. So once all of the things settle, we will have more details. But I would say order of magnitude for us, maybe around 10. Leonardo Marcondes: That's clear. That's clear. José Pons: And that's for 2026, right? And again, we would expect potentially similar or even slightly higher benefits for the period of 2027 through 2031. I think this was a major accomplishment for a portion of the petrochemical industry in Brazil, especially the one that consumes very basic petrochemical feedstocks like it is the case for us on paraxylene. Barbara Amaya: Our next question comes from Thiago Casqueiro from Morgan Stanley. Thiago Casqueiro: I have 2 questions here from my side. The first one, I mean, I know it has been a very challenging environment for the petrochemical industry and that the key goal of the company is to reduce leverage towards the 2.5x in the long term. But I would like to understand when would the company start like discussing the possibility of paying dividends this year if this opportunity appears in the future, obviously. Would it be only when leverage target is reached or it could be discussed before that? Because despite all this the pressured environment we see right now, we also see that the free cash flow profile for the year looks quite healthy. And the second question is related to protection measures. So kind of a follow-up on Leo's question. Well, we have seen in Brazil some government actions aimed at protecting domestic industry and preserving competitiveness recently, also with [ hake ]. So beyond the potential upside from the US PET tariffs that you mentioned in the release and today in the webcast, are there any other items on the government agenda, either in the U.S. or in Mexico that could represent additional upside to the guidance you provided? José Pons: Thiago, thank you for your question. Regarding your first question in terms of leverage, I would say that we would like to devote the free cash flow that we will have this year to deleveraging the company. That will be our top priority. We want to get closer for the 2.5x that it's our target. And therefore, we are not expecting to have a dividend this year. I mean you know this industry, this situation and the circumstances could change all of a sudden. If we get closer to our leverage target and improved performance in the company. Well, certainly, that could be on the table, but we will devote the majority of our efforts to deleveraging now. Jorge P. Young Cerecedo: I will comment on your second question that pertains to, what you've mentioned, you define protection measures. And well, I think the efforts -- I mean, that's a very important area of focus for us, and we have efforts pretty much in all the countries where we participate. And again, it's not only something that we do as Alpek only, right? I mean this is something we do in conjunction with relevant industry on each country. And you see significant activity happening across other petrochemicals as well. Just to comment on the one on US [ PET ] tariffs because there's still some uncertainty, I think as Jose Carlos mentioned, we are yet to see more benefits. That is something that we were able to capture going into 2026. Somewhat is masked by your assumptions on margins remaining at relatively low levels or ocean freight still coming down. But even with that uncertainty, I think we see interest on the current administration in the United States to protect local manufacturing. And I think even if the Supreme Court comes with a ruling that doesn't confirm the tariffs, I think there will be parallel mechanisms. Again, we as an industry and as Alpek continue to work in evaluating other paths in parallel in pretty much all the countries where we are participating. So some of these details, we will share as information becomes public. But as I mentioned, this is a very important area of focus across all our key relevant markets. Barbara Amaya: Our next question comes from Ben Isaacson from Scotia. Ben Isaacson: You hear me okay? Jorge P. Young Cerecedo: Very well. Ben Isaacson: I just have one question only. And the question is, is there a strategic or financial rationale for having both the Polyester and the P&C segments together? Do you think that your stock suffers from a discount that could be improved if those businesses were separate? What are the reasons to keep them together? José Pons: Thank you, Ben. Thank you for your question. This is Jose Carlos. Very good question. Certainly, we believe that as of today, we see benefits in having a larger company merging or having the both divisions together. We have efficiencies in SG&A and other operational metrics. So clear, at this moment, the rationale and the benefits are better than having 2 split companies. But certainly, we're doing work in 2026 to review our portfolio and see if there are opportunities for us to divest, which implies that your question, certain portions of our portfolio, certainly with the key objective of deleveraging the company. Barbara Amaya: Our next question comes from Andres Cardona from Citi. Andres Cardona: I have a quick question on the guidance. If you could help me to understand on the Polyester segment, how much of the volume has been contracted [indiscernible] for 2026? If I remember correctly, in an average year, it is around 60%. So just trying to understand how [indiscernible] the guidance is. Jorge P. Young Cerecedo: Yes, Normally, I would say 70% to 80%, especially in North America. And perhaps also in South America is a little bit less and the Middle East a little bit less in those percentages. So maybe all in all, it's about 60%. But coming back to North America, in that range of 70% to 80%, probably we're still more towards the lower end of the range, again because of the some level of uncertainty on what will happen, the visibility that what will happen with tariffs. So yes, I mean, potentially in a more favorable environment on tariffs, there could be still some upside. And we did capture that in the -- together with other variables in the additional range that Jose Carlos described. As you know, we provided the guidance in a base case and we see this year more upsides than downsides on the guidance, and we encompass all of them together in the second [ quarter]. Andres Cardona: Thank you for the scenarios that you present. It's something that I find very helpful. Jorge P. Young Cerecedo: You're welcome. Barbara Amaya: Our next question comes from Tasso Vasconcellos from UBS. Tasso Vasconcellos: I have 2 here. One, Jorge, moving back to the asset sales. Can you remind us exactly what assets would you be willing to divest the most? And if you have any expected amount that you would be targeting to raise considering all of these divestments? And the second question is on that sensitivity that you released for the guidance for the year, the incremental EBITDA. In your view, what would need to happen in the industry, so those assumptions become a reality for the year? I have these 2 questions here. Jorge P. Young Cerecedo: Sure. And so here on the first question about the asset sales. Right now, we have 4 pieces of property in the United States that are all of them in different degrees of negotiations or document preparation to complete the sale. I mean these are -- again, 4 assets where we had operations in the past. We have been working on those throughout last year. And I would say pretty much the 4 of them are converging right now into the, let's call it, the stretch time to finish the process. I think we have interested or counterparts that are concluding their due diligence. All those 4 property combines could potentially represent $50 million. And again, we feel very confident those will materialize in the first half. Maybe some of those in Q1, but I would say more likely most of them by the end of the first half of the year. And it's a meaningful $50 million contribution to our cash flow. So that's more or less what we have. On top of that, this is taking longer, perhaps more than 12 to 18 months. It's our largest site in Monterrey, where we used to produce fiber because that potentially has more value. But that is going to require -- is requiring more time as we need to -- that was an industrial site that needs to be prep for other potential uses. So we continue to make progress on that one, but we don't see that yet within the 2026 time line. I mean we will push for that, but that will likely spill over into the future. And right now, we are focused on these 4 assets in the United States. And on top of that, we have another propylene that are coming in Mexico and Brazil. And so there will be perhaps not as large, but another bucket for the second half. José Pons: And just to complement, Jorge, we're planning to use all the proceeds of these sales to deleverage the company. That's our top priority. And everything that we get on those sales, we will use it to come back to our 2.5x target. Jorge P. Young Cerecedo: Yes. I think on the other part of the question, I mean, we laid out the key variables, right? What needs to happen? I mean, for example, in margins, global margins the industries in general are under significant pressure. Again, as we mentioned in the previous question, it's a positive signal that in China, even in China, there is acknowledgment that the margins went to unsustainably low levels. We see a small rebound to begin the year. So if that stays, that obviously that support for the guidance. And the other one important one if the uncertainty on tariffs it's removed and there is more certainty on tariffs, that will eventually drive more volume and margin opportunities that we will capitalize that process again is taking longer, right, given the lower visibility on tariffs, but that's potentially the other one. We just mentioned the rate benefit in Brazil. We didn't capture that in our range, but that's going through the chambers now. So that's the other one. But more importantly for us is to focus on operating our assets very well. I mean, for us operating our facilities very safely and with pristine reliability is how we can best help ourselves. So that's [indiscernible]. Just to give you a flavor, right? So many variables combining into one range, but that's more or less what we see today. Barbara Amaya: Our next question comes from Alejandra Andrade from JPMorgan. Alejandra Andrade Carrillo: I just wanted to understand from you guys, what do you think the time line could be to realistically get back to your target leverage? And also, I'm just curious if you've had discussions with the rating agencies given your current outlook on how patient they'll be in terms of your delivery to get leverage down to your target? José Pons: Thank you, Alejandro. Thank you for your question. To be completely clear, we don't expect to get to the level of 2.5x this year. It's something that can happen in 2027. So we're working towards that. Of course, if we get some of the upsides that Jorge already pointed out. If we are successful in selling those nonstrategic assets that I already mentioned, and there might be a second wave of other divestitures. Well, that could speed up the process and maybe by year-end this year. But at this moment, our base case is that this could happen in 2027. In terms of our rating agencies, we've had a close conversation with all of them. We have updated them on the performance of the company and our perspective for 2026. Well, the conversation is fluid, and we're working with them to see not only this year's performance, but all the things that we're doing to improve our leverage and the commitment that we're doing. So no decision from them, and we will continue to work together with them to keep us updated. Barbara Amaya: Our next question comes from Milene Carvalho from JPMorgan. Milene Carvalho: So I have 2 matters that I want to approach here. So first one is the diversification to power that you mentioned in the presentation. So what do you see as the benefit in this segment? How can you operate this? And is there any strategic CapEx forecasted for 2026 in the segment? And the second question is regarding severe weather conditions that we saw early this year. Is this somehow impacting your production? What should we expect in the first Q specifically into this situation? Jorge P. Young Cerecedo: On diversification to power I think for us, this is a very significant opportunity. We have amassed over the last decades significant know-how in energy markets, especially in Mexico by expanding into others like Brazil. But our focus has been mostly on being a very reliable supplier. But more than a producer, we commercialize energy, both in more historically as natural gas and more recently we're incurring in electricity. For the most part, this does not require CapEx. Again, I think over the years, it's a matter of developing know-how and having the right permits and certified experience because there are barriers of entry. And again, I think it's capitalizing on a strength that we have and it's becoming a very interesting area of focus for us. Would you mind framing again the second question? Milene Carvalho: Sure. So the second question was regarding the severe weather conditions that we saw earlier in 2026. So there was a lot of activities across U.S. that was just shut down. I wanted to understand if somehow this has compromised your production or first quarter expectations. Jorge P. Young Cerecedo: Did not disrupt our operations. I think there were 2 waves of very cold weather. In one, we took short proactive shutdowns in the United States, but are not going to be very material for our financial purposes. We will see though some impact on higher natural gas prices because the -- although natural gas prices have already come down again to where they were before the cold weather waves. In the meantime, the February contract prices of natural gas in North America ended up on the high side. I think we will see that impacting our energy cost in February. But not -- I would say no -- I mean we weather the storm fairly, fairly well. Barbara Amaya: Our next question comes from Federico Galassi from Rohatyn Group. Federico Galassi: Two quick questions. The first one is in your guidance and potential drivers you are using the FX at MXN 19 per U.S. dollar. The question is how is the sensitivity to the Mexican peso or U.S. dollar depreciation? This is the first one. And the second one, in the guidance, are you including all the positive impact for the increase in tariff in Mexico last year? That's both questions. José Pons: Thank you for your question. Quick answer on the exchange, MXN 1 more or less it's equivalent to $15 million of benefit or cost depending on how you see it. And the impact, yes, we're including a portion of what we saw in Mexico on the protection against Chinese and other imports. So yes, that's included already in our forecast. Barbara Amaya: Our next question comes from Chelsea Colon from Aegon Asset Management. Chelsea Colón: I just have a few quick ones. Firstly, to clarify, you mentioned around 3.5x net leverage by the end of this year. Does that consider that $50 million-ish in asset sales? And also, is that calculated based on your comparable EBITDA guidance? José Pons: No. The short answer is yes. The 3.5x would require us to sell the nonstrategic assets, and it's based on reported EBITDA because that's the way our banks measure our covenant compliance. Chelsea Colón: Okay. Great. And then with regard to the emerging businesses that you mentioned, you're trying to double in size over the next 3 years. Can you provide some context as to how relevant those businesses are right now from an EBITDA perspective? And so what does like a doubling mean? Like how relevant is it? Jorge P. Young Cerecedo: On that question on emerging business, when you look at our numbers, we have our 2 key segments and then we have the line others. So it's commingled there with a few other corporate -- smaller corporate adjustments that we have. And it's our goal that maybe over the next 4 to 5 years, that line reaches closer to 50. So that will give you a good idea. I think we expect to be perhaps in the 20s this year of 2026 and again, doubling for that. That will be our goal towards the 4 to 5 years from now. And obviously, we will be more ambitious than that. This is to give you a flavor of what we are seeing and flavor of the magnitude, but that doesn't prevent us for pursuing that goal faster or at a higher level. José Pons: And maybe a portion of those emerging businesses are within the -- already the polyester and the polypropylene, those -- because it was presented by Jorge that we're also entering into high value-added products within our core businesses, and that's not included in the others. So it's really just the power and some other things that we're doing in the others. Chelsea Colón: Okay. Got it. And then lastly, I'm just curious, with the closing of the Reading facility, you mentioned that there's more demand for virgin resin versus recycled. Can you just elaborate on like the reason for that? Is it just a cost issue for clients? Jorge P. Young Cerecedo: Recycling continues to be a very important priority for us and for our customers. It's very important for the sustainability of PET packaging. But yes, recently, I mean, there are some issues that we observed the prices of virgin PET are low. And again, some of the -- there is a growing path towards increasing recycling content. But sometimes that comes with some success. And I think we see at least in the medium term, the opportunity for us to -- at least for our key customers to supply that recycling content through our other facilities, which include, as we mentioned, our Richmond facility in Indiana. And also we have recently increased our capability to add recycling content through a technology we call Single Pellet Technology, where we add recycling feedstock into a virgin PET plant and the final product is a PET with, let's say, 25% recycling [ content ]. So we're using those 2 tools or assets to continue this growth path. But to your question, there is also some shift -- small shift back to virgin given the economic pressures that the industry is facing and that reflects also the decision of some of our customers. Chelsea Colón: Okay. And at this stage, the idea to potentially open the running facility at some point? Or is that likely to be permanently closed? And then also, can you tell us how much you expect in cost savings from that? And also on the flip side, like any extraordinary costs related to the suspension like severance and whatnot? Jorge P. Young Cerecedo: Yes. I mean this -- I mean just to give you orders of magnitude, in the short term, it might represent maybe between 5% and 10%, maybe closer to 5%, mid-single digits, mid- to high single digits in terms of savings. We remain with the possibility to restart the asset. But in not very significant shutdown costs, some, but not very significant. This is not a petrochemical plant and doesn't have the same complexities. But it will also -- our decision will come later, it will also depend on whether we can extract some value from those assets, right? So we will assess our options. So what we chose right now is to suspend the operation, take on the savings to keep supplying our customers from the rest of the assets that include the other recycling plant, other avenues we have to deliver recycling content to the customers, including what we call our Single Pellet Technology. So we took the savings and we'll wrap up for more strategic decision later in the year. Barbara Amaya: Our next question comes from [ Andres Ortiz ] from BTG. Unknown Analyst: I would like to have a follow-up on Federico's question on the incremental EBITDA. I understand your disclaimer, but I just want to understand, you mentioned that $1 is equivalent -- MXN 1 appreciation or depreciation is equivalent to $50 million impact. And you said that you see $50 million incremental EBITDA from for several reasons, and one of them was MXN 1. So I don't understand if you are seeing more incremental EBITDA from all this happening together or if every single one of them is $50 million, just to understand. José Pons: Thank you, Andres. I'm sorry if I did not make the right number. MXN 1 is equivalent to $15 million of impact or benefit depending on where we see it. And maybe just a clarification, we presented there several opportunities to improve our results. What you see here is an assessment probability weighted that they could materialize around $50 million. In a perfect world with every single line item would materialize, certainly, they will be more than 5-0, $50 million. Barbara Amaya: We received a couple of questions through the Q&A. I will proceed. First question was from [ Rodrigo Salazar ] from AM Advisors. Could you tell us where the spot metrics used in the guidance stand today? Jorge P. Young Cerecedo: Yes. In our guidance, we said reference margins, which represent China PET margins at $145 per ton. Year-to-date, they are approximately $170 and the last data point is in the mid-$180. Barbara Amaya: The next question that came to the Q&A comes from Pallavi Nagia from HSBC. Could you please provide an update on refinancing plans, particularly for the debt due in 2028 and 2029. José Pons: Thank you for your question. Yes, certainly, we're exploring opportunities to refinance what we have in '28. We have a couple of proposals at this moment that we're exploring. There will be facilities that would take the maturities even further than 2032 or '33. And that will, again, take out pressure on any maturity coming due in the short term. We remain one of the key pillars of our financial strength is to have strong liquidity, which we have, a strong amount of committed credit lines, which we have and also not having any maturity due in the short term. So that's certainly one of the priorities. We are targeting to have that refinanced in the first half of this year. We'll keep you updated. Barbara Amaya: And the next question Historically, increases in the oil price have led to improvement in margins and increasing international shipping costs. My question is, do you still see a correlation with the recent increase in oil price? Do you expect to have a positive in the EBITDA? José Pons: It's a good observation. Yes, typically, oil prices will lead into higher raw materials, not necessarily shipping cost. Shipping cost, yes, oil is a variable that influences shipping cost. The shipping cost freight rates are mostly supply demand in that market. But oil prices will generally push raw materials a little higher. I think this is the first quarter in a while where we didn't have a significant inventory adjustment. We have been last year going through an environment of falling oil prices and falling raw materials. So this year, they stabilized. And if this rebound in oil continues, we should see, again, some support on higher raw material prices that will provide some -- potentially some improvement to our reported EBITDA on inventory restatements. However, our guidance excludes those effects, positive or negative, we are talking about comparable. But yes, definitely, it will be an influence of oil prices influence higher raw materials. Barbara Amaya: Thanks, everyone, for your interest. That is all the time we have available for today. The IR team remains also available if there are any follow-up questions. Thank you for joining our webcast. We look forward to seeing you soon at our shareholders' meeting. Have a great day.
Geraldine J. M. Picaud: Well, good morning, everyone. Thank you for being here for our annual 2025 results presentation. So let me start now here with our first performance. Marta and I will go through the full financial presentations. But here, I would like to start with a couple of remarks. As we know, for the whole world, 2025 has been a challenging year, marked by international conflicts and fluctuating or volatility in economy. I'm happy to say that at SGS, we've kept the course and even executed our best financial performance ever. We have recorded the highest sales in Swiss francs, highest adjusted operating income and highest free cash flow in the group history. Sales grew by 2.2% despite a strong adverse ForEx during the year, again, offset by a strong organic growth of 5.6% and good contribution from acquisitions. The adjusted operating income margin has reached 16%, boosted by operational performance and cost saving plans. Cash generation and earnings per share have recorded excellent growth, and Marta will give more color about this. For 2026 now, we expect to follow the same trends. Organic growth should remain between 5% and 7%. You may remember that we signed the acquisition of Applied Technical Services in July 2025. ATS deal was successfully closed early January 2026. And together with the bolt-on acquisitions, we will exceed an additional 5% sales coming from acquisitions. In terms of margin now, we want to keep full flexibility to invest in innovative solutions. Therefore, we don't want to put more pressure on profitability for 2026, which I remind you is also subject to ForEx fluctuations. Therefore, we will maintain 16% adjusted operating income margin minimum in reported terms. And similarly, cash generation will remain high. On top of our excellent 2025 results, I'm also very proud of how we have executed our Strategy 27. I can now say that we have achieved all necessary milestones to reach all of our initial objectives. We have launched -- for sustainability and digital trust, we have launched powerful offerings designed to match client needs. And these offers are the foundation of double-digit organic growth. Together with a targeted bolt-on policy, we are already in 2025, close to where we are expecting to be in 2 years. In July, I already had the opportunity to share with you that we had achieved 80% of our objective to double sales in North America compared to the baseline of 2023. And now ATS is closed. So it's a great achievement that we have accomplished. And this will be obviously an excellent complementary of expertise and services for SGS. Finally, as you know, we've completed the reorganization that gives us more agility and performance. So with all these actions, we have reached the excellent level of profitability, cash flow and balance sheet that we report today. So focusing on sustainability, we have recorded about 15% growth. The 4 pillars of Impact now strongly contributed, leading to a very strong performance on an organic basis, and we also added complementary offers through bolt-on acquisitions, especially in environmental testing. Digital trust services are really at the heart of our strategy more than ever. And in this area, we have a very solid basis to our clients' growing needs in connectivity, cybersecurity and in AI. Here, we also recorded a very strong organic growth and a double-digit growth from acquisitions. In our Strategic Plan 2027, we included the objective to significantly increase our presence in North America. We believe that North America will provide the foundations for sustainable growth on a long-term basis. The reasons for this are that it's a market with high consumption levels. There is high consumer demand and regulatory requirements, notably for life sciences. In addition, a few years ago, as you know, the country entered into a phase of reindustrialization, which is now further accelerating. So we definitely needed to be there. We definitely need to be there, and this is done with the acquisition of ATS. Now let me give you a short update on bolt-on acquisitions. Since our last sales update call in October, we have acquired 7 additional companies. Let me go briefly into these companies. And I remind you that all these bolt-ons represent CHF 190 million of additional sales on an annual basis. So who are the new covers? Semi in France, essentially a carbon accounting platform. Australian Superintendence Company provides inspection and laboratory services for exported agricultural products. Information Quality, again in Australia, is a digital engineering services company. Panacea Infosec is a leading cybersecurity services company based in India. MSMIN in Chile provides asset reliability and integrity services for the mining sector. Murray-Brown Laboratories is specialized in food safety in the U.S. Cyanre, finally, is a digital trust player with an expertise in digital forensic in South Africa. So I'm very excited to welcome the talented employees of these companies. So before reviewing the business drivers of 2025 in more detail, we wanted to give you a sense of the group development since we implemented our Strategy 27. Sales has regularly expanded, sustained by organic growth between 5% and 7%. Adjusted operating income and free cash flow have both grown over proportionally to the sales growth and also benefited from improved organizations and improved operations. Earnings per share has followed the same positive trend. Now let's start with Industries & Environment. The business here delivered strong organic sales growth of 6.5% and an improved adjusted operating income margin of 13.1%, driven by inspection, safety and supervision. Safety, for instance, delivered double-digit organic growth, fueled by robust demand in the Americas and in Eastern Europe, Middle East, Africa. Inspection & Supervision of construction projects recorded also a double-digit growth. It was driven by new project wins and robust execution, particularly in Latin America as well as Asia Pacific, which benefited from infrastructure development and energy transition-related activity. Industrial Testing delivered solid performance across all regions, supported by construction material testing. And finally, Environmental testing achieved solid organic growth with sustained momentum in field monitoring and sustainability-related services like PFAS, supported by tighter regulation and growing customer focus on environmental quality. Let's now move on to Natural Resources. Natural Resources delivered a solid performance in the year with organic sales growth of 3.4% and an adjusted operating income margin of 13.6%. Minerals delivered solid growth led by trade services in Europe, Latin America and Asia Pacific. This growth was supported by strong demand for metals, including gold and copper and critical minerals. This demand, as you know, was driven by electric vehicles, battery-related regulations. When we look at oil, gas and chemicals, they achieved a solid growth, reflecting resilient demand, particularly in Asia Pacific and also in Latin America. Finally, Agriculture grew moderately with strong activity in the Americas, but that was partly offset by softer market conditions, notably in Europe. If we look at Connectivity & Products now, they delivered a strong organic sales growth of 6.4% and an improved margin of 22.8%. That was driven by positive momentum across all the business segments of Connectivity & Products. And let's start with connectivity, which delivered strong organic growth led by product safety, continued electric vehicle momentum in Asia Pacific and robust wireless demand in North America. The demand for technology, security and compliance continues to increase as connectivity requirements expand across devices, platforms and networks. This reflects the strong demand for digital trust services. Hardlines achieved excellent organic growth, benefiting from strong demand for home appliances. When we look at Softlines, they posted a very strong organic growth driven by performance testing in what we call athleisure, athletic leisure and all the wellness products, alongside with high demand for eco-friendly products. Government services also recorded solid organic growth that was led by anti-fraud and conformity assessment services as authorities continue to strengthen consumer protection and trade compliance. Let's turn to Health & Nutrition. This business line recorded a strong performance with 7.3% organic sales growth and an improved adjusted operating income margin of 14.1%. Food delivered double-digit organic growth was supported by strong demand for food safety services and contaminant testing that was across all regions. This growth reflects tightening regulation and an increased focus on food toxicology, rising consumer health awareness and growing expectation around the product safety and transparency. We have continued to invest in analytical capabilities, particularly in Southeast Asia to support this growing demand. Pharma. Pharma delivered a solid growth. It was led by clinical research activity in Europe, which was partly offset by softer performance in drug development despite improving pipeline conditions in the United States. Here, we continue to focus investment on higher-value areas, including biologics and advanced drug development, and that will support our long-term growth in Pharma. Cosmetics & Personal Care recorded solid organic growth. Performance was partly impacted by midyear tariffs followed by a recovery in activity towards the end of the year. That was supported by new project wins and an improving demand. Let's now turn on to Business Assurance. Business Assurance delivered organic growth of 4.2% and adjusted operating income margin of 19.6%. Performance was led by sustainability and Digital Trust. Digging into more details, all the quality management systems, the ISO certification schemes were impacted by a high comparable of last year that was coming out of a post-certification cycle. Consulting also remained soft in Business Assurance. But by contrast, sustainability continued to deliver double-digit growth, driven by strong demand for supply chain audits and greenhouse gas emissions verification. It was also supported by increasing regulatory requirements and stakeholders' expectation there. Food and Medical Devices certification also maintained double-digit growth, reflecting tightening regulation. And you know that certification here plays an absolute key role in protecting product integrity, safety and market access. Digital Trust delivered strong double-digit growth as demand for cyber resilience and data protection continues to accelerate. So with that, I will now hand over to Marta to review our 2025 financial performance. Marta Vlatchkova: Thank you, Geraldine, and a very warm welcome to everyone. Let me start with the main financial indicators of 2025. Sales reached a record high of CHF 6.95 billion, supported by the strong organic growth of 5.6%. Adjusted operating income also hit a record high of CHF 1.1 billion or a 16% margin on sales. This is an excellent improvement of 70 basis points compared to 2024 and 130 basis points when compared to 2023, which is the baseline of Strategy 27. Earnings per share before the gain on disposal of our former headquarters in Geneva amounted to CHF 3.21, up 3.5%. Lastly, the record results were confirmed by a record free cash flow generation of CHF 774 million, representing 57% cash conversion, in line with the already very strong cash conversion in last year. Moving to the sales bridge. You can see the strong 7.3% growth in constant currency, comprising of 5.6% organic growth and 1.7% from M&A. The Swiss franc continued its appreciation, generating 5.1% negative ForEx, reducing the growth to 2.2% in reported terms. As you can see, sales growth was supported by all regions. In Testing & Inspection, Europe added 2.4% organically with solid growth in Health & Nutrition and Industries & Environment. This was partially offset by low trading volumes in Natural Resources and Connectivity & Products. Asia Pacific delivered high 7.7% organic growth with strong performance across all business lines and in particular, double-digit growth in Food and high single digits in Connectivity & Products. North America expanded 3.9% organically, led by a double-digit growth in Safety, Connectivity and Food and moderate growth in Environment. Minerals and Pharma remained stable. Eastern Europe, Middle East and Africa grew by 5.3% despite low trading volumes in Natural Resources, impacted by the political uncertainty in the region. Latin America added 13.6% organically, supported by new project wins in Chile. We saw double-digit growth in Inspection & Supervision, Environment, Safety and Food. And finally, as presented earlier by Geraldine, Business Assurance delivered 4.2% organic growth, led by sustainability and Digital Trust services, while quality management systems were impacted by a high comparable from a post-certification year. Consulting remained soft. Looking now at the adjusted operating income of CHF 1.1 billion, which is 16% margin on sales. It expanded organically by CHF 108 million, equivalent to 70 basis points of margin improvement, boosted by the successful execution of the organizational efficiencies plan. Accretive bolt-on acquisitions added CHF 26 million, contributing 20 basis points of margin progression. Lastly, the negative ForEx impact of CHF 66 million, equivalent to minus 20 basis points was driven, as commented earlier, by the strength of the Swiss franc. Looking now at the ForEx, which remains a headwind. You can see here the main currency impact. Overall, the negative 5.1% ForEx on sales was equivalent to minus 6.4% on adjusted operating income or 20 basis points in the AOI margin, as commented earlier. Moving at our efficiency plans update. We are proud to confirm that both the lean operating model and the procurement savings plans are now fully executed. They delivered CHF 115 million visible in the P&L since 2024, with CHF 150 million run rate reached at the end of 2025. In terms of savings, you remember that in 2024, we already accounted for CHF 50 million savings. This was followed by CHF 65 million in 2025, bringing the cumulative impact to CHF 115 million. The remaining part of the savings will flow through the P&L in 2026. Let's now dig into the full P&L. As presented earlier, sales grew by 2.2% and the adjusted operating income expanded over proportionately by 6.5% or CHF 68 million in absolute. When we look below the adjusted operating income, you can see the decrease in restructuring expenses as the lean operating program is now fully executed. The other nonrecurring items and transaction costs include the gain on the HQ disposal, which was offset by acquisitions and legal costs and loss on divestments from noncore businesses in Eastern Europe, Middle East and Africa. The financial expenses improved slightly, thanks to the net debt decrease. And the effective tax rate improved as well to 25% from 26% in prior year. Thanks to all that, the earnings per share reached CHF 3.48 or an increase by 12.3%. When we exclude the HQ disposal gain, this becomes 3.5% expansion. Now -- and as we report in Swiss francs, often regarded as the strongest currency in the world, especially today, we wanted to show how this compares when presented in euro or U.S. dollars. In terms of sales growth, the 2.2% in Swiss francs corresponds to 3.9% in euros and 8.3% should we report in U.S. dollars. The earnings per share before HQ disposal, which grew by 3.5% in Swiss francs translates to 5.3% in euros and close to 10% in U.S. dollars. Coming to the free cash flow, where I'm happy to report that the record '25 results were confirmed by the strong free cash flow, a record high as well of CHF 774 million. This is 57% cash conversion on adjusted EBITDA, in line with last year. Furthermore, the net proceeds from the former Geneva HQ disposal brought additional CHF 67 million, bringing the total free cash flow to CHF 841 million. Moving now at the return of invested capital ratio. In 2025, the ROIC remained at the industry-leading 24%. This illustrates our highly efficient operating model and disciplined M&A program execution. Now in terms of debt leverage, the excellent profitability and high cash conversion further improved the ratio, which stood at 1.7x of net debt on adjusted EBITDA. This improvement reflects our commitment to maintaining a solid financial profile, which is crucial for supporting growth initiatives. Finally, our excellent results allow us to maintain a highly attractive dividend of CHF 3.20 per share. This will be proposed as a scrip dividend, giving shareholders the option to receive it in cash or shares. 