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Operator: Thank you for standing by. My name is [ Freilla ], and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson-UTI Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Mike Sabella, Vice President of Investor Relations. You may begin. Michael Sabella: Thank you, operator. Good morning, and welcome to Patterson-UTI's earnings conference call to discuss our fourth quarter 2025 results. With me today are Andy Hendricks, President and Chief Executive Officer; and Andy Smith, Chief Financial Officer. As a reminder, statements that are made in this conference call that refer to the company's or management's plans, intentions, targets, beliefs, expectations or predictions for the future are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties as disclosed in the company's SEC filings, which could cause the company's actual results to differ materially. The company takes no obligation to publicly update or revise any forward-looking statements. Statements made in this conference call include non-GAAP financial measures. The required reconciliations to GAAP financial measures are included on our website at patenergy.com and in the company's press release issued prior to this conference call. I will now turn the call over to Andy Hendricks, Patterson-UTI's Chief Executive Officer. William Hendricks: Thank you, and welcome to our fourth quarter earnings conference call. We closed 2025 with a strong fourth quarter, delivering steady results through what's typically a seasonally soft period. Our teams remain highly disciplined with strong operational execution in the field and a focus on cost controls. We are pleased with the performance across all our businesses during 2025, particularly given the challenging commodity environment we faced throughout the year. Patterson-UTI once again demonstrated its ability to generate strong free cash flow, delivering $416 million in adjusted free cash flow in 2025. Notably, the fourth quarter marked our highest adjusted free cash flow quarter since we completed our strategic transformation in 2023. This achievement highlights our ability to adapt to changing market conditions and underscores the effectiveness of our teams in maximizing our potential throughout all phases in the cycle. We are showing greater resilience to market fluctuations as we use our technology edge to deliver operational excellence. I'd like to extend my sincere appreciation to all our employees for their hard work and dedication throughout 2025. Your efforts were instrumental in our success, and we look forward to moving Patterson-UTI forward again in 2026. The industry overcame numerous challenges in 2025, including an increase in OPEC+ supply and ongoing macroeconomic uncertainties. Despite these pressures, the oil market has remained resilient with crude prices today at a similar level to those on our last quarterly earnings call. Although commodity prices remain unpredictable, in any scenario, at Patterson-UTI, we will remain committed to our core principles: delivering safe and efficient execution for our customers, investing capital responsibly in differentiated technologies and maximizing returns while generating substantial adjusted free cash flow for our investors. Our free cash flow profile continues to be robust, which gives us confidence to increase our quarterly dividend by 25% to $0.10 per share in the first quarter. We are confident that our free cash flow will exceed our dividend commitments, providing the opportunity for additional share repurchases or other investments aimed at creating further shareholder value. From a macro perspective, uncertainties remain regarding the sustainability of U.S. oil production at the current pace of activity. Recent data suggests that reduced drilling and completion programs in 2025 are beginning to impact production figures. The industry is likely approaching a point where we'll need to decide between declining production volumes or increased drilling activity to maintain production trends. Although there may be a moderate decrease in U.S. oil activity in the near term, we do not believe that the industry can continue operating at lower drilling levels without causing a more significant impact to production than what has been seen so far. We remain optimistic about the long-term prospects for natural gas, and we anticipate that a multiyear increase in drilling and completion activity will be needed to meet future demand. While there have been some incremental increases in natural gas-focused activity and natural gas prices have rebounded sharply due to winter weather demand, we expect most large customers will wait for clear commodity price signals after peak winter demand before making changes to their plans. As physical demand for natural gas for both LNG and power generation grows, we expect to see additional demand for our services in the second half of 2026. In response to the macro environment, we have reduced our gross CapEx budget by around 15% to roughly $500 million in 2026. After accounting for the expected proceeds from a typical cadence of asset sales during 2026, we continue to expect that our CapEx net of asset sales will be below $500 million this year. We have made significant progress in lowering our unit level maintenance CapEx requirements. We continue to successfully implement new digital processes that improve preventive maintenance, high grade our asset base with new technologies and consolidate facilities as we move further through the integration process of our businesses. Importantly, our 2026 CapEx budget reflects funding for high-return projects that will further enhance the quality of our operations and ensure we are well positioned with new technology that supports the next leg of customer demand. While we are substantially reducing our overall CapEx budget, we fully expect to exit 2026 with a more advanced and higher-quality asset base than at the start of the year. During the fourth quarter, our U.S. Contract Drilling Business saw a relatively steady activity and pricing compared to late third quarter levels, and this stability continued into 2026. Our focus remains on identifying investing in assets and technologies that bifurcate drilling performance and create unique value for both our customers and investors. Of note, we have seen increasing acceptance of performance-based commercial agreements, and this shift reflects growing customer interest in partnering with service providers who can enhance operational efficiency. Our ability to deploy advanced APEX rig technology that enables faster drilling of more complicated wells is resonating with our customers. We are also seeing strong results from the broader adoption of our drilling automation packages. Nearly all of our rigs are now equipped with our proprietary Cortex automation applications, and demand remains high as we continue to develop new software applications to further improve drilling operations, with many of these in partnership with our customers. Looking ahead, the evolving shale landscape is characterized by more complex well designs, requiring rigs with increased load capacity that control deeper geological formations as well as longer and more complex laterals into higher pressure zones. Future demand will increasingly favor differentiated rig technology, positioning Patterson-UTI and our fleet of advanced assets and technology with a distinct advantage over much of the competition. The benefit of this differentiation has already been reflected in our ability to sustain margins at higher levels than we have seen during periods of activity moderation in prior cycles. As the market continues to favor high-quality drilling solutions, we anticipate that our advanced technology will further strengthen our position as we aim to sustain pricing and margins as customers seek out the best available drilling contractor to meet their increasingly complex needs. In Argentina, we are excited with our recent agreement to lease 2 high-spec rigs for work in the Vaca Muerta field. The multiyear agreement is a capital-efficient way for us to put idle assets in the U.S. to work internationally. The opportunity in Argentina is one of the most promising that we see to put our idle assets to work globally, and our fleet of rigs in the U.S. are well suited to meet the region's growing demand for unconventional drilling over the next few years. The expansion also complements our established position in drilling products, including Ulterra drill bits in Argentina. We believe that further planned increases in drilling activity in Argentina will reduce the available supply in the U.S. Our Completion Services segment delivered strong results in the fourth quarter. Segment adjusted EBITDA for the second half of the year was higher than the first half, reflecting the quality of our operations and the steps we have taken over the past year to add new technology to our portfolio, streamline operations through our digital platform and improve our cost structure. Our team effectively managed holiday downtime across several of our larger fleets, successfully securing work to maintain high utilization. Pricing and activity remained steady compared to the third quarter. Our frac assets remain highly utilized in the first quarter with almost 2.5 million horsepower either deployed in the field or in normal maintenance cycles. We have very little spare capacity, and our idle horsepower consists entirely of older diesel equipment that is not part of our long-term strategy. As we direct our capital towards high grading our asset base with additional Emerald 100% natural gas equipment, we are likely to have fewer fleets in operation as we continue to idle lower-quality diesel assets and focus on the premium market. Our equipment that can utilize natural gases and fuel is fully utilized. Our asset base will continue to reflect this high-grading strategy. Our nameplate horsepower totaled 2.7 million at the close of 2025, which is down more than 600,000 horsepower from 2 years. And we are likely to see a further reduction this year. Within our Completion Services segment, we continue to see growth opportunities in high-end natural gas powered frac equipment in our industry-leading and proprietary digital completions platform, which we call eos. Our Emerald 100% natural gas-powered footprint will grow again in 2026. And by the end of the year, we expect that more than 85% of our assets will be capable of using natural gas as fuel in some capacity. We believe our asset quality is among the best in the industry and the strong demand and returns for our high-end equipment position us to maintain resilient margins across our higher technology assets. We will reduce capacity of our older assets, and we believe the industry is also doing the same. Although public estimates of U.S. industry fleet count shows a decline, the total horsepower deployed has not declined and has remained roughly consistent. The frac industry is evolving towards larger fleets at the well site, a trend that we believe is being overlooked by public industry data on the number of active fleets, resulting in the frac fleet count becoming less of a reliable metric to determine industry completion activity. At the same time, the significant increase in pumping hours per day over the past several years has likely run its course. Some providers are encountering technical limitations on most of their fleets with our average frac fleet now pumping over 22 hours per day. With continuous pumping, our team has been leaders in executing on the growing trend to achieve 24-hour operations. But continuous pumping fleets require significantly more equipment on location relative to a more normal operation, which increases the cost of continuous pumping and further restrict supply. We have successfully executed several continuous pumping jobs to date as customers are currently evaluating whether the incremental increase in uptime justifies the additional cost. During the fourth quarter, we launched our proprietary eos Completions Digital Platform. Eos connects our customers directly with their live field data, allowing the customer and our Completions teams to improve real-time decision-making on the same platform. Our customers can eliminate the need for multiple third-party software platforms in their data flow and improve their overall data quality with a direct link to our digital performance center. The eos platform is hardware-agnostic, allowing our completions data and also third-party data sets to be delivered to customers on the same platform with no delays. The eos platform includes our advanced Vertex automated frac controls, which to date have been deployed across most of our active fleets and regardless of frac power type. Eos also supports our other services such as waterline, pump down, natural gas delivery and proppant logistics. This takes our completions segment to the ultimate goal of push button frac, and soon, with closed-loop decision-making, which will deliver more consistent completions to our customers and over time lower our operating and equipment maintenance costs. We have revenue-generating agreements in place now and are seeing increased customer interest for deploying this platform. Our Drilling Products segment delivered another strong quarter in North America, Revenue per industry rig remained close to company record levels in both the U.S. and Canada, underscoring our robust market position in drill bits. Additionally, we are having continued success with new downhole tool product innovations helping us to maintain relative strength in these markets. Internationally, revenue experienced a slight decline from the third quarter, primarily on lower-than-expected revenue in the Middle East. However, we achieved revenue growth in several important regions, including Latin America and Asia Pacific. Looking ahead, we remain optimistic that the international outlook for our Drilling Products segment will improve as we progress through 2026. We have opened a new manufacturing facility in Saudi Arabia that is now manufacturing drill bits in country, which should give us an advantage as growth resumes in the Middle East. Patterson-UTI continues to look to extend our leadership position while the U.S. shale industry undergoes significant changes. The company's operational excellence within both the drilling and completions segments has provided a competitive advantage, enabling effective navigation through the current commodity environment. Target investments across businesses will remain a potential focus. These strategic efforts are evident in the company's ability to generate robust free cash flow and maintain relatively resilient margins, even through periods of activity moderation. Even with ongoing commodity volatility, we are well positioned to deploy capital in ways that add value for shareholders, including through additional shareholder returns. We will continue to be flexible with capital deployment and evaluate a mix of dividends, buybacks and other potential growth opportunities. I'll now turn it over to Andy Smith, who will review the financial results for the quarter. C. Smith: Thanks, Andy. Total reported revenue for the quarter was $1.151 billion. We reported a net loss attributable to common shareholders of $9 million or $0.02 per share. Adjusted EBITDA for the quarter totaled $221 million. Our weighted average share count was 379 million shares during Q4. During 2025, we once again showed the cash generation potential of our company with adjusted free cash flow totaling $416 million for the year. As expected, the fourth quarter was the strongest cash-generating quarter of the year by a wide margin. It is important to remember that given the timing of some working capital items, including significant customer prepayments that we typically receive in the fourth quarter for work to be performed during the first half of the following year, it is far more meaningful to analyze our free cash flow on a full year basis as the quarterly results can show greater variability. For year-over-year comparisons, the customer prepayments we received in the fourth quarter of 2025 were roughly $15 million higher than those we received in the fourth quarter of 2024. Before we get into the segment discussion and the outlook, I want to give an update regarding the impact from severe winter weather that has already occurred during the first quarter. The January 2026 winter storm disrupted large portions of our operations for several days, and we believe the full impact of the disruption will have a negative impact on our first quarter adjusted gross profit, particularly in our Completion Services segment. The estimated impact of this event is included in the quarterly guidance numbers we will discuss. In our Drilling Services segment, fourth quarter revenue was $361 million and adjusted gross profit totaled $132 million. In U.S. Contract Drilling, we totaled 8,596 operating days for an average operating rig count of 93 rigs. Our successful cost reduction measures mostly offset the revenue decrease during the quarter. For the first quarter in Drilling Services, we expect our average rig count to be in the low to mid-90s. We expect adjusted gross profit within the Drilling Services segment will decline by less than 5% from the fourth quarter. Revenue for the fourth quarter in our Completion Services segment totaled $702 million with an adjusted gross profit of $111 million. Activity and pricing were mostly steady compared to the third quarter with minimal seasonal downtime. For the first quarter, we expect Completion Services adjusted gross profit to be approximately $95 million with slightly lower activity given the impact of the first quarter winter weather. Fourth quarter Drilling Products revenue totaled $84 million with an adjusted gross profit of $34 million. Revenue per industry rig in the U.S. remain near company record levels. We saw a decrease in revenue from our international operations, mostly from lower-than-expected sales in the Middle East, although we did see revenue growth in several markets, including Latin America and Asia Pacific. For the first quarter, we expect Drilling Products adjusted gross profit to improve slightly with slightly lower revenue in the U.S. offset by an increase in activity and revenue from our international business. As we move through 2026, we expect to see an improvement in international revenue in the Drilling Products segment as activity improves, primarily in Saudi Arabia. We also expect to see growth in downhole tools and new product development. Other revenue totaled $5 million for the quarter with $1 million in adjusted gross profit. We expect other adjusted gross profit in the first quarter to be steady compared to the fourth quarter. Selling, general and administrative expenses in the fourth quarter were $62 million. For Q1, we expect SG&A expenses will be approximately $65 million. On a consolidated basis for the fourth quarter, depreciation, depletion, amortization and impairment expense totaled $221 million. And for the first quarter, we expect it will be approximately $225 million. During Q4, total CapEx was $139 million, including $61 million in Drilling Services, $59 million in Completion Services, $15 million in Drilling Products and $4 million in Other and corporate. For 2026, we expect gross CapEx to approximate $500 million and to be below $500 million net of asset sales. We expect CapEx will be weighted towards the first half of the year as we bring in new technologies into both the Drilling and Completion Services businesses. We closed Q4 with $421 million in cash on hand and we did not have anything drawn on our $500 million revolving credit facility. We do not have any senior note maturities until 2028. During 2025, we returned $119 million to shareholders through dividends and share repurchases. Since the start of 2024, we have returned roughly 2/3 of our adjusted free cash flow to shareholders through dividends and buybacks, and we remain committed to returning at least 50% of our adjusted free cash flow to shareholders. Our Board has approved a 25% increase in our quarterly dividend to $0.10 per share, payable on March 16 to holders of record as of March 2. I'll now turn it back to Andy Hendricks for closing remarks. William Hendricks: Thanks, Andy. I want to close the call with some comments on our company and the industry. I'm very pleased with how our segments performed in the fourth quarter, where we were able to show improvements in controlling costs and keeping them in line with the activity changes. This is a testament to focusing on what we do best: providing products and services to efficiently drill and complete wells. The result is that we were able to generate strong free cash flow to close out 2025. As well, I'm pleased to see the stable activity continue into the first quarter of 2026. The outlook for 2026 has the challenge of some commodity uncertainty. With oil prices trading near $60 per barrel, my expectation is that activity in oil basins remains relatively steady from where we are today. Oil markets have remained resilient, looking ahead to continuing economic growth, along with some geopolitical unrest. Gas markets remain steady and have the potential for some activity upside later in the year. It's early to predict how 2026 will play out, but I'm encouraged by our current activity levels so far in the first quarter. We continue to invest in new technology in both drilling and completions, where we are seeing strong returns on our capital investments. In Drilling Services, we are being asked for new Cortex automation applications by our customers, along with upgrades to our APEX rig structures to drill deeper geological horizons and longer laterals. In Completion Services, we will continue to add new Emerald 100% natural gas fuel technology to our fleet and continue the rollout of the eos platform, which includes the Vertex automated frac system. In Saudi Arabia, Ulterra manufactured their first drill bit in-country in December. And this new manufacturing capacity, combined with our strong performance in the region and the planned increase in drilling in Saudi Arabia, gives our drill bit business some international upside this year. These technology and manufacturing investments allow us to continue to differentiate ourselves versus our competitors and maximize the margins we were able to earn. And we're doing all of this while reducing our overall capital expenditures in 2026. We remain focused on generating strong free cash flow for our shareholders and, over the last year, we have a higher level of cash than what is currently required to sustain our business. Given our cash generation potential, I am pleased that our Board has approved a 25% increase in our quarterly dividend as part of our overall commitment to return cash to shareholders. With our current cash position and after capital expenditures, we will continue to repurchase shares in the market where it makes sense and also continue to look for growth opportunities. Once again, I'd like to thank the men and women of Patterson-UTI Energy for their outstanding performance in 2025 and for helping to responsibly provide energy to the world. Thank you for joining us today for our Q4 2025 earnings call. We'd now like to open the lines for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Scott Gruber with Citi. Scott Gruber: Andy, I appreciate all the color on the dynamics at play in the frac market today. How do you see the U.S. frac supply/demand balance today given the enlargement of the average fleet? It's grown a long way here over the last couple of years. And do you have a sense of roughly the fleet utilization for the market? And can attrition alone drive us back to a relatively tight market balance in the not-too-distant future? William Hendricks: Yes. In terms of fleet activity, it's really an interesting situation. We've been trying to explain for a while now the dynamics in the data that you're getting from various public sources. If you look at what we did across 2025 last year, public data is showing a reduction in our fleet count. But at the same time, the size of our fleet, the amount of horsepower on location has just been continuing to grow. We're doing more simul-frac. We're doing more trimul-frac. And even on the same simul-frac, we're getting requests for higher rates and higher pressures. So that's causing us to put more equipment on location. When we do put more equipment on location, we certainly factor that into the pricing for the job. We're committing more assets so it costs the operator more, but they're getting a cost benefit. They've done their economic evaluation on what it takes to maximize production out of their wellbore and that's what they've determined. So in some ways, it's been a win-win. But the challenge for people trying to understand the business is that while the fleet count looks like it's going down, we've actually remained really relatively steady in the amount of horsepower that's been deployed. So we've been moving horsepower around to different places and growing the amount that we have on the well site. And I see that trend continuing at maybe a measured pace in 2026, but you see that trend continuing. And what that means is it continues to reduce overall supply in the frac market. And all the equipment that we have that can burn natural gas is certainly not working, and that has a cost benefit to operators when they convert natural gas. So that market still remains very tight because of the amount of horsepower growth on a per fleet basis. Scott Gruber: I appreciate all that. And then I think your current power business is looking at some opportunities to supply energy storage systems at data centers and other applications outside of oil and gas. Can you provide some color on that initiative? William Hendricks: Yes. We do have an electrical engineering division. It's called Current Power. And they've built and engineered very specific micro grids and they do battery storage for mainly our drilling rigs. There may be an opportunity in the future for them to do some measured type of storage for data centers, but that would be a pretty large-scale project even for us. There's some technology there that could be interesting, but I'd say it's very early to see if that pans out to anything. Operator: Your next question comes from the line of Saurabh Pant with Bank of America. Saurabh Pant: Andy, maybe I'll just start with a bigger picture question. I think you were talking about increasing differentiation in your prepared remarks. And honestly, I see that in the kimberlite data as well, right? I think your performance, your value proposition seems to be improving in the eyes of the customers in both drilling and completion. As I think about what it means for financial, right, it seems to me like the gap between the top 2, 3, call it, 4 players, including yourselves, and the other small medium-sized providers is actually increasing, right. So it should be good for your pricing power in the market. So maybe just talk to that dynamic a little bit, differentiation and pricing power and how pricing has held up a lot better. William Hendricks: Yes, I appreciate that question, and thanks for noticing some third-party data that shows that we continue to improve our operations. Really pleased with how the teams have improved execution over the years. And also, it gives us confidence to continue to fund them with capital for a new technology. And we do think that, that continues to differentiate us in the market, both on Drilling Services and Completion Services. So really pleased with the performance overall for the teams. We're working for some of the biggest E&Ps in the U.S. in both drilling and completions. And it's the size and scale of the operations, the breadth of services that we can provide, the level of technology we can provide and the execution that we're providing in the field that's really driving all that. So it's not just one thing in particular but it's multiple factors, and just really pleased with how that's been working out. In terms of pricing, one of the things that we've shown here over the last couple of years is even though you've seen especially in drilling a decline in the rig count, you haven't seen compression in margins like you've seen in previous years. And technology is a big part of that driver where we can differentiate certainly for much smaller companies. And it helps to really kind of shore up our ability to protect the pricing and margins where we can. Our business is certainly still competitive in nature, especially in West Texas, where you're seeing a little bit more slowdown in the oil markets versus the gas market. So there's still competitive market out there. But really pleased with how we're performing in general and also very pleased at how well we've been able to keep the margins up relative to previous cycles. Saurabh Pant: No, that's fantastic, Andy. And then maybe just a quick follow-up on what Scott was asking on the supply/demand side of things. I know it's very early to asking about pricing power coming back to the market, but I know it will at some point, right? So in some ways, Andy, how should we think about how much incremental demand maybe on the rig side and on the frac side would it take for soft pricing power to come back to the industry? Now I don't know when it happens, but just some sense of what kind of demand pull we might need for that. William Hendricks: Yes. It's a really interesting situation, especially for us, where all of our equipment that can burn natural gas is out working today. And so if we see the activity increase in the natural gas basins towards the end of this year to supply both LNG demand initially and, over time, increasing power demand in the U.S., that draw on natural gas is going to cause an increase in activity in both drilling and completions. And on the completions side, we are essentially sold out of all of our equipment to convert natural gas. And when you're working in those gas markets, the operators, the E&P certainly want to fuel that equipment with natural gas. And we would have to add to our asset base at that point and that's going to cause a significant inflection in pricing in that point. So my expectation is that once we see an activity increase in these gas basins, it's really going to drive an increase in the pricing on the completions as well because we're going to have to add assets to do that. Saurabh Pant: Got it. Right. No, I think things move pretty quickly on both sides, right? So we should not forget that. And a very quick follow-up for Andy, if you don't mind. Andy, you were talking about some weather impact on your first quarter guidance. Did you quantify the impact, if I missed that, if you have any color on how big that impact is. C. Smith: We didn't quantify it, but it's in the range of $5 million to $10 million. It's included in our guidance. So it's certainly not incremental to anything. It's already included, but it's probably in the $5 million to $10 million range. Operator: And your next question comes from the line of Jim Rollyson with Raymond James. James Rollyson: Andy, you kind of talked about the demand side with your technology and all the things you've been going through this kind of market over the last couple of years. One of the things that's really been pretty notable here over the last -- at least the back half of '25, if not longer, is what you guys have been doing on the cost side. It showed up really in Completion Services kind of first. It certainly showed up in Drilling Services this quarter. Maybe just spend a minute on kind of what all you're doing to bring your cost structure down and kind of what inning you might be in just as we think about -- it may be a stable market, not that, that happens, but how margins proceed in both those businesses going forward. William Hendricks: Yes. So my hats off to the teams. They've really been digging in hard as to how we're spending every dollar out there both in OpEx and CapEx. And you look at things like maintenance CapEx, what are we spending our money on? Are there things that we can do to refurb versus buy new parts? Are there things that we can do to negotiate with some of our suppliers given the state of the market? There's just a number of efforts out there to try to rein that in. I'll also say that the teams have worked to become more efficient so they can do more with the same amount of people and get more accomplished from a maintenance standpoint. So maintenance has been a big driver in the cost savings in both the Drilling Services and Completion Services segment, both OpEx and CapEx. C. Smith: Yes, Jim, I would add to that. So yes, as Andy said, crew sizes particularly around in the Completion Services area as well as the support structure footprint, as we have consolidated these businesses over time, we've looked to co-locate where we can or slim down sort of our fixed asset footprint in terms of our support facilities. And then on the SG&A side, as we've gone through and tried to integrate the back office even more, consolidate, centralize, it allows us to control some of those costs, get them out of the businesses and let them be managed, quite honestly, from the corporate side. So we turn the business units loose to sort of focus on their operations more so than kind of what they're doing on the back office side. So I would say all of those things have an effect, and we'll continue to do more on those. But yes, it's been a real focused effort over the last year or 2. James Rollyson: Yes. Well, it's been impressive. And then just as a follow-up, you kind of took upon this path of returning at least half your free cash flow a couple of years or so back. And you've obviously exceeded that number pretty candidly each year. You just raised the dividend by 25%. And I presume with all the things going on, your free cash flow conversion rate should probably be pretty stable at least. Just curious, you didn't buy a whole lot of stock back in 4Q. And even with the dividend hike and kind of where numbers are, you have quite a bit of room to be able to buy back stock throughout 2026. Just maybe your philosophy on that given that your share price hasn't ripped but it's certainly improved a little bit from where it was at the bottom. So I'm just kind of curious the philosophy there. C. Smith: This is Andy Smith. I would say that nothing has really changed philosophically for us, Jim. Look, it's pretty clear for those that have been following us for a while that we run this company to maximize free cash flow. And so as we look at anything on the capital allocation front, that's kind of our primary focus. Whether it's looking at reinvesting into our fleet, whether it's looking at buying back shares, whether it's looking at M&A, we kind of look at them all in terms of how much cash flow per share accretion can we get out of those opportunities. And I would say in the fourth quarter, the reason there was a little bit of pause on the buyback was more about lumpiness of working capital and things like that, and it kind of came in late in the quarter. And so nothing really has changed. But we continue to look at all of our capital allocation priorities through that sort of free cash flow per share metric. And we ultimately think that in the end, that serves us pretty well and that's how we run the business. So again, I wouldn't say to read too much into that. I don't think anything has really changed in terms of our philosophy. William Hendricks: Yes, I agree. I don't think anything has changed in how we look at that. But one thing, when you look at the bigger macro and you look at what's happening in the industry over the last couple of years, the market has softened over the last couple of years, but yes we're still generating strong free cash flow, that's our focus. And so that gave us the confidence to go ahead and just raise the dividend. Because here we are in a softer portion of the market but yet we're still producing strong free cash flow, and we still have forward visibility on that. Operator: And your next question comes from the line of Derek Podhaizer with Piper Sandler.. Derek Podhaizer: I know you mentioned some of the comments around Argentina and setting some of your idle rigs down there. Maybe just give us a sense of you walk around the world, you're seeing all the unconventional development pickup. I think it's specifically about your turn well JV over in the UAE. What can we think about you guys explore these international regions, starting with Argentina, maybe UAE, anywhere else? Just some comments and thoughts around that. William Hendricks: Yes. We've looked at these markets for more than a decade to try to see where we can fit in and where it makes sense and where we can get decent earnings out of it. And these markets have various competitors, but they also have rig specifications that differ from the U.S. in a lot of markets. The interesting thing about Argentina, it's almost an identical rig specification to what we have here in the U.S. And so it's easy from a technology transfer and even a capital efficiency standpoint to say, okay, yes, we can move a drilling rig down in Argentina and work in that environment without big technical changes. And so as the Vaca Muerta activity continues to grow in activity and they continue to use the available supply in Argentina, they're looking to the U.S. to bring rigs down from various drilling contractors. This agreement worked out for us to partner up with a local supplier who, has a good reputation in the region and is working for some of the biggest E&Ps there. And so this worked out really well for us to be able to get to an agreement with them to provide them with a couple of drilling rigs to go down there. And while it's only 2 rigs leaving the U.S. market, I think everybody who's been following Argentina knows that you've got operators that are over there currently. You've got U.S. operators that are looking to move into Argentina. And activity will continue to grow in Argentina over the next 5 years and those rigs are going to come out of the U.S and, over time, that's going to reduce the U.S. rig supply. And so we'll continue discussions with companies that are currently there and companies that are going down there, and we'll provide rigs where it makes sense for us to provide rigs. Derek Podhaizer: Got it. That makes sense. Very helpful color. And then just thinking about the frac side of things, I appreciate the comments quantifying some of the impact here in the first quarter due to winter. But maybe you can take a chance on walking through second quarter, third quarter, what you see out there, your customer conversations. Will we get a snap back in utilization? Just trying to think through the different crosswinds around pricing resetting. Just maybe some help understanding, as we move through the year, what we could see out of the completion side of the business. William Hendricks: Yes. We were really pleased to see that the first quarter was still relatively steady. In the fourth quarter, we were able to exceed expectations in overall activity relative to how a fourth quarter normally plays out. And then relatively steady into the first quarter, the weather issues aside that everybody went through. As we go through the year, if the commodity prices stay in the $60 range, my expectation is that the oil markets stay relatively steady. I think that as a lot of E&Ps were working on their budgets in December, you had oil commodity prices at various levels in December, which kind of made it challenging for a number of our customers to decide what their activity is going to be during the year. But we've seen more resilience, I think, than many of us have expected. And if that resilience persists and oil stays in that upper 50% to 60% range, then the market likely to remain relatively steady. Operator: And your next question comes from the line of Stephen Gengaro with Stifel. Stephen Gengaro: I guess, on the frac side, I was just curious what your view is on two things. One is if you think we'll see further consolidation in the business. And maybe tied to that, do you feel like over the last, I don't know, 6 months or a year that the behavior of the industry and the peers has been fairly good? Or do you still see some people who are underpricing the market? William Hendricks: So I think the frac market has been evolving from a technology standpoint, and I think that you're seeing differentiation with the top 3 or 4 players versus others. And I think that technology differentiation continues for the next few years. You can certainly see it in where we're investing dollars. So we continue to invest in the 100% natural gas Emerald fleets that we have deployed. There's still very strong demand for equipment that can burn 100% natural gas, and we're going to continue to do that. And so we're going to continue to grow our capacity of that high-end frac equipment probably higher than some of the others are deploying today. So we see that. And then you see digital. Digital still has a lot of evolution to go in the frac space. And so we announced, it was a big event at an industry conference this week in the Houston area where our teams rolled out the new eos platform for digital. It allows our customers to be able to aggregate all their data without various third parties, put it all in one place, visualize it, work with it, do what they need to do with it. But that platform is not just about data aggregation and moving data. It's also about the controls and working with the control systems that we have, which are proprietary to our equipment. And we have the Vertex automation on the frac. And so it's these kind of investments in the higher-end technology on the equipment side, but also the investments on the digital, which will allow us to continue to differentiate. And I think that it's going to roll up to the top 4, maybe just 3 players that can do that and differentiate from the others. Stephen Gengaro: Okay. That's helpful. And just the other quick question. Just on the rig side just on the North American market, do you feel like pricing has stabilized? William Hendricks: I think where we are today, you've got some available rigs in West Texas. It's still a price competitive environment out there. But I'm pleased with our ability to protect our pricing and margins the way we have. And we'll just have to see how it plays out. I think where the commodity price lands as an average for the year will be a lot that drives that. So if it stays upper 50s to 60s, then I think pricing remains relatively stable. It will get a little bit more competitive if we see a different commodity price if it's lower. But I think where we are now, that it stays relatively stable. Operator: And your next question comes from the line of Arun Jayaram with JPMorgan. Arun Jayaram: I was wondering if we could start with the CapEx. You mentioned how you're reducing CapEx by around 15% to less than $500 million. I was wondering if you could maybe unpack the year-over-year decline, what that kind of represents, maybe a little bit of a mix between drilling and completions and perhaps how much of the CapEx is going to be earmarked for the Emerald direct drive kind of horsepower. C. Smith: Yes. So I can give you a little bit of color on that. So of our total CapEx projection or CapEx guidance, about 40% of it is going to drilling, about 45% of it going to Completion Services, a little over 10% is going to Drilling Products. And the rest is sort of Corporate and Other on a percentage basis. And in Completions, of that 45%, gross dollars, about $65 million or so is going to new Emerald equipment that will be coming into the fleet over the course of the year. Arun Jayaram: That's super helpful. Andy, for you. I wondered if you could maybe elaborate on this trend you're seeing with continuous pumping. I think in one of your previous slides I've seen that you've talked about how simul-frac now is representing about 30% frac activity today. Where are we in terms of continuous pumping? And is it advantageous for operators such as Patterson to pursue continuous pumping? Just obviously, I assume you're getting paid for the extra horsepower on site. William Hendricks: Yes. Continuous pumping is interesting in that there are certain advantages for the E&P to -- if they don't have to stop, you're basically pulling production forward. So there's a value to the E&P to do that. And the E&P has to work through those economics to decide what that value is. Because on average, if we're pumping 22 hours per day across all of our fleet, and you want to take that number from 22 to 24, we may have to deploy in terms of capital another 20% to 30% of capital allocation with more frac pumps, more high-pressure iron, more valves to be able to have a system out there that can achieve that. And so the E&Ps -- and we charge for all that equipment when it goes on location. So the E&Ps have to do their own earnings math to decide, is that worth the extra equipment that's on location to be able to accomplish that? Is that value of bringing production forward on that particular pad or multiple pads really worth that effort? So what we see today is we see a number of E&Ps that are trialing it to see how it works, to see what the costs are going to be. And we're working with a number of our customers to reduce those costs so we don't maybe have to put so much equipment on it on there. So it's all evolving at the same time. But at the end of the day, it's going to be up to the E&P to decide, does it make economic sense for them. Technically we can do it. Technically we know how to do it. We are working to continue to reduce the cost to do it. But it's the E&P's economic decision at the end of the day. Arun Jayaram: Andy, you said it's 20% to 30% more horsepower at the well site to do that. William Hendricks: I would say 20% to 30% more capital in general because you've got pump equipment. You've got maybe redundancy on a number of things. You've got more piping, more valves out there. Because if you're going to pump for multiple days straight, you still need to be able to access pumps to maintain them. So you have to have more pumps than you're using so that you can swap pumps in and out of the lines while you're circulating without stopping the circulation. So you're going to have more equipment on location so you can manage all that. Arun Jayaram: Okay. If I could just sneak in one more. Andy, I believe you were anticipating running around 2 million-horsepower plus or minus in 1Q or currently. What is your average fleet size in terms of horsepower today? William Hendricks: There's no average fleet size. I mean, I can tell you, every fleet that we have deployed is a different size. Is it in the Midland Basin? Is it in the Delaware Basin? Is it a simul-frac in the Delaware Basin? Is it pumping in the Haynesville? And so everyone is different. Everyone has become very bespoke to whatever operation the operator is trying to accomplish. As I mentioned earlier, just even a simul-frac job, we might have a simul-frac job today that's got another 20% of horsepower versus a simul-frac last year because they want to do it at higher rates and higher pressures because they're seeing increases in production. So it even changes from pad to pad. It may be a high amount of horsepower on one pad. And for the same customer, moves and it shrinks for the next pad. So it's constantly changing. Operator: And your next question comes from the line of Ati Modak with Goldman Sachs. Ati Modak: Andy, I was wondering if you could give us color on the private versus public customer conversations as we think about your exposure in the U.S. William Hendricks: Yes. So we work for some of the biggest publics and we also work for some of the biggest privates in the U.S. And I would say that the large privates think of things long term just like the large publics think of things long term. They take a multiyear view to everything and that's how they view it. We do some work for some of the small private equity-backed privates but that's a very small percentage of what we do. We're heavily weighted to the largest E&Ps in the U.S., whether they're both public or private. Ati Modak: Got it. And the Saudi opportunity, it sounded like it's mostly on the bit size because of in-country value. Is that the right way to think about it? Or are there other strategic opportunities for you down the road? William Hendricks: Saudi for now is focused on drill bits for us. And you're absolutely right. It's the in-country value equation that the country uses. And so if you manufacture in-country, it improves your score. It allows your customers to buy more products from you. If you're manufacturing in-country and exporting out to other countries in the region, that improves your score and allows your customer there to buy more from you. So we think that, that's certainly a benefit for us, and our team has done a great job of getting us to the point where we can manufacture the first one in December. And we'll continue from here. Operator: And your next question comes from the line of Keith Mackey with RBC Capital Markets. Keith MacKey: Just wanted to start out on the rig side. Can you just talk through some of the technology offerings on your rigs? How has that changed? And what sort of revenue or just net benefit uplift do you get from the technology in this market? And finally to that, more of your customers are starting to talk about robotics on the rig floor. What's your view there? William Hendricks: So in our Cortex automation is a number of applications that enhance our control systems and automate a number of the functions that a driller might normally do when he's operating the drilling rig and working with his crew. And we've developed a number of these applications over the years, and it's been an interesting evolution because as you start to develop applications, then your customer comes back with what ifs. Well, what if we do this or what if we do that? And that either improves the existing applications where you tweak them some more, where our data analytics team will look at the data in different ways and decide how to best fine-tune these applications, or the customer works with you to come up with a new application that they see as beneficial and ask for priority on that. And so over the years, we've continued to develop those out. And there's revenue involved. We certainly charge for these. But it also means that we become more important for that customer when we're offering these things. And we tune these applications to their specific procedures or their workflows or their specifications on how they want to see the drill bit go back to bottom or what kind of weight on bit or they want to carry on the drill bit or what kind of differential pressures they want to maintain. And so it just allows us to be closer with the customers on how we run those types of operations. In terms of robotics, our teams have certainly -- they're looking at it. There are some advantages. There are also some big costs. And we've done a lot of the groundwork to deploy that on either our APEX-XC plus rig or APEX-XK. And I think over time, we'll do that as well depending on what the customers are requesting. Keith MacKey: Got it. And just finally, Q4, we're expecting a lot more seasonality from you and several of your peers. Can you just give us a little bit more color on really why you think that didn't happen and things were a lot more resilient? Is there some element of the E&Ps just not being able to slow down given where current activity levels are? Or are there pricing incentives given to keep fleets going? Just what is your sense of really why activity was so resilient in Q4? William Hendricks: I think for us, it was a combination of two main things. It was our customer base. As I've mentioned before, we work for some of the largest customers in the U.S. And those customers have stayed even more resilient than we've thought and just kind of kept working through the quarter maybe more than they normally would. And then the other piece is for some of those customers that may have slowed down, our teams have done a real good job placing that equipment in other places to be able to do that. Certainly wasn't pricing concessions but really more working with the customers. But again, I think it goes back to our customer base and the ability of our teams to know all the customers so that when we do have to move something around, then we can do that efficiently. Operator: And your next question comes from the line of Eddie Kim with Barclays. Edward Kim: Just wanted to dig into the Completion Services guide for the first quarter. You said you expected gross profit of around $95 million, which represents about a 14% sequential decline. At the same time, you said you expected activity to decline only slightly in the first quarter due to winter weather. So I mean, that would seem to imply a not insignificant pricing decline from fourth quarter to first quarter. Is that a fair assessment? And should we expect that to be sort of a headwind for you as your fleets move on to this lower pricing level as we move throughout the year? William Hendricks: No, not at all. I wouldn't say this is any significant pricing decline by any means. I think this is all more activity related. You can go back and look at the number of days below freezing in the Permian or the number of days that Pennsylvania had heavy snowfall, and that's where we were held up in activity in the first quarter. So that's just pushing revenue from the first quarter eventually into the second quarter. So that's how that's kind of moving. In terms of pricing decline, what we've said before even at the last earnings call, we're going to have a slight decline because of various tenders that have happened in the second half of last year, but that's in the single digits. So any price decline on average is single digits. But certainly, that's not what's driving what you're seeing in the decrease in gross profit. It's more had to do with weather activity and some mix in activity during the quarter. Edward Kim: Got it. Got it. Okay. My follow-up is just you opened up a new manufacturing facility in Saudi. You said you're manufacturing drill bits in the country. Could you sort of talk about the growth ramp-up you expect in Saudi maybe this year and next? And do you think Saudi demand is going to be sufficient to absorb all that capacity coming out of that new facility? Or is there going to be opportunity to sell drill bits into other countries in that region in a couple of years? William Hendricks: Yes. We've seen -- of course, we follow the rig count, the announcements on increasing rig counts in Saudi because that's what drives our drill bit business. They've had a big slowdown over the last 1.5 years in both onshore and jack-up drilling rigs over in Saudi, and we're seeing the calls to put the onshore drilling rigs back to work. And so you've had a number of drilling contractors that operate in Saudi that have made those announcements, and that will start to drive an increase in drill bit demand. We do expect the customer over there to consume some of their existing drill bits that they might have in a warehouse. But as they go through that, then they'll be calling for new drill bits. And we'll have some manufacturing capacity over there to be able to meet that need. We'll probably still likely ship drill bits from the U.S. at the same time. So it will be a mix of local manufacturing plus drill bits coming into the U.S. until we expand our manufacturing over there. But real pleased with what the team did given some of the constraints and challenges we had over there to get manufacturing set up. We've been doing remanufacturing in Saudi for years. So it was really a matter of expanding the space, the types of machines that we needed over there and also the skills that we needed over there to be able to go to full manufacturing. But they were able to produce that first drill bit in December. Operator: And we'll take our last question coming from Jeff Bellman with Daniel Energy Partners. Jeffrey Bellman: Andy, bit of a high-level question, and definitely related to some of what you've already addressed, but I wanted to get your take. If I had a thesis that the U.S. industry has gone a long way working through their Tier 1 inventory and activity is going to have to increasingly shift towards, let's say, more complex or Tier 2 resources, how do you view that transition for Patterson? And how does your asset base help operators kind of extend their economic life and expand the resource base if that shift actually has to occur? William Hendricks: Sure. There's a lot of talk about shifting from Tier 1 to Tier 2 and I really think that's operator specific. We work for some E&Ps that tell us they have another decade of Tier 1 that they're still working on. And then we have some E&Ps that say, yes, we're going to start to look at some of the Tier 2 or some of the deeper geological horizons. For us to do that, that means more service intensity, and more intensity means that it's positive for our pricing. But on the drilling side, it means we may need to continue to add capacity on the size of the rig that we're using. So we'll continue to do that. And on the completion side, it may require more horsepower on location for some of the deeper plays. And so it just increases overall service intensity, which is positive for us. Operator: And that concludes our question-and-answer session. I would like to hand it back to Andy Hendricks for closing remarks. William Hendricks: Thank you. I appreciate everybody dialing in today, and we'll wrap up this call for the Q4 2025. And look forward to talking to you again in April. Thank you. Operator: Thank you, presenters. And this concludes today's conference call. Thank you all for joining. You may now disconnect.