2025 was also a year of big progress in terms of ESG. Most notably, customer satisfaction increased to 92%, and we provided 7.7 million training hours to our customers and employees. We also maintained our leading ESG ratings position, and SGS was included for a second consecutive year in Times World's most Sustainable Companies list. And with that, I hand over to you, Geraldine. Geraldine J. M. Picaud: Thank you, Marta. So now let's turn on the outlook again. And for 2026, I see that part of our megatrends becoming even more stronger and stronger. More precisely, cybersecurity and AI as well as customer awareness and well-being, also called conscientiousness that will drive growth in the future. And this will especially benefit digital trust services and life science activities and we will provide more color at our next capital market event. So thank you for listening. And with that, we will now move to Q&A. Thank you. Operator: [Operator Instructions] Annelies Vermeulen: Annelies Vermeulen from Morgan Stanley. Firstly, just on the margins, you've clearly delivered more rapid progress than you originally guided for. So could you talk a little bit more specifically about what contributed more positively to that margin expansion than you originally anticipated when you set the plan 2 years ago? And if you think about margin progress from here, do you still see further upside opportunity from cost cutting, productivity gains, et cetera, as you think about the future? And then secondly, on organic growth and the guidance, you had quite a range between the divisions in 2025. Do you expect growth to be more balanced between the divisions in 2026? And if not, where do you see the strongest and lowest growth? Geraldine J. M. Picaud: Thank you, Andy. So on your first question about the margins, when you start to have cost saving plans, you better execute them fast. So that's what we've done and not communicate on that year-on-year. So that's what we've done, and that's just the speed of the execution that lead us to basically get to our 2027 target faster than planned initially. So we have overperformed in terms of, let's say, in terms of speed of execution, we are ahead of schedule. That's clear. That's also why we are positioning a new capital market event at the end of this year. So basically, speed of execution is key. When it comes to the future, you're asking what the future margins are going to look like. And I think I have said at least for 2026 that we want to maintain at least, again, at least a 16% adjusted operating income margin. And remember that I'm guiding in reported terms. And you've seen the slide of Marta, there was 20 basis points as a headwind this year on the margin on top. So that's not going to fade away. There's going to be some headwind on the margins next year. So that means we need to get efficiencies. We need to go always for more efficiencies, and there are some that we can get. So we will get the surplus. But my message here is that I'm keeping the right to investing this surplus into innovative solutions as we need to provide more digitalization and offering and so on and so forth. And then I want to keep that possibility. That's why you have this guidance. And then you mentioned about the organic growth. We are just at the beginning of the year. It's a bit too early to say. I think the megatrends that I described are here to fuel the growth, right? So that's where -- when you look at it, these megatrends are selected because they are impacting our customer the most and therefore, are propelling and fueling our own growth, right? You see. And this is where, of course, we need to always see how things are evolving because things are evolving and accelerating very fast. So you need also to adapt. That's also a good reason for doing another capital markets event at the end of this year. But let us enter the year, and we'll give more color for the Q1, right? Thomas Burlton: Tom Burlton here from BNP Paribas. I just had a couple of questions. One on the U.S. You talked about signs of -- or at least the theme of U.S. reindustrialization. Just curious as we think about that U.S. up cycle, what evidence are you seeing already within your business of the early signs or sort of green shoots of that? And then separately, if I think about your Health & Nutrition business, I wonder if you could comment on your exposure to this building infant formula recall issue that we're seeing from some of the staples companies. What exposure you might have already there? What services you might provide or what services you could in theory provide as that crisis builds? Geraldine J. M. Picaud: Sure. So in the U.S., we see a lot of demand around all the energy needs with regards to data centers and obviously, in AI. And that provides a need for safety, a need for compliance, the need for ensuring that the environment -- environmental testing needs are also required there. So that is driving the demand. All -- everything around digital is also very, very strong in the U.S., all the cyber resilience, AI -- well, is the AI true it's sake is the algorithm proper? Is it biased or not based and so on and so forth? So we see a lot of demand in the U.S., as I said. And in terms of reindustrialization, it's basically all the building construction sites for sure, but also -- all the aerospace, military, industry, defense industry are also effectively driving this reindustrialization that has taken place already for some years. It's just not yesterday, but it's accelerating. On the infant formula recall, well, first, I mean, it's a big topic. I mean we're talking about nutrition for babies. So our goal here is to be side-by-side with our customers and to accompany them and obviously, to help them to do the new test in the new -- fulfill the regulations requirements that are effectively changing and becoming strengthened, are stronger. And we are there all over our network to accompany our clients and be with them so that they can ensure safety for the consumers. William Kirkness: It's Will from Bernstein. If I could just go back to the margin point. So just thinking about the bridge for '25, because I think the CHF 115 million of cost savings would give you a decent uplift, maybe 170 bps, 20 off for FX. So there's still a bit to bridge that gap, which I guess is sort of investments M&A. So if you could to run through what that is? And then how we think for '26 as well. So I guess you've got 50 basis points that should flow through just from the incremental cost savings to come in. And then secondly, I just wonder if you could talk a bit about AI tooling, so how that's driving efficiency in the business, where those efficiencies are and whether it's really realistic to think about them as margin accretive? Geraldine J. M. Picaud: On the AI efficiency? William Kirkness: On the AI efficiency. Geraldine J. M. Picaud: Yes. So I'll let the first question to Marta. He's going to go through the bridge for you. Yes. I'll take the second one. Marta Vlatchkova: So indeed, if you look at the 2025 margin bridge, you have 70 basis points coming from the organic growth of the margin. Into that, a bit more than 80 basis points are coming from the lean operating model and procurement savings. And then the difference is to be attributed to the investments we did in commercial excellence in marketing and also building new service offerings, especially in digital trust. Geraldine J. M. Picaud: So on AI, obviously, we are looking at it to generate more efficiency and more productivity. We are a people business. So there is a potential, as you can imagine, to optimize greatly SGS. Now the first thing we see is there's going to be an upskilling. So as we put AI into more and more of our business lines, it's going to be an upskilling. And then we will obviously identify productivity gains clearly. And that's part of the journey and part of the constant improvement and efficiencies that I've mentioned that we have to produce each year, and we are committed, obviously, to use AI also for ourselves. But also for our customers, it's also a source of growth as we're putting AI into our services that we're rendering to our customers. So you have to see it both ways, externally and internally. Arthur Truslove: Arthur from Citi. So a couple of questions from me. So the first one was just around the scrip dividend. So I was just wondering where you think -- when you think that will stop? And where do you want the net debt EBITDA to go to kind of within that context? And then second question, going to sort of Softlines, Hardlines within Connectivity & Products. Obviously, there has been some sense in the market that, that has been performing sort of unusually strongly in the last couple of years. How are you thinking about that as it progresses forward into 2026? And are you seeing any sign of any sort of slowing or tough comps or any of that? Geraldine J. M. Picaud: Thank you, Arthur. Look, on the Softlines and Hardlines, we're very happy about the performance. It's very strong in effectively in Asia Pacific region. It continues. We see it continuing actually. We don't see it slowing down as we are also enhancing our services here. Connectivity also is a part that remains particularly strong as you have more and more cyber resilience required, AI sometimes embedded into the devices that you're using. So we see also a strong demand part of this digital trust megatrend. And on the scrip dividend, do you want to comment on our ideal net debt to EBITDA level? Marta Vlatchkova: Yes. You have seen we started in the baseline year 2023 with 2x debt leverage. This improved to 1.8 in '24, now at 1.7. Of course, we have closed ATS at the beginning of 2026. So the net debt leverage will temporarily go up to around 2.1, 2.2x and then gradually reduce in the years following the acquisition. Now you have seen also the attractive dividend we have committed and we distribute of CHF 3.20 per share. So it's important for us. It's important to keep this highly attractive remuneration to shareholders. And the elegant way to reconcile growth and investments with attractive remuneration is the scrip dividend. It's optional. Taking shares is also tax effective, so proven successfully over the last 2 years with more than 60% take-up. So yes, we are happy with that setup and our investors as well. Arthur Truslove: [indiscernible] with the scrip beyond '25 year-end, would you expect to be doing a scrip for the summer '27 as well? Geraldine J. M. Picaud: I remind you that's part of the Strategy 27 to ensure a solid financial profile. So that's part of the strategy was announced in January. So at the moment, yes. Allen Wells: Allen Wells from Jefferies. Just a couple from me. I'd like to follow up on Will's question on the margin progression in 2026. If I look at 2025 and as you kindly provided, you strip out the investment, the savings, it looks like underlying margins are broadly flat, which is explained by the reinvestment you're putting in the business. How should we think about the underlying margin progression in 2026? I mean the savings will come through, there will be an FX will be what it is. But would you expect underlying margins to broadly be flat again as you reinvest most of that back into growth? And maybe you can elaborate on building blocks there to what extent you think mix, operating leverage, reinvestment will play a part in that? And then second question, just on M&A. Obviously, post the ATS deal, could you maybe just talk about appetite for slightly larger deals in 2026, what the pipeline looks like? I guess it feels like with the 5% to 7% guidance, 1% to 2% from additional deals, it's maybe a bit more of a year of bolt-ons, but any expansion would be helpful. Geraldine J. M. Picaud: Yes, I'll take your second question. And Marta, you can maybe build on all the positive actions that we have to boost our margins and underlying margins. Even though I don't like this underlying margins because it looks like you're slicing down everything. But when a lab manager make an effort to reduce costs, it's not a bucket separately. It is part of his operating leverage. When it increases the business, it's part of this operating leverage. So slicing it down to bits and pieces like that is not really how we look at it, but Marta will answer you. So about a big acquisition, another one. Look, we will continue certainly our bolt-on acquisition program. And you've seen that we've done already 5 or 6 already since the beginning of the year. And that is something we want to continue to do because it's accretive to the growth. It's accretive to our margins. We have to consolidate our offering into the megatrends that I described in the right geographies and the right segments. So that's something we will continue to do. And look, if something happens that we have or we can't miss, then we'll see in due course. I don't have a crystal ball for now, but who knows. Marta Vlatchkova: And on 2026 margin, you have seen that we have another CHF 35 million to flow through the P&L from the CHF 150 million operational efficiency plan. So that is there. That's secured. Then, of course, we are, you may say, a fixed cost business to a big extent, especially for the testing part of the business. Then naturally, when we grow volumes, when sales are growing, this drives positive operating leverage. But now we are also a high-growth business and it's services. So you have to see the investment in the business on one side as CapEx for our facilities in our testing labs. But on the other hand, as pure OpEx investments to build those new service offerings. And our ambition, and this is constantly the feedback I give, don't expect from us to be a business at 17%, 18% margin, but flopping sales. So right now, I think we are lean, we are agile. We are hungry to continue growing fast. and that's our focus. So we will continue to reinvest and it is not margin at all cost. We have now bridged the gap with peers if you had to compare us. We are happy with that. Important to remain at those levels to keep agility. And again, I'm confident if it is the case. I think the key word is keeping flexibility about the same. So yes, we'll get the surplus. We'll get more than 16%. But the point, we want the flexibility to invest that surplus and we will or we will not, but we want that flexibility. Daniel Bürki: Daniel from Z�rcher Kantonalbank. I have 2 questions. One, about the extraordinary costs, you had like CHF 90 million in '25 plus the headquarter, so it was about CHF 150 million. Could you give a run rate on extraordinary cost restructuring? And the second one, could you remind us of the integration plan you have for ATS, how you can get stronger growth in the U.S. because of it and also of the CHF 30 million savings you plan there when they will come through? Geraldine J. M. Picaud: Yes. I'll come with the -- I'll start with the ATS and give the first question to Marta. So we were ready day 1. We appointed an SGS talented director to lead ATS, lead the 4 P&L leaders of ATS that you remember are testing, inspection, calibration, forensic in order to ensure that we can get the cross-selling synergies and we can get the best of the 2 worlds between SGS North America and ATS. So it's not an integration where you're putting a bolt-on into your systems here, they are a big group. They have already very good and very best practices. It was important to have things going both ways. And this is ensured through a governance, which is Marcus is taking the lead on ATS and he reports directly to me. Marta Vlatchkova: Regarding the items below the adjusted operating income. So the first big line is restructuring expenses, right, where you saw the peak in 2024 with the lean operating model program, which is now in 2025 reduced to around CHF 45 million level. In 2026, again, you should expect there CHF 20 million to CHF 40 million restructuring expenses, which is continuing the business to operate. They are already -- they are always a need of some level of restructuring expenses. Then the level below what we call other nonrecurring items or extraordinary items, we don't usually guide on that. Again, a reasonable level. If you look at the historical trend over the average few years, you will be at a level of CHF 120 million, something like that, but it can fluctuate. So again, we don't guide on that. Those are items that are not easy to forecast. They wouldn't be extraordinary otherwise. Geraldine J. M. Picaud: So in short, the restructuring costs are going to continue to decrease. They've already halved by compared to '24, and we are going to continue to lower this. The rest is noncash cost that Marta has and that might not have in the years to come or it's kind of difficult to predict. But in any case, what does imply the free cash flow. Victoria Chang: Victoria Chang from JPMorgan. My first question is on the margin phasing between first half and second half. So given that you still have the run rate savings from the procurement done in 2025 to be seen in the first half, would you expect first half margin expansion to be higher year-on-year versus second half? And my second question is on Natural Resources and on the margin specifically. Marta, I think you mentioned in your opening remarks that there was some political uncertainty impacting growth in the Middle East within Natural Resources. Could you also expand a little bit more on the key drivers on the margin in 2025 and the weakness there? Geraldine J. M. Picaud: Okay. Marta, do you want to start with the Natural Resources maybe and what... Marta Vlatchkova: Yes. So you see all the news, be it in the Middle East or in Africa. So again, this leads to uncertainty. This leads to less trading volumes, and it's reflected in the slower growth of natural resources, specifically in the Middle East. Now the margin, it's a business. There is an inspection component and, of course, testing. But when the top line is temporarily down, we have chosen not to reduce our inspectors because it's a cyclical business by definition. So Natural Resources, if you also look back at the historical data, it fluctuates. But it always come back because it's driven eventually by consumption. You can have temporary slowdown. Inventories are depleted, then it has to pick up. So you see it that way. And again, Eastern Europe, Middle East and Africa is a difficult region politically. Geraldine J. M. Picaud: It's been fairly challenging on the political uncertainties, and you've got 3 components on Natural Resources. So you've got agriculture, you've got minerals and you've got oil and gas and chemicals. And we really have suffered from a very bad crop in Europe for agriculture. So that has really lowered our performance in agriculture. Minerals has done super well. Metallurgical testing is booming because of gold, copper, critical minerals that has been offset by a, I would say, sluggish or slowdown in oil gas chemicals, but -- and this crop is agricultural. But as Marta said, it's bouncing back. And 2 years ago, that was almost the opposite. So it's changing. And the fact that we are having this exposure to these 3 areas makes it -- makes us quite resilient. Marta Vlatchkova: And maybe on the procurement savings and the phasing of Bayer Impact in 2026. Again, those are structural procurement savings, and they are really driven by the renegotiation of our main suppliers contracts, which happened at the end in Q4 of 2025. Therefore, in terms of saving, it is really throughout 2026. There is no biggest portion to fall in H1. It is more evenly spread because the new contract and new prices were signed at the end of 2025. Arnaud Palliez: Arnaud Palliez, CIC CIB. On Sustainability Products and Solutions, do you see any change in trend following the environmental backlash in the U.S. and softer regulations in Europe? Or are we still on the same kind of trend? Geraldine J. M. Picaud: No, that's a good question. But look at our performance in sustainability, we have 15% of growth, reported growth, organic growth, 15%. So there's still a very strong demand in all areas related to the energy transition, I would say, also to what I described as this consumer consciousness. And it's not only the X or the Y and the Z generation that people want to know where the product they use has been produced, how it is being produced. Does it contain heavy metals, PFAS, contaminants? They want to know it. And this trend is really fueling the growth on the sustainability impact now framework that we have inaugurated. So it's really no. And it's not only U.S., it's also Europe. And in Europe, the carbon emissions still matter and still matter a lot. So overall, no, I don't see any decline here on this megatrend. Virginia Montorsi: Maria Virginia Montorsi from Bank of America. Could I ask you, if we think about I&E for 2026, what are the key moving pieces for growth when I think about end markets? Because you obviously had a very strong Q3 and a little bit of a sequential slowdown in Q4 despite easier comps. So -- and obviously, it's a very good end market for you guys. So how should we think about the full year and what's really driving the strength? Geraldine J. M. Picaud: Yes. Thank you. Look, we have a very good performance that we see continuing and everything we call safety. You see inspection, testing, that is something that we feel is going to continue. Remember that we were impacted also a bit by shutdown in the U.S. also in Q4 that didn't help. But everything around construction is an area that we need to definitely focus more because construction material testing is effectively growing fast, notably in APAC, actually. So look, we see fundamental strong growth for I&E. Suhasini Varanasi: Suhasini from Goldman Sachs. Just a couple for me, please. Given the growth rates that you saw first half, second half in '25, when you think about the growth for 2026, underlying organic, do you expect growth to be weighted maybe a little bit to the first half or the second half? That's the first question. And do you anticipate doing any more portfolio review work that can be a drag on numbers in '26? The second is just more housekeeping, to be honest. When we think about including ATS in the numbers, do we expect it to be accretive to EBIT margins? What is the current FX drag on revenues, profits, interest tax? If you could just run through that. Geraldine J. M. Picaud: So there are several questions. So we are going to start with the FX question with Marta, and then I'll take on ATS, the portfolio. And about the growth, it's a bit too early to really give something. We really, as I said to early, I think I prefer to wait for the Q1 call to give more perspective on how the organic growth is going to unfold for us during 2026. Marta, you're taking the ForEx? Marta Vlatchkova: Yes. So ATS, they are operating exclusively in the United States. So their margin per se is not really impacted. Of course, if the U.S. dollar depreciates further, it is proportionate between sales and EBIT. In terms of is it accretive, we were showing 20 basis points here in 2025 from our bolt-ons. Now that we have reached the 16% EBIT margin level, I would say ATS is slightly accretive in our EBIT, but don't expect the same proportion. Obviously, we are now at a higher level compared to '25. Geraldine J. M. Picaud: It's accretive with the synergy. I want to insist on that. So let us put the synergies in place. But I think it's the ForEx for 2026, the impact on sales, I think that was more. Marta Vlatchkova: Overall -- yes. Now the overall impact of ForEx, you remember in terms of evolution in the baseline last year, Q1 actually, the Swiss franc was stable compared to other currencies until liberation day in early April 2025. So now in '26, when you compare, we are having huge ForEx in Q1. You should expect 8% ForEx and then easy comps in terms of ForEx from Q2, Q3, Q4. Again, this is if we take the current levels. Geraldine J. M. Picaud: Yes. So we prepared for another strong ForEx adverse impact as we are going to publish Q1, we're on a minus 8%, minus 9%, probably if rate stays as is for Q1. That's what it is. Again, you can make the translation and see the impact if we were publishing in another currency. You mentioned about portfolio, I would say that there's -- if you're thinking in terms of sales of potential activities, there's nothing we want to sell apart from little things here and there, but that's not worth really making an announcement about that. We've done some in 2025, derisk clean, and that's part of the things that we are going to continue to do. But overall, we are happy with our businesses. They have good margins. Neil Tyler: It's Neil Tyler from Redburn. Two questions, please. Coming back to margin. Divisionally, the 2 areas that grew the strongest of those were typically the kind of higher fixed costs, the testing-based businesses, CP and Health & Nutrition. Is that sort of right to draw a line between that cost structure and the margin progression? Or was there more efficiency to be gained within those businesses? And taking that sort of one step further into your comments about reinvesting, are you looking at that sort of reinvestment of margin on a division-by-division basis? Or if one division produces more gain, is there scope to reinvest it elsewhere? Second question on capital allocation and M&A. It's a pretty impressive and diverse list of bolt-ons, both sort of regionally and business line-wise. Can you talk about a little bit about the process of selecting those businesses? How many you have to sift through to kind of get to that point? And some of these are sort of relatively small and emerging and fast-growing businesses. And how do you get comfortable given you've said that the sort of megatrends and the backdrop are changing so quickly that you get comfortable that these businesses aren't those that are going to be sort of potentially of disintermediated or at risk as things continue to change. Geraldine J. M. Picaud: Right. It's a good question. Look, on the bolt-ons, we have a very strict process. But first and foremost, it is a business leader that source the deal. It's not coming out from any fancy consulting consultant presentation or whatever. It is really sourced by the business. The business has to know its market, has to liaise with competitions or with complementary services that is missing in its offering. And obviously, we look at it. There's a very big pipeline. We're very selective. We described during our capital markets event the criteria upon which we do acquisitions. We look at it from a ROIC standpoint, from a payback standpoint, and we always assign a business leader in charge. So there's no one that can come with, oh, I have this idea that would be great -- looks great, it's fancy, it's fashion, whatever, without having someone that is fully committed to execute the business the acquisition business plan. And that's really the important thing here. So it's payback, and there's a business ownership that is extremely strong. We obviously look and study the business. We see how resilient the growth is, how the customer base is. We see how it can fit in our portfolio as well, what kind of complementary services. And then we effectively scale what we can scale to get synergies on top on the cost side, right? This is what -- you've seen it's accretive to our margin. It's accretive to our growth. So it is very important that in an industry which is growing and which is so fragmented, you have an active role. Otherwise, you wake up one morning and then you stick with your own lab, but you haven't provided or evolved into what you offer to customers. And it takes time to get an accreditation. That's also one of the fundamental barriers to entry we're having in our business. And acquiring a lab is already the set of accreditation that you don't have just provides you an edge and allow you to speed up. And that's why bolt-ons are a key component of our strategy. So that was your question on the bolt-ons. And you asked about -- what was it about the margins, right? About reinvesting, how we are going to reinvest? Look, again, it has to be accretive to the growth. It has to be accretive to margins. So this is where we're going to reinvest. I think the important thing is that when people ask a lot about digital or AI, and there's a lot of fancy startups all over the place and great. But here, we often prefer to do it organically and to invest into people to develop this capability internally. So that will cost some basis points of margins because we're going to have the cost internally, but I prefer big time this and taking a bet in. So we take care. Michael Foeth: Michael Foeth, Vontobel. I have a question on Business Assurance. If you could give some more color on the trajectory of the consulting business. I think there's a big discrepancy between all the double-digit growth that you described in many parts of Business Assurance and the overall growth is only 4%. I'm trying to figure out at what point we can see a real reacceleration of the overall business there. Geraldine J. M. Picaud: Yes. It's clearly we've been impacted in consulting. It's a business that is suffering for the last 2 years. That's clear. Projects have been a lot delayed last year. We see and are hoping it to bounce back this year. But I will remain cautious. I hope I'll have better news to announce to you in the end of Q1 when we have our Q1 call. I always want to remain cautious. You know me. I will not start to overpromise anything and deliver, not with me. So we have to fix the business. You've seen that we changed the management of Business Assurance, and this is in process. But I think the environment is better for consulting this year than it was last year. So let's see. Last question. James Clark: James Rowland-Clark from Barclays. My first is, after all this M&A in the last year plus, has the competitive backdrop changed at all? Is there a greater attention on the bolt-on deals that you're after? And then secondly, you've done maybe 2/3 of the deals in North America and Europe, which are organically underperforming the rest of the group. So can you just talk about whether those regions should accelerate back up to near the group average over time as you drive growth? Or is it really a margin story and a return story on those deals? Geraldine J. M. Picaud: No, there's no margin or return story on North America and Europe. We needed to -- we're in a process to fix these regions. It's been tough in Europe economically and politically. I mean, it's fair to say that there's been a recession in Germany with the automotive industry. There has been challenges. And I said it's been challenging here in 2025. But we are in good -- let's say, good momentum to get things much better. And the fact that we are going to have better results in all verticals like Business Assurance, like environmental testing, like Food and Pharma is going to help Europe and North America. And ATS is going obviously also to help greatly in North America. So no, there's no fatality there at all, and it remains core sectors and core geographies for us to invest. And on the M&A, right, the M&A, the competitive, yes, well, we see some competitors entering the same areas and the same verticals that we like. So that's true that on some targets, we can feel the competition that we were not necessarily having when I started 2 years ago. That's fair to say. But we want to remain disciplined. And if we can't get synergies or anything, we won't go -- we won't change our rule and our financial discipline rule, which is very simple. It's about payback, as I said, and double-digit ROIC in 5 years. So that's clear. And therefore, that's where we are playing, and we are fine with that. So I think this is the end of our session. Thank you for being here with us today. It was great having this time with you and answering your questions. I hope that you enjoyed it and bear with us because it's just the beginning. Thank you. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines.
Operator: Hello, everyone, and thank you for joining us for today's First Capital REIT's Q4 2025 Results Webcast and Conference Call. [Operator Instructions] And now to get us started with opening remarks and introductions, I am pleased to turn the floor over to Alison Harnick. Please go ahead, Alison. Alison Harnick: Thank you, and good afternoon. In discussing our financial and operating performance and in responding to your questions during today's call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control, and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. A summary of these underlying assumptions, risks and uncertainties is contained in our securities filings, including our MD&A for the year ended December 31, 2025, and our current AIF, which are available on SEDAR+ and our website. These forward-looking statements are made as of today's date and except as required by securities law, we undertake no obligation to publicly update or revise any such statements. Also during today's call, we will reference certain non-IFRS financial measures. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these as a complement to IFRS measures to aid in assessing the REIT's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this call. I'll now turn it over to Adam. Adam Paul: Okay. Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us today for our Q4 and year-end conference call. We're very pleased to deliver another strong set of operating and financial results in Q4, which rounded out a very solid year for First Capital. For the full 2025 year, same-property cash NOI grew by a healthy 5.9%. This excludes lease termination fees and bad debt expense. In round numbers, approximately 2% of the NOI growth was from increased occupancy and new tenants paying cash rent at One Bloor East. Primarily higher rents across the balance of the portfolio contributed roughly 4% of same-property NOI growth. This is a very strong growth rate for our business. And as you heard from Neil on prior calls, it exceeded our expectation from the beginning of the year. The primary driver of this outperformance has been better-than-expected leasing. Following a record high occupancy level of 97.2% set in Q2, occupancy remained solid at 97.1% at year-end. Our average in-place net rental rate now stands at $24.73 per square foot, which is an all-time high. During 2025, we renewed approximately 2.2 million square feet across 535 spaces. Net rental rates in year 1 of the renewal terms saw an average increase of nearly 15% over expiring their rents. Approximately 3/4 of our renewed leases in 2025 included contractual rent escalations during the renewal terms. This resulted in a renewal lift of nearly 20% when comparing net rents in the last year of the expiring terms to the average net rents during the renewal terms. In addition to renewal leasing, we also completed approximately 500,000 square feet of new leasing last year. This related to 193 spaces with an average year 1 net rent of $28.23 per square foot. Following a strong Toronto ICSC last fall, we've recently concluded another productive ICSC in Whistler last month. Both conferences had a very positive tone with a notable increase in tenant attendance seeking additional First Capital locations. With demand continuing to exceed supply for FCR-type retail space, leasing continues to be very strong. We own great assets in great markets and our leasing team's deep understanding of the strong fundamentals for our product type, which I discussed in detail a couple of quarters ago, positions us well to continue to capitalize on opportunities for rent growth. We continue to have confidence that market dynamics provide a very long runway for strong and sustained rent growth for our portfolio. We're now 2/3 of our way through the 3-year strategic plan that we presented to our investors at the beginning of 2024. At its heart, the plan is focused on delivering on 3 primary investor objectives: stability and consistent growth in FFO per unit, growth in net asset value per unit and absolutely stable, reliable monthly cash distributions to our investors and growth in those distributions over time. The business continues to perform exceptionally well. We remain on track to achieve the operating FFO per unit growth and debt-to-EBITDA metrics that are the core premise of our 3-year plan. For the first 2 years of the plan, our OFFO per unit CAGR is approximately 6%. We're tracking ahead on operating FFO. Our debt-to-EBITDA has improved to the low 9s and is on track to improve further by the end of 2026. While we strengthened our balance sheet, we've also extended the weighted average term of our debt in a meaningful way, which Neil will touch on. With strong results, significant balance sheet strength and positive outlook the Board approved a 2.5% increase to FCR's monthly distribution, effective with the January 2026 distribution that will be paid next week. As we've discussed, stable and growing distribution is one of First Capital's key long-term objectives. We believe that we will look back on our 3% increase a year ago, together with the 2.5% increase this year as the beginning of a long-term track record of regular distribution increases for our investors, supported by healthy FFO growth. As we enter the final year of our 3-year plan, we're very pleased with our progress to date. And with that, I will now pass things over to Neil. Neil Downey: Thanks, Adam, and good afternoon, everyone. Consistent with our usual practice, we have a slide deck available on our website at www.fcr.ca. And in my remarks today, I will make references to that presentation. So starting with Slide 6. As shown here at the bottom of the page, FCR generated operating FFO of $72 million during the fourth quarter. This was an increase of 7% from $68 million in the fourth quarter of 2024 and a 1% increase sequentially from Q3. OFFO per unit was $0.34, representing a 6.6% increase from $0.32 earned 1 year ago and it was 1% higher than the $0.33 earned in the third quarter of 2025. Once again, we characterize the fourth quarter results as being very strong with same property NOI growth as the key driver. Now moving back to the top of the slide to net operating income. Same-property NOI, excluding bad debt expense and lease termination fees was $112 million in Q4. This was a $6 million increase from $106 million in Q4 2024, representing growth of 5.7%. I also note that same property underlying represents 95% of FCR's total NOI. Below the same-property NOI line item, you can see that Q4 lease termination fees were $2.6 million. This was higher than the expectations stated on our third quarter results call. During the fourth quarter, we ultimately secured these termination fees from 7 tenants, representing 47,000 square feet of space. While these vacancies will represent about 25 basis points of portfolio vacancy and they will result in a short-term loss of recurring rental income, we see strong backfill prospects through this year. And clearly, we expect these transactions to have a positive net present value. Acquisition and disposition activity had very little impact on Q4. On the disposition front, we closed on 2 sales in the quarter for $67 million. Both were development sites and collectively, they provided a slightly negative NOI contribution. Finally, within the other non-same-property NOI line, you'll see that there's a $3.5 million year-over-year decrease. A big piece of this, in fact, $2.9 million specifically relate to straight line rent. About $1.2 million is an accelerated straight-line rent charge-off that's actually related to the lease terminations that I just mentioned a minute ago. Most of the balance of the straight-line rent decrease related to the lease-up of our One Bloor East property, which turned cash NOI positive during the second quarter of 2025. Moving further down the FFO statement. Interest and other income of $6.1 million was consistent with the $6.4 million earned in Q4 2024. And it was $700,000 higher sequentially from Q3 due to higher fee income and higher interest income. The increase in interest income occurred specifically because FCR carried about $300 million of cash for most of the month of December. Interest expense of $40 million was 5% lower year-over-year relative to $42 million, the year ago amount included a $1.7 million realized swap loss that was related to debt that we repaid early. So if you normalize for that amount, interest expense is a little changed year-over-year. Moving to general and administrative expenses, which were $11 million. This was a 4% year-over-year increase for the quarter. Overall, we're very pleased to have held G&A flat at $43.5 million for the year. As I've noted on prior calls, we've been very focused on containing discretionary expenses. Quickly moving to Slide 7, just to touch on the 2025 results. It included $466 million of NOI for the year, an $11 million increase. Same-property NOI, again, ex lease termination fees and bad debt expense increased by nearly $25 million, equating to a strong growth of 5.9%. Also benefiting from proactive management of the debt ladder, the good G&A expense containment, FCR was able to flow this growth through to operating FFO which reached $286 million for the year or $1.33 per unit, and that was relative to $270 million or $1.26 per unit in 2024 on what I'll refer to as a comparable basis. Slides 8 and 9 cover key operating metrics, many of which Adam touched upon already. And at the risk of being repetitive, the theme really remained consistent again through the fourth quarter with continued and broad strength across key occupancy, leasing velocity, leasing spreads and rental rate metrics. Slides 10 and 11 provide various distribution payout ratio metrics. FCR's OFFO payout ratio was 67% for 2025. Similarly, the ACFO payout ratio registered 83%. Advancing to Slide 12. FCR's year-end net asset value was $22.57 per unit. Sequentially, this is an increase of $0.28 during Q4. The largest contributor to the change was a $36 million net fair value increase on investment properties. Beneath the surface of this net number, FCR recorder Q4 total fair value increases of $42 million related to higher NOI and cash flow assumptions and increases of just over $20 million related to mark to sale values across 4 newly announced disposition transactions. Offsetting these contributions were net fair value markdowns of $27 million related to development intensity properties and some very small asset specific adjustments to cap rates and discount rates. For 2025, as a whole, FCR's NAV per unit increased by $0.52 or 2.4%. The primary drivers were retained FFO and net fair value increases on investment properties of approximately $160 million related to the passage of time and higher cash flows. The biggest offsetting factor was just over $100 million of fair value reductions related to density and development land and residential development properties. Turning next to capital investments as outlined on Slide 13. During Q4, $63 million of capital was invested into the business, bringing the full year to $223 million. Q4 investments included $47 million of development-related expenditures and $16 million of leasing costs and CapEx into the operating portfolio. Full year 2025 development expenditures were $163 million, while operating capital was $60 million. The more significant development expenditures during the quarter and frankly, for the year for that matter related to our Yonge and Roselawn development, the Humbertown Shopping Centre redevelopment, where Phase 3 continues to advance very nicely and our 1071 King purpose-built rental project. Moving to Slide 14. Q4 was a very productive quarter on the financing front with $531 million of originations, primarily comprised of the issuance of $500 million of senior unsecured debentures through 2 offerings. The newly issued bonds had an 8.7 year weighted average terms and a weighted average spread of 149 basis points. The net proceeds were principally applied towards the early repayment of $175 million term loan that was due in mid-April of this year, and the $300 million Series T unsecured debentures, which were callable in early February of this year. One of the objectives we clearly stated at our 2024 Investor Day was to extend our debt ladder. And in just under 2 years, we've made very good progress on this front, which you can see on Slides 15 and 16. Including term loan extension options in the REIT's favor, the debt ladder now has a 4.6-year weighted average term to maturity. One year ago, this figure was 3.7 years and that the outset of our Investor Day and our 3-year plan, the weighted average term was 3.3 years. Therefore, over the past 2 years, the REIT debt ladder has been extended by approximately 40%. Moreover, the Q4 financing activities dramatically reduced FCR's near-term debt maturity exposure. As of December 31, 2025, term debt maturities in 2026 totaled only $129 million or 3% of total debt. And notably, during the first 6 weeks of 2026, we have already paid out mostly from cash on hand approximately $85 million of maturing mortgages carrying a weighted average interest rate of 3.3%, thus further reducing 2026 debt roles. Slide 17 summarizes a number of important credit metrics. FCR finished the year in an exceptional financial position with more than $700 million of liquidity in the form of cash on hand and availability under 3 revolving credit facilities, an unencumbered asset pool of $6.3 billion, equating to nearly 70% of total assets and a low 16% secured debt to total asset ratio. Now before turning the call to Jordie, I will make a few comments related specifically to the year ahead. 2026 is the third and final year of our 3-year plan. And in this regard, we continue to track towards or ahead of the key 3-year objectives that we outlined at our 2024 Investor Day. So in terms of 2026, specifically, I'll speak to 3 items. Firstly, we believe same-property NOI growth should be approximately 3% and for clarity, this growth excludes potential lease termination fees and bad debt expense or recovery. The important context here is that, look, we're comping against a very high growth year in 2025. And moreover, we took back some space late last year, as I discussed in my comments related to the Q4 lease termination fees. And with the failure of Toys "R" Us in Q1, we received some additional vacancy in the month of January. But to stand back, assuming FCR delivers 3% organic growth for the year, this means the 2-year stacked same-property NOI growth over the 2025, 2026 time frame will cumulatively be more than 9%. Secondly, financing costs. A moment ago, I touched on the significant derisking benefits of our Q4 financing activities, in particular. Now these benefits do come with a short-term cost as they bring forward by a few months. Some of the higher interest expense that FCR was inevitably going to incur in 2026 and beyond. The $500 million of unsecured debentures issued in mid to late November carried a weighted average effective interest rate of 4.7%. The funds were applied to the early repayment of debentures and term loans that had a weighted average effective interest rate of 3.5%. So the impact of 120 basis point yield increase on $500 million of debt equates to an annual increase in funding costs or interest expense of $6 million. And beginning in Q1 2026, FCR will be subject to that full run rate impact. Finally, turning to developments. We expect 2026 expenditures to be within a range of $200 million to $240 million. This is higher than the spend in each of the last 2 years and we expect it to be higher than the spend in each of the 2 years beyond 2026. So there will be a ramp-up in the pace of development spend, specifically at our 50% owned Yonge and Roselawn project, and this should be our single largest project development spend this year. As the year progresses, we also anticipate commencing a large-scale retail redevelopment initiative at our Westmount Shopping Centre in Edmonton. So I think this gives you a bit of flavor for the year ahead. On the delivery side, we expect $55 million to $65 million of retail development and redevelopment to come online. The stabilized NOI yield on this capital should be between 6.5% and 7%. The NOI impact, however, will be quite weighted towards the end of the year and into 2027 based upon the timing of the deliveries. Phase 3 of our Humbertown Shopping Centre redevelopment and our Calgary and Bridgeland development are the largest components of these deliveries. So this concludes my prepared remarks. I'm pleased now to turn the session to Jordie to elaborate further on FCR's investing and related activities. Jordan Robins: Thank you, Neil, and good afternoon. Today, I plan to update you on our investment, development and entitlement activities. Starting with dispositions. It was a productive fourth quarter. We closed or entered into binding agreements to sell 5 properties for gross proceeds of $85 million, including $43 million of newly announced transactions. One of these sales that both went firm and close in the fourth quarter with the development site located to the southeast corner of Leslie Street in York Mills in Toronto. After assembling and entitling the property for midrise residential, we sold it to a seniors housing developer for $25 million. We entered into binding agreements on 3 additional properties this past quarter for total sale proceeds of $18 million. The largest is the disposition of a 1.5-acre parcel of land adjacent to our Plateau Des Grives shopping center located in Gatineau, Quebec. This $10.5 million transaction is under contract to close in the first half of 2026. Altogether, in 2025, we completed or secured firm agreements to sell 10 properties for $193 million. The run rate NOI yield of these assets is well under 3% and the sale proceeds represent roughly a 40% premium to our pre-mark IFRS value. Turning to active redevelopments. Our $45 million modernization and expansion of Humbertown Shopping Centre is advancing nicely and is on schedule. When completed, we will have demolished all of the common area and added 23,000 square feet of additional leasable area to the center. Humbertown will present as a brand-new unenclosed grocery and pharmacy-anchored shopping center. It will have modern prototypical retail units providing retailers with ideal space and reduced operating costs. Considering this and the excellent surrounding neighborhood demographics, the center commands premium market rents. The Loblaws grocery store is scheduled to open and are enlarged 34,000 square foot premises towards the end of Q2. We will turn over the final phase, which includes a newly created 20,000 square foot Shoppers Drug Mart, a Scotiabank, a TD Bank, along with a number of other to-be-announced tenants in the second quarter of 2026. The redevelopment of the former Molson building in Calgary is also tracking on time and on budget. This property is located in Bridgeland, a very desirable rapidly gentrifying neighborhood close to downtown. We demolished the former building on site and are well under construction of a new 29,000 square foot building that will be occupied by Shoppers Drug Mart. Shoppers took possession of their new premises in Q4 of 2025 and plan to open in Q3 of 2026. Considering the locational advantage of our portfolio, we continue to source value creation opportunities by applying our retail redevelopment expertise, which is one of our core competencies. In this regard, and as Neil had touched on in his formal remarks, we are finalizing plans on several other shopping center redevelopments, including Westmount Centre in Edmonton. We look forward to providing you with details on it and others we're working on in the coming months. Our mixed-use development program continues to advance as well. This quarter, we'll top off our 17-story 298-unit rental project at 1071 King Street West, in which we retained a 25% interest. Precast and window installations reached the fifth floor. 95% of the costs have been awarded, and we remain on budget. We expect first occupancy in mid-2027. Structural formwork is also moving steadily at our Yonge and Roselawn project in Toronto. The 4th floor of the podium is nearing completion and decking has started on the 5th floor. We own a 50% interest in the 636-unit residential rental building and serve as its development manager. The Yonge and Roselawn project also includes 65,000 square feet of prime retail space. Unsurprisingly, tenant interest for the newly built retail space is very strong. 85% of the construction costs have been awarded, and we remain on budget. We expect first occupancy of the residential space in the first half of 2028. Turning now to residential inventory. Registration and final closing and our even bridge condominium project will occur in Q1 2026. 177 owners now have taken occupancy with 3 additional contracted sales defaulting and for going on their 20% deposits. 2025 was another active and productive year for our entitlement program. We secured approvals for 3 million square feet of incremental density, and submitted rezoning applications for a further 1.7 million square feet. To date, net of the density we've already sold, we've submitted for approximately 18 million square feet or 75% of our 23 million square foot pipeline. Since initiating our entitlement program, we have sold over 5.5 million square feet of density at premium prices. As these entitlements are secured, our strategy remains to sell the majority of it while maintaining flexibility to retain partial interest in specific instances. Thank you all for your time and your continued support of FCR. Operator, you can please open the line for questions. Operator: [Operator Instructions] We'll hear first from Sam Damiani at TD Cowen. Sam Damiani: Just on the 2026 outlook for same property. It's a tough year-over-year comp, as you said. But if you were to strip out the impact of One Bloor East last year and this year, what would the same property number look like for 2026 relative to that 3% you provided? Adam Paul: Sam, it's Adam. Thanks for the question. So we're not prepared with what the number is, excluding each property we own. So we can definitely get back to you on it, but leave it with us. Sam Damiani: Okay. That would be great. And just on the condos, coming to sort of finalization this year, early next year? Any guidance on how that's going to impact financials in terms of FFO and capital repatriation? Neil Downey: Yes. Sam, it's Neil. We've not given specific profit guidance on that. And what we've really focused on, I would say, is our recurring FFO number at any rate. You've seen us exclude transactional type income in the past. So we just encourage you to focus on the core number. And similarly, that's the way we look at metrics such as our debt-to-EBITDA. From a cash receipt perspective, it's obviously beneficial. For instance, Edenbridge at our share is a gross revenue opportunity of somewhere in the range of $115 million to $120 million. And at December 31, we had already collected in terms of initial deposits and then deposits as occupants move in about 33% of the gross revenue number. So there's a round of closings that will occur. We anticipate in the first quarter, and that's another $50 million to $60 million of I'll call it proceeds. And then there is a balance of some unsold inventory, which we anticipate being spread over a number of quarters as we monetize those units. 400 King, is, as you know, a much larger building, although we have a smaller share. The gross revenue opportunity there is bigger and we currently anticipate it will be completed either late in 2026 or possibly turned over in early 2027. That would be a delevering event that you would measure in terms of somewhere in the range of 0.4 turns on a debt-to-EBITDA basis. So it's more significant. Sam Damiani: And again, Neil, the impact on debt-to-EBITDA is purely from reduced debt? You're not including the EBITDA from the condo profits? Neil Downey: Well, there will be a headline EBITDA number, an impact to the extent there's profit, yes. But again, we focus on the trend of the core and you've seen us reference a normalized debt-to-EBITDA in the past when there's unusual or positive lumpy contributions in the EBITDA. So we look at the trend. Sam Damiani: Okay. And the last one for me, just on -- I think the MD&A does reference that low 8x debt-to-EBITDA target for the end of 2026. Just wanted really to confirm that. And if there's any other I guess, information you want to relay as to sort of the building blocks getting from 9.1x to low 8 in the next 4 quarters. Neil Downey: Well, I would say, generally speaking, some growth in EBITDA and some continued execution on asset sales. Operator: Our next question will come from Mike Markidis at BMO Capital Markets. Michael Markidis: Congrats on the strong end to the year and the great outlook for this year, guys. Just with following up, and I hate -- it's ticky-tack, but on the condo gains, so your OFFO will include condo gains. I know you're encouraging us to focus on core, but we do have to tie a number to what you report for consensus numbers. So I just want to get some clarity there. Neil Downey: The short answer, Mike, is yes. It will be included in OFFO. It will be most [indiscernible] per unit number. Michael Markidis: Okay. Got it. Okay. Just with respect to your mezz loan balance, I think maybe it was 2 or 3 quarters ago, you were expecting that number to come down, and it's actually been fairly stable. So maybe if you could just give us your outlook for that balance for the rest of this year? Is it expected to stay where it is currently? Or do you expect that number to -- that you're going to get some capital back from there as well? Neil Downey: Sorry, Mike. We just missed the question. Which balance is that? Michael Markidis: Your loans receivable program, mezz loan balance. Neil Downey: Mezz loan balance. Yes, we actually did roll a couple of loans in the back half of the year. We actually also received repayments on some loans. So your point actually is valid. We had originally anticipated that balance might come down. Our current modeling for what it's worth, continues to anticipate that, that balance will come down. But look, we're always on the lookout for opportunities and ways to accretively deploy capital while still meeting our core objectives as it relates to leverage metrics. Michael Markidis: Okay. And I'll ask one more before I turn it back. Just with respect to sources of capital coming in, you're still on track to hit your disposition target by the end of this year. Mezz loan balance, sounds like you're modeling it to come down, but who knows. But just from the early refis that you've done, where do you see the opportunities to repay debt early without any material frictional cost? Or is that opportunity to exists if you do get capital back? Neil Downey: Yes, Mike, there's actually -- there's not a lot of opportunity candidly. But we also, as I indicated, put capital out every quarter to remind everyone through development. So I would say in the first 6 months of this year, we actually don't contemplate much in the way of net debt repayment. Operator: [Operator Instructions] Moving forward, we'll hear from Lorne Kalmar at Desjardins. Lorne Kalmar: Maybe just on the Toys "R" Us just quickly. Obviously, they declared the CCAA. Can you remind us when does the -- when did they cease paying rent or when did they cease paying rent? Adam Paul: So 2 locations, Lorne, they ceased paying rent in January. So they paid December rent, they did not pay January rent. Lorne Kalmar: That's very helpful. And then any plans -- early plans? I mean I'm sure you guys kind [ of the writing was on the wall ] for this one. Just wondering if there was any plans put in motion to backfill those spaces. Jordan Robins: So it's Jordie. We have temp tenants in place at 2 of the locations and it gives us an opportunity to find permanent solutions. We have a couple of tenants that we're in negotiations with [indiscernible] park in particular. And interest seems to be, I'll say, fulsome. So we'll update you as that progresses. Adam Paul: Yes, just to expand on that. So we've got a roster of temp tenants that are a good, very quick plug, which, as Jordie mentioned are in place. So those rents would be lower than what Toys was paying. We are in negotiations with permanent tenants on both spaces. Those rents are clearly going to be higher than what Toys was paying. Lorne Kalmar: Can you give a rough idea of what the type of tenant, is it grocery, value? Adam Paul: Look, we're dealing with more than one. They would be very typical core FCR tenants for that size of space. So you would recognize them in our existing portfolio. Lorne Kalmar: Okay. Fair enough. And then maybe just lastly, on the lease term income, we hear how strong in demand for spaces. Can you give us a little bit of color on what happened there and maybe the NOI impact? Or was the NOI impact already realized in 4Q? Adam Paul: Yes. The 2 main ones are 2 beer store locations. So there was an opportunity to get both back. We ended up with roughly a little over 2 years of gross rent of the remaining term. We've got great prospects. They're fantastic spaces and great shopping centers. We will release them this year, but for certain at higher rents, but they primarily relate to 2 Beer Store locations. Operator: Our next question will come from Matt Kornack at National Bank Financial. Matt Kornack: Maybe a quick follow-up to that line of discussion and the context of your outlook for '26. Beyond Toys and what you experienced in Q4, are you expecting to see any additional kind of tenant turnover? And then if you could give us -- I know things don't change rapidly, but an updated lay of the land in terms of how tenants are approaching current economic uncertainty and immigration, everything that we've seen up to this point. Adam Paul: Yes. So nothing other than ordinary from what we see right now in terms of tenant turnover. For what it's worth in prior calls, we've been asked what's your watch list? Our response was you can count the retailers on one hand and the store locations on 2. We didn't give the names because they were current on their rent. We can tell you now one of those was toys. So no surprise. Other than them, we're not -- and this will turn out to be an opportunity. There's no question about it at this point. But there's no one else that we're aware of that there's no large space we're aware of that's going to turn over this year. From what we see, it's going to be normal churn from this point. In terms of tenant tone, you highlighted a couple of macroeconomic events that are sounded a bit negative, Matt. I can tell you, we're not seeing that at all in the lease negotiations. Things are just as robust as we've ever seen them. We're fresh off the ICSC in Whistler, very well attended. A lot of demand for FCR space. Our leasing pipeline is deep and very strong. So we are not seeing any pulling back whatsoever from tenants as a result of the things that you just mentioned or for anything else for that matter. Matt Kornack: No, that's good to hear. And then maybe just a last quick one. Neil, it sounds like 2026's losses, to some extent, 2027's gain in terms of -- I'm looking at FFO growth and that the interest rate stuff's temporary. And it also sounds like towards the back half of this year, you'll see the benefits of lease-up and some of the vacant space. So am I thinking about that kind of an average between the next 2 years kind of a normal number for what you get from an FFO growth standpoint? Neil Downey: Well, Matt, you're as good at modeling as the next guy, I'm sure. I mean I brought these points to everyone's attention for a reason. Interest rate roll-up is a factor for FCR. It's not a unique factor to FCR. And I do think that actually when you look at the debt roll and the weighted average in place debt, it does actually extend through 2027 as well. So it's a challenge we're all facing. And we've got a plan that we're applying to deal with it. And we have, of course, strong core organic growth in the business, and we're dealing with it through an asset allocation strategy to continue to monetize low and no-yielding density value in other properties. So our core objective is -- one of our core objectives is growth in FFO per unit. We have been dramatically exceeding our stated target for our 3-year plan to date. We're going to work hard to continue to exceed those numbers -- that number rather. But the interest rate headwind does kick in probably more so over the next 24 months than it actually has over the last 24... Matt Kornack: That's fair. Sorry, I said that was the last one. But just quickly on your point with regards to disposition activity. It seems like it had moderated a bit, but then you've made good progress over the last call it, 6 months. So can you give us a sense of -- as investor demand remained very strong the type of assets that you're looking to dispose of? And it seems like the pricing is consistent with what you've said historically, if not a little bit ahead. So just a confirmation of that comment, if anything? Adam Paul: Yes. Look, it's definitely been a grind given the nature of the assets we're selling majority and the investment team have done a fantastic job of being very methodical, very tactical and selling assets at great prices. But yes, it's certainly been tough and tough for a couple of years, and we expect it to continue to be tough. It's not materially different today than it was 6 months ago or even 12 months ago. So we're about 66% of our way through our 3-year plan. We're about 60% of our way through the disposition volume, so still some wood to chop, but still generally on track. Operator: Our next question today will come from Pammi Bir at RBC Capital Markets. Pammi Bir: Can you just maybe sticking to that disposition theme. Can you maybe just speak to what's maybe currently being marketed for sale? And is there anything that might be in advanced stages? And how maybe that mix might have changed from a few months ago when we last spoke on the -- on that topic? Adam Paul: Yes. Not much of a change, Pammi. They are low and no-yielding assets. This has been a market where generally most of the stuff that Jordie and his group sold have not been broadly marketed. Some of them have been a more subtle marketing campaign through a broker, some we've done directly within our investments team. But it's the low, no-yielding assets -- some we think are more prime for sale than others. And so we're out there working on a bunch of them. Some we think we'll get done, some probably don't get done. But it'd be very similar in nature to what Jordie and his group has sold over the last couple of years. Pammi Bir: Okay. And I think, Neil, your comment that I think you said no significant debt paydown in the first half of the year. Would -- are you implying then any transactions are probably more second half weighted in order to hit that -- your -- the balance of your $750 million target, $750 million? Neil Downey: Yes, Pammi. I mean debt that will get repaid is related to condo construction debt at Edenbridge, for instance. But I think the question really related to, is there any debt that we can prepay. So I guess that was more of the focus of my response. Having said that, we do anticipate that the reduction in net debt will be more weighted to the back half of the year than the front half of the year. Adam Paul: Yes. And the dispositions, just for clarity. So yes, you're right, Pammi. Operator: [Operator Instructions] We'll move forward to Mario Saric at Scotiabank. Mario Saric: It may be a bit more granular, but just sticking to the disposition theme. Any relevant update in terms of selling some of the Yorkville assets that you talked about the last quarter or 2? Adam Paul: Yes. Well, there were 2 assets that were marketed. Jordie, do you want to give the update on those specific asset? Jordan Robins: Yes. So we had listed, as you know, Mario, 2 properties in Yorkville. We were very clear from the outset that these were great assets, very attractive growth profiles. And by virtue of that, we would need a large premium to transact. Otherwise, we're very happy to keep them and take advantage of the NOI growth and value growth that would result. What I can say is we received offers for the properties. The offers we received were in excess of our IFRS value. But we really didn't see it as a high enough premium for us to agree to sell those assets now. So we'll continue to hold them until such time as we can transact at the prices we think makes sense. Mario Saric: Got it. Okay. And more of a broader question, Adam. I think you depicted the transaction environmental market for grocery anchored in Canada has been very strong, but largely kind of dominated by private smaller investors. To what extent has that changed in terms of incremental institutional capital, especially for institutional capital coming into the market? Adam Paul: Yes. So just so all my comments are clear. There are 2 main buckets of assets FCR holds and the disposition environment for the 2 are dramatically different. So the low and no-yielding properties, the ones that have a lot of residential development density. That's the one that I described has been more of a grind, but the sale of those are the ones that advance our strategic plan. So that's what we're focused on. The core grocery-anchored shopping center portfolio, that's the area of our portfolio that we view as core and is an area we're actually keen to grow in. The demand for that type of space is much stronger, it's much deeper. The stuff we've been selling has been largely to smaller private type outfits. There's a lot more institutional capital that would be interested in investing in grocery-anchored shopping centers. It's broad-based. We haven't seen a material change in foreign capital that you touched on foreign capital. So we haven't seen a meaningful change in that over the last year. I would still describe the demand as being heavily weighted to more domestic investors. Mario Saric: Got it. Okay. And my last question, in '24, you put out a 3-year business plan. Arguably, it was a transformational time for the REIT. Looking out, should our expectation be kind of similar 2, 3-year plan on a rolling basis? Or are we more likely to see annual updates in terms of the outlook? Adam Paul: Well, I mean, to be frank, that's to be determined. We thought it was an important time to put out a 3-year strategic plan. I'm glad you used the word transformational because that's how we viewed it as well. It was transformational from a real estate portfolio perspective and monetizing a lot of assets that don't contribute to our key objectives that we feel a lot of REIT investors perhaps don't fully value in the same way as the balance. And so monetizing those and deploying the capital that gets repatriated into lower debt, strengthening the balance sheet and into assets that do fit more appropriately. So we've made a lot of progress on that front. We will continue selling those types of assets I mean, given the size of the pool we have probably for the next decade with just the assets we own today. And so it was transformational from that perspective. Our balance sheet has also been transformed on the debt side. Our credit has been totally rerated. I think in the last couple of years, our unsecured spreads are in over 200 basis points when the peers are in roughly half of that. So we're going to continue executing the plan where we've now entered our final year. It's gone exceptionally well. We still have wood to chop, and so we're focused on that. And likely as we navigate throughout the balance of the year, we will certainly be coming to you and other stakeholders in a manner that describes how we're thinking about the future. It will likely be one of the 2 options you put out. I don't know for sure we're going to put out another 3-year plan, but we'll certainly provide some guidance in terms of how we're thinking about the business and what we think it can deliver on a regular annual basis at minimum. Operator: We have no further signals from our phone audience today. I would like to turn the floor back to our management team for any additional or closing remarks. Adam Paul: Okay. Thank you very much, and thank you, everyone, for your time, your interest and support for First Capital. We look forward to continuing to execute well and keeping you updated on our activities. Have a great afternoon. Operator: Ladies and gentlemen, this does conclude First Capital REIT's Q4 2025 Results Webcast and Conference Call. We thank you all for your participation, and you may now disconnect your lines.
Operator: Thank you for standing by, and welcome to the Breville Group Limited FY '26 first half results investor and analyst briefing. [Operator Instructions] I would now like to hand the conference over to Martin Nicholas, Group CFO. Please go ahead. Martin Nicholas: Thank you, and good morning to everyone. I'm Martin Nicholas, Breville's Group CFO, and it's my pleasure to welcome you to the presentation of our first half 2026 results. I'll be walking you through the group's financial results, and then Jim Clayton, our CEO, who will provide an operational and strategic update. But I'd like to start our presentation today by acknowledging and paying our respects to the traditional custodians on whose land we meet today. I would like to pay respect to their elders, past and present, and further extend that respect to all Aboriginal and Torres Strait Islanders present today. We celebrate the continuing contribution of their food culture and their connection to and custodianship of this country. Turning to the presentation. We'll start on Slide 4, with an overview of our first half results. A challenging but encouraging half that demonstrated both BRG's tactical agility and consistent growth track record. We delivered double-digit revenue growth, continue to invest in the future of the business and successfully managed the significant impact of U.S. tariffs while maintaining profitability and improving our net debt position. Let's walk through each of those highlights. In first half '26, we delivered double-digit revenue growth of 10.1% against a backdrop of resilient premium consumer demand, supported by continued NPD and the coffee tailwind. Record sales of $1.1 billion for the half represent a doubling of revenue over the last 6 years. Our group gross margin was impacted by the significant impost of increased U.S. tariffs on China and on the rest of the world. We successfully mitigated much of this impact and future-proof the business with the diversification of our 120-volt production to new lower tariff locations. Jim will say more about this later in the presentation, but the relocation project has been highly successful, and we met our target of having 80% of gross margin -- U.S. gross margin manufactured outside of China by December 2025, a remarkable operational achievement. We held our prices on our U.S. core range and took selective price increases on our tail range, and we worked our distribution mix. This clawed back some of the remaining on cost with some also offset by gross profit increases in other theaters. Net-net, our gross margin decline was successfully contained to 130 basis points, and we grew gross profitability by 6.3%. During the half, we kept our focus on driving future growth with investments in our new markets, China, Middle East and Korea and an increased investment in marketing and in D&A itself partly driven by manufacturing diversification. The resulting flattish EBIT of $145.8 million was in line with our plan. Our underlying cash flow was strong and net debt improved over the prior comparative period. Overall, an encouraging half, and I'm pleased to note that a fully franked interim dividend of $0.19, an increase of 5.6% on the prior period we paid in March. So let's go into a bit more detail. Turning to Slide 5, we see key segmental results. The Global Product segment grew revenue by 10.9% or 9.3% in constant currency. Our NPD landed well with the Oracle Dual Boiler and the Encore ESP Pro generating strong consumer responses and helping to drive double -- drive healthy double-digit coffee growth. Our cooking and food preparation categories, both recorded high single-digit revenue growth. Our direct countries where we have boots on the ground, grew in double digits in constant currency, with our newest geographies, Korea, China, Mexico and the Middle East growing at over 50%. We saw slower growth in distributor-led geographies, which cycled a strong first half '25. While tariffs remain uncertainty -- while tariff uncertainty remains, with the Supreme Court ruling still awaited, the USMCA renewal in July and feasibly new tariffs, we are ready to tactically respond to these new challenges if and when they occur. Our Distribution segment fulfilled its tactical role, delivering an increase in gross profit of $2.1 million. Turning to Slide 6. We show our geographical theater performances. And our first half '26 pleasingly saw underlying strength in all theaters. The Americas grew total revenue by 11.1% in constant currency, with coffee in double-digit growth led by premium NPD launches and a really strong performance from the Barista Express. Food preparation also grew double-digit, with cooking in high single-digit. Exciting also to note that 300 extra store-in-stores were installed in Best Buy in the U.S.A. in November. Turning to APAC, our direct markets, that's Australia, New Zealand, Korea, and now China, delivered double-digit constant currency revenue growth. NPD landed well, and although still small, China sales were encouraging, with Korea continuing to go from strength to strength. Total theater growth was 6.1%, with cyclically weaker sales growth in distributor-led markets after a strong first half 2025. In EMEA, our direct markets, the U.K., the EU, and the Middle East, again grew in double digits, led by coffee and NPD. Growth was strongest in the EU and the Middle East, with the U.K. in solid single-digit growth against a challenging economic backdrop. Overall theater growth of 7.6% includes more moderate performances in distributor markets, including Turkey, the Nordics, and Southern Africa, after a strong first half 2025. Turning to Slide 7. Here, we see our EBIT growth drivers across the first half. Volume growth was healthy, but U.S. tariffs increased COGS, leading to gross profit growth of 6.3%. In terms of operating expenses, we maintained our discipline in investing in future growth drivers, investing $12.9 million or approximately 60% of the OpEx increase in growing new markets in marketing and in D&A itself driven by new production facilities and NPD. Outside of ForEx translation, the increase in our other OpEx was modest. EBIT growth of $1 million or 0.7% was in line with our plan and reflects the gross tariff exposure we absorbed during the half, our tactical approach to managing through this turbulent period whilst keeping an eye on sustaining and investing in future growth. Turning to Slide 8, we look at the balance sheet. Here, we saw a healthy half of underlying cash generation, delivering an improved net debt position despite funding an increase of $42 million in U.S. tariff cash payments in the half. Reported inventory was flat year-on-year with lower unit holding in the U.S. effectively offsetting a cost per unit tariff-led increase. Inventory was broadly flat in our other theaters. Looking ahead, our transition to our new manufacturing facilities will necessitate an earlier build of 120-volt inventory for the FY '27 peak season. We will start building for peak in March rather than July with our resulting reported June inventory balances planned to be higher than in previous years. Turning to receivables. These seasonally peaked in December at $515.7 million, or 7.6% above prior year, with debtor days in line with the prior period. In January, as peak receivables were collected, the group moved back into a net cash position of $70.1 million as at the 31st of Jan 2026, which compares to $18.7 million in the prior period. PPE and development costs together reflect the continued investment in our growth drivers, our tooling investment in alternative manufacturing sites, our store-in-store CapEx investments and our investment in new products and solutions. As more new products are developed and then launched, capitalized development costs will grow in turn fueling future growth. The intangible balance shown here is a good leading indicator of expected future growth, with the growing balance signaling that we have a number of projects moving towards launch or recently launched. As mentioned earlier, with strong underlying cash flow, our December 31 net debt position improved by over $11.5 million over the pcp to $43.6 million. Our balance sheet remains in good health. At 0.2x the last 12 months EBITDA, BRG remains conservatively geared, and we have significant cash and unused debt facilities, providing flexibility for further expansion. Before concluding my review and handing over to Jim, there are 4 key takeaways from our first half performance that I'd like to emphasize. Firstly, our revenue growth drivers remain robust with NPD, new geographies, our direct markets and the coffee tailwind delivering another record half. Our net sales have doubled over the last 6 years. Secondly, the impact of U.S. tariffs have been well managed within a flattish EBIT and the timely manufacturing diversification of our 120-volt variants was a remarkable logistical achievement. Thirdly, we continue to manage the business for the long term. While short-term margin pressure was real, we have increased our strategic investment in our growth drivers. Lastly, this is all underpinned by a strong underlying cash flow, low leverage and a healthy balance sheet, providing funding flexibility for further expansion. So overall, a very solid set of results. And with that, I will hand over to Jim. Jim Clayton: Thanks, Martin, and good morning to everyone. Now that Martin has walked you through our first half '26 results, I'm going to pivot to our manufacturing diversification program, some updated numbers from our Beanz service, show you our new products and highlight a few marketing investments and lay out our new transformation program, then end with my thoughts on the second half and outlook for the year. On Slide 11, as a reminder, our manufacturing diversification program began in FY '23 with the production of the Barista Express in Mexico. We accelerated the program in FY '25 and set the objective of sourcing at least 80% of U.S. gross profit dollars from locations outside of China by the end of the first half of '26. I'm pleased to report that we achieved this goal. I cannot overstate the complexity of this task given the speed. Working closely with our manufacturing partners, we moved what we planned slightly ahead of schedule and equally importantly, are delivering the same quality of products off the new lines. In the second half, the program enters its next phase, continuing to move remaining SKUs while transitioning already moved SKUs into a component localization exercise to optimize the long-term production costs. The approach we've taken with our supply chain was designed to minimize risk and disruption while still achieving our objective. Our NPD team still works directly with our manufacturing partners in China on new products, and all 240-volt products continue to be produced in China. It's just the vast majority of our 120-volt variants for the U.S. market that have moved to other locations. The heavy lifting is complete. The team is now working through the program tail at a controlled pace. Slide 12. Now on to the snapshot of the Beanz Service. The growth rates you see here represent calendar year '25 over '24. The service continues growing at an accelerated pace, a testament to consumer demand and service quality. When services grow this quickly, they typically experience infrastructure problems. Our team has stayed ahead of the curve. We just handled the volume spike of Black Friday through Christmas and our platform and roaster partners didn't miss a beat. The architecture and processes are battle-tested and sound. Now on to new products. In FY '26, we've been rolling out the Oracle Dual Boiler, which recently won the best new product at the World of Coffee in Dubai, the IQ Toaster and the Encore ESP Pro from Baratza. All 3 products are performing quite well in market, and we're getting positive consumer reviews. In late December, Williams-Sonoma launched the new mixed metals range. The brass range we launched with them last year performed quite well, and they're equally excited about this range. Many kitchens in the U.S. have a mixed metals design, so these products will slip stream quite nicely into that look and feel. On to Slide 17. I've told you I will only disclose launch products, but I'm making an exception here because this demonstrates something important about our portfolio strategy. This is the Mara X3 by Lelit launching next month in Europe and the U.K. Lelit established itself in the prosumer category with Bianca also in the picture, bringing flow profiling popularized by Slayer in the commercial space to the prosumer. Mara X3 now brings this capability to the heat exchanger platform through the Pagaia, which is Italian for paddle, a small finger-driven knob that gives users total control of pressure throughout the shot. Pressure profiling lets you get the best result possible in the cup for any given coffee. What makes this particularly noteworthy is that Pagaia is leveraging a BRG patent. It's a concrete example of Lelit joining BRG and then unlocking value for its customers using BRG IP. Mara X3 combines this new capability with a refined design language as well as Lelit's patented temperature control capability. Slide 18, I've highlighted a few of our go-to-market investments that we implemented in the first half of '26. If you recall, we opened a cafe on the first floor of our headquarters in Seoul. What you see in the upper left is the next iteration of this format, a stand-alone cafe in Seongsu, a hip shopping area in Seoul. This is a cafe first Breville store second format, and it is performing quite well. In the upper right, you see our store in store in El Palacio de Hierro in Mexico City. Palacio is the most premium department store in Mexico. We delayed going in until they agreed to let us execute store-in-store formats. So this store actually represents our entry into the retailer. And at the bottom, you see an image of a large project we executed in October, November, which was rolling out 300 stores in stores in Best Buy. Best Buy consolidated their entire in-store SDA offer to 3 primary brands and 2 secondary brands. The primary brands, which are Breville, Dyson and SharkNinja will execute store-in-store formats, though we moved first. De'Longhi and Bella, which is a mass market brand, are the secondary brands which share an aisle. All other brands were deranged. This is a material change to the retail channel structure in the United States. Slide 19. I'd now like to spend a bit of time talking about the next phase of BRG's transformation. Slide 20. To be fair to the team, they've been on quite a journey. On my first day, I promised change and said it would never stop, and I'm doing my best to keep that promise. As a quick recap, Phase 1 was about a total replatforming of the company, organizational structure, key processes and the technology platform. With that in place, we kicked Phase 2, which was about globalization. With the basics of a hardware company in place, we started Phase 3, which was the art to solutions like Breville+ and Beanz, each phase built on the last replatforming globalization solutions. Phase 4 is different. AI doesn't sit on top of what we built. It cuts across every function, every geography, every process. It's holistic. And because of the foundation we've laid, we are executing at pace. Slide 21. In August of 2025, Cisco surveyed over 8,000 companies globally to assess AI readiness across 6 dimensions: strategy, infrastructure, data, governance, talent and culture. Only 13% qualified what they call pacesetters companies positioned to execute. Pacesetters, they claim are 1.5x more likely to achieve measurable gains in profitability, productivity and innovation. We didn't participate in the survey, but when you map BRG against the criteria, a single global instance, centralized data lake with AI configured data streams, AI capable engineering team, formal governance structure, we're squarely in the top 13%. This isn't aspirational. It's a description of what we've already built. I know many of you over the years with commentary on our corporate platform, here's proof that it matters. Those investments position us to rapidly fold AI into our architecture. Slide 22. Our program has 3 components. First, training and enablement. This is a top-down effort. As a result of our initial training program, we now have over 1,000 employees actively using AI every month. We are now in the throes of Phase 2 training, which teaches employees how to amplify their individual capabilities by leveling up their AI skills. I am personally leading this phase, training every geography and function across multiple LLMs. I accept this is unusual, not many CEOs are personally doing this. It's both an indication of how important I believe this transformation is, and it signals that becoming an AI-driven organization is nonnegotiable. Second, agents and process automation. This is a process-driven component led by our CTO and his team. They're partnering with functions to implement agents in high-impact areas, specifically targeting high-volume, high friction, low-risk processes first, pacing here is thoughtful and deliberate with significant test and learn. Third, AI infrastructure. This is led by our data science team and is aimed at AI enabling our entire platform plus implementing governance and security, which our CIO leads. We are well down this path, so this is an adaptive project that will morph as the technology evolves. While we have many agents in production, I want to give you one example to show you what this looks like. In October, we took BRG AI live for our customer services teams globally. This is an AI support service that touches every facet of customer support, training, documentation, case resolution and knowledge management. These are the early results from our global team. Onboarding time is down 40%. Employee turnover has dropped significantly. Support documentation is both faster to create and of higher quality. Cases are resolved in fewer interactions, cutting time to resolution, which in turn reduces product replacements. Two things worth noting here. First, these results are coming from Phase 1 of the project. We haven't even optimized it and we' added incremental capabilities. Second, we built it ourselves. A single engineer built BRG AI in 3 weeks, followed by 1 month of user acceptance testing before going live. This signals the state of our underlying platform as well as the talent within our team. Most companies would have to outsource this to a vendor. We have the internal capability to build our own AI solutions, which I believe will manifest itself as a fundamental advantage going forward. This AI program is truly transformational because AI isn't just a new tool in the toolbox. It is a re-architecting of the entire enterprise. You eat the elephant one bite at a time. While there are many benefits, I'm most excited about 2 in particular, quality and speed. Taking a 6-month process and turning it into a higher quality 3-month process, increased decision-making velocity and you increase enterprise velocity, making us more adaptive to both opportunities and challenges. Slide 24. As I think about the second half, it's certainly a continuation of projects in flight, the AI transformation program and the manufacturing diversification program. A knock on from the latter is that we will see a change in how we build inventory for peak season. We will peak earlier and the curve will be flatter. As Martin mentioned, we will buy the same amount of inventory, but we will build the 120-volt variant earlier, which will naturally affect the June reported inventory and cash levels. Slide 25. Given the magnitude of the U.S. tariffs that our value chain is absorbing in FY '26, we expect EBIT for the year to be a slight uptick over last year. Absent material changes to the U.S. tariff program, this is a onetime event with FY '27 running against an FY '26 baseline. With that, I'll now hand the call back to the operator for any questions you might have on our first half '26 results. Operator: [Operator Instructions] The first question today comes from Shaun Cousins from UBS. Shaun Cousins: Just a question regarding the tariff impact. You noted that was well managed. Beyond the tail pricing, was the real skill and the real way it was well managed just that retailers, the distribution mix and the product mix, noting you launched some new products. Just curious around how you've managed the tariffs and how that's gone relative to your expectations, please? And if that's the plan for the second half '26 as well, please? Martin Nicholas: No problem, Shaun. The biggest action that we took or the biggest mitigant that was played was the moving of the 120-volt manufacturing out of China into lower tariff locations. That's probably the biggest mitigant that was played. And then we talked -- you mentioned also about distribution mix and around pricing on the tail. But we tried to later to that in the presentation. The biggest thing was getting out of higher tariff location into lower tariff location. That's gone extremely well, extremely well. And then we've honed our channel distribution and taken some price rises. And I also called out a little bit that we had slightly improved gross margins outside of the U.S.A., which in the total group result also gave us some mix benefit. Operator: The next question comes from Tom Kierath from Barrenjoey. Thomas Kierath: Just following on from Sean's question on the tariffs. Is it fair to say that first half '26, that's like the peak impact from tariffs because you were selling a bunch of product that was made in China. And then as we kind of get into maybe FY '27, you should actually see some relief on that front and maybe some gross margin expansion? Martin Nicholas: I think that's right, all else being equal. And that's a big statement, Tom. I don't think we've had a period so far where we've had stability in tariffs. But if everything freezes exactly like it is now, yes, you're right. We will increase the mix of product that bought into inventory then sold that came out of those new plants, and we will have decreased the amount that came out of China. So yes, there would be a positive mix impact going forward, all else being equal. And then we've got foreign exchange, we've got pricing. We've got shipping costs. We've got all that noise, normal noise going on. But just related to the tariff part, you're right, we'll have a better mix going forward in second half '26 and definitely into first half '27. Operator: The next question comes from James Leigh from Goldman Sachs. James Leigh: My question is around the indirect markets, noting that there's some cyclical weakness that you've called out there. How have conversations with distributors gone in those markets? And how should we think about this going into the second half? Jim Clayton: So what's basically happening is distributors roll on a bigger wave in a sense than what happens inside of a half because their lead times are a lot longer. So if you look at them -- I mean, if I'm pulling CAGR, I pull them over a 2-year period in a sense because they ebb and flow because of the longer lead times. And this is that natural -- we had a, let's call it, the up wave in the first half of '25. You've got that as a denominator, which then drives the down wave. And it's because we're reporting revenue on what we sell them, not what they sell out. And so this is how they manage their inventory as it flows through. Martin Nicholas: Correct. And we called out, James, this time last year, we called out really strong performance from distributors. Go back 2 years, we called out weaker performance in distributors. So it's definitely a cycle or a wave that's flowing through. And the scale of that volume, it's about $40 million in EMEA, maybe $20 million in APAC. So it's not the largest part, but it's enough at the edges to either enhance the growth number for the theater or slightly dampen the gross number for the theater. And that's why we've got in a habit of calling out how distributors have gone half after half after half. Operator: The next question comes from Craig Woolford from MST Marquee. Craig Woolford: My question is a different one. Just on the property, plant and equipment growth, it was quite high, but then the depreciation and amortization increase was meaningful, but not quite matching that. Should we expect a significant step-up in depreciation and amortization in the second half as the sort of tooling depreciation kicks in? Martin Nicholas: Yes, but it's not really the tooling. That's more the store in stores going into Best Buy that you've seen boosting the actual CapEx spend or the fixed assets in the first half. And yes, they will start amortizing. They went live in December. So they're now amortizing in the second half. Craig Woolford: Should it match PP&E growth, like is in just a question. Martin Nicholas: Yes, should match, if not slightly exceeded as you catch up. So yes, we've modeled and we expect a step-up in D&A in the second half. If you just look at it half on half on half, that's been happening over the last 4 or 5 years even. So each half, we invest more and then depreciation amortization catches up with a lag. Last half year, it was tooling in the factories. This half, it's SIS in Best Buy. and each one is lagged slightly. So yes, I would expect it to catch up, great. Operator: The next question comes from Sam Haddad from Petra Capital. Sam Haddad: Just a question around pricing. Just to clarify, so you remain steadfast on your core products and only raise prices on your noncore? And how are you seeing competitors respond so far? And any further clarity on price elasticity with U.S. consumers? Jim Clayton: So one, just to be clear, we're only focused on the United States. What I would say on the -- if I'll pick on espresso first or coffee first, which is basically everybody held steady. So in coffee, yes. In coffee, there wasn't really any movement at all. On the other core category in the U.S. would be ovens, and you saw some of both, right, which is you saw some hold and some move. And that's been stable since it happened. It's kind of like everybody made the first move, which was either no decision or a decision, and there hasn't been a lot of movement since then. Operator: The next question comes from Olivier Coulon from E&P Financial. Olivier Coulon: The localization cost opportunity, can you maybe try to quantify for us what the size of that could be when you get to where you want to be? So I suppose maybe a good way to look at it is what are the first half FOB prices for the 120-volt range out of the new territories versus what you were buying them out of China? And what's the target relative to China? Martin Nicholas: Yes, I'll try and answer that, Olivier. But there's a lot of movement in mix going on through that first half. I think that was the point of an earlier question. So in the first half, our FOBs were partly out of China at China tariffs and then progressing to out of -- as an example, espresso machines out of Indonesia with Indonesian lower tariff. The second wave now is to -- what you're referring to is to localize some of the componentry out of Indonesia rather than bringing the componentry from its original locations. That wave is underway now. But as it bites, I think that's more going to impact FY '27 onwards because we're already building the inventory for peak season '27 now. So we're already -- it's not going to impact second half '26. It's too much of a lag as we now look to localize. Broadly speaking, we'd hope that the FOBs out of Indonesia, Cambodia, Mexico would be similar to the original FOBs out of China, but you've got to strip the tariffs out of all of them to see whether you're in an advantaged or disadvantaged position. Overall, the world has got more tariff than it was 1.5 years ago. So overall, even out of the new locations, you're paying the tariff. Are we doing localization initiatives? Of course. And we always look to reduce our FOBs where we can, of course, but it will take some time for that to flow through. I think there's other factors flowing through the margin, which is the mix, which I'm more monitoring over the next 6 months, say. Jim Clayton: I think the other thing I'd add on localization is this will have a longer tail, which is there's kind of 2 ways you solve this problem. One is to find a local supplier of that particular component or teach them how to do it and qualify them and so forth. And then the other thing that's happening is a lot of the -- let's call it, core manufacturers to the entire vertical themselves are setting up manufacturing locations in Southeast Asia and Mexico, it takes them time because they have to move, set that up. And once they do, then effectively, everyone in that geography benefits from that. So all of these are lots of moving pieces because now we're at the bond level. And so it will -- you'll just be chippi-ng away at it over time. Martin Nicholas: Is the next wave of focus on localization? Yes, it is. And we just see that flow through over the coming months and years. Olivier Coulon: But I suppose -- maybe if I allow one quick though. I suppose if mix is a positive in FY '27 versus FY '26 as a mix of location, Indonesia versus China, et cetera, localization should also be a positive in FY '27 and beyond versus FY '26. Is that kind of how we can think about it? Martin Nicholas: Agreed. All else being equal, both of them are tailwinds, yes. Operator: The next question comes from Apoorv Sehgal from Jarden. Apoorv Sehgal: Just on the EMEA business, can you unpack the slight softness you called out in the U.K.? I mean you talked about the challenging macro, but can you talk about any kind of category-specific trends that may have driven the softness? And how do you think Breville performed versus peers in the U.K. Jim Clayton: I mean, there wasn't anything -- I mean -- well, to be fair, I didn't look at it at that level of granularity. I mean, just honestly, because I don't. So I can't -- I don't think there was any one thing or another, so to speak, right? It was just flip side is still growing, right? It just wasn't whatever it was. Martin Nicholas: Almost the point we're making, Apoorv, it was still growing high single digits against a pretty miserable high street environment. Times are pretty tough in the U.K., and we were quite pleased to have a single-digit growth in the U.K. It was lower than the rest of EU and Middle East, but it was still positive. Jim Clayton: I mean, if it was minus 15%, I would have looked at high single digit, where the roll-up of Europe as a whole is double digit. I move on to the next issue. Operator: [Operator Instructions] The next question comes from Tim Lawson from Macquarie. Tim Lawson: Can I just dig into the weakness in the third-party distributors for a minute. Did you say that in Australia -- sorry, in APAC, that about $20 million is from third-party distribution in the revenue. Martin Nicholas: That's right. Yes. Tim Lawson: Because if I put that into a sort of simple table, I assume I've got this right, and you've got double digit in your direct distribution, that suggests that, that third-party distributor was materially, materially negative. Is that correct? Jim Clayton: Yes. I think this is -- so you just need to be careful, which is that would mean last whatever. First half of '25 is materially, materially positive, like... Martin Nicholas: APAC, we printed plus 16% in first half '25. Jim Clayton: Yes. It's a wave. It's not a weakness. It's a timing -- so there's a big difference between these 2 things. So you just got to be -- this is the reality of distribution. And I think what EMEA is more exposed like in the Americas, we don't really have a ton, right? So you don't have this kind of third wheel rolling around. But EMEA has the most exposure in a sense to the size of revenue that comes from distributors and then APAC has got a smaller number, and they will all roll on a wave. It's never a straight line. Tim Lawson: Okay. I'm just trying to understand, is there some problem with that. I mean I appreciate you're trying to point a 24-month sort of story. But do they have like the working capital to deal with the sort of demands that you're putting on them? Do you need to move to a direct distribution model in those markets? Jim Clayton: No, no, no. There's nothing wrong with them. Like I may move for a different reason. There's nothing wrong with them. This is just a cycle. So if there's something wrong with a geography, we'll switch. So -- or if we think there's a better opportunity. So as an example, one of the things that rolled through EMEA is we switched distributors in South Africa. And when you do that, you got the drawdown and then the cutover and all this kind of bit, right? So that was basically the EMA story was we decided to move from one distributor to another, and that's kind of a onetime event. And then you've got other distributors that are just cycling the construct of when they place the order versus when we reported the half. So you just can't -- I don't know how to describe this other than you cannot tell how distributors are performing by looking at any half, you have to pull it out over like an 18-month period to get a sense of is there something wrong with this distributor? Martin Nicholas: They buy inventory, they work through inventory. They buy inventory, they work through inventory. And depending on where they are in that cycle, Tim, you've either got a strong positive or you can have a negative during that period. And that's why we call it out mainly at the halves. We seldom talk about the full year because once it's diluted over a full year, it hardly dense the number. Tim Lawson: So can you see the inventory that sits at the third-party distributors? And is it materially lower than what it was this time last year? Jim Clayton: No, I can't see it. Meaning I don't -- I can't log into their systems. They bought and then when they're placing -- they have to place orders really far out, so to speak. So within that construct, you have a whole lot of visibility to what's coming because they have to deal with a very long lead time. I mean, if I go back to '15 and '16, there used to be this kind of hole when we weren't direct kind of anywhere other than Commonwealth, that was a big piece, and it all moved this way. And they had 9- to 12-month lead times. And so they have to kind of buy -- they put all their orders in to get everything that they need for a period. So as an example, they have to -- they've got to order like early in the second half, so that they can have a high season. And while we were going peak inventory, like we were starting for high season in July, they got to get in front of that because we're about to blow through all the capacity as our direct markets climb. So they got to go all the way in the back and order really early. And then so all of a sudden, you'll go, oh, my goodness, that was a big order. And then they'll go apply it for 6 months because they did that. And then it's just wavy is all it is. Martin Nicholas: I think the key message, Tim, is that in markets where we're direct, we grew double digits America, double digits EMEA, double digits APAC. And then there's this volatile smaller piece, which can impact the reported number, and that's why we shared it with you. But the key message is how we're performing in those direct markets that we focus upon. Operator: The next question comes from Sean Xu from CLSA. Sean Xu: You talked about the extra product display in Best Buy in the U.S. Did you see much benefit in the first half from this arrangement? And what's the early signs there? Jim Clayton: Yes. So there's a meaningful impact, right, with Best Buy. So there's -- you've got the question of did Best Buy steal market share from someone else? In that instance, we don't see it in the total, right? But what this decision in Best Buy is going to materially affect the players that were chosen and more materially affect the ones who weren't because it's like 1,000 doors. And by the way, this is not just happening in small domestic appliances, it's TVs, it's every category. They very much rationalized and hit their winners and got rid of everything else. So what you end up with is this construct of there's a range out that happens, which is across all 1,000 doors. They've made this decision. Now in the tail, they won't carry as many of the SKUs, but they're only going to carry SKUs from the 5 that they chose because that's all they buy from now. So you'll get this load in, so to speak, happen across the system. And then you're going to see an accelerated sellout from Best Buy by definition because all of a sudden, they deranged at the same time they expanded range kind of in your SKUs. And if you're going to Best Buy, you're either buying Dyson, SharkNinja, or Breville or you're going to the second tier and getting something from De'Longhi or Bella, and that's all you can buy. So in a sense, all of those brands will feel a tailwind to the extent that they have SKUs on the shelf. So of all the players, we have the biggest range in the sense of number of SKUs. And it's pretty sat. I mean, honestly, it's something if you go to the states, you kind of have to see it to believe it. I used to work at LG. So I wanted to go to the TVs and see what they did, and it's a big call. Sean Xu: And you guys have a very similar, not exactly the same, but very similar arrangement Target. That's my understanding. Is that right? And what's the context there, please? Jim Clayton: So yes. So Target, we went into Target maybe... Martin Nicholas: 3 years ago. Jim Clayton: 3 years ago. And we -- you can ask them how they want to describe it. I would say we're kind of the lead horse in Target. It's performing exceptionally well. And we didn't really talk about this, but there was a big store-in-store play on the Best Buy side, which is what hit PP&E is going to roll through. There was also a big investment on the Target side of stepping up that offense but it's not -- they're sleds or it's a different kind of format that we just ran through OpEx because it's not something that you would -- that will definitely last for a longer period of time. But Target has got us leaning into them as well. So both of those retailers are getting a big, let's call it, a Breville tailwind in the sense as they pull this through. I think the only thing I would add is Target didn't go through the deranging side of the equation, which is they're picking who they're going to lean into and let kind of invest in the aisle, so to speak, kind of category captain like, but they'll still have all the other brands. The big change in Best Buy was not just that first part, but it was the deranging of KitchenAid, Keurig, Vitamix, Nespresso, like you go down, it's everyone. And that's the part that's pretty fascinating. Operator: The next question comes from Sam Teeger from Citi. Sam Teeger: Just wondering, given the success you're having in new markets such as Mexico, Korea, China and the Middle East, what's the likelihood of additional new markets in the second half or FY '27? And what geographies would have the most appeal? Jim Clayton: So there won't -- I don't mind saying this because we're so busy. There's not going to be a new market in '27. The geographic expansion lever is always on. I think the U.S. put a lag in that construct, which is we had to pull a material portion of the team out to move the entire 120 staff into all these different locations. So in a sense, that was the geographic expansion that's happening, so to speak. And then you'll also see it across -- within this construct, I'm talking about the Breville Sage brand. You'll see continued movement of the other brands as they slip stream behind it. But we -- what I can say is we're not done. We're just busy. Operator: Thank you. That does conclude today's question-and-answer session. The conference has now concluded. Thank you for participating. You may now disconnect.
Giorgio Iannella: Good morning, and good afternoon, everybody. This is Giorgio Iannella from the IR team. Thank you for joining EssilorLuxottica Interim Results Management Call. The Group Chairman and CEO, Francesco Milleri; the Deputy CEO, Paul du Saillant; and the CFO, Stefano Grassi, will walk you through the business and financial highlights of the first half of the year. After their presentations, there will be a 30-minute Q&A session [Operator Instructions]. With that, I hand it over to Francesco. Francesco Milleri: Welcome back, everyone, and thank you for joining us today. I'm pleased to reconnect with you and to share where we stand with the execution of our new strategy, which is clearly driving the group business momentum. This is in line with our plans, and I believe it will become more and more visible in the near future as the new projects, products and medical services will translate directly into numbers. 2025 marked a year of sharp acceleration for EssilorLuxottica as we manage our deep transformation from a traditional optical company into a leading med-tech and data-driven group. This broader scope now better defines and makes clear our core business, strategic focus and investment priorities. The new ambition of our group is to shape the future of health and human performance. This evolution represents the key engine behind our faster revenue growth and the driver of the positive progression of our profits. The strong increase of revenue in the fourth quarter reflects the solid performance of our overall business, further reinforced by our clear leadership in wearable and med-tech. We are confident that this trajectory will continue, confirming the strength of our vision and the excellence of our execution. Stefano will walk you through our financial performance later on. I would just like to highlight that we recorded revenue growth at constant currency above 18% in the fourth quarter and 11% in the full year. For the first time, we see a double digit in our history. With EUR 28.5 billion revenue in the full year, the adjusted operating profit reached EUR 4.5 billion after EUR 300 million headwind from U.S. tariffs and materially adverse exchange rates. Solid operations are clearly shown by a strong free cash flow of EUR 2.8 billion, EUR 400 million higher than last year. At this stage, the new category we have created in AI glasses is at the heart of this journey. In 2025, we sold more than 7 million units of AI glasses, posting exponential growth, driven by the strength of our iconic brands, Ray-Ban and Oakley across all geographies and channels. This success of our wearable brands has been made possible by our unique logistics and distribution footprint. with 18,000 stores in retail and 300,000 partners in wholesale, forming the most powerful go-to-market platform for a product that is first and foremost, a vision care device. This view is further reinforced by rapidly growing attachment rates of prescription lenses and the already high penetration of photochromic lenses, which together are delivering a strong increase in daily usage and confirming the relevance of this category for all consumers. Wearables are now becoming part of our normal life. As a testament to our capacity to roll out this new category and expand its scope, the recently launched Oakley Vanguard unlocks new use case across both sport and lifestyle. More is coming in terms of brands and futures with increasing levels of personalization, not only in daily and social life, but also in professional activities. Several projects are already underway with banks, consulting firms and health care institutions, opening up larger and sometimes unexpected market opportunities. AI glasses are not only the evolution of traditional eyewear. They are above all, a new digital platform that brings together vision correction, by sensors, audio, cameras and artificial intelligence into a single system. We are increasingly convinced that this category has the potential over time to replace the mobile phone as the primary personal computing interface in both personal and professional context. In 2025, our plan has been focused on growth and scale. We are convinced that leadership and consistent market share in this strategic area are essential for the future of our Med-Tech vision. This acceleration require significant upfront investments in both OpEx and CapEx across R&D, operations, marketing and communications. As expected, these initial investments are reflected in our P&L, but still the group reached record earnings results. As our Med-Tech and wearables segments reach scale, we expect profit to accelerate and the operating margin to regain momentum for both EssilorLuxottica and the whole optical and Med-Tech industry. The future direction of the company is now set around a clear and well-executed strategy based on emerging field of Oculomics. This enables us to expand our scope from vision correction into medical support and the early detection of metabolic, neurological and cardiovascular conditions. In line with this vision, our journey will continue to extend into advanced health technologies, predictive medicine, diagnostic instruments and clinical practices, including surgical applications. One of our most important achievements has been our ability to integrate in a truly holistic way, AI glasses as a consumer-facing evolution with a data-driven med-tech, health care and clinical business. You will see our M&A approach evolve with an increasing focus on start-ups in vertical medical AI, advanced diagnostics and support for clinical studies. At the same time, we will continue to improve and extend our logistics and distribution footprint through both internal and external growth across physical retail and e-commerce. The convergency of these 2 dimensions, digital and physical, together with our strong medical reputation is what we believe makes our strategy truly unique and almost impossible to replicate. Finally, in hearing aid glasses, we continue to invest in a vertical application of our technology in the audio space, bringing in new customer segments and incremental revenues. We have high expectation for the launch of new products in the second half of this year, combined with our strategy to expand audio feature across our wearable through a subscription-based approach. In conclusion, we have closed a remarkable year and are starting the new one with strong confidence and clear plans to be at the forefront of the convergence of multiple sector and different industries into glasses. That is why EssilorLuxottica is taking leadership in the whole med-tech space. Last word on our financial road map, why we confirm we are fully on track with our long-term outlook dating back to March 2022. Today, we are updating it, planning to deliver over the next 5 years, a solid and broadly aligned growth of revenues and operating profits. With that, I will now hand over to Paul. Thank you. Paul du Saillant: Thank you, Francesco, and hello, everyone. Happy to reconnect with you. As you have heard, in 2025, EssilorLuxottica took further decisive steps in its strategic journey and delivered solid financial results, driven by an ambitious vision, strong execution and a relentless focus on innovation. This performance is underpinned by our best-in-class manufacturing and logistics platform, our global and resilient supply chain and a unique omnichannel distribution model that enables us to scale innovation efficiently and consistently across markets. Today, I would like to take a step back and focus on what sits at the very core of our vision and strategy in the traditional business, which is the scientific ecosystem we are building around eye health. Let me start from lens innovation and myopia management in particular, a field that we have been investing in for almost half a century and where we further strengthened our leadership in 2025. Stellest has become a global reference in myopia management, supported by robust long-term clinical evidence and is now worn by millions of children worldwide. Importantly, Stellest remains the first and only spectacle lens to have received FDA market authorization in the United States. This is a decisive recognition of myopia management as a medical treatment. In 2025, we took a major step forward with the launch in China of Stellest 2.0, our most advanced myopia management lens to date. We have maximized the lens power and aspiricity of the micro lenses based on our fundamental research at a neurobiological level, leading to almost 2x lower actual length growth after 12 months in Stellas 2.0 versus the previous generation. This new generation is being rolled out in EMEA and will apply for authorization with the FDA. At the same time, we are moving earlier in the patient journey. With Stellest Plano solution, we are addressing children at risk of developing myopia based on clinical evidence showing that delaying onset can deliver long-term benefits comparable to years of slow progression. This marks a shift from management toward evidence-based prevention, a meaningful evolution. Our approach to myopia is deliberately multi-technology and multi-brand. Alongside Stellest, SightGlass Vision Dot technology commercialized under Nikon and Kodak in China continues to gain great traction, reinforcing our portfolio and offering eye care professionals a broader set of clinical validated solution across different price points. As a result, in 2025, total revenue generated by our myopia management portfolio grew by 22%. Beyond myopia, innovation across our lens portfolio remains strong. In presbyopia, brands such as Varilux, Nikon and Shamir continue to introduce designs that combine optical precision, personalization and comfort, leveraging AI-driven modeling. Transition, extending light management benefit across prescription, plano and smart eyewear is increasingly becoming a standard feature in connected glasses. In frames, 2025 was a year of strong brand momentum and creative activation across our portfolio. On the licensing side, we renewed our long-term partnership with Burberry through 2035, reaffirming a collaboration rooted in craftsmanship and innovation, and we launched the first-ever collaboration between MIU MIU and Puyi Optical, demonstrating our ability to blend exclusivity, design excellence and retail leadership, particularly in Asia. Across our proprietary brands, we further strengthened Ray-Ban's creative leadership by naming A$AP Rocky as its first ever creative director. We celebrated Oakley's 50th anniversary, and we are now seeing the brand gain exceptional global visibility through its presence at the Winter Olympic in Italy. At the core of all our initiatives is science. Last year, we formalized this commitment with the creation of our Scientific Advisory Committee, bringing together 5 world-class experts across physics, mathematics, ophthalmology, bioethics and neuroscience, including Nobel Price and Fields medal [indiscernible]. Their role is to challenge us, guide us and help us explore new frontiers from oculomics to AI and neuroscience, always with patient in mind in areas of human health where ethic matters as much as innovation. We are reinforcing our ecosystem through open collaboration. Our partnership with the Politecnico di Milano continues to advance research at the intersection of optics, bioengineering and artificial intelligence, while the joint smart eyewear lab is shaping the future of connected vision devices. Our membership in the collaborative community on ophthalmic innovation allows us to contribute to global standards and consensus building across myopia, AI and data-driven ophthalmology. Through our collaboration with Chips-IT, we are also investing in application-specific semiconductor designed to enable the next generation of smart and medical eyewear. Finally, at our [indiscernible] R&D lab in Paris, teams are working at the frontier between vision science and neuroscience, exploring how visual signals are processed and transmitted by the brain. This research is essential to deepen our understanding of perception and cognition and to unlock the next wave of optical and neuro adaptive solutions. Sustainability remains a fundamental pillar of our strategy, guided by a clear road map across climate, circularity, responsible operation and social impact. This year, our efforts were recognized by leading external benchmarks. We achieved an A rating for climate from CDP, placing EssilorLuxottica among [indiscernible] organizations. In parallel, our Standard & Poor's Global Corporate Sustainability Assessment score reached 66, securing the third position in our industry worldwide out of more than 250 assessed companies. To sum up, 2025 confirm that EssilorLuxottica growth is built on a unique combination of clinical science, technological depth and industrial scale. From med-tech to neuroscience, from eyewear to eye health, we are not only innovating with our industry, we are redefining its boundaries. At the same time, with our new long-term outlook, we are looking at the next 5 years with solid ambitions on our financial delivery. With that, I will now hand over to Stefano. Thank you. Stefano Grassi: Thank you, Paul, and welcome to our full year 2025 earnings results. We closed another record year for EssilorLuxottica with revenue that grew 11% at constant currency, almost 2x faster than the 6% that we delivered in 2024. North America, EMEA and Asia Pacific, they were all up double digit, while Latin America delivered a high single-digit year. In an outstanding quarter like 2025, Q4 was actually the strongest one for all the year. Our top line was up 18.4% at constant currency, 12.1% at current exchange results. These numbers are even more remarkable in consideration of the fact that in Q4, Supreme and Heidelberg became full comparable as they were both included in 2024 and 2025. So fully comp for our reporting. In Q4, our North American business was up 24%. EMEA delivered 16% sales growth, while Asia Pacific was up 12%. And the last, Latin America delivered 8% sales lift in the quarter. Last note on foreign exchange. For the third consecutive quarter, we had some headwinds, unfortunately, in our results with about 6 percentage points of difference between constant and current exchange results. As usual, the main driver for that is the U.S. dollar. They had a devaluation of approximately 8 percentage points year-over-year versus euro. At those currency level, you might still expect some currency headwinds during the course of 2026. But now as usual, let's take a closer look across the 4 different regions. In North America, we recorded a top line growth up 23.8% at constant currency. This result doubled the speed of growth that we had in North America during the course of the third quarter, where our revenue grew 12%. But what I think is probably even more evident is the different speed between the first half in North America, there was a 5% growth at constant currency and the second half, where we recorded an 18% growth at constant currency. In our Professional Solutions, our B2B business, our independent channels, our key accounts, our department stores were all positive. While when we look at our sales on our e-commerce partners, over there, we have a negative territory for the revenue in Q4. When we look at our product category, frames were up triple digit, thanks to an outstanding performance of our AI glasses category, but also optical frame delivered solid growth in the quarter, while our lens business in Q4 was flattish. When we look at our frame brands, Ray-Ban and Oakley were up triple digit. On the lens side of our business, we start seeing some good traction of Stellest, the first and only lens myopia solution FDA approval that is now available in the United States that is now getting orders in excess of 4,000 doors in North America. Last comment on price/mix, which I would say was strong in both lenses and frames. But now let's move to the direct-to-consumer. On the direct-to-consumer side in North America, our e-commerce business was just attached below double digit in the quarter, and our retail business delivered high single-digit comp sales for Q4. Sunglass Hut was up 9% and LensCrafters was up 7% in Q4. So I would say a very compelling story proposition for a direct-to-consumer business. A quick highlight on LensCrafters. We're reporting another great quarter. We posted in Q4 the 2 single days with the highest revenue in LensCrafters history, and that happened during the insurance days at the end of December. Our lens mix continues to improve during the quarter. We have a higher penetration of transition. We have a successful adaptive progressive lens powered by Shamir across the all different LensCrafters stores in North America. All the fundamental KPIs like price mix, eye examination, traffic and conversion that were all trending in the right direction. Moving to the Sun banner, Sunglass Hut now. Q4 was simply the best quarter in 2025 despite a tough comparison base as last year, Q4 comp sales were actually the best in 2024. So best result on top of best result last year. Our international and co- location performed, I would say, at a fairly even pace. AI glasses continue to represent a key driver of our growth with both Ray-Ban Meta and Oakley Meta that deliver an outstanding results. But before moving to EMEA, let me say that as we enter in 2026, our direct-to-consumer trend in North America is further accelerating. So we're just 1 month into the year, but obviously, we are up for a very promising start. Moving on to EMEA. EMEA delivered a 15.7% growth in Q4, the 19th consecutive quarter of growth in the EMEA region, the best quarter in 2025 for Professional Solutions, the best quarter in 2025 for direct-to-consumer with both segments that delivered a double-digit pace. In the region, Italy, Spain, U.K., Turkey, Eastern Europe and Middle East posted double-digit quarter at constant currency, while Scandinavia was up high single digit and France delivered a fourth quarter in a low single-digit territory. When we look at our 2 distribution channels in Professional Solutions, our frame business delivered an outstanding quarter, thanks to the AI glasses and the optical business with a growth that was very much driven by volume and also price mix. We're happy with our luxury portfolio in the EMEA region. We had a mid-single-digit pace. I would put on the spotlight, CHANEL, Prada, MIU MIU. Now when we look at the lens side of the business, the other product category, we had a good performance of transition and Varilux and a double-digit growth on Stellest with a growth that was very much driven by volume on the lens side of the business. Now let's switch channel and let's look at our direct-to-consumer. Comps were in the high single-digit territory for optical EMEA and double digit in the Sun part of our business in EMEA. Optical business, I would say that we are very much at the ending stage of the integration between the former GrandVision banners into the operating machine of EssilorLuxottica. And just to give you a flavor for that, approximately 85% penetration of the EssilorLuxottica product in our frame assortment and approximately 90% penetration of a lens assortment across the banners in the EMEA region. The subscription model is now available in about 19 countries and represents 22% of the optical revenue in the region, a couple of percentage points more than what we have in the fourth quarter of last year. Last but not least, there is another important asset, and that is represented by teleoptometry. And just to give you an idea how important is this asset and how successful was this exit in 2025, let me share with you that we hit over 200,000 eye examinations performed through the teleoptometry in 2025. That number is up 40% versus 2024 eye examinations. Now if we move to Sun, fourth quarter was actually the best quarter for Sun in 2025, with U.K., Turkey, Italy all at double-digit pace. The top door in the EMEA region for Sun, you remember, those are the 50 largest ones that we have deliver a double-digit quarter. So whether you are in Dubai or you are in Paris, in Madrid rather than in Istanbul, Sunglass Hut more and more is the destination location for Sun in the EMEA region. And that clearly makes everyone in the Sun team in EssilorLuxottica extremely proud for that. Now let's switch gears. Let's move to East in the Asia Pacific region. Top line up 11.6%. Another strong quarter in this region with India, Australia, Southeast Asia, all up on the double-digit pace. China and Japan were high single digit, while Korea delivered a mid-single-digit growth during the course of Q4. An important asset here is myopia. And the myopia category in China delivered another great quarter of double-digit growth with revenues that today in Greater China are about 27% of the total business. The demand continues to be strong. And I would say it's the demand that continues to be strong for all the different myopia solutions that range from Stellest up to the Kodak and Nikon that leverage the other technology, the DLT1. When we look at our other category, frame business delivered a strong quarter, I would say, across pretty much all the regions with sales that were driven by volume, but also with price mix. Ray-Ban, Oakley, luxury portfolio, they were all up double digit during Q4. Now when we look at our direct-to-consumer channel, the other channel, I would say that we are very pleased with our key banners in Mainland China. Those banners delivered a double-digit growth pretty consistently throughout 2025 in every single quarter. The other leading optical banner in the region, OPSM, posted a low single-digit quarter in comp sales with the key metrics on premium lenses on transition, on myopia solution that were all improving versus the fourth quarter last year. Now let's touch on the last region in the pipe, and that is obviously Latin America. In Latin America, we had a fourth quarter up 7.6%. That trend is an acceleration compared to the third quarter, where you remember, we delivered 5.2% top line growth. Both Professional Solutions and direct-to-consumer delivered high single-digit quarter. I would say we had pretty much a great quarter across the different country in the region. Brazil and Argentina were up double digit. Mexico, Colombia and the other Latin American country delivered a mid-single-digit quarter. In the Brazil, the largest country, we had a double-digit growth for our frame business and double digit in Oakley and in our luxury portfolio with price mix being very much the primary driver of our growth in the country. When we look at our lens business in Brazil, we had a low single-digit quarter, but all the key assets, Transition, Varilux, Eisen, they all delivered positive growth in Q4. Last touch on Oticas Carol as usual. The 1,400 stores delivered a double-digit quarter. And I would say that in Oticas Carol, AI glasses are start becoming more and more important and very much instrumental to our growth and success story for those banners. Let's touch now to the direct-to-consumer region. In the direct-to-consumer region, the Sun banner was just a touch below double digit. Ray-Ban stores, Sunglass Hut stores and Oakley stores were very much the primary driver of our comp sales growth in Q4. While when we look at our optical side of the business, the largest GrandVision footprint, the one that we had in Mexico posted a high single-digit comp sales. Now we are now concluding our journey across our 4 different regions. And now let's take a closer look to our profit and loss as usual. We will be looking at the full year profit and loss. And as usual, I will walk you through the key line items at constant currency, and I won't spend time on sales as we largely covered that before. So the first line item is the gross margin. Our gross margin is down 260 basis points in '25 versus 2024. And this is really the combination of 2 effects. On one side, you have the impact of tariffs. And here is the gap is largely in the second half versus the first half of the year as those tariffs impacted for 2 quarters in 2025, second half, while in the first half of the year, the impact was very much in the second quarter. The second part, important part, is the percentage dilution coming from the AI glasses that in the second half of the year due to the higher contribution of AI glasses to our growth rate had a much stronger impact on our margin. I would say that on a full year basis, just to give you a broader picture, approximately 1/3 of the impact is due to -- on the gross margin is due to tariffs, while 2/3 of the impact is attributable to AI glasses. Now let's take a look a little bit of our OpEx. Our OpEx as a percentage of revenues are 170 basis points down versus 2024 levels. Here, you have on one side, the investment that we continue to do to support our new strategic initiatives. We talk about during the different regions, the performance on AI glasses. Francesco and Paul explained our long-term strategy on med tech the development of the audiology business and those investments, the deployment of those initiatives across the different channels, across the different geography, clearly have an impact on our selling, marketing and also G&A. But at the same time, we are undertaking a deep exercise to relook at our organization, understand whether we have deployed all the people in the right spot, and we are working to realign our organization to our strategic priorities. So overall, you look at our operating profit as a percentage of revenue, that is down 70 basis points at constant FX and about 100 basis points at current exchange rate. Below the operating profit, our cost of debt as a result of a higher interest rate environment, it's higher versus last year. Clearly, that is the primary driver for that. While on the tax rate, we have a slightly more favorable pretty much as a result of a different country mix. That leads to a total net profit for EssilorLuxottica full year '25, down 50 basis points at constant FX and 70 basis points at current exchange rate. Now the last chapter of this journey before the Q&A session is clearly an important one, and that is represented by our cash flow. I will start saying one number that I believe tells you all, EUR 2.796 billion of free cash flow generation during the course of 2025. This represents a record high free cash flow generation. Those figures were achieved despite the material headwinds from tariffs and the material headwind from currencies. A last comment on our net debt-to-EBITDA ratio that is now at 1.7 at the end of 2025, clearly confirming our ability on one side to maintain a strong balance sheet and at the same time, to invest in all the strategic priorities for the group. But now as usual, let's leave the floor to the operator for the usual Q&A session. Operator: [Operator Instructions] Our first question comes from Oriana Cardani, Intesa Sanpaolo. Oriana Cardani: The first one is on the evolution of wearables sales by channel. Considering the full year results, can you provide us with the channel mix for wearable net revenues and tell us if you expect different future trends between the 2 channels? And my second question is on the margin outlook for wearables. How do you expect operating -- OpEx, operating cost to evolve in this year, next year for the wearables? And at what level of production volume do you expect economies of scale to help improve margins? Francesco Milleri: I take the first question is channel. Is professional solution wholesale, it will be the one that really will give us the best chance to grow everywhere. Also, if we believe that the direct-to-consumer, special the physical network that we have, the 18,000 stores that we directly manage it will be really the crucial factor that it can really activate in the wholesale, the growth of our sales of the AI glasses. AI glasses now is something more common. It is still something different from the normal glasses. So has to be tested, tried, explained sometimes. So it's a outdated fact that we have this very high professional network has helped a lot in the speed of really how we enter in the market. And then the Professional Solution follow also imitating the strategy that we have in our retail stores. So I believe that the mix will be much bigger on the wholesale because wholesale the number of doors are much bigger than our retail. But the sales -- the number of units for single door, it will be -- it will remain in the future, in the near future higher in our own retail where we can take care and we can better define the communication strategy that will help also the independent optician and also the consumer electronic to better understand how to sell eye glasses and wearable. Stefano Grassi: I'll take the second question you have for tonight. So margin outlook for the AI glasses. I think there's a couple of things that you need to take into consideration. On one side, we do expect consistently with what we have seen in the last couple of years, a price/mix going up as a result of product innovation. If you think about it, where we priced the original Ray-Ban stories at $2.99 and the evolution of pricing for Ray-Ban Metal now, it's obviously going exactly in that direction. And we believe that, that will happen again, driven by innovation as much as we have done with other parts of the business. Then there is a second part of the equation that is a cost. And I believe that the scale will have to get cost progressively lower throughout the time. Operator: Our next question comes from Chiara Battistini, JPMorgan. Chiara Battistini: The first question is on the wearables and the rollout of further capacity and production. So I was wondering and also, we've seen some comments from Meta in the last few weeks, if you could give us an update on how to think about the expansion of capacity and also CapEx for 2026 on the back of potentially expanding capacity? And the second question, you've mentioned myopia management up 22%. I was wondering if you could give us an update on the size of myopia management in 2025? And how to think about the priorities for myopia management in 2026, especially given the new push in the U.S. Stefano Grassi: Chiara, I'll take the answer to the first question with respect to capacity evolution. Let me put it in a broader perspective here. I think we will have the capacity that is needed internally or externally to manage the demand that we will face in the coming years. And I think we are planning according to that in close partnership with Meta. Then the second question is on myopia, Paul. Paul du Saillant: Yes, I will take the second one. Thank you, Chiara. To give you a little bit of a reference, so the global myopia activity for the group, as it was said, has grown 22% globally. As you know, mainly today, this activity is in China and Europe. For China, just to have in mind, I think Stefano gave a data point, we have close to 30% of the full China activity that is myopia management based. So it's quite significant. The priority for '26 is quite simple, and I did refer to it in my little talking point. First is to continue to deploy the full solution that we have at work with hospitals and the government in China, namely Stellest, Stellest 1, Stellest 2 and the DOT technology, which gives us a full platform to address the different price points and needs. Second is to continue to roll out in Europe and introduce Stellest 2.0, which is the latest technology platform in Europe. And of course, a huge focus of our American colleagues is following the FDA approval back in September that we obtained, we are now really in the full launching process of Stellest 1.0, the first platform as we prepare to file with FDA the Stellest 2.0 also. But right now, the focus is to establish with the doctors, with the optometrists, with the parents, this totally new solution in U.S., which is first ever available for the children. And we have already close to 4,000 doors that have been trained and equipped. And we, of course, are expanding the distribution to many more doors as we talk. So this is really the plan for us this year. It's a big priority for the teams. And it's a fantastic where also to connect to the med-tech strategy that was explained because this is taking us in the doctor and in the clinic in the high hospital space. Operator: Our next question comes from Anne-Laure Bismuth, HSBC. Anne-Laure Jamain: Congratulations on the very strong top line earnings. Just 2 questions. So first of all, I would like to come back on the production capacity because there were some headlines mentioning that you can -- there were some discussion to double the production capacity, so let's say, to reach EUR 20 million to EUR 30 million of production capacity in wearables this year. Is this -- is this assumption a number that we should take in consideration? Can you give us a bit more color on that? And the second question is still on the wearables. So the Meta Ray-Ban display. So the display is a big... Paul du Saillant: Okay. So I will -- I think we don't hear Anne, anymore. So I will take the first question on the capacity. I think you have to look at this question in a different angle. The company is well equipped with building and plans to follow the needs ramp-up as it comes. And you have to have in mind that we have a very modern plant in China, where we have actually a full new building that was realized in the last 18 months. We have also a very large campus. As you all know, we built in Thailand, where we have there, what I call advanced surface ready to be equipped. And as we need to follow the demand, we add production line, which we now have standardized. We know very well how to equip them. And also, we are connected when we need with a Vietnamese partner company to support. So we have an in-place capacity setup that can follow the demand. And I think this is the way to look at it more than anything. Operator: The next question comes from Hassan Al-Wakeel, Barclays. Hassan Al-Wakeel: I have a couple, please. Firstly, if I can follow up on wearables. Your P&L and business is changing in a meaningful way as wearables become a larger share of your top line. Can you talk about the longer-term benefits from scale and better unit economics on the EBIT margin, but also gross margin from product bundling. Do you see a wearables margin over the medium term in line with the group? I ask given your long-term targets broadly imply flat margins? And then secondly, can you please quantify the tariff and meta dilution headwind in the second half as you helpfully provided in H1 and the work that you've been doing to offset tariff, how do you see this in 2026? And what was the FX impact at the margin last year? Stefano Grassi: I'll take on your question. So beginning with the AI glasses. So the longer-term benefit in operating leverage and I would say, price/mix improvement is fully reflected in our long-term guidance, the new one that we just shared. Clearly, in that guidance, you have -- we are anchoring revenue growth with operating profit. And that's obviously creating that pace of earnings throughout the time. I would say that, again, when you look at the price mix, it's evident. You look at the collections that we have displayed today between Ray-Ban Meta, between Vanguard, Meta Ray-Ban Display, they all have price points that are higher -- significantly higher than the original product that we marketed a few years back because there is a higher technological content and because all those features, which, by the way, have been extremely appreciated by consumer are clearly creating a positive effect on our products. So remember, when you look at the ecosystem of our wearable AI glasses, you have to bear in mind there's always a couple of other add-ons, which obviously help top line, but also profitability. The first important part is the lenses. 20% of the AI glasses that we sell are equipped with prescription lenses. And that's obviously a margin lift that is quite material. The other important thing is represented by coatings with transition that typically 40% to 50% penetration in our AI glasses. So that's obviously something that helps. And that's pretty much the story for AI glasses. Again, you will see price/mix going up. You will have on a cost side scale that will help also on a cost management. And all of that is pretty much baked into our long-term guidance. Operator: Our next question comes from Hugo Solvet, BNP Paribas. Hugo Solvet: Congratulations on the print. I'd like to give you a break on smart glasses and focus on the base business. Could you maybe discuss the performance of the non-smart glasses portfolio and whether you continue to see that halo effect that you highlighted in Q3? And would you expect that to continue? And going back to smart glasses, but keen to get your thoughts on how do you see competition unfolding given the recent nervousness in anticipation of upcoming competitive launches? Francesco Milleri: Hugo, no eyeglasses sun halo effect. I believe that we have to start really thinking to glasses, sunglasses or eyeglasses, not as a really different category. It's really an expansion of category for different functionality. So we now start to consider AI glasses or wearable really part of our normal portfolio. Then, of course, the -- as any big innovation, especially the Ray-Ban display, they will drive traffic into the store. And honestly, the conversion is very high when the product is available and when it's not available is really we convert in a different kind of sunglasses of eyeglasses. So of course, the halo effect is quite important. But I believe that is really a part of the game. We don't consider something special. It's something that will continue in the future. This is the strategy of how we manage our portfolio. The same for competition, welcome competition on this new category because we are 2 years ahead of all others. We have the unique distribution platform, really almost impossible to be replicated in the short term, maybe also in the long term is not easy. And competition means more investment in the category. And since we lead the category, that means that for us is we expect an increasing share of the market. So both are good things, halo effect and competition are really welcome in our future. Thank you. Operator: The next question comes from Veronika Dubajova, Citi. Veronika Dubajova: Congratulations on a very impressive finish to the year and frankly, on a very impressive 2025. I will keep it to 2. I'm actually going to change it up a little bit and ask about Stellest and your ambitions in the U.S., Paul, I think based on the disclosure that you've given us, China is about a EUR 300 million or so revenue line for Stellest. How long do you think until we get to a similar number in the U.S.? And ultimately, how do you assess the potential in the U.S. market versus China? If you could talk about that, that would be super helpful. And then my second question is going back to wearables. And I was hoping maybe you can give us a little bit of a preview around what's in the pipeline for 2026. Obviously, I noted your comments around it sounds like Nuance Generation 2.0. But to the extent that you can maybe talk upon what what's planned on the sort of AI glasses front in terms of iterations in 2026, that would be helpful. Paul du Saillant: Yes. Thank you. So I will take your -- I'm sure I understand fully, and we also are trying to be reasonable in the ambition we can fix ourselves for the U.S. Let me give you just a few data points. In the U.S., you have 15 million children from the age of 5 to 17 that are corrected for their myopic vision. in China, this number, of course, is very much more than that. And in China, we have been able to see that myopia solution have been progressively deployed to 20% of those children that need -- that are corrected for myopia. So if you take that metric, which, of course, will take time, we have been in market really with those solutions for now 5, 6 years in China. But in the U.S., if you say that it could represent progressively 20% of the children that will embrace that technology, although Francesco will tell me every children have to be wearing Stellest. And he's right because it's actually the duty to make it available to any children. But this is the kind of order of magnitude that we see in the U.S. And the most important, it's that it's our duty and the duty of the parents of the -- all the stakeholders to make it available to equip the children in the U.S. with this solution because it's a good solution. It's super efficient. But that is what we are talking about. And be sure that there is a huge focus on that to reach millions of children with this solution in the U.S. Francesco Milleri: About the wearable pipeline once -- and just one thing on Stellest U.S. ambition. We start to understand that longevity is start when you are young. So that is why we are pushing so hard on Stellest. Stellest can change the progression of your myopia that it will prevent early stage of many others ocular pathology. So we believe that there is also a netic approach that we have -- we need to have because a kid with Stellest really have a chance to have a better life in the future. And this is the first time that is that problem we have to deal with. It's like in the pharma industry, when you need to make available some drugs to everybody because this will affect the future of your life, not just correct something, is slow down the pathology. That is really something that we are looking at, and we are reflecting how to really very well penetrated the market to give the information to doctors and to parents. For wearable pipeline and ones, of course, we believe that the portfolio has to grow very, very fast, as to touch different segments of our customers from luxury to more affordable eyeglasses and as to really have cover in a much better segmentation approach of female, male, kids, everyone that is -- can have interest in this new category. So it's not so easy like in analogic glasses to have a new product, but now the platform is very solid. We have more than one platform with different capability and features. And we are really focused on expanding our portfolio. The same for Nuance. We had a wonderful return on the first launch of Nuance. People have to really understand that is totally different approach, having Nuance towards in canal traditional hearing aids. At the first try, you don't see immediately the big benefit that amplification in canal gave to the patient. But in the long term, really, we had a strong return. People is telling us that their life change, the capability to have a clear understanding and conversation in-house with the TV or outside in the noisy place improve a lot. So the new launch that we expected for the second part of the year, it will really expand the portfolio with something that we will see big improvement in amplification and in the power supply, the battery and many other features, including the capability to take phone call from our hearing aids out of Canal. Operator: The next question comes from Thierry Cota, Bank of America. Thierry Cota: First, on the guidance, so you get for an aligned growth of sales and EBIT over the coming 5 years. I was wondering whether you think this is going to be aligned more or less every year or whether we should still have a margin drop at EBIT level in 2026. And secondly, in Q3 or on Q3, you gave the contribution of AI glasses to the growth of the quarter on an organic basis. Could you give us the same amount, the same number for Q4, please? Stefano Grassi: Thierry, let me answer your 2 questions here. First question on the guidance. I mean, we gave and shared a long-term guidance. And when we do that, we clearly don't guide on a single year. Clearly, there are certain things that are evident in 2026 as far as we see today. We have the annualization of tariffs. As you know, in 2025, we had from the second quarter until the end of '25, the impact of tariffs. We will annualize that effect in 2026. FX, apparently, it doesn't look like it's going to be our friend for 2026 with the U.S. dollar-euro exchange rate at this level. And obviously, the other thing that we know is that AI glasses will represent an important constituents of our growth profile this year. And we also know that the new initiative, the new assets that we recently deployed, Paul talked about the Stellest launch and deployment in the United States as the one and only solution to manage myopia as a lens. We know that the hearing aid will evolve throughout 2026. We know that the AR glasses family will expand in 2026. So all of those are constituents of this year. We have a checkpoint in the middle of the year where we'll see where we are in terms of trajectory. What I can tell you tonight is that already January started well. We are delivering a double-digit month in January. Clearly, is the lowest month in terms of contribution to the overall revenue. We have 11 months more to go, but it's a promising start for 2026. The second question you had, Thierry, was around the contribution of AR glasses. I can tell you, I mean, I think it's pretty evident that the contribution of AR glasses to our revenue profile, it was bigger during the second half of the year, particularly in the fourth quarter, even more than in the third quarter. I -- again, I think it's a natural evolution of our expansion of distribution network, as mentioned before. There's also probably a little bit of a seasonality linked to the holiday season. But again, it's nothing that shouldn't surprise as we keep rolling out a product that is highly desirable in the market and is very successful on both direct-to-consumer as well as Professional solution. Operator: The next question comes from Richard Felton, Goldman Sachs. Richard Felton: My first one is a follow-up on Veronika's question on Stellest in the U.S. I appreciate the comparison with China, but my understanding is that reimbursement is a little bit better in the U.S. So could you comment on current reimbursement coverage for Stellest and your expectations during 2026? And if that is reasonable to potentially drive higher penetration rates than you commented on in China? And my second question is on AI glasses. Are you able to provide any color on the acceleration in AI glasses in Q4 by product? So which products within the AI glasses portfolio were driving that acceleration in growth? Paul du Saillant: Reimbursement. So clearly, you're right, in the U.S., you have managed vision care programs and a very important, very positive news is that Stellest has already been put in the so-called formulary of VSP, which means that it is already very visible by all the eye care provider, the eye care professional as being a reimbursed product solution. So it's part of the installing this category, this product, this solution in the U.S. You are right, we are looking at every aspect that is going to make this, as Francesco and I said, a standard solution for children, for myopic children. Stefano Grassi: And I'll take the second question, Richard, with respect to eyeglasses. I have a hard time to honestly put on the spotlight a specific model for the fourth quarter because I think we had a successful rollout of the second generation of Ray-Ban Meta. We had an incredible, incredible curiosity and excitement around the launch of Vanguard and also the other product that we are selling during the end of the third quarter that is Houston. So -- and Meta Ray-Ban display, it's another product that attracted a lot of curiosity, a lot of interest. We have pretty much all the appointments booked in our stores to try on Meta Ray-Ban display booked throughout the end of the year. So all of them have been contributing to our successful story in the fourth quarter. Francesco Milleri: So thanks for following us also today. Really appreciate the patience that you show to our company and has been a really interesting question. I hope that next time, we will talk a little bit more about health care, predictive medicine and our investment in eye clinic and clinical study that is a part that will be really relevant for our future as eyeglasses are now. Thank you, and see you soon.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Long WALE REIT 2026 Half Year Results Briefing. [Operator Instructions] Please note that this conference is being recorded today, Thursday, the 12th February 2026. I would now like to hand the conference over to your host today, Mr. Avi Anger, Diversified's CEO. Thank you, sir. Please go ahead. Avi Anger: Good morning, everyone, and welcome to the Charter Hall Long WALE REIT Results Presentation for the 2026 half year. Presenting with me today is Erin Kent, Head of Long WALE REIT Finance. I would like to commence today's presentation with an acknowledgment of country. Charter Hall acknowledges the traditional custodians of the lands on which we work and gather. We pay our respects to elders, past and present and recognize their continued care and contribution to country. The format for today's presentation is that I will start with an overview of CLW and key highlights for the FY '26 half year. You will then hear from Erin, who will provide an overview of the financial performance of the REIT. I will then return to provide an operational update and portfolio overview and provide guidance for FY '26. We will then offer the opportunity for questions. Turning now to Slide 4 and key highlights for the half year. I'm pleased to report that we have delivered operating earnings of $0.1275 per security, representing 2% growth on the prior corresponding period. Our NTA at 31 December is $4.68 per security, an increase of 2% from June 2025. The portfolio delivered 3% growth in like-for-like net property income with 52% of income of the REIT being CPI linked and the balance being fixed reviews. 86% of the portfolio was independently valued during the half year with $139 million net valuation uplift achieved, representing an increase of 2.8% for the properties independently valued. The portfolio is sitting at a very high occupancy level of 99.9%. CLW has a long WALE of 9.2 years, providing security and continuity of income to our investors. We completed $1.1 billion of new interest rate hedging with average forecast hedging of 80% for the balance of this financial year. We remain focused on prudent capital management. Balance sheet gearing is 29.8% within the target range of 25% to 35%. In December 2025, Moody's reaffirmed CLW's Baa1 investment-grade credit rating. We are pleased to reaffirm FY '26 guidance of operating earnings and distribution per security of $0.255, reflecting 2% growth over FY '25. Turning to Slide 5. Today, CLW has a best-in-class $6 billion diversified real estate portfolio secured by long leases to blue-chip tenants with a weighted average lease term or WALE of 9.2 years. Our portfolio has an occupancy level of 99.9% and continues to be diversified by tenant, industry, geography and property type, which contributes to the stability of our cash flow. Our portfolio has delivered strong like-for-like net property income growth of 3%. CLW has 49% of its income derived from triple net lease properties. This is an important feature of our portfolio given that under a triple net lease structure, the tenant is responsible for all outgoings, maintenance and capital expenditure. The security of income of the REIT is also reinforced by the high-quality income stream generated from blue-chip tenants with 99% of the tenants of the REIT consisting of government, ASX, multinational or national businesses. Our largest tenants are federal and state governments, Endeavour Group, Telstra and BP. All leases in the portfolio have annual rent increases with 52% of annual rent reviews linked to CPI with the balance being fixed reviews. Turning to Slide 6. In the following slides, I'd like to provide an overview of the net lease real estate sector, its unique and distinguishing features and why we believe it's an attractive investment proposition. The net lease real estate sector is a sleep well at night investment class, providing investors with stable and resilient income. Long-term leases provide resilient and predictable cash flows. Tenants are blue-chip best-in-class operators, which reduces default risk. Properties are mission-critical to tenants, which reduces vacancy risk and portfolios are diversified by tenant, industry and property type. Turning to Slide 7. On this slide, we outline the features that make CLW Australia's largest and most diversified net lease REIT. CLW has predictable long-term rental cash flow as a result of its long 9.2-year WALE and 30-year WALE plus. The CLW portfolio has average annual rent increases of 3.1% with 52% of lease rent reviews being CPI-linked. CLW's portfolio has relatively minimal landlord expenses as a result of the net, double net and triple net leases in the portfolio. CLW features blue-chip tenant covenants with portfolio occupancy consistently near 100%. 99% of leases are to secure government and leading ASX-listed multinational and national tenants operating in non-discretionary essential industries. CLW's portfolio is diversified across core property sectors and 79% of the portfolio is located on the Eastern Seaboard in prime locations. Turning to Slide 8. CLW provides an attractive distribution yield relative to domestic and global investment options. Based on yesterday's closing price of CLW securities, CLW is forecast to deliver a 6.8% distribution yield in FY '26. This distribution yield is considerably higher than what are often considered alternative investment options such as Australian government bonds, big 4 banks, term deposits, the AREIT index and the ASX 200 Index. I would now like to hand over to Erin, who will provide an overview of the financial performance of the REIT. Erin Kent: Thank you, Avi, and good morning to everyone on the call. Commencing on Slide 10, which provides a summary of CLW's earnings for the first half of FY '26. The REIT achieved like-for-like net property income growth of 3%, which has been further supported by net transaction activity adding incremental income to the portfolio in the current period. Finance costs have increased by 13.6% due to the higher average debt drawn in the first half of FY '26 to fund transaction activity, combined with a higher weighted average cost of debt in the current reporting period. Both operating earnings per security and distribution per security for the first half of FY '26 were $0.1275, representing growth of 2% on the prior corresponding period and in line with our guidance provided to the market. Turning to Slide 11 and CLW's balance sheet position. During the current reporting period, the REIT completed $376 million of net property acquisitions, including the on-completion value of the new Coles distribution center in Truganina, which Avi will talk through shortly. 86% of CLW's portfolio was independently valued throughout the last 6 months, resulting in a total portfolio valuation uplift of $139 million. The REIT's NTA per security is $4.68, as at 31 December 2025, reflecting an increase of $0.09 since 30 June 2025, driven by the positive revaluations achieved during the half, which was partly offset by the fair value movement of debt and derivatives. Turning to Slide 12, which provides a summary of the REIT's capital management initiatives. During the first half of FY '26, CLW completed approximately $700 million of earnings accretive debt refinancing initiatives. $270 million of new facilities were established on CLW's balance sheet to fund the acquisitions completed in the half. These facilities were 5-year terms and reflected 5 to 10 basis points lower all-in margins versus CLW's current bank facilities. New and refinanced secured debt facilities of $430 million were successfully completed within CLW's joint venture investments. This includes the establishment of a new $375 million secured debt facility within CLW's ALE joint venture partnership, which was previously an unlevered investment. This refinance generates an equivalent capital return to CLW's balance sheet. Financing within the joint venture structure, which owns a high-quality, diverse portfolio of 80 properties resulted in a superior pricing outcome of over 20 basis points lower weighted average credit margin. An additional $55 million of existing joint venture facilities were also refinanced during the period, resulting in an enhanced covenant package and reduced margins of 20 to 45 basis points. As at 31 December 2025, balance sheet gearing was 29.8%, calculated on a pro forma basis, including the return of capital to CLW from the refinance of the ALE partnership. Look-through gearing sits at 41%. The REIT has total facilities calculated on a look-through basis of $3 billion with a weighted average debt maturity of 3.4 years and a smooth expiry profile from FY '27 through to FY '32. Moody's has also reaffirmed its Baa1 investment-grade credit rating for CLW. As at 31 December 2025, CLW's weighted average cost of debt was 4.4% based upon look-through debt drawn of $2.5 billion and look-through hedging of $1.8 billion at an average fixed rate of 2.6%. During the period, the REIT progressively established $1.1 billion of new hedges across its balance sheet and joint venture investments. This has resulted in materially higher hedging coverage of 80% across the second half of FY '26 and 71% on average during FY '27. I will now hand back to Avi to provide an operational update and portfolio overview. Avi Anger: Thank you, Erin. In the following slides, I would like to provide an operational update, overview of our portfolio and some key attributes of the portfolio. Turning to Slide 14. During the half year, we settled $376 million of net transactions, consisting of $455 million of acquisitions and $79 million of divestments. The acquisitions settled consists of acquisitions announced at CLW's 2025 full year results in August last year, together with the investments announced today in the Coles Core West Distribution Center and the Charter Hall Long WALE office partnership. The divestments consisted of the sale of CLW's interest in the Coles distribution center in Truganina and non-core divestments from our BP Australia and LWIP pub portfolios. The decision was made to sell our interest in the existing Coles distribution center in Truganina and reinvest these proceeds into the new Coles distribution center in Truganina. This is an attractive WALE-enhancing transaction for CLW, converting a 6.6-year WALE to a 20-year WALE from completion. Further details are included on the following slide. In our BP portfolio, which is co-owned alongside BP, BP identified 2 properties over the past 6 months that were considered non-core and recommended these for sale. As previously reported, in our LWIP portfolio, we sold the Brunswick Hotel after receiving an unsolicited offer. The property was sold at a 75% premium to our purchase price and 10% premium to our December book value, demonstrating the embedded value of our long WALE portfolios. Turning to Slide 15. We are pleased to announce that CLW has acquired a 49.9% interest in a super prime automated distribution center currently under construction in the core industrial market of Truganina in Melbourne's West. The facility is 100% pre-leased to Coles for an initial 20-year term. On completion, the facility will be a 68,100 square meter state-of-the-art distribution center and is expected to service all stores in Victoria and Tasmania and will integrate into Coles existing supply chain in South Australia and Western Australia with significant investment by Coles in the automation capabilities of the facility. Construction is expected to complete in 2027 with a forecast on completion value of $440 million with CLW share being $219.6 million. Turning to Slide 16. CLW has acquired a $17.6 million equity interest in a new Charter Hall Long WALE office partnership alongside Charter Hall Group and an institutional capital partner. The partnership owns a portfolio comprising interests in 5 modern prime office buildings in core CBD markets. The portfolio is 98% occupied and leased to Commonwealth and state government and blue-chip multinational tenants with an 18-year portfolio WALE at the time of acquisition and average fixed annual rent reviews of 3.8%. Slide 17 is our portfolio overview. At 31 December, the REIT consisted of a portfolio of 515 properties valued at approximately $6 billion. The portfolio average cap rate is 5.4%. The portfolio is virtually fully occupied with an occupancy of 99.9% and a long-dated WALE of 9.2 years. At December, CLW had 49% of its income derived from triple net lease properties. This is an important feature of our portfolio given that under a triple net lease structure, the tenant is responsible for all outgoings, maintenance and capital expenditure. The properties in the portfolio feature a blend of annual lease review structures, both fixed and CPI-linked. The mix of annual rent reviews resulted in a weighted average rent review of 3.1%. Turning now to Slide 18 and an outline of our tenant customers and the tenant diversification of the REIT. Our portfolio of long WALE properties is leased to high-quality tenants, including government, Endeavour Group, Telstra, BP, Metcash and Coles. The REIT's largest tenant exposures are to government tenants and best-in-class pub and bottle shop operator, the $6.5 billion Endeavour Group. In the data center and telecommunications sector, we have a partnership with another best-in-class operator, the $55 billion Telstra Corporation, which includes our portfolio of 37 exchange properties on long triple net leases. Our BP Australia and New Zealand portfolio of 285 properties on long triple net leases provides us with exposure to the resilient fuel and convenience retail sector. We also have a high proportion of tenants operating in the non-discretionary grocery and food sectors such as Woolworths, Coles, Metcash and Arnott's. Turning to Slide 19 and the industry diversification of our tenant customers. Within our overall portfolio, approximately 99% of tenants are ASX-listed, government or multinational or national corporations, with the vast majority of these tenants operating in non-discretionary defensive industries. The REIT's major sector exposures are to convenience retail, government, data centers and telecommunications, grocery and food manufacturing. Turning to Slide 20 and geographic and sector diversification of the REIT. Our portfolio is diversified by geography and sector type. 79% of the portfolio is located on the Eastern Seaboard in prime locations, whilst the REIT's largest sector exposures are to the convenience, net lease retail and industrial and logistics sectors. Turning to Slide 21. As can be seen from the chart on this slide, the REIT's portfolio has a long-dated lease expiry profile and reflects a low-risk position relative to our peers in the sector. Our portfolio WALE is a long-dated 9.2 years. We have minimal leases expiring in the near term, and we are in discussions with a number of tenants with expiries in FY '26 and beyond regarding lease renewals and extensions. We continue to work to push out our expiry profile as far as possible to the right of this chart, both through portfolio curation and negotiating lease extensions with our valued tenant customers. On Slide 22, we would like to outline that a significant portion of CLW's portfolio is comprised of properties that are of critical importance to the business operations of our tenant customers with the tenants likely to be in occupation well beyond the current lease term. 49% of CLW's portfolio consists of triple net leases. And if these tenants were to remain in occupation for all option periods under their leases, this would increase the WALE of the portfolio to 30 years today. This is particularly relevant in the context of our Endeavour leased ALE portfolio. This represents approximately 11% of CLW's portfolio by income with an expiry and market review in November 2028, less than 3 years away. This is dragging down the average WALE of our portfolio. These properties are very important to Endeavour's business with the tenant likely to remain in occupation of these properties at expiry of the current lease term. This also represents a significant positive market rent reversion opportunity for the REIT. Turning now to Slide 23 and environmental, social and corporate governance. We remain focused on implementing sustainability initiatives across our portfolio and consider ESG as a driver of long-term value for investor and tenant customers. As a business, we've taken accelerated climate action. CLW has maintained net zero Scope 1 and 2 emissions for assets that fall under the operational control of Charter Hall. Additionally, CLW has been focused on clean energy transition with 9.4 megawatts of solar installed across its portfolio, an increase of 500 kilowatts over the past 6 months. CLW's predominantly modern office portfolio features high environmental credentials, with 5.4 star NABERS Energy and 4.9 star NABERS Water ratings, an uplift of 0.2 stars over the past 6 months. CLW remains committed to aligning with best practice frameworks to support transparency and disclosure. The fund achieved a score of 82 in the 2025 GRESB assessment, a 4-point increase from last year. These preceding slides demonstrate the resilience and strength of our portfolio. Our portfolio WALE, quality of tenants and proportion of triple net leases provides better downside protection and more resilient income streams for our investors. Turning now to Slide 25. CLW's strategy is to provide investors with stable and secure income and target both income and capital growth through an exposure to a diversified portfolio leased to corporate and government tenants. The portfolio maintains a long 9.2-year WALE and occupancy remains near 100% with leases to secure blue-chip tenants underpinning stable rental cash flow, which continues to grow with annual rent increases. Active curation and asset recycling continues to enhance portfolio and tenant quality with recent transaction activity included in the FY '26 guidance. Based on information currently available and barring any unforeseen events, CLW reaffirms its FY '26 operating earnings per security of $0.255 and distribution per security of $0.255, which reflects 2% growth over FY '25. This is a distribution yield of 6.8% based on yesterday's closing price of CLW securities. Finally, I would like to acknowledge and thank the teams of people across the Charter Hall platform that contribute to the performance of CLW and the results delivered today. The Charter Hall Group provides the REIT with access to a high-caliber team of experts across all areas of the REIT's management and provides CLW with access to a best-in-class management platform. That concludes the presentation, and I would now like to invite questions. Operator: [Operator Instructions] Our first question comes from the line of Richard Jones with JPMorgan. Richard Jones: Just wondering if you can talk me through your thoughts around balance sheet gearing versus look-through gearing, which measure you focus on? And I guess, why do you see that being more relevant? Avi Anger: Richard, thanks for the question. Look, we have a balance sheet target, as you're aware of 25% to 35%, and we sit comfortably within that range. Look, we provide look-through gearing measure as well given that our covenant is pegged to that. So we give that measure as well. But bearing in mind that we have sufficient buffers to those covenants and also in our underlying JVs, we've got plenty of headroom to covenants as well. So they're both relevant at present, but the balance sheet one is the one that we have the target towards and probably the more relevant one going forward. Richard Jones: Okay. And can you clarify how much capital was released from the ALE debt facility being put in place? Erin Kent: Yes, sure. Richard, there was about $340 million representing CLW's 50% share released back to balance sheet. Richard Jones: And just on the Coles DC acquisition, what was the yield on cost on that? And what are the fixed escalators? Avi Anger: Yes. Look, Richard, we're limited in the information we can provide on that given it is commercial in confidence between us and Coles. So we could only provide at this point the information that we've given in the presentation. Richard Jones: Okay. And then -- Avi Anger: Suffice to say, I can say though, what I can say, Richard, is that it is accretive to us. So the yield at which we sold our existing Coles facility is lower than the yield on which the yield on cost will achieve through this development. So it's accretive in that sense. And the rent reviews are also better than what we've got. Operator: Our next question comes from the line of Simon Chan with Morgan Stanley. Simon Chan: A couple of simple ones. So what's your average debt margin across your portfolio now that you've done all this debt restructuring, jamming stuff into the ALE level, et cetera? Erin Kent: Simon, our all-in margin across the entire platform has come down closer to 140 basis points. Simon Chan: And what's the quantum of savings there relative to before all these activities? Erin Kent: We're sitting at around 145 before the restructuring to the JVs. Avi Anger: It's been coming down [indiscernible]. It's -- we were at 150, then 145, now 140. And I think we are seeing competitive margins from the banks. Our treasury team has done a great job at being able to secure and refinance our facilities at attractive margins. So at the moment, based on other discussions that are going on, I wouldn't be surprised to see that coming down. So yes, we've got some headwinds with rates, but I think we've got a little bit of tailwinds as well with those margins. So yes, that's sort of the way we're seeing things at the moment. Simon Chan: If you reckon it could head towards like 120 like as low as some of your other stable banks or because the asset class is different, we should hold you to the same benchmark? Avi Anger: Well, I don't want to be held to numbers at this point, but I think we can -- as I mentioned, I think I'd like to see that number coming down going forward, but we'll keep working with our treasury team and hopefully can deliver some positive news in future results periods. Simon Chan: Look forward to that one. Can we -- can you give me a bit of a color on this long WALE office partnership? Like what's the rationale there? I mean $17 million is not exactly a huge number. Like is there a strategic reason for owning the stake? And also, what is this fund? Because from memory, 275 George and 10 Franklin were assets that were in CHOT2 right? So is this partnership more of a fund-of-fund style investment? Avi Anger: No. Look, I'll give you the background to this. So there's a few questions in your -- in that sort of what you've just said, so I'll try and sort of separate them out. So the rationale is that we believe that long lease, modern, high-quality core CBD office is going to perform very well going forward. We've seen cap rates expand and unlike other sectors haven't started contracting yet. We see very strong tenant demand for that type of office, which is different to, say, other less desirable types of office product. So we're very -- we see a lot of upside going forward in sort of modern core CBD, long WALE office. The WALE of this portfolio fits what we're about, given it's sort of an 18-year portfolio WALE with some of the properties -- the 2 largest investments in that portfolio having close to 30-year WALE. So that ticks the WALE box for us. We would have liked to make a larger investment in that partnership. We're somewhat limited at present, but it's something we can look at in the future, and we're able to secure a position that we can build on given that some of it is owned still by Charter Hall Group. And that's sort of the thesis behind it. Is it -- do I miss -- I may have missed part of the question, but I think that covers most of it. Simon Chan: Yes, that covers most. The other part is just in relation to 275 George and 10 Franklin. I thought they were actually CHOT2 assets. Avi Anger: No. So this is one -- that's part of it and then part of it is owned in this vehicle. But I might just say that it is -- those 2 assets are the smallest interests in the portfolio, and they probably represent not even -- not about 15% of the overall. So they're pretty small. The largest 2 assets in the portfolio -- sort of 60% of the portfolio is made up of an interest in 52 Martin Place, which is a 30-year WALE to New South Wales government and 140 Lonsdale in Melbourne, which is a 20 -- 27-year WALE remaining to Australian Federal Police. So that gives you a bit more color around the portfolio. The -- by far, the largest weightings to those -- that flavor of asset as opposed to the 2 you've mentioned. Simon Chan: And just one more for me. Telstra Canberra, what's the latest there? Avi Anger: Well, as we mentioned previously, they're vacating. We secured a 6-month extension with them over part of the building. So they'll start vacating part of the building in the next month or 2 and then the balance at the end of the year, and we've been active in the market talking to potential tenants. And we had -- we're having good dialogue with tenants on that building, and we've had good interest. What's good about that property is that it's a good size for Canberra being about 14,000-odd square meters in the heart of the Canberra CBD. It's a very prominent corner location right next to the Canberra center, which is the largest sort of best quality regional mall in the ACT. And it's probably -- that area is probably considered the CBD of Canberra. So we've got interest from both private and government type tenants. And I'm hopeful that we can provide some more updates on progress on leasing at our next results. But I'm encouraged by the interest we're seeing. Operator: Please standby for our next question. Our next question comes from the line of Daniel Lees with Jarden. Daniel Lees: I just got a question on the ALE portfolio. Can you just give us a sense of how under-rented that portfolio is today and perhaps if you've got any potential to bring the negotiation forward? Avi Anger: Yes. Sure, Daniel. Look, as we've mentioned previously, at the time of acquisition, the LEP trust that we acquired had come out to the market and said that their view was the portfolio was about 30% under-rented. We haven't come out with a number. We -- although we can -- we're very strongly of the view that it's improved from when we acquired the portfolio. So that's probably increased. But we're not going to give our number because that's going to be a negotiation that we're going to have to enter into with the Endeavour Group when the market review comes up in November 2028. So we are -- it's significantly under-rented, and we'll work towards that market review in November '28. Bringing it forward, there's no active dialogue in relation to that, but we're open to discussions if they were to eventuate. Daniel Lees: And just on the Department of Defense in Canberra, any news in your strategy there? Any approach for the shorter WALE lease assets there and what you're doing about it? Avi Anger: Yes. I mean the approach there was always to work with that tenant. We're a long lease REIT, so to work with the tenant to keep them in occupation and extend the lease. So that's the strategy, and that's what we'll be working towards. Operator: Our next question comes from the line of Solomon Zhang with UBS. Solomon Zhang: [indiscernible]. Maybe a question for Erin. It's good to see the lift in hedging and it looks like you're sort of swapped or hedged at the mid-3 range. Just wanted to confirm, did you pay any capital for the swaps in the period? The reason I ask, I can see a reference to payment in the derivative financial instruments in the cash flow statement, but it hasn't been separately split out. Erin Kent: Solomon, yes, there were some usual swap execution costs, although these are minimal. And I think as you've noticed, our hedge rates have increased to delay -- due to us layering in close to market-based swap rates. So it's very immaterial in the period. Avi Anger: Yes, you'll see in our -- if you compare the swap charts from last period to this period, you see the rates gone up. So that reflects the market, right? Solomon Zhang: Yes. So it was pretty immaterial in terms of the size of the amounts paid. Could you quantify it? Avi Anger: Yes, they were just the amounts we would need to pay in terms of upfront and execution costs that we would ordinarily incur. Solomon Zhang: Yes. And maybe just phasing of the new Coles DC CapEx. Could you just talk to that? Avi Anger: Sorry, what was it -- can you repeat the question? Solomon Zhang: The phasing of the new distribution center, CoreWest. So could you just talk to how the phasing of the CapEx? Avi Anger: Yes, yes. Solomon Zhang: Looks like in the next few years. Avi Anger: Sure, sure. So that's going to complete in 2027. So over the next 1.5 years, we -- it's about half -- we're about halfway there. So we've contributed about half of the $220 million to date. And then over the next 18 to 24 months, we'll fund the balance. Operator: Please standby for our next question. Our next question comes from the line of Suraj Nebhani of Citi. Suraj Nebhani: Maybe one question for Erin first. Just on this ALE facility. Is it fair to say that essentially that puts the gearing out of the balance sheet into the joint venture? Is that the way to think of it? And then what happens with the capital that comes back? Are you paying down debt at the balance sheet level? Erin Kent: Yes. Suraj, this facility was within that joint venture structure. So it did result in a reduction in our balance sheet debt drawn number and it also reduces our investments in JVs line within total assets as this is now a share of a net JV investment number rather than a gross. Suraj Nebhani: That makes sense. And I guess just one question, Avi, for you on the development asset with Coles. Obviously, you acquired on a non-completion basis over here. Are you looking at more such deals in the future? And how do you think about the appetite that you guys have and the capacity from a balance sheet perspective? Avi Anger: Yes. I mean, as you know, Suraj, we're always looking for sale and leaseback or long WALE deals like this. It's been a large part of what we've done since we listed almost 10 years ago. So it's very much on our radar. How we fund those deals going forward is going to be a combination, as you've seen, [ of ] recycling as we've done in this instance, where we've taken an asset that's sort of an older one with a shorter WALE, and we're able to recycle the proceeds of that into this. We'll look at opportunities like that. And we'll also -- as time passes and the market inevitably moves in cycles, we'll hopefully get back to a point in the not-too-distant future, where we can grow through actively raising capital. But we'll -- both those sources of funding new deals are available to us. So yes, look, it's -- and we're very fortunate that as part of the Charter Hall Group, we get access to those type of deals. That's not a deal that was available on market. That was something that Charter Hall was able to negotiate and secure given our relationships with the likes of Coles. So we'll continue to look at deals like that, and we're fortunate to have the opportunity to do those. Suraj Nebhani: And one final one, Avi. There were some comments -- I mean, there's obviously a chart in the presentation around the attractive distribution yield. I agree, 7%, almost 7% is a very good yield. I guess, if you look at it on a price to NTA basis as well, the stock is obviously pricing a big discount to NTA, which is going into the yield number. But do you -- as a management team, I guess, from your perspective, how are you thinking about being able to close that discount? I know in the past, you resort to a $50 million buyback as well. Is that on the cards or some other measures that you can take? Avi Anger: Yes. Look, I think at the moment, we're in a volatile market. A few -- not that long ago, only a few months ago, we were $4.70 and now with circa $3.75 or $3.80. The price is jumping around a lot. It's volatile interest rate environment is impacting that. I'm hopeful it's short term, as you say, it's a very attractive distribution yield. It's a large discount to NTA. And I think performance and delivering on earnings, delivering on earnings growth, that's the way we're going to keep delivering value for investors and close that gap. But that's -- and that's what we're focused on. We don't -- there's no intention at this point for -- to do a buyback. Operator: Standby for our next question. Our next question comes from the line of Ben Brayshaw with Barrenjoey. Benjamin Brayshaw: Av, just on the DC you acquired in Truganina, I just want to, I guess, clarify, will Coles be relocating out of the building that you previously owned? Or is it a new requirement that will support the lease for the fund through? Avi Anger: Yes. I'm not aware of what their intentions are for the building that we've divested. They still have close to 7 years on that lease and it's a growing business. They may well -- I don't know, but they may well retain that and use the new one. But I'm not privy to that information. Benjamin Brayshaw: No problem. And just on the pricing achieved for the sale, are you able to clarify how that compared with the book value at 30 June prior to the transaction? Avi Anger: It was at -- at book value. Operator: Please standby for our next question. Our next question comes from the line of David Pobucky with Macquarie Group. David Pobucky: Just one follow-up on look-through gearing, which is now at 41%. Are you able to provide where covenants sit? And does that level and the fact that rates have moved higher constrain your ability to acquire for growth without continuing to divest lower-yielding assets? Avi Anger: So David, in terms of where our covenant sits, the current target -- sorry, the current covenant is 50%, and there's sufficient headroom there, particularly what we're seeing with valuations increase, and we expect notwithstanding movements in interest rates, I think cap rates have stabilized, and we have rental growth year-on-year coming through the portfolio that should continue to drive valuation growth. We're very comfortable with where we sit on that front. But in terms of new acquisitions, we need to, as I mentioned earlier, recycle or look at points in the market and the cycle, where we can continue to grow through equity raisings or something like that. But there's no intention at this stage to do more debt-funded acquisitions if that's the -- that's the question. David Pobucky: And just a follow-up on the Coles DC as well. What's the development risk? Is there a construction or income guarantee, builders coupon, anything of the like? Avi Anger: It's just a straight construction of a facility that's 100% precommitted to Coles. We have a builder delivering the facility. The vast majority of risk has been absorbed by the builder. So that's how we would usually structure those type of deals. David Pobucky: And just one final one around guidance. Are you able to provide what weighted average cost of debt is in guidance? And has that changed since the start of the year given the debt initiatives you completed? Avi Anger: The weighted average cost of debt remained -- the guidance hasn't changed. So we've reaffirmed guidance today. So the weighted average cost of debt is as per pack. Yes. Erin Kent: Yes. So we expect over FY '26, we'll be at around that 4.4%, and that doesn't move much from 31 December, given we've just rolled our March quarter debt at 3.8% floating, and we've assumed market floating rates over that last quarter. And the hedge percentage is obviously outlined in the pack as well. Operator: [Operator Instructions] Please standby for our next question. Our next question comes from the line of Winky Tan with Morningstar. Yingqi Tan: Just a very quick one for me. Would you be able to share your interest coverage ratio as of December 31? Erin Kent: Yes, sure. Winky, our ICR was sitting at about 2.9x at 31 December. Operator: Please standby for our next question. Our next question comes from the line of Peter Davidson with Pendal. Peter Davidson: Just a quick question on this CoreWest at Truganina. Is that an Ocado facility or the previous one was Ocado? What's the purpose of that Coles DC? Is it to home or is it to shops? Avi Anger: Yes. No, it's not Ocado. This one is to shop, so it services their network, their main Victorian distribution center, but it will be fully automated, that type of structure like the current breed of DCs. Peter Davidson: The second one, Avi, I just noticed your comments about BP nominating a couple of service station sites that they were quite happy to sell. The question is, do you go through them yourselves as well with a sort of fine-tooth comb just to find whether you can -- there's a few assets you could sell perhaps well above book and just incrementally increase returns to shareholders. Avi Anger: So -- yes, the way it works, Pete, and you may have noticed in our results, there's usually every results period, there's a couple of small surveys that we announced that we've sold. And the way that works is BP, given if we're in a joint venture with them, they'll come to us and identify assets that they believe are non-core to the portfolio that the joint venture wants to sell, and we do that and we have made whole. So we don't -- we're not left with -- but we're very happy with the portfolio, and we're happy with the WALE. And so long as BP is happy with those -- the sites, then we continue to own them long term and the ones that they want to curate, we're happy to participate along with them. And as part of the deal, we're no worse off. Peter Davidson: Same question again for the Endeavour relationship, the old LEP portfolio. I mean, do you go through that portfolio and identify sites because a lot of that's supported by bottle shop sales, but bottle shop sales are more difficult now than they used to be. It's a weaker market than it used to be. So do you go through and identify potential sites there, which you might be able to perhaps realize, make the portfolio a bit smaller, increase the returns, sell above book value. Avi Anger: Yes. I mean, we have done. And as just reported today, there was one asset, where we received an offer well above book and decided to sell, and that happens from time to time. We're more than happy to look at that. And yes, we're happy to -- but otherwise, longer term, we think there's a lot of value in the portfolio. Unless we get an offer well above book that's -- then we want to own these assets and continue to benefit and enjoy the strong rental growth and the growth in underlying land value. And particularly in the case of the ALE portfolio, we've got a big rent reversion coming. So we're not really inclined to want to give that away. So we just keep working towards that. Peter Davidson: Okay. And then just last one for Erin. Just is there any opportunity for margins to come down Erin, in this portfolio? I know that rates are going up in the background, and we've probably got a couple of rate hikes coming. But what about the margin, the margin outlook? Erin Kent: Yes, sure. Peter, so credit spreads are at cyclical lows and the bank and loan markets do remain highly constructive with strong support received for assets like CLW's portfolio. The Charter Hall team, I think, as Avi mentioned earlier, very active in driving these refinancing opportunities to try and capture some of the favorable margins in the current environment. So yes, that's definitely a priority. Peter Davidson: And what sort of savings might you capture? So you captured 20 points would -- what impact -- so 20 points lower margin. How would that sort of play out in terms of borrowing costs? Is it all in 1 year? Or is it going to be staggered over time? Or how do people factor that in? Avi Anger: Well, if we were able to renegotiate debt facilities that typically -- that would become applicable straight away. So yes, I mean, if we did the whole $2.5 billion of debt and renegotiated it all in the next few months, then yes, you could realize that the way you're looking, it's correct. But it just depends how quickly we can work through the book and renegotiate facilities. Peter Davidson: Yes. So I mean that's really the question, Avi, it's just like how would it actually play out within the portfolio, you might do it piece by piece as each fund matures. Avi Anger: Correct. I mean we've just done ALE, and that was a favorable outcome. And we'll continue to work with our treasury team to look across the portfolio and identify opportunities for further savings. Operator: Please standby for our next question. We have a follow-up question from the line of Ben Brayshaw with Barrenjoey. Benjamin Brayshaw: Avi, thanks for taking my follow-up question. Just wanted to go back to our discussion earlier on the Coles DC in Truganina. The book value in the presentation, just gone back and checked that June was $75.9 million versus the transaction price in the accounts of $71.4 million. So I just wanted to clarify, I think you indicated that the transaction went through at book. But just by way of that comparison, it would appear to be about 6% below. Avi Anger: Below June book, not December book. Benjamin Brayshaw: That's right, below June book. Avi Anger: Yes. But I'm saying that there was a valuation at the time the transaction was undertaken. So we -- that was -- that valuation stale being almost 8 months old. So the most recent valuation that was done on the property was the price at which the transaction occurred. Benjamin Brayshaw: So you marked it down. Avi Anger: [indiscernible] the value down. Yes. Because as the WALE comes down on that asset, the valuation was impacted and there was a bit of cap rate movement as well. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Avi for closing remarks. Avi Anger: Thanks, everyone. Appreciate your time today and for joining the call, and we look forward to catching up with you in one-on-one meetings in the coming days and weeks. Thank you.
Frank Calabria: Good morning, everyone, and welcome to the 2026 Half Year Results for Origin Energy. It's Frank Calabria here, and I'm joined by my executive leadership team. I'll provide a brief overview of the performance and outlook. Tony Lucas will also provide an overview of the financial results, and we'll follow that with questions and answers. And you may already be aware, but you'll see that we've got additional detail included in the appendices. Okay. So then turning to the highlights. I think the overall message for Origin in this half is a half year results that have been solid, allowing an upgrade to the full year guidance for Energy Markets. Our retail performance continued to strengthen. Grid scale batteries added further portfolio flexibility. Gas production was steady. And we continued to maintain cost management discipline. Turning to the summary of the financial results. Overall, we've got EBITDA of $860 million for Energy Markets, which is higher than expected with continued strong operational performance. Integrated Gas also had an EBITDA of $860 million, which was in line with expectations for APLNG and LNG trading. Octopus recorded an EBITDA loss of $89 million for the half, reflecting seasonality in their earnings. U.K. regulatory costs, they've invested in smart tariffs to grow connected customers and they continue to invest in the scaling of their non-U.K. retail and energy services businesses. Turning to the business highlights. Operational performance across the portfolio has been strong. We grew our customer base by 96,000. We reduced our cost to serve by $32 million. We brought the Eraring battery Stage 1 online, and it's generating revenue since December, and it was delivered on time and on budget. Supernode 1 is in commissioning in January, and we've been earning revenue on that battery as well. All other battery developments remain on track. And we've committed through the half, we committed a further $80 million to expand Eraring Stage 2 battery, which will now be nearly 6 hours of storage. As you probably all know, we've announced that the Eraring power station operations have been extended to April 2029. And during the period, we continue to progress the Golden Beach gas storage project and have committed a further $25 million to that project. As announced in late December, Kraken announced its first stand-alone equity raise at a look-through valuation of USD 8.65 billion, alongside a major licensing agreement that increased contracted accounts to the Kraken platform to 90 million and they now have doubled their contracted annual recurring revenue in the last 18 months. Octopus continued its rapid growth. It added 1.2 million customer accounts in the half with 0.8 million, 800,000 of those accounts growing outside of the U.K. The Board determined a $0.30 fully franked interim dividend, which is really supported by our strong cash flow and balance sheet strength. So now turning to the financial highlights. Statutory profit for the half was $557 million. The underlying profit was $593 million. The underlying EBITDA was $1,589 million, that you can see there, with higher-than-expected Energy Markets earnings offset by the lower Integrated Gas earnings, as I say, which was in line with expectations and also a lower contribution from Octopus Energy. Good to see our adjusted free cash flow lifting. It's up by $187 million to $705 million. The balance sheet continues to be strength reflected by net debt to adjusted underlying EBITDA of 2x. And as I said, we've declared a $0.30 interim dividend fully franked. Turning to our purpose, which we continue to make sure we focus on getting energy right for our customers, communities and planet. Just very briefly during the half, what we've achieved, $23 million spent on customer hardship. Lifted our customer happiness to 71%. We've expanded use of AI to improve customer experience and outcomes. We've launched new battery products, and we continue to be one of the largest East Coast gas suppliers through APLNG. For communities, we spent $232 million with regional suppliers, $14.4 million with First Nation suppliers. We committed a further -- we committed $1.5 million of the $5 million Eraring Community Investment Fund in the period. And through our foundation, made contributions of $2.1 million and pleasingly 3,500 employee hours as we continue to contribute to the community more broadly. When it comes to the planet, we received very strong support for our second Climate Transition Action Plan with a 94.67% vote. And the Eraring power station extension is not expected to impact our climate targets or ambitions. As I said, the Eraring batteries online for Stage 1, and we've continued to grow that through Stage 2. We now have over 30 megawatts of community batteries under operation, and we continue to progress the pre-FID activities for our 1.5 gigawatt Yanco Delta project. Looking to the next slide. Origin strategy remains to lead the energy transition through cleaner energy and customer solutions, and we do that with a clear focus of continuing to deliver reliable and affordable energy along the way. To achieve that, we've established differentiated assets and capabilities that we continue to build upon. And you can see that, that ranges from customer energy supply, energy resource, Octopus and Kraken. And that turns us to our investment proposition, which combines 2 things: a leading Australian energy businesses with strong cash flows, that are being generated and fully franked dividends and continuing to enable us to invest in the transition. And in addition to that, we have a significant global growth potential through these businesses, Octopus Energy and Kraken Technologies. Energy Markets benefits from a leading brand, advanced technology platforms, advantaged assets and cost position, and there are lots of opportunities for growth across customers, products, renewables and storage that we remain very firmly focused on executing. Through APLNG, we have a very low cost of supply. We have very strong reserves and exciting exploration opportunities, and our reserves are well beyond the export contracts we have today. So a very long runway and valuable asset. Our dividend yield is 5.3% and that is before you take into account the franking benefit. Turning to Octopus and Kraken. Octopus is now the largest U.K. energy retailer, and it's scaling both in the non-U.K. markets and also in Energy Services. And that brand, which is very strong in the U.K., is now building itself in more than one market. In Kraken Technologies, we have a global technology platform that is growing rapidly and has a significant addressable market ahead of it. I'll now hand over to Tony Lucas, and he will take you through the financial results. Anthony Lucas: Thank you, Frank. Tony Lucas here, CFO of Origin. Good morning, everyone, and thank you for joining. I'll spend a few minutes with you digging a little deeper into the segment results as well as our cash and balance sheet positions. Today's result reflects three consistent themes, the strength of our diverse portfolio, our disciplined approach to capital management, and our continued delivery of sustainable returns for our shareholders. Starting with EBITDA. Group earnings were supported by stronger-than-expected performance in Energy Markets and an Integrated Gas contribution that was in line with expectations. In Energy Markets, our strong and diverse portfolio resulted in a 17% increase in EBITDA. Electricity was higher, reflecting the lagged flow-through of higher wholesale pricing into retail customer tariffs, combined with lower green scheme costs and solar feed-in costs. Gas was lower on the prior period. This reflected lower trading volumes and some legacy contracts rolling off. Importantly, we continue to expect full year gas earnings to be moderately higher than fin year '25 as both sale and purchase contracts reprice in the second half. Pleasingly, reduction in cost to serve continued with ongoing Kraken benefits, and we remain on track to deliver the midpoint of our cost-out targets. As we continue to grow the customer base, bring additional grid scale batteries online, progress the Yanco Delta development, the business remains very well positioned to deliver through the energy transition. Turning to the Integrated Gas business. The contribution was in line with expectations with lower realized prices and volumes at APLNG and lower trading LNG trading gains. Realized prices in APLNG reflected softer oil and spot LNG markets and also the impact of the Sinopec price review, which was effective 1 January 2025. APLNG continues to focus on field optimization activities, including improved production forecasting, which informs low-cost drilling opportunities. APLNG remains a world-class asset and a significant contributor to the East Coast gas market with 22% of sales volumes delivered to domestic customers. Turning to Octopus Energy. Kraken revenue growth continued. However, EBITDA was lower. This was due to investment in accelerated client delivery and growth opportunities, as well as a change in the capitalization policy for the technology development costs. The contribution from the U.K. retail business was lower due to investment in smart tariffs to grow Flex customers and the expansion of the U.K. government's warm home discount scheme, where we expect some recovery in fin year '27 of those costs. Octopus continues to invest in its non-U.K. expansion and in its scaling of its Energy Services business with continued customer growth across the U.K. and non-U.K. markets and the global expansion of Kraken, Origin's investment in both Octopus and Kraken continue to build substantial long-term value for our shareholders. Moving on to cash. We delivered a strong cash generation in this period. Energy Markets cash conversion was above 100% and fully franked dividends from APLNG of $542 million. CapEx reduced $400 million in the period. This reflected the fact that we've passed the peak of our spend on the battery growth projects. Tax paid was $500 million lower due to a higher balancing payment last year for the fin year '24 tax return. That was a function of the higher earnings and partially franked APLNG dividends in that return. Also worth noting, we expect a net tax refund in the second half, and this should result in tax paid of around $160 million for fin year '26. Our two strong businesses continue to generate the cash required to deliver our strategy execution and shareholder returns. Now focusing on the balance sheet. We saw a small reduction in adjusted net debt to $4.59 billion. This reflected strong operating cash flows in APLNG distributions, largely offset by the CapEx and dividend. We're currently at the bottom end of our 2x to 3x target range of adjusted net debt to adjusted underlying EBITDA. As we deliver the battery programs, we expect to move further into the target range over fin year '26 and fin year '27, noting a lease liability to be recognized in relation to the tolled batteries as they come online. Overall, the balance sheet remains strong and flexible. Finally, capital allocation. The Board is determined to pay a steady fully franked dividend of $0.30 per share, reflecting continued balance sheet strength and the cash generation from two strong businesses. As Frank mentioned, this represents a 5.3% dividend yield before franking benefits and is consistent with our policy to deliver sustainable distributions to shareholders through the business cycle. When I reflect on this result, what stands out to me is that we're consistently delivering what we said we would. We're investing selectively and thoughtfully. We remain disciplined and we're keeping the business well positioned to deliver for shareholders and customers through the energy transition. I'll hand back to Frank now to delve deeper into underlying business drivers. Frank Calabria: Thanks very much, Tony. Now we'll turn to business performance, which dropped into a little bit more detail based on the summary you've just heard from Tony and I before. Turning firstly to Energy Markets. We continue to track in line with our medium-term targets there. Our electricity earnings were above the $25 to $40 a megawatt hour target range that we've set for the half. We expect to be above that range also for the full year 2026. And in 2027, we'll benefit from the ramp-up of batteries coming online. But we're also seeing some lower wholesale electricity prices in recent times. So that has an offsetting impact. For Gas earnings, they remain in line with budget at $3 to $4 a gigajoule, and we are on track to deliver the $100 million to $150 million cost savings in FY '26 or by FY '26. That's driven by a range of things, good deployment of technology, organizational improvements, efficiency more broadly. And what we are seeing even throughout that, despite the fact that we've achieved such a good cost reduction is that with the non-repeat of the energy bill relief we've got some higher bad and doubtful debts that have come through this period of time. Then turning to customer. The momentum remains very strong. We've now had more than 10 consecutive halves of customer growth. We increased customers by 96,000 in this half. It does include a 52,000 customer accounts from the Energy Locals acquisition. And in February, we also completed a further acquisition of 1st Energy, which will add an additional 80,000 customers to what you see on that chart. We have an unrivaled brand. We've got the #1 community energy services or embedded networks business with 484,000 customers. And we've grown the Internet on a compound annual growth rate by 37% over the last 3 years, and that continues to grow. We've got market-leading churn and a continued improvement in customer experience, including the introduction of new propositions. And we have leading tech and product, and we -- AI continues to scale, particularly for our customer business. And you can see there in terms of messages sent, but in voice, we're now serving over 100,000 customers up from 25,000 customers. We have grown digital interactions to our customers for up to 80% from 75% and our market-leading virtual power plant has continued to grow. Turning to Energy Supply. The generation performance has been strong. We've talked about bringing the Eraring Stage 1 battery online, and you can see good early performance as shown on that left-hand chart. More broadly, for generation performance, we've had high reliability for the gas peaking and hydro fleet. We've contracted the coal for the 2026 financial year, it's largely, fully contracted and that's at prices lower than the prior financial year. And for Eraring, we generated 6.4 terawatt hours in the half and an availability of 72.26%, which is measured after both planned and unplanned outages. On the right-hand side, our investments in storage are on track. They're both on time and on budget. It's a 1.7 gigawatt or 6.3 gigawatt hour program underway. And once again, we are confirming our target post-tax returns of between 8% and 11% with the front end of those asset lives at the upper end. APLNG revenue declined due to lower realized LNG prices. I'm now on Slide 16, primarily reflecting oil price movements. And also a contribution to that by the Sinopec price review. Our costs remained stable at $4.30 a gigajoule compared to the second half of FY '25. We've got higher optimization activity. We've completed key infrastructure projects and exploration through that half. And then that's been offset by reduced power costs and some lower nonoperated development. But good to see we're holding that discipline of $4.30 that we gave guidance to the market last time we issued results. Slide 17 takes us into a little bit more depth around that production optimization and midterm supply options. Production of 339 petajoules for the half is on track to deliver 645 to 680 petajoules guidance for the full financial year. It really is a story of continued field optimization and us progressing our midterm supply options. When we talk field optimization activity, we're really talking about well availability, which is good to see that it's grown to 95% over the last year. That's driven by increased workovers, deployment of artificial lift systems, formation stabilization. And we're now performing the majority of those of our major workovers being performed live, which has a production benefit. We've also completed several gathering lines. So a very extensive program being executed by the team there. At the same time, in terms of midterm supply options, they include additional processing capacity in the Western asset, and we're also awaiting EPBC and other approvals to drill further wells in the Eastern asset, most notably the Ironbark program. Over the last 12 months, production forecasting has continued to improve, and that's giving more and more confidence and information for us to be choosing the right opportunities to be drilled and the right optimization activity we carried out. Just dropping into exploration and certainly made reference before, but we're providing further information on that, and in particular, the advancing exploration opportunities in the Taroom Trough where APLNG holds a large 10-year footprint across both our operated and nonoperated holdings. And most of those are near our existing gas infrastructure. To date, our activity has been concentrated along that shallow eastern margins of the trough with the initial exploration wells delivering encouraging gas flows. And three additional pilot wells are being drilled and are to be fracture-stimulated with production testing to commence this calendar year. So we've got a bit of activity underway there. And in separate or other exploration activity, we've successfully fracture stimulated and completed the horizontal CSG wells in the Peat, which is the first in Queensland. So another achievement there. So very excited by our exploration opportunities and the activity we have underway. Now turning to Kraken and Octopus Energy. I did talk about the fact that these transactions at the commencement of the presentation. The net outcome of those is that Origin maintains or retains a 22.7% economic interest in Kraken and Octopus Energy. And by the way, there will be an Investor Day with the CEO of Kraken on the 28th of April in Sydney, which is good and gives an opportunity for investors to get a much deeper dive into that business as well. Those series of transactions are summarized on the right-hand side, and I did go through those before key highlights. Kraken did its first stand-alone raise at USD 1 billion. It's a valuation of USD 8.65 billion. Origin will invest AUD 210 million as part of that and get 1.5% in exchange for releasing exclusivity to the Kraken platform in Energy in Australia. The major licensing agreement is another step along the way, gives line of sight to those 100 million accounts and give a bit of guidance as to where that USD 1 billion raise funds will be deployed, $150 million retained in Kraken, $850 million retained in Octopus. Octopus Capital and other investors have injected a further $320 million funding in Octopus Energy, and that will also support future growth and other requirements. Just [ move forward ] to the Slide 20, just to give some context that you can see, just really what's happened over time for this investment and as much to identify also the investors that have come along at various points on the journey. And I think it's been a very deliberate strategy to introduce investors with key capabilities that that benefit the organization over time, and you can see they're very credible and also to highlight what we've committed, which is AUD 1.4 billion over the journey. Now turning to Octopus Energy's results on Slide 21. They grew U.K. customer accounts by 400,000. They now have 14.5 million U.K. customer accounts. They capture 35% of switches, churn is 40% below peers. And the customer base is high quality, and they have much better than market collection performance. And as we highlighted before they've invested in smart tariffs to really grow that Flex customers and further customer lifetime value. On international, they've grown that customer account base by 28%. So that's up by 800,000. They have now 3.5 million accounts in those markets. They continue to be deliberate about the choices where they invest for the growth in those markets and they make those decisions pretty actively. And you can see there are emerging scale benefits, and we give an example there about direct acquisitions that are occurring in Italy and Spain. Germany is also, I think, notably reached 1 million customer accounts. For Energy Services, they're increasing cross-sell, increasing scale, and they've improved efficiencies since the start of the year, which has contributed to a halving of the energy services investment compared to the prior comparable half period and good to see the progress there. Turning to Kraken. Kraken continues to scale that competitive advantage that they have with the software platform, track record in migration is very strong. The revenue growth matches the completion of those migrations. So therefore, it's not always linear. And there has been a margin impact this year by lower capitalization of development costs as the customers move into the operations phase. So we've sort of guided what's really happened over the last 3 years to give you a sense for the EBITDA margin, which has been 40% over the last 3-plus years. Continuing to invest in future growth for Kraken, that's a delivery capacity that's capabilities, including AI talent. It is really an enterprise-grade platform that's very well set up, and therefore, as nonpublic data, it's actually a very -- it's a very strong proprietary system with deep integrations and regulatory compliance. So that is not that's hard earned and therefore, puts them in a very strong position as they continue to benefit from coding technologies to accelerate product development. And the introduction of very knowledgeable investors like D1 Capital at that last raise is also good to see as we bring public crossover investors onto the register. Strong sales momentum, we're at 90 million accounts and well on our way to the 100 million. And I've talked about that major license agreement before. Just now turning to guidance, which I'm sure you're all waiting for. Pleasingly, Energy Markets EBITDA guidance has been upgraded to $1.55 billion to $1.75 billion range, and that is up from the previous guidance range of $1.4 billion to $1.7 billion. LNG trading and Octopus guidance remains unchanged. We -- the group CapEx is expected to be between $900 million and $1.1 billion. We updated APLNG production guidance when we released our quarterly and that is now 645 to 680 petajoules. APLNG CapEx and OpEx guidance remains unchanged, and we provided now APLNG cash distributions, which is what come to Origin of between $700 million and $950 million. The appendix has got further commentary on guidance for all of your information. So in closing, Origin, we still have a strong belief that we're very well positioned for the transition with advantaged assets and capabilities. We've got strong cash flows and returns from two diversified businesses in Energy Markets and Integrated Gas. And we've got global growth exposure and value upside through Kraken and Octopus, continued balance sheet strength at 2x debt to EBITDA, and been able to declare a stable, fully franked dividend, which is delivering a 5.3% yield to shareholders before you take into account the franking benefit. So on that note, we are very happy to now hand over to questions. Operator: [Operator Instructions] Your first question today comes from Tom Allen from UBS. Tom Allen: Just in the energy markets, electricity GP margins at over $40 a megawatt hour over the half are clearly a long way ahead of your through-the-cycle margin guidance. And looking into FY '27, the result calls out new battery earnings and lower coal costs being a tailwind, but partly offset by weaker wholesale prices. Can you please refresh us on an indicative range for the incremental EBITDA in FY '27 from batteries and also comment on the extent to which your electricity portfolio is hedged into FY '27, just to help us understand how much of a down driver weaker wholesale prices might be as you see them currently? Frank Calabria: Yes, sure. So you've actually peeled away. We're obviously not giving guidance today, but you are picking up correctly and we'll take these in turn. We've got a battery and coal tailwinds. We've certainly been setting ourselves up for '27. The key variable that's playing itself out now is the way wholesale prices will flow through to the default market offer. So you're right, you've got all of those playing out. I might just ask -- sorry, I'll give an overall view on the coal. I'll ask Tony then to give a little bit more depth on the battery, and we can give you a bit of the drivers around that. But you've got the key drivers there. In terms of coal, we're certainly well on our way to contracting coal and well progressed. And that's looking at prices to be below -- at cost below what we've contracted in '26, and '26 was below '25. We still got to actually complete the contracting of that coal over time, but that's where we're tracking at the moment. On batteries, you're right, we'll see an uplift in the battery earnings. And Tony, do you want to just add anything further to that in terms of -- we do give some information where CODs are occurring, but there will be uplift. Anthony Lucas: Yes. So we would expect uplift, obviously, into fin year '27 from -- full year contribution from those batteries. We haven't guided specifically on what that EBITDA is, but you sort of take that range that we give the IRR range and sort of back solve what that might be. Coal costs, we are seeing lower than where we've contracted this fin year. And then probably sort of offsetting that is -- or not offsetting entirely, but sort of the headwind, as you called out really is we would expect that the lower forward prices to make their way into lower mass market DMO tariffs and potentially C&I rates as we contract that book. In terms of where we sit in that GP range, we originally put that out there as a target range once we got through sort of 3 to 5 gigawatt build-out in renewables over the short-term renewables and storage was to reflect the retirement of Eraring. So we have called out, we sit above that or near the top end of that when we've got Eraring in and those investments coming online. So without guiding '27, I'd expect it to be near the top of that range. Frank Calabria: And Tom, just the last comment, you made a comment about using the term hedging. And certainly, the wholesale team have been active and I'd say even proactive early on in terms of what we do in respect of '27. And if that's the reference you're making, certainly, we've been pleased to be able to work actively on that and well in advance. The one thing that is yet to play out, as you know, is just how wholesale prices and the DMO flow in and then what flows from that in terms of the retail book, and that's probably the key variable that will play itself out over the coming months. Tom Allen: Great. A follow-up question. The interim dividend at $0.30 per share fully franked, I think, is the first time since half year '22 that Origin hasn't lifted the interim dividend year-on-year. Just in the context of having upgraded guidance in both energy markets and APLNG leverage at the bottom end of your target range. Can you comment on whether we should interpret this as a hint of the potential for an incremental capital commitment over the coming period of scale, perhaps at Golden Beach given you spent more there or Yanco Delta or potentially within APLNG? Anthony Lucas: Yes. Thanks, Tom. We've probably gone through a period where we were obviously paying no dividend for a while and so increasing the dividend through the period. When we look forward, we've got oil prices probably potentially a little bit lower. They're holding up in the high 60s at the moment. We've got the tail end of the CapEx on the battery program. And then we've got the sort of the impact, albeit not a cash impact of the change in the accounting methodology for the battery. So we sort of see gearing in that range that we've indicated. We'll get through the rest of the CapEx spend. We'll see what other opportunities are there, see where oil sort of settles. So we feel sort of comfortable at where we're setting the dividend at this time. Frank Calabria: And Tom, we will continue to actively manage capital between the opportunities before us and returns to shareholders, and we will continue to review that based on what Tony has just talked about. Tom Allen: I mean you've been clear that the capital framework seeks to deliver a sustainable dividend. So is this a sign that recognizing the volatility in oil markets that you've called out, coming to the end of the battery CapEx, is this at that sustainable level now? Or there's still capacity to pay out more? Anthony Lucas: Well it's sort of hard to -- I don't want to forecast where dividends might go. But the way you should think about it is when gearing was particularly low, sort of sub-2x, you could absorb sort of economic cycle and commodity cycle impacts a lot easier and increase the dividend. I think we would be sort of challenged that we're under geared at that level. So in the 2 to 3x, we feel that's the appropriate gearing given the commodities prices that we're exposed to. So we don't sort of -- we don't look at necessarily a progressive dividend. But as those business cycles started to improve cash flows, that could be a potential opportunity, but we'll balance that against what options we've got in front of us equally. Operator: Your next question comes from Henry Meyer from Goldman Sachs. Henry Meyer: Let me start on APLNG. The Taroom Trough is getting a lot of focus at the moment. I remember years ago we had some oil shows coming up from deeper intervals in Condabri. But with this exploration program planned, could you share a bit more detail on what potential resource volume you're looking at and what the success criteria might be to inform potential developments, whether it's a flow rate or other metrics? Frank Calabria: Okay. Andrew, do you want to pick that up? Andrew Thornton: Yes. Thanks, Henry. So as Frank called out earlier, I mean, the main purpose of this update was to say, firstly, we've restarted our exploration program after a number of years of very low activity. And secondly, we have a very large position, I think the largest position of acreage and tenure across the Taroom Trough, which runs pretty much north to south along our tenure from both an operated and nonoperated perspective. We drilled a well in the Condabri Deeps a few years ago. And it was -- it performed pretty strongly, but we didn't get to frac it all the way down post the -- deeper than the Coles. And so what we've done this year is we've gone in and drilled an additional 3 pilot wells. We've done that now. That's telling us -- that's telling us that the reservoir is consistent with what we thought and well logs are supportable, everything looks good, but we have to critically go back in and frac it. And that will tell us ultimately the deliverability and the true potential of the play. So that's going to happen sometime midyear. And really, we agree with the thinking and the commentary that Taroom Trough is a potentially very significant play, but it is still early stage, and there's a number of technical and economic uncertainties to be resolved. So I think all that says is post the well test after the frac in the middle of the year, we'll know a lot more. And there's a pretty good opportunity for us because, as Frank mentioned, the acreage that we have is right near our existing processing facilities. And in particular, in Condabri there, we have outage that we could connect into these wells into pretty quickly if it goes well. Henry Meyer: Okay. And second one, sticking to Integrated Gas. You've called out the ongoing investments to Golden Beach here. Could you just share a bit of detail on what agreement is already in place there and potential timing for the developments? Any costs that Origin would need to support either on balance sheet or off balance sheet through contracting? Andrew Thornton: Yes. So we disclosed there how much we've put into the project to date, and we've committed another $25 million. The project is making good progress. As far as timing, and it will be likely that we'll participate both as an offtaker and an investor of some kind moving forward. A couple of things will be timing, FID, we'll take FID when -- as you'd expect, once we've derisked the project from a regulatory procurement and commercial perspective. And there's still a fair bit of work to go on that front before we sort of want to put out a view on timing of an FID and operations. Ultimately, it will be a $1 billion-plus project if it goes ahead, but it's not intended that Origin would be the majority of the equity or anything like that. And so we'll need to bring in partners. And so we'll have choices ultimately into how much we want to invest at the time when we know when we have sort of a better -- get our arms around the project and the economics. Operator: Your next question comes from Gordon Ramsay from RBC Capital Markets. Gordon Ramsay: Just interested about battery returns and the comment that the front end of asset life is expected towards the upper end of your guided returns and 8% to 11% post-tax IRR. What's the expected difference between front and tail end? Frank Calabria: I'll get Tony to give you some... Anthony Lucas: Yes. Thanks, Gordon. Yes. So in the past, we've guided that we think that we'll be at or even potentially above that target in the front end. And then when we took fit on those projects, Gordon, if you remember, batteries sort of get their revenue from 3 components. Firstly, there's the cap price. Secondly, the arbitrage spread during the day, and finally, ancillary services. And we -- on that latter one, we would forecast that those ancillary service revenues fall through time as more of the kit, I guess, that comes into the market can offer those services. And equally, when we took FID on the projects, we wouldn't have banked necessarily that -- you should think that we bank necessarily that cap prices remained at the level they were when we took FID. So we expect potentially sort of both of those, the cap return and then also -- sorry, the cap premium and also the ancillary to fall through time. In some cases, when we run scenarios, it might be right at the sort of tail end of that range. Equally, we've got scenarios that don't fall -- fall as much as that. So we just sort of -- we would say that they're more solid in the first 5, 7 years than they are in the tail end. Gordon Ramsay: Just one more from me, and this is not for you because it's a technical question, sorry. On the Taroom Trough, when you're talking about drilling a horizontal well, can you give us an indication of what the length of those wells would be in the number of frac stages? Andrew Thornton: Thanks, Gordon. Andrew here. So no, they're verticals at the moment into Taroom Trough. So you might be talking about the -- we've got there -- we're doing a horizontal frac in Peat. But as far as the Condabri Deeps wells, yes, they're going to be vertical frac wells. Still think it's competitively sensitive on frac stages, et cetera. I will say that we're drilling on the eastern flank, it's a bit shallower, which we see a bit shallower than the rest of the trough. And so we see that as an advantage, obviously, on well costs. Gordon Ramsay: Okay. Sorry, Peat -- what kind of well you're drilling then on Peat? Andrew Thornton: Yes. So this is a deeper play. And it's the first time, as we understand it, that the industry and the CSG industry in Queensland will have done a horizontal frac well. We see -- clearly, we've done lots of horizontals before, but this is the first frac well. It's about a 1-kilometer lateral. And in addition, probably the reason for calling it out the way we have is in addition to potentially opening up the Peat acreage to a future development, there's actually a number of other areas that are quite deep and quite tight. And if we can prove that we can do horizontal fracs, it probably opens up some other areas like in Spring Gully that we haven't gone after at this point. So it's sort of like -- it's a test to see what we can do in horizontal fracs beyond -- in Peat and beyond. Operator: Your next question comes from Amit Kanwatia from Jefferies. Amit Kanwatia: Just a question on the energy markets. And I mean, if I look at the skew of the business first half, second half, I think last year, it was 53%, 47%. And given you've upgraded the guidance in Feb for full year '26, how do you see that to be evolving for this year, please? Anthony Lucas: Yes, sure. Thanks for the question. So in terms of split, we're probably, I would expect more like more evenly weighted, perhaps sort of slightly maybe 1% or 2% higher in the first half at a total EBITDA level. Amit Kanwatia: Right. Okay. And this includes the contribution from the, I think, which is a benefit in second half. But more so, I mean, if you can speak to how you see the wholesale -- I mean, the hedge book and how the wholesale price volatility, which was very low in the first half, but how do you see that to be evolving as well? Anthony Lucas: Yes, there's a couple of things, I guess that if you remember, sort of end of last year, we had quite a lot of volatility in that second half, very late in the second half of the prior fin year. And so we're not necessarily forecasting that we get that sort of level of volatility. The book will be positioned particularly well for that if that was to occur with the peaking fleet. So really, the electricity book is probably a little bit stronger first half, second half. In terms of the gas is probably the key call out. We would traditionally normally have a stronger first half in gas in a normal year. What we're seeing this year is just the roll-off of some trading contracts and the recontracting and changing nature of the book. We've got a much stronger -- or sort of a stronger second half than we have first half. So that's probably a different weighting to what you normally would expect out of that gas book. Amit Kanwatia: Right. And maybe just a question on Eraring and you've made a decision to extend this until fiscal '29. And then at the same time, you're saying you're not going to do any major maintenance from here. Maybe if you can speak to how do you see all 4 units to be operational for the next few years? And any obligations from the government to keep the asset operational as part of your deal with the New South Wales? Greg Jarvis: Amit, it's Greg Jarvis. Look, just with -- we're very confident about maintaining Eraring out to April '29. The Eraring power station is in good order. So we're very confident in not doing any major outages. I think the important thing here is that with the changing market, there will be opportunities where we can take out units when there's low demand and high capacity and do proactive management. And so by doing that, that will improve the reliability. So I'm pretty confident about extending these units out to April '29. Amit Kanwatia: All right. And last question, if I can move to Kraken and formal separation. May be useful to provide an update on the process from here and the potential pathways to unlock value for shareholders, particularly given the recent volatility in the equity markets in the tech space. Frank Calabria: Yes. Okay. Thanks, Amit. Clearly, what you can see has happened since we last reported to the market is that a series of transactions have been set up so that this business can separate, and it's now set up to be able to pursue independent paths for both businesses. That might include an IPO of Kraken, but we're not in a position to confirm anything on that today. That's certainly a choice available to the investors. We obviously continue to be supportive of both of them. But clearly, you can see that it's now on a path for both of those, and that's an active consideration. So you can see those steps demonstrating action. But as to timing and final decision, I haven't got anything further to add today. And the main focus is that it's ready to pursue whatever path we choose. And I think investors that have come in. They're very -- it was very clear about the investor base we wanted to bring in on this transaction. I mean D1 has led that out, but there's a number of others. And so we feel we're well placed to have now a cap table that enables us to take several parts. And that's what the focus is right now. Everyone is aware of what's happening in markets. But at the same time, it wasn't that long ago that a bunch of knowledgeable investors came in and invested at USD 8.65. And so we're still very, very focused on quite an exciting future for Kraken. It might be worth me just adding a couple of things about that because there's a lot happening in the tech space, and it's difficult for us to comment on sentiment at a very granular level. But that look-through valuation is one. The pipeline that we can see for Kraken is another strong point. And the nature of what happens in utilities is we should never forget the fact that these are big decisions for utilities. And therefore, the sort of proprietary nature, the nonpublic data, the domain logic, the integration, the regulatory compliance and also the brand trust and delivery record are really quite important factors to be successful in this market. And the proven platform, the fact that it was cloud native, the fact that you can actually have that unified data set and you can, therefore, code and add more AI capability to it and you get an opportunity to hear directly from [ here ] does see -- we see opportunities. But clearly, you've got sentiment in market and other things, but we do feel it is very well placed to continue to be successful. And certainly, I think they're a good organization in the sense of the way they leverage those capabilities, build those capabilities and continue to advance, and that's certainly been active. Operator: Your next question comes from Dale Koenders from Barrenjoey. Dale Koenders: I was hoping you could provide a little bit more color around, I guess, the rest of Octopus outside of Kraken. Just understanding how much in the sort of the negative EBITDA was seasonal? And because when we look at that seasonal swing historically from the limited data we have, it looks like sort of second half up $80 million is the best we've seen in U.K. retail. So how much of this is structural versus seasonal in terms of the first half result? Frank Calabria: Okay. Look, when we gave the quarterly, we were guiding to the fact that it is always -- the first half has always been very little earnings come out of the U.K. retail business in itself. So that's another feature this half. But you're right, the one thing that happened in addition to that was that the warm home discount came in, which has actually cost the U.K. retailers this half, part of which or a reasonable chunk of which gets recovered the following year. So there's an element of timing associated with that. Otherwise, if I looked at U.K. retail, they would be the 2 key features associated with that. Then turning to international retail, that is -- that's a growth and a conscious choice to grow those businesses. Actually, before I come to that, just the last thing really on U.K. retail is a decision to invest in the smart tariffs. By that, what do we mean by that? It's really owning the flexibility customers that come on to that platform over time and grow value in that respect. So there's an investment that's being made by them in that. That's a choice they'll make each year as to how much they want to invest in it, but it certainly has been heavier this half than prior. When it comes to the international, it's a very conscious decision. They're growing customers. It'd be like the early stages of the U.K., so the cost to acquire would be close to GBP 100 rather than the GBP 50 or GBP 60 they're paying in the U.K. now. So that's very much a growth story. Services is all about scaling, improving efficiency. So you would expect that to continue to get better, and that's the aim of the businesses. So I wouldn't say structural. The only thing on the accounting for Kraken and other things like that is that, that's why we're trying to give an average of that margin over time simply because the -- if you then think about you go into IFRS or other accounting, there will always be some element about what goes to development, what goes to capitalization versus expense. So that's the one thing that's probably just playing it through right now. I don't -- we just continue to expect that these business -- the U.K. business, in particular, Dale, will achieve its sort of GBP 40 to GBP 50 a customer in EBITDA. Like I mean, I think there's no change to our view around that. But you can -- I fully appreciate there's quite a bit moving around and noise in that in the 6-month period, but that's hasn't changed our fundamental view of the business. Dale Koenders: I think the hard thing, Frank, just the guidance for FY '26 is $0 to $150 million. Like when we think about the loss that was made in the first half and the seasonal swing in U.K. retail with potentially plus $80 million back the other way, it's looking like the second half might be maybe breakeven and still not enough to get over the first half loss to hit the bottom end of your range. So like what scenarios do we need to actually see to hit the bottom end and the top end of that guidance range? Frank Calabria: Yes. Well, we give a range, so you can form a view in that. There's -- but we do expect the second half to be much stronger. We've gone through January. It is much stronger for the U.K. retail business, to be clear, Dale. There's a lot always moving around. January was a decent month for them. They go through those shoulder periods. That's the only -- there's a reason for the ranges around those aspects. But we do expect we're not giving a range with the objective of hitting the bottom end. We're giving a range because we would be wanting to hit in the middle of it. That's the objective. I don't know, Tony, if you've got anything more specific on U.K. retail. Anthony Lucas: It's just -- it's really the shape of the U.K. retail cash flow. So it is a much stronger second half in the U.K. retail. It predominantly comes about because of the way that they pay capacity charges in the gas market and then recover that across the customer base. The revenue has really recovered across that second half period with the winter. So predominantly that will be where we see a stronger second half out of those. There'll be some slight improvements in Energy Services run rate. We're seeing good progress in that. Non-U.K. retail, as Frank called out, will be a function really of investment and they've swung into market and swung out of market as they've seen opportunities. But yes, predominantly U.K. retail. Operator: Your next question comes from Nik Burns from Jarden Australia. Nik Burns: First question on energy markets. The final Nelson review released late last year, just can you talk through your thinking and your thoughts on the review and the potential impacts on Origin? Frank, you've said before you feel pretty comfortable where your generation portfolio sits. But with the recent commitment to Eraring life extension and the review now released, has your view shifted at all on the opportunity set for further investment? You've still got Yanco Delta out there. And is there an increasing need for more gas peakers and even more investment in battery storage as well? Frank Calabria: Yes, sure. The market -- we're early stages into a very large transition, Nik. So I think the need for everything is going to grow over time. Specifically back to your link to the Nelson review, though, obviously, they handed down their report at the end of last year. Probably the key thing though, now that the industry and policymakers and government will actually work on is in specifically the ESCM, which is the contract mechanism being recommended by the panel that will drive future investment. That mechanism has quite a lot of work acknowledged by everyone in the detail of how those, let's call it, contract structures, and that's really addressing this tenor gap. And so that becomes a very important piece of detail to be landed and landed soon so that it is attracting the right investment enduring over time beyond structures like the CIS, and that's why the government has initiated that review. So I think there's still more work to be done on that. Linking it back to what do you think the market will need. We still remain of the view that you can see there'll be a lot of batteries being built and that's going on underway. There'll need to be a replacement of energy over time, and that diversification points to the fact that, that energy is also going to need to come from sources like wind, which is why we remain very positive by having a very large-scale attractive wind project. So that's going to be needed in the system. And we do think there'll need to be more gas-fired generation introduced. And if you had Daniel Westerman, for example, at AEMO, he would give you a very consistent message to this. Why the mechanism becomes important for that asset class is you can see that there will be a lot that plays out on an average day being produced initially by coal, then by -- more by renewables and by batteries moving it around. But we will need to have sufficient capacity for periods of time, which we've seen over the last period of time where you're going to need more than 6, 8 hours of storage, but they're likely over time to be less frequent. And so therefore, they need to be supported by a well-constructed mechanism that rewards capacity appropriately. And that's probably the one thing we would see critical. You can see it's not getting in the way of people bringing storage on like us and others, but that becomes, I think, a key ingredient. And one that I think is understood as I say, even if you talk to AEMO and others, I don't think that's controversial, but it will need to be brought in. Nik Burns: But from your perspective, there still needs to be more work done before you feel confident moving ahead with any further investment decision there? Frank Calabria: Well, certainly, at the moment, we would be either investing in current mechanisms, and therefore, there are both states and federal governments with their own mechanisms, and we continue to engage with all of those. If you're asking about a long-dated asset when people are envisaging that there would be a new market mechanism coming in over the coming years, then we would need to see more of the detail associated with the ECM. We certainly are not stopping the advancing of opportunities to be clear, Nik, and we're assessing that and working on that and being ready for that. So we will make judgments. But at the moment, making a large gas-fired peaking, it would need a form of support that rewarded capacity over time. Nik Burns: Got it. I might stick with the theme on government reviews or my other question, just around the gas market review and APLNG. Obviously been talk around a reservation scheme being introduced there, and there's been a range of percentages that may be applied to the Queensland LNG producers. Can you just confirm, first of all, that under the ranges being proposed, there wouldn't be any incremental gas supply that APLNG will need to supply to the domestic market. And then just looking through, you flagged the medium-term investment needs at APLNG just to maintain gas supply. Does -- post the release of the gas market review, does the joint venture there have sufficient confidence on the impact of the review to approve that new investment that you're currently looking at? Frank Calabria: Well, I think there's further work to be done on the gas market review. A lot of work done, but acknowledged, I think, also by the policymakers, they've got to actually work through how some of the specific mechanisms work. And so my starting position, we haven't talked in the joint venture is that there needs to be some further clarity around some of those mechanisms for investment. But Andrew, do you want to add anything further given the detailed work that APLNG has been doing? Andrew Thornton: Yes. So -- we obviously support the holistic review of all of the mechanisms that are in place in the gas market at the moment. And I think you asked a question of between 15% and 25%, would APLNG have to contribute more, I think maybe was the question. And we don't think so in the short term, but at some point, contracts roll off. And so if you look out 5-plus years, for example. And depending on what that reservation percentage is, depending on the term of the reservation, depending on how often it's reviewed, et cetera, there are a number of variables which could impact ultimately APLNG's obligation. But certainly, in the short term, as we talk about, we're a very significant contributor to the East Coast gas market. And so I wouldn't see there being any near-term impact. I think then in terms of like the length of future investment, there are a number of factors, which obviously we take into account the view of the market, the outcome of this review, they are all inputs. Certainly, we want to continue to support our supply and production irrespective of the outcome of the gas market review from the perspective we've got to meet contracts. We've just reduced or eliminated one of the constraints we had to additional drilling in the West in Spring Gully through the completion of a water pipeline between Spring Gully and Reedy Creek. So we've got the opportunity to commence drilling again in Spring Gully next year. Some of the -- probably the larger investment opportunities we've talked about an expansion in Reedy Creek processing facility. We talked about exploration as well. Some of those items, I think, where you're really making a choice to have additional length above contracts. That's where I think you've really got to have a good look at market inputs and policy inputs as well. Operator: Your next question comes from Ian Myles from Macquarie Equities. Ian Myles: If we just go back to Energy Markets for a second. You upgraded guidance, but in the referencing you talked about batteries and the gas position. How have they changed from your previous guidance? Because you would have known about both of those prior. So I'm just interested in what has lifted that sort of guidance expectation. Anthony Lucas: Ian, Tony here. Really, in terms of where we thought going into the year where we have benefited really is, again, remember, last year, we were able to change the mix a bit on the portfolio trading in the forward market. We're able to repeat components of that in the first half. We had the lower LRET and [ VWAP ] prices that materialized through the first half, which is -- and we predict into the second half, which has contributed to that. We also had sort of higher volumes out of C&I, and we've also been able to run Eraring harder than what we probably forecast at a lower coal cost. So it's just 2 or 3 sort of contributing factors that gave us a little bit more in the tank than what we would have thought going into the year. And then on the gas, we've done a little bit of what we call sort of value management in terms of tariffs in the gas book. And then we've also got some lower supply costs coming through there. So there were just a few things we've been able to do throughout the year that's enabled us to increase the outlook. Ian Myles: Okay. That's great. And on the -- and I just maybe ask the question a different way. You've got lower coal contracts. You put in your slide deck, the VWAP price for New South Wales base for '27 is down the better part of circa $7. You have a pretty good view of where the DMO pricing would and BDO pricing will be coming out at this point in time. Does the coal drop offset the drop in baseload prices? Andrew Thornton: Ian, is that -- that's a '27... Frank Calabria: '27. Andrew Thornton: Yes. Well, ultimately, we won't have contracted all of our coal for '27. So it's kind of hard to make a full statement there. I think that you would sort of indicate that the forward prices the way that they have -- if you look at forward fin year '27 prices and how they relate to fin year '26, which is kind of the important thing to look at, not how '27 has evolved through time, you'll see that, that has a reduction in the tariff of a certain amount per megawatt hour, which I think is probably ultimately more than the coal. The coal will go some way to offsetting it. But ultimately, it will depend on where we contract the remainder of that. Frank Calabria: And then competitive dynamics in the retail market as well that flow from that. But... Ian Myles: Okay. And then -- okay, that's fine. On Octopus Energy, do you want to clarify, OE obviously raised implicit money through the Kraken transaction. Is that business now capitally sufficient? And I'm curious to understand, did Origin have a look at the convertible note, which Octopus Co acquired and why you didn't seek to have that own part of that CB? Frank Calabria: Yes. Look, just in terms of the Octopus, it is capitally efficient to go forward on its independent path. And the focus for us, firstly, was around the Kraken. We -- I don't think we've -- if there's a further convertible note opportunity that might arise and there's other funding opportunities, we'll continue to assess those. But it was one that was really done by Octopus Capital, this particular one, and we were happy for them to do that. But it doesn't stop us assessing opportunities like that going forward. And so we certainly were active in a lot of the conversations around that and relationships... Ian Myles: You didn't say no to that opportunity. Frank Calabria: No, no, didn't say... Ian Myles: You weren't given the opportunity. Frank Calabria: Octopus Capital agreed and we were aware. They did tell us they were going to do that note. And like a lot of these relationships over time, we were aware that they were going to put that in there. It's not a question of saying no. It's a question of us then thinking about future opportunities with them. That was the way it was set. Ian Myles: Okay. Yes. And you make a comment to Kraken EBITDA guidance of 40% over the last 3 years. Year 1 was really high, year 2 and year 3 were incrementally lower. Why is 40% the right number? You spoke... Frank Calabria: We just want to I'm not -- what we're really trying to guide over time is there's been movements around in that margin in that business over time, and we're just giving a look through over a 3-plus year view. And you can look at those averages over time as to where it's going. And also, as you go into the future, I've been asked a question about whether it goes to IPO. And I don't know what market it goes to IPO and what accounting might flow from that as well. So I think the fundamentals are, though, that they're growing that revenue base at good unit economics. And that's -- and there's certainly been some movement around investing in capability that's growing it to the business it is today. And secondly, there's been some accounting change to that. So yes, that was all it was intended to do, Ian. Ian Myles: Okay. That's fine. And on that, has the business now got that baseline capability of being an independent company operating. So the cost base has actually done the step-up so that the incremental wins that you get and the incremental conversions are actually got really high conversion rates that we're going to get a return in the margin. Frank Calabria: Yes is the answer. And the objective of having -- so there has been a heavy capability build over the last, I would say, 18 months or so. You have a leadership team that's now scaling a global enterprise platform business. The objective of having EMEA come out at the end of April is for people to hear that directly, and they are set up today to deliver across multi-geographies and products and winning those accounts. And the last one was obviously significant, and it's continuing on that growth path, and that is definitely the case. Ian Myles: One final question. We've seen volatility in the -- obviously, the Australian energy market slipping. Is this changing your time lines of investment cycles for the gas plants and additional batteries in the system given I think for the first time, I've heard you guys talk the actual cap prices are falling in a reasonable way. Frank Calabria: Yes. That has -- there are probably different durations to that answer, Ian. And by the way, we foreshadowed that cap prices would fall over time. Cap prices are, as you know, can be a function of volatility, and we've gone through a 6-month period where through a combination of baseload availability, good renewable output and batteries coming into the system, we saw low volatility, then you come into the New Year and you're seeing more. And then we've just talked about previously and we raise it again, that winter is becoming one of the riskier periods, so we're still got to play that out. So we continue to see volatility, but cap prices will be informed by that volatility. There's a lot of batteries coming into the system. We feel very confident about the investments we've made. That's why we've given the commentary we have to date, continue to assess those. They've lowered in cost, and we've been able to increase pretty cheaply incremental capacity and duration on that. I think when you think about assets like gas-fired peakers, you're essentially introducing a 20-plus year asset into your portfolio. I think it's really around the latter half of those periods versus the front half in terms of understanding how the market would play out over the longer term. There's still a lot, that's still going to come into the market. There's still a substantial amount of all of these assets that are going to come in. But certainly, as it relates to gas-fired peaking, I think because the nature of those assets may not run high capacity factors, but play a very valuable role. I think that's the one where you'd want to make sure you understand that, particularly in the outer years. Operator: Your next question comes from Rob Koh from Morgan Stanley. Robert Koh: Congratulations on the result. I thought I'd ask an electricity question and give Mr. Jarvis an opportunity to talk as I think he's got plans for the rest of this year or I hope he does. Just again, in terms of... Frank Calabria: Not yet, Rob, not just yet... Robert Koh: Got everything you can. But just in terms of battery revenues, and I guess following on from Myles' question about caps and avoided cap cost revenue. Can you give us any sense of how your thoughts are evolving? Are the new morning and evening peak products also maybe providing a battery opportunity? Greg Jarvis: Yes. Rob, look, the battery is working really well in the portfolio. There's a few things. The intraday volatility still plays out. So right now in summer, it probably lends itself to really manage the sort of the evening peak. So we're probably doing all one cycles. But you can see -- going forward you can see how we can double cycle these batteries as well. So they're playing really well in the portfolio. I've got to say the other benefit we get from these batteries is we don't have to turn on gas peakers just for a 1- or 2-hour period, which is -- that leads to high maintenance costs. So we're also seeing some benefit just with the existing fleet. So we can use our sort of gas peakers more for duration events, if that makes sense. So really, these batteries -- and we're having a battery in every state. So that just gives flexibility right across the portfolio, which is playing very well for us. Robert Koh: Okay. Sounds good. I was trying to say something nice about your announcement there and do wish you all the best in your next opportunity. Greg Jarvis: Rob, I appreciate it. And let me tell you, can I just say that I leave a good team in place, and it's going to be a very smooth transition to Andrew. So it's playing out very nicely. Robert Koh: To Andrew. Congratulations to Mr. Thornton. Very good. Okay. My next question is, I guess, around balance sheet for Octopus and Kraken. I guess as at June, there was some sizable current liabilities and then there's prudential requirements and things like that. I take it that everybody is pretty comfortable with that. There was also a small investment by the British Business Bank. So I'm just wondering if you can provide any color on the balance sheet strength of the 2 entities, please? Frank Calabria: Yes. So certainly, as -- look, there are facilities in place today across the group, and they're all very well capitalized. And remember that you need to make sure that you are protected for weather events and a whole range of things, and they've always been very prudently managing that capital through both facilities, cash and a number of things in terms of the strength of the balance sheet. The recent set of transaction sets it up for the future because we need to make sure that, that energy business has enough available for working capital as well as the ongoing growth of the other businesses, and we feel confident around that. You are correct in stating that there's a variety of arrangements in the U.K. market that go -- and there's even been recent announcements that are changing some of those obligations, for example, the renewable obligation and the region budget announcement is changing -- I mean, changing to actually have some of that being managed by government rather than the industry as well. So we feel very comfortable around the balance sheet. It will be around the ability for it to continue to grow, and it's got runway today for that over a period of time, and that will be where we're really making choices around capital going forward. But yes, we feel confident about the facilities they have today and the cash that's being raised for the benefit of when these entities separate. Robert Koh: Yes. Great. Maybe if I can ask a slightly more direct question. Should we be thinking that there's a permanent amount of debt or nonequity capital in the structure at this point? Or is it all just still influx? Frank Calabria: I think there are debt markets available as part of that as well. They've certainly -- they will have some debt, but it would be a lot less debt once they separate Kraken. And so therefore, it will be a combination. But they're making choices between what's the most efficient form of capital put into the business, and it is a combination of debt and equity, but the debt would be lower than what it is today across the group. Operator: There are no further questions at this time. I'll now hand back to Mr. Calabria for any closing remarks. Frank Calabria: Okay. Thanks very much, everyone, for joining us this morning. We look forward to meeting with many of our investors over the coming days and look forward to having further discussions. So thanks very much for your time today.