Vincent Clerc: Welcome, everyone, and thank you for joining us on this earnings call today, where we present our fourth quarter and full year results for 2025. My name is Vincent Clerc, I'm the CEO of A.P. M�ller - Maersk. And with me in the room today for the last time is our CFO, Patrick Jany. Before we start, I'd like to thank Patrick for all of his hard work and support over the past 6 years here at A.P. M�ller - Maersk, and wish him the very, very best in the next steps of his career. As we announced back in December, Robert Erni will succeed Patrick in the coming days. We look forward to introducing you to Robert on our upcoming road shows and conferences. If we start with the highlights from 2025 notwithstanding a challenging external environment, especially in Ocean, we are pleased with the strong year overall, in which we made good operational progress across all of our business segments. We closed 2025 with a full year EBITDA and EBIT of $9.5 billion and $3.5 billion, respectively. This places us towards the upper end of the most recent financial guidance we had communicated to you back in November. Specifically in Logistics & Services, we strengthened the performance of our portfolio on the back of improved operation, stronger cost and yield management measures, delivering 4.8% in EBIT margin for the year. This represents an improvement of 1.2 percentage points on 2024. We are, of course, proud of the progress we have made, but are either complacent or satisfied with where we are. And improving both our results and growth rates in Logistics will remain a priority in 2026. In Ocean, Gemini successfully implemented, delivering unprecedented reliability for our customers and significant cost benefits, which we have revised upwards on an annual basis, and I will look at this further in a short while. Gemini has also allowed us to deliver strong volume growth of nearly 5% through increasing asset turns while limiting the fleet size expansion. This was against the backdrop of sequentially receding rates because of increasing overcapacity and volatility created by trade tensions, especially towards the middle of the year. The agility of the new network helped us manage this volatility by ensuring that we could react to the volume swings on the U.S.-China trade lanes. Finally, it has been a record year for Terminals, both in terms of top line and earnings. In the year, we delivered a strong revenue growth of 20% and EBIT growth of 31%. The top line was driven by strong volumes, mainly from additional Gemini services, higher pricing and continued growth investments in critical infrastructure. Utilization remains high, but with our multiyear investment program, we are confident in our ability to take advantage of the market growth in the upcoming years. As we look ahead to 2026, we see a continuation of strong global container demand translating into a volume growth that we expect to land between 2% and 4%. Based on various scenarios we currently see, especially on industry overcapacity in Ocean, we guide for a full year EBIT of between negative $1.5 billion to positive $1 billion free cash flow above negative $3 billion and a CapEx for full year '26 and '27 combined of between $10 billion and $11 billion. As usual, more detail on the guidance will follow later in the call. With the numbers now out of the -- for the full year, we can also announce a dividend proposal for the year that just passed. For 2025, the dividend proposal will be set forward by the A.P. M�ller Board at the AGM on March 25 and is a dividend per share of DKK 480. This is equivalent to 40% payout of our underlying net results in line with our dividend policy and the same payout ratio of the 2024 dividend. Looking back at the year just past, we generated thus a total shareholder return of 35% in 2025 through capital gains and dividends. With a strong balance sheet, we are also in a position to announce a continuation of the share buyback program. The new tranche will be approximately $1 billion with a duration of 12 months and will begin immediately. The lower level reflects the higher level of uncertainty and the lower rate environment that we are headed into in 2026. This implies a total cash return to shareholders for 2026 of approximately $2.1 billion, of which $1.1 billion is the proposed 2025 dividend subject to the AGM approval, and the remaining $1 billion is the new tranche of the share buyback program. Now taking a closer look at the fourth quarter performance for each of our business segments. First, Logistics & Services continue to track positively this quarter. We achieved an EBITDA margin of 4.9% up from 4.1% last year, but down from the 5.5% we had in the last quarter. The year-on-year margin improvement comes from the -- on the back of operational progress made in warehousing and distribution primarily. This quarter marks the seventh consecutive quarter year-on-year margin improvement. And meanwhile, the margin contracted sequentially. On the top line, revenue grew 1.9% year-on-year, driven mainly by warehousing and distribution, but fell 0.5% sequentially against the third quarter of this year of '25. Our focus remains on stringent cost control, portfolio discipline and capital efficiency to live the performance upwards towards an EBIT margin target of 6%. We are happy about the general trend throughout the past 7 quarters, but we also clearly have more work to do. In Ocean, we had our second full and clean quarter after the Gemini implementation. We delivered above-market volume growth with volumes up 8% year-on-year and a stable -- and stable on the prior quarter following the peak season. The network continued to deliver high schedule reliability of 90% for our customers despite significant weather disruptions and substantial cost savings to Maersk. We continue to use our fleet efficiently with utilization of 94% on par with the third quarter. The cost benefit and agility of the new network have bolstered our operation against the backdrop of the ongoing freight rate decline. In Terminals, we delivered a solid quarter in a record year with a strong top line growth, mainly driven by volumes. Volumes grew 8.4%, driven by Europe, North America and Latin America and mainly through the Gemini network. As we mentioned last quarter, much of the volume uplift has come from Gemini, which has put more boxes through our gateway terminals. Utilization remains high at 88%, but we are confident that with ongoing investments, we will continue to be able to capture good volume growth in the coming years. Finally, return on invested capital for Terminals remained strong at 16.1%, well above the target of 9%. Turning to the main achievement of the year. We have updated the Gemini cost benefit we showed you previously and now expect the benefits to be higher than our initial guidance last quarter. Starting with bunker. We can see that the continued advantage of Gemini stemming from a more efficient use of our ships, for example, through lower speed, shorter distances and shorter dwell time is allowing us to reduce bunker consumption. This translated to an approximately 9% bunker consumption improvement adjusted for capacity for the quarter. Then on the asset turn side, from the more efficient use of our vessels, Gemini allows us to transport more volumes on the same capacity. This quarter, we saw capacity growth of about 4% year-on-year against a volume growth of about 8%. The delta was about 4 percentage points, representing the improvement in asset turn. We can quantify the bunker consumption improvement of about 9% at fixed bunker prices into a cost benefit of about $150 million for the quarter. Likewise, we can quantify the asset turn improvement of about 4 percentage points, which against our total network where cost translates into about $120 million of cost benefit for the quarter. An added advantage of Gemini has been to increase volumes in some of our gateway terminal, allowing us to significantly increase throughput. As with the prior quarter, the additional uplift has generated about $4 million in benefit this quarter, which annualizes to about $120 million to $200 million based on full year implementation and seasonality. Overall, across Ocean and Terminal, therefore, we have generated over $300 million in benefits here in the fourth quarter, and we are now targeting $820 million to $1.1 billion in annual benefits. Turning to our midterm targets. As you might recall, we introduced these targets back in May 2021 to cover the midterm period of '21 to '25. Even though the reporting period technically ends, we will continue to use those indicators for 2026 and report on our progress in the same terms. Later in the year or early in 2027, we will revise our achievements and formulate new midterm targets. Nevertheless, we are finishing those 5 years -- as we're finishing those 5 years, it is time to have a closer look at the progress made, and you can see to the right of the table how we have performed over the 19 quarters since the introduction of the targets. Overall, we have delivered exceptional performance at the group level with almost all quarters delivering last 12 months ROIC above target, which translates into an average ROIC of above target for all 19 quarters. Similarly, Ocean has performed well with EBIT above the 6% target for all but the first 2 quarters in 2024 and this most recent quarter with downward pressure on rates from increasing overcapacity. Terminal has truly transformed with a ROIC starting shy of the target back in 2021, but has been consistently above its target of 9% since the first quarter of 2023. At the same time, we know where we have fallen short, namely in Logistics & Services, with an EBIT margin still below the 6% target that we laid out and modest revenue growth because of challenged products, primarily in middle mile and warehousing. Our priority in 2026 is to continue to improve where we have fallen short in Logistics & Services. And that is a good segue into the next slide. Looking ahead to 2026, we have laid out our key strategic priorities. In Logistics, our priority is to accelerate margin improvement and push harder on growth wherever it makes sense, which we define as the many part of the portfolio delivering high margin and where higher volumes will increase network utilization and thus, translate also in better margin. Focus areas are, for example, a further reduction in white space and contract logistics or adding density to our e-commerce network. As part of our efforts to accelerate improvement in Logistics, we will simplify the organization as well. I will get back to this shortly on the following slide. Within Ocean, we seek to protect the high asset turns we have achieved with Gemini, which will allow us to carry more containers with our existing fleet and so we can grow with minimal fleet expansion. Further, we continue to grow with the market as we did in 2025. Given market headwinds we are facing in -- for 2026, we will focus on profitability by sticking to our core principle of cost leadership, which will prove to be even more important in the coming quarters. Finally, in Terminals, we continue to grow through existing and new location, maintain long-term profitability and ultimately deliver on our ROIC target. Our aim here is growth, concession excellence and operational excellence. Across all our business segments and in corporate, we continue to focus on driving further efficiency and simplification of our organization. Cost leadership remains core to being the best operator. We are transforming our organization within the Logistics & Services as well. This is to drive more value for our customers and reflecting the feedback from all of you. It will increase comparability and transparency to allow you to better benchmark our performance with peers. We will report 3 new product segments, which reflect how we will simplify also the way that we run the business. These segments will be landside, forwarding and solutions with each of these product segments comprising its own set of products. Landside will comprise local and regional products linked to inland transportation, drayage in and out of terminals, ground freights in North America which offer largely expedited LCL road transport between centers. Depots, which are often located close to ports and terminals as well as custom services to assist customers with declarations, tariffs and other regulatory matters. Forwarding will comprise global forwarding and ancillary products, namely air freight, less than container load for ocean forwarding and project logistics of large cargo as well as insurance. Finally, solution will complain supply chain management, e-commerce and warehousing and distribution. This organizational change will take effect on April 1 and will be reported externally for the first time in the second quarter reporting later this year in August. We will provide at that time, a year-to-date and year-on-year figures according to the new segmentation to help you for comparability purpose. Finally, on the guidance for the upcoming year. First, we expect global container volumes to continue to grow in 2026, with growth expected to be between 2% and 4% and for Maersk to grow in line with the market. In that context, we expect an underlying EBITDA of $4.7 billion to $7 billion, and underlying EBIT between negative $1.5 billion to positive $1 billion and a free cash flow of negative $3 billion or higher. While we plan on operational progress and growth across segment, we expect container shipping rates to develop adversely, such that our guidance for 2026 is lower than for 2025. The guidance range reflect industry overcapacity that already exists today from the new vessel deliveries and different scenarios with respect to a full Red Sea opening in 2026. Our CapEx guidance for '25 and '26 is unchanged compared to the previous levels and around $10 billion to $11 billion, and we expect the current funding -- the corresponding figure for '26 and '27 to be the same. I'll now hand over to Patrick, who will walk you through the detailed financial and segment level performance. Patrick Jany: Thank you, Vincent, and good morning, everyone. We closed the book on 2025 with a good operational delivery in the fourth quarter, delivering an EBITDA of $1.8 billion and an EBIT of $118 million, implying margins of 13.8% and 0.9%, respectively, placing us very much where we expected to be. On a full year basis, we delivered an EBITDA of $9.5 billion and an EBIT of $3.5 billion, equating to a 17.7% EBITDA margin and a 6.5% EBIT margin for 2025. While both Logistics & Services and Terminals delivered improving year-on-year performance, excluding one-offs, the first benefiting from improved operational efficiency and the latter from higher throughput from Gemini, the quarter saw overall decreased earnings resulting from receding freight rates in Ocean. Return on invested capital was 5.7%. This is lower both year-on-year and sequentially and reflects the additional investments made this year in Ocean and Terminals together with a very strong earnings in the latter half of 2024, no longer being included in the last 12-month measure. We continued returning cash to shareholders in Q4, distributing $620 million through the ongoing share buyback program for a total of $2 billion for the full year. Finally, we maintained our strong liquidity positions with total cash and deposits at $21.4 billion at quarter end and with net cash decreasing year-on-year to $2.9 billion primarily due to the cash returned to shareholders through dividend and share buybacks. Going into 2026, our balance sheet remains strong and allows us to continue pursuing our strategic growth objectives while simultaneously returning cash to shareholders and weathering the expected downturn in Ocean. Let's take a closer look at the cash flow breakdown on Slide 15. The fourth quarter operating cash flow was $2.5 billion, driven by an EBITDA of $1.8 billion, together with a positive impact from a substantial unwind of net working capital. This resulted in strong cash conversion of 137%, up on last year's 123% in the quarter, leading to 102% conversion for the full year. Gross CapEx decreased to $919 million, down both year-on-year and sequentially, primarily due to a lower level of investments in Ocean which, together with capitalized lease installments of $819 million resulted in free cash flow of around $1 billion. For the full year, CapEx landed at $4.8 billion at the lower end of our guidance. Free cash flow also included a positive contribution of $349 million, mainly from dividends received from our minority investments. We repurchased roughly $620 million of shares during the quarter, which is reflected in the dividend and share buyback column. Finally, a large portion of our term deposits matured in the quarter, implying an increase of the readily available cash. Starting our segment review with Ocean on Slide 16. Strong demand prevailed in the fourth quarter and our Ocean business managed to successfully capitalize on this momentum, delivering substantially increased volumes while reaping the cost benefits of Gemini in an otherwise deteriorating market environment. Volumes increased by 8% year-on-year across more trade lanes, driven by sustained strong Asian import. Sequentially, volumes remained roughly stable at a negative 0.4%. Fit rates continue to decline in response to the ongoing market pressure in industry supply demand imbalance, declining by 23% year-on-year and 8.8% since the previous quarter. As a result of the significant rate decline, profitability turned negative in the fourth quarter as Ocean incurred a loss of $153 million. Ocean continued to benefit from the Gemini network. The scale reliability of the network remains in line with our target. And we have seen the immediate financial and operational year-on-year impact of better asset turns and bunker savings cushioning the full impact of declining rates. While continuing to invest in our Ocean business in line with the overall strategy, CapEx was comparatively low at $603 million compared to $1.2 billion last year, mainly due to significant vessel installments in Q4 2024. Sequentially, CapEx also decreased by around $300 million due to lower equipment investment. On the next slide, you can see a breakdown of the individual elements, which contributed to the EBITDA development in Ocean. The year-on-year rate decline was the dominant headwind, contributing a large negative impact of $2.1 billion, only partially offset by stronger volumes. The price of bunker decreased 11% year-on-year to $512 per tonne, which had a positive impact together with 5.4% lower bunker consumption from primarily Gemini-related efficiency gains. Container handling costs were up from increased terminals and empty repositioning costs. And then there is a negative comparative impact from the timing of revenue recognition in the final bucket, offsetting the impact of lower SG&A costs. Overall, Ocean EBITDA for the fourth quarter landed at $1.2 billion, down 59% from the previous year and 35% sequentially. Now let's have a look at the KPIs of the Ocean business on Slide 17. Loaded volumes increased by 8% year-on-year to 3.4 million FFEs across most trade lanes from continuing strong Asian exports, leading us to almost 30 million FFEs for the full year. At the same time, average freight rates decreased 23% from last year and 8% sequentially, while remaining flat throughout the quarter itself. Unit cost at fixed bunker decreased 4% year-on-year and 1% sequentially, benefiting from the stronger volumes offsetting the higher cost base. Bunker costs decreased 12% year-on-year, primarily from 11% lower bunker prices and further supported by the already mentioned 5.4% lower bunker consumption driven by high efficiency of the Gemini network. This was all partially offset by the EU ETS payments. The size of our fleet was stable sequentially at 4.6 million TEUs, implying a 4.3% increase year-on-year. This is the result of the capacity injection in early 2025, initially for Gemini, which has allowed for higher volumes and to satisfy the strong demand, which is also reflected in our sustained high utilization, which was sequentially unchanged at 94% in the fourth quarter. In terms of product mix like in the last couple of quarters, a majority of the volumes came from strong term contracts with 55% of volumes in Q4 compared to 45% of volumes for our long-term contracts. Looking forward for 2026, we expect a slightly higher share of volumes to come from long-term contracts with about half the volumes to come from long and half from short-term products, respectively. I would also like to briefly comment on the change in how we account for our vessels in -- on the balance sheet starting in January 1st of this year. Over the last years, we have observed an increase in the average time frame in which our vessels remain economically viable. And as a result, we have increased the estimated useful life from 20 to 25 years. The impact of this will be approximately $700 million of reduced depreciation in 2026, which is reflected in the financial guidance, as you might have already read in the footnote. We continue to our Logistics & Services business on the next slide. The year-on-year development in Logistics & Services highlights the operational improvements to the segment that we have made throughout 2025. While there was top line growth, the biggest difference came through improved profitability resulting from our efforts at turning around the more challenged products like warehousing and middle mile. Revenue in Logistics & Services grew to almost $4 billion in the quarter, up 1.9% compared to last year, driven by improved volumes across most products. Sequentially, revenue declined modestly at negative 0.5% following a strong third quarter. EBIT increased to $194 million, mainly driven by solid performance in warehousing, last mile and lead logistics. This implies a 4.9% margins, up 0.8 percentage points compared year-on-year and marking the seventh consecutive quarter of year-on-year EBIT margin increase. Sequentially, the margin decreased by 0.6 percentage. CapEx was $129 million in the fourth quarter, declining another quarter year-on-year to reflect the slightly lower investment level in 2025, where focus has been on improving operational performance. Now let's have a look at the segment breakdown by service model. Overall, we recorded a positive business development in a generally supportive business environment with one of the biggest weak point being the U.S. import-linked activities. This can be seen in particular, in freight management, where revenue declined to $532 million, down 8.9% year-on-year as lead logistics volumes were significantly down on the China-U.S. corridors, given the tariff environment, while customs held broadly stable. EBITDA margin improved to 19% from better execution. Fulfillment services increased revenue by 1.5% to $1.5 billion, while increasing the EBITDA margin to around breakeven. Warehousing was here the largest contributor to the higher margin with middle and last mile also trending better after the rebasing actions we executed during the year. In Transport Services, revenue grew by 5.6% to $1.9 billion. EBITDA margin eased to 7.1%, and strong air and landside transportation volumes growth was offset by softened prices against a still relatively fixed cost base in own control capacity. Additionally, margin was impacted by a $22 million impairment of aircraft, representing about 1.2 percentage points of the year-on-year margin decline. Stepping back to margin journey we set out at the start of the year remains on track. We have lifted the operational flow in our fulfilled by Maersk products and prioritize profitable wins while keeping CapEx insured. While the business is by far not where we want it to be in terms of growth and profitability, 2025 has moved us closer. Let us now turn to our Terminal segment. This business rounded off an excellent year with another strong quarter. Revenue grew 13% to $1.4 billion, driven by strong volumes, which increased 8.4% year-on-year, supported by increased throughput from Gemini and geographically driven by Europe, North and Latin America. Additionally, the top line was supported by a higher rate level. With another quarter of strong volumes, utilization for Terminals remained high at 88%. Revenue per move increased 4% year-on-year to $363 per move driven by improved rates and favorable FX development, somewhat offset by lower revenue from storage. On the other hand, cost per move increased by 5.9% from labor inflation coming through together with adverse FX, overall increasing despite higher utilization. Terminals delivered fourth quarter EBIT of $321 million, down 5% from $338 million the previous year, impacted by an $86 million expense related to the impairment of a terminal in Europe and a write-down in Asia. Adjusting for this one-off, EBIT would have increased to $407 million, equivalent to an EBIT margin of 30.1%. Sequentially, EBIT decreased as expected given the significant positive one-off reported in the third quarter. On the back of strong performance throughout the year, return on invested capital increased to 16.1%, CapEx remained stable at $152 million, roughly in line with previous quarters. Now let's have a look at the breakdown of Terminals EBITDA development on the last slide. EBITDA for the fourth quarter increased to $440 million from $421 million the previous year. The year-on-year increase came mainly from the higher volumes contributing a positive impact of $52 million, which was further supported by a $16 million impact from higher revenue per move. This more than offset the negative impact from labor inflation and higher costs of $48 million. This finishes our business segment review. Let us now proceed to the Q&A. Operator, please go ahead. Operator: [Operator Instructions] And we have the first question coming from Muneeba Kayani from Bank of America. Muneeba Kayani: So Vincent, you talked about the range of the guidance. I just wanted to get back on that, like how have you thought the low and the top end of that guide in terms of a freight rate scenario or Red Sea timing? I know you said gradual reopening is kind of what you've assumed, but if you can help us think about that scenarios and kind of the cadence of that guide for this year, please? Vincent Clerc: Muneeba, thank you for your question. I think the way to think about this is whether it is through the new ships that are coming in or through the return to Suez, we're going to free about -- we're going to have an overcapacity of anywhere from 4% to 7%, 8%. And for that to resorb itself, you will need to see some scrapping. There is a lot of pent-up capacity that needs to get scrapped and didn't get scrapped since COVID basically for 6 years. And there is also a tonnage that needs to be returned. So that will create a few quarters that are going to be a bit bumpy. If we return fast and full to Suez, we will see probably more pressure on the freight rate because there is a bigger gap that we need to close at once. If we have an orderly slow gradual return, we might be able to manage it better, but it all starts to get to the upper end of the guidance that we start to see some scrapping starting to occur because it means that we're starting to eat into some of that overcapacity. And so it really depends how quickly the industry reacts to the current start over the capacity, how quickly we move through -- we get back to Suez and how much of the tonnage gets pushed back to provider. I think that's really the underlying thing that you need to get into towards the upper or the lower end of the guidance. Operator: The next question comes from Cristian Nedelcu from UBS. Cristian Nedelcu: It's a two-part question, if you allow me. The first part of CMHC has recently announced that it's selling a 25% stake in their terminal business. Would you consider spinning off or selling a stake in terminals to crystallize value or accelerate the growth in Terminals? And in relation to this -- in relation to the capital allocation, there are some opportunities out there, Panama ports. You talked about Logistics M&A. The way you've reduced the share buyback, so just a more prudent approach on capital deployment. Is this prudent approach valid also for acquisitions in Terminals and Logistics.? Vincent Clerc: Cristian, we've seen the deal from CMA. I think they are trying to monetize some of the portfolio. I think with the balance sheet that we have today, we have no need to monetize and can perfectly as we do this year, even on a reduced guidance, maintain a strong return to shareholder and conduct the investment that we need to do. You mentioned Panama, there would other -- I think, in general, the world has underinvested in terminal capacity for a while, and there is over the coming decade, need for significant investment in greenfield projects to add terminal capacity to match the flows of containers that there is globally. That's also what we plan on doing, and you've seen some of those facilities start to come online during 2025. There will be more in the coming months and quarter. But here also, we have the wherewithal to do it. We have the wherewithal to continue to renew our fleet and be able to sustain a strong position in shipping. And then on Logistics, it's always a question of finding the right candidate, the right opportunity and being ready to do that integration. Certainly, that remains one of the financial axis of the strategy. But at this stage, I would say we are, of course, prudent towards capital deployment and keeping as much of our powder dry as possible given some of the unknowns in the outlook. But it is exactly to preserve the ability to countercyclically go and do some moves when the time comes. Operator: The next question comes from James Hollins from BNP Paribas. James Hollins: Best of luck to you Patrick. Thanks for everything. Just on the Red Sea, I'm just wondering if, if you can run us through kind of the rationale you saw with your desire seeming desire to be a first mover back in the Red Sea amongst your main competitors and kind of linked to that, the expected time lines as you would see them for Maersk to be fully back through the Red Sea, assuming everything else geopolitically stays the same and kind of what you'd expect to see from your competitors from here? Vincent Clerc: Yes. Thank you, James. So a couple of points to start with. If you look at the Suez transit in January, they're up 50% versus what they were a year ago. So -- and that's not with a lot of Maersk ships there was only one of them that crossed during that period. So we're not the first movers. There has been a significant uptick across tankers and bulk segments, for sure, but also with CMA having a much more aggressive, they have multiple services already that have been transiting throughout the period and more aggressively also over the past month and even quarter. So we are a second mover, if you will, on that. For us, the security assessment has been on different levels. First of all, obviously, we follow the situation in Gaza, where we seem to be moving slowly along a peace process with where we are going to go with the reopening of the border with Egypt and so on, where there's a lot more talk about now reconstruction rather than a new round of hostilities. There has not been any attack since October from the Houthis on any ship. There has been declaration also from the Houthis that they do not intend to attack anybody. So for us, the -- and again, a lot of ships are crossing every week. And we monitor the situation and how we're doing. We're talking to others and see what intelligence do they have. The conclusion that we have is today, it is safe for us to move into a Phase 1, which is having some services specifically the ones for whom going around the Cape of Good Hope is the longest deviation where it is safe to move under escort and go through the Bab el-Mandeb. There is limited escort capacity. There are a lot of shipowners today that already moved through Bab el-Mandeb without escort. I feel that it's a bit premature for at least for how we assess the security situation. And therefore, there is a certain limit to what we can do. At some point, we need to get into a situation where the temperature comes further down, where we feel it is also safe for us to move into -- to reopen services even if we don't have escort. And that would be probably what triggered the difference between what we have announced so far and a more full return would be the ability that we have to see that we can move without the military escort that the service that we do it today have. Operator: The next question comes from Lars Heindorff from Nordea. Lars Heindorff: Yes. On the share buyback, I don't know if you can indicate your thoughts behind the $1 billion, down from the $2 billion last year? And also, what kind of balance sheet ratios, I don't know if net interest bearing debt to EBITDA is the only ratio you look at? Or if there are other ones that you sort of steer after in order to determine the size of the share buybacks? Patrick Jany: Yes, I think probably two parts to your question, Lars. So first on the share buyback, I think we decided to continue with the share buyback. I think, which is the main message here because we have a strong balance sheet. And as we have said before and Vincent mentioned as well on the call, we will continue to obviously invest in growth in Terminals to renew our fleet and also to expand our logistics business while knowing that you were downturn in Ocean. This is now coming, I would say, closer with a return to the Red Sea, which you see different scenarios reflected in our guidance. I think it's a word of caution to continue the confidence, which we show by continuing, but also reduce a bit the dimensioning, which at $1 billion is still pretty significant when you look in terms of absolute returns. So we feel it's a good balance. But by keeping a prudent approach to the balance sheet obviously recognizing and keeping a commitment to return cash to shareholders. If you look at the ratios, which we use for that, I think when you are on a net debt positive, so a net cash position, the ratio is a little bit out of scope in terms of net debt-to-EBITDA, clearly. So we look more at free cash flow, right ratios, but we are well above those elements. So it's really when you look forward on -- as we talked around the last few years, when you model a potential overcapacity having an impact on Ocean profitability and the Red Sea returns compared to the progress in Terminals and Logistics. You come into different scenarios, and we feel with this strength of balance sheet, return on shareholder via SBB, but also our guidance. We have a good cushion looking ahead, and we will not be threatening any ratios. Typically, as you know, we aim to be solid BBB. That is quite far off the position where we are today. We can only repeat the 1.5x net debt-to-EBITDA as an order of magnitude on the over-the-cycle EBITDA, obviously, not the crisis year EBITDA as being the reference in terms of balance sheet modeling. Operator: The next question comes from Jacob Lacks from Wolfe Research. Jacob Lacks: So it feels like there's a pretty clear focus on the cost structure between the corporate restructuring and further increases in Gemini savings. To the extent the market remains oversupplied beyond just this year, do you think there's further cost opportunity to help offset inflation rightsize the cost base? Patrick Jany: Jacob, yes, I think -- so obviously, as we head towards leaner times, focus on cost and very hard focus on cost is absolutely paramount. So I think the work that we have done with Gemini has yielded quite a significant amount of efficiencies for us. We think that there is more that can be done there. And certainly, we're going to do this. A return to Suez is going to reduce costs going to enable more slow steaming as well. So -- and we can expand some of the Gemini philosophy to other services. Something can be done on organization as well. We've made some announcements on this. I think there are -- there are 3 more levers to reduce cost further. The first one is we still have a time charter market that is at extremely elevated level. which usually follows freight rates after -- with a bit of lag. And I think when the trend on freight rates confirms itself, which, I mean, unless there is another shock, this is what we're going to continue to see in the months to come, we're going to see the time charter market come down as well, and this will generate significant savings as well because a significant amount of our fleet also is on time charter and will gradually be renewed at those lower levels. That's the first -- that's the first one. The second one is procurement. I mean the times have been good. And of course, some of our suppliers might have been benefiting a bit from that. And that's certainly time for us to just make sure, and I think this is going to happen across the industry that we get back to pretty hard core negotiation on everything and in some cases, roll back some of the inflation we have seen in the past few years. And then finally, I think on the front of productivity, the scaling of some of the AI tools that we are having, they have some opportunities to go further on the organizational costs in the couple of years to come. And so those are the areas where we feel there is more to go get and that will help continue to cushion further I think the results, if the supply and demand environment stays weak for a few quarters. And then, of course, the other thing is to continue to diversify the portfolio. The more -- the better margins we get in logistics, the more we get out of our Terminal business also to more, it kind of reinforces the whole thing. Operator: The next question comes from Alex Irving from Bernstein. Alexander Irving: I'm going to come back on your Gemini cost savings, please, on your slide 7. So you talk about $820 million -- $1.1 billion of annual cost savings, $960 million at the midpoint, of which there was $310 million in Q4, about 1/3 of it so our cost savings going to be lower in the coming quarters? Or how should we think about the cadence of those cost savings as we go through 2026, please? Patrick Jany: Yes. So I think, Alex, you can expect it's hard to estimate there is some seasonality always. I think the savings are going to be a bit less in the first quarter because you have Chinese New Year with a month of subdued demand and a lot of canceled sailings and so on. And then I think we look a bit at the average of what we have achieved in the third quarter and the fourth quarter, adjust also for maybe seasonality demand first quarter and then we get to a midpoint. What I think is truly important here is that we can see the consistency with which this is being delivered. You see this on a quarterly basis. I have the benefit of getting weekly reports on that. I think this is very, very solid. We've really made a parallel shift on our production cost with Gemini. And we can see that with some of the reports or some of the financial data we're getting on some of our competitors that we can actually notice that we stand with a competitive advantage today. And especially given some of the tougher times, we might have ahead, I mean that is going to stand -- they're going to be very -- are hitting a dry spot, if you will. I think for us, the key now is to say, how can we grow that? Of course, we need to realize the $1 billion for the full year. But then how can we grow that further because Gemini today is about half of the network, and there is still some potential for us to do that elsewhere. But it does require, for instance, that we have a permanent hub in Panama, so we can stabilize our Latin American coverage over there. It does require a few things that we're working on now to continue to grow that competitive advantage. Operator: The next question comes from Alexia Dogani from JPMorgan. Alexia Dogani: Could you let us know if you're interested in engaging in any shipping M&A? Patrick Jany: Is it because you're aware of candidates or are you selling? I think it's really hard to comment on that. I think the strategy that we have is pretty clear. Our focus is we have an infrastructure business in Terminals and a Logistics business that have a lot of growth potential and a lot of very stable and solid earning potential. At the same time, we have a shipping business that we continue to invest in from a renewal perspective and where we keep an eye on the competitive landscape and how we can stay, how -- what is the best way for us to remain competitive and not just bleed this to a place where certainly it's not good. So it is not the focus for us to do that in the shipping. Our focus is elsewhere. Our strategy is unchanged. But it's something that might require a review at some point. But I think for now, that's the strategy that we have. Operator: The next question comes from Arthur Truslove from Citi. Arthur Truslove: So just quite a simple question for me. Based on freight rates that we've seen thus far, is there any reason why the loss in notion in Q1 should be significantly different to what you saw in Q4? Obviously, at the EBIT level and obviously stripping out the adjustment you've made the depreciation rates. Vincent Clerc: So I think there's 2 things you should expect in Q1. First of all, I think quite a lot of the contracts are basically resetting either the 1st of January or the 1st of February. And then you have some seasonal fluctuations around Chinese New Year, which means that in general, the volumes and therefore, the yields that you carry on your network are a bit lower than what you have in a normalized quarter, which the last 2 would be from a volume perspective. Operator: The next question comes from Parash Jain from HSBC. Parash Jain: I have one follow-up question. if you can shed some color on how has the start of 2026 been? And we have seen some pullback in the rates leading up to the Chinese New Year. But when you look at the CCFI trend sequentially or when you look at the guidance from one of your Asian competitors, it seems like all else being equal, first quarter will be sequentially better than fourth quarter. Do you concur with that impression? And secondly, what are you hearing from your customers, particularly in the U.S. with consumption remains solid potential restocking post Chinese New Year? Patrick Jany: Parash, Yes. So as Vincent was saying, I think we obviously don't guide on the quarter. But I think if you look at directionally, we would expect rates to continue to come down. And as Vincent was saying Q1 is not the strongest quarter, right? You have Chinese New Year and so on. So the rhythm will be determined on how the business is doing after Chinese New Year, right? What is the level that is set afterwards. I think if you look at our yearly guidance, it implies certainly that Ocean will have results lower than it has in 2025 or even the last quarter of 2025. As you can assume that Terminals will continue to be good. Rather stable, I guess, from 1 year to the other logistics will continue to progress, and therefore, the difference in EBIT is clearly to be looked at from the Ocean point of view. So I think clearly, we see demand still strong. We had just guided for 2% to 4%. So there might be here and there some quarterly impact. As I said, for Q1, it is Chinese New Year and the rebound. But overall, for the year of '25, we see on a continuation of a quite solid demand. So between 2% and 4%, so roughly 3%. And the EBIT of Ocean being obviously significantly worsening as the rates have come down and continue to come down. Vincent Clerc: And then on the U.S. consumer, I think the sentiment from the customers I've been talking to is that actually 2026 in the U.S. is going to be strong. There's a midterm coming, and there is a huge fiscal stimulus that continue to be put into -- pumped into the U.S. economy. And therefore, the American consumer keeps on doing what it does best, which is actually consuming. And so we expect demand to stay quite stable in the U.S. and to continue to grow also elsewhere. After that,' '27, we'll have to see, but that is for '26, that's -- we see no sign of weakening anywhere. Operator: The next question comes from Ulrik Bak from Danske Bank. Ulrik Bak: Just a question on your Ocean volume growth for 2026. You obviously assume the volume growth to be in line with the market, 2% to 4%. However, over the past couple of quarters, you've actually outgrown the market. So would it be fair to expect some tailwind in Q1 and Q2, where you may grow faster than the market as Gemini was only ramping up in H1 last year before aligning with the market in H2. Some comments on that, please? Vincent Clerc: Yes. Ulrik, I think look at it over the years, you will always have a couple of quarters where you are a bit faster. It's always super hard to just hit it right down to the month or the other quarter basis. I think if you look at 2025, clearly, the Q1 was a bit weaker on the volumes and then the following 3 quarters were very strong and it contributed to us growing in line with the market for the year. I think probably just a year-on-year comparison would assume that then because we had a first -- a bit of a weak first quarter, growth will be higher than market in Q1. But since we have very strong quarters after that, then more subdued and distributed after -- in the subsequent quarter. But overall, we're going to be able to tag along with the market. Ulrik Bak: That's very clear. And if I may just follow up, just in terms of your capacity in Ocean, if your prediction that we will see a return to the Red Sea. How should we think about your capacity in Ocean, which has gone up quite significantly over the past couple of years? Vincent Clerc: I think you should think about -- you should think about it in a way that we're going to manage it with a keen eye on the bottom line. There is some tonnage that we will keep and reinvest into slow steaming. There is some tonnage that we will return to the tonnage provider. As I mentioned before, I think the market is going to come down. We're going to do also a lot of yield management. The fact that the deliveries that we have from our order book is maybe not as high as some of the others, and we still want to keep growing with the market may mean that some of it we will keep and invest it into ensuring that we do grow with the market. But we have basically -- I think we come into this down cycle with a lot of flexibility. We don't have a lot of capital commitments in investments that are coming online. We have a fairly flexible portfolio. So I think as this situation normalizes, we are left with the optionality to do what's right for the bottom line. Operator: The next question comes from Marco Limite from Barclays. Marco Limite: So you were discussing before about '26 and potentially at least a few quarters of very weak spot rates once and when the Red Sea opens. But then if we look beyond '26, in '27, '28 we have according some external data, we have got 9% capacity addition in '27, 14% '28. I mean, what do you expect for profitability? I mean do you think that profitability will further slowdown in '27 versus '26 and even more '28 versus '27 given the very big influx of new capacity? And therefore, what can you say at this point in time about share buyback beyond '26, so share buyback in '27 and '28? Patrick Jany: Look, when you look at the development, we have obviously alluded it in our previous encounter. I think we have a strong balance sheet towards the downturn. The unknown is how deep and how long will it last, which is your question. I think you have 2 different models. One is to have it on a multiyear smaller impact or to have it on a deeper impact in 1 year and then it rebounds because ultimately, as we have listed and also Vincent alluding to it, -- you do have a lot of capacity, which has not been replaced. So you do have a lot of old vessels on the water, which are economically not viable, which with the current level of rates -- and if you project that this continues, are just not economically viable to be in the water. So there will be, at one point in time, return to the capacity providers or scrapped or idled. And those tools will be deployed as soon as the rates are starting to take effect and be painful from the cash point of view. And therefore, I would expect this to happen this year, particularly in the scenarios where the Red Sea reopens fully and fast. That will trigger a reaction. So our view is not that we will have 3 years of pain, but more that you will have 1 or 2 years of pain and then the capacity will be taken out and that will readjust a little bit because ultimately, demand is actually quite solid and has been quite solid, and we see it for '26 as well, quite stable. So those elements will adequate over time. It is hard to say whether it's in 12 months, 24 months or 36 months. But it will adequate. And therefore, we don't feel that the balance sheet is stretched on the one hand, but on the other hand, it is conservative and good to keep a solid balance. And share buybacks are every year, right? So we will look at it every year. And if the world is totally different from what we expect, we'll have to come to new conclusions. But for now, we see that it's actually pretty much in the line of the scenarios that we have discussed in the past. Marco Limite: And is there a sort of minimum level of rates you have got in mind for the medium term? Patrick Jany: Sorry, can you repeat the question? We didn't get it here. Marco Limite: Sure. Is there, let's say, a minimum level of rates on which the industry can leave in your view on the medium term? Where things will normalize despite the big influx of capacity? Patrick Jany: Yes. So I think the important thing to consider is that -- for me, the overhang of capacity that is coming in the next 4 years, when I put it side by side with the amount of ships that are over 26, 27 years, and that would be candidates for scrapping because they are just at level of either fuel efficiency or cost or whatever that are no longer or size or models that are no longer competitive. I think this -- we have all the tools across the industry to get this back in whack. The question for how long it takes is how long does it get for the industry to get back to what was normal before like hygiene before every year, but that has not been necessary for the past 6 years because of the abnormal cycle we've been into. If it takes long for the discipline to come, then you will see rates that can be at a difficult level for a while. If you -- if there is good discipline and people do what needs to be done because it's not a lot, it's not abnormal. Then this could resorb itself quite fast. But I think what -- to your point, I think you will go down to incremental cost. So that, I think, is a bit of the -- what is your -- what is the incremental cost that there is for the capacity. And then so you get to this cash neutral pricing. And then on the up as well, if the profit gets above a certain margin, where some of these old ships make sense to sell, then you might want to keep them. So I think the need that there is now to do that homework will put both a floor under how bad it can be, but also probably a ceiling about how high it can be for a while before people stop doing what they need to do, and it pressures things again. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Vincent Clerc for any closing remarks. Vincent Clerc: Well, thank you for joining us today. And to summarize, I think that we have finished 2025 with a really solid fourth quarter, translating into a strong full year results with our 2025 guidance delivered. We demonstrated operational products across all of our business segments, most notably with the successful implementation of Gemini in Ocean, the operational initiatives that we undertook in Logistics & Services, which have improved our margin there and a record year in our Terminal business helped by the volume uplift from additional Gemini services. Further, we continue to deliver significant capital returns to our shareholders with the continuation of a share buyback program and dividend in 2025. As we navigate the potential headwinds of the external market environment, our focus remains the same as in prior quarter, and that is to stay the course on being the best operator and for the upcoming period, this means focused on cost discipline and reduction, improving productivity and simplifying the organization. We will look forward to seeing many of you on our upcoming road shows and conferences. Thank you for your attention, and see you all soon. Thank you. Bye-bye.
Operator: Good morning, and welcome to the Victory Capital Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. Matthew Dennis, Chief of Staff and Director of Investor Relations. Please go ahead, Mr. Dennis. Matthew Dennis: Thank you. Before I turn the call over to David Brown, I would like to remind you that during today's conference call, we may make several forward-looking statements. Victory Capital's actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that may cause actual results to differ materially from those expressed on today's call. Victory Capital assumes no duty and does not undertake any obligation to update any forward-looking statements. Our press release, which was issued after the market closed yesterday, disclose both GAAP and non-GAAP financial results. We believe the non-GAAP measures enhance the understanding of our business and our performance. Reconciliations between these non-GAAP measures and the most comparable GAAP measures are included in tables that can be found in our earnings press release and in the slides accompanying this call, both of which are available on the Investor Relations section of our website at ir.vcm.com. It is now my pleasure to turn the call over to David Brown, Chairman and CEO. David? David Brown: Thanks, Matt. Good morning, and welcome to Victory Capital's Fourth Quarter 2025 Earnings Call. I'm joined today by Michael Policarpo, our President, Chief Financial and Administrative Officer; as well as Matt Dennis, our Chief of Staff and Director of Investor Relations. I'll begin today by reviewing the fourth quarter, which capped off a transformational year for Victory Capital, one marked by significant operating and financial milestones. Most notably, we successfully closed our strategic partnership with Amundi and integrated Pioneer Investments onto our platform. From a financial perspective, 2025 was a landmark year. We surpassed $1 billion in annual revenue for the first time in our company's history, while also delivering record earnings, milestones that underscore the strength of our diversified platform and the momentum we've built as we look forward to 2026. Following my remarks, I'll turn the call over to Mike, who will provide a detailed review of our fourth quarter and full year financial results. After that, we will be available to answer your questions. The quarterly business overview begins on Slide 5. We had an excellent final quarter to end 2025. We achieved record high AUM in the quarter and ended the year with $317 billion in total client assets. Client engagement remained exceptionally strong with long-term gross flows of $17.1 billion, representing our highest level ever of quarterly gross sales. We generated very strong sales momentum in our international distribution channel, our VictoryShares ETF platform and multiple investment franchises. This momentum was supported by new products and creating vehicles for distribution outside of the U.S. as well as our recently enlarged U.S. sales force and increasing investments in our distribution partners. Long-term net flows of minus $2.1 billion were off trend and reflected several onetime items during the quarter. The one-off outflows were primarily attributable to one large platform redeeming one of our strategies, which was close to $1 billion and several larger year-end client reallocation redemptions where clients redeemed to get back in their investment policy guidelines, but still have sizable accounts and remain our clients. Profitability remained excellent to end the year with record adjusted EBITDA of $197.5 million, supported by a strong fee rate that increased quarter-over-quarter, and the achievement on a run rate basis of $97 million of the targeted $110 million in net expense synergies at year-end. The adjusted EBITDA margin of 52.8% in the quarter is up from last quarter and is a result of our continued superb execution. We continue to have one of the highest, if not the highest, EBITDA margins of any publicly traded traditional asset manager. These strong results translated to record quarterly adjusted earnings per diluted share with tax benefit of $1.78. When you look at our long-term EPS growth chart, which is in the appendix of this presentation on Slide 21, you can see our 21% compounded annual growth rate in EPS since our IPO. This steady progression demonstrates the resilience and quality of our differentiated platform in many different market environments and significant changes in the industry. As we look to the future, we see the same growth trajectory as we have experienced since our IPO in 2018 for the upcoming years. Stepping back for a moment, when we look at our full year accomplishments, we achieved record financial performance across a broad spectrum of key metrics. Today, Victory Capital offers a more comprehensive suite of investment capabilities and manages more assets for a larger and more diversified client base than at any point in our company's history. Our reach now extends across multiple U.S. distribution channels and internationally, it spans over 60 countries with 17% of our AUM currently coming from clients outside of the U.S. While we are certainly proud of our long-term success, our strategy has never been simply to grow for growth's sake alone. Rather, we are purposely focused on strategically expanding and deepening our relationships with intermediary platforms, financial advisers, institutional investors, consultants and direct investors. This approach ensures that our growth is sustainable, profitable and aligned with delivering value to both our clients and our shareholders. The acquisition of the Amundi U.S. business, Pioneer Investments, was truly transformational. It was not about only enhancing scale. It was a multifaceted transaction that brought us strong investment capabilities, a well-known brand at Pioneer, globalization of our company by significantly expanding our presence outside the U.S., and it provided us with a deeper platform to accelerate our company-wide growth strategy. It is also worth noting that under our ownership, Pioneer Investments, investment performance has remained extremely strong. If you compare Morningstar data from the end of this year versus the end of last year when they were under Amundi ownership, the overall investment performance metrics have been steady or in many cases, improved. Pioneer Investments has also continued to experience organic growth and is net flow positive in each quarter since the transaction's closing. This is a good example of our ability to enhance acquired businesses without disrupting the investment process or client experience. Our integration efforts are close to complete. We are on track to reach the full $110 million target during the 2026 calendar year. Beyond the numbers, we're continuing to integrate our sales forces in the different channels. As we fully integrate our sales forces, we anticipate our current sales momentum will increase. One of the most exciting outcomes of this transaction is how it has globalized our business. We now have 17% of our AUM coming from clients outside of the U.S. across 60 countries. This international diversification is significant strategically and represents a tremendous growth opportunity. Our business outside the United States is net flow positive since closing and in the fourth quarter and continues to ramp up in 2026. We have added resources to handle the influx of international RFPs and continue to make other investments in this area. International geographies provide us with new distribution channels and client segments that were not previously accessible to us. As we continue to expand and integrate our international sales force and launch products suitable for these markets, we expect this to be a sustainable source of growth going forward. To support our international expansion, Amundi launched 5 new UCITS products during the fourth quarter specific to Victory Capital. These registered products are designed for distribution outside the U.S. and include 3 UCITS that are managed by our RS Global and RS Value investment teams and 2 are managed by Pioneer Investments. These product launches set us up well for 2026 and beyond and as we continue to build out our international shelf space, and we are planning for more UCITS launches in 2026. Turning to Slide 6. Our ETF platform delivered another strong quarter with $1 billion in positive net flows, bringing year-end assets to nearly $19 billion. This growth shows no sign of slowing as we are off to a nice start in 2026. We are winning new shelf space at multiple U.S. intermediary platforms and Amundi's sales force began selling our U.S.-listed ETFs overseas at the start of this year. This adds a new distribution engine to the growth story. The consistency of our progress here is particularly noteworthy. Our Free Cash Flow ETF series generated positive net flows every single month in 2025, while our active fixed income ETFs also produced strong net inflows throughout the year. This is not sporadic success. It is sustained due to demand for our value-added product lineup. Our recent platform wins validate this outlook. For example, at Morgan Stanley, our VictoryShares Core Intermediate Bond ETF, ticker UITB and the VictoryShares Short-Term Bond ETF, ticker USTB, broke through as the first active fixed income ETFs on their Morgan Stanley wealth management focus list. Our VictoryShares Free Cash Flow ETF, ticker VFLO continues to be highlighted in the single factor subcategory as the top-rated quality ETF option on Merrill's platform. Meanwhile, USTB has also earned recommended list status at Wells Fargo, RBC and LPL. These are just a few of our recent wins that demonstrate broad-based recognition of our capabilities. The economics of this business remain compelling as well. With an average fee rate of 34 basis points across our 23 ETF suite, this business contributes meaningfully to both organic growth and profitability. Turning to Slide 9. I'm pleased to report improvements in investment performance across both short- and long-term periods. 54 mutual funds and ETFs, representing 65% of our rated fund AUM achieved 4- or 5-star overall ratings from Morningstar. According to Morningstar, nearly half of our fund AUM ranked in the top quartile over the trailing 3-year period. It's important to note that these figures represent only our products with Morningstar ratings. Many of our newer high-growth products, including several from our expanding VictoryShares platform, have yet to reach their 3-year anniversary and therefore, aren't eligible for Morningstar ratings. When we look at our entire AUM against benchmarks, picture is strong, well over 60% is outperforming across key time periods. This broad-based investment performance strength across our platform gives us confidence in our ability to continue winning new mandates and retaining existing client relationships over a long-term horizon. Turning to capital allocation on Slide 10. Our #1 priority is to ensure that our balance sheet can support our inorganic growth strategy. Over the last year, we have materially brought down net leverage to the lowest level for the company since we went public in 2018. Additionally, given that our earnings are at the highest levels they have ever been, we are now generating the most cash we ever have as a company. This puts us in an excellent position to execute inorganically and to execute with size and scale, which is our preference. We continue to be extremely busy from an acquisition standpoint. In fact, I would say the busiest we ever have been. Add this to a very conducive environment for acquisitions in our sector, where the issues on why the consolidation is happening are becoming more pronounced. Factoring the aforementioned, I could not be more encouraged about the acquisition opportunity set. The exact timing of an acquisition is always hard to predict and patience is an asset when sourcing and diligencing opportunities. That said, our cadence of executing quite frequently has been consistent over the last decade plus, and I see no reason for that to change as we look forward. Our second priority with our capital is the buyback of our stock. We think the sector is underappreciated and undervalued and our company is ground zero for this. We have a 21% EPS CAGR since our IPO 8 years ago, over 50% margins that have expanded materially over the years to be best-in-class, strong cash flow with a sizable cash tax benefit supported by strong diversified recurring revenue stream and an expense base that is 2/3 variable and is well tested during multiple market environments. Moreover, our firm-wide investment performance is excellent, and we are just beginning to see the benefits of the globalization of our business through the opening of the distribution channels outside the U.S. Within the U.S., we've increased the size of our sales force significantly throughout our different channels. Lastly, we recorded the highest level of gross sales we ever have had in the history of our company this past quarter. All of this makes us extremely excited to be buyers of our stock through our buyback program given the current value ascribed to our business by the market. To be even clearer, we will buy our stock back even more aggressively, we're working on executing on our next transformational acquisition. We think using our capital to purchase our stock or to execute on a transformational acquisition are great outcomes for our shareholders. With that, I will turn the call over to Mike, who will go through the financial results in more detail. Mike? Michael Policarpo: Thanks, Dave, and good morning, everyone. The financial results review begins on Slide 13. Our financial results demonstrate the strength of our integrated platform and the operating efficiency in our business. Revenue reached $374.1 million, up 3.6% sequentially from the third quarter, driven by a 3.1% increase in average AUM to $312.9 billion. At the same time, our revenue realization rate increased slightly, reflecting the diversified mix of our product suite and client base. GAAP operating income was $153 million and GAAP net income was $1.32 per diluted share. Both metrics were up sharply from the third quarter and the same period last year. Adjusted EBITDA reached a record $197.5 million, up $7 million or 3.7% from the prior quarter. This marks continued growth as we get closer to the full realization of our projected net expense synergies. Our adjusted EBITDA margin increased to 52.8%, demonstrating our ability to maintain profitability while simultaneously investing in our platform. With 88% of our net expense synergies now realized on a run rate basis, we are on track to achieve our full $110 million target during 2026, which is ahead of our original time line. Adjusted net income with tax benefit totaled $151.7 million or $1.78 per diluted share, representing strong cash generation that supports our capital allocation strategy that Dave mentioned earlier. In the fourth quarter, we repurchased 814,000 shares under our repurchase plans, deploying $51.6 million at an average price of approximately $63 per share. At year-end, we had more than $300 million in remaining capacity under our current $500 million authorization. In total, we returned $93 million to shareholders in the fourth quarter through a combination of share repurchases and dividends. For the full year 2025, we returned $366 million to shareholders, underscoring the cash-generative nature of our business and our commitment to delivering shareholder value. The Board declared our regular quarterly cash dividend of $0.49 per share, which will be paid on March 25 to shareholders of record at the close of business on March 10. Our net leverage ratio was 1.0x as we end the quarter with $164 million in cash on the balance sheet, and our revolver remains undrawn. Total client assets reached $316.6 billion, as you can see on Slide 14. This is up from $176.1 billion at the beginning of 2025, an increase of $140.5 billion or 80% for the year. On an average AUM basis, fourth quarter average AUM rose 3.1% to $312.9 billion. For the full year 2025, average AUM was $268.8 billion, reflecting the end of the first quarter closing of the Pioneer acquisition. The composition of our AUM reflects a well-diversified platform across asset classes, distribution channels, investment vehicles and geographies. On Slide 15, we show the gross and net flows of our long-term AUM. Long-term gross sales reached an all-time high of $17.1 billion in the fourth quarter, up slightly from the third quarter. This marked the sixth consecutive quarter of higher gross sales. Year-over-year, gross sales increased by 159% from $6.6 billion in the final quarter of 2024. At an annualized run rate of approximately $68 billion or 22% of long-term AUM, we believe gross sales are sufficient to drive positive organic growth over the longer term. Long-term net outflows were $2.1 billion in the fourth quarter compared to $244 million in Q3. Q4 was an off-trend quarter from a net flow perspective, as Dave explained earlier in the presentation. We did realize strong underlying positive net flows in key growth areas in the fourth quarter, including Pioneer's multi-asset and fixed income strategies, validating the strength of the Pioneer franchise and our integration efforts. Our international channel was also net flow positive, and there is substantial runway ahead as Victory products become more widely available in new geographies and in packaging suited for sales outside of the U.S. Our VictoryShares ETFs had net inflows along with multiple other franchises in 2025. Our one but not yet funded book remains strong, spanning across numerous franchises and distribution channels. We expect this to help us in the first half of 2026 as most mandates will fund during this time frame. Looking ahead, we remain confident in achieving consistent positive net flows as we now have the product set, the distribution reach and the investment performance to support this. As illustrated on Slide 16, revenue for the fourth quarter was $374.1 million, up $12.9 million or 3.6% sequentially from $361.2 million in the third quarter. Our revenue realization rate was 47.4 basis points in the fourth quarter. This is at the high end of our guidance range of 46 to 47 basis points and reflects the favorable product mix we are seeing across our diversified platform. For the full year 2025, total revenue surpassed the $1 billion mark at $1.3 billion, a substantial increase from the previous year. The stability of our revenue realization rate is noteworthy. Despite significant changes to our AUM composition throughout the year, including the Pioneer acquisition, VictoryShares nearly doubling in size and various franchise rationalizations, we have maintained revenue realization within a tight range. This speaks to the quality and diversification of our product mix. For 2026, we expect our revenue realization rate to remain consistent within our 46 to 47 basis point guidance. On Slide 17, you can see total GAAP operating expenses of $221 million were essentially flat with $223 million in the third quarter. The decrease in operating expenses was due to lower acquisition, restructuring and integration costs, which peaked in the second quarter and should continue to decline in future periods as we complete the final stages of the Pioneer integration. This was partially offset by slightly higher compensation expenses, which are correlated to revenue and earnings. Including nonoperating expenses, total expenses of $232.5 million were in line with the prior quarter's $231.9 million. Our GAAP tax rate was 20.4% in the fourth quarter, below our long-term guidance of 24% to 25% because of onetime state tax apportionment adjustments related to the pro forma business incorporating the Pioneer Investments business. While we see no material changes to our long-term guidance for taxes, this did have a few cents positive impact on our ANI EPS in the fourth quarter. Our expense discipline is reflected in our industry-leading margins. Looking at the expense trajectory throughout 2025, we've shown consistent progress on integration and net expense synergy realization while continuing to make investments to drive future growth. Turning to our non-GAAP results on Slide 18. You can see the upward trajectory of our business over the past 4 quarters. This chart illustrates consistent profitable growth in both adjusted net income and earnings per diluted share with tax benefit, demonstrating the quality and sustainability of our earnings. The sharp year-over-year growth metrics detailed in the sidebar tell an important story. Our ability to drive earnings and cash flow expansion. This is the power of our strategic M&A model at work. We're actively building a more valuable and profitable platform. We believe our track record of consistently achieving stepwise growth through strategic acquisitions remains significantly underappreciated by the market. We have demonstrated a repeatable playbook for identifying, acquiring, integrating and creating shareholder value from transformational transactions. The Pioneer acquisition is the latest proof point. We are ahead of schedule on net expense synergies. And at the same time, we nearly doubled the size of our VictoryShares platform. Enhanced our organic profile with additional high-performing products and access to new clients, and we are generating industry-leading margins while simultaneously investing for growth. These results, just 9 months post the closing have exceeded our original accretion estimates of low double digits. This is not just about one successful deal. It's about a proven inorganic growth strategy that creates compounding value over time. Turning to capital management on Slide 19. We continue to be disciplined stewards of our shareholder capital. At the end of the third quarter, we combined our original term loans into a single credit facility of $985 million. This new consolidated Term Loan B has a 7-year term, effectively pushing out our debt maturity to 2032, eliminating any near-term refinancing risk and simplified our capital structure. This provides us with significant strategic flexibility, and we also lowered our borrowing costs. The new facility is priced at SOFR plus 200 basis points, which represents a 35 basis point reduction from our pre-refinancing rate. This improvement translates to approximately $3.5 million in annual interest savings, a meaningful reduction that flows directly to our bottom line. At the same time, we extended our $100 million revolving credit facility for an additional 5 years. The revolver, which remains undrawn, now matures in 2030 and provides us with additional liquidity and financial flexibility. At year-end, our leverage position was very strong and supportive of our inorganic growth strategy. Our Term Loan B balance stood at $982.5 million, down $2.5 million from the refinancing. Combined with $164 million in cash on the balance sheet and our undrawn $100 million revolver, we have substantial liquidity and a net leverage ratio of 1x. With that, I will turn the call back to the operator for questions. Operator: [Operator Instructions] Your first question comes from the line of Craig Siegenthaler with Bank of America. Ivory Gao: This is Ivory on for Craig. As legacy Victory strategies begin to be registered into UCITS vehicles and distributed through Amundi's global network in 2026, what should we expect in terms of UCITS product additions and platform approvals? And how quickly could these contribute to an improvement in non-U.S. flows? David Brown: I'd first start off to say that we did highlight in the script that we had launched a few new UCITS, I think, 5 of them. 3 of them were kind of legacy Victory and 2 of them were Pioneer. And so we've already started on that journey of launching products into the system. We plan to launch more in 2026. And the impact of the new launches will probably take effect as we move through the year and more towards the end of the year. There are a lot of products today that are in the system that are selling. We did highlight that outside the U.S., we have been net flow positive since we closed the acquisition in April, and we're pretty excited about the international distribution channel. But I'd say over -- not just '26, but over the years to come, we'll be launching a lot more product into the system. Ivory Gao: And for a follow-up, as you evaluate a pipeline that stands well above and below the $50 billion to $200 billion target range, what characteristics would make a larger deal actionable for you in the near term versus one you prefer to defer? David Brown: I think when we think of acquisitions, we look at what's available, and we also look -- we start off with the concept of does it make our company better? Does it enhance our platform from a distribution perspective, from a product perspective, from a size and scale perspective. And so we look at all of those characteristics. And if it fits well, all of those, we'll execute on it. I don't think that we're in the position to want to defer an acquisition or not. I think it's kind of what's in front of us and what's available and does it fit the things that we're thinking about that betters our company. Operator: Your next question comes from the line of Benjamin Budish with Barclays. Benjamin Budish: Maybe just following up on the M&A discussion. It sounded like after the Amundi transaction, you guys were quite operationally ready to do something again. I think in the prepared comments, you talked about sort of sticking with your historical cadence, but you're also -- do you see more opportunities, you're going to be very aggressive here. Just curious how should we be thinking about the potential cadence of M&A? Could things be happening more frequently given the -- what you see as an urgency kind of building across the industry and your own sort of appetite? Or is Amundi a little bit different since it's not -- it's a different type of acquisition and a kind of traditional straightforward transaction would require more internal integration. So just curious how we should think about that cadence going forward? David Brown: I'd start off to say that we are almost complete with the integration of Amundi/Pioneer Investments. And you can see that through the progression of the net expense synergies almost getting to the complete target that we have out there. And so we're very comfortable with where we sit today that we are ready to do an acquisition. And I think from there, we highlighted that a larger sized acquisition makes a lot of sense for us for a lot of the reasons we've articulated over the last few years with what's happening in the industry. And the cadence, we have been very active. If you go back to when we did our management buyout in 2013 and even when you look at when we did our IPO in 2018, we have averaged an acquisition every 1.5 years is really what the cadence is. And I don't think there's any reason to think that, that's going to change. It could be a little bit faster, it could be a little bit slower. But when you look at it over a longer period of time, I think that's a good cadence. Of course, there are lots of external factors that impact that. But what I would leave you with is that we are ready to do an acquisition. We're very busy. I think there's a lot of great opportunities out there that would make our company a lot better and also would allow us to create a lot of shareholder value. And I would -- last thing I would say is our balance sheet is ready as well as we've brought down our leverage to the lowest it's been since we've been a public company. Benjamin Budish: Understood. Very helpful. Maybe just a follow-up. You've been talking about the build-out of Victory's sales force in addition to sort of the preparation being done with the Amundi sales force. Can you maybe talk about where you are in that process? How much more hiring needs to be done or training? Obviously, you sound like you're very confident on the near-term outlook, but just what else is required to be done internally? Or is it sort of -- in addition to those synergies, the pieces are in place and it's sort of a matter of time before your confidence in the inflow outlook starts to come to fruition? David Brown: So we're about 10 months in since we've closed the acquisition. We are done with the hiring and the integration. The teams are set and the training is happening. I would say that really in all of our distribution channels, I think our team is trained well. I think they understand the products. I think it's getting out in the field and educating clients and platforms inside the U.S. and outside the U.S. about our different products. So we're well into the journey. I think as we look out in '26, we think that a lot of the investments we've made from a training, from a marketing, from a partnership perspective are going to pay us back in 2026. So I think a lot of the hard work has been done, and now we're really ready to reap the benefits of it. Operator: [Operator Instructions] Your next question comes from the line of Michael Cho with JPMorgan. Y. Cho: I just wanted to touch on the commentary, Dave, you made about the ETFs and the various intermediary partnership. I was hoping you could flesh out some of the comments you made earlier and maybe the benefits you see these partnerships providing Victory, including any market share dynamics that you've observed, and really how that's relative or how that's evolved relative to the traditional mutual fund side? David Brown: Michael. So let me start off and say that our ETF platform, VictoryShares, I think, is quite unique. It averages about 34 basis points across the platform, and we have 23 ETFs. And we have, over the last few years, really invested into the distribution platforms through partnerships, through partnering on marketing and education and a lot of other areas where we think we're adding value to the platforms and also to the advisers. And so with those investments, we're seeing a lot of great results. And I think as time goes on, we're going to do more of them. And I think those types of partnerships are going to be super important for the future, and I think they're going to be table stakes to be able to be competitive in selling and servicing ETFs. We're seeing more opportunities. A lot more of the platforms have come up with different kinds of partnerships that are unique to their own platforms. The ones that we like are ones that have more of a selection perspective as opposed to partnering with everybody, and those are the areas that we're investing that have more of a limited set of managers they're partnering with. But I see it as a big part of the future. They are similar to mutual fund platform partnerships. They are not so different, but there are some unique characteristics from an ETF perspective. Y. Cho: Great. I appreciate all that color. I guess if I could just follow up just along the same topic with more partnerships, more selective and more nuances to come. Now how would we think about maybe an extension of these types of partnerships, maybe as it relates to private markets, right? I mean does that give Victory an edge when thinking about shelf space for any prospective private markets partners that may be out there? David Brown: I think it does. If you have a partnership or you're close with a platform, I think it makes it a lot easier to introduce new products, be it private market products or other types of products. We have seen that over the years as we've come into partnerships, as we've built relationships with the platforms and the home offices and a lot of the advisers, it's much easier to introduce new products off of an existing relationship and partnership. And so as we evolve our business and I think as the industry evolves to buying different types of products, again, private markets and other products, I think these partnerships and these relationships are super valuable to us. And I think it just gives comfort to the platforms of who they're doing business with, how we do business, how we service. And I think there's a real long-term relationship opportunity that you can maximize as you develop new products. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Vincent Clerc: Welcome, everyone, and thank you for joining us on this earnings call today, where we present our fourth quarter and full year results for 2025. My name is Vincent Clerc, I'm the CEO of A.P. M�ller - Maersk. And with me in the room today for the last time is our CFO, Patrick Jany. Before we start, I'd like to thank Patrick for all of his hard work and support over the past 6 years here at A.P. M�ller - Maersk, and wish him the very, very best in the next steps of his career. As we announced back in December, Robert Erni will succeed Patrick in the coming days. We look forward to introducing you to Robert on our upcoming road shows and conferences. If we start with the highlights from 2025 notwithstanding a challenging external environment, especially in Ocean, we are pleased with the strong year overall, in which we made good operational progress across all of our business segments. We closed 2025 with a full year EBITDA and EBIT of $9.5 billion and $3.5 billion, respectively. This places us towards the upper end of the most recent financial guidance we had communicated to you back in November. Specifically in Logistics & Services, we strengthened the performance of our portfolio on the back of improved operation, stronger cost and yield management measures, delivering 4.8% in EBIT margin for the year. This represents an improvement of 1.2 percentage points on 2024. We are, of course, proud of the progress we have made, but are either complacent or satisfied with where we are. And improving both our results and growth rates in Logistics will remain a priority in 2026. In Ocean, Gemini successfully implemented, delivering unprecedented reliability for our customers and significant cost benefits, which we have revised upwards on an annual basis, and I will look at this further in a short while. Gemini has also allowed us to deliver strong volume growth of nearly 5% through increasing asset turns while limiting the fleet size expansion. This was against the backdrop of sequentially receding rates because of increasing overcapacity and volatility created by trade tensions, especially towards the middle of the year. The agility of the new network helped us manage this volatility by ensuring that we could react to the volume swings on the U.S.-China trade lanes. Finally, it has been a record year for Terminals, both in terms of top line and earnings. In the year, we delivered a strong revenue growth of 20% and EBIT growth of 31%. The top line was driven by strong volumes, mainly from additional Gemini services, higher pricing and continued growth investments in critical infrastructure. Utilization remains high, but with our multiyear investment program, we are confident in our ability to take advantage of the market growth in the upcoming years. As we look ahead to 2026, we see a continuation of strong global container demand translating into a volume growth that we expect to land between 2% and 4%. Based on various scenarios we currently see, especially on industry overcapacity in Ocean, we guide for a full year EBIT of between negative $1.5 billion to positive $1 billion free cash flow above negative $3 billion and a CapEx for full year '26 and '27 combined of between $10 billion and $11 billion. As usual, more detail on the guidance will follow later in the call. With the numbers now out of the -- for the full year, we can also announce a dividend proposal for the year that just passed. For 2025, the dividend proposal will be set forward by the A.P. M�ller Board at the AGM on March 25 and is a dividend per share of DKK 480. This is equivalent to 40% payout of our underlying net results in line with our dividend policy and the same payout ratio of the 2024 dividend. Looking back at the year just past, we generated thus a total shareholder return of 35% in 2025 through capital gains and dividends. With a strong balance sheet, we are also in a position to announce a continuation of the share buyback program. The new tranche will be approximately $1 billion with a duration of 12 months and will begin immediately. The lower level reflects the higher level of uncertainty and the lower rate environment that we are headed into in 2026. This implies a total cash return to shareholders for 2026 of approximately $2.1 billion, of which $1.1 billion is the proposed 2025 dividend subject to the AGM approval, and the remaining $1 billion is the new tranche of the share buyback program. Now taking a closer look at the fourth quarter performance for each of our business segments. First, Logistics & Services continue to track positively this quarter. We achieved an EBITDA margin of 4.9% up from 4.1% last year, but down from the 5.5% we had in the last quarter. The year-on-year margin improvement comes from the -- on the back of operational progress made in warehousing and distribution primarily. This quarter marks the seventh consecutive quarter year-on-year margin improvement. And meanwhile, the margin contracted sequentially. On the top line, revenue grew 1.9% year-on-year, driven mainly by warehousing and distribution, but fell 0.5% sequentially against the third quarter of this year of '25. Our focus remains on stringent cost control, portfolio discipline and capital efficiency to live the performance upwards towards an EBIT margin target of 6%. We are happy about the general trend throughout the past 7 quarters, but we also clearly have more work to do. In Ocean, we had our second full and clean quarter after the Gemini implementation. We delivered above-market volume growth with volumes up 8% year-on-year and a stable -- and stable on the prior quarter following the peak season. The network continued to deliver high schedule reliability of 90% for our customers despite significant weather disruptions and substantial cost savings to Maersk. We continue to use our fleet efficiently with utilization of 94% on par with the third quarter. The cost benefit and agility of the new network have bolstered our operation against the backdrop of the ongoing freight rate decline. In Terminals, we delivered a solid quarter in a record year with a strong top line growth, mainly driven by volumes. Volumes grew 8.4%, driven by Europe, North America and Latin America and mainly through the Gemini network. As we mentioned last quarter, much of the volume uplift has come from Gemini, which has put more boxes through our gateway terminals. Utilization remains high at 88%, but we are confident that with ongoing investments, we will continue to be able to capture good volume growth in the coming years. Finally, return on invested capital for Terminals remained strong at 16.1%, well above the target of 9%. Turning to the main achievement of the year. We have updated the Gemini cost benefit we showed you previously and now expect the benefits to be higher than our initial guidance last quarter. Starting with bunker. We can see that the continued advantage of Gemini stemming from a more efficient use of our ships, for example, through lower speed, shorter distances and shorter dwell time is allowing us to reduce bunker consumption. This translated to an approximately 9% bunker consumption improvement adjusted for capacity for the quarter. Then on the asset turn side, from the more efficient use of our vessels, Gemini allows us to transport more volumes on the same capacity. This quarter, we saw capacity growth of about 4% year-on-year against a volume growth of about 8%. The delta was about 4 percentage points, representing the improvement in asset turn. We can quantify the bunker consumption improvement of about 9% at fixed bunker prices into a cost benefit of about $150 million for the quarter. Likewise, we can quantify the asset turn improvement of about 4 percentage points, which against our total network where cost translates into about $120 million of cost benefit for the quarter. An added advantage of Gemini has been to increase volumes in some of our gateway terminal, allowing us to significantly increase throughput. As with the prior quarter, the additional uplift has generated about $4 million in benefit this quarter, which annualizes to about $120 million to $200 million based on full year implementation and seasonality. Overall, across Ocean and Terminal, therefore, we have generated over $300 million in benefits here in the fourth quarter, and we are now targeting $820 million to $1.1 billion in annual benefits. Turning to our midterm targets. As you might recall, we introduced these targets back in May 2021 to cover the midterm period of '21 to '25. Even though the reporting period technically ends, we will continue to use those indicators for 2026 and report on our progress in the same terms. Later in the year or early in 2027, we will revise our achievements and formulate new midterm targets. Nevertheless, we are finishing those 5 years -- as we're finishing those 5 years, it is time to have a closer look at the progress made, and you can see to the right of the table how we have performed over the 19 quarters since the introduction of the targets. Overall, we have delivered exceptional performance at the group level with almost all quarters delivering last 12 months ROIC above target, which translates into an average ROIC of above target for all 19 quarters. Similarly, Ocean has performed well with EBIT above the 6% target for all but the first 2 quarters in 2024 and this most recent quarter with downward pressure on rates from increasing overcapacity. Terminal has truly transformed with a ROIC starting shy of the target back in 2021, but has been consistently above its target of 9% since the first quarter of 2023. At the same time, we know where we have fallen short, namely in Logistics & Services, with an EBIT margin still below the 6% target that we laid out and modest revenue growth because of challenged products, primarily in middle mile and warehousing. Our priority in 2026 is to continue to improve where we have fallen short in Logistics & Services. And that is a good segue into the next slide. Looking ahead to 2026, we have laid out our key strategic priorities. In Logistics, our priority is to accelerate margin improvement and push harder on growth wherever it makes sense, which we define as the many part of the portfolio delivering high margin and where higher volumes will increase network utilization and thus, translate also in better margin. Focus areas are, for example, a further reduction in white space and contract logistics or adding density to our e-commerce network. As part of our efforts to accelerate improvement in Logistics, we will simplify the organization as well. I will get back to this shortly on the following slide. Within Ocean, we seek to protect the high asset turns we have achieved with Gemini, which will allow us to carry more containers with our existing fleet and so we can grow with minimal fleet expansion. Further, we continue to grow with the market as we did in 2025. Given market headwinds we are facing in -- for 2026, we will focus on profitability by sticking to our core principle of cost leadership, which will prove to be even more important in the coming quarters. Finally, in Terminals, we continue to grow through existing and new location, maintain long-term profitability and ultimately deliver on our ROIC target. Our aim here is growth, concession excellence and operational excellence. Across all our business segments and in corporate, we continue to focus on driving further efficiency and simplification of our organization. Cost leadership remains core to being the best operator. We are transforming our organization within the Logistics & Services as well. This is to drive more value for our customers and reflecting the feedback from all of you. It will increase comparability and transparency to allow you to better benchmark our performance with peers. We will report 3 new product segments, which reflect how we will simplify also the way that we run the business. These segments will be landside, forwarding and solutions with each of these product segments comprising its own set of products. Landside will comprise local and regional products linked to inland transportation, drayage in and out of terminals, ground freights in North America which offer largely expedited LCL road transport between centers. Depots, which are often located close to ports and terminals as well as custom services to assist customers with declarations, tariffs and other regulatory matters. Forwarding will comprise global forwarding and ancillary products, namely air freight, less than container load for ocean forwarding and project logistics of large cargo as well as insurance. Finally, solution will complain supply chain management, e-commerce and warehousing and distribution. This organizational change will take effect on April 1 and will be reported externally for the first time in the second quarter reporting later this year in August. We will provide at that time, a year-to-date and year-on-year figures according to the new segmentation to help you for comparability purpose. Finally, on the guidance for the upcoming year. First, we expect global container volumes to continue to grow in 2026, with growth expected to be between 2% and 4% and for Maersk to grow in line with the market. In that context, we expect an underlying EBITDA of $4.7 billion to $7 billion, and underlying EBIT between negative $1.5 billion to positive $1 billion and a free cash flow of negative $3 billion or higher. While we plan on operational progress and growth across segment, we expect container shipping rates to develop adversely, such that our guidance for 2026 is lower than for 2025. The guidance range reflect industry overcapacity that already exists today from the new vessel deliveries and different scenarios with respect to a full Red Sea opening in 2026. Our CapEx guidance for '25 and '26 is unchanged compared to the previous levels and around $10 billion to $11 billion, and we expect the current funding -- the corresponding figure for '26 and '27 to be the same. I'll now hand over to Patrick, who will walk you through the detailed financial and segment level performance. Patrick Jany: Thank you, Vincent, and good morning, everyone. We closed the book on 2025 with a good operational delivery in the fourth quarter, delivering an EBITDA of $1.8 billion and an EBIT of $118 million, implying margins of 13.8% and 0.9%, respectively, placing us very much where we expected to be. On a full year basis, we delivered an EBITDA of $9.5 billion and an EBIT of $3.5 billion, equating to a 17.7% EBITDA margin and a 6.5% EBIT margin for 2025. While both Logistics & Services and Terminals delivered improving year-on-year performance, excluding one-offs, the first benefiting from improved operational efficiency and the latter from higher throughput from Gemini, the quarter saw overall decreased earnings resulting from receding freight rates in Ocean. Return on invested capital was 5.7%. This is lower both year-on-year and sequentially and reflects the additional investments made this year in Ocean and Terminals together with a very strong earnings in the latter half of 2024, no longer being included in the last 12-month measure. We continued returning cash to shareholders in Q4, distributing $620 million through the ongoing share buyback program for a total of $2 billion for the full year. Finally, we maintained our strong liquidity positions with total cash and deposits at $21.4 billion at quarter end and with net cash decreasing year-on-year to $2.9 billion primarily due to the cash returned to shareholders through dividend and share buybacks. Going into 2026, our balance sheet remains strong and allows us to continue pursuing our strategic growth objectives while simultaneously returning cash to shareholders and weathering the expected downturn in Ocean. Let's take a closer look at the cash flow breakdown on Slide 15. The fourth quarter operating cash flow was $2.5 billion, driven by an EBITDA of $1.8 billion, together with a positive impact from a substantial unwind of net working capital. This resulted in strong cash conversion of 137%, up on last year's 123% in the quarter, leading to 102% conversion for the full year. Gross CapEx decreased to $919 million, down both year-on-year and sequentially, primarily due to a lower level of investments in Ocean which, together with capitalized lease installments of $819 million resulted in free cash flow of around $1 billion. For the full year, CapEx landed at $4.8 billion at the lower end of our guidance. Free cash flow also included a positive contribution of $349 million, mainly from dividends received from our minority investments. We repurchased roughly $620 million of shares during the quarter, which is reflected in the dividend and share buyback column. Finally, a large portion of our term deposits matured in the quarter, implying an increase of the readily available cash. Starting our segment review with Ocean on Slide 16. Strong demand prevailed in the fourth quarter and our Ocean business managed to successfully capitalize on this momentum, delivering substantially increased volumes while reaping the cost benefits of Gemini in an otherwise deteriorating market environment. Volumes increased by 8% year-on-year across more trade lanes, driven by sustained strong Asian import. Sequentially, volumes remained roughly stable at a negative 0.4%. Fit rates continue to decline in response to the ongoing market pressure in industry supply demand imbalance, declining by 23% year-on-year and 8.8% since the previous quarter. As a result of the significant rate decline, profitability turned negative in the fourth quarter as Ocean incurred a loss of $153 million. Ocean continued to benefit from the Gemini network. The scale reliability of the network remains in line with our target. And we have seen the immediate financial and operational year-on-year impact of better asset turns and bunker savings cushioning the full impact of declining rates. While continuing to invest in our Ocean business in line with the overall strategy, CapEx was comparatively low at $603 million compared to $1.2 billion last year, mainly due to significant vessel installments in Q4 2024. Sequentially, CapEx also decreased by around $300 million due to lower equipment investment. On the next slide, you can see a breakdown of the individual elements, which contributed to the EBITDA development in Ocean. The year-on-year rate decline was the dominant headwind, contributing a large negative impact of $2.1 billion, only partially offset by stronger volumes. The price of bunker decreased 11% year-on-year to $512 per tonne, which had a positive impact together with 5.4% lower bunker consumption from primarily Gemini-related efficiency gains. Container handling costs were up from increased terminals and empty repositioning costs. And then there is a negative comparative impact from the timing of revenue recognition in the final bucket, offsetting the impact of lower SG&A costs. Overall, Ocean EBITDA for the fourth quarter landed at $1.2 billion, down 59% from the previous year and 35% sequentially. Now let's have a look at the KPIs of the Ocean business on Slide 17. Loaded volumes increased by 8% year-on-year to 3.4 million FFEs across most trade lanes from continuing strong Asian exports, leading us to almost 30 million FFEs for the full year. At the same time, average freight rates decreased 23% from last year and 8% sequentially, while remaining flat throughout the quarter itself. Unit cost at fixed bunker decreased 4% year-on-year and 1% sequentially, benefiting from the stronger volumes offsetting the higher cost base. Bunker costs decreased 12% year-on-year, primarily from 11% lower bunker prices and further supported by the already mentioned 5.4% lower bunker consumption driven by high efficiency of the Gemini network. This was all partially offset by the EU ETS payments. The size of our fleet was stable sequentially at 4.6 million TEUs, implying a 4.3% increase year-on-year. This is the result of the capacity injection in early 2025, initially for Gemini, which has allowed for higher volumes and to satisfy the strong demand, which is also reflected in our sustained high utilization, which was sequentially unchanged at 94% in the fourth quarter. In terms of product mix like in the last couple of quarters, a majority of the volumes came from strong term contracts with 55% of volumes in Q4 compared to 45% of volumes for our long-term contracts. Looking forward for 2026, we expect a slightly higher share of volumes to come from long-term contracts with about half the volumes to come from long and half from short-term products, respectively. I would also like to briefly comment on the change in how we account for our vessels in -- on the balance sheet starting in January 1st of this year. Over the last years, we have observed an increase in the average time frame in which our vessels remain economically viable. And as a result, we have increased the estimated useful life from 20 to 25 years. The impact of this will be approximately $700 million of reduced depreciation in 2026, which is reflected in the financial guidance, as you might have already read in the footnote. We continue to our Logistics & Services business on the next slide. The year-on-year development in Logistics & Services highlights the operational improvements to the segment that we have made throughout 2025. While there was top line growth, the biggest difference came through improved profitability resulting from our efforts at turning around the more challenged products like warehousing and middle mile. Revenue in Logistics & Services grew to almost $4 billion in the quarter, up 1.9% compared to last year, driven by improved volumes across most products. Sequentially, revenue declined modestly at negative 0.5% following a strong third quarter. EBIT increased to $194 million, mainly driven by solid performance in warehousing, last mile and lead logistics. This implies a 4.9% margins, up 0.8 percentage points compared year-on-year and marking the seventh consecutive quarter of year-on-year EBIT margin increase. Sequentially, the margin decreased by 0.6 percentage. CapEx was $129 million in the fourth quarter, declining another quarter year-on-year to reflect the slightly lower investment level in 2025, where focus has been on improving operational performance. Now let's have a look at the segment breakdown by service model. Overall, we recorded a positive business development in a generally supportive business environment with one of the biggest weak point being the U.S. import-linked activities. This can be seen in particular, in freight management, where revenue declined to $532 million, down 8.9% year-on-year as lead logistics volumes were significantly down on the China-U.S. corridors, given the tariff environment, while customs held broadly stable. EBITDA margin improved to 19% from better execution. Fulfillment services increased revenue by 1.5% to $1.5 billion, while increasing the EBITDA margin to around breakeven. Warehousing was here the largest contributor to the higher margin with middle and last mile also trending better after the rebasing actions we executed during the year. In Transport Services, revenue grew by 5.6% to $1.9 billion. EBITDA margin eased to 7.1%, and strong air and landside transportation volumes growth was offset by softened prices against a still relatively fixed cost base in own control capacity. Additionally, margin was impacted by a $22 million impairment of aircraft, representing about 1.2 percentage points of the year-on-year margin decline. Stepping back to margin journey we set out at the start of the year remains on track. We have lifted the operational flow in our fulfilled by Maersk products and prioritize profitable wins while keeping CapEx insured. While the business is by far not where we want it to be in terms of growth and profitability, 2025 has moved us closer. Let us now turn to our Terminal segment. This business rounded off an excellent year with another strong quarter. Revenue grew 13% to $1.4 billion, driven by strong volumes, which increased 8.4% year-on-year, supported by increased throughput from Gemini and geographically driven by Europe, North and Latin America. Additionally, the top line was supported by a higher rate level. With another quarter of strong volumes, utilization for Terminals remained high at 88%. Revenue per move increased 4% year-on-year to $363 per move driven by improved rates and favorable FX development, somewhat offset by lower revenue from storage. On the other hand, cost per move increased by 5.9% from labor inflation coming through together with adverse FX, overall increasing despite higher utilization. Terminals delivered fourth quarter EBIT of $321 million, down 5% from $338 million the previous year, impacted by an $86 million expense related to the impairment of a terminal in Europe and a write-down in Asia. Adjusting for this one-off, EBIT would have increased to $407 million, equivalent to an EBIT margin of 30.1%. Sequentially, EBIT decreased as expected given the significant positive one-off reported in the third quarter. On the back of strong performance throughout the year, return on invested capital increased to 16.1%, CapEx remained stable at $152 million, roughly in line with previous quarters. Now let's have a look at the breakdown of Terminals EBITDA development on the last slide. EBITDA for the fourth quarter increased to $440 million from $421 million the previous year. The year-on-year increase came mainly from the higher volumes contributing a positive impact of $52 million, which was further supported by a $16 million impact from higher revenue per move. This more than offset the negative impact from labor inflation and higher costs of $48 million. This finishes our business segment review. Let us now proceed to the Q&A. Operator, please go ahead. Operator: [Operator Instructions] And we have the first question coming from Muneeba Kayani from Bank of America. Muneeba Kayani: So Vincent, you talked about the range of the guidance. I just wanted to get back on that, like how have you thought the low and the top end of that guide in terms of a freight rate scenario or Red Sea timing? I know you said gradual reopening is kind of what you've assumed, but if you can help us think about that scenarios and kind of the cadence of that guide for this year, please? Vincent Clerc: Muneeba, thank you for your question. I think the way to think about this is whether it is through the new ships that are coming in or through the return to Suez, we're going to free about -- we're going to have an overcapacity of anywhere from 4% to 7%, 8%. And for that to resorb itself, you will need to see some scrapping. There is a lot of pent-up capacity that needs to get scrapped and didn't get scrapped since COVID basically for 6 years. And there is also a tonnage that needs to be returned. So that will create a few quarters that are going to be a bit bumpy. If we return fast and full to Suez, we will see probably more pressure on the freight rate because there is a bigger gap that we need to close at once. If we have an orderly slow gradual return, we might be able to manage it better, but it all starts to get to the upper end of the guidance that we start to see some scrapping starting to occur because it means that we're starting to eat into some of that overcapacity. And so it really depends how quickly the industry reacts to the current start over the capacity, how quickly we move through -- we get back to Suez and how much of the tonnage gets pushed back to provider. I think that's really the underlying thing that you need to get into towards the upper or the lower end of the guidance. Operator: The next question comes from Cristian Nedelcu from UBS. Cristian Nedelcu: It's a two-part question, if you allow me. The first part of CMHC has recently announced that it's selling a 25% stake in their terminal business. Would you consider spinning off or selling a stake in terminals to crystallize value or accelerate the growth in Terminals? And in relation to this -- in relation to the capital allocation, there are some opportunities out there, Panama ports. You talked about Logistics M&A. The way you've reduced the share buyback, so just a more prudent approach on capital deployment. Is this prudent approach valid also for acquisitions in Terminals and Logistics.? Vincent Clerc: Cristian, we've seen the deal from CMA. I think they are trying to monetize some of the portfolio. I think with the balance sheet that we have today, we have no need to monetize and can perfectly as we do this year, even on a reduced guidance, maintain a strong return to shareholder and conduct the investment that we need to do. You mentioned Panama, there would other -- I think, in general, the world has underinvested in terminal capacity for a while, and there is over the coming decade, need for significant investment in greenfield projects to add terminal capacity to match the flows of containers that there is globally. That's also what we plan on doing, and you've seen some of those facilities start to come online during 2025. There will be more in the coming months and quarter. But here also, we have the wherewithal to do it. We have the wherewithal to continue to renew our fleet and be able to sustain a strong position in shipping. And then on Logistics, it's always a question of finding the right candidate, the right opportunity and being ready to do that integration. Certainly, that remains one of the financial axis of the strategy. But at this stage, I would say we are, of course, prudent towards capital deployment and keeping as much of our powder dry as possible given some of the unknowns in the outlook. But it is exactly to preserve the ability to countercyclically go and do some moves when the time comes. Operator: The next question comes from James Hollins from BNP Paribas. James Hollins: Best of luck to you Patrick. Thanks for everything. Just on the Red Sea, I'm just wondering if, if you can run us through kind of the rationale you saw with your desire seeming desire to be a first mover back in the Red Sea amongst your main competitors and kind of linked to that, the expected time lines as you would see them for Maersk to be fully back through the Red Sea, assuming everything else geopolitically stays the same and kind of what you'd expect to see from your competitors from here? Vincent Clerc: Yes. Thank you, James. So a couple of points to start with. If you look at the Suez transit in January, they're up 50% versus what they were a year ago. So -- and that's not with a lot of Maersk ships there was only one of them that crossed during that period. So we're not the first movers. There has been a significant uptick across tankers and bulk segments, for sure, but also with CMA having a much more aggressive, they have multiple services already that have been transiting throughout the period and more aggressively also over the past month and even quarter. So we are a second mover, if you will, on that. For us, the security assessment has been on different levels. First of all, obviously, we follow the situation in Gaza, where we seem to be moving slowly along a peace process with where we are going to go with the reopening of the border with Egypt and so on, where there's a lot more talk about now reconstruction rather than a new round of hostilities. There has not been any attack since October from the Houthis on any ship. There has been declaration also from the Houthis that they do not intend to attack anybody. So for us, the -- and again, a lot of ships are crossing every week. And we monitor the situation and how we're doing. We're talking to others and see what intelligence do they have. The conclusion that we have is today, it is safe for us to move into a Phase 1, which is having some services specifically the ones for whom going around the Cape of Good Hope is the longest deviation where it is safe to move under escort and go through the Bab el-Mandeb. There is limited escort capacity. There are a lot of shipowners today that already moved through Bab el-Mandeb without escort. I feel that it's a bit premature for at least for how we assess the security situation. And therefore, there is a certain limit to what we can do. At some point, we need to get into a situation where the temperature comes further down, where we feel it is also safe for us to move into -- to reopen services even if we don't have escort. And that would be probably what triggered the difference between what we have announced so far and a more full return would be the ability that we have to see that we can move without the military escort that the service that we do it today have. Operator: The next question comes from Lars Heindorff from Nordea. Lars Heindorff: Yes. On the share buyback, I don't know if you can indicate your thoughts behind the $1 billion, down from the $2 billion last year? And also, what kind of balance sheet ratios, I don't know if net interest bearing debt to EBITDA is the only ratio you look at? Or if there are other ones that you sort of steer after in order to determine the size of the share buybacks? Patrick Jany: Yes, I think probably two parts to your question, Lars. So first on the share buyback, I think we decided to continue with the share buyback. I think, which is the main message here because we have a strong balance sheet. And as we have said before and Vincent mentioned as well on the call, we will continue to obviously invest in growth in Terminals to renew our fleet and also to expand our logistics business while knowing that you were downturn in Ocean. This is now coming, I would say, closer with a return to the Red Sea, which you see different scenarios reflected in our guidance. I think it's a word of caution to continue the confidence, which we show by continuing, but also reduce a bit the dimensioning, which at $1 billion is still pretty significant when you look in terms of absolute returns. So we feel it's a good balance. But by keeping a prudent approach to the balance sheet obviously recognizing and keeping a commitment to return cash to shareholders. If you look at the ratios, which we use for that, I think when you are on a net debt positive, so a net cash position, the ratio is a little bit out of scope in terms of net debt-to-EBITDA, clearly. So we look more at free cash flow, right ratios, but we are well above those elements. So it's really when you look forward on -- as we talked around the last few years, when you model a potential overcapacity having an impact on Ocean profitability and the Red Sea returns compared to the progress in Terminals and Logistics. You come into different scenarios, and we feel with this strength of balance sheet, return on shareholder via SBB, but also our guidance. We have a good cushion looking ahead, and we will not be threatening any ratios. Typically, as you know, we aim to be solid BBB. That is quite far off the position where we are today. We can only repeat the 1.5x net debt-to-EBITDA as an order of magnitude on the over-the-cycle EBITDA, obviously, not the crisis year EBITDA as being the reference in terms of balance sheet modeling. Operator: The next question comes from Jacob Lacks from Wolfe Research. Jacob Lacks: So it feels like there's a pretty clear focus on the cost structure between the corporate restructuring and further increases in Gemini savings. To the extent the market remains oversupplied beyond just this year, do you think there's further cost opportunity to help offset inflation rightsize the cost base? Patrick Jany: Jacob, yes, I think -- so obviously, as we head towards leaner times, focus on cost and very hard focus on cost is absolutely paramount. So I think the work that we have done with Gemini has yielded quite a significant amount of efficiencies for us. We think that there is more that can be done there. And certainly, we're going to do this. A return to Suez is going to reduce costs going to enable more slow steaming as well. So -- and we can expand some of the Gemini philosophy to other services. Something can be done on organization as well. We've made some announcements on this. I think there are -- there are 3 more levers to reduce cost further. The first one is we still have a time charter market that is at extremely elevated level. which usually follows freight rates after -- with a bit of lag. And I think when the trend on freight rates confirms itself, which, I mean, unless there is another shock, this is what we're going to continue to see in the months to come, we're going to see the time charter market come down as well, and this will generate significant savings as well because a significant amount of our fleet also is on time charter and will gradually be renewed at those lower levels. That's the first -- that's the first one. The second one is procurement. I mean the times have been good. And of course, some of our suppliers might have been benefiting a bit from that. And that's certainly time for us to just make sure, and I think this is going to happen across the industry that we get back to pretty hard core negotiation on everything and in some cases, roll back some of the inflation we have seen in the past few years. And then finally, I think on the front of productivity, the scaling of some of the AI tools that we are having, they have some opportunities to go further on the organizational costs in the couple of years to come. And so those are the areas where we feel there is more to go get and that will help continue to cushion further I think the results, if the supply and demand environment stays weak for a few quarters. And then, of course, the other thing is to continue to diversify the portfolio. The more -- the better margins we get in logistics, the more we get out of our Terminal business also to more, it kind of reinforces the whole thing. Operator: The next question comes from Alex Irving from Bernstein. Alexander Irving: I'm going to come back on your Gemini cost savings, please, on your slide 7. So you talk about $820 million -- $1.1 billion of annual cost savings, $960 million at the midpoint, of which there was $310 million in Q4, about 1/3 of it so our cost savings going to be lower in the coming quarters? Or how should we think about the cadence of those cost savings as we go through 2026, please? Patrick Jany: Yes. So I think, Alex, you can expect it's hard to estimate there is some seasonality always. I think the savings are going to be a bit less in the first quarter because you have Chinese New Year with a month of subdued demand and a lot of canceled sailings and so on. And then I think we look a bit at the average of what we have achieved in the third quarter and the fourth quarter, adjust also for maybe seasonality demand first quarter and then we get to a midpoint. What I think is truly important here is that we can see the consistency with which this is being delivered. You see this on a quarterly basis. I have the benefit of getting weekly reports on that. I think this is very, very solid. We've really made a parallel shift on our production cost with Gemini. And we can see that with some of the reports or some of the financial data we're getting on some of our competitors that we can actually notice that we stand with a competitive advantage today. And especially given some of the tougher times, we might have ahead, I mean that is going to stand -- they're going to be very -- are hitting a dry spot, if you will. I think for us, the key now is to say, how can we grow that? Of course, we need to realize the $1 billion for the full year. But then how can we grow that further because Gemini today is about half of the network, and there is still some potential for us to do that elsewhere. But it does require, for instance, that we have a permanent hub in Panama, so we can stabilize our Latin American coverage over there. It does require a few things that we're working on now to continue to grow that competitive advantage. Operator: The next question comes from Alexia Dogani from JPMorgan. Alexia Dogani: Could you let us know if you're interested in engaging in any shipping M&A? Patrick Jany: Is it because you're aware of candidates or are you selling? I think it's really hard to comment on that. I think the strategy that we have is pretty clear. Our focus is we have an infrastructure business in Terminals and a Logistics business that have a lot of growth potential and a lot of very stable and solid earning potential. At the same time, we have a shipping business that we continue to invest in from a renewal perspective and where we keep an eye on the competitive landscape and how we can stay, how -- what is the best way for us to remain competitive and not just bleed this to a place where certainly it's not good. So it is not the focus for us to do that in the shipping. Our focus is elsewhere. Our strategy is unchanged. But it's something that might require a review at some point. But I think for now, that's the strategy that we have. Operator: The next question comes from Arthur Truslove from Citi. Arthur Truslove: So just quite a simple question for me. Based on freight rates that we've seen thus far, is there any reason why the loss in notion in Q1 should be significantly different to what you saw in Q4? Obviously, at the EBIT level and obviously stripping out the adjustment you've made the depreciation rates. Vincent Clerc: So I think there's 2 things you should expect in Q1. First of all, I think quite a lot of the contracts are basically resetting either the 1st of January or the 1st of February. And then you have some seasonal fluctuations around Chinese New Year, which means that in general, the volumes and therefore, the yields that you carry on your network are a bit lower than what you have in a normalized quarter, which the last 2 would be from a volume perspective. Operator: The next question comes from Parash Jain from HSBC. Parash Jain: I have one follow-up question. if you can shed some color on how has the start of 2026 been? And we have seen some pullback in the rates leading up to the Chinese New Year. But when you look at the CCFI trend sequentially or when you look at the guidance from one of your Asian competitors, it seems like all else being equal, first quarter will be sequentially better than fourth quarter. Do you concur with that impression? And secondly, what are you hearing from your customers, particularly in the U.S. with consumption remains solid potential restocking post Chinese New Year? Patrick Jany: Parash, Yes. So as Vincent was saying, I think we obviously don't guide on the quarter. But I think if you look at directionally, we would expect rates to continue to come down. And as Vincent was saying Q1 is not the strongest quarter, right? You have Chinese New Year and so on. So the rhythm will be determined on how the business is doing after Chinese New Year, right? What is the level that is set afterwards. I think if you look at our yearly guidance, it implies certainly that Ocean will have results lower than it has in 2025 or even the last quarter of 2025. As you can assume that Terminals will continue to be good. Rather stable, I guess, from 1 year to the other logistics will continue to progress, and therefore, the difference in EBIT is clearly to be looked at from the Ocean point of view. So I think clearly, we see demand still strong. We had just guided for 2% to 4%. So there might be here and there some quarterly impact. As I said, for Q1, it is Chinese New Year and the rebound. But overall, for the year of '25, we see on a continuation of a quite solid demand. So between 2% and 4%, so roughly 3%. And the EBIT of Ocean being obviously significantly worsening as the rates have come down and continue to come down. Vincent Clerc: And then on the U.S. consumer, I think the sentiment from the customers I've been talking to is that actually 2026 in the U.S. is going to be strong. There's a midterm coming, and there is a huge fiscal stimulus that continue to be put into -- pumped into the U.S. economy. And therefore, the American consumer keeps on doing what it does best, which is actually consuming. And so we expect demand to stay quite stable in the U.S. and to continue to grow also elsewhere. After that,' '27, we'll have to see, but that is for '26, that's -- we see no sign of weakening anywhere. Operator: The next question comes from Ulrik Bak from Danske Bank. Ulrik Bak: Just a question on your Ocean volume growth for 2026. You obviously assume the volume growth to be in line with the market, 2% to 4%. However, over the past couple of quarters, you've actually outgrown the market. So would it be fair to expect some tailwind in Q1 and Q2, where you may grow faster than the market as Gemini was only ramping up in H1 last year before aligning with the market in H2. Some comments on that, please? Vincent Clerc: Yes. Ulrik, I think look at it over the years, you will always have a couple of quarters where you are a bit faster. It's always super hard to just hit it right down to the month or the other quarter basis. I think if you look at 2025, clearly, the Q1 was a bit weaker on the volumes and then the following 3 quarters were very strong and it contributed to us growing in line with the market for the year. I think probably just a year-on-year comparison would assume that then because we had a first -- a bit of a weak first quarter, growth will be higher than market in Q1. But since we have very strong quarters after that, then more subdued and distributed after -- in the subsequent quarter. But overall, we're going to be able to tag along with the market. Ulrik Bak: That's very clear. And if I may just follow up, just in terms of your capacity in Ocean, if your prediction that we will see a return to the Red Sea. How should we think about your capacity in Ocean, which has gone up quite significantly over the past couple of years? Vincent Clerc: I think you should think about -- you should think about it in a way that we're going to manage it with a keen eye on the bottom line. There is some tonnage that we will keep and reinvest into slow steaming. There is some tonnage that we will return to the tonnage provider. As I mentioned before, I think the market is going to come down. We're going to do also a lot of yield management. The fact that the deliveries that we have from our order book is maybe not as high as some of the others, and we still want to keep growing with the market may mean that some of it we will keep and invest it into ensuring that we do grow with the market. But we have basically -- I think we come into this down cycle with a lot of flexibility. We don't have a lot of capital commitments in investments that are coming online. We have a fairly flexible portfolio. So I think as this situation normalizes, we are left with the optionality to do what's right for the bottom line. Operator: The next question comes from Marco Limite from Barclays. Marco Limite: So you were discussing before about '26 and potentially at least a few quarters of very weak spot rates once and when the Red Sea opens. But then if we look beyond '26, in '27, '28 we have according some external data, we have got 9% capacity addition in '27, 14% '28. I mean, what do you expect for profitability? I mean do you think that profitability will further slowdown in '27 versus '26 and even more '28 versus '27 given the very big influx of new capacity? And therefore, what can you say at this point in time about share buyback beyond '26, so share buyback in '27 and '28? Patrick Jany: Look, when you look at the development, we have obviously alluded it in our previous encounter. I think we have a strong balance sheet towards the downturn. The unknown is how deep and how long will it last, which is your question. I think you have 2 different models. One is to have it on a multiyear smaller impact or to have it on a deeper impact in 1 year and then it rebounds because ultimately, as we have listed and also Vincent alluding to it, -- you do have a lot of capacity, which has not been replaced. So you do have a lot of old vessels on the water, which are economically not viable, which with the current level of rates -- and if you project that this continues, are just not economically viable to be in the water. So there will be, at one point in time, return to the capacity providers or scrapped or idled. And those tools will be deployed as soon as the rates are starting to take effect and be painful from the cash point of view. And therefore, I would expect this to happen this year, particularly in the scenarios where the Red Sea reopens fully and fast. That will trigger a reaction. So our view is not that we will have 3 years of pain, but more that you will have 1 or 2 years of pain and then the capacity will be taken out and that will readjust a little bit because ultimately, demand is actually quite solid and has been quite solid, and we see it for '26 as well, quite stable. So those elements will adequate over time. It is hard to say whether it's in 12 months, 24 months or 36 months. But it will adequate. And therefore, we don't feel that the balance sheet is stretched on the one hand, but on the other hand, it is conservative and good to keep a solid balance. And share buybacks are every year, right? So we will look at it every year. And if the world is totally different from what we expect, we'll have to come to new conclusions. But for now, we see that it's actually pretty much in the line of the scenarios that we have discussed in the past. Marco Limite: And is there a sort of minimum level of rates you have got in mind for the medium term? Patrick Jany: Sorry, can you repeat the question? We didn't get it here. Marco Limite: Sure. Is there, let's say, a minimum level of rates on which the industry can leave in your view on the medium term? Where things will normalize despite the big influx of capacity? Patrick Jany: Yes. So I think the important thing to consider is that -- for me, the overhang of capacity that is coming in the next 4 years, when I put it side by side with the amount of ships that are over 26, 27 years, and that would be candidates for scrapping because they are just at level of either fuel efficiency or cost or whatever that are no longer or size or models that are no longer competitive. I think this -- we have all the tools across the industry to get this back in whack. The question for how long it takes is how long does it get for the industry to get back to what was normal before like hygiene before every year, but that has not been necessary for the past 6 years because of the abnormal cycle we've been into. If it takes long for the discipline to come, then you will see rates that can be at a difficult level for a while. If you -- if there is good discipline and people do what needs to be done because it's not a lot, it's not abnormal. Then this could resorb itself quite fast. But I think what -- to your point, I think you will go down to incremental cost. So that, I think, is a bit of the -- what is your -- what is the incremental cost that there is for the capacity. And then so you get to this cash neutral pricing. And then on the up as well, if the profit gets above a certain margin, where some of these old ships make sense to sell, then you might want to keep them. So I think the need that there is now to do that homework will put both a floor under how bad it can be, but also probably a ceiling about how high it can be for a while before people stop doing what they need to do, and it pressures things again. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Vincent Clerc for any closing remarks. Vincent Clerc: Well, thank you for joining us today. And to summarize, I think that we have finished 2025 with a really solid fourth quarter, translating into a strong full year results with our 2025 guidance delivered. We demonstrated operational products across all of our business segments, most notably with the successful implementation of Gemini in Ocean, the operational initiatives that we undertook in Logistics & Services, which have improved our margin there and a record year in our Terminal business helped by the volume uplift from additional Gemini services. Further, we continue to deliver significant capital returns to our shareholders with the continuation of a share buyback program and dividend in 2025. As we navigate the potential headwinds of the external market environment, our focus remains the same as in prior quarter, and that is to stay the course on being the best operator and for the upcoming period, this means focused on cost discipline and reduction, improving productivity and simplifying the organization. We will look forward to seeing many of you on our upcoming road shows and conferences. Thank you for your attention, and see you all soon. Thank you. Bye-bye.
Operator: Good afternoon, and welcome to Banco de Chile's Fourth Quarter 2025 Results Conference Call. If you need a copy of the financial management review, it is available on the company's website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer, Mr. Pablo Mejia, Head of Investor Relations, and Daniel Galarce, Head of Financial Control and Capital Management. Before we begin, I'd like to remind you that this call is being recorded, and the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties and actual results may differ materially. Please refer to the detailed notes in the company's press release regarding forward-looking statements. I will now turn the call over to Mr. Rodrigo Aravena. Please go ahead. Rodrigo Aravena: Good afternoon. Thank you for joining our conference call. Today, we will present Banco de Chile results for the fourth quarter and the full year 2025. We are very proud of the bank's performance this year. Once again, Banco de Chile delivered market leadership and superior financial outcomes, reinforcing the strength and consistency of our business model. Starting with our financial results. Banco de Chile ranked #1 in net income and return on average assets, #1 in net fee income and #1 in net interest margin among peer banks. This result reflects the resilience of our core revenues, solid customer activity and disciplined balance sheet management. For the full year, we generated the highest net income in the local banking industry amounting to CLP 1.2 trillion, which translated into a 2.2% return on average assets, significantly above the 1.3% achieved by the industry. We also maintained the largest market value among private banks in Chile of almost $20 billion, and we are leading the market in average trade volumes with over $25 million per day, demonstrating strong investor confidence and liquidity in our stock. On capital, Banco de Chile remained the most highly capitalized bank as demonstrated by a CET 1 ratio of 14.5%, [indiscernible] regulatory requirements and peers. Also, our risk indicators continue to be among the strongest in the industry, supported by a 223% coverage ratio and CLP 661 billion in additional provisions reflecting our sound [ with ] management culture. From a cost perspective, we delivered a 3.5% real contraction in operating expenses, consistent with efficiency efforts that we have implemented over the past several years that have leveraged on a digital strategy that has benefited productivity across all business and operating processes. On the Commercial side, Banco de Chile continues to stand out in customer experience, ranking first in service quality and top of mind awareness. We also reinforced our ecosystem with the launch of Banchile Pagos our new acquiring and payment processing subsidiary, which strengthen our positioning in digital payments. In addition, Banchile mutual funds remains the largest mutual funds managed in Chile, excluding pension funds with a 22.5% market share in assets under management. Finally, our strong performance has been widely recognized as shown by the awards on the right side of this slide, including recognition for Best Customer Satisfaction, Best Corporate Governance, Best Place to Work and Best Bank in Chile. In the remainder of this presentation, we will provide a detailed analysis of our quarterly and full year results of 2025. Before moving on, I'd like to share a brief analysis of the macroeconomic and business environment. Please go to Slide #4. Chilean economy growth continues posting above trend figures with a favorable shift in the composition of GDP as shown in the chart on the left. The [indiscernible] expanded by 1.6% year-on-year in the third quarter, resulting in an average expansion of 2.5% year-to-date, although the annual growth rate accelerated, it's important to highlight the statistical effect of the higher comparison base from a year ago when the economy began to improve. However, the positive news come from the composition of growth. Domestic demand increased significantly by expanding 5.8% year-on-year in the third quarter primarily driven by a strong recovery in gross investment, which rose 10% year-on-year, led by a 22% year-on-year increase in machinery and equipment. As shown in the other right chart, the acceleration in local investment has offset the slowdown in exports, which remained unchanged in the quarter. The [ growing ] contribution from domestic demand is relevant not only because it supports positive GDP growth, but also because loan volumes are more closely linked to domestic demand than the overall economy. This could have narrowed the gap between loan growth and GDP growth that we have observed in recent years. It's reasonable to expect the trend to continue in the near term. Monthly GDP data shows that the commerce sector grew 6.7% year-on-year in the fourth quarter, while capital good import, which is a good leading indicator for investment activity increased 19.6% year-on-year in the fourth quarter after rising 30.6% in the previous quarter. Looking ahead, several factors suggest that this positive momentum will persist through the year. One of them is improvement in consumer confidence as shown in the bottom right chart apart from the upward trend in the overall continent, the sub index that measures the 12-month economic outlook for the country rose to 59 points, surpassing the neutral level of 50 and reaching its highest value since the first half of 2018. Now please go to Slide #5. Overall, we have seen a normalization of the main nominal figures prices, interest rates and the exchange rate. Regarding inflation, the 12-month CPI variation ended the year at [ 3.5% ], down from 4.4% in September and 4.5% in 2024. The [indiscernible] convergence over the Central Bank's 3% target was driven by lower inflation in the fourth quarter to just 0.1% quarter-on-quarter from 1.4% in the third quarter due to lower contribution from food, energy and core goods. Core inflation, which excludes volatile items also declined from 3.9% year-on-year in the third quarter to 3.3% in the fourth quarter. It's noteworthy that the decline occurred in an environment of economic recovery, particularly in domestic demand, suggesting improvements on the supply side, such as lower unit labor costs due to productivity gains. Depreciation of the Chilean peso against the dollar also showed to ease inflationary pressures. Given these trends, the Central Bank continues normalizing monetary policy by reducing the policy rate by 25 basis points in December to 4.5%. According to the forward guidance provided in the December monetary policy release, further rate cuts are expected this year toward the estimated neutral rate of 4.25%. Updated macro-forecast and guidance will be provided by the Central Bank in its March monetary policy report. In these more favorable environment, the Chilean peso has strengthened against the dollar, narrowing the gap relative to the global dollar index, the DXY as shown in the bottom chart. Key drivers include improved terms of trade supported by higher copper prices and better expectations for the Chilean economy. I would now like to present our baseline scenario for this year. Please move to Slide 6. We expect about Chilean economic growth of around 2.4% in 2026. This expansion should be supported by strong domestic demand, driven by both investment and consumption as confidence improved, monetary ease continuing to take effect and corporate price rise. Given better-than-expected global conditions and potential improvements in domestic factors, we are now led in our bias to beat GDP outlook. We also expect inflation to convert to the 3% target in 2026. This forecast is based on the absence of further adjustment in regulated prices comparable to those seen in electricity tariffs in previous years, the impact of peso appreciation on tradable inflation and lower unit labor costs resulting from improved productivity. In this scenario, we expect the Central Bank to reduce the policy rate to the neutral level of 4.25%. We can roll out an additional reduction to 4% if the peso appreciate further or if supply side pressures is more than expected. As we mentioned in previous webcast, this forecast are subject to risk. The evolution of the global environment is particularly relevant for Chile given our high degree of integration into world market. Developments such as U.S. and Chinese GDP performance as well as geopolitical tensions remain critical to monitor. On the domestic front, the geopolitical agenda, will also be important considering the recent government transition and the possibility of a more market-friendly quality framework. Before moving to our quarterly results, let's begin with a review of the industry landscape. Please go to Slide 7. The banking industry continued to show resilience even as inflation and interest rates move toward more normalized levels as shown on the chart on the top left. Quarterly net income for the industry was CLP 1.2 trillion with a 15% return on average EBIT, a moderate result from peak levels, but it's still in a healthy and sustainable range. Turning to asset quality. The top right chart shows that NPLs remained steady at 2.5% with a coverage ratio at 1.4x. In terms of loans to GDP, this ratio reached 75% as of December 2025, extending the below trend behavior observed in recent years. Loan demand remains subdued in 2025 despite lower interest rates and signs of improving investment, particularly over the second half of the year. The bottom right chart further reinforces this. Since December 2019, total loans for the industry have contracted 2.6% in real sense with consumer lending down around 17% and commercial lending down close to 11%, while mortgage remains the only segment showing growth, rising 19% over the same period. Looking ahead, industry projections point to a rather reactivation in 2026. According to our baseline scenario as presented in the fourth quarter 2025, financial management review report, total loans are expected to grow around 4.5% in nominal terms this year, with commercial lending returning to positive real growth helped by improving business sentiment, a big capital expenditure by companies and a more supportive interest rate environment. Consumer and mortgage loans are expected to expand between 4.5% and 5% nominal, consistent with a moderate rebound in household consumption and a demand for housing that is expected to keep on growing. In terms of profitability, it's likely to stabilize, as the industry net interest margin is expected to ramp from 3.5% and 3.7%, reflected a yield curve that remains relatively flat and normalized inflation near to the Central Bank's 3% target. Credit risk metrics should continue to improve gradually with NPLs projected to decline toward 2.2% to 2.3% and the credit loss expense ratio should read a range of 1.2% to 1.3%. Overall, this trend suggest a more balanced rate environment as the sector transitions away from market-driven revenues and back to our fundamental base growth. Now I'll turn the call over to Pablo to discuss Banco de Chile results for the quarter. Pablo Ricci: Thank you, Rodrigo. Let's turn to Slide 9. Before discussing the financials, I would like to briefly review our business strategy and our core aspirations that guide Banco de Chile's actions. At the core of our strategy is our purpose: to contribute to the development of the country, its people and companies. Everything we do across our business, our culture and our digital transformation flows from that principle. Our model is built around three strategic priorities, placing the customer at the center of our decisions, operating with efficiency and productivity and maintaining a strong commitment to sustainability and [ de ] Chile. Together, these pillars support our long-term ambition and delivering sustainable and profitable growth supported by strong governance, disciplined risk management and the collaborative culture. In line with these aspirations, we have defined clear midterm targets, as shown on the right. That reflects both our competitive position and the standards that we set ourselves. We aim to remain top one in return on average capital among our relevant peers, and maintain a cost-to-income ratio below 40%, which we have revised down from 42% based on the solid improvements we have achieved in the recent years. We also seek to strengthen our market leadership by leading market shares and demand deposits in local currency, commercial loans and consumer loans. From a customer standpoint, we are committed to delivering a Net Promoter Score of at least 73%. While on the reputational front, we aspire to rank among the top 3 institutions in Chile based on the Merco ranking. Together, these goals anchor execution of our strategic plan and reinforce our long-term vision to be the best bank for our customers, the best place to work for our people and the best investment for our shareholders. Let me now move to Slide 10, which highlights some of the most relevant business advances we achieved during 2025. This year, we launched our new acquiring and processing subsidiary, Banchile Pagos which seeks to give us a stronger position in the payment ecosystem and allowing us to broaden our value proposition for companies ranging from SMEs to corporations. As discussed in previous calls, this initiative reflects our strategy of deepening digital capabilities and strengthening fee-based income streams. We also continue to expand and enhance our FAN digital accounts, which have met a sustained demand for a fully digital on-boarding and transactional solutions from customers. Total FAN accounts reached 2.4 million in December 2025, representing a 25% year-on-year increase while balances per account rose by 32% over the last year. In parallel, we stepped up cross-selling initiatives for credit cards and micro loans within the FAN base driving higher engagement and further deepening relationships in this fast-growing segment. Likewise, we continue to advance in our leadership ambitions in lending. Originations and consumer loans increased by 7.2% year-on-year, reflecting disciplined growth and improved origination capabilities across our distribution channels as we continue to benefit from increased originations through digital channels. At the same time, our SME client base continued to expand with current accounts growing around 12% year-on-year reinforcing our role as a primary bank for a broader base of small- and medium-sized enterprises. Within this segment, non-government guaranteed installment loans for SMEs showed particularly strong momentum, growing 9.4% year-on-year, highlighting healthy underlying demand beyond support programs. In addition, our investment in AI-based virtual assistance enhance both customer and employee experiences by speeding up response times, improving service availability and boosting internal productivity. These tools have become an increasingly important part of our digital transformation journey. We also made significant progress in improving productivity across the organization, supported by the steady expansion of digital channels, higher levels of automation and continued adoption of advanced technologies in their commercial and operational processes. Additionally, we managed to deepen operational synergies with our subsidiaries by centralizing functions, standardizing processes and leveraging shared platforms to capture economies of scale and simplify our operating model. The successful integration of our collection subsidiary, SOCOFIN, represents a concrete example of this strategy and marks a major step towards a more centralized, efficient and simplified operating model without compromising service quality or collections performance. We have also continued to strengthen talent and capability development across the organization. Throughout the year, we deepened our leadership in commercial training programs, broaden internal mobility opportunities to support career growth and reinforce a positive collaborative workplace climate. These efforts were complemented by competitive employee benefits and initiatives designed to retain and develop high-performing teams, ensuring that our people remain a core differentiator for Banco de Chile. On the sustainability front, we placed U.S.-denominated ESG bonds under our MTN program to finance social projects, reinforcing our commitment to sustainable development and further diversifying our funding sources. This transaction builds on our long-standing approach to responsible finance and our strategy to support community-focused initiatives. And finally, in the second half of 2025, we presented the 4270 Project, a unique audio-visual initiative that documented Chile's 4,270 kilometers from North to South through a 90-day drone journey. Beyond this cultural value, the project reinforces our brand by linking Banco de Chile with national pride and long-term commitment to the country. Conceived as a gift to Chile and made more than 500 royalty-free images available for educational use and has received international recognition. Turning to Slide 12. Our results once again position us as the leader in the Chilean banking industry. We closed the quarter with a net income of CLP 266 billion. And for the full year, we reached CLP 1.2 trillion, maintaining our historical leadership and profitability. Our return on average capital stood at 21.9% in 2025, above most of our peers and consistent with our long-term track record on this matter, which coupled with an unparalleled capital position, the strongest among relevant peers. In terms of market share, we attained a 22% industry net income comfortably ahead of all of our peers. This performance reflects the quality of our franchise, disciplined risk management and the resilience of our core business. The chart on the bottom right shows the evolution of our return on average assets which continues to lead the system with a clear gap over peers. Even in the year marked by lower inflation, sudden yield curves, and softer loan demand, we maintained the superior result, thanks to solid funding, sound credit quality and efficient operating model. Moving to Slide 13. Our operating revenues remained resilient despite the normalization and inflation and the decline in noncustomer income. Total operating revenues reached CLP 749 billion in the quarter, with customer income increasing 4.4% year-on-year, reflecting the continued strength of our core business. Noncustomer income when compared to the fourth quarter of 2024, declined as expected, given the lower contribution from inflation index net asset position and net interest rate environment marked by flat yield curves yet overall revenue levels remained solid, well aligned with our forward-looking expectations. For the full year, operating revenues totaled CLP 3 trillion, remaining relatively stable when compared to 2024. This performance reflects the expected normalization in noncustomer income, mainly the lower contribution of our inflation index net position and decreased revenues from ALM. On a positive note, the underlying strength of our core business continued to make a difference. In fact, customer income increased by 4.2% for the full year, driven by solid retail loan related revenues, that benefited from improved lending spreads and higher fee generation across transactional services and mutual fund management. These dynamics underscore the resilience of our banking activities and the diversification of our revenue base. Even in the year marked by softer inflation and interest rate environment was marked by both lower short-term interest rates due to the ease in monetary process and a slight term spreads as yield curves remained flat for most of the year. On the right side of the slide, you can see how our margins continue to differentiate us. Our NIM remains the strongest among our peers, supported by our leadership in demand deposits, and the diversified loan mix that continues to provide a structural advantage. A similar pattern is evident in our fees margin where both the strength of our product offering and solid customer engagement allows us to maintain a stable and attractive contribution to operating income. Finally, our operating margin continues to position us ahead of peers. Even though market conditions have normalized, our focus on efficiency, digital adoption, process optimization has allowed us to protect profitability and maintain a clear gap relative to the system. Together, these drivers underscore the strength of our strategy and our consistent ability to convert commercial activity into superior financial performance. Please turn to Slide 14. Total loans rose 0.8% year-on-year, reaching CLP 39.2 trillion as of December 2025. This evolution reflects very different dynamics across mortgage, consumer and commercial portfolios. First, Residential Mortgage loans were the main source of our loan book expansion by growing 5.3% during the period. This growth was supported by higher inflation, lower interest rates, a stable housing market and recent public programs aimed at reactivating this industry. Second, Consumer Loans increased 3.9% year-on-year in line with the improvement seen in household consumption indicators during the year and the gradual recovery in demand reported in the -- by the Central Bank in the fourth quarter, 2025 credit survey. Third, in contrast to individual loans, Commercial Loans fell 3%, consistent with the slower recovery in private investment and the more conservative behavior of large corporates. This decline was further amplified by loan prepayments, a pattern observed across the banking industry among corporate customers. In terms of the composition of our loan book and our main growth drivers, Retail Banking is the most relevant in both cases, representing 67.5% of total loans, growing 4.2% year-on-year. Within Retail, individuals grew 4.4% year-on-year primarily driven by mortgage lending and the gradual pickup in installment loans during the second half of 2025. Meanwhile, SME expanded 3.3% during the same period, although an important note that excluding amortization of FOGAPE loans, SME loans grew 9.4% year-on-year, up from the 8% growth rate posted in the third quarter, reflecting a healthy and accelerating lending activity in this market, which is coupled with our continuous support for entrepreneurship. In Wholesale Banking, performance remains subdued. Total loans from this segment dropped 5.5% year-on-year with corporate banking leading the drop with 8.8%, while large companies posted a slight decrease of 0.5%. This decline was mainly due to the maturity of low spread trade finance operations, lower credit demand from corporations, prepayment and appreciation of the Chilean peso, which reduced foreign currency exposures when converted to CLP. At the same time, sectors such as real estate and construction are showing initial signs of improvement according to the Central Bank's credit surveys, although activity remains weak. In summary, our loan book is well balanced and ready to benefit from a more positive macroeconomic outlook. The economy is showing firmer domestic demand. The labor market is stabilizing. Inflation is heading back towards target and interest rates are expected to continue normalizing throughout 2026. In addition, surveys already reflect early improvements in credit demand from households, SMEs and sectors such as real estate and construction, coupled with increasing consumer confidence levels. With these positive conditions emerging, Banco de Chile is in a strong position to capture new opportunities and continue delivering industry-leading results. Turning to Slide 15. Our funding structure continues to be one of the strongest competitive advantages. As you can see on the left, demand deposits represent 26.8% of our total liabilities giving us a highly efficient funding base that remains structurally superior to the rest of the industry. This mix is further strengthened by time deposits and savings accounts, long-term debt issued and equity, supporting both solid liquidity position and cost efficiency. Looking at the chart on the top right, our demand deposit to loan ratio stands at 37%. Once again, the highest among major peers. This leadership is not only a source of lower funding costs, but also a reflection of our strong franchise, customer engagement and the trust we've built across all of our business segments. More importantly, our demand deposit base is primarily composed of retail depositors, which provide us with enough funding stability in the medium term. At the bottom of this slide, you can see the evolution of our inflation index position in the banking book. As explained in our financial management review report, our net asset exposure to the U.S. reached CLP 8.8 trillion in December 2025, increasing relative to the third quarter, mainly due to the growth in U.S. assets and the amortization of the previously issued denominated -- U.S.-denominated bonds. This position is composed of both our structural inflation index gap, which serves as a long-term hedge for our shareholders' equity against inflation and temporary directional positions managed by our treasury depending on short-term market expectations. Based on revenues obtained from inflation variations over the last quarters, we believe our strategy has more than offset the risks involved. Nevertheless, we continue to closely assess the expected inflation path and fed rate to adjust the exposures if needed. Altogether, the strength of our funding base, combined with the disciplined and effective balance sheet management allows us to sustain one of the lowest financing cost structures in the banking industry. Please turn to Slide 16 to review our capital position. As shown on the slide, Banco de Chile continues to maintain one of the strongest capital bases in the Chilean banking system, consistently operating at comfortable levels that are also well above peers. In December 2025, our CET1 ratio reached 14.5%, and our total capital ratio stood at 18.3% both reflecting a robust capital generation capacity and disciplined balance sheet management. These levels place us comfortably above the fully loaded Basel III requirements applicable in Chile. We achieved this solid position after multiple years of sustained profitability and prudent but attractive dividends, which allowed us to preserve capital even in 2025, a year marked by lower inflation and more normalized revenues. Moreover, moderate loan growth in 2025 contributed to the expansion of capital. Finally, an important regulatory update occurred earlier this month on January 16, 2026, the CMS removed the Pillar 2 charge of 0.13% previously assigned to us, bringing this requirement down to zero. This decision reflects the regulators positive assessment of our risk profile, governance and capital management practices. In summary, our strong CET1 and total capital ratios position us exceptionally well to continue growing profitably, maintaining our leadership in the industry and navigate the next stages of the economic cycle with confidence to grow our portfolio. Please turn to Slide 17 to review our asset quality. Our loan portfolio once again reflects the consistency of our risk culture. In the fourth quarter, expected credit losses were CLP 116 billion, bringing the full year figure to CLP 382 billion, which is 2.5% below the level we posted last year. In terms of cost of risk, this indicator improved to 0.97% slightly below 2024, underscoring the resilience of our loan portfolio and the effectiveness of our risk management practices. Breaking down the quarterly changes. The increase in provisions reflects both the normalization of asset quality indicators and a loan mix effect, given the stronger momentum in retail lending during the period. In the Retail banking segment, expected credit losses rose CLP 15 billion year-on-year, largely due to the low levels of 30- to 89-day past due loans recorded in the fourth quarter of 2024, which created a low comparison base. This was intensified by a pickup in lending activity during the quarter as reflected by consumer loans that increased 2% and credit card balances that grew 7.7% versus the third quarter. By contrast, the Wholesale Banking segment recorded a CLP 6 billion reduction in provisions compared with last year, also driven by a comparison base effect, but in the opposite direction. Specifically, the fourth quarter of 2024 included downgrades in certain real estate, construction and transportation clients, while the reclassifications in 2025 were more moderate. For the full year, credit loss expenses decreased CLP 9.8 billion year-on-year. This was mainly driven by the Wholesale Banking segment where better credit profiles in the real estate and construction sectors together with the reduction in exposures to specific manufacturing clients contributed to lower credit losses. The Retail segment also recorded a modest year-on-year reduction, these positive trends were partially offset by a CLP 19.6 billion loan volume and mix effect, entirely concentrated in the Retail Banking segment as well as CLP 3.4 billion increase in impairment on financial assets. In terms of delinquencies, the chart on the upper right shows that the entire industry's NPLs remain above pre-pandemic levels. Nevertheless, we continue to have a lower past-due loan ratio of 1.7%, maintaining a sizable gap versus our peers and the industry, due to a sound origination standards and monitoring practices. Looking forward, as economic activity improves, inflation moderates, we expect delinquency indicators to gradually converge towards our historical ranges. Nevertheless, as shown on the bottom left, our coverage remains one of the highest in the industry. As of December, total provisions reached CLP 1.5 trillion, including both specific allowances and additional provisions resulting in a coverage ratio of 223%. This robust buffer provides meaningful protection against potential stress scenarios and once again, differentiates our credit risk position from peers. In summary, despite the credit cycle that remains above long-term averages for the system, our asset quality metrics, strong provisioning levels and disciplined risk management practices continue to position Banco de Chile with one of the most resilient profiles in the industry. Please turn to Slide 18. Our structural cost discipline is supporting important efficiency gains, as you can see on this slide. Total operating expenses reached CLP 293 billion in the fourth quarter of '25 down from 3.5% and 6.7% in nominal and real terms, respectively, year-on-year. The decline, as shown on the chart on the top right was led by personnel expenses decreasing 7% year-on-year in nominal terms in the fourth quarter of 2025, mainly due to lower severance payments versus the 4Q '24 and slightly higher growth in salaries as headcount decreased 4% year-on-year as a result of the adoption of our sales and service model. Depreciation, amortization and other expenses dropped 12% year-on-year. This was partially offset by administration expenses that rose 5.1% year-on-year, mainly from marketing and technology-related expenses. For the full year, operating expenses were essentially flat at CLP 1.1 trillion, and in real terms, decreased 3.5% year-on-year. Specifically, personnel expenses fell 2.1% year-on-year, more than offsetting a 3.1% year-on-year increase in administrative expenses which remained below inflation while depreciation, amortization and other expenses also trended lower in 2025 versus the prior year. These positive trends in our cost base reflect a solid cost control culture we have developed over the last 5 years. The benefits we have obtained from successful optimization programs, including improved service and operating models, which have leveraged on targeted IT capital expenditures that are bearing fruit in terms of increased efficiency and productivity. As a result, our efficiency measured as total operating expenses to income reached 37.4% for 2025, comparing well to our history, peers and the industry. Looking ahead, our focus is unchanged. Maintain strict cost control while investing in capabilities that matter: digital, data and distribution so we can continue to post excellent productivity and efficiency levels. For 2026, our baseline guidance forecast efficiency around 39% under normalized revenue conditions. Please turn to Slide 19. Before taking your questions, I'd like to highlight a few key points from this presentation. Chile continues to demonstrate solid and resilient macroeconomic fundamentals, supported by credible institutions, a sound financial system and a stable policy framework. Despite a complex global environment, Chile remains well positioned relative to its peers and continues to offer a favorable environment for long-term investment. For 2026, we expect above-trend GDP growth of around 2.4% driven by stronger contribution from domestic demand, particularly investment, machinery equipment. Inflation and interest rates are also expected to converge to the long-term levels at 3% and 4.25%, respectively. Turning to Banco de Chile. I would like to reinforce our ability to combine strong earnings with robust capital levels. As shown on the left, we delivered $1.2 trillion in net income with a CET1 ratio of 14.5% and a return on average assets of 2.2%. Finally, regarding our full year 2026 guidance, we expect return on average capital in the range of 19% to 21%, efficiency around 39% and cost of risk between 1.1% and 1.2%. We remain confident in our ability to continue positioning Banco de Chile as the most profitable investment in the Chilean banking industry over the long term, supported by a solid strategy, the best customer base, superior asset quality, a sound risk culture and the strongest capital position among peers that will enable us to take advantage of a more dynamic lending environment as the Chilean economy gains momentum. Thank you. And if you have any questions, we'd be happy to answer them. Operator: [Operator Instructions] Our first question is from Ernesto Gabilondo from Bank of America. Ernesto María Gabilondo Márquez: Thank you. Rodrigo, Pablo and Daniel, and thanks for the opportunity to ask questions. My first question will be on the economic and political outlook. Just wondering what have you been hearing in terms of reducing the statutory tax rate and reducing the credit card limit on credit cards? I have seen other banks with a more cautious view on the timing of the approval of both topics. So I just want to hear your view. My second question is on your loan growth expectations. I wonder if you can break down your loan growth expectations per segment? And my last question is on your capital allocation. So shareholders approved a dividend payout ratio of 85%. But Banco de Chile continues to have a very high common equity Tier 1 ratio. So just wondering how you're seeing your capital allocation in the next years? And if you're expecting to take advantage of your strong balance sheet to take market share in the second half or next years? Rodrigo Aravena: Ernesto, thank you very much for the question. Its Rodrigo Aravena. In terms of the economic and the political outlook that we have. I think that there are a couple of things that's important to highlight here. First of all, we have for this year an official outlook for the economy for the GDP of 2.4%. However, we are aware about the potential asset risk in this estimate because we have seen very positive signs from the domestic demand. And also in terms of the business confidence, the consumer confidence, for example, we have seen a very positive trend. In fact, today, we have, for example, the highest consumer confidence, the expectation for the next 12 months from the household is the highest since 2018. Additionally, we have very good signals from the capital imports anticipated a good trend for investments. So having said that, I think that it's very important to mention that even though we will likely have a similar economic growth this year compared to the number that we have in 2025 and 2024. I think that the good news is the composition of growth because the main driver of activity this year will come from large domestic demand. In terms of the political agenda, political outlook, the new government will take office, March 11. Only at that time, we will know the main priorities, the main agenda. However, there is an important consensus in Chile, which is part of the agenda of the new government as well in terms of, for example, to propose a reform by reducing the corporate tax rate from the current 27% to -- we have to wait for the announcement of the government, but the consensus that the rate could fall towards, I don't know, 23% something like that. It could be a positive news in terms of the investment, in terms of the economic growth in the future. But again, we have to see what will be their priority for the new government, and we will have information on that only after March 11. But overall, today, we have a more positive view on the economy, especially from the domestic demand. But we have to take into consideration as well that the recent strengthening of the Chilean peso would review the inflationary pressures this year, which could have a potential impact in terms of interest rates. So we -- still we have some mixed trends that we have to pay special attention to. Pablo? Pablo Ricci: Okay. In terms of the interest rate caps and discussions, it's still very early, but obviously, similar to what happened in the past, the reduction leaves vulnerable or the mass market consumer markets unbanked and is precisely what occurred after those regulations that were implemented. This obviously could help return to the segment for the financial institutions. So this would be a positive move, but it's very early in the discussions to see if this will actually come through. In terms of loan growth by segment, what we're seeing for next year in the industry is loan growth growing around the 4.5% level for the industry. So we think that one of the most relevant areas that we should see a return to growth is in the Corporate Banking. So in Corporate Banking, which has been very weak over the last year, we believe that this -- we should start to see an improvement. And in terms of us what we're looking at growing is slightly -- well, above those levels, focusing in our key segments. We're seeing somewhere around the 7% nominal level of growth. Obviously, it will depend on the evolution of changes or improvements in terms of politics. We're seeing a recovery also in Consumer loans, which is very important for us, somewhere in the levels of around 6%. These numbers are nominal. Mortgage loans around the 5%, and Commercial Loans, we should see a pickup that's more around the 8%, which is the area that has had the highest difficulties over the last 5 years, where we've seen an important decrease with a special focus in those smaller and medium-sized businesses, SMEs. The third question was the capital. So I'll pass the call Daniel Galarce. Daniel Ignacio Galarce Toro: This is Daniel. Ernesto, as we have mentioned in the past, we have favorable gaps in terms of capital risk today, of course. And basically, we want to use them in the future as long as the economy gains some momentum. As we mentioned in our quarterly report also, we want to save and we take some market share in the future, particularly in 2026. So we want to grow above the industry in terms of loans. In the long run, and also, as we have mentioned in previous calls, we believe that we should cover, we should flow in capital ratios at least 1% above the regulatory limits. That means that probably we can float even over that margin over than 1% or something like that. But in the long run, important thing is that we want to use the capital in order to take more growth and faster growth than the rest of things. Operator: Our next question is from Andres Soto from Santander. Andres Soto: I have a couple of questions. The first one is regarding your loan growth expectations. I would like to understand two aspects. The first one is, how do you expect this loan growth to happen. Is it going to be more tilted to the second half of the year? Or you are going to see this pickup from the beginning? This considering that at the end of 2025, we actually saw a deceleration of growth for all the Chilean banks, but particularly for Banco de Chile. That will be my first question. Pablo Ricci: Yes. So for loan growth expectations, it should probably be more in the second half of the year, in line with activity and changes that can occur. You have to remember that in Chile, the government takes office on March 11. So all changes and benefits that could occur in the short term, would change after that date as well. So what we've seen in the last quarter of this year was low demand from customers from corporate customers some loan repayments from larger corporate customers and foreign trade loans that were -- that came due -- the retaken. So the fourth quarter was a little bit weaker in the commercial loans, so we should expect that in the second half of the year, we should start to see a larger pickup in terms of loans and in the medium term, we should see the possible benefits more in coming years because our expectations for the industry, remember is 4.5% nominal growth, which is under 1x the loan elasticity of Chile because we're expecting Chile to grow around 2.5% plus inflation of 3%, we're below the 1x. Andres Soto: Understood. And so thinking about 2027, can we assume that you -- there will be additional acceleration in lending based on this regulatory agenda that is being proposed by the new government? Or how do you see the medium-term expectations in terms of Chile GDP and lending activity? Pablo Ricci: If we look in the past, Chile always grew 2x. Probably that's more challenging to achieve by the medium-term goal or level of reasonable is around 1.4x, 1.5x, and they should be times there's higher levels of growth for a shorter period of time. So in 2027 and beyond, we should see better growth in the industry, taking back that level of growth that was lost during the last 4 years, especially in commercial loans and consumer loans. Rodrigo Aravena: Yes. Hi Andres, I think that it's also important to keep in mind that -- it's going to depend on the type of measure that the new government will announce. For example, there is an important consensus about the rules to reduce taxes, but the question is about the timeline of this potential reduction impacts. We have to remember that there is not an important majority in both [indiscernible]. So that's why -- there's going to be some indication between different parties, coalitions, et cetera. So that's why I think that even though we are aware about the potential average buyer now we're forecast for both for domestic demand loan growth for the GDP. I think that it's very important to analyze the specific details of the proposal of the new government especially in terms of the timeline of the potential reduction in taxes, the main area where the government will try to reduce the bureaucracy for investment, et cetera. So I think that the detail of the new proposal and the reform will be very important in terms of the potential timing of recovery of loans. Andres Soto: Perfect. My second question is on your guidance. You said 39% efficiency ratio. And I would like to understand better what drives this view considering your loan growth expectations and your NIM, I get a lower margin -- a lower efficiency ratio. So I wanted to clarify what you're seeing in terms of fee income, expense growth to see this would be the reason why you assume this level of efficiency? Pablo Ricci: Well, our 3-year project that was implemented, and we've seen significant improvements in terms of costs has been mostly implemented. We've seen improvements in efficiencies and productivities across the bank, a reduction in the branch network, optimizing the structure of Banco de Chile and that's permitted us over the last couple of years to have very low expense growth. For 2026, we should think of more in line with inflation expense growth due to last year's inflation affecting basically all of our numbers on operating expenses as well as some slightly higher depreciation levels because of technology investments, et cetera. In terms of operating income, as we mentioned, 4.5% NIM and fees, we should think, as we've said in other calls, our main driver is customers. So we should be having a good level of fee growth, thanks to a rise in customers, which is generally around the 7%, 1/3 is coming from FAN accounts of that number, cross-selling. And particularly this year, we should have more growth related to transactional revenues as well as some of our subsidiaries and will begin to have income from Banchile Pagos, our acquiring business. So it's reasonable to think of a level of around high single digits, low double digits for fee growth. So it should be similar to what we had in the prior year, but the composition of that number will be different because we expect more moderate growth in terms of AUM and mutual fund management, which we've had a very strong growth over the last few years. Andres Soto: Pablo, just to summarize, you are seeing expense growth in line with inflation and fee income above lending growth. Is that correct? Pablo Ricci: Expense growth in line, slightly above inflation and expense and fees similar to 2000 -- the prior year. We also take into consideration in operating expenses, we have in Banchile Pagos and in fees, we have Banchile Pagos as well and the rest is inflation Operator: Our next question is from [ Lindsay Shima ] from Goldman Sachs. Unknown Analyst: First, maybe just a follow-up on Banchile Pagos. Do you have any initial updates on how operations have been going? And then how do you see the overall market and the opportunity set there? And how much it can contribute to earnings in the future? And then my second question is just clarifying if the upside risks to local GDP growth are factored into your loan growth estimates and your overall estimates or if there's some upside risk there? Pablo Ricci: So for Banchile Pagos , it's been going very well. We started this, as you know, in the fourth quarter of 2025. Today, we have a level of around 4% of customers that are SMEs or equipment to the size of our SME book. We have about 4% of our Banchile Pagos customers. It's been growing well. We have a customer base that we're focusing this target of about 160,000 SMEs. And if we look at the smaller like mid-cap companies, that number goes up to 200,000. So we have an interesting level of customer base that we're cross-selling with our account managers, to Banchile Pagos. This number -- this new subsidiary will be adding important value to -- is one of the drivers for fee growth. It's also one of the drivers for a little bit more expensive, but it's coming out positive evolution of Banchile Pagos overall. So we're very happy with the level of growth that this product has had. Rodrigo Aravena: Okay. Thanks for the question. This is Rodrigo Aravena. As you mentioned, we have an up risk in terms of our GDP forecast, which is mainly based on five key drivers. First of all, we have a better [ copper ] price, which is important for the country. You know that the mining sector is important for us, represents nearly 15% of the GDP. So the improvement of the terms of trade is positive for us. Second, we have seen an important improvement in consumer confidence. Third, a similar trend for the business confidence. Fourth, we have seen an important pickup in capital goods imports, which potentially anticipate a better dynamics on total investment. And also, there are positive expectations regarding the measures that can be taken and announced by the new government, especially in terms of the reduction of [indiscernible], bureaucracy and also the potential room to reduce the corporate tax rate in the future. Of course, that when we have a better environment for the GDP, it's reasonable to expect a greater dynamics in loans. However, we have to consider that there is a delay between the GDP cycle and the loan cycle. I mean what I'm trying to say is that when you have an acceleration activity in some quarter, not necessarily, we have a fast acceleration in loans in the same period of time. So that's why I would say that we have an upward risk with GDP for the domestic demand this year that is not necessarily. We have the same asset risk for total loans this year. We can rule out that part of the recovery on loans will happen in the -- during the next year. Operator: Our next question is from [ Daniel Mora Adela ] from CrediCorp Capital. Unknown Analyst: I just have one question. You mentioned that you want to be the most profitable bank in Chile in terms of return of average capital. The new guidance of 19%, 21% since conservative, if we think about the ROE expectation of a key competitor. So I would like to understand if this will be the long-term return on average capital figure? Or do you expect -- and how do you expect to expand profitability? Pablo Ricci: Daniel, well, thank you for your question. I think it's important to consider if we look at different metrics and similar levels of capital, we have a very attractive level of returns. If we look at ROA, we're by far the leader. Today, we have -- it's true we have a CET1 ratio that's higher than our peers, and that generates a lower return on average capital. But our aspiration is to be number one. So in our guidance for this year is 19% to 21%. Maybe there's some things change within Chile. Those numbers can evolve, obviously. But in the medium term, the idea is to use this capital and organic growth, inorganic growth and we need to use effectively our capital. So this should generate better returns for us, and we should begin to see a return and return on average capital similar to what we see in return on average assets which we should return to being leaders as we deploy this additional capital and growth or how we use this to become more sustainable. Unknown Analyst: Perfect. And do you have a long-term figure already incorporating the use of the excess capital that you currently have? Pablo Ricci: No, we don't have a long-term figure, but as Daniel Galarce has mentioned that it's reasonable to see banks should have a reasonable level of capital in order to grow and use during a normal course of business, which generally is in the levels of 1%, 1.5% above the regulatory limits. Operator: Our next question is from Neha Agarwala from HSBC. Neha Agarwala: A quick one on the cost of risk and asset quality. How do you see that evolve going forward? Your cost of risk is slightly higher than what you had for 2025. It seems like it's mostly driven by the loan growth that you're expecting. But is there any other moving factors, if you could elaborate on that? And when I look at your guidance and the growth assumptions, the ROA is 19% to 21%, it seems like we could have a bit of upside risk to that number. Any thoughts that you can share on that? Pablo Ricci: Hi, Neha. Thanks for the questions. In terms of cost of risk, it's true our number of 1.1% to 1.2% is higher than what we've had over the recorded what we -- over the past few years. And that goes in line with the levels that we think are more in line with our long-term levels of cost of risk, and asset quality. We should see a year that's more -- we should see more growth this year, especially a change in mix that is more focused on SMEs, more focused in consumer loans. So the net position should be more profitability in terms of net interest margin cost of risk in the long term as this evolves to more normalized levels where we've been has been very low levels of cost of risk, which don't make sense for the cycle that we're in. We're in the cycle of GDP that's growing around above 2%, but unemployment rate quite high for this level. And coming out of a very high level of inflation that affected household income, and that's affected payment behavior. So we think it's reasonable to consider a cost of risk, which should move slowly return to the levels of our long term of 1.1% to 1.2%, but obviously, there's positive scenarios in that number if the economy improves better than expected unemployment comes down, real wage has increased more. That number could be better. So you can argue both ways. In terms of ROE, its similar to that, what's driving these numbers of ROE of 19% to 21% and part of this is cost of risk and part of this is operating expenses. So as improvements if there's surprises in the year, there can be a positive effect on the bottom line as well. And you can also have the negative effect if the surprises in the year of lower inflation, more unemployment, you can have the opposite. But considering everything that economists are looking at. We think it's reasonable the levels of cost of risk today that we should have and the levels of return on average capital. Operator: Thank you. We would like to thank everyone for the participation today. I will now hand it to the Banco de Chile team for the concluding remarks. Pablo Ricci: Thanks for taking the time to listen to our call and we look forward to speaking with you in the next quarter's results. Bye. Operator: We'll now be closing all the line. Thank you, and have a nice day.
Operator: Hello, and thank you for joining the Stewart Information Services Corporation's Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] Please note today's call is being recorded. [Operator Instructions] It is now my pleasure to turn today's conference over to Kat Bass, Director of Investor Relations. Please go ahead. Kathryn Bass: Good morning, and thank you for joining us today for Stewart's Fourth Quarter and Full Year 2025 Earnings Conference Call. We will be discussing results that were released yesterday after the close. Joining me today are CEO, Fred Eppinger; and CFO, David Hisey. To listen online, please go to the stewart.com website to access the link for this conference call. This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ materially. During our call, we will discuss some non-GAAP measures. For a reconciliation of these non-GAAP measures, please refer to the appendix in today's earnings release, which is available on our website at stewart.com. Let me now turn the call over to Fred. Frederick Eppinger: Thank you for joining us today for Stewart's Fourth Quarter and Full Year Earnings Conference Call. Yesterday, we released the financial results for the fourth quarter and full year, which David will review with you shortly. I'd like to open today's call with some remarks on the overall progress we made in '25 and before shifting -- and then shifting to market conditions a little bit and then our fourth quarter results and strategic outlook for each of the businesses. We are very pleased with the progress we made in '25, strengthening and growing the earnings power of all our businesses. While commercial markets saw some awakening, in '25, we remained in a multiyear slump for existing home sales with 2 years in a row of the lowest existing home sales in 30 years. Despite this market headwind, we grew revenues by 18%, net income by 48% and adjusted EPS by 46% full year '25. That growth has allowed us to gain share and improve margins. We grew the company's adjusted pretax margin to 6.8%, up from 5.8% a year prior. We have created momentum for the company through continued execution of our targeted growth plans and have strengthened our position in each business. We delivered more distinctive products and services for our customers and made good progress on becoming a destination for the best talent in the industry. At the end of '25, we also rounded out our lender services portfolio with the acquisition of Mortgage Contracting Services, also known as MCS. And in 2025, virtually all of our growth was organic, but we will continue to set our sights on additional profitable growth through targeted acquisitions, and we enhanced our financial flexibility to capitalize on potential opportunities in the near term by successfully upsizing our credit facility by $100 million to $300 million and executing an equity offering of 2.2 million shares of stock, raising $140 million to provide additional dry powder. In 2025, we also increased our dividend for the fifth year in a row, moving from $2 to $2.10 a share annually. Moving towards some highlights for our businesses. In 2025, we grew all domestic commercial revenues by 34% year-over-year. This growth can be attributed to continued success in the expansion of our national commercial services business and growth in our small commercial growth initiative in our direct operations business unit. Our national commercial services business grew 43% year-over-year with significant growth across all of our asset classes. In our real estate solutions business, we grew revenues by 22% year-over-year and continue to have a very robust pipeline of opportunities. We have made significant progress on our expansion of this business line since beginning the journey in the late 2019 and look forward to seeing how recently acquired MCS will expand our breadth and client coverage for top lenders and services. Our agency services business also made strong progress in '25, growing revenue by 21% overall. And our strategy to drive more commercial to our agents was also very successful, delivering 34% growth for the year. Now I'd like to turn to the broader housing environment and our fourth quarter results. In the fourth quarter, we were able to maintain and in most of our businesses improve on our momentum. For the fourth quarter, we grew revenue 20% and adjusted net income by 52% compared to the fourth quarter of '24. This growth is meaningful for us given the existing home sales grew in the quarter just under 1% in the same time frame. While existing home sales purchases improved very slightly in the quarter, we will see signs for cautious -- we see signs for cautious optimism for housing in '26. In the fourth quarter, 30-year mortgage rates hovered between 6.1% and 6.35% range, showing a bit more stability than more recent short-term trends. We have also seen a shift in the composition of mortgage holders with the population of mortgage holders with rates of 6% or higher, exceeding the population of those below 3%. This implies that we are seeing people continue to buy and sell for life events and that the market is beginning to accept we are unlikely to return to 3% rates in the future. In the beginning of '26, we have seen rates remain in the low 6% range, and housing inventory has continued to be a little bit better than last year. And it was up 8% for the quarter compared to fourth quarter of '24. Looking forward, we believe we have rounded the corner and are heading in the right direction to get back to a more normalized existing home sales environment in the coming years. We do not anticipate existing home sales getting all the way back to their long-term historic average of 5 million units in '26, but we believe we will begin to see modest market improvements in '26. Our direct operations business unit grew 3% -- I'm sorry, 8% in the fourth quarter compared to the same period last year, which we feel is strong given that this business is the most impacted by the effects of the challenged residential housing market. We remain focused on prioritizing share gains in target MSAs, both organically and inorganically, and we continue to make strides in our strategic initiative to grow our main street commercial business that runs through our direct office. Our main street commercial business grew 17% for the full year and 16% in the fourth quarter in direct operations. We continue to expect a portion of our future growth in this business to come from targeted acquisitions, and we maintain a growing pipeline of targets that should begin to develop as the market signals a return to normal levels. Our national commercial services business delivered another solid quarter of growth. Success for this group is largely due to increased coverage in a number of geographic markets and asset classes, expansion of our team and our ability to underwrite larger transactions over the past several years given our improved surplus. We are focused on continuing to invest in best-in-class talent to grow share as relationships are especially important in this space and will allow us to expand on our network and deepen our expertise. Because of the work we have done to continually improve this unit, in the fourth quarter, we benefited from underwriting some sizable transactions. We grew national commercial services business unit by 49% in the quarter. We are pleased with the progress here, and it really represents the improved competitive position we have built for ourselves in the commercial market. Energy continues to be a point of strength, but for the year, energy growth was less than overall growth in this sector. In '25, energy grew 34% for the year and all other classes grew 46%. We remain focused on growing all asset classes and target geographies to expand our overall footprint. Our agency services business had another strong quarter with revenues up 20% year-over-year for the quarter. This amount of growth is strong when considering that the overall housing market is near flat to last year, which affects our agency partners. We remain focused on growing this business through the expansion of wallet share with existing agents and onboarding new agents in all states with an emphasis on 15 states that are most attractive from an agency perspective. We are seeing sustained growth year-to-date agency across all our target markets and most notably, Florida, Texas and New York. Our commercial initiative with agents have also been a big part of our success as we continue to build on the momentum we have had in recent years and for our agents to differentiate our service and better our offerings to our agent partners, and we saw 34% growth in this important initiative in 2025. Our real estate solutions business grew by 29% in the fourth quarter compared to last year. We also improved our margin in the fourth quarter over last year, but our full year margin of 10.1% was a bit short of our target for the full year '25 due to some isolated pricing issues and expansion costs. For the full year '26, we fully expect to improve margins and deliver in the low teen range for this segment and expect that our recent acquisition of MCS will help us improve our historical margin outlook. As mentioned in late December, we closed our acquisition of MCS, a property preservation service provider, allowing us to expand our default services offering and cross-sell customers across our expanded product lines. We expect continued progress in this business line as the market improves. Moving to our international operations. We are focused on broadening our geographic presence and depth in Canada, increasing our commercial penetration and expanding our presence in the refi market. In the fourth quarter, we grew our noncommercial revenue by 20% for the year, and we grew total international revenue by 11%. We believe we can build on our strong position in these markets and continue to grow share. Overall, we remain dedicated to strengthening our company throughout geography, customer and channel expansion in each business to set the company up for continued long-term success. I'm proud of the work we did in '25 to further the company and look forward to seeing how we can capitalize on the potentially improving market conditions and opportunities in '26. I want to thank our customers and our agent partners for their continued trust. We are committed to doing our best to serve you with excellence. And finally, to the Stewart team, I want to thank you for the loyalty and continued dedication to excellence. We are committed to being a destination for best-in-class talent. This year, I had the opportunity to meet with thousands of employees across many different cities in the U.S. and Canada as part of my year-long roadshow. My time with you all during this series was powerful as it showed me that we have a very dedicated team that is aligned and focused on the strategic objective of becoming the premier title services company. We point to this dedication and alignment as a key component of why we received several employment awards this year, including the USA Today's Top 25 Workplaces Award, Forbes' America's Best Employers for Company Culture and ranking #1 per Forbes America's Best Employer for Women in Business Services. We are also proud that we were able to support our employees by donating $1.2 million to the Stewart Foundation to their local communities. We stood up the foundation together in '21, and we've made a significant impact on our community since the inception. I cannot be prouder of the progress we have made on our journey, which we all know that much remains to be done to accomplish our goals, but I look forward to seeing where we grow together. David, I will now turn it over to you to provide an update on our results. David Hisey: Good morning, everyone, and thank you, Fred. I appreciate our employees and customers for their steadfast support in the slow residential real estate market. Yesterday, Stewart reported strong fourth quarter results with both revenue and profitability improvements. Fourth quarter net income was $36 million or diluted earnings per share of $1.25 on revenues of $791 million. Appendix A of our press release shows adjustments to our consolidated and segment results, primarily related to net realized and unrealized gains and losses, acquired intangible asset amortization and office closure and severance expenses that we use to measure operating performance. On an adjusted basis, fourth quarter net income was 50% higher at $48 million or $1.65 diluted earnings per share compared to $32 million or $1.17 diluted earnings per share. In our Title segment, operating revenues improved $106 million or 19%, driven by strong results from both our direct and agency title operations. As a result, title pretax income increased $13 million or 28%. On an adjusted basis, title pretax income improved 35% to $68 million from $51 million. Adjusted pretax margin improved to 10% compared to approximately 9% last year. In our direct title business, total fourth quarter open and closed orders for commercial and residential transactions improved compared to last year. Domestic commercial revenues increased $32 million or 38% with growth in all asset classes led by data centers and energy. Transaction size increased as our average domestic commercial fee per file improved 39% to approximately $27,000 compared to approximately $20,000 last year. Average domestic fee per file improved 13% to $3,300 compared to $2,900 last year, primarily as a result of transaction mix. Total international revenues increased modestly. Our agency operations were robust with gross agency revenues of $334 million, 20% higher than last year. This increase was primarily driven by improved volumes in our key agency states such as Florida, New York and commercial transactions. After agent retention, net agency revenues increased $11 million or 22%. On title losses, total title losses in the fourth quarter increased slightly due to increased title revenues. The fourth quarter title loss ratio improved to 3.4% from 3.7% last year due to our continued overall favorable claims experience. We expect our title losses in 2026 to average in the 3.5% to 4% range. On our Real Estate Solutions segment, total revenues improved 29% by $25 million, primarily driven by our credit information services business. As Fred mentioned, we recently added MCS and expect it to be a major contributor to the segment's revenues and profits going forward. The segment's adjusted pretax income improved 47% to $10 million compared to $6 million last year. We are focused on the overall cost of services and strengthening customer relationships. Adjusted pretax margin was 8.5%, 1% better than last year's fourth quarter, and we expect our margins to normalize in the low teens as these relationships mature. On consolidated expenses, our employee cost ratio improved 29% compared to 31% last year, primarily due to increased revenues, while our other operating expense ratio was 25% comparable to last year. On other matters, our financial position remains solid to support our customers, employees and the real estate market. Our total cash and investments were approximately $480 million in excess of statutory premium reserve requirements. As Fred noted, our line of credit and December common share equity offering provide us financial flexibility. Total Stewart stockholders' equity at December 31, 2025, was approximately $1.6 billion with a book value of $54 per share, which is $4 better than last year. Net cash provided by operations improved by $22 million or 32%, primarily due to higher net income. Again, thank you to our customers and employees, and we remain confident in our service to the real estate markets. I'll now turn the call over to the operator for questions. Operator: [Operator Instructions] Our first question comes from Bose George with KBW. Bose George: I just wanted to start with the commercial. Just given the strong commercial activity in 2025, can you talk about your expectations for commercial revenue growth in '26? And then just related question, usually, there's been meaningful seasonality in 1Q. But given what you see in the commercial pipeline, on the commercial side, do you think 1Q could be sort of a little better than usual? Frederick Eppinger: Yes. Great question, Bose. So I feel very confident in our kind of our pipeline activity. It's pretty broad. It's pretty good. I do think there is seasonality -- will continue to be seasonality in commercial. And the fourth quarter, in particular, this year, I think, was very robust. I think you're going to see that for a lot of people in the industry for some reasons. But -- so I do think it's -- we got -- our first quarter in general should be a little bit better than last year, but we'll still have the difficulties of the first quarter in my view. And the commercial in general, I think, is going to -- it will be a good year for us next year, looking at the activity and the breadth of the activity. Some of the comparisons, it will be interesting to see on growth. So do I think we can grow commercial next year? Yes. I just think 49% is not -- like there's going to be some comparisons here given how quickly we're going to grow into our skin that we might see some kind of moderating of growth, of course, and some comparisons that might be kind of not as robust on the growth side. But again, it's going in the right direction in every class, and we're hiring and trying to really get after it. And I feel good about the depth. The other thing that's really interesting qualitatively is we're leading more deals. Like some of these big deals, right, historically, we would participate, but we control more now, and you can just feel it and see it, which gives me comfort that we're moving in the right direction. So even if we went a little sideways this year and digested the growth in the next 2 years, I'm as confident as I've always been on being able to go forward. We're probably 14% share right now in the market. I think over the next 2, 3 years, we're going to get closer to 20%, right? So I can't time that, but the momentum and our ability to get after it is there. And I do think the market in general is going to be relatively strong this year as well. So hopefully, that's helpful... Bose George: Yes, that's great. That's very helpful. And then actually, can you remind us what percentage of your agent premiums are commercial? Frederick Eppinger: That's a great question. So we've been obviously trying to grow that business. And let me just -- I have some of the information on that. But we grew in -- of the 20% growth, we grew purchase about 16% for the quarter and 15% for the year. We grew refi with the real estate -- with the agents about 40%, but that's only about 3% -- $3 million of growth because it's such a small percentage of our business. And then we grew -- see, the commercial was about 34% for the year. And so you can look at the mix. I don't have the specific percentages of each, but it's very small refi. Again, of the growth in the purchase, it represent about $125 million of the growth. And so you can kind of back in the percentages. But it's -- but again, it's heavy purchase. It's probably somewhere around 15% to 20% commercial now. And the rest is refi. But it's -- what's nice about it to me is that when you look at the 15% -- excuse me, 16% growth for the quarter in purchase, the market is somewhere between 1% and 2%, right? So I know this year, we're going to get the data. We're going to have another share movement in most of these markets that is pretty robust. And on commercial, I would say we're playing catch up. if I was a guessing man and I looked at my competitors, their numbers of commercial and their agency would be closer to 15% to 20% of the business. And so we're still catching up of our penetration of commercial in the agency. So I wouldn't be surprised if we -- our percentage of growth in commercial doesn't continue because we're catching up, right? We're not -- I would say our competitors are probably in the 20% to 22% range, and we're probably in that 15% range. Bose George: Okay. Great. Actually, just one last one on commercial. Have you talked about commercial, the direct margins versus the residential direct margins? Is that something -- I can't remember if you discussed that? Frederick Eppinger: They're a little better. Again, it has a lot -- the costs are more variable in commercial because of the way the commission structures work and the arrangements with involved and stuff. So -- but it's a tad better. It's probably 1/3 better. And again, the other thing about it is the float is also better. So there's an investment income portion of commercial that is quite important. And there is a -- and for us, I don't know -- I can't tell you what the competitors' numbers are, but scale matters because of the nature of the work. And so as we get bigger, the margins get better, right, because of the critical mass we see in some of these asset classes and skill sets. So it's a good margin enhancer, and it's a margin grower if we can continue to grow this business. We are probably somewhere -- probably the fourth quarter, 18% of our revenue was commercial. But over the year, my guess is the average was like 14% to 15%. But if I look at my best competitors, the big guys, they're probably in the low to mid-20s, if I was guessing. It's hard to back into it because it goes through the various channels. But we are, again, short there, too. So it's not just our share in that business, but even relative to our business mix, we were short. And that's why this has been an important initiative, and this progress for us is very helpful as a company. Operator: [Operator Instructions] We'll now move on to Geoffrey Dunn with Dowling & Partners. Geoffrey Dunn: A couple of questions. First, what are the plans for the line of credit? Do you have an aggressive paydown schedule there? Or do you think it's just the plan to let that leverage come down gradually with equity growth? David Hisey: Jeff, it's David. I would say the latter. I mean we could pay it off at any point. I think we're just trying to keep flexibility, as Fred talked about. And so I think we're about $200 million drawn. We may bring it down a little, but you may see that for the year. Geoffrey Dunn: Okay. And then bigger picture, I wanted to ask you about AI and the effect you feel it's had on your business and if that's still accelerating. But also the effect it's had on the broader business. It looks like there's been some capital investment coming into the space for data collection, data mining, data organization. Curious if you view those as M&A opportunities? Or is that something we should think about in terms of a longer-term competitive consideration? Frederick Eppinger: Yes. It's a great question. It's obviously -- as I said previously, because of the way we have so much unstructured documents, there's a big benefit both on efficiency, customer satisfaction, quality because what we -- our losses are because you make a mistake, right? We're a warranty. And so the more efficient you can examine the documents and get to the right points quickly, the better you are. We have, gosh, probably 75 individual initiatives, right -- going on right now that have AI to apply in our businesses around customer service or efficiency or data consolidation and management. My view from a competitive point of view is an enormous advantage of the bigger people. It's not going to eliminate our business or anything. It's going to make us better, higher quality, better kind of throughput and consistency. It's a lot of little singles is the way I'd describe it, but important. There are tools, you are exactly right. There are innovation and tools. There's one tool in one of our businesses right now, to your point, that I'm likely to buy, so -- which is -- can get plugged in and make our service better in one of our businesses. And again, because our business is so unique and weird, this isn't a revolution. This is kind of, in my view, a way to make so many parts of your business better. And title is weird. So the opportunities tend to be smallish in these -- the market opportunity. And so there will be some of that tool thing. Just if you remember, in the P&C world after the crisis, the dot-com, same exact thing happened as all these companies failed, but some of the solutions, the models were extracted by the bigger companies to accelerate some of their innovation. And I think there will be some of that. Is it going to be massive? No. But I'm pretty excited about what's happening. And again, it's just another thing that's going to -- we have a really interesting oligopoly, right, because of the scale and size and the data and the reach. And if the big players are using this kind of tool, it's going to increase the quality of our delivery. So it's a great -- it is a really good, interesting observation. And I would also say there's characteristics in our business that are very similar between us and other kind of insurance delivery through independent channels. And so there are some of these things that are kind of repetitive. And so there'll be people that will be able to kind of accelerate your advancement because they can take something from another industry and kind of slide it over. So again, it's -- I tell our folks, what I like about it is that it's not about technology, right? It's about businesses driving improvements by using a tool that makes a more consistently -- consistent delivery of data. And it's helpful. I would also say that some of the -- what people talk about is overblown a little bit. I mean this is a world still of -- you can get to 90% of the solution, but the last 10% is the hardest, and we're still in that range. And so human intervention is going to be really -- remains really critical, particularly in our business. And again, so that's kind of how I see it developing. Geoffrey Dunn: Okay. And then, David, just an accounting question related to this. Given the digitization at the municipal level and the increased ease of collecting data, is there any implication for the title plant assets, particularly the more legacy plants because it's now cheaper to create those? David Hisey: No. I mean, as you probably know, title plants vary in access. The title data varies across the country. And the plants are needed in the markets that we're in to access data, so there shouldn't be any issues if you're talking about recoverability. Frederick Eppinger: What is happening -- right. Again, what is happening is we're able through the way we've set up the centralized processing and management, the enhancing of the value of those plants has been kind of really helpful, right, because we can supplement the data in those plants more efficiently. And it's becoming kind of more helpful in our business, particularly as we grow. Operator: We'll now move on to Oscar Nieves with Stephens. Oscar Nieves Santana: Earlier, you mentioned seeing signs of cautious optimism for housing as we look into '26. Can you talk a bit more about the specific industry [ direction ] and whether those are broad-based or concentrated in certain [ regions? ] Frederick Eppinger: Yes, it's a good question. So last year, everybody said -- this time last year or earlier, say, in the fourth quarter, when we had that little downturn in rates, and we had a nice little spurt in December orders and market ended up translating into some March close orders, people were saying, oh, by the end of the year, we're going to see 8% to 10% improvement. I didn't see any of that, right? Because your under 3% mortgage was still really high, and the inventory quality was not great. And a matter of fact, I think we got to a point where 20% of all transactions were really old, were flippers because it was old inventory. Now what I see is the under 3% has ticked down a little bit. The quality of inventory has gotten a little bit better and has increased and people say it goes up and down, and there's some seasonality in the inventory. But it's 8% up in the fourth quarter year-over-year, and we're seeing more activity. Do I think it's going to be more than 6% to 7% or 8% growth? No. It's modest. But I was -- it's hard to guess, but it feels like that this year. Whereas last year, right from the get, I think it was going to be flat, even though the estimates from some of the economists were up. This year, I could feel it. And you saw our open orders, right? You can see some of the open order data and how it's getting a little bit better. And so again, I don't think it's going to be over the top, but I believe we're going to start seeing some movement this year. Again, the first quarter is always hard for us for geography reasons. And as far as the breadth, I think there is some breadth to it. Again, some of the places that didn't go up as much, don't move as much like the Midwest kind of has less variability in it. And so the South tends to be the swing a lot of times. But I feel pretty good about modest improvement. So what we're trying to make sure we're on top of and planning for is that kind of how do you capture that... Oscar Nieves Santana: And touching on rates, looking at data from the ICE Mortgage Monitor, I can see that once rates go below, say, 6%, the number of people with in-the-money mortgages increases significantly. Could you give some color and maybe quantify the impact that would have in your revenues if that were to happen and ultimately in earnings? Frederick Eppinger: Yes. Again, there's a lot of talk about it. I don't know how scientific any of that is. But again, I look at last October, and we had a cup of coffee, a little bit under 6% and things jumped, right? So there is some optics around that 6%. What I would tell you about our economics, our big swing of our economics is really existing home sales, as we've said. And we're -- we've been sitting at $4 million for 3 years, right, with 0 growth. And the reason it's such a swing for us is because it's the fixed cost base for us with 500 locations. And particularly in the first quarter, when you're at that level, you've got so little volume going through the system, it's a real drag on your returns. And what I've said is if we got to $5 million, our margins go to 12%, right? But I don't have 12% because you're filling the excess capacity. And particularly if you want to go -- if you can't sleep one night, look at the first quarter results in '23 and '22 and '21 when things were still really strong, it's an enormous swing for us, right? Now we try to fill the bucket in direct through small commercial growth and some organic attempts around micro markets, et cetera. So you can think about a straight line almost between the $4 million and the $5 million of leverage of our business. And again, it's a little seasonal because, again, the volumes are so low in the first quarter. But that's the way we think about it. And again, it's tied -- so that's the big portion, but it's everywhere, right? Like appraisal -- you go through the businesses, there's a fixed cost portion of all those businesses. And when you're at a 30-year low, you strain kind of on the margin. That's why what I say in our lender services business, I think we're 11% to 12%. Now I think we're 12% to 13% is kind of the -- where we're going for this kind of year. But if we got back to $5 million, that thing is going to get to mid-teens because all those businesses are affected too, right? A little less, but it's part of our equation. And one of the things that are most interesting about us is if you look at '19 to '24, for example, in the volumes, all our competitors' margins went down more than ours because of the volume decrease and ours went up, but that's because we started bad. So we've made improvements, but we're still very tied to that core metric and trying to give less metrics. The other thing I would say, and I've mentioned this a number of things in public settings, because I think there's some chance that it's a journey beyond 4.5% is going to take longer. I mean, I think we're going to get some improvement, but it could get stalled for various reasons. We're working hard to make that -- try to get to double digit at 4.5%. A lot of work to do, but with geographic focus, some product portfolio stuff we're doing, some operating model because I'd like us to be able to show kind of improvement if we get stalled at that kind of 4.5% because there is some chance it's just going to take a little bit longer to get to 5%. So I'm kind of -- I'm optimistic on an improvement, but I'm cautious about how quickly it gets to that $5 million, $5.5 million and really focusing on continuing earnings growth while we get there. Oscar Nieves Santana: Yes. And maybe a last one, and I'll get back in the queue. You've highlighted efforts to grow agency in a few targeted MSAs, including Texas. With the Texas Department of Insurance finalizing the reduction in title premium rates effective March 1, if you can walk us through how that change will flow through your financials and how you're thinking about the impact on the business, both near term and longer term? Frederick Eppinger: Yes. So the rate, again, is like 6%, what that agreed to is a 6% reduction, and it's like July or something. And so that's much less of an issue than it was when it was 10%, first of all. But what we've done is we've addressed this through reviewing all our fees and services and stuff in Texas. And so it's less -- it's low single-digit impact on earnings this year. So we managed it well. Now I'm concerned for some of our agent partners in rural places in particular, because they don't make a lot of money, and that's a meaningful change. And so I do think it's going to cause some disruption in the agency -- some of the agencies, particularly small agents in parts of Texas because there is a -- in my view, right now, there's not a ton of margin for agents given the rate structure. What's weird about our world, right, is that people think about it as a cyclical world. So they take a 3-year average or a 5-year average or whatever. The problem is that '21 and '22 are once in a lifetime, never happen again kind of event. And if you weigh them too much, you overreact to the excess earnings that were made in those 2 years. And I think Texas is a perfect example where that reduction is overstated given what today's environment is, and it's going to have an impact on agents. But for us, it's not. Financially, I don't think it's going to be much, if anything -- like I don't -- we put it in our plan, everything, but it doesn't change my expectations of growth of earnings or anything in our businesses. Operator: [Operator Instructions] And we do have a follow-up from Oscar. Oscar Nieves Santana: All right. I guess this will be my last one. You highlighted efforts to grow -- you talked about prioritizing share gains in those key MSAs, both organically and through M&A. Can you give us a bit more color on how you're thinking about that strategy today, including whether that -- you have a target level of capital that you plan to deploy this year and how that might be split between the title business and the Real Estate Solutions business? Frederick Eppinger: Great question. So in direct, to me, the direct, as I said, is more of a kind of a fixed cost minimum scale way to think about direct in MSA levels. And early on, the problem we had is we were an inch deep and a mile wide. So we had a lot of offices that were chronically unprofitable unless the market was at its peak. And so we shut some stuff down, reallocated capital. We actually purchased in about 30 MSAs, some business because of the scale difference, if you get over 10% share locally is -- the margins are much better. The ability to manage the ups and down is better. Your service consistency is better, your ability to centralize things and variabilize the cost of them. So we have this -- we reviewed the 140 MSAs. We said which ones are mostly agent oriented, which ones are we strong, which ones we like the market, but we're not where we need to be. And we have 30 or so MSAs in particular that we think we can move the dial, and it'd be good for the company to get to a higher share level in those areas. We also have what I call micro markets, which is the markets, the suburbs of Nashville, the difference between Austin and San Antonio, the growth in between where we can do fill-ins and acquisitions and tie it to the bigger offices in those locations. So we have these targets that would materially both improve top line and bottom line for the company. For the last 3 years, we've got -- we kind of didn't do really any because what happened is agents weren't making any money. And so their price expectations -- they weren't going to get enough to be comfortable or happy about that. So they can kind of talk to us and communicate with us, but there was a price point even with an earn-out. What has happened is as people have reengineered their operations through -- getting through the tough times, they're making a little bit more money. They're seeing the improvement that I'm seeing. All of a sudden in these target markets, those conversations are becoming more constructive, right, for those that are deciding this is one of the alternatives they want to consider. And so for me, I've said over the next 3 years -- I said a bunch of times, over the next 3 years, I see $300 million roughly of acquisitions in the direct channel against these kind of markets that would structurally improve our margin regardless of cycle in that business. And so what I'm saying and what I said in my script, I am much more optimistic that this year, some of that can start to happen. And I don't know when. And again, I only want people that want to be here. I only want it to work for both of us. So it's getting to that right trading price, so there's no risk for us and no risk for them. And I think we're getting closer. And so that $300 million in my mind over the next 3 years is kind of the way I've thought about it. As you know, most of the transactions in that space are small, $10 million to $30 million. It's what -- because you're geared to a market or a market opportunity. And that, by far, if you look at our overall capital plan, I would say the other businesses I'm in -- are in, we don't need to do acquisitions. What I have said out loud recently is that in lender services, there's a couple of spots where we've got really good traction that it might make sense to consolidate some of the competitors. Again, those won't be -- they wouldn't be big transactions. But what's emerging is we've got so much momentum with some of the big lenders that filling in our network or buying some of those customer relationships could make some sense. So again, that's a little bit more opportunistic. And again, it's not -- I don't think you're going to see a $300 million opportunity. Those again are -- will there be a $20 million or $30 million opportunity. The other thing I would say is what Jeff just said, there are a handful of really teeny like $3 million, $4 million of tool sets that I do think will be available in some of these businesses that accelerate some of the development we want to do to make our service better and our delivery better because of what's happening with not just AI, there's a bunch of things happening with certain development. So that's where our capital is. I don't think it's going to be a huge number. I think what happens quickly as the market comes back and we improve margins, we generate a lot of cash. So I believe the majority of what we're going to be doing is self-funded. I still believe that. And it was just a timing thing here that I wanted to give ourselves some flexibility because of what I saw happening over the next 6, 9 months. But I think in general, we should be able to self-fund what I'm talking about over the next 3 years. Oscar Nieves Santana: I'm going to stick to my word. You answered the follow-up that I would have but... Frederick Eppinger: Thanks a lot. Appreciate it. Operator: We'll go next to Geoffrey Dunn with Dowling & Partners. Geoffrey Dunn: Just a couple of number questions. David, could you update us on what you saw January trend-wise for orders and also share your thoughts for investment income in the coming year relative to '25? David Hisey: Yes, Jeff, I mean with respect to orders, I think Jeff -- or Fred just covered it a little bit. Things have been opening up a little, particularly relative to last year's quarter, they're up a bit. We just have to see how things play out here because rates have been a little volatile as you've seen. But right now, things seem to a little bit better than last year. With respect to interest income, and this also goes to Fred's comment on the flow benefit of getting commercial. So as it stands now, if you plan on maybe 1 or 2 rate cuts and assume most escrow earnings are tied to short-term rates, we may come down a little bit, but most -- we don't expect it to come down that much. And the main reason is because the escrow balances will grow and offset it. Geoffrey Dunn: Okay. So largely a volume offset to rate cut impact? David Hisey: Yes. I mean I would say it could come down a bit, like several million or so, but it's really a function of how quickly -- like if they don't drop rates until the fall, right, and volume continues to pick up, then you're sort of holding, maybe increasing a little, right? If volume doesn't pick up as quickly and they drop rates like at the next meeting or 2, right, then you could go down a little bit. Operator: We'll now move to Bose George with KBW. Bose George: One more for me as well. The -- actually, can you give us an idea about the revenue contribution from MCS? And is there much seasonality there as that comes in? Frederick Eppinger: Yes, both good questions. So there is a little seasonality, particularly in the first quarter, okay, for that business. It's -- and we -- I think when we bought the company, we talked [indiscernible]. David Hisey: Yes. Bose, I think we had covered this a little bit in different forms, but it's about $165 million a year revenue company sort of in the $40 million EBITDA or so range. And we'll just have to see where it goes from there because foreclosures have been increasing as you've seen, FHA delinquencies have been increasing, but that's about how they're running now. Frederick Eppinger: Yes. So a little lower in the first quarter... Operator: At this time, there are no further questions in queue. I will now turn the meeting back to management for closing remarks. Frederick Eppinger: I just want to thank everybody for their interest in Stewart. As I said earlier, I'm very pleased with '25. We've made good progress, and we have good momentum. And I believe that momentum will continue into '26 if we stay focused. So thanks for -- thank you for all your attention and interest in the company. Thanks. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good day, ladies and gentlemen. Welcome to the Natural Grocers First Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question and answer session, and the instructions will be given at that time. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Miss Thiessen, you may begin. Jessica Thiessen: Good afternoon, and thank you for joining us for the Natural Grocers by Vitamin Cottage First Quarter Fiscal Year 2026 Earnings Conference Call. On the call with me today are Kemper Isely, Co-President, and Richard Helle, Chief Financial Officer. As a reminder, certain information provided during this conference call, including the company's outlook for fiscal 2026, contains forward-looking statements based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements due to a variety of factors, including the risks and uncertainties detailed in the company's most recently filed forms 10-Q and 10-Ks. The company undertakes no obligation to update forward-looking statements. Our remarks today include references to adjusted EBITDA, which is a non-GAAP measure. Please see our earnings release for a reconciliation of adjusted EBITDA to net income. Today's earnings release is available on the company's website, and a recording of this call will be available on the website at investors.naturalgrocers.com. Now I will turn the call over to Kemper. Kemper Isely: Thank you, Jessica, and good afternoon, everyone. During today's call, I will provide an overview of our financial results, highlight the key drivers of our performance, and share an update on our key operational initiatives. Then Rich will discuss the first quarter results in greater detail and review our fiscal year guidance. Our first quarter results were in line with expectations, including daily average comparable store sales growth of 1.7% and diluted earnings per share growth of 14% to $0.49. Based on our first quarter performance and outlook for the remainder of the fiscal year, we are maintaining our full-year guidance. There are several key underlying trends that I would like to highlight. The first quarter sales comp increase of 1.7% was cycling an 8.9% comp last year. The two-year comp of 10.6% continues to reflect a robust growth rate relative to the broader grocery retail industry. While first-quarter sales were consistent with our outlook, we believe these trends reflected cautious consumer spending behaviors, observed broadly across the grocery retail sector. Additionally, the sales comp primarily reflected trends with customers who do not participate in our rewards program. We continue to see stronger sales growth by our Empower Rewards program members. We believe that our differentiated offer of high-quality natural and organic products at always affordable prices continues to deliver strong value for our customers and reinforce our competitive position amid economic uncertainty. Furthermore, we believe that our company's initiatives position us well to achieve sustainable long-term growth. Next, I will review the performance of key operational initiatives. During the first quarter, nPower Rewards program net sales penetration increased two percentage points to 83%, supported by strong membership gains and higher traffic by nPower customers. The continued expansion of both membership and sales penetration highlights our customers' appreciation for the program's value and benefits. Empower remains an effective tool for optimizing promotional and strengthening customer engagement. Our Natural Grocers brand products represent value through premium quality at compelling prices. In the first quarter, our private label products accounted for 9.6% of total sales, up 70 basis points from a year ago. The strong growth reflects rising customer awareness, driven in part by more prominent marketing efforts as well as the impact of new product introductions. During the first quarter, we relocated one store. Relocations are a key element of our store development strategy, as they typically generate accelerated sales growth off a higher sales base. Additionally, today, we are affirming our plan of opening six to eight new stores in fiscal 2026 and are targeting 4% to 5% annual new store unit growth for the foreseeable future. Yesterday, our company released its fiscal year 2025 sustainability report. The featured topic is our differentiated nutrition education program. Since my parents founded our company in 1955, we have offered free nutrition education because we believe it empowers our customers, crew, and communities to improve their well-being. This long-standing commitment earned us the Shelby Report 2025 Sustainability in the Food Industry Award for Advancing Sustainable Practices in the Food Sector and driving meaningful change through our nutrition education program. For further information about our nutrition education program, our rigorous product standards, and commitment to our crew and communities, please refer to our sustainability report or visit our company's website. Last but not least, an important component of our differentiated model is the best-in-class customer service provided by our Good For You crew. I wish to express my deep appreciation to our crew for their continued commitment in delivering an exceptional shopping experience. Now I will turn our call over to Rich to discuss our financial results in greater detail and fiscal 2026 guidance. Richard Helle: Thank you, Kemper, and good afternoon. Our first-quarter net sales increased 1.6% from the prior year period to $335.6 million. Daily average comparable store sales increased 1.7% and on a two-year basis increased 10.6%. Our daily average comparable transaction count increased 1%. The daily average comparable transaction sizing increase of 0.7% included annualized product inflation of approximately 2% to 2.5%. Items per basket were down less than half an item year over year. We continue to see the greatest sales growth in meat, dairy, and produce, which are some of our most differentiated offerings. We saw a modest decline in the number of transactions using SNAP EBT in the first quarter. SNAP represents approximately 2% of net sales, and the reduction in SNAP transactions was immaterial to our overall sales comp for the quarter. Gross margin decreased 40 basis points to 29.5%, driven by lower product margin primarily due to higher inventory shrink, the majority of which was driven by isolated events. Store expenses decreased 0.7%, primarily driven by expense management. Administrative expenses decreased 5.9%, primarily driven by costs incurred in the prior year period related to the Chief Financial Officer transition. Operating income increased 97% to $14.6 million. Net income increased 14% to $11.3 million, and diluted earnings per share increased 14% to $0.49 in the first quarter. Adjusted EBITDA increased 3.1% to $23.5 million. Turning to the balance sheet and cash flow, we ended the first quarter in a strong liquidity position, including $23.2 million in cash and cash equivalents, no outstanding borrowings, and $67.6 million available for borrowing on our revolving credit facility. During the first quarter, we generated cash from operations of $21.1 million and invested $9.6 million in net capital expenditures, primarily from new and relocated stores, resulting in free cash flow of $11.6 million. Today, we are affirming the company's fiscal year outlook that we originally provided in November. It continues to reflect both the opportunities we see in our differentiated market position and appropriate caution given the current consumer environment. Our outlook includes the following: open six to eight new stores with the pace of openings weighted towards the back half of the fiscal year, relocate or remodel two to three existing stores, achieve daily average comparable store sales growth between 1.5% and 4%, achieve diluted earnings per share between $2 and $2.15, and direct $50 million to $55 million towards capital expenditures to support our growth initiatives. In addition, our current expectation is that sales comps will be at the low end of our outlook range through the second quarter as we cycle strong comps in the prior year while increasing slightly in the second half of the year as we cycle lower comps. Additionally, the comp range reflects the uncertainty in the consumer environment. We expect modest inflation throughout the year in line with current trends. Our outlook anticipates that year-over-year gross margin will be relatively flat, primarily depending on the level of promotional activity. We expect that year-over-year store expenses as a percent of net sales will be relatively flat to slightly lower. Lastly, in fiscal 2026, we are investing approximately $0.12 of diluted earnings per share in new store openings, primarily through higher preopening expenses and store expenses. Now we'd like to open the line for questions. Thank you. Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to attend our roster. And the first question will come from Scott Mushkin with R5 Capital. Please go ahead. Scott Mushkin: Hey, guys. Thanks for taking my questions. So I actually wanted to start off where you guys left off on the $0.12 headwind from the new stores. As we think about that going forward, is it gonna be as dramatic? I would think it wouldn't be as dramatic the kind of the headwind as we think about next year and the year after. How should we think about that type of drag as we move out beyond this year? Kemper Isely: Well, you know, this year, we're accelerating our growth from two new stores to eight. So that definitely gives us quite a bit of more preopening expense for, you know, six more stores with preopening expense. So that's where that 12 basis points came from. Next year, if we open a consistent eight new stores and do a couple remodels, it should be fairly flat going forward. If we add, you know, if we accelerate it to 10 or 12, then there would be a little bit more headwind. But it'll probably be flat next year to eight. Again, eight to nine new stores again next year. Scott Mushkin: Was it 12¢ or 12 basis points? I just wanna make sure I... Kemper Isely: Twelve. Twelve. Wasn't it 12¢? 12¢. 12. Yeah. $12.12 cents. Okay. Kemper Isely: Yep. Scott Mushkin: K. So, you know, conceivably a pretty good tailwind, I guess, as you look out depending on what happens with the rest of the business. Okay. So then switching gears to get some more thoughts on the shrink. I know you guys said that was kind of the biggest issue with the gross margin. And you called out, I think, some onetime isolated events. Can you give any more color on that? And are those isolated events gonna continue, or is that it was just, hey. This gross margin is actually would have been a lot better if it this hadn't happened. Richard Helle: Yeah. Scott, this is Rich. Scott Mushkin: Hey, Rich. Richard Helle: Hi. And one of the big items was recycling. Fairly low shrink in Q1 of last year. So last year was probably running about 15 below our three-year average. This quarter, we're probably running about 10% above our three-year average. So, you know, I would say a lot of that is sales velocity. And then we had some onetime items related to weather-related power outages that were obviously unexpected. Had some incremental shrink related to store closures as well. So that would be, you know? And then I'd say, yeah, a little bit of execution, operational execution that you tend to see quarter by quarter, but nothing overly material. Scott Mushkin: So it sounds like a lot do you have any size of that of the percentage of the decline in gross margins that would be attributed to power averages and stuff like that or no? Richard Helle: Well, I think in terms of just the cycling, the cycling was about 50% of that variance. And then, you know, and then I would say some of these anomalies probably another 25%, and then the balance of it would have been, I'd say, just, you know, standard variances. Scott Mushkin: Right. Alright. That's great that's great color. Then my final question is just around the environment. And, you know, I've been doing this a long time, and I think a stack comp is useful, but also not necessarily the end all be all when a and when an industry should be generally growing faster than it is right now, and this is not as statement to you guys. It's kind of a general thought. And I was just if you kinda look at your customer base, you guys gave some good color on the Npower. But if you look at it, by segment, by age, who's coming in and driving a lot of that growth? Are there any consistencies there that you would say, hey. Like, this demographic has definitely pulled back a little bit. Kemper Isely: Well, the demographic that's income constrained has pulled back. And that's where you're losing customers right now. They're just nervous, and their paychecks aren't keeping up with the rate of inflation, and they're looking for as inexpensive of alternatives as they possibly can find. And so that's where you... Scott Mushkin: Is there an age where we've lost customers right now? Kemper Isely: Have you seen an age reflection there? We've seen some data that, you know, suggests that the younger households are the most impacted, or you guys not really seeing that? Kemper Isely: Not really. I mean, there's a definite, you know, if they're income constrained, then there's they're pulling back. Scott Mushkin: Right. Does that make sense too? Richard Helle: Yeah. But with demographic wise, I mean, you know, great data. We haven't seen sort of a shift in our demographics from third-party data that we get. So nothing material there. And I think that, you know, the shrinking basket that we've been seeing is really all around sort of cautious consumers were very much seeking value. And, you know, the pullback that we've seen is not been in our Empower customers, but our less engaged customers. Scott Mushkin: Okay. Alright, guys. That's our our our our customers actually were really robust. Kemper Isely: Yeah. In this tough environment out there, so I was glad to see the numbers you put. So, anyway, alrighty. Appreciate it. Scott Mushkin: Thanks, Scott. Operator: The next question will come from Chuck Cerankosky with Northcoast Research. Please go ahead. Chuck Cerankosky: Good afternoon, everyone. I wanna dive in a little bit on the new store opening program for this year. You've got six to eight new openings. You've done one relo. So far. Now that would that would count as a new opening and a closure. Any net closures for the year and what's your definition of a relo and a remodel? Are they are they coincident events as we as we look at the the storing? Program for this year? Kemper Isely: No. We've had the one close we had a one closure in our Austin Arbor store in Texas in October, and we don't we won't have any more closures this year. Probably not any next year either. Anyway, the one relocation, that's a relocation. So we'll have 68 actual new stores then. One, three relocations or remodels. This year. So overall, be from eight to 11 I mean, six ninth Yeah. Think about that. The eight eight to 11 actual remodel moves and new stores. Chuck Cerankosky: Okay. That's helpful. And as you're talking about the three strongest categories, which tend to be some of the more expensive purchases, how does that square with the cautious consumer? Or is that reflected in the reduction in the items per basket? Kemper Isely: Well, supplements, which is our highest margin category, had a slight decline in sales for the quarter, but there was zero inflation in the supplement sector, which kind of explains the decline in the category. So we had a slight very slight drop in items sold in the supplementary because we had zero inflation in that category. Our other I would guess, what would the other ones be that you would Body care. Body care was similar. And grocery, we actually had good growth. Chuck Cerankosky: Growth in units? Kemper Isely: Yes. Chuck Cerankosky: K. Great. Kemper Isely: Yes. I mean, yeah, it was it was definitely body care and supplements where we saw the biggest decline in units. Then also also household items. Chuck Cerankosky: Okay. And with the and with supplements being up? A high gross margin category that showed up in the overall p and l then? Kemper Isely: Yes. It did. Chuck Cerankosky: It had a slight impact. Kemper Isely: But, I mean, overall, our our our our cash register ring margin was flat for the quarter. So we got we had some pickup in margin in some of the other categories. Operator: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Kemper Isely for any closing remarks. Please go ahead. Kemper Isely: Thank you for joining us. We are committed to our differentiated business model of offering high-quality natural and organic products at always affordable prices. And we are confident in our ability to continue to drive profitable long-term growth and enhance value for all our stakeholders. Thank you, and have a great day. Operator: Bye now. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and a warm welcome to the analyst call. [Operator Instructions] Let me now turn the floor over to your host, Elke Brinkmann, Investor Relations. Elke Brinkmann: Good afternoon, and welcome to our call on the results of the first 3 months of fiscal year 2025-'26. We are here with our CEO, Toralf Haag; and our CFO, Steffen Hoffmann, who will walk you through the figures for the first 3 months of 2025 and '26 and current developments at Aurubis. We will first take you through the presentation and then open the line for your questions. [Operator Instructions] But before we dive, a short reminder of our disclaimer on forward-looking statements. Today's capital markets presentation contains forward-looking statements about Aurubis plans and expectations. These statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated. Let me now turn the floor over to Toralf Haag. Toralf Haag: Thank you, Elke, and good morning, good day, good afternoon from Hamburg. Aurubis started the new fiscal year with a sound result that was in line with market expectations. Operating EBT was satisfactory at EUR 105 million, driven mainly by higher metal prices and consequently, a higher metals result. Declining TC/RCs, however, partly offset the positive metal result effect. EBITDA was EUR 164 million compared to EUR 184 million last year, which reflects anticipated higher costs in the overall group. Net cash flow was slightly negative at minus EUR 8 million compared to EUR 178 million in Q1 of last year. Free cash flow before dividend was minus EUR 103 million compared to EUR 39 million the year before. Higher working capital at higher metal prices was the main factor in lowering cash flows, and both figures should be viewed as snapshots, as Steffen will explain further later in the presentation. Operating ROCE on a rolling 4-quarter basis decreased to 7.8%, down from 11.7% the year before. This reflects lower earnings in prior year quarters and higher capital employed from our growth investments. Looking ahead to the remaining quarters of the fiscal year, we expect positive effects on earnings, in particular from higher metal prices and strong demand for copper products. In light of these factors, we raised our full year guidance for operating EBT to between EUR 375 million and EUR 475 million. The previous range was EUR 300 million to EUR 400. Once again, our production figures show the broad scape of our multi-metal competence. I would like to briefly highlight the key drivers. Starting with our input, concentrate throughput went up 5% year-over-year to 630,000 tonnes, carried by a good operational performance. Copper scrap/blister copper output, on the other hand, went down by 5% to 115,000 tonnes. This was caused by our input mix in the quarter. Other recycling materials totaled 125,000 tonnes, slightly above last year. On the output end, the stable performance of our Tankhouse resulted in 285,000 tonnes of cathodes produced. Sulfuric acid output increased by 5% to 583,000 tonnes, right in line with concentrate throughput. Wire rod output remained stable at 201,000 tonnes, while copper shapes output dipped by 15% to 34,000 tonnes. Lagging demand, trade barriers and imports were the main factors here. In contrast, flat rolled products and specialty wire increased slightly to 22,000 tonnes. Our output of other metals is another indication of the complexity of our feed materials and varies based on the content of those materials. Let me now take you through the market environment. This chart shows the development of our 4 key indicators since September 2023 based on market intelligence. On the downstream side, European spot copper premiums remained widely stable at a high level in fiscal year Q1. Please bear in mind that premiums for annual contracts differ from spot premiums and will become effective only from fiscal year Q2 onwards. Sulfuric acid prices showed another increase, a move supported by strong demand, especially from overseas markets. On the upstream side, RCs for recycling materials improved in Q1 of the fiscal year because higher metal prices increased the availability of scrap. We expect that this trend will take effect in our results with a time lag. Spot TC/RCs for copper concentrates stayed at low levels in fiscal year Q1, reflecting the tightness in the concentrate market. Our long-term supply contracts and diversified sourcing, however, help us manage this challenging environment. Let me now turn to the price environment for key metals and the U.S. dollar. As all of you have taken notice of in fiscal year Q1, gold and silver prices continue to rise and reached all new-time highs. Copper prices also moved up notably as well with an increase to close to $1,000 per tonne in December alone, with an increase of $1,000 per tonne in December alone. The favorable development of these 3 metal prices positively contributed to our metal result as we see later. Compared to Q1 of the last fiscal year, the U.S. dollar depreciated against the euro. Aurubis' long dollar position remains unchanged at approximately USD 530 million for the fiscal year. 54% of our U.S. dollar exposure is hedged at 1.125. For fiscal year '26, '27, around 40% of the exposure is hedged at a rate of 1.188. As a reminder, please note that there is no direct one-to-one correlation between our P&L and the price development shown here. We hedge part of our earnings and some of the effects are only visible with a time lag. Before we move on the details of our financials, I would like to share an update on our contracting season. Despite the challenges in the concentrate market, we have already secured a very high share of our supply for calendar year 2026. Through long-term contracts that target complex raw materials, we ensure reliable supply to our primary smelters. This also allowed us to close additional long-term contracts, including agreements with new mining projects. At the same time, we also ensure we have the flexibility to obtain additional volumes and steer our market presence as needed. For recycling, the market is still short term in nature and visibility is limited. Copper scrap availability still improved compared to the summer, a development supported by higher metal prices. This, in turn, allowed us to secure a supply of scrap that is enough to cover our needs until the end of the second quarter of '25, '26 at the very least. In the U.S., we are focused on securing the supply for Aurubis Richmond in line with the planned ramp-up. Finally, we are expanding our sourcing presence beyond Europe to broaden our supplier base at the same time as well. In the downstream business, we have mostly wrapped up a very successful sales campaign. Demand for our copper product remains high. This is especially true for wire rod, which we largely supply to the energy, infrastructure and communications sector. We remain on track, moving in the right direction with sustainability, our Tomorrow Metals commitment, foster customer relationships and helps generate new business. Demand for copper shape and flat-rolled products lagged somewhat behind the high demand for wire rod. This was mostly due to the reasons I already mentioned in detail. Looking at sulfuric acid, we are still seeing stable demand from the European chemical and fertilizer industries. Demand from overseas has also stayed high and is supporting the current market terms. Our asset sales book gives us good visibility in the summer despite the higher volatility on the spot market. This reinforces our confidence that we will be able to maintain this high level during this fiscal year. And now let me hand over to Steffen Hoffmann, who will take you through the details of our financials. Steffen Hoffmann: Thank you, Toralf, and a warm welcome from my side, too. Let me take you through the financial details of the first 3 months of 2025-'26 and touch on the KPIs in this chart. Revenues increased by 25% to EUR 5.3 billion, primarily due to higher precious metal revenues driven by the marked rise in metal prices. Gross profit was slightly lower at EUR 426 million versus EUR 433 million in the prior year quarter. Higher cost of materials more than offset the gross margin increase. Operating EBIT came in at EUR 101 million and operating EBT at EUR 105 million, which is 19% below the prior year level of EUR 130 million. Compared to the EBITDA, the decrease of the EBT was more pronounced than in the previous year. Personnel expenses increased by EUR 12 million and depreciation rose by EUR 10 million as planned due to strategic projects. The main positive impact on the result was a significantly higher metal result due to increased metal prices, especially for precious metals. Sulfuric acid revenues on par with the high prior year level and sustained higher copper product revenues provided additional support to the result. Markedly, lower treatment and refining charges with higher year-over-year concentrate throughput, along with a mild input mix-related decline in earnings from the processing of recycling material had a counteracting effect. In addition, anticipated higher expenditures for strategic projects had an adverse effect on the result. With an EBITDA slightly below the previous year, the net cash flow was at minus EUR 8 million, significantly below the prior year level of plus EUR 178 million due to reporting date related higher inventories, coupled with higher metal prices. Here, I would like to emphasize that this cash flow is a snapshot as of December 31, 2025, and inventory buildups will turn into cash flows in future quarters. In contrast, previous year's Q1 net cash flow was exceptionally high, considering the usual seasonal pattern. Operating ROCE, taking the operating EBIT of the last 4 quarters into consideration, decreased from 11.7% to 7.8%. This reflects lower earnings in previous quarters and higher capital employed due to continued investments. Looking at quarterly performance. Profitability improved significantly in Q1 of '25, '26 compared to Q4 of '24/'25. Revenues increased from EUR 4.4 billion to EUR 5.3 billion. Gross profit climbed from EUR 380 million to EUR 426 million, driven by a stronger metal result and good smelter performance in CSP. Operating EBT rose from EUR 68 million to EUR 105 million. The previous quarter was still affected by the scheduled major shutdown in Pirdop. One-off effects in the MMR segment also weighed on Q4 '24/'25. Net cash flow declined from EUR 319 million in Q4 to minus EUR 8 million in Q1, mainly due to the buildup of working capital at higher price levels, which will translate into future cash flows, as mentioned before. Coming to the gross margin. This slide shows the breakup on a group level. Total gross margin was around EUR 546 million, slightly above the prior year level of about EUR 534 million. Metal result was the main contributor to the gross margin and accounted for 45%. This is a step up from last year's 36% and reflects higher prices, especially for precious metals. Products and premiums were the second largest contributor and accounted for 33% of the gross margin. This share is broadly in line with the previous year, which underlines the stability of our downstream business. Higher earnings from products to come as of Q2 fiscal year. And finally, treatment and refining charges for concentrate and recycling input decreased to 22% of the gross margin, down from 31%. This was mainly driven by the marked decline of concentrate TC/RCs as well as slightly subdued RCs for the recycling material purchased in the months before. As Toralf mentioned earlier, improved availability and higher RC levels will support earnings with some operational time lag, most probably starting in Q2 of the fiscal year. Overall, strong metal prices and solid product demand more than offset headwinds from lower TC/RCs at the gross margin level. Coming to MMR. In the Multimetal Recycling segment, gross margin increased slightly from EUR 171 million to EUR 177 million. The main driver here was again a higher metal result that benefited from overall higher metal price levels. The strong increase of the metal result was, however, weakened by lower refining charges for recycling materials sourced in the previous months, coupled with a slight input mix-related drop in throughput. In contrast, operating EBIT declined from EUR 28 million to EUR 20 million and operating EBT fell from EUR 28 million to EUR 18 million. Higher expected costs and increased depreciation, among others, at Aurubis Richmond outweighed the gross margin uplift. Operating ROCE decreased to 0.4%, down from 5.5%. The central factors here were lower earnings and over 20% higher capital employed, mainly for Richmond. Please keep in mind that the rolling EBIT of the last 4 quarters includes quarterly EBITs that were impacted by one-off items. Operationally, the segment's performance was mixed. Input mix-related effects resulting from scrap availability during summer impacted the throughput of copper scrap and blister copper, which moved down from 92,000 tonnes to 83,000 tonnes. Throughput of other recycling materials, however, was stable at 112,000 tonnes, while cathode output in the segment increased slightly to 134,000 tonnes. In the next quarters, we continue to focus on stabilizing higher throughput levels, while enrichment revenues will gradually start to compensate the operating cost of the plant. And generally in MMR, RCs should pick up. In the Custom Smelting & Products segment, gross margin improved slightly from EUR 362 million to EUR 369 million. The powerful increase in the metal result was largely offset by the decline in concentrate TC/RC. The stable contribution of products and premiums to the segment's gross margin reflects just how robust our downstream business is. Scheduled comprehensive maintenance in Hamburg with an EBIT impact of minus EUR 6 million, general cost inflation and anticipated cost increases for strategic projects weighed on operating EBIT. It declined from EUR 125 million to EUR 122 million, while operating EBT decreased from EUR 131 million to EUR 113 million. Operating ROCE was 17.8% compared to 19.4% in the prior year quarter. This decline was essentially due to lower earnings. As in the MMR segment, the rolling 4-quarter EBIT level also took effect here. Concentrate throughput rose from 602,000 tonnes to 630,000 tonnes based on stable operations in Hamburg and Pirdop. In line with higher concentrate throughput, copper scrap and blister copper input increased to 32,000 tonnes and sulfuric acid output went up 5% to 583,000 tonnes. Cathode output reached 151,000 tonnes, which was due to temporarily lower current efficiency in Pirdop is only slightly below the previous year's level. Overall, we are satisfied with the segment's operational performance at the Hamburg and Pirdop plant. We are targeting ongoing high utilization levels to maximize copper supply to the markets. Let's now take a look at cost development in the group. Total costs amounted to about EUR 464 million compared to roughly EUR 441 million in the prior year quarter. This EUR 23 million increase was significantly driven by higher scheduled depreciation in the amount of EUR 10 million for the strategic projects, which are being executed right now. At about 35% of total costs, personnel costs increased slightly. The main factors here were collective wage increases and expanded staffing levels for our strategic projects. Other operating expenses declined slightly to 21% of total cost with logistics and administration as the main items. Active energy management and hedging helped keep energy cost inflation under control and stable at around 7% of total cost. Excluding depreciation, cash costs totaled EUR 401 million compared to EUR 388 million in the prior year. Turning to the cash flow bridge. In line with the operational performance of the business, operating EBITDA amounted to EUR 164 million. Compared to the previous year, the main deviation here is from the buildup of working capital, which was strongly influenced by higher metal prices. Inventories were EUR 495 million higher and receivables increased by EUR 176 million. Factoring was EUR 100 million lower than in last year's Q1. On the other hand, liabilities rose by EUR 404 million, partly offsetting the increase. The position other covers valuation changes for financial instruments that we are using for forward sales. In Q1 '25/'26, the noncash effect amounted to EUR 110 million. Taken together, this resulted in a net cash flow of minus EUR 8 million. Here, I would like to highlight once more that our cash flow is subject to intra-year volatility and that the working capital tends to normalize over the course of the fiscal year. Net cash flow at December 31 should be regarded as a snapshot, in particular, because factoring capacities have not been exhausted in Q1. Finally, we spent EUR 91 million in cash on investment activities. These were mainly linked to Richmond and the new Precious Metals Refinery in Hamburg. Total free cash flow for the first quarter came in at minus EUR 103 million. Before we move to our outlook and guidance, I would now like to take you through some of our balance sheet KPIs. The equity ratio on an operating basis was 49.9%. The slight decrease was caused by the balance sheet expansion driven by working capital that negatively offset the addition of EUR 81 million in earnings to the equity. Let us put the equity ratio into perspective, though. The close to 50% level is still very solid and clearly above our larger than 40% target. And in the next quarters, we expect to exceed the 50% mark again. The debt coverage defined as net financial liabilities over rolling EBITDA was around 0.6 in Q1. Again, the increase of this KPI was primarily the result of higher working capital. Our debt coverage is still well below the 3.0 ceiling. Capital expenditure was EUR 108 million compared to EUR 141 million in the prior year quarter. This quarterly decline reflects the progress on completed projects as well as our disciplined approach. When we take the investments made in our strategic projects in recent quarters in account, the operating capital employed was about EUR 4.3 billion. This represents an increase from the EUR 3.8 billion recorded at the end of Q1 '24/'25. Nevertheless, as a bottom line, it's fair to say that Aurubis remains solidly and conservatively financed. Let us now turn to our outlook for the key drivers of our business. Compared to last year's view on the markets, the outlook for our key macro drivers has improved overall. We all have followed the development of the metal prices. And since we last presented this chart, metal prices have reached even higher levels, which will positively impact our metal result. Regarding earnings from copper products, we anticipated strong earnings levels already last year. Still demand presented itself healthier than previously projected, which supports earnings from product sales even further. So both earnings drivers remain a green traffic light, however, even more positive than anticipated before. Furthermore, as I've mentioned earlier, we are seeing a stable, if not slightly increasing sulfuric acid demand. Our sales book now provides us with visibility into the summer of '26. So we are taking a slightly more positive view than we did at the end of '25 and correspondingly added a touch of green to the yellow traffic light. For recycling, material availability has improved somewhat due to higher prices, and we are seeing better market conditions than last summer paired with improved market visibility. At this stage, we maintain a cautious view as expressed by the yellow traffic light, but see the potential for an improvement in the coming months. The U.S. dollar-euro exchange rate remains an important factor as well, and we anticipate headwinds from the depreciation of the U.S. dollar versus the euro. Since we are somewhat mitigating the impact through our hedging strategy, we keep the yellow light here. While we are confident that we will be able to supply all our assets with raw materials, we are still seeing tight concentrate markets. Consequently, the red traffic light for concentrate TC/RCs remains, in particular, since we have seen a visible TC/RC decline versus the previous year and the corresponding effect in our gross margin. In summary, these developments provide us with higher confidence regarding the outlook for the business in the remainder of the fiscal year. Based on the improved market outlook that I've just shared with you, we have raised our full year guidance for fiscal year '25, '26 last week. As we have highlighted before, the continuous rise in metal prices will have a strong positive effect on the group's metal result. Moreover, we anticipate that higher earnings from copper products and lower concentrate TC/RCs will still be a net positive effect on the EBT. For Richmond, we expect to achieve breakeven on EBITDA level, meaning on EBT level, the contribution will still be a negative item. Finally, due to the recent depreciation of the U.S. dollar versus the euro, we factor in an additional headwind from foreign exchange. Therefore, we now expect operating EBT to be between EUR 375 million and EUR 475 million, up from EUR 300 million to EUR 400 million. And we now expect an operating EBITDA where the range has equally been lifted by EUR 75 million to be between EUR 655 million and EUR 755 million. By segment, we project an operating EBT of EUR 320 million to EUR 380 million for CSP, which is plus EUR 40 million and for MMR, an operating EBT of EUR 115 million to EUR 175 million, which is plus EUR 35 million versus prior guidance. As a result, we upgraded the operating ROCE forecast as well to between 9% to 11% at the group level, which is up by 2 percentage points versus the prior guidance. Breaking it down to the segment level, we anticipate ROCE between 13% to 15% for CSP and between 8% to 10% for MMR, also here up each by 2 percentage points as well. Furthermore, we have refined our net cash flow forecast and expect it to be above last year. This means net cash flow should exceed EUR 677 million for full year '25, '26. And finally, we expect free cash flow before dividend to be at least at breakeven for the full fiscal year. So in other words, we do expect that higher earnings levels will also result in higher cash flows. So the free cash flow guidance is slightly raised to at least free cash flow breakeven. Having said this, please bear in mind that in context of raw material shipments at record high metal prices, a certain degree of imprecision around the balance sheet date may be unavoidable. And with this, I'd like to hand back over to Toralf. Toralf Haag: Thank you, Steffen. Before we come to the final slide of our presentation, I would like to update you on the progress of our strategic projects. To sum up, our strategic projects continue moving forward and every day brings us closer to commissioning. By December 31, around EUR 1.4 billion, which is about 80% of the approved investment volume for strategic projects has been invested. In Hamburg, we successfully installed the converter for complex recycling Hamburg. This is a key project milestone and commissioning is planned for the first half of this fiscal year '25, '26. That puts it in the current quarter. In Pirdop, the Tankhouse Expansion will allow us to process all anodes produced on site. This will increase refined copper capacity by about 50% to around 340,000 tonnes. Commissioning is also scheduled for fiscal year '25, '26. In Richmond, we achieved a number of milestones that highlight the progress made on Phase 1. The first blister was shipped to Europe, generating the first revenues for the plant. Depreciation started in Q1 '25, '26, a signal of the site's technical readiness. The first complex melt was carried out on January 28, another important step in the ramp-up. Looking to the Phase 2, commissioning is still planned for this fiscal year. Reaching the end of our presentation on the first quarter of fiscal year '25, '26, I would like to summarize the key takeaways. We had a sound start to the fiscal year. A higher metal result and strong metal prices drove gross margin expansion despite lower TC/RCs. EBITDA of EUR 164 million and operating EBT of EUR 105 million were in line with market expectations and were carried by good operational performance. Net cash flow and free cash flow came in below last year, in particular on account of working capital buildup at higher metal prices. Operating return on capital employed was lowered by high investment in trailing earnings. However, as the projects ramp up, they will support returns over the medium term. The execution of our strategic CapEx program is on track. Complex Recycling Hamburg, the Tankhouse Expansion in Pirdop and Richmond Phase 2 are all scheduled for commissioning in '25, '26. For the full year '25, '26, we expect higher metal prices and stronger product business to offset the challenging raw material markets. Therefore, we now expect an operating EBT between EUR 375 million and EUR 475 million and a free cash flow before dividends to be at least at breakeven for the full fiscal year. And with this, I would like to hand back over to Elke Brinkmann. Elke Brinkmann: Thank you, Toralf and Steffen. Before we open the line for your questions, I would like to provide you with an outlook on the next event. Next week on Thursday, February 12, we look forward to welcoming many of our shareholders at our Annual General Meeting. And on May 11, we will publish our half year results for '25, '26. With that said, I hand over to the operator for the first question. Operator: [Operator Instructions] The first one is from Adahna Ekoku of Morgan Stanley. Adahna Ekoku: I've got a question on your free metal hedging. So at the Capital Markets Day, you outlined that given the elevated metal prices, you would keep your remaining open position that you had for the rest of this year unhedged. Is there any more color you could give us now on where this hedged versus unhedged exposure is for the rest of the year? Steffen Hoffmann: Yes. Thanks, Adahna, for the question. I mean, as we now have 3 months, let's say, advanced in the fiscal year, we've also advanced a bit on our hedging position. I think what I can share here is that for copper, we are hedged for this fiscal year at around 60%. And for gold, silver, talking about the main pieces on precious metals, we are hedged at around 70% for this fiscal year. Operator: The next question is from Bastian Synagowitz of Deutsche Bank. Bastian Synagowitz: Maybe starting with -- also with the metal prices, I guess we've seen obviously an amazing volatility there. Given the higher value in metals, do you see that your metal terms are changing for the procurement of raw materials? Or do you still see a pretty stable content in free metals in tonnage terms? That's my first question. Toralf Haag: Yes. Bastian, no, we don't see any major change in our contract terms because of higher metal prices. Bastian Synagowitz: Okay. Great. And then just moving on to Richmond. I actually touched on that in the presentation. But just on the current weather situation in -- I guess, in the region, has this become effective for the supply of the business? I guess you said that you are relatively well supplied for scrap overall for the upcoming quarter. But I just wanted to understand how far maybe the weather is causing any effects here upstream or downstream? And then also, have you advanced on the next possible steps for U.S. footprint? If you could give us an update there, that would be great. Toralf Haag: Yes, Bastian, on Richmond, the weather conditions U.S. don't have any major effect on our supply situation. We are currently well supplied with materials for our ramp-up for, I would say, until summer of this year. We also have the different materials available. So no impact of the weather on our tonnage or mix situation when it comes to recycling materials for Richmond. Next steps, we are still in the evaluation phase. We are also in contact with the U.S. government for potential funding. But we stick to our milestone. First, we want to get Phase 2 up and running in the course of this fiscal year, and then we will make a decision on further expansion in the next fiscal year. Bastian Synagowitz: Got you. Okay. Great. And then lastly, on, I guess, the European market. What are you making out of the European plans for securing access to critical raw materials? I guess we have had a bit of noise on that front in the last couple of days. So what does this mean for you? And are there any implications to you on the project pipeline as well? Toralf Haag: Of course, we welcome this, this attention to critical materials in Europe. We hope that also new mining projects will be started in Europe in order to increase the independence of Europe in the magnitude or in the direction of raw materials. Short term, we don't expect any major effect because it takes a while until these mining projects get started or help us supply more concentrates out of mines. But mid to long term, this we see a positive effect for us. We also hope that with this Critical Raw Materials Act that also there will be more focus on the support for the competitiveness of European raw material companies who use raw materials and who produce metals. So we expect more support from the government here. So we see this positive. Operator: [Operator Instructions] The next question is from Maxime Kogge of ODDO BHF. Maxime Kogge: So first question is on the consolidation wave that we are seeing on the mining side. So now there are talks between Glencore and Rio. There has been already talks concluding into a merger between Anglo and Teck. What's your take on that? Because I guess that from the smelting point of view, it's not necessarily great to have this consolidation. You prefer to speak to Rio and to Glencore separately than to a global player? And would you see the need as well to consolidate on the smelting side to somehow mirror this consolidation on the mining side? Toralf Haag: Yes. Thank you for that strategic question. Of course, we monitor these mergers quite intensively. We don't see a big negative effect. We rather see a neutral effect on us because our contracts are, in most cases, directly with the mines, and we have long-term relationships, as you know, with many different mines. So we continue to -- we expect that these long-term relationships and long-term contract agreements will continue. Consolidation talks on the smelting side, we don't see right now. We have a good market position in Europe. We are building up a good market position in the U.S. with our focus on Europe and the U.S. and our -- as is market position in Europe and our to-be-built market position in the U.S., we feel strong enough to stay independent and not have any further consolidation. So no consolidation plans from our side on the smelting side. Maxime Kogge: Okay. And just a second and last question is on the wire rod. So this is really the product that is in hot demand right now. So I guess that you're basically at full capacity there in Europe. So would you see a case for expanding your capacity there? The current program doesn't plan any big capacity increase in Europe. Is this a segment where you would perhaps be more inclined to envisage that thing? Toralf Haag: As you rightfully said, there is strong demand for wire rod. We see that across industries. We are almost at our capacity, where we still have a capacity limit where we still have some capacity left. First, we want to use or expand -- materialize this excess capacity that we have. And then in the second step, we would think about further expansion. But right now, there are no concrete plans. Operator: Next question is from Daniel Major of UBS. Daniel Major: Just first and a couple of follow-ups on the existing questions. You mentioned 60% of copper and 70% of precious were hedged for this year. What sort of levels are those hedges at? Steffen Hoffmann: Yes, Daniel, I think that's the $1 billion question, right? So I think what I can share is that the guidance increase of the EUR 75 million, which is basically linked to more positive view on metals, a very positive view as well on our copper products, a bit more cautious view on Richmond, and obviously, also an update on the foreign exchange. Those comments that we were making were based on, let's say, on data points and on market information from the beginning of this calendar year. So that gives you a rough impression where the metal prices were there. And obviously, we do not know where the next months will go to. But as I said, in the midpoint of the guidance grounds on premises of early calendar year '26. Daniel Major: So if prices persist at this level, you'd be in the range. Is that a fair assessment? Steffen Hoffmann: Can you repeat if prices... Daniel Major: If spot prices were the same for the rest of the year, you would be within the range. There's no upside risk of spot pricing. Is that the right way of thinking about it? Steffen Hoffmann: That's correct. If prices would stay on those levels of early beginning of January, then we would see ourselves at the midpoint of the range. And if prices would be significantly higher than that or significantly lower than that, then it could be the one or the other. Daniel Major: Okay. Second question follows on from Bastian's question a little bit, but specifically on scrap export restrictions from Europe. Is there any update on time line or kind of parameters around that? Toralf Haag: No, Daniel, there's unfortunately no update on the time line. We are in close contact with the political authorities here. They are willing to do something, but we have no concrete time line. Daniel Major: Yes. Next question, just going back to your slide with the variables. So Slide #5, you've seen a pickup in spot refining charges and sulfuric. In terms of the scrap market, you're mentioning improving availability because of the higher price environment. Do you think that's sustainable? Or is this just a destocking of available inventory of low-quality scrap because of the high pricing environment and that will normalize? Or is this a sustainable improvement in scrap availability? Steffen Hoffmann: I mean, Daniel, on -- let's say, we all know that on the scrap side, the visibility is limited. So kind of it's the next 3 months. But we do think that for now, it's -- let's say, for the next few months, it is sustainable. For the next few months, we count on higher RCs starting now with our next Q2. We see it coming. Let's say, new material that's going in is coming in with better RCs than the material we were putting in the smelters in Q1, having been sourced earlier or in the mid of '25 or in the fall of '25. So for the foreseeable few months, we think it's sustainable. And obviously, it will be a function of copper price developments going forward. Daniel Major: And then kind of similar question on the sulfuric market. It's not a market I know very well at all. What are the dynamics that have driven the recovery? And again, what's the outlook as you see it in the near term? Steffen Hoffmann: I mean also here, Daniel, let's say, visibility is a bit limited. But as I can say it that way, we see it at the time of the CMD or when we did the full year disclosure end of last year, we were giving the sulfuric acid market a yellow traffic light, yellow meaning same level as the very good level last year. And now we added some shade of green to it, meaning it's a bit better than that. And we think this is market driven in some of the subsegments, basically in the overseas -- from our perspective, in the overseas subsegments of the sulfuric acid prices. So here, it's a slight further improvement on real good levels that we see. Daniel Major: And then final one, you also highlight the positive contribution from the strength of products, which is predominantly wire rod. Is there any improvement in other end markets you're seeing coming through? I noticed you had a sequential year-on-year decline in flat products, but is there any signs of life in the other segments outside of wire rod? Toralf Haag: Well, as you know, automotive is still at a low level. We see no major improvement there, but we see slight increases on the construction and infrastructure industry. So we see a slight pickup here, but no major pickups yet. Operator: At the moment, there are no more questions in the queue. [Operator Instructions] All right. There is a follow-up from Bastian Synagowitz from Deutsche Bank. Bastian Synagowitz: Just on Richmond, I think your overall commentary there on the ramp-up sounded quite positive, but you said in the guidance mix, you basically marked it down a little. I guess Richmond is one area where at least on pretax level, I guess, the FX should actually work in your favor. So what's been driving the markdown? Steffen Hoffmann: Yes, Bastian. At the CMD, I think we had a chart that indicated that EBITDA would be a positive level. I think from the scale one could derive that it was, let's say, a plus EUR 20 million EBITDA figure. And as Toralf has said, we feel well with what we have on stock. We feel well also with the commercial terms. I mean what we talked about RCs improving now in Europe. We see similar things in the U.S. So the reason why we scaled it down a bit by the EUR 20 million roughly that I said is basically a few weeks slower ramp-up than we thought last fall. But I mean, here, you see we are very granular. It's just a few weeks. We are happy that we had the first revenues in Q1. We are happy that we have the depreciation, which is a sign that the system is up and running. But it's really granular, perhaps at the end of the year, we are missing very few weeks of revenues, and that would be it. Operator: So at the moment, there are no questions in the queue. So with that, I would like to close the Q&A session, and I'm handing the floor back over to the host. Elke Brinkmann: Yes. Thank you. The IR team will, of course, be happy to answer any further questions you may have. We would now like to close today's conference call, and thank you for your attention. We wish you a pleasant rest of the day. Thank you, and goodbye.
Operator: Good day, and thank you for standing by. Welcome to the NOV Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host for today, Amie D'Ambrosio, Director of Investor Relations. Amie, please go ahead. Amie D'Ambrosio: Welcome, everyone, to NOV's Fourth Quarter and Full Year 2025 Earnings Conference Call. With me today are Jose Bayardo, our Chairman, President and CEO; and Rodney Reed, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis, for the fourth quarter of 2025, NOV reported revenues of $2.28 billion and a net loss of $78 million or $0.21 per fully diluted share. For the full year 2025, revenues were $8.74 billion and net income was $145 million or $0.39 per fully diluted share. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation. Now let me turn the call over to Jose. Jose Bayardo: Thank you, Amie, and thank you, everyone, for joining us this morning. I want to start by recognizing and thanking Clay Williams for his leadership and his lasting impact on NOV. Clay served as NOV's CEO for over 10 years, but he helped build and shape this great organization and its incredible culture over nearly 30 years. As CEO, he led this company through some of the most challenging industry cycles while setting a high standard for integrity, perseverance and commitment to all of NOV's stakeholders. NOV is the great company it is today due to his exceptional leadership and all of us wish him the very best in retirement. Turning to our results. NOV delivered an outstanding fourth quarter to cap off a solid year, executing well in what continued to be a turbulent market environment. Fourth quarter revenue improved 5% sequentially but decreased 1% year-over-year against a global drilling activity decline of 6%. EBITDA was $267 million, up $9 million sequentially. For the full year, revenue decreased 1% to $8.74 billion and EBITDA exceeded $1 billion for the third straight year despite the challenging market environment. I'm proud of the way our team performed and pleased by the demonstrated resilience of our diverse portfolio of market-leading technologies. We achieved a full year book-to-bill of approximately 91% on a 15% increase in revenue out of backlog, and we ended the year with a total backlog of $4.34 billion. 2025 orders were led by demand for offshore production technologies, resulting in our offshore-related backlog growing more than 10% during the year, supported by demand for subsea flexible pipe offshore construction equipment and processing modules. Strong demand for offshore equipment and solid execution on our backlog more than offset lower demand for aftermarket parts and services from our offshore drilling contractor customers, leading our Energy Equipment segment to post its fourth straight year of revenue growth and margin improvement. Energy Equipment's strong performance mostly offset a 4% decrease in revenue from our shorter-cycle, more North America land-weighted Energy Products and Services segment. Rodney will provide more color on operating unit performance, but both segments performed well in a challenging market due to continued efforts to drive additional efficiencies and process improvements. Those efforts enabled us to reach our second consecutive year of converting over 85% of our EBITDA to cash, resulting in $876 million in free cash flow in 2025 and $1.8 billion in free cash flow over the last 2 years. Today, NOV is entering 2026 in a position of strength. We have strong market positions in almost everything we do, a fortress balance sheet, and we have what I believe is the best team of people in the industry. They believe in our mission to lower the marginal cost of energy production and help deliver reliable, affordable energy to the world. They also take great pride in providing exceptional service for our customers and come to work every day with a continuous improvement mindset. While NOV is in a strong position, we see additional opportunities to drive value for our shareholders over the coming years. As we look forward, there are 2 simple overarching areas of emphasis on which we are focused. One, continue to drive operational efficiencies; and two, lean into the many growth avenues we have in front of us. NOV has done a significant amount of heavy lifting over the last 10 years, actions that were needed to navigate through the repercussions of the November 2014 oil price war, the global pandemic and the dramatic shift from investments in offshore activity to U.S. shale. Our work included consolidating, repositioning and simplifying our business and improving operational and back-office efficiencies. This work continues today with our ongoing $100 million cost-out program, multiple facility consolidations and exiting underperforming product lines and geographic markets. While we are well beyond the low-hanging fruit, we still have opportunities to drive efficiencies, grow margins and increase return on capital, and we are accelerating the pace and increasing the scope of our efforts. As we drive efficiency and productivity gains, they are being offset by lower activity levels, tariffs and inflation. Still, we are driving more change to make the organization better every day, and our work is positioning NOV to outperform over the long run. There are many indications of the progress we are making with a number of our operations achieving record performance, some of which Rodney will highlight. We also see progress in numerous KPIs we measure and benchmark in our businesses, including cost of quality, which measures warranty, scrap and rework rates. We've seen significant improvement in this area over the last few years. And today, most of our operations are well within the top quartile of performance. Benchmark not only against oilfield equipment companies, but also leading industrial manufacturing peers. This also shows up in recognition from our customers, such as our subsea flexible pipe business receiving their top customers Best Supplier of the Year award for the third consecutive year. We've also driven improvements in health and safety KPIs such as total recordable incident rate and lost time incident rate over the last few years. Better HSE performance means our employees return home from work safely and in good health. Additionally, we are convinced that strong HSE performance reflects a culture that has pride, accountability and ownership in its operations, which translates into higher quality, reduced downtime and better service for our customers. Another sign of operational and process efficiency is our cash conversion cycle, which has benefited from the work we've done to improve all facets of our operational processes. We exited 2025 with a cash conversion cycle of 119 days and a working capital to revenue run rate of less than 22%, down from 143 days and 28.8%, respectively, in 2023, freeing up around $630 million of cash. While we will continue to focus on optimizing our portfolio, lowering costs, improving margins and driving efficiencies to increase return on capital, the actions we are taking also enhance our ability to lean more aggressively into both organic and M&A growth opportunities. We've always been disciplined in our allocation of capital. But over the past few years, we significantly raised the hurdle related to our criteria for acquisitions. In 2025, we did not complete a single acquisition. It's not that we're no longer interested in pursuing acquisitions. We've just set a much higher standard for them. For us to pursue an acquisition, it should fit within 1 of 3 categories: one, core business technology bolt-on, meaning a business or a technology that replaces or supplements a current core offering: two, direct consolidation opportunities; and three, larger acquisitions that already have scale, competitive advantage and compelling growth prospects. Any acquisition must also be accretive to our margins, earnings, cash flow and return on capital. Also, the more efficient our internal processes are, the better we are able to leverage NOV's global manufacturing, supply chain, marketing and other functions to improve profitability and grow the acquired business, making our case for investment more compelling. We expect all of our businesses to be leaders in what they do. We must either be a top 3 player in the market or have a compelling strategy and path for how we get there. If we do not have an achievable path, we will plan to exit the line of business. Today, we are a top 3 player in most everything we do. The combination of technology leadership, exceptional service and scale can be self-perpetuating, driving market leadership and additional growth opportunities. Complacency kills, and we will not lose sight of the continuous need to invest in product development and innovation. The success we are having with our new products and technologies is driving increases in market share and additional growth opportunities become even more compelling with the type of market we see emerging in late '26 and into 2027. Our objective is not growth for growth's sake, it is about value creation. We will invest in areas where we have clear competitive advantages, high barriers to entry, technology differentiation and a high likelihood of outsized market growth, all of which would be expected to result in investments that are accretive to margins and return on capital and drive value for our shareholders. Our market outlook naturally informs how we think about deploying capital, and 2026 will likely continue to provide a challenging market environment. However, our mid- to longer-term outlook is compelling. The current consensus view is that the oil market is currently oversupplied by between 2 million to 3 million barrels a day. This is due to an oil supply wave coming from OPEC's unwinding of production cuts and from pandemic era non-OPEC FIDs that are now coming online. Despite the excess supply, oil prices are holding up reasonably well due to geopolitical risk and increased storage capacity in Asia. However, with OECD inventories at the high end of their 5-year range and total global inventories that appear to be at their highest levels since 2021, there's downside risk to commodity prices. As a result, we are seeing customers take a cautious approach to the start of 2026, but we expect oil markets will start coming back into balance in the second half of the year, driving higher levels of customer spend and setting up a much healthier market in 2027 and beyond. Overall, we expect global industry spend and drilling activity to decline slightly year-over-year. In the U.S., we expect activity to be down mid-single digits year-over-year due primarily to the low activity exit rate from 2025 and further declines in oil-directed activity that will be offset by higher activity in gas basins. Slightly longer term, we expect U.S. short-cycle activity to remain sensitive to price signals, resulting in a modest recovery in activity by late 2026 and early 2027. We believe fiscal discipline among operators due in part to concerns related to depth and quality of drilling inventories and the state of the service complex's asset base will constrain activity growth. Capacity has moved overseas and attrition from the wear and tear of equipment operating 24/7 has taken its toll. Any increase in activity levels will likely require a disproportionate amount of demand for capital equipment, creating a compelling market opportunity for NOV. Longer term, we expect U.S. activity to realize modest but consistent growth to maintain a long production plateau as unconventional basins continue to mature. In international markets, we expect activity will be flat to up slightly in 2026, driven by rigs going back to work in Saudi Arabia and by the expansion of unconventional activity in international markets. This increase in unconventional activity throughout the Middle East, Latin America and Australia will continue to drive investments in the high-spec drilling, completion and production equipment needed to efficiently develop these resources, almost all of which NOV provides. Additionally, we see meaningful potential in Venezuela for us to help get the industry back on its feet over the longer term. This will require significant investments in capital equipment. NOV has a long and proud history in the country that began back in 1949. We employed over 450 people there before we had to shut down our operations. Since then, we have continued to sell equipment and spare parts to support major IOCs Venezuelan operations. And just over the past several weeks, we've received new orders with a value that exceeds the total amount of revenue we've generated during the past several years while supporting this operator's activity in the country. Given our history operating in the country, we will quickly ramp up support for our customers when it becomes appropriate to do so. Moving to the offshore markets. First, I'll talk briefly about what we see in the construction space, then cover production and drilling markets. NOV is a leading provider of critical cranes and deck machinery for drilling rigs, offshore support vessels, or OSVs, cable and pipe lay vessels and wind turbine installation vessels or WTIVs. Demand for new WTIVs has been soft, impacted by cost inflation, supply chain pressures and higher borrowing costs for developers. While we booked 1 order in 2025, the outlook for offshore wind has deteriorated with the latest forecast for turbine capacity additions through 2030 down over 35% since this time last year. As a result, offshore wind contractors are cautious and there is poor visibility into future orders. However, demand for cable lay vessels needed to connect power from the still growing number of offshore turbines to shore has remained solid with 2 orders in 2025, including 1 in the fourth quarter. We expect this level of demand to continue through 2026 with longer-term demand contingent on the ultimate pace of offshore wind development. We're seeing strong demand for our offshore cranes with our operation reaching its highest level of revenue in over 10 years. This demand has been led by operators of OSVs, where the average age of the global fleet is now almost 20 years, approaching a typical 25-year life and giving us confidence that demand will remain solid over the coming years. Turning to offshore production and drilling equipment. Industry forecasts suggest 2026 will be another year of lower spending, down low to mid-single digits. While we do not disagree with this view, the market is nuanced, and we believe the offshore market is rapidly nearing the beginning of a strong extended up cycle. Over the past decade, the offshore industry has fundamentally changed. Improved project execution, greater standardization, industrialization of infrastructure and better technology have materially lowered breakeven costs. NOV's drilling and production technologies have contributed to this emerging renaissance. Our automation packages, digital solutions and other equipment have improved drilling efficiencies. And the industrialization we've applied to building gas and fluid processing modules for FPSOs has helped lower costs. Additionally, operators are now benefiting from artificial intelligence using the latest processor chips that enable quicker iterations and better subsurface interpretations to reduce time, risk and costs associated with deepwater exploration. All of this has meaningfully improved offshore economics with breakevens in many areas now falling below $40 per barrel. Lower costs, along with a growing need to offset structural production declines are increasingly positioning long-cycle offshore barrels to supplant short-cycle North America shale as a source of incremental supply, supply that is needed to feed the world's growing demand for energy and which will reinvigorate offshore exploration. We're already seeing many IOCs planning to significantly increase their deepwater exploration budgets in the coming years, some by as much as 50%. In the offshore production space, we are leaders in providing most of the critical components outside of power and compression for FPSOs and mobile offshore production units. We also provide mooring and fluid transfer systems and other equipment for FLNG projects. 2025 was a massive year for deliveries of FPSOs with 15 vessels starting operations, many for projects sanctioned before the pandemic. Only 5 new FPSO FIDs advanced during the year, while others were postponed due to higher costs, supply constraints and macroeconomic uncertainties. Over the last year, operators and suppliers have been working together to lower upfront capital costs by evolving designs of large FPSOs to smaller to midsized units optimized for average anticipated field production rather than maximum throughput. The projects are now starting to move forward. In 2026, we see the potential for up to 10 FPSO FIDs and expect demand to remain strong with an average of 8 FIDs per year through 2030. Notably, while we expect the average size of FPSOs to decrease, we see a higher proportion of FPSOs destined for gassier markets in harsher environments, which plays into NOV's strength in gas and condensate processing and in quick disconnect turret mooring systems. Lastly, in offshore drilling markets, we are seeing green shoots with growing indications that the white space for our offshore drilling contractors is beginning to shrink. Our customers are seeing an increase in the pace of contracting and the average duration of new contracts is increasing significantly, which we believe reflects building momentum for long-term offshore developments. From September 2025 through January 2026, there have been 59 floater contracts awarded in comparison to only 33 during the same period last year. Additionally, as of year-end 2025, public open tenders for all offshore rigs reflected approximately 30% more minimum rig days relative to open tenders at year-end 2024. That number increases to over 100% if you consider only open tenders for floating rigs. While most new contracts are scheduled to begin in 2027, our offshore contract drilling customers typically call us as soon as contracts are signed to begin preparing rigs to go back to work. This drives demand for service and repairs, spare parts, recertifications and capital equipment upgrades. We've now realized 2 straight quarters of increased spare part bookings and expect orders to improve further in the second half of the year. We also believe the stage is set for an extended recovery as the call on production from deepwater increases, driving the industry to get back to work. We're extremely excited about NOV's future and the market environment we see unfolding over the next several years. We performed well in 2025, reflecting the strength of the diversity in our portfolio and the great work our team is doing to execute well in a tough environment. Rodney? Rodney Reed: Thank you, Jose. Consolidated revenue for the quarter was $2.28 billion, an increase of 5% sequentially and down 1% year-over-year. Net loss was $78 million or $0.21 per fully diluted share, impacted by a higher effective tax rate from valuation allowances on deferred tax assets and a higher mix of foreign earnings. The company also recorded $86 million within other items, primarily related to the impairment of goodwill and long-lived assets. Adjusted operating profit was $177 million, or 7.8% of sales and adjusted EBITDA totaled $267 million, representing 11.7% of sales. Sequentially, margins benefited from strong operational execution, offset by a less favorable mix of business and higher tariff expense. Our team delivered another strong quarter of free cash flow generation, totaling $472 million in the quarter. As Jose mentioned, free cash flow was $876 million for the full year, our second consecutive year with an EBITDA to free cash flow conversion rate of over 85%, representing our best 2-year free cash flow in 10 years. Working capital as a percentage of revenue run rate decreased to 22%, our lowest level in 10 years. We continue to execute on our return of capital program. During the quarter, we repurchased 5.7 million shares for $85 million and paid dividends of $27 million, bringing total capital return to shareholders to $505 million year-to-date. This includes a supplemental dividend of approximately $78 million paid in the second quarter. In the past 2 years, we've returned $842 million to our shareholders while increasing our cash balance by $736 million. Through our disciplined share repurchase program, our current shares outstanding are at their lowest level in 18 years. Our balance sheet remains strong with net debt-to-EBITDA at 0.2x, and we remain committed to our return of capital framework. For the quarter, tariff expense was $25 million, increasing around $8 million sequentially. In the current regulatory environment, we expect our tariff expense to slightly increase in the first quarter, leveling off at a similar amount for the remainder of 2026. We're seeing an increased cost in our supply chains from secondary impacts from tariffs, including sizable increases for items like Tungsten carbide. We continue to focus on our supply chain and execute strategic sourcing initiatives to reduce tariff impacts. Our efforts to reduce structural costs, standardize and simplify processes and upgrade systems to improve productivity are progressing as planned. These programs are on track to deliver over $100 million in annualized cost savings by the end of 2026, although tariffs and other inflationary impacts remain headwinds. As Jose mentioned, we expect overall upstream spending to contract slightly from 2025 levels with reductions in North America being greater than international and offshore markets. We expect this will lead to slightly lower revenue in 2026 with results being more weighted to the second half of the year and full year EBITDA in line to slightly lower than 2025. Given the strong fourth quarter collections and anticipated timing of progress billings on projects, we expect EBITDA to free cash flow conversion to decrease to between 40% to 50% for 2026. Capital expenditures for the year should be between $315 million and $345 million. Higher expected foreign earnings will likely lead to a higher effective tax rate of around 34% to 36%. Turning to segment results. Our Energy Equipment segment fourth quarter revenue was $1.33 billion, up 7% sequentially and 4% year-over-year. Adjusted EBITDA for the fourth quarter was $180 million or 13.5% of sales, driven by solid execution on a higher quality backlog and further strength in our offshore and production-oriented businesses. As Jose mentioned, this represents 4 years of consecutive revenue and margin growth with annual revenue increasing almost 60% over that time. Capital equipment sales accounted for 63% of the segment's revenues in the fourth quarter of 2025, increasing 8% sequentially and 15% year-over-year, led by growth in our subsea flexible pipe, Process Systems and Marine Construction business units. Aftermarket sales and services accounted for the remaining 37% of revenue, growing 6% sequentially, but declining 12% year-over-year, which I will discuss momentarily. Capital equipment orders for the quarter were $532 million and $2.34 billion for the full year, resulting in a book-to-bill of 91% for 2025 and backlog at the end of the year of $4.34 billion. Orders during the quarter were led by a newbuild offshore jack-up rig equipment package, additional scope on offshore production projects, subsea flexible pipe, subsea cranes and a cable lay vessel. These bookings reflect the diversity of end-use markets where NOV has leading positions and technologies critical to our customers. We continue to have a constructive outlook on bookings and expect the full year 2026 book-to-bill to be near 100%. Our Subsea flexible pipe business delivered another exceptional quarter, achieving its highest quarterly revenue and EBITDA on record for the second consecutive quarter. Backlog since the end of 2023 has doubled, while annual shipments have increased around 50%. Margins remained robust, driven by better quality backlog and operational execution. Production levels set new records as the team continues to produce high-quality, on-time deliveries, earning further recognition from customers for reliability, quality and consistent execution. Another sizable project was booked in the fourth quarter, and we expect strong bookings in the first quarter of 2026. Given the expectations for growth in greenfield projects, tiebacks and an increased need to replace aging pipes, the outlook for this business remains bright. Our Marine and Construction business achieved an upper single-digit increase in revenue sequentially and a sizable increase compared to the fourth quarter of 2024, driven by higher revenue from cranes as well as pipe and cable A systems. During the year, this business has booked orders for critical equipment supporting cable A, FLNG, FPSO, offshore supply and wind turbine installation vessels. As Jose mentioned, we expect an increase in FPSO and FLNG-related awards, which should drive incremental demand for our gas and liquids processing systems and our mooring and fluid transfer systems over the next several years. Our Process Systems business delivered solid performance during the fourth quarter with revenue slightly outpacing last quarter's record revenue. Compared to the fourth quarter of 2024, revenue was up more than 40%, supported by continued strong activity across offshore production and onshore gas markets, particularly in the Middle East. For the full year, the business delivered more than 30% growth, reaching its highest ever revenue and EBITDA. Bookings for the year doubled compared to 2024. During the quarter, the business secured key awards for a gas dehydration unit in Saudi Arabia and an expansion of scope in existing North Sea project. Representing over 40% of 2025 business unit bookings, demand for MEG systems remains strong, driven by offshore projects and large onshore gas field expansions. Also, the business is seeing increased opportunities for brownfield applications in our produced water technologies. Our book-to-bill over the past 3 years in subsea flexible pipe, process systems and marine construction has exceeded 120% with backlog growing nearly 40%. These businesses represented over 70% of total energy equipment bookings for 2025, and we anticipate continued strong demand as momentum builds and FIDs increase in offshore markets. Revenue from our drilling capital equipment business during the fourth quarter experienced a year-over-year decline in the low teens percentage range, but notably increased nearly 10% sequentially. We are encouraged by recent contracting activity among our offshore drilling customers, which helped capital equipment orders improve sequentially. We delivered our 14th high-specification land drilling rig manufactured in Saudi Arabia and expect a solid cadence of rig deliveries in 2026 and beyond. And as previously mentioned, we secured a drilling equipment package for a newbuild jack-up rig being constructed in Saudi Arabia. Continued engagement with customers as offshore tendering remains active is leading to an increase in demand for select upgrade opportunities, including BOP-related equipment, managed pressure drilling and automation and robotic systems. We're having more constructive dialogue around future opportunities, positioning the business to benefit as offshore drilling activity should improve later this year and into 2027. Revenue for intervention and stimulation capital equipment declined 10% year-over-year, but increased substantially compared to the prior quarter, driven by solid demand for coiled tubing equipment and wireline equipment. During the quarter, we shipped new coiled tubing equipment to the North Slope and the U.K. and wireline equipment throughout the Middle East. New orders included 2 dual trailer large-diameter CTU units with 50,000-foot reels and injectors. Even with constrained budgets for our North America customer base, book-to-bill for the year was 94%, primarily supporting international markets, which more recently represents about 50% of the business' total revenue. Turning to aftermarket portion of the Energy Equipment segment. In our drilling equipment business, fourth quarter revenue for aftermarket parts and services was down in the mid-teens percentage range year-over-year, but increased nearly 10% sequentially. Spare parts bookings for the fourth quarter were above their trailing 8-quarter average, reaching their second highest level in the past 6 quarters. Aftermarket revenue for our Intervention and Stimulation Equipment business was down mid-single-digit percentage sequentially and low double-digit percentage year-over-year. The year-over-year change was due to lower sales of spare parts and a decrease in rentals resulting from reduced completion activities in North America, partially offset by higher coiled tubing, repair and service activity. For the first quarter, we expect Energy Equipment segment revenue to increase 3% to 5% year-over-year with EBITDA in the range of $145 million to $165 million. Moving to the Energy Products and Services segment. Our Energy Products and Services segment generated revenue of $989 million during the quarter, representing a sequential increase of 2%, driven by higher sales of the segment's composite solutions, seasonal bulk sales of downhole products and stabilizing activity in the U.S. and the Middle East. Compared to the fourth quarter of 2024, segment revenue declined 7% and adjusted EBITDA decreased to $140 million or 14.2% of sales. The year-over-year decline was driven by lower drilling activity in the U.S., Saudi Arabia and Argentina. Lower volumes, increased tariff expense and other inflationary pressures more than offset cost control efforts and efficiency improvements, resulting in larger-than-normal EBITDA decrementals year-over-year. In North America, the segment continued to outperform underlying activity levels. Market share gains and increased adoption of new technologies contributed to a modest increase in revenue year-over-year despite a 6% decline in rig count. Our strong market positions in Saudi Arabia and Argentina hurt our performance in 2025 as drilling activity declined. However, we expect meaningful activity improvements in those markets progressing through 2026. For the fourth quarter, the sales mix within Energy Products and Services was 49% service and rental, 33% capital equipment and 18% product sales. Revenue from services and rentals declined 7% year-over-year, driven primarily by softer global activity levels. This decline was partially offset by increased adoption of NOV's wired pipe enabled downhole broadband services, DBS, and continued market share gains across several offerings. Revenue from NOV's DBS services more than doubled compared to the prior year, driven by increased activity in the North Sea, where technology is enabling enhanced geosteering and faster drilling in complex long lateral wells. During the quarter, a North Sea operator highlighted the value of high-frequency downhole data and enabling faster and more confident decision-making, crediting the technology with enabling the drilling of a reservoir section that likely would not have been achievable without real-time data transmission. NOV's drill bit rental business also finished the year strong, capturing additional market share across U.S. land markets and driving a revenue increase of about 20% in the region for the full year compared to 6% decline in U.S. rig count. Across the broader services portfolio, softer activity in Saudi Arabia, North America and Latin America reduced demand for rentals of downhole tools, solids control services and tubular inspection operations. These declines were partially offset by growing adoption of our advanced technologies into new markets and higher activity levels in the UAE. Sales of capital equipment declined in the low single-digit percentage range year-over-year, but increased at a high single-digit rate sequentially, driven by a recovery in shipments of composite solutions. The year-over-year decline reflected strong shipments of composite pipe for the Middle East and FPSO vessels in the prior year that did not repeat, partially offset by continued strength in demand for fuel handling tanks and large diameter composite pipe supporting produced water takeaway capacities in North America. Our composite business experienced its highest annual revenue in history during 2025 with fourth quarter bookings reaching their highest level in 3 years, with strong demand from multiple end markets, including fuel handling, where orders doubled from 2024. While we expect to see typical first quarter seasonality, demand remains supported by ongoing investments in infrastructure and offshore developments. Our Tubular Products business, which includes drill pipe and large diameter conductor pipe, saw orders for drill pipe in the second half of 2025 significantly outpaced the first half, leading to a high single-digit revenue increase year-over-year. However, timing of orders for our large diameter conductor pipe led to a year-over-year decline in revenue for this product line, which will also have a negative effect for the first quarter of 2026. Revenue from product sales increased modestly sequentially during the quarter but declined in the mid-teens percentage range year-over-year. The year-over-year decline reflected lower industry activity levels, particularly impacting typical year-end bulk purchasing in the Eastern Hemisphere of our downhole drilling tools and drill bits. Sequentially, strong shipments of completion tools to customers in the Middle East, Argentina and Europe were offset by lower shipments of fishing tools and drilling tools to Asia. For the first quarter of 2026, we expect our Energy Products and Services segment to experience a seasonal decline consistent with prior years, translating into revenue that is down 6% to 8% year-over-year with EBITDA between $105 million and $125 million. That sums up our financial results for the quarter and for the full year. If we take a step back, our adjusted EBITDA for 2023 was $1 billion, with 2025 improving about 3% to $1.03 billion despite significant market headwinds. Over that time, North America rig count declined 15%, Saudi Arabia rig count declined over 10% and the offshore floater count declined 4%. Additionally, changes in trade policies resulted in tariff expense of over $50 million in 2025. Nevertheless, NOV generated $1.8 billion in free cash flow during that 2-year period, demonstrating the diversity and resilience of our portfolio. With that, I'll turn the call back over to Jose. Jose Bayardo: Thanks, Rodney. As we go forward, NOV is in a very strong position. The near-term market environment may become more difficult, but we will further improve our operational efficiencies. We also intend to lean harder into growth opportunities that will generate value for our shareholders and that will be supported by a much more favorable market setup that we expect to emerge later in the year. I'd like to end by saying thank you to all our employees for delivering another solid year and for the dedication you have to our customers and to our fellow employees. I appreciate your focus on making NOV better every day. Our outlook is bright, thanks to everything that you do. With that, we'll open the call to questions. Operator: [Operator Instructions] The first question will come from the line of Jim Rollyson with Raymond James. James Rollyson: Maybe on the offshore rig kind of expected ramp late this year going into '27. You guys have done an interesting job of kind of laying out like the FPSO opportunity set for you, which is a pretty wide range from a revenue standpoint. Maybe if you could just kind of give us order of magnitude how you're thinking about the order opportunity set for spares and upgrades and all the different components that you're in discussions with on folks as they look to ramp back up hopefully into the next couple of years. Jose Bayardo: Yes. Thanks for the question, Jim. So yes, as you can tell, we're pretty optimistic about the lay of the land in terms of what we expect to happen in the offshore space, both from an offshore production equipment standpoint as well as in the drilling environment. And so the last few years, as Rodney really laid out, we've seen a tremendous increase in terms of demand for offshore production-related equipment, and we have really positioned the business well to capitalize on that opportunity set. And as I mentioned, it was just a huge year in terms of FPSO deliveries in 2025, really a wave that kind of came about from FIDs that are around the time of the pandemic. Some of those were pushed out later than anticipated because of all the dysfunction that occurred in the marketplace during the pandemic era. And they're finally coming online. And recall that part of the reason or really a big driver for the reason of the white space in the offshore drilling market was because the production equipment wasn't yet in place to put those rigs back to work. And so we've been saying for a while now that, hey, do you really think the world is going to build all this production equipment and not drill a bunch of wells to feed into those assets? And that's what we continue to expect to happen. A lot of those vessels just recently set sales and are connecting. And we're also now starting to see unsurprisingly, really significant impact or improvement in terms of offshore rig tendering, and we provided those stats with comparable period contracts increasing from 33 contracts a year ago to 59 over the most recent period. And really importantly, the average duration of these contracts that are being tendered is significantly longer than they were before, indicating that, hey, we're moving from an era here recently where rig contracts have basically been very short term in nature for single well or double well projects, and now we're shifting to crew development mode from some of these offshore opportunities or field development projects. And so we feel really good about all facets of our offshore business. As we mentioned, we still continue to see a lot of demand for offshore production-related equipment with potentially 10 FIDs this year and averaging 8 or so going forward for the next several years. Additionally, we see a little bit of a different mix in terms of the types of vessels that will be needed. And those -- that mix kind of plays, we think, into our strength -- with having higher gas and condensate content, which is where we really shine as well as more of those vessels that will be operating in harsh environments, which create larger opportunities for our quick disconnect through our boring system. So excited about that. But here, as we've talked about over the last year with the white space, there's been a lot of pressure on our rig aftermarket business, which, as Rodney mentioned, was down mid-teens percent year-over-year. And Jim, as you know, that's a really good business where the -- where we really have a really good position as the original OEM of a lot of this equipment that's out there. And so we're going to benefit from just a higher pace of activity offshore that's going to command a higher level of aftermarket parts, but also as these rigs go back to work, -- there's service and repair work that needs to be done. There's recertifications, there's upgrades, et cetera. And so we feel like the outlook here is really bright. James Rollyson: Appreciate all that color. And then just one quick follow-up. Rodney talked about the tariff impact, and you guys have talked about this over the last couple of quarters or so really since it all started. And I seem to recall maybe a couple of quarter conferences ago -- conference calls ago that one of the plans was the $100 million cost-out program to help kind of offset that. But longer term, I think the hope was you pass some of this tariff costs through higher pricing. And I'm just curious like where we are in the status of maybe that actually happening. Is the market still soft enough that you can't quite get there and you need that to change or maybe where we are in that process? Jose Bayardo: Yes, Jim, we're certainly having some success passing on those costs. But as you can imagine, it is a difficult market environment to pass along those costs, right? We've been -- we've seen a steady decline in industry activity over the last couple of years at a time -- during a time period when not only are we seeing heightened costs from tariffs, but also inflationary costs hitting in other areas. And so while in general, the number of areas that are experiencing large increases related to inflation, the number of areas has decreased a little bit. We're still seeing certain areas where there are really significant increases. Rodney highlighted the tungsten carbide, that's going to be a bit of a shock to the system, really important in the manufacturing of matrix body bits as well as for art-facing steel body bits. And we've gone up a couple of hundred percent in a couple -- in a 1-month time period due to all the supply constraints there coming out of China, and that's just really volatile. Also costs associated with electronics and memory and then not to mention continued pressure on labor and medical has been a real challenge. But look, this is just a fact of life in our business. Sometimes these things are more volatile than others, and we're managing through it. We've got some good efforts underway in terms of making sure that we get paid an appropriate value for the technologies that we bring to bear for our customers. Also have good efforts underway to continue to improve the efficiencies across the organization and offset some of those costs. And when we talked -- initially talked about that cost-out program, which we're making really good progress on, we mentioned that it would not fully offset what we expected to happen over the next few quarters related to inflation, tariff expense, et cetera. So you haven't really been able to see it just looking from the outside in on the P&L, but we're certainly seeing the benefits of what we're doing internally in some of the KPIs that I referenced earlier. And then as we progress through 2026, when tariffs will stabilize, assuming no other changes to the regime and a larger amount of those cost savings come through, I think you'll really start to see more of that in the second half of the year. Operator: Our next question comes from the line of Marc Bianchi with TD Securities. Marc Bianchi: Jose, you had some comments in your prepared remarks about M&A. And it sounded to me like the company, given the stuff that you guys have put in place over the last several years to sort of respond to the new world is maybe in a better position to pursue M&A going forward. And I don't know, maybe that wasn't the intended takeaway, but just maybe frame for us how we should be -- how investors should be thinking about your intentions around M&A now? Jose Bayardo: Yes. Thanks for the question, Marc. And I think you picked up on the general message, but let me clarify a little bit. Yes, certainly, our focus has been a little bit more internal recently, really focused on cost out, driving internal efficiencies and really preparing to get ourselves ready to really capitalize on growth opportunities. And so it's really a mindset shift to a large degree in terms of having played defense in a very challenging market to really moving into the -- in the role of playing offense. And having really incredibly efficient processes, whether it's manufacturing, whether it's supply chain, whether it's back-office processes, certainly helps in terms of being able to justify and validate M&A type transactions. So we're very confident. And look, one of the benefits that we get when we do acquisitions is being able to buy businesses that are within our core expertise areas, leveraging our core competencies to make those businesses better and accelerate their growth through leveraging our manufacturing base, our global supply chain, our marketing resources around the world, et cetera. And so the more efficient those are, the better we can integrate these acquisitions and drive more value. But the other part of what we were really trying to get at is that while we will lean into M&A a little bit more and try to be a little bit more aggressive, we're still going to be incredibly disciplined. We're still going to be focused on making sure that that's the best use of our capital, certainly in comparison to buying back our own shares and things of that nature. So we will continue to be very, very disciplined. And what we're really excited about is the organic growth opportunity that is in front of us. Our businesses have developed some fantastic technologies that have recently been commercialized or that are soon to be commercialized. And that, combined with the market outlook that we see evolving over the next couple of years has us extremely excited and presents additional growth avenues in areas where we can invest our capital to lean into those growth opportunities. And look, those -- the need for capital in those opportunities is not -- we're not talking about huge amounts because it's organic, but there are opportunities where we look into the future and we see, hey, we're going to be manufacturing constrained in this area, and we need to build these areas out. There are other areas where we're seeing really rapid adoption of what we're doing, and we need to build out more capacity from a rental equipment standpoint to be able to effectively deliver for our customers. So that's -- hopefully, that helps provide a little bit more clarity in terms of what I was getting at there. Marc Bianchi: Yes. Yes, sure does. The other one I had was on the order outlook. I think, Rodney, you mentioned a near 1 book-to-bill. And within that context, you also talked about FPSO FIDs doubling in '26. So maybe help us think about the range of scenarios if you were to get your fair share and there are 10 FIDs for FPSOs, should we be comfortably above 1? And then along those lines, how are you seeing 1Q shape up? Jose Bayardo: Yes. Thanks for that question as well. And look, it's never over until it's over, but we feel really good about our prospects to win our fair share related to the opportunities that are out there. As I touched on earlier with Jim's question, there are some of those opportunities that really are areas in which we should do very well related to leveraging our expertise in high condensate gas processing and environments. So we're excited about that. And look, if you look -- if you think about kind of what we've done over the last several years, yes, this year was a 91% book-to-bill, but each of the preceding 4 years was greater than 100% book-to-bill. We've got a very healthy backlog today that has been driven by those offshore production awards, backlog of $4.34 billion. So while it's 91% for the year, we're only down $93 million year-over-year, and the outlook for this coming year is really good. Always tough to give precise guidance related to future awards. As you know, these are big and chunky typically, and they can push and pull from quarter-to-quarter. As we suggested here, we anticipate a relatively slow and cautious start to the year. So I think we'll be below 1x book-to-bill in Q1. But for the year, we think things will even out, and we expect to be around 1x. Operator: Our next question coming from the line of Stephen Gengaro with Stifel. Stephen Gengaro: Jose, I think you got Clay words for minute down pretty pat. Jose Bayardo: I had a lot to say this morning, Stephen. Stephen Gengaro: No, the commentary is great, and there's a lot of detail. The -- I may be overthinking this, but when we think about the aftermarket business that you have and given your large installed base, the amount -- do you know -- do you have a sense for the amount that you serve of your installed base? And maybe more importantly, over the last couple of years, has the third-party ability to service existing assets dwindled at all from a competitive perspective? Jose Bayardo: Yes. A good question, Stephen. Look, it always ebbs and flows. And inevitably, people want to look for ways to do things more efficiently and more cost effectively. And at times, that leads them to go to the sort of proverbial [indiscernible] mechanic. But more often than not, those efforts are short-lived because they realize the complexity of what it is that we provide and what we do and the critical importance of making sure that you operate incredibly efficiently and reliably and that tends to drive people quickly back to the OEM. So I can't precisely tell you exactly where we are, but we feel great about our position and that we're getting our fair share. And look, every day, we're focused on providing better and better service and delivering better value for our customers. So certainly, intent is to bring that down more and more every single day, but there are always little ebbs and flows here. Stephen Gengaro: Okay. And then just the quick follow-up was when you look at sort of the basket of sort of stacked idle deepwater assets, it's -- I think it's fairly small, but do you have a sense for what the market opportunity is there for reactivations? Jose Bayardo: Yes. I think, look, it's -- when you talk about deepwater drillships, it's pretty limited. And I'm not going to give specific numbers. I'll let our contractor customers talk about it. But look, it is limited. I think it's -- you can sort of see exactly what's been operated here in the recent past and what those levels are that we could probably more easily get back to. But then I think your question is really around the stuff that's been stacked for a really long time or rigs that were never fully completed that were ordered during the last boom cycle. And I think that opportunity set, lucky to call it kind of a handful. So it's a limited opportunity and those opportunities that do exist. They're going to be large opportunities, right? They've been stacked for a very, very long time. And when I say handful, that's the number that are higher spec and that we think will be in line with what the market currently demands. And like I said, they've been stacked or uncompleted for a very long time. There's going to be a big ticket associated with bringing those back. So TBD exactly how that will play out. But it's a good opportunity for us. And then we see the market obviously tightening up very quickly, which means it will be a very good market for our drilling contractor customers, and that's a good thing for the space. Operator: Our next question coming from the line of Dan Kutz with Morgan Stanley. Daniel Kutz: So just going back to Venezuela. I was wondering if you guys could kind of quantify at all maybe what the level of revenue you were doing back pre-sanctions when you had the -- I think you said 400 employees in country or kind of what the equipment and spares revenue streams have been the last couple of years, which you said like the inbound you've gotten is kind of a multiple of the annual revenue stream. So basically just driving that, anything you could help us with as we're trying to kind of quantify the potential opportunity in Venezuela would be really helpful. Jose Bayardo: Yes, Dan, fair question. But I think what I would point to is that I don't think kind of the history is the precise dollar amount isn't particularly relevant, right? There's been a lot of change in pricing. And more importantly, I think the market environment going forward is going to be very, very different. But look, you can do the quick math. I said 450 employees. Today, we have a little over 30,000 employees. And so you can sort of figure out what the revenue per employee should be, and that's kind of in line with where we were. But the reason why I say it's not entirely relevant is because if and when the right fundamentals get put in place to really get back to work in the country. And what I mean by that is the right governance, the right laws and rules that allow us and more importantly, our customers to go to work there, along with alleviating security concerns and all those sorts of things. It's a country that's been -- it's a country whose oilfield assets have been neglected for an incredibly long period of time. And so that's going to create -- should create massive opportunities for new capital equipment. So when you go back in the day when we were active there, virtually all lines of business were active there. So we have -- certainly have the capability to do that and scale up very quickly. But we think the opportunity there, if and when the right guardrails are put in place will be meaningfully larger than what they were in the past. Daniel Kutz: Awesome. That's really helpful. And then I just wanted to check in on kind of your through-cycle CapEx and free cash flow framework. So not asking about 2026 because I know you guys gave the explicit guide for both of those items. But just wanted to check in on -- I guess you guys have kind of said like a 50% plus free cash flow conversion framework through cycle. I wanted to see if that's still a good assumption or that's the latest. And then maybe if you could kind of unpack CapEx a little bit, how you think about that through cycle, whether it's in terms of revenue or some type of maintenance level plus some growth investments. So yes, anything you could help us on the through-cycle CapEx and free cash flow framework would be great. Rodney Reed: Yes. Thanks, Dan. This is Rodney. So just stepping back and giving some credit to the team with respect to free cash flow conversion for the last couple of years, 85% free cash flow conversion, really excellent performance by the team. A lot of that was really system structural improvements. So if you look at the improvements that we've had on DSOs during that time, you look at the improvements that we've had, in particular, for some of our project-based businesses with some of the progress billings and timing of collections during that time, really strong and also on our inventory turn improvement. So 2023 inventory turns at 3.1 improving to 3.9, almost 4 turns in 2025. So just across the board, I know Jose gave some commentary on cash conversion through the cycle, but just some components there. And then we kind of mentioned, as we think about '26, a little bit more directed to your question, about 40% to 50% free cash flow conversion for '26. And if you look at the components of that, CapEx in that sort of $315 million to $345 million range. You look at working capital as a percentage of revenue, probably about flat to maybe slightly up. So that kind of gets you to that cash conversion rate there for '26. And I think going forward, as Jose mentioned, we've got some organic opportunities that we always evaluate. I think our CapEx in '24 and '25, if you look, was a touch higher than '22 and '23. '26 at that sort of midpoint gets back to a little bit more sort of average level. But the positive thing is with the strength that we have on the balance sheet and where we're at right now, we've got the flexibility to look at those opportunities going forward. But overall, I'd say kind of through cycle, that sort of 50% -- 40% to 50% number from a conversion perspective is a good marker for us. Operator: Our last question will come from the line of Jeffrey LeBlanc with TPH & Company. Jeffrey LeBlanc: I wanted to see if you could provide an earnings potential of your ATOM RTX robotics platform over a multiyear period and how we should think about the gating events for it to become the next drive? Jose Bayardo: Yes. Thanks, Jeff. Look, we are super excited about kind of what we're doing on the automation front and really more broadly speaking, on all things that we're doing digital-wise. First of all, just a quick answer on the robotics piece. This is something that we put our first effectively pilot system out a couple of years ago. It's been operating consistently with a couple of upgrades and getting better and better every day over the last couple of years, operating in a very harsh environment. We've been working very closely with the drilling contractor customer and an IOC. This is a great stage that's set to where we're doing a lot of cooperation with industry partners to ensure that this is successful. And we're working with 2 different IOCs and 2 different drilling contractors. And all 4 of those customers are really excited about what we're delivering with them out in the field. We currently have 3 rigs operating on land, 3 operating offshore, and we've sold around 27 to 30 robot arms, and we're having super constructive conversations with our customers about doing a whole lot more. So that's really about all I can give you on that front right now. But look, the other thing that I'm extremely excited about is the capabilities that we have under one roof related to data control systems and automation. Look, we've been in the data business for over 100 years when we started an instrumentation business. Obviously, we've migrated from analog to digital on a lot of fronts, including data capture aggregation and now more and more high-speed downhole data transmission, combine that with our world-class capabilities for control systems, then layer on top of that automation and robotics and now the use of AI, and we're super excited about where we can take all this over the coming years. So really excited about our prospects there. Operator: And I'll now turn the call back over to Mr. Jose Bayardo for any closing remarks. Jose Bayardo: Great. Olivia, thank you very much, everyone, for joining us here this morning. We look forward to talking to everybody again here in late April. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect. .
Operator: Hello, and thank you for standing by. Welcome to StoneX Group, Inc. First Quarter Fiscal Year '26 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Bill Dunaway. Sir, you may begin. William Dunaway: Good morning, and welcome to our earnings conference call for our quarter ended December 31, 2025, our first quarter of fiscal 2026. After the market closed yesterday, we issued a press release reporting our results for the quarter, and this press release is available on our website at www.stonex.com as well as a slide presentation, which we will refer to on during this call. The presentation and an archive of the webcast will also be available on our website after the call's conclusion. Before getting underway, we are required to advise you and all participants should note that the following discussion should be considered in conjunction with the most recent financial statements and notes thereto as well as the Form 10-Q filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the company's actual results will not differ materially from any results expressed or implied by the company's forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether a result of new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance. With that, I will now turn the call over to Philip Smith, the company's Chief Executive Officer, for a brief introduction. Philip Smith: Thank you, Bill. Good morning, everyone, and thank you for joining our first quarter earnings call for fiscal 2026. I'm very pleased to report a very strong start to our fiscal year, reporting record net operating revenues, net income and EPS, which showcases the power and the scale of the ecosystem we have built at StoneX and of which we are incredibly proud of. We play a vital role in the global financial and physical markets by serving a wide and diverse range of clients. Our platform enables clients to access multiple markets, giving them the flexibility and choice they need to pursue opportunities and/or mitigate risk wherever they arise. This broad market access positions us with several avenues for growth as demonstrated by our performance this quarter. When conditions shift from one market to another, we have the breadth of products and services to support our clients' needs wherever they arise. This diversification is a core strength of our business model. Bill will go into more detail around our financials, but I would like to highlight a few areas that helped drive our record results. Record listed derivatives volumes and average client equity, significantly enhanced by the acquisition of R.J. O'Brien. Record commercial performance driven by an exceptional performance in global metals and in particular, in our precious metals business, which generated $75 million in segment income this quarter, which is $24 million more than it did in the entire financial year '25. This was an exceptional quarter, whereby our global footprint, the depth of our product vertical and our logistics expertise in being able to move physical metal globally in order to take full advantage of locational discounts and premiums being second to only the largest two global bullion banks allowed StoneX to record its best revenue quarter ever. To remind you of the deep dive into metals we provided in our Q2 earnings call last year, our unique precious metals vertical includes the following: StoneX is a leading OTC liquidity provider in all precious metals. StoneX is uniquely positioned as the only nonbank participant in setting the gold, silver, platinum and palladium daily price benchmarks. StoneX is the #1 nonbank FCM, providing access to futures contracts on exchange for all metals. StoneX is a wholesale and retail service producer of small bars and coins direct to consumers under our StoneX Bullion platform or to third-party companies themselves servicing direct to consumers. StoneX is one of the largest wholesale physical bullion businesses moving metal across jurisdictions efficiently to satisfy locational shortages and oversupply of material. StoneX owns a recently CME accredited vault, which now has in excess of $1.2 billion worth of metal in custody after only a couple of quarters of operations, providing bolting, storage and custody services. And of course, StoneX owns a London Good Delivery silver recycling and refining facility, providing investment-grade products into the bullion market from recycled material. Together, these products and capabilities produce a truly unique ecosystem in the metals market. In addition, our Institutional segment reported a record quarter, which was enhanced by the addition of R.J. O'Brien's institutional business as well as the investment banking, equity research and institutional sales and trading of Benchmark. This was in addition to record revenues reported in our legacy StoneX equities, fixed income and prime service business lines, underscoring the true value of our ecosystem. Finally, we also saw record payments average daily volume to start off the fiscal year. Bill will now cover our financials in more detail. So over to you, Bill. William Dunaway: Thank you, Philip. I will begin with a financial overview for the quarter, and we'll be starting on Slide #4 in the slide deck. First quarter net income came in at a record $139 million with diluted earnings per share of $2.50. This represented 63% growth in net income. However, earnings per share grew at a 48% rate due to the additional shares outstanding as compared to the prior year, primarily related to the issuance of approximately 3.1 million shares for the acquisition of R.J. O'Brien during the immediately preceding quarter. Net income and diluted earnings per share were up 62% and 59%, respectively, versus the immediately preceding fourth quarter of fiscal '25. This represented a 22.5% ROE despite a 70% increase in book value over the last 2 years. We had operating revenues of just over $1.4 billion, up 52% versus the prior year and up 20% versus the immediately preceding quarter. As a reminder, our operating revenues include not only interest and fee income earned on our client balances, but also carried interest that is related to our fixed income trading activities. Net operating revenues, which nets off interest expense, including that which is associated with our fixed income trading activities as well as introducing broker commissions and clearing fees were up 47% versus a year ago and 24% versus the immediately preceding quarter. Total fixed compensation and other expenses were up $75.6 million or 31% versus the prior year quarter. $44.4 million of this is attributable to the acquisition of RJO and Benchmark during the fourth quarter of fiscal '25. Total fixed compensation and other expenses were up 10% or $29.4 million versus the immediately preceding quarter, with $12 million of this change attributable to the acquisitions of RJO and Benchmark, each of which were only in the immediately preceding quarter for 2 months. Fixed compensation and benefits was up 17% versus a year ago and up 2% or $2.4 million versus the immediately preceding quarter. The increase versus the immediately preceding quarter includes $5.3 million attributable to the acquisition of RJO and Benchmark, partially offset by lower PTO benefit costs and higher participation in our employee-elected deferred compensation plan, which is part of our restricted stock plan. Professional fees increased $13.8 million versus the prior year, primarily as a result of higher legal fees related to our defense and various legal matters, including fees related to the BTIG matter associated with the commencement of the arbitration this quarter. They were up $5.9 million versus the immediately preceding quarter, which included $8 million of investment banking advisory fees paid out in connection with the acquisition of RJO. The acquisitions of R.J. O'Brien and Benchmark contributed $28.5 million and $4.6 million in pretax net income, excluding acquired intangible amortization, respectively, for the quarter. Looking at our results with a longer-term lens, our trailing 12-month results show operating revenues were up 28%. Net income was a record $359.8 million, up 30%, with diluted earnings per share of $6.70 and an ROE of 16.9% for the trailing 12-month period, above our target of 15%. We ended the first quarter of fiscal 2026 with a book value per share of $48.17. Turning to Slide #5 in the earnings deck, which compares quarterly operating revenues by product as well as key operating metrics versus a year ago, we experienced growth across all products with the exception of FX/CFDs and payments. Transactional volumes were up across all of our product offerings with the exception of FX/CFDs and spread and rate capture increased in all of our products with the exception of payments down 10% and FX/CFDs, which declined 30%. Just touching on a few key highlights for the fourth quarter. We saw operating revenues derived from listed contracts, increasing $157.3 million or 141% versus the prior year. Primarily due to the acquisition of RJO, which contributed $130.7 million as well as strong growth in base metals activity in LME markets, which increased $12.7 million versus the prior year. Listed derivative operating revenues increased 30% versus the immediately preceding quarter. Operating revenues derived from OTC derivatives increased 72% versus the prior year, driven by increased client activity in Brazilian and European markets. This also represented an 8% increase versus the immediately preceding quarter. As Philip noted earlier, we had a record performance in our physical business, with operating revenues derived from physical contracts increasing 69% versus the prior year, primarily driven by an $83.9 million increase in precious metals operating revenues, partially offset by a $19.8 million decrease in physical agricultural and energy revenues. Operating revenues derived from physical contracts were up 138% versus the immediately preceding quarter. Securities operating revenues were up 43% as volumes were up 22% and the rate per million increased 35% versus the prior year, with the improvement driven by strong growth in both equities and fixed income. Payments revenues were down 4% versus the prior year quarter, but up 7% versus the immediately preceding quarter, primarily due to an increase in the average daily volume. FX/CFD revenues were down 30% versus a near record prior year quarter, resulting from a 4% decline in average daily volume, primarily in institutional markets and a 30% decline in rate per million, primarily driven by lower spread retention in our self-directed business, particularly in non-FX markets. FX/CFD revenues were up 24% versus the immediately preceding quarter. Our interest and fee income earned on aggregate client float, including both listed derivative client equity and money market FDIC sweep balances increased $66.1 million or 61% versus the prior year, with the acquisition of RJO contributing $63.8 million. Average client equity and average money market FDIC sweep client balances increased 100% and 5%, respectively. For the current quarter, RJO contributed $5.8 billion in average client equity. Turning to Slide #6. This depicts a waterfall by product of net operating revenues for both the prior year quarter to the current one as well as the same trailing 12-month period. Just a reminder, net operating revenues represent operating revenues less introducing broker commissions, transaction-based clearing expenses and interest expense. For the quarter, net operating revenues increased 47%, principally coming from listed derivatives and physical contracts, up $68.4 million and $58.3 million, respectively. In addition, securities and OTC derivatives added $55.7 million and $26.5 million, respectively, versus the prior year. On a net basis, interest and fee income on client balances increased $38.1 million with RJO contributing $37.3 million. As noted earlier, due to the -- primarily to the decline in rate per million, we saw FX/CFD's net operating revenues decline $30.8 million versus the prior year. Looking at the bottom graph for the trailing 12-month period, securities has the largest increase, up $175.9 million versus the prior year, driven by a 23% increase in average daily volumes and 23% increase in rate per million. In addition, listed derivatives and interest and fee income increased $115.2 million and $54.9 million, respectively, primarily as a result of the acquisition of R.J. O'Brien as well as strong growth in LME base metals markets. Physical contracts, net operating revenues added $57.9 million versus the prior fiscal year, while OTC derivatives also added $38.8 million off of strong growth in Brazilian and European markets. Finally, FX/CFD's net operating revenues declined $60 million versus the prior year. Moving on to Slide #7. I'll do a quick review of our segment performance. Our Commercial segment saw net operating revenues increase 65%, primarily resulting from 56% and 72% growth in listed and OTC derivatives, respectively. In addition, physical contracts increased 75%, while net interest and fee income increased 50%. The growth in listed derivative and interest income were primarily driven by the acquisition of RJO as well as in the case of listed derivative volumes, base metal markets on the LME. Segment income increased 72% versus the prior year, while on a sequential basis, net operating revenues were up 50% and segment income was up 61%. Our Institutional segment also saw record net operating revenues and segment income with growth of 86% and 78%, respectively. The growth in net operating revenues was principally driven by a $54.9 million increase in securities revenues. In addition, listed derivatives and interest and fee income increased $47.5 million and $21.5 million, respectively, primarily driven by the acquisition of RJO. On a sequential basis, net operating revenues and segment income were up 11% and 4%, respectively. In our self-directed retail segment, net operating revenues declined 34% and segment income was down 67%, driven by the 41% decline in rate per million captured in FX/CFD contracts, partially offset by the 13% increase in average daily volumes. On a sequential basis, net operating revenues were up 25% and segment income increased 26% in this segment. In our Payments segment, net operating revenues were down 3% and segment income decreased 1%. Average daily volume was up 11% versus the prior year, while rate per million was down 10%. Versus the immediately preceding quarter, payments net operating revenues increased 10%, while segment income increased 13%. Moving on to Slide #8. Looking at segment performance for the trailing 12 months, we saw strong growth in our Institutional segment with net operating revenues up 54% and segment income increasing 60%. Our Commercial Payments segments added 14% and 4% in segment income, respectively. Our self-directed/retail segment income decreased 35%. Finally, moving on to Slide #9, which depicts our interest and fee income earned on client balances by quarter as well as a table which shows the annualized interest rate sensitivity for a change in short-term interest rates. The interest and fee income net of interest paid to clients and the effect of interest rate swaps increased $38.1 million to $115.5 million in the current period. And as noted, the acquisition of R.J. O'Brien contributed $37.3 million in net interest in the current quarter. During the first quarter of fiscal 2026, we entered into $1.2 billion in fixed rate SOFR swaps to hedge our aggregate interest rate exposure. The swaps have a duration of 2 years and an average rate of 3.32%. These swaps as well as the additional average client assets from the RJO acquisition are reflected in the interest rate sensitivity table on this slide. As shown, we now estimate a 100 basis point change in short-term interest rates, either up or down, would result in a change to net income by $43.2 million or $0.80 per share on an annualized basis. On a final note, before I turn it back to Philip, on February 3, our Board of Directors approved a Three-for-Two stock split of its common stock. The stock split will be effective as a stock dividend entitling each stockholder of record to receive 1 additional share of common stock for every 2 shares owned. Additional shares issued as the result of the stock dividend will be distributed after the close of trading on March 20, 2026, to stockholders of record at the close of business on March 10, 2026. Cash will be distributed in lieu of fractional shares based on the opening price of a share of common stock on March 11, 2026. Trading is expected to begin on a stock split adjusted basis at the market open on March 23, 2026. With that, I will hand you back to Philip for an update on the RJO integration as well as a product spotlight on our global hedging business. Philip Smith: Thank you, Bill. Moving to Slide 11. And as Bill mentioned, this is the first quarter of our combined and consolidated operations of StoneX and R.J. O'Brien. On last quarter's call, we provided a detailed overview of the integration process and reiterated our confidence in achieving the synergies set out in our initial announcement. The transaction has transformed StoneX into the leading nonbank player in this space. And now 5 months into the integration, we are seeing increased cross-sell opportunities due to our scale and breadth of offering, which I will touch on later. In terms of integration, this remains firmly on track and continues to follow the sequence we outlined last quarter. As a reminder, this includes the consolidation of our non-U.S. entities. We stated this will be completed in quarter 2 2026. As an update, we have migrated the business and assets of the largest subset of these entities, the R.J. O'Brien U.K. entity into the StoneX U.K. entity successfully in the first week of January. I expect the others to follow our execution and integration plan we set out previously. The U.K. consolidation has released $20 million in capital. The consolidation of the U.S. entities, this remains on track and is targeted to be completed by the end of the fiscal year. We are working hard to ensure a smooth and seamless transition for clients as we have prioritized revenue protection and continuity for clients of R.J. O'Brien. All in all, the integration remains on track, and we remain confident in achieving the synergies we set out at announcement and are making strong progress in providing a holistic integrated offering to clients across StoneX and R.J. O'Brien. Now moving to Slide 13. As done in previous earnings calls, we think it's helpful to go a little deeper into a specific business area, and I wanted to spend some time going over our global hedging business, which forms part of our Commercial segment and was recently reorganized to globalize what was a more fragmented regional set of businesses. This is a business that is core to StoneX's history and legacy of working with commercial clients to hedge and mitigate their risk exposure going back nearly 50 years and represents approximately 60% of the segment income for the Commercial segment for the last 12 months. We have built a deep presence in North America, Latin America, EMEA and are rapidly growing in Asia Pacific. We have always worked towards a North Star of connecting clients to markets, which help them manage the risks they face in their businesses with transparent access and risk management tools for our clients. On this slide, you will see the breadth of our global hedging and risk management offering. We provide deep market access across more than 40 derivative exchanges worldwide, combined with an ability to deliver customized OTC and structured products, which means we can create tailored hedging solutions, which closely align with our clients' risk management needs. Our leading market intelligence offering and digital platforms are core differentiators for us. They give clients market insight supported by teams with real boots on the ground experience across global markets. These combined efforts and capabilities allow us to serve a diverse range of clients and all parts of the supply chain shown on the right-hand side of the page, from farmers, producers and cooperatives to merchants, global traders, industrial end users as well as energy and resource extractors. In short, by operating across all parts of the supply chain, StoneX becomes a critical partner connecting markets, clients and flows in a way a few others can. On the next slide, being Slide 14, I wanted to expand on what I think makes us unique in this space. With the acquisition of R.J. O'Brien, we became the largest nonbank FCM in the United States, and eighth overall, which gives us scale and flexibility that very few firms can match in clearing and execution of listed derivatives. Furthermore, with our registered swap dealer, we can offer bespoke OTC solutions to address clients' needs through margin relief, financing and/or access to customized structured products. In addition, in collaboration with our physical businesses, our risk management consultants have the ability to embed hedging strategies within physical contracts in order to provide enhanced price risk mitigation to the clients. Another key differentiator is our people and experience. We have hundreds of risk management consultants around the globe who work directly with clients, building hedging strategies that help manage exposure and optimize their financial results. Through this work, we've earned a long-standing reputation as a trusted partner, one that clients rely on to help them navigate uncertainty and make confident decisions during volatile market conditions. We do this through the support of market-leading technology tailored to the commercial segment. This includes StoneX Hedge, automated order management, merchandising and origination platform integration into clients' ERP systems. Through this platform, clients have hedged in excess of 1 billion bushels, and we look forward to growing this further. StoneX Plus, leading dairy market platform for the delivery of market intelligence, pricing and trade data, OTC trading a.k.a. spot, web trading platform for customizable structured products and OTC trading across multiple commodities. We also spend a great deal of time, effort and resources assisting and educating our clients and the market at large through hedge scores, professional programs, product seminars, market outlooks, expos, conferences and joint events with exchanges. Some examples of these activities just in the last quarter include our participation in the ADPI, the American Dairy Products Institute, co-hosted with the CME, the Dairy Purchasing and Risk Management seminar, Brazil's National Association of Cotton Exporters, the Global Cattle Connect webinar, online events bringing together experts from across the globe to discuss trends shaping the future of the cattle industry, representing StoneX Brazil, North America and Australia. We do hundreds of events like this every year, reinforcing our integral role within the industry and form a very important component of our global hedging business with dedicated resources and teams supporting this globally. Our market intelligence platform is rooted in our employees' expertise, enabling us to deliver cutting-edge research based on data and insights from specialists on the ground. We have further broadened our reach by expanding our digital content through podcasts, videos and white papers, ensuring clients can access market insights whenever and wherever they need through our mobile app. Turning to Slide 15. We outline how we continue to strengthen this business and deepen the value we deliver to clients. First, we continue to expand our ecosystem by growing the number of OTC products we offer and deepening the links between this financial hedging business and our existing physical sales and trading business. We have begun to enter new markets such as power and electricity in Australia, carbon in Europe and other environmental markets, which we believe will not only diversify our client base, but capture more wallet share. Secondly, we continue to grow and diversify our client base. This includes extending our commercial introducing broker network, largely inherited from R.J. O'Brien, expanding our geographical footprint with new locations in Madrid and Paris and extending our OTC offering further into the adjacent markets like meat and dairy, where our expertise can help unlock new client segments. And thirdly, we are actively digitizing the business. This includes advancing our ERP integrations with clients to further embed StoneX into their operational workflow, expanding functionality with our farmer-focused mobile apps, such as Farm Advantage, et cetera, and utilizing AI to significantly increase broker capacity and automate tasks. These actions not only improve efficiency, but strengthen client engagement and reduce friction onto our platform. Taken together, these pillars position StoneX to continue expanding market share, deepen client relationships and increase margins, all while building a more interconnected, more digital and more scalable global hedging franchise. Moving on to the final slide, Slide 16. This was another consecutive record quarter, highlighting the strength of our diversified business. We achieved earnings of $139 million, a diluted EPS of $2.50 and an ROE of 22.5%, which represents a 32.4% return on tangible book equity. Our earnings and diluted EPS were up 63% and 48%, respectively. We remain well positioned to capitalize on current market volatility due to our diverse offerings, combined with our fortress balance sheet. Our assets under management and custody continue to grow as we are increasingly seen as the largest alternative to banks and an easily accessible ecosystem for banks as well. Our unique ecosystem captures clients across multiple touch points, and we continue to dedicate ourselves to better serve our growing client footprint. The enormous total addressable market still available to StoneX will continue to power growth in the years to come. We are very proud of the StoneX team for their steadfast commitment to clients throughout challenging market conditions, and we remain focused on providing the industry's most robust and comprehensive financial ecosystem. Operator, please open the lines for questions. Operator: [Operator Instructions] Our first question comes from the line of Jeff Schmitt with William Blair. Jeffrey Schmitt: In the physical trading business, obviously, a really strong quarter there due to precious metals. How much of that strength came from cross-selling RJO clients? Or was that really kind of mainly volatility driven? And then just curious how that business is trending here in January, February with now that gold is pulling back? Philip Smith: There was limited upside from the precious metals revenues and volumes from traditional R.J. O'Brien client base. So I think a lot of it was primarily driven on the fact that we saw a heightened level of interest in this space, both in the wholesale and also at a retail level. Now you'll recall, in 2019, we purchased a company called CoinInvest, which we subsequently rebranded as StoneX Bullion. That was our direct-to-consumer retail trading platform. That has exceeded our expectations. And I think it's fair to say that when it was purchased, it was making probably $1.5 million a year. They've achieved that in a single day recently. So I think that's been a transformational expansion of our ecosystem because it gives us that ability to go directly to consumers. And at the same time, the wholesale business is also supplying physical material and refined products, mint-produced coins and small bars to other B2C companies, which themselves have been benefiting from the recent uptick in interest from a retail level. And at the same time, the disconnect that we often see in these markets and have seen for many years where there is a physical price disconnect between jurisdictional country A and country B. And because of our ability to move physical around the world sufficiently [Technical Difficulty] where there was a significant shortage of silver in India and it is not the easiest place for people to move gold into, but we've been [Technical Difficulty]. Jeffrey Schmitt: Okay. And then on the cost synergies, those appear to be on track or maybe you're realizing them even faster than expected. As you dig into the RJO business, I guess, are you seeing any potential upside to the $50 million? Or is it still kind of too early to tell? William Dunaway: Yes, Jeff, I mean, at this point, I think that we're still kind of just confirming the $50 million. I mean I think that it's coming along as we talked about last quarter. I think that we've seen some of the wins thus far. They'll continue to pick up throughout the rest of the fiscal year. The kind of milestones we have will be later this year. Over the summer, we will migrate the largest entities combined. So kind of coming out of fiscal '26, I think we'll probably be in a pretty good spot of having about 40 of them kind of in the run rate. And then going forward, we'll capture the rest over fiscal '27. But I think we're still kind of affirming at this point that $50 million figure. Jeffrey Schmitt: Okay. Great. And then just one quick one on the institutional segment. The securities business there had a great quarter. And you mentioned moving into U.S. stocks in the market maker business. I'm just curious how much of the mix that is? And maybe if you could talk about that. The rate per million there, I know you've talked about that inflecting up, but are we at a point where we're at a better run rate there? Or is there more upside to that? Philip Smith: Yes. I think that part of the business is still quite early stages in terms of its expansion. Most of the increase we've seen is very much across equities market making, fixed income and prime services. So as a subcomponent, we continue to grow in that space. That space has probably the addressable market of all areas, but it is one small step at a time. We continue to see growth, but not at the level and not at the level of maturity that you will see, say, in our market-making business for our unlisted ADRs, where we continue to be ranked #1 and have been for the last 11 years. So we'd love to be in that situation for mainstream equities, but it's a big market, and we're not there yet, but we're very pleased with the progress made so far. Jeffrey Schmitt: Great. And is that rate per million, I mean, do you expect that to inflect up more? Or are we at a point where maybe it's a good -- a better run rate? William Dunaway: Yes. I mean I think at this point, Jeff, it's probably kind of getting back to more of a run rate. I mean it kind of really dipped as we moved into some of those stocks. And as our institutional sales and trading business has picked up and some of the other the equity market making continue to perform. I think we've gotten -- this is obviously a high watermark, right? We're 320-ish. And we were a year ago -- I'd say a year ago, we were kind of at the low inflection point. I think somewhere in this 300 -- a little over 300 range is probably a more normalized rate for us now going forward. Operator: Our next question comes from the line of Dan Fannon with Jefferies. Daniel Fannon: Just wanted to follow up on the environment. And obviously, you've seen a lot of movement in the underlying, whether it's gold, silver, all this stuff. So I was just curious about the health of the customer kind of post quarter, if there's been any changes in losses or as you just think about activity levels still being good and just the environment being constructive versus maybe this point in time, we've seen bad volatility. And so I just want to understand if this is still a constructive environment for you guys. Philip Smith: Yes. And I think we've discussed this previously. I mean we obviously benefit from increased volatility in the markets across multitudes of products within the StoneX ecosystem. But when it reaches a point of extreme volatility, that stress can become heightened and more of a concern for our underlying clients. I think the closeness of the relationship helps us through that. We obviously don't want our clients to get into a situation where such positions or such transactions put them in a hazardous situation. And I think identifying concerns and talking to our clients, speaking with them on a daily basis and just walking them through how they are hedging their positions, but at the same time, ensuring they have sufficient liquidity to stay at the table and to not be forced into taking off their hedges. So it's an engagement exercise. We obviously like the volatility. We don't like extreme volatility because of that potential negative impact on our clients. But that's been the case for many years for us. Daniel Fannon: Understood. And then just on the R.J. O'Brien deal in the context of what you see as the kind of most near-term kind of cross-sell opportunity in the context of some of -- there weren't numbers that were outlined when the deal was announced, but obviously, you've talked about multiples in size versus the expense synergies. So I just want to, again, if you could reprioritize kind of where you see those opportunities and what we should see as we think about the next couple of quarters. Philip Smith: Well, I mean, it's a sort of dual approach in terms of we have the integration process itself. And as we said, we've begun that with the U.K. entities. That's been completed. We're seeing the schedule of time lines for further integration and building up to the largest part of it in the U.S. That is a big part of the potential cross-sell. Because don't forget that until such time as we can kind of consolidate the entities, there's still the case of repapering with other legal entities within the StoneX Group. There's still an education process in many areas. So we talk about comparing and whilst we didn't specify the potential revenue expectations from cross-selling, we do anticipate based upon looking at our OTC, as an example, revenues versus our exchange-traded derivatives revenue and how that's morphed over the years and the revenue attributable to the OTC side of the product, we can then superimpose that onto a lot of the RJO revenue. It's not a guarantee, it's not a certainty. There's work to be done. There's education exercises to be done. We have to help all the RJO employees to sort of be confident enough and be able to engage with the clients and most importantly, make sure that it is the right thing for all the clients involved. We talk about some simple wins in that R.J. O'Brien across the entire organization did not have the ability to offer foreign exchange. That's a relatively mainstream vanilla product for us within StoneX. So things like that, we are gradually introducing more and more capability to across the organization. And even before the integration is completed, we're trying our best to ensure that we can get as much capability and products in front of our incoming R.J. O'Brien clients as possible. But it's -- we've had a lot of small wins that have built up, and we continue to encourage that, and we welcome it and we circulate internally some success stories. But we're not at the point to be able to say, here you go, we recognize this about so far. But we continue to be very optimistic about the potential there. Daniel Fannon: Understood. Okay. And then Bill, just in the context of the expenses and since we -- this is the full quarter with both the last couple of acquisitions in there. As we think about the run rate and the kind of go forward, anything to normalize based on integration or other things from an expense perspective or areas where you think the growth and/or movement of -- at a line item level might be most? William Dunaway: I mean I think we'll see, as you see every year, right, our Q2 is the start of the calendar year, right? So we'll see a tick-up in nonvariable compensation kind of related to the annual merit increases, kind of all the taxes and benefits and all those kind of things reset. So we'll see a tick-up from there. But I don't see -- I don't think there's other line items, Dan, that we would expect to materially change other than as we see some of the synergies come through. We should see hopefully some downtrend on that nonvariable comp line as well as some of the tech spend and on the longer term is where you'll start to see some occupancy, et cetera. But most notably here at start of the calendar year will be -- kind of there will be a bit of a tick up on the nonvariable compensation line. Operator: [Operator Instructions] our next question comes from the line of Lukas Jaeger with Liberty One Investment Management. Lukas Jaeger: Okay. So long time listener, first-time caller. I have a question in regards to sort of the pre-existing business of StoneX not really focused on the R.J. O'Brien and Benchmark acquisitions. This time last year, some of the discussion was within the securities business and sort of the sort of client group in the active ETF space sort of adding an additional piece of growth. And I guess I'm just sort of further looking for a discussion on some client groups that are going to come into the existing pre-existing StoneX client business that will kind of show sustained interest within sort of your risk management contracts and trading services? Philip Smith: Not quite clear in terms of the question. But from an institutional perspective, we do see a big sort of sizable shift in terms of the client space in the regional banks in the U.S., for example, where what we're seeing now is that if you turn up to one of the regional banks knocking on their door and saying, I'd like to talk to you about this particular product. They're not interested. What they are becoming very interested with us is the multitude and the breadth and depth of our product offering. So we're suddenly seeing some dividends coming through with regards to our ecosystem, which we talk about on a near constant basis and very proud of. But it's now becoming a big distinction between us when talking to new and potential clients in the -- just in the regional community bank space in the United States. So that's where we're optimistic in terms of this could be another phenomenal uptick in terms of revenue that we're looking to benefit from, but also to be able to solidify the relationship we have with said banks because what we increasingly can see across all of our products is where we fit in, I guess, in the level of priority or relevance from their perspective to us. We aspire to be a one-stop shop offering as much capability and product to as many clients as possible through a single avenue through to StoneX and our ecosystem. But it's starting to become a door opener in ways that perhaps we weren't necessarily expecting, just like we weren't expecting the growth in our build-out of our fixed income business in APAC to hit the ground so quickly and build so rapidly. Because we -- I don't think we fully understood the lack of alternatives, lack of service and lack of localized dealing desks in that region. So there are a lot of areas where we're looking to expand our capability. But at the same time, sometimes it takes a while for us to really get the benefit of something perhaps we weren't necessarily expecting in the first place. And the intro into those regional banks has demonstrated that. So we will talk to household names in terms of regional community banks. But the fact that we're offering -- we're able to offer a multitude of fixed income products. We're able to offer them access to SWIFT. We're able to offer them payments. We're able to offer them equities, overseas equities, ADRs, things like that, which you previously would be expecting them to be using multiple providers for, they can now do it in a single avenue. So that's where we see some sizable momentum coming down. Lukas Jaeger: Perfect I appreciate the additional color. And despite my poor phrasing, you look -- you answered my question very well. Moving on to sort of the FX and sort of CFD area of the business. I'm kind of just curious, so I saw that the rate per million is down around 30% compared to last year. And I was hoping to unpack sort of the reasons for that. My understanding would probably be that's largely because of some lower volatility. So I think the CVIX like average from this period compared to the last period is down around 15%. But I'm wondering if you could have further unpacked that rate per million figure just so that I can understand it. William Dunaway: Sure. I think I'll take that. So I mean, last year, just a reminder, we were -- that was probably the highest rate per million that we've seen out of the business since the acquisition of GAIN Capital back in -- or in 2020. So we did still kind of see -- I mean, the FX space, both as a reminder, in the FX/CFD space, we do that both on the institutional side as well as obviously the bigger piece of it in the self-directed. But overall, I think we continue to see kind of the FX volatility being somewhat muted and not the greatest environment for us. And obviously, it benefited tremendously in our physical space and the commodity space from the movements in gold, but it proved to be a bit more challenging in that space on the retail side with the markets moving around. So a combination of everything. And so I would say that it's not -- the rate per million that we're seeing now isn't out of line with expectations. I think it was more last year was just such a bang-out quarter for us on the retail side with really strong spreads. So I would say that this is probably a bit more normalized environment, something in the -- if you look at the retail -- the self-directed retail, we were at 110. We've kind of averaged over the last 4 quarters around 116. And I would say -- so it's not out of the realm of what the expectation is. It's just last year's comparable period of 185 was very strong. Lukas Jaeger: That makes complete sense. I mean that sort of falls with what the graphs on Bloomberg tell me so that I appreciate the additional color. Is there any particular currency pairings that sort of self-directed client group is interested in, just as a follow-up question. Philip Smith: No, I don't think we can step that into the mix. It's not as easy to sort of simply say, yes, this is the pair that we find more interesting than others. I think what you'll find is that the volume going through certain currency pairs and euro-dollar is one of probably the largest currency pair that we trade. But it's market-driven. So our clients will -- our clients in the wholesale FX business will be looking to hedge, looking to hedge their exposure, looking to lock in forward rates. And our retail CFD business is much more of a looking to take advantage of market moves at a retail level. But it will vary. And it's not something we really publish, but it's -- you would expect currency pairs and I include gold in those currency pairs because it trades like a currency where dollar-euro, dollar gold, dollar silver will be consistently high. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Philip for closing remarks. Philip Smith: Thank you, operator, and huge thank you to everyone [Technical Difficulty]. Operator: Thank you. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Kersten Zupfer: Good morning, and thank you for joining the Regis Second Quarter 2026 Earnings Conference Call. I am your host, Kersten Zupfer, Executive Vice President and Chief Financial Officer. I am joined today by our Interim Chief Executive Officer, Jim Lain. [Operator Instructions] And this conference is being recorded. I would like to remind everyone that the language on forward-looking statements included in our earnings release and 8-K filing also applies to our comments made on the call today. These documents can be found on our website, www.regiscorp.com/investor-relations. We will be taking questions at the end of the call. Please use the Q&A feature to submit any questions. With that, I will now turn the call over to Jim Lain. Jim Lain: Good morning, everyone, and thank you for joining us for Regis Corporation's Second Quarter Fiscal 2026 Earnings Call. As I mentioned last quarter, our focus remains on building a more durable, modern and disciplined Regis, one that is positioned to sustain consistent cash generation, improve financial performance and create long-term value for all stakeholders. Q2 represents continued progress on that journey. We are operating with greater precision and sharpening our focus on the execution levers that matter most despite traffic headwinds across the system. For the second quarter, adjusted EBITDA was $8 million, an increase of $900,000 year-over-year, driven by continued G&A discipline and contributions from our company-owned salon portfolio. Year-to-date adjusted EBITDA of $16 million is up $1.2 million versus the prior year. Consolidated same-store sales for the quarter declined modestly by 0.10%. Importantly, Supercuts delivered same-store sales growth of 2% year-to-date, while consolidated same-store sales increased 0.4%. We generated $1.5 million of unrestricted cash from operations in Q2 and $3.9 million year-to-date, reflecting improved operating discipline and cash management. At the same time, traffic remains our most significant challenge and the primary drag on top line performance. While pricing actions have supported same-store sales, particularly year-to-date, sustainable traffic improvements remains the central objective of our strategy. Since Q1, our strategy has not changed. What's different is the focus and rigor with which we are executing it. Over the past 2 quarters, we've zeroed in on the specific enablers that drive effective execution, including tighter organizational alignment, clear leader ownership, disciplined capital deployment and a sharper focus on adoption and compliance across the system. We continue to make good progress in our efforts to modernize and transform our flagship brand, Supercuts. Highlights include continued improvements in loyalty participation, digital engagement and execution of brand standards. In December, we launched pilots that will help us evaluate improvements designed to enhance customer digital interaction. As loyalty membership continues to grow, we are further refining our CRM strategy to improve customer retention. As I mentioned earlier, Supercuts delivered same-store sales growth of 2% in the quarter. However, traffic does not yet fully reflect the work underway. Our priorities for the coming quarters are clear: reducing friction, increasing franchisee adoption and compliance and demonstrating measurable lift through targeted pilots that can be scaled with confidence. Our company-owned salon group continues to be an important strategic asset. For Q2, these salons delivered sales growth of 4.3% -- as we noted in Q1, we introduced a new stylist pay plan designed to support a more productivity-driven operating model. As with any significant change, early implementation insights highlighted areas for refinement and the timing of pricing actions created some near-term margin pressure. During the second quarter, we moved quickly to implement targeted actions, including service pricing adjustments and the rollout of a labor optimization tool. While still early, we are beginning to see improved alignment with our margin expectations. The trajectory of performance is improving. And importantly, this group of salons is increasingly positioned to serve as a center of excellence, testing, learning and refining operating practices that can inform the broader franchise system. Across our portfolio of brands, we are taking deliberate steps to strengthen performance and drive long-term value. While SmartStyle continues to face more pronounced performance challenges relative to other brands, we are approaching this with a disciplined and proactive mindset focused on stabilization and improvement. Stepping back, our objective across our entire portfolio is not to make every brand the same, but to ensure they operate on a common operational and digital backbone. This allows each brand to retain its unique customer proposition while benefiting from shared capabilities that reduce complexity and cost. Our multi-brand portfolio is a meaningful asset for Regis, enabling us to reach different geographies and consumer segments effectively while operating with greater discipline and efficiency underneath. Technology remains a critical enabler of our strategy, and we are making steady progress across key initiatives. In the near term, we are focused on more effectively leveraging and integrating our POS platform to help drive traffic and improve the overall guest experience. This includes targeted enhancements to guest-facing digital capabilities ahead of the service, most notably booking and loyal connectivity. In parallel, we are defining a longer-term modernization road map designed to support scale, personalization and a unified guest identity across our brands. Loyalty and CRM continue to show promise, particularly in driving repeat visits and increasing engagement. While gains are incremental today, these platforms are foundational capabilities to unlocking greater frequency and utilization over time. We are also taking a disciplined forward-looking approach to AI. An AI task force has been established with a clearly defined charter, ensuring the responsible and productive use of AI across the organization. Our focus is practical, leveraging AI to improve process efficiency, enhance data analysis and support better decision-making across our portfolio of brands. We are taking actions required to position Regis for its next phase, simplifying the organization, tightening leadership scope and reallocating resources toward the highest impact priorities. This is not change for change's sake. It's about ensuring Regis is structurally prepared to execute with greater speed, clarity and accountability. As we move through the back half of fiscal 2026, our priorities are clear: stabilizing traffic through increased adoption of our initiatives, maintaining disciplined cost and cash management, strengthening the operational and digital foundation across our brands and building credibility through execution, not just ambition. While there is still work ahead, we are encouraged by the progress we're making in profitability, cash generation and organizational focus, which gives us confidence in the path forward. I want to thank our franchisees, our stylists and team members for their resilience and commitment. Together, we are building a more focused, more disciplined and more modern Regis. With that, I'll turn the call over to Kersten to walk through the financial results in more detail. Kersten Zupfer: Thanks, Jim. As a reminder, the company's acquisition of approximately 300 salons from Alline closed on December 19, 2024. Consequently, our results for the fiscal second quarter ending December 31, 2025, include a full period of contribution from those salons, while the prior year quarter included less than 2 weeks of contribution, which affects year-over-year comparability. As Jim discussed, our fiscal 2026 second quarter results reflect ongoing progress in executing our transformation strategy. While this work will take time, our fiscal second quarter results demonstrate continued strengthening of Regis' financial performance, supported by improving brand level performance and advancement of the initiatives that will drive long-term profitable and sustainable growth. For the second quarter, we delivered a 13% increase in GAAP operating income, $8 million in consolidated adjusted EBITDA and generated positive cash from operations for the fifth consecutive quarter. Total second quarter revenue was $57.1 million, an increase of 22.3% or $10.4 million compared to the prior year. This increase was primarily driven by increased revenue from company-owned salons resulting from the acquisition of Alline in December of 2024. This increase was partially offset by lower royalties and fees and non-margin franchise rental income. As of December 31, 2025, we had a net decrease of 374 franchise locations compared to December 31, 2024. Of the 374 franchise locations that closed since last December, 96 were in the 6 months ended December 31, 2025. We believe closures in the second half of fiscal year 2026 will be in the same range as the first half of fiscal 2026. The closures year-over-year primarily involved underperforming stores with much lower trailing 12-month sales than our top-performing units. The gap between those stores and our highest performers was approximately $350,000, highlighting both the strong potential in our system and the opportunity to further enhance profitability and cash flow as we continue executing our transformation strategy. We reported GAAP operating income of $6.2 million, an increase of $0.7 million compared to $5.5 million in the year ago quarter. This increase was primarily driven by operating income contribution from the company-owned segment, which includes the salons from the Alline acquisition and continued cost management discipline, which was partially offset by onetime professional fee expenses associated with the Alline acquisition in the prior year and salon closures. Income from continuing operations was around $456,000 compared to $206,000 in the year ago quarter. The year-over-year improvement was primarily driven by an increase in company-owned salon contribution and reductions in G&A expenses, which was partially offset by lower contribution from higher-margin royalty revenues. The increase in both operating income and income from continuing operation reflects positive same-store sales performance at Supercuts and our company-owned salons as well as disciplined cost management. Turning to our adjusted results. As a reminder, our adjusted results exclude stock-based compensation expense. We believe this provides a clearer view of our underlying business performance. A reconciliation of our GAAP to non-GAAP results is included in our press release. For the second quarter, our consolidated adjusted EBITDA was $8 million, an increase of 11.9% compared to $7.1 million in the prior year quarter. The improvement was primarily driven by the EBITDA contribution from the acquired company-owned salons and lower G&A expenses, which was partially offset by lower franchise royalties and noncash fee recognition. Our adjusted G&A was $9.8 million in the second quarter of fiscal year 2026, up from $9.6 million in the year ago quarter. The slight increase resulted from G&A associated with our additional company-owned salons, partially offset by lower corporate G&A expenses resulting from our continued focus on disciplined cost management. Adjusted EBITDA for our franchise segment was $6.2 million in the quarter, a $173,000 decrease compared to $6.4 million in the prior year quarter. This decrease was primarily due to lower royalties and noncash fees in the current period, which were partially offset by lower G&A expenses. Franchise adjusted EBITDA as a percentage of franchise revenue was 16.5%, up from 14.8% in the year ago quarter. Adjusted EBITDA for our company-owned salon segment improved by $1.1 million year-over-year to $1.8 million for the quarter, primarily as a result of increased number of company-owned salons, which were acquired in December of 2024. Turning to cash flows. For the 6 months ended December 31, 2025, we generated $3.9 million in cash from operations, which is an improvement of $3.1 million compared to the $787,000 in the prior year period. The increase in cash generation was driven by impacts from the Alline acquisition. As a reminder, when evaluating our reported cash flows, we believe it's important to understand that cash flows are derived from 2 sources: unrestricted cash from operations, which is available for general corporate use and restricted cash related to our ad fund, which is sourced from the contributions made by our salons, both franchise and company-owned. Ad fund cash is designated specifically for marketing purposes and is not available for corporate use. For the first 6 months of fiscal year 2026, our total reported cash from operations of $3.9 million includes $200,000 of cash used for the ad funds, which is restricted, and $4.2 million in cash generated from our core operations, which is unrestricted. The business continues to generate positive cash from operations, providing a strong foundation for growth and financial flexibility. For fiscal year 2026, we continue to anticipate a meaningful increase in unrestricted cash generated from our core operations compared to fiscal year 2025. This expected improvement is supported by continued operational strength, a full year of acquired company-owned salon results and the absence of onetime expenses we experienced last fiscal year. Additionally, working capital improvements are expected to further enhance cash generation from our core business. Ad fund cash, which is designated specifically for marketing purposes and not available for corporate use, built up over fiscal year 2025 as we moderated spending to focus on executing our business transformation strategy. Our marketing plans for fiscal year 2026 anticipate deploying a portion of this accumulated ad fund cash to support initiatives aimed at driving growth. In allocating capital, our priorities remain the same: reinvesting in the business to support growth, maintaining disciplined debt management and evaluating potential strategic opportunities. Turning to our balance sheet. In terms of liquidity, as of December 31, 2025, we had $27.4 million of available liquidity, including capacity under our revolving credit agreement and $18.4 million in unrestricted cash and cash equivalents. As of the end of the second fiscal quarter, we had outstanding debt of $126 million, excluding deferred financing costs and the value of warrants plus accrued paid-in-kind interest. As a reminder, in accordance with GAAP, our balance sheet contains approximately $208 million of operating lease liabilities related to our franchise salon leases. These leases have a weighted average remaining term of less than 5 years and the associated obligations are serviced by our franchisees. Provided the franchisees continue to meet their lease payments as they historically have, we believe these amounts should not be considered part of our debt position when evaluating our financial leverage. We expect these liabilities will continue to decrease over time as the leases mature and as we further reduce our use of franchise leases. And lastly, we continue to receive questions from shareholders regarding the potential to refinance our existing debt. While our current interest rate is higher than recent market levels, the economics of refinancing also depend on other terms of the agreement, including prepayment penalties and fees. Taken together, these factors may make refinancing after the 2-year anniversary of the agreement in June of 2026, economically viable and in the best interest of our shareholders. In the meantime, I want to assure investors that reducing our debt service remains a top priority. We are speaking with potential partners to explore refinancing options as we near the 2-year anniversary of the agreement in June of 2026, and we will keep shareholders informed as things progress. In summary, our fiscal year 2026 second quarter results reflect meaningful progress in strengthening Regis' financial profile. Our adjusted EBITDA and positive operating cash flows demonstrate the benefits of operating leverage and the contributions from the Alline acquisition, while our balance sheet and liquidity position provide flexibility to support our strategic initiatives. This concludes our prepared remarks. We will now open the call to any questions. Kersten Zupfer: We do have a question from Bill Charters of Sabal Capital. William Charters: Well, that's great news on the proactive refinancing efforts. I know it's almost 5 months away, but that's good that you're looking at that now. My question is actually on the Alline stores. And what is your initiative to improve performance there? Is it pricing? If you could just elaborate on that, that would be great. Jim Lain: Yes. Bill, this is Jim. Thanks for the question. Thanks for joining today. Yes, this has been one that I've been particularly involved with for the last many months. There's really 3 components to what we're doing. First off is a refinement of the pay plan itself. I'm no stranger to pay plans in our business, and this particular pay plan needed a bit of tweaking to put it kind of in simplistic terms. And we've made some, what I think to be pretty solid meaningful adjustments without any kind of a massive impact at all to the stylist. Second component is pricing. I think we were a bit slow early this past year in terms of taking price, and we've caught that up. We took further price adjustments in early December. And then the important part about pricing when you take price with a pay plan is that you adjust the associated tiers, the commensurate tiers so that it's all kind of going up equally together, that ensures that you maintain the appropriate margins in terms of the pay plan itself versus labor. And then lastly, what I will call labor optimization. You heard me talk in my narrative about the early steps we're taking with AI, and we've done some good work here. This is probably one of the first notable steps we've taken where we've levered the machine learning to help us, as an example, dumping in data in terms of sales by hour, so call it dayparts so that we better understand where we're overstaffed on stylist or understaffed on stylist. And one of the first things that really popped for us was where we were overstaffed. And so moving those stylists accordingly with the business is really the kind of the ultimate output of this labor optimization tool. It's early. I like what I see so far with it, but I think it's going to take the rest of the quarter that we're in to get a better understanding and where that might need to be tweaked. So listen, overall, I'm encouraged by what I'm seeing so far, and we're going to continue to stay very, very close to it. William Charters: Great. One other thing, just in the stores, I think it was like last fiscal year, it was -- maybe the store closures were 200. So far this year, maybe 100 closures, and you kind of guided for another 100. So if you look at apples-to-apples with the Alline stores going to company-owned from franchise, that is about a 50% reduction. Is that right from the previous fiscal year? Kersten Zupfer: Yes, that's about right. Just -- you mean reduction from half of the amount of closures that we had last year? William Charters: Yes. Jim Lain: That's said properly, Bill. Kersten Zupfer: We did get one more question in the Q&A feature, and I'll just read it and respond. Can you share any preliminary high-level feedback you're getting from potential replacement lenders on what rates you might get as a much more stable system with better leverage ratios? I'd love to be able to answer that at this point. But unfortunately, I can't really share anything more on rates or discussions we've been having, but know that we are having initial conversations with potential advisers. And as we can share more information, we definitely will. Jim Lain: Yes. Another question has come in. Can you walk through major new insights or initiatives from awareness to consideration to store visit to retention to address foot traffic goals? And if I'm following the question correctly, yes, there's -- if you listen kind of what I walked through in the narrative, the loyalty component, obviously, in Supercuts is a big driver, and we're continuing to see loyalty membership increase. With that, we stay highly focused on a group of what I would call lead measures with the lag -- the ultimate lag measure being the impact on traffic. And there are several components there. One is top of funnel, middle funnel, bottom funnel paid media, driving customer acquisition and then getting the customer in our door and then maintaining the stickiness of that customer. And that's where the CRM and the loyalty come into play. But data such as online booking, we look at very, very closely, 90-day customer retention, transactions with a valid e-mail. Those are all of the things that I consider to be important lead measures. And again, the primary drivers, the resources, the tools we're using and leaning into is paid media, and we continue to improve and tighten our execution there as well as loyalty, the kind of offers that we have and down the road, what I would call gamification in that particular arena. And then, of course, the whole idea of 90-day customer retention and what we're doing to maintain that stickiness. Kersten Zupfer: We did get a couple more questions that came in through the Q&A. I'll combine these 2 questions from the same individual. Are you planning to add cost-cutter locations? And why is loyalty adoption lagging in SmartStyle and cost cutters? Jim Lain: Yes. So first off, cost-cutter locations, there isn't an all-out effort to add cost-cutter locations. However, there are some cost-cutter locations that are coming online really as we speak right now in an area where a franchisee has found the ability to go over an old hair cutting business and has converted that business is now defunct and the owner of a Supercuts brand for us has gone in and been able to convert those to cost cutters, providing kind of a cool approach where we've got the 2 brands now in a given DMA and able to grow instead of growing the Supercuts brand where it didn't make sense, we can bring in the cost-cutter brand and fill in appropriately and productively. So I'm encouraged by that. And then in terms of loyalty adoption, the loyalty adoption is lagging because we started it later. It came -- we just have recently turned it on in the balance of our brands. The good news is we're seeing it grow. And in fact, in some cases, it's growing at a faster rate than it did initially at Supercuts when we launched it at Supercuts. So as I said in my narrative, ensuring that we are implementing and taking the logical wins that we're seeing on the Supercuts side and deploying those into the balance of our brands is an important part of our strategy. In terms of the CEO search, sorry, I wanted to make sure I'm looking at the questions here live. We continue -- the Board continues to evaluate and continues to consider the appropriate options for the next CEO. And I continue to operate as I am in running the organization and working in close partnership with the Board to ensure that we're moving forward. So more to come. Kersten Zupfer: That is -- that wraps up our Q&A session. That wraps up our second quarter fiscal year 2026 earnings call. Thank you for your interest and continued support of Regis. Have a great day. Thank you.
Operator: Good day, everyone, and welcome to the Helmerich & Payne Fiscal First Quarter Earnings Call. [Operator Instructions] Please note, this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Kris Nicol, Vice President of Investor Relations. Kris Nicol: Welcome, everyone, to Helmerich & Payne's conference call and webcast for the first fiscal quarter of 2026. On today's call, John Lindsay, our CEO, will be joined by Trey Adams, President; Mike Lennox, Executive Vice President of the Western Hemisphere and Kevin Vann, our Chief Financial Officer. Before we begin our prepared remarks, I'd like to remind everyone that this call will include forward-looking statements as defined under securities laws. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that the expectations will prove to be correct. Please refer to our filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. Reconciliations of direct margin and certain GAAP to non-GAAP measures can be found in our earnings release. I also want to highlight that we will have a presentation, which will support the prepared remarks from the management team and can be found on the IR website. With that, I'll turn the call over to John. John Lindsay: Thank you, Kris. Hello, everyone. Thank you for joining us. As always, we appreciate your interest in H&P. I'll begin with an overview of our first quarter results, and then I'll turn it over to Trey and he will discuss the broader macro environment, current dynamics in the rig market and several key commercial developments from the quarter. Including an update on our latest technology initiative, FlexRobotics. Kevin will then walk through our financial results and provide guidance for the second quarter and full fiscal year. To wrap up, Trey will return to summarize the key takeaways before we open the line up for questions. Turning to Slide 4 of the presentation, I'd like to begin by highlighting some of our key achievements for the fiscal first quarter. Execution continued to strengthen across our business. Driving solid operational and financial performance. Adjusted EBITDA exceeded expectations at $230 million, supported by resilient results in our North America Solutions and Offshore Solutions segments as well as the stronger-than-anticipated performance in International Solutions. I would note that the first quarter benefited from the timing of certain rig reactivation expenses, which will be more heavily reflected in the second quarter. Beyond the rig reactivations in Saudi Arabia, we also saw meaningful margin improvement from our FlexRig fleet operating in the vast Jafurah gas field. I'm encouraged by this progress and optimistic that we will continue to see further margin expansion throughout the remainder of the year. In North America Solutions, I want to recognize the team for another quarter of strong execution. We averaged 143 rigs working and our industry-leading technology and talented teams continue to deliver for customers, generating average margins of over $18,000 per day. Our offshore segment also delivered another quarter of robust operational performance. This business typically operates under long-term contracts, which provides a stabilizing counterbalance to the more cyclical land drilling market. As Trey will discuss during his remarks, FlexRobotics, automated drilling and connections, represent the next step forward in rig safety and capability. I am personally very excited about this development and view it as yet another example of how H&P continues to lead the industry in rig technology and drilling innovation. Now as this is my final earnings call as CEO for H&P, I want to take a step back for a moment and share a few reflections. I started my career at H&P 39 years ago. And while I don't have time to thank everyone that was instrumental in my career, there are many, and I am deeply grateful to all of them. During my 12 years as CEO, we've navigated volatile cycles, shifting markets and rapid technological change, and H&P still leads. Our long-term success depends on discipline, the skill and commitment of our people and the company's willingness to invest through the cycles rather than just react. Durability matters, we don't chase a perfect quarter, but we would build with patience, rigor and people who do things the right way. We build for decades of performance. Finally, I want to thank my exceptional leadership team and the many employees I've had the privilege to work with along the way. For their commitment, professionalism and support. For truly living the H&P way. I also want to thank our customers for their partnership over these many years and our shareholders for their long-term support of the company. It's been a privilege to lead H&P, and I'm excited about the future of the company under Trey's leadership. We have a strong team, a clear strategy and we are well positioned for the future. So thank you all. And now it's over to you, Trey. Raymond Adams: Thank you, John. I'd like to express my gratitude both on behalf of our whole organization and personally for your outstanding leadership, discipline and the example you've provided and especially for the mentorship and friendship. You've led this company with a long-term mindset, a steady hand through multiple cycles and a deep respect for the people and values that define H&P. The strength of the company today is a direct reflection of that leadership. As I step into the role next month, I do so with a great deal of respect for what's been built and for real excitement about where we're headed. The foundation is strong, a global footprint, differentiated technology and the H&P way, a culture that truly differentiates us. Building on that foundation, our focus will be on continuing to evolve, leaning into innovation, advancing our capabilities and positioning the company to compete and create value at a global scale in what is a constantly changing energy landscape. I'm honored to take on the role of CEO and to lead the next chapter of Helmerich & Payne alongside this team. I look forward to working with our employees customers and shareholders as we move forward together. Turning our attention to the current macro environment on Slide 6. We firmly believe that in the future, the world will require significantly more energy than it consumes today, driven by expanding population and growing prosperity in emerging markets, along with the rising power needs from AI advancements in many developed nations. This dynamic supports our view that demand for oil and gas will persist and grow for many years to come, which in turn, bolsters the need for our global drilling solutions. Looking at this year, the energy landscape appears cautiously positive, but uneven as various macroeconomic and geopolitical factors continue to influence the market. While these developments have these concerns over an imminent fall in oil prices at the year's offset, the price rebound has not been sustained for long enough to influence a pickup in industry activity. Operators remain focused on disciplined capital deployment, conserving inventory and prioritizing returns over volume expansion. Consequently, we anticipate oil-related investment will remain soft this year with greater upside potential likely to play out beyond this year. In contrast, the outlook for gas markets is more robust. Structural growth continues, fueled by demand for LNG and surging AI-led power demand. As such, we expect 2026 global upstream investment levels to remain flattish overall, though with notable variations by region and market segment. North America is likely to remain most restrained market in the quarter ahead. This is evident in current activity levels and the recent behaviors of both customers and competitors. We do, however, expect activity to gradually improve through the course of the year and strengthen into 2027. Internationally, the market demonstrates greater resilience. With a clear uptick in activity in the Middle East. Our recent announcements regarding reactivations in Saudi Arabia highlight this growing momentum, and we are beginning to observe broader improvements across the region. South America is also on a more positive path. In this context, our strategic priorities remain unchanged. Maintaining our focus on pricing, making selective capital investments and positioning our business to capitalize when the market cycle strengthens. Turning to rig dynamics on Slide 7. I want to provide a brief update on the operational front. Lower 48, rig demand moderated into the end of the year, with operators adjusting activity levels to align with market conditions. North America Solutions exited the first fiscal quarter with 139 rigs, a 4% decline from the prior quarter's exit rate. For the second quarter, we expect to average between 132 and 138 active rigs and currently have 135 rigs operating as of today. Although activity has softened, we remain optimistic for the full year outlook, supported by ongoing discussions with customers. Our expectation is that conditions will gradually improve over the course of the year with a pickup in both oil and gas focused activity. Moving to our international operations. We continue to expect the phase reactivation of the suspended rigs in Saudi Arabia that we've been notified will return to service. We now have raised the mast on 2 rigs and anticipate completing reactivations by mid-2026. Offshore Solutions continues to perform well, reinforcing H&P's leadership in offshore operations and platform maintenance. Currently, this segment has 3 active offshore rigs and 31 management contracts backed by long-standing customer relationships, creating a steady and reliable cash flow base. Our geographic footprint positions us well for anticipated offshore investment cycle and the continued integration of our land and offshore operating models and safety practices will strengthen our performance, both over the near and long term. Turning to Slide 8, on the commercial front, we made progress in several areas during the quarter, most notably was the announcement of rig reactivations in Saudi Arabia, which commenced in November last year. This marks a turning point in activity levels in the Kingdom, and we remain hopeful that we will see further reactivations as well as the opportunity to further deploy our technology and performance capabilities over time. Our teams are working hard to redeploy these rigs in country with a focus on customer satisfaction, safety and operational performance. Elsewhere in our International Solutions business, we are pleased to deploy additional rigs in both Australia and Pakistan and continue to see a high level of engagement with host NOCs, IOCs and leading OFS service firms on opportunities to expand our presence in the Middle East and North Africa. The potential reopening of Venezuela could offer meaningful growth for H&P in the medium term. We have a long and distinguished heritage of operating in the country and with the right operator, commercial framework and returns profile in place, we can mobilize relatively quickly. Furthermore, we are excited to note that geothermal rig interest remains high, both in Europe and North America. During the quarter, we received 3 contract awards for geothermal rigs in Germany, Denmark and the Netherlands. In January, we added another rig for a geothermal project in North America. Domestically, while the rig count remains soft, we are pleased to sign multiyear contract extensions for several of our rigs operating for key customers across the Lower 48. This strengthens our term backlog and provides greater visibility regarding activity levels and margin rates. Offshore Solutions saw continued commercial momentum during the quarter with progress on several multiyear offshore contract renewals and extensions under evolving commercial frameworks. These opportunities span multiple regions and reflect ongoing customer demand for H&P's operations, maintenance and integrated service capabilities. While certain contracts remain subject to customer approvals and customary conditions, the company is encouraged by its potential to support long-term revenue visibility in the offshore portfolio. As I mentioned, our Offshore Solutions business is differentiated from the more cyclical parts of our portfolio providing durability and longer-term visibility and is in an area we are actively looking to expand over time. Moving to the next slide, I would like to take this opportunity to discuss our latest advancement in rig technology. FlexRobotics, our system has been successfully deployed on 3 pads for a Super Major customer in the Permian Basin, delivering results in line or better across several operational metrics. FlexRobotics is all about the automation of routine tasks so that crews can concentrate more on performance and safety. FlexRobotics fully automates drilling, drilling connections and tripping rig floor activities. This, in turn, helps improve safety and operational performance by helping move our rig crews out of the rig floor Red Zone. We started our journey with FlexRobotics testing in 2024 on our R&D FlexRig 918 in Tulsa to help validate the system. But now FlexRobotics is successfully deployed and operational in the Permian Basin. The FlexRobotics system is designed with 3 off-the-shelf robotic arms used in many industries, allowing for a retrofit-ready system to integrate seamlessly with any of our active rigs. We are excited about the potential to deploy more FlexRobotic systems on our rigs in the future. At the same time, customers are excited about its potential with several inbounds on our latest innovation. As John said, H&P continues to lead in rig technology innovation. We remain dedicated to developing solutions that both enhance customer experience and deliver superior returns for our business. With that, I will now turn the call over to Kevin, who will walk you through our financial results. J. Vann: Thanks, Trey. I will start by reviewing our first quarter operating results and providing details on the performance of our operating segments. I will then spend some time walking through our capital allocation framework and conclude by outlining our guidance for the fiscal second quarter before handing it back to Trey. Let me start with highlights for the recently completed quarter on Slide 11, where we exceeded the midpoint of our direct margin guidance in all our operating regions despite the dynamic market environment. Alongside our continued operational and commercial success, we also made strong progress on the deleveraging front as we have paid off $260 million on our $400 million term loan as of the end of January, remaining significantly ahead of the debt reduction goals we laid out last year. During the quarter, the company generated revenues of $1 billion, which is the third consecutive quarter at that $1 billion mark. We generated $230 million of adjusted EBITDA coming in ahead of expectations. This was primarily led by stronger-than-anticipated margin performance in International Solutions as a result of the lower-than-expected reactivation cost in Saudi during the quarter. The balance will now occur in the second fiscal quarter and is reflected in our 2Q international margin guidance. On EPS, we reported a net loss of $0.98 per diluted share. These results were negatively impacted by a non-cash impairment charge and some unusual non-cash items of $103 million. Absent those items, we generated a loss of $0.15 per share. Capital expenditures for the first quarter were $68 million, trending below our sequential run rate. This outcome was primarily driven by slower-than-anticipated CapEx associated with the Saudi reactivation capital deployment in International Solutions, along with timing changes in some of our North American solutions spend. In line with this, H&P free cash flow in the quarter came in strongly at $126 million. Our cash flow generation funded $25 million in base dividends in addition to the significant progress on paying down our term loan. Now turning to our 3 segments, beginning with North American Solutions on Slide 12. We averaged 143 contracted rigs during the first quarter, which was up slightly from the levels we experienced in the fiscal fourth quarter of 2025 and consistent with the activity expectations we set on the prior call. Segment direct margin for North American solutions was $239 million, which came in above the midpoint of our guidance range. This was driven by a higher rig count sequentially and our total gross margin holding in above $18,000 per day as we closed out the calendar year. This outcome is also evidence of our commitment to our customers. We benefit when they benefit via our performance-based contracts. Ultimately, our goal is to help them meet their objectives of drilling consistent and timely wells and setting them up for a clean and efficient completion and production process. Turning to International Solutions on Slide 13. The segment ended the first quarter with 59 rigs working and generated approximately $29 million in direct margins, exceeding the high end of our guidance range of $13 million to $23 million. Again, the much higher-than-anticipated margin rate is primarily driven by the timing of reactivation costs, which were anticipated to occur in the first quarter, but will now happen in the second fiscal quarter. Underlying the lumpiness of our reactivation cost in Saudi Arabia we saw continued improvement in the margin performance of our FlexRig fleet and higher-than-anticipated rig utilization in the Middle East and in Colombia. Finally, with our Offshore Solutions segment on Slide 14, we generated a direct margin of approximately $31 million during the quarter, which came in slightly ahead of the midpoint of our guidance range. We had 3 active rigs and 33 management contracts in operation during the quarter. As with prior quarters, we are excited about this business and the consistent and stable results that it delivers. As Trey said, it requires minimal capital and generate steady cash flow, which is distinctive from the cyclical and more capital-dependent nature of our onshore portfolio. Turning to Slide 15, I want to provide an update on our capital allocation framework. Our focus remains unchanged, with the top priority being continued deleveraging and maintaining our investment-grade status. In relatively short time, we've made meaningful progress to reduce our post-acquisition leverage and we remain committed to reaching our near-term goal of paying down our term loan of $400 million ahead of schedule by mid-2026. As I mentioned earlier, we have paid down $260 million on it as of the end of January. At the end of the fiscal first quarter, we had cash and short-term investments of approximately $269 million. Including the availability under our revolving credit facility, our total liquidity is approximately $1.2 billion. Beyond the term loan repayment, we are focused on driving leverage down to around 1 turn or 1x net debt to EBITDA. We continue to evaluate our asset base to ensure capital is directed towards the highest return opportunities while simplifying the portfolio where appropriate and driving structural cost improvements across the organization. Since we closed the sale of the transaction, we have been able to reduce our SG&A by over $50 million relative to premerger stand-alone run rates, and we'll continue to align the cost structure with the level of activity. Further, as I stated last quarter, we are harmonizing processes and systems across our Eastern and Western Hemisphere operations. These efforts will help in the longer term with the cost-conscious culture we have at H&P. On portfolio optimization, we continue to work diligently to streamline the portfolio and have line of sight on over $100 million of divestments. Lastly, on shareholder returns, a key element is the dividend. We view the base dividend as a core commitment to shareholders, and we remain confident in its sustainability. The dividend is well covered by cash flow and our capital allocation decisions are structured to support it across commodity cycles. Now I want to transition to our second quarter and full year guidance on Slide 16. Looking ahead to the second quarter of fiscal 2026 for North American Solutions, we expect our margins and operated rig count to taper down in line with the typical seasonality and ongoing softness in U.S. land activity levels. As a result, we expect direct margins in our second quarter to range between $205 million to $230 million based on anticipated rig count of between 132 to 138 rigs in the second quarter. Importantly, as we look out to the fiscal third and fourth quarters, we do see signs of the market stabilizing and expect our rig count to pick up in the back half of the year, giving us a path to approach the midpoint of our full year rig count of 132 to 148 rigs. For international, we anticipate the rig count to average between 57 to 63 rigs in the second quarter, which includes the rigs being reactivated in Saudi. As a reminder, this outlook also includes the expectation for some lower rig counts in non-core countries where the current EBITDA contribution is minimal. When we think about core Middle East, the year-on-year trend is positive. We expect International Solutions to generate a direct margin between $12 million to $22 million. As previously mentioned, we did not incur as much reactivation costs in the first quarter as we anticipated. The balance will now fall in the second quarter, resulting in a step down in sequential margin rates. We are also experiencing some churn in Argentina, where rigs coming to the end of their term are returning to the yard to be fitted with additional technology packages before being redeployed. Despite this timing difference, we expect the direct margin in the fiscal third quarter and fourth quarter to be materially higher than the direct margin rate we achieved in the fiscal first quarter. All reactivations will be behind us, and we expect our FlexRig fleet margin to continue to improve. For offshore, we anticipate an average of 30 to 35 management contracts and operating rigs. We expect the margin rate in the fiscal second quarter to range between $20 million and $30 million. This step down is reflective of typical seasonality, lower revenue days and the roll-off of some higher-margin rig management contracts in Angola. As we progress through the remainder of the year, we anticipate the margin rate to step back up and remain confident in the $100 million to $115 million direct margin full year guidance we shared previously. We are also trimming our 2026 gross capital expenditure budget slightly to be between $270 million to $310 million as a result of activity levels and ongoing benefits of our optimization programs. All other full year guidance ranges remain the same. To conclude, the timing difference of the cost associated with reactivations is creating some lumpiness in the direct margin between the first and second quarters. Beyond that, we remain optimistic about activity and direct margin progression in the third and fourth quarters and are comfortable with where external expectations lie for the full year. I will now turn it back over to Trey for some closing remarks. Raymond Adams: Thank you, Kevin. Turning to Slide 18. I'd like to conclude by refocusing on our compelling investment thesis. H&P today is unrivaled in our scale, geographic diversity and portfolio to capture rising global onshore drilling activity. We are clearly the technology leader and see a significant opportunity over time to deploy our cutting-edge technology across our global fleet. We believe we are only in the early stages of international shale development and are particularly excited about the prospects in the Middle East and North Africa. At the same time, we are embarking on a rewarding journey of enterprise optimization with several programs underway to streamline our portfolio, cost structure and deliver on the full potential of the KCA Deutag acquisition. Our near-term commitment remains on deleveraging our balance sheet, and we are confident in repaying our term loan ahead of schedule. Beyond that, we believe we will have the financial strength and flexibility to enhance our attractive shareholder return profile and further differentiate our portfolio. Lastly, I'm proud of the way we started the year with solid first quarter results. While we face some timing and market dynamics in the second quarter, we are optimistic about activity improving through our fiscal third and fourth quarters and remain confident in the guide we set out at the start of the year. I want to thank the employees of H&P for all of their efforts and look forward to what we can achieve together this year and beyond. That concludes our prepared remarks for the quarter. And I will now turn it back to the operator for questions. Operator: [Operator Instructions] We'll take our first question from Scott Gruber with Citigroup. Scott Gruber: And before I ask the question, I just want to thank you, John, for all the insights over the years. It's been a real pleasure and enjoy your next adventure. John Lindsay: Great. Thank you very much, Scott. I appreciate it. Scott Gruber: Yes, indeed. And Trey, congrats on the promo to you as well. Raymond Adams: Thank you very much. . Scott Gruber: So I want to ask about the moving parts incorporated into the fiscal 2Q guide. We got some color, which I appreciate. It sounds like the start-up costs are going to increase in 2Q as you really push forward those reactivations in Saudi. Are you able to dimension the size of those start-up costs in fiscal 2Q? And will there still be some reactivation costs continuing into fiscal 3Q? And then you mentioned the seasonal headwinds in the U.S. business. Outside of seasonality, is the underlying profit margin for the North American services business now is pretty stable? Or is there still some contract roll headwind in that business. So just some color on those moving parts in the guide for 2Q and how some of those headwinds abate into the future. Raymond Adams: Yes. Thank you for the question. This is Trey. I'll start, and then Kevin and Mike may fill in some additional color as we go through this question. We definitely saw some lumpiness between Q1 and Q2, and we'll discuss the 3 primary drivers of the lumpiness between the quarters here in just a second. I will firmly commit and say that we feel good on the forward guide. We feel good about our guided activity range in North America, as Kevin stated in his prepared remarks, and we feel good about the international Solutions outlook. As it relates to reactivation costs in Saudi, those costs we anticipated occurring in the first fiscal quarter now have moved into the second fiscal quarter. We will see some of those costs continue to move forward into the third quarter, but the vast majority of those will occur in the second fiscal quarter and within our guide. We did also -- the other kind of key driver was in our North American Solutions segment. As you guys are aware and as we've shown, we do expect fewer rigs in North America. This was largely driven by the end of the calendar year 2025 crude pricing. Some of the churn rates and some of the private activity that we have traditionally seen was much more moderated as we exited the calendar year 2025 and entered into our second fiscal quarter. Mike can get into some color later on the call about how we see that outlook as we progress through the year, but we feel like that's much more robust. Private E&Ps compared to a couple of years ago, definitely didn't load to the wagon in the fourth quarter and into the first quarter like they had been over the past couple of years. Our public E&P customers remain very fiscally disciplined. Their capital returns programs remain very much firm and in place. So we feel pretty robust on that guide as we go forward, but it just all kind of occurred as we started this new year with a little bit lighter of a guide than we had initially anticipated in North America. The last kind of component of some of the lumpiness was this offshore seasonality that Kevin referred to in some of his prepared remarks. We definitely had some rigs that moved from a drilling to a more maintenance mode. We had 1 rig that stopped working and stopped activity in Africa. That is pretty seasonal, though. We expect those rigs to go back to drilling and off of maintenance mode. And so it just provided a little bit of lump in our quarter through the offshore segment. What we are, though, is very optimistic on the full year guide. The Saudi reactivations are putting a lot of wind in our sails. We feel like those are largely behind us and the start-up expenses are behind us. We feel good about our forward guide on those as well as our FlexRig margins throughout the rest of this FY '26 year. Our FlexRig margins continue to trend well and are moving in the right direction. In North America Solutions, the current expectations of activity improvement are being felt and seen. And so we still feel very good about our overall activity guide in North America Solutions. And then lastly, I'll just touch on before I turn it over to Kevin for some additional color. I'll just touch on the optimization of costs and expenses throughout the company and portfolio will be a keen focus area throughout the rest of FY '26. Kevin referenced in his prepared remarks and can add some additional color on our CapEx guide, but we feel comfortable about that. So overall, I think we're feeling good about the second half of FY '26 and believe that this second quarter bumpiness will abate and resolve itself. Turning to you, Kevin? J. Vann: Yes. Scott, yes. And if you think about second quarter international guidance of $12 million to $22 million. We've got all of the additional start-up reactivation costs that are hitting margin. We've got them plugged into that quarter. We're pretty confident they'll all hit next quarter. But what you're going to see, without giving you third quarter guidance, you're going to see a material step-up in gross margin coming out of our International Solutions segment from the second to third quarter. So again, from an International Solutions perspective, it's really just kind of sliding some costs between quarters, but we still anticipate when you think about those reactivation or those reactivated rigs in Saudi. We're anticipating a little over $5 million of EBITDA per year contribution out of those rigs. And then on top of that, with our FlexRig performance continuing to get better in Saudi. I think what we've talked about historically has been between $20 million and $25 million for that fleet, those rigs to contribute to annualized EBITDA. So again, second quarter, kind of a lull. Some of that's activity driven. Some of that's, that's just getting ready to really ramp up our International Solutions segment. So -- and as Trey mentioned on cost, using all that as the opportunity from a capital perspective really to take a long hard look in the mirror and make sure that -- we've got capital allocated to the best projects and the ones that are going to return the most value the quickest. And so we're lowering our capital guidance a slight touch. But again, I think that's demonstrative of just us keeping our eye on the ball. Operator: We'll take our next question from Arun Jayaram with JPMorgan. Arun Jayaram: Yes. Good morning, gentlemen. Trey, I wanted to start -- see if we could start with your vision for H&P. You talked about this being a new chapter for the company as you take over for John next month. But I was wondering if you could talk about your vision for the company, including what you see as some of the opportunities internationally, particularly as we see growth in unconventionals and geotherm? Raymond Adams: Yes. Thank you. And first, I just want to take a moment to say how excited I am about the future and about where we're positioned today. John is sitting here and his vision has been manifested in is coming to reality across the organization. The company is well founded. And our foundation is strong. If you think about where we were 14 months ago prior to the KCA Deutag acquisition and the True from 2 of H&P today versus where we were then, we're a truly different company in business today than we were 14 months ago. We're the global leader in onshore drilling. We have a great base of operations in offshore, the leader in platform, operations and maintenance services globally and having an incredible customer base to be levered and build upon as we look into the future. In addition to that, if you think about the geographic diversity and talent we have at the organization today, it's just incredible. From an engineering resource, drilling expertise, our office-based employees, we just have an incredibly talented organization to build and leverage for a lot of future growth. When you think about the vision over the next 3 to 5 years, obviously, this will continue to be dynamic and very iterative as we look forward. But it's really founded on 4 kind of key notes and nodes, if you will, right? And the first one being international growth and expansion that you referenced. We are very, very focused on continuing to build our Eastern Hemisphere land exposure, the Middle East and North Africa, backed by our rig reactivations in Saudi, key IOC relationships. And then the transference of our models and technology from the North American business will really underpin what we believe is going to be a growth -- a great growth story for the organization into the future. In addition to that, North America Solutions and maintaining and continuing our leadership position in North America will be a key focus for us. Over the last decade, 1.5 decades, we've continued to accrete and grow our share position in North America. We've done that through our great people, processes, equipment, technology portfolio. Continuing to build and expand on that will be a big focus and we'll be right in our front window as we look forward through '26 and beyond. And today, we've talked about in some of our prepared remarks, some of our technology innovations, continuing a leadership position in the digital and automation space, FlexRobotics and continuing that progression in the North American shale market will be a very critical for us to maintain that leadership position and continue to grow share over time here in North America. A subcomponent that I will reference is offshore. It's not bullet 3, but offshore continues to be a very exciting space for us. It's a very capital-light and stable, very durable business that we look to expand and grow in '26 and beyond. Bullet 3 really is what Kevin was talking about in his prepared remarks and we'll continue to discuss and that's deleveraging and maintaining our fiscal discipline at H&P. For 106 years of our company's history, we've been very fiscally rooted and founded in very good stewards of capital. We're committed to shareholder returns, and we're committed to getting balance of 1-turn of leverage, and that will be a focus for us through the rest of this year and over the next 3 to 5 years to really maintain that fiscal discipline. The fourth bullet I'd like to discuss and really focus on here is this enterprise optimization. If you think about enterprise optimization, I'll break it into 2 pieces. One is on the field and front office focus for us. And you think about the transference of the H&P business system, the transference of the H&P way outside of the North American market and into the international markets in a big way and in our offshore segments. Our customer-centric culture and being able to see that through everything we do, everywhere we work, driving safety excellence every single day, everywhere we work and continuing to be the performance and technology leader that we are today. But we need to see that, and we will see that come through all of our operations across the globe. On the back office, we're committed to being a very lean and efficient organization. We're committed to being a very cost-conscious culture, as Kevin mentioned. And now leveraging our global scale and capabilities, there's ways to continue to optimize our customer delivery and everything we do as we're looking forward. Moving to international excitement. Yes, go ahead. Arun Jayaram: No, no, go ahead. Go ahead. Raymond Adams: Moving to international excitement, right? We sit here today, and we're talking about the reactivations in Saudi that are going to be foundational for our Eastern Hemisphere land growth. What we haven't referenced in a big way, I think Kevin touched on it a little bit earlier, but we are adding a second rig in Australia today, excited about that opportunity. In addition to that, we saw a little bit of activity moderation going from 1Q to 2Q in Argentina. We expect that activity to pick back up through the second half of the year. And what we're taking advantage of through that activity moderation period is we're investing in technology in Argentina. And so our digital applications and fleet we'll be able to be levered by our customers down there that's going to create exponential value for us as we look forward in Argentina. Today, as we stand here on the call, we're rolling out technology and our digital solutions in Oman as well for some key IOC clients. We're excited about that progression. And so as we stated in prepared remarks, we believe we're in the early innings of a really long game here and a long great growth story in the international market. Outside of some of the rig reactivations in Saudi, there's continuing ongoing discussions with IOCs and NOCs in North Africa and in the Middle East. Those are great conversations. We look forward to providing more material updates as the quarters move through the year. But it's really, really exciting to see kind of where we're going. I think you mentioned geothermal. Geothermal, both in Europe and North America continue to be exciting for us. We've added a second rig in the North American market. We've signed an LOI for a third rig in North America. And then Europe, geothermal, we're proud to be over the most advanced extended-reach complex geothermal project in Europe today with more activity points that are coming in the near term. And so that's really starting to gain some good momentum. Arun Jayaram: Great. John, I wanted to wish you the best. John, I want to wish you the best as you joined Hans and George Doty in retirement? John Lindsay: Yes. Thank you very much. I appreciate it. It's an exciting time for the company, and I'm looking forward to my next chapter as well. Thank you. Operator: We'll take next question from Saurabh Pant with Bank of America. Saurabh Pant: And John, I'll echo Arun, and Scott, congrats on your retirement. It's been a pleasure to hear your patient and reassuring voice over all these years. John, Thank you. John Lindsay: You're welcome. Thank you very much. It's been a great journey. Saurabh Pant: Yes. I'm sure you're looking forward to slowing down a little bit. But Trey, you will face the tougher questions now. So -- maybe I'll throw one at you. Maybe I want to dig in a little bit on the international outlook, Trey or Kevin, if you don't mind. I know you alluded to this a little bit in your prepared remarks and in response to Scott's question, but how should we think about profitability when all these 8 FlexRigs are done fully ramping up and the 7 rigs we are reactivating in Saudi. I know activity moved up, right? But keeping everything else steady. How should we think about where margins can go, I think, let's say, perhaps by the fourth fiscal quarter of this year. Just some idea of where things might land. Raymond Adams: Yes. Thank you. And I'll start and then turn it over to Kevin for additional color on anything I missed. So we're excited today, as we sit here on the call, we have 2 masts in the air of the planned reactivations and a third mast that's ready to be raised imminently. So we're making good progress on our rig reactivations, working closely with our customer there in the Kingdom to make sure that those start-ups move seamlessly and go really, really well. Overall, we expect 6 of those 7 reactivations to resume prior to the first half of calendar year 2026. The seventh rig, we're still working on timing for rig #7, as it relates to some of the financials around those reactivations, our CapEx for those reactivations has been built into our CapEx guide. So there's no additional CapEx that is being planned or will come out. It's based into our FY '26 assumptions as we sit here today. Beyond that in Saudi Arabia, that being a really core and key area for us on Eastern Hemisphere growth. We're continuing to have ongoing conversations with our primary NOC customer there in the Kingdom and really think that there's plenty of opportunity as we look through '26 and '27. Nothing that we can comment on materially today, but a lot of encouraging conversations. It's all underpinned by safety and performance. So we have great safe start-ups and our FlexRig performance has been moving in a direction that's providing a lot of tailwinds for us for incremental activity. That operations team continues to drill very safe and efficient wells. The more we do that, the more opportunities will be right there in front of us. As the rigs come out of suspension, the 7 reactivations, we anticipate annualized EBITDA of roughly $5 million per rig. And as you alluded to, we expect that to get there into full run rate by Q4 of our fiscal year. In addition to that, we referenced on some commentary earlier that our FlexRig margins continue to improve, and we expect those rigs to get to full annualized run rate numbers by the end of FY '26 as well. So it provides a pretty robust and well-founded business for us there in Saudi through this fiscal year. I will just hit more broadly on the international segment direct margin before turning it to Kevin to see if there's anything I missed here is once everything is reactivated in Saudi, and it's still -- obviously, there's still a lot more to happen and more opportunity in front of us, but these reactivations come online. We expect our International Solutions segment, to be right around a direct margin rate exceeding $45 million per quarter. And so it's just a good testament to getting these reactivations behind us and we can get to a very stabilized run rate as we're looking beyond FY '26. J. Vann: No, and this is Kevin. I don't really have much to add other than as Trey mentioned, getting gross margin above $45 million, hopefully relatively soon when I think about the big step-up that I mentioned earlier between the second and third quarter. But even more important to that, Trey mentioned all the potential new business and growth that we're going to see out of the Eastern Hemisphere. The acquisition of KCAD basically enabled us to be in this position where now we have that footprint to continue to grow from it. And so $45 million is a good start, but I'm anticipating for years to come now that number to continue to grow. Operator: We'll move next to Eddie Kim with Barclays. Eddie Kim: I wanted to circle back to a comment you made about North America likely remaining the most restrained market in the quarter ahead as evidenced by recent behaviors of competitors. Are you still seeing some bad actors out there in terms of pricing? And I know you expressed confidence in maintaining your full year rig count in North America, which does imply a ramp up as we move through the year. Does that same confidence apply to pricing as well? Or do you think that ramp-up will take a bit longer to materialize. Michael Lennox: Eddie, I'll start. This is Mike. I appreciate the question. Yes. So let's start with the customers and kind of what we're seeing is there's kind of 2 camps out there, the ones that are just disciplined and staying true to what their plans are. And then we have the ones that are more sensitive to the commodity prices. And so what we saw in the quarter, and we've already rebounded essentially, as I described it, where they had pulled back kind of a wait and see, but they still have plans to pick up, and we're starting to see those conversations pick up. And that's why in the back half of the year, we're very optimistic of picking up. Most of those players that were obviously sensitive are your smaller E&Ps, your independents, as far as pricing, we're still saying true. We're not wavering from the 45% to 50% direct margins that we've been on. We're not chasing market share. And really why 45% to 50% direct margins, it's what we need as an organization to continue to invest back in the organization and to achieve the outcomes that our customers are looking to achieve. Again, we're confident in our ability just to navigate the near term and we're very optimistic about the back half of the year. Eddie Kim: And just a quick follow-up. Do you think direct margins in North America you'll be able to hold around that $18,000 a day level for the full year? Or does that look more like an upside case based on pricing trends you're seeing right now? Michael Lennox: Yes, kind of more short term, I'd call it flat. Yes, we're holding -- trying to hold on to that 18 roughly a day. The back half is kind of -- let's -- we'll see. We do think -- like I said, there's some opportunity there. And of course, that's on the revenue side. And then on the expense side, we're obviously working that. Just from a Trey had mentioned just leveraging our scale, we had some great opportunity there, and we continue to work on our expenses as well. Operator: We take our next question from Derek Podhaizer with Piper Sandler. Derek Podhaizer: I just wanted to discuss the opportunity for FlexRobotics. I mean could you please explain the details around how much capital is required to retrofit an active rig? How many rigs you see being upgraded to FlexRobotics? Will this be customer-funded? How should we think about the paybacks? And how meaningful could this be for your earnings over the near to medium term? Michael Lennox: Derek, this is Mike again. I'll start, and then Trey probably add in. I'll just start bluntly. I think it is meaningful in the long term. There's a lot of excitement and really proud of the efforts we've made on our robotics so far. I think Trey mentioned in his earlier comments, we have a test rig that we've been testing this on for quite some time, and we're rolling it out. It's already proven I'll talk about the rigs that's already deployed for a Super Major in the Permian. We work very closely with them to establish goals. We weren't just going to do robotics for robotics just for fun, it was going to have to at least perform at P50 level. So the average level for that operator in the Permian Basin. And after 10 wells, we've drilled and completed. We've moved the rig twice, so 2 pads we're roughly at P40. So we're exceeding that. And really, that's a lot of hard work by our employees, our rig crews, our customer working with us very closely as well as our vendors. It's taken some vendors interacting and setting that goal and going out and achieving. So very optimistic. The demand, the pipeline, the discussion around it. Yes, we think it's very optimistic and look forward to progressing that. Raymond Adams: Yes. And I'll just -- this is Trey. I'll just share that on your question around pricing and commercial constructs, right? We intend to make these investments with appropriate returns. Obviously, we're focused on improving safety out at the edge. And then the performance related to robotics is going to be another step change in uplift for us and for our customers. And so those creative commercial constructs that we've levered throughout the rest of our business will be looked at and levered here as well. And we're not going to make this investment without an appropriate returns profile. But it's still early days. The conversations are moving with customers. There's great customer interest and intrigue in the FlexRobotics system and look forward to providing additional color as we move forward. Operator: We'll move next to Keith MacKey with RBC Capital Markets. Keith MacKey: Maybe just a question on free cash flow conversion, very strong for Q1. We have some of the pieces for how 2026 will unfold. But can you help us maybe fill in some of those gaps for how we should be thinking about free cash flow conversion for the full year? J. Vann: Yes. I mean, obviously, without giving full year guidance, when you think about how much cash we're going to be able to generate, as I mentioned earlier, and we've talked about in some of Trey's prepared remarks, we have a clear line of sight on the paying down of the remaining $140 million of our term loan, and that's just from organic cash flow. And that should happen by the end of our third quarter or right around the end of our fiscal year third quarter. So very optimistic about that. But that tells you that how much additional free cash flow, obviously, the dividend is still of primary importance to us. And so we'll continue to obviously pay that. But then when you think about just the capital guidance that we're giving this quarter, obviously, a slight reduction, but or -- but again, just the free cash flow will continue to increase. This quarter was a little bit higher just because of the lower CapEx numbers. But again, for the full year, again, clear line of sight on being able to pay down just organically, the remaining balance on the term loan. And then on top of that, we haven't really talked about it, but we've got -- as we said on the call, we've got $100 million of clear or clarity around some portfolio optimization that we're doing coming out of the acquisition. Feel very strongly about our ability to execute and get those deals pulled across the line by the end of the year. Operator: And we'll move next to Ati Modak with Goldman Sachs. Ati Modak: I guess on the rig rationalizations in the quarter, should we expect more? Can you talk about that? And can you give us any more color on what your thoughts are for market to reduce capacity? J. Vann: Yes. This is Kevin. I'll begin just in terms of rig rationalization and the impairments that we took for the quarter. It's very difficult. Accounting rules will drive a lot of those impairment decisions and impairment accruals that we have to take. But I'll let Mike touch a little bit on just kind of what those stem from in terms of the rigs that we've had on the sidelines for a while. And if you look at the amount of capital that was going to be necessary in order to put those rigs back to work versus the rigs that, obviously, we're just continually trying to churn and get those put back into our operating system. We just -- from an accounting perspective, we looked at that as too much of a hurdle. And so as a result of it, again, these impairments happen from time to time. But I'll let Mike touch on kind of the specific rigs. Michael Lennox: Yes, Ati, more on the details. So we're talking about 30 rigs. Most of them had already been decommissioned. We had been pulling a componentry, reusing that across our fleet. These rigs had not worked since COVID or prior to COVID. So they had been idle for quite some time. And some of the components that we're talking about, for example, on 42 of our rigs today, we have what I call Level 1 automation. So it's a rig floor automation that's removing people from the Red Zones on the floor. So as we've put new equipment on those rigs, the equipment that we've pulled off is what we're talking about that we've -- we're decommissioning and impairing. Another example would be, as we've upgraded our entire fleet, at least domestically, we've had to put new drillers cabins with new technology to run our full suite of tech on those rigs. So these drillers cabins, we've used about as much as we can on them, and it's time to clean the yards and dispose of that equipment. So that's kind of the nature of what we're talking about on equipment. Ati Modak: And congratulations, John. John Lindsay: Thank you. I appreciate it. Operator: And that does conclude our question-and-answer session for today. I would now like to turn the call back to John Lindsay for any additional or closing remarks. John Lindsay: I just want to thank everyone for joining us on the call today. It has truly been honored to lead the company as CEO, serving our shareholders, our Board of Directors and our amazing employees. It has really been the dream of a lifetime and we'll be forever thankful. I truly believe Trey and team will achieve great success. I have complete confidence in their ability to execute the strategy going forward. And with that, operator, you may now close the call. Operator: Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at this time.
Operator: Good day, ladies and gentlemen. Welcome to the Fourth Quarter 2025 Illumina Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, we will conduct a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the call over to Head of Investor Relations, Conor McNamara. Conor McNamara: Hello, everyone, and welcome to Illumina's Fourth Quarter 2025 Earnings Call. Today, we will review our financial results released after the market close, and provide prepared remarks before opening the line for Q&A. Our earnings release is available in the Investors Relations section of illumina.com. Joining us on today's call are Jacob Thaysen, Chief Executive Officer, and Ankur Dhingra, Chief Financial Officer. Jacob will start with an update on Illumina's business, followed by Ankur's review of the company's financials. We will be discussing certain non-GAAP financial measures on today's call, and a reconciliation to GAAP can be found in today's release and in the supplementary data available on our website. Please note that unless otherwise stated, or when referring to end markets, all year-over-year revenue growth rates discussed in our prepared remarks are presented on a constant currency basis, excluding the impact of foreign exchange fluctuations. In addition, all references to China refer to our Greater China region, which also includes Taiwan and Hong Kong. This call is being recorded, and the replay will be available in the Investor section of our website. It is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina files with the SEC, including our most recent forms 10-Q and 10-K. With that, I will now turn the call over to Jacob. Thank you, Conor. Jacob Thaysen: And good afternoon, everyone. I'm pleased to announce that our Q4 results exceeded expectations capped off with 20% growth in our clinical consumables revenue ex-China, reflecting execution across the organization as we closed out 2025. We made tremendous progress throughout the year, and the momentum we have built going into 2026 gives me high confidence that the strategy we put in place in 2024 to return to long-term growth is working. Highlights of our 2025 achievements include, we return to growth in 2025, with ex-China revenue growth of 2% for the year and 7% in Q4. An acceleration in clinical consumables revenue growth throughout the year with mid-teens growth in the second half and Q4 growth of 20% ex-China. We achieved our high throughput transition milestones we set out to achieve. We advanced our portfolio beyond core sequencing into multiomics and data software and AI, and we expanded non-GAAP operating margins by 180 basis points and grew non-GAAP EPS by 16% year over year. We generated strong free cash flow and returned approximately $740 million to our shareholders through share repurchases. All of this was achieved in a rapidly evolving market, and our team members stayed ahead of many of the dynamic developments we saw throughout the year. Our success in 2025 is a testament to the strength of the Illumina team, and I want to recognize their ongoing commitment to our customers through innovation and execution. Now, I want to expand on our success we are seeing in our clinical business where revenue growth accelerated throughout 2025. The strength we are seeing in clinical consumables, including 20% ex-China growth in Q4, is being driven primarily by two factors. First, adoption of sequencing-based diagnostic tests is increasing. As customers launch new assays, and expand reimbursement coverage in areas like minimal residual disease, and early cancer detection testing. Second, we are seeing broader demand for comprehensive genomic profiling and whole genome approaches in oncology and genetic diseases, both of which require greater sequencing intensity and benefit from the power and consistency of the NovaSeq X. As customers scale more data-intensive applications on a more powerful platform, the elasticity dynamics we've discussed in previous quarters continue to take hold. This is driving strong instrument sales. Q4 represented the second highest quarter placement since launching the NovaSeq X in 2023, while also accelerating consumables demand supporting durable growth in our core sequencing business. Next-generation sequencing remains vastly underutilized, and we are positioning our business to capitalize on growth as the market evolves. One example of this is the recent addition of Dr. Eric Green as our Chief Medical Officer. Eric brings extensive experience in genomics and healthcare policy, most recently serving as director of the National Human Genome Research Institute at the NIH. His leadership in the field will be a catalyst for driving continued adoption of genomics and multiomics toward standard of care for patients. I now want to talk about how our long-term strategy is working. In 2024, we set out three strategic growth pillars: core sequencing, scaling multiomics, and expanding our service data and software capabilities. Our continued execution on each of these pillars drove strong 2025 results, positioning the business for 2026 and beyond. Let me walk through examples of our progress for each of these strategic pillars. Our first pillar is core sequencing, anchored by the NovaSeq X. As mentioned earlier, clinical remains our primary growth driver, and higher testing volumes with more sequencing-intensive applications reinforce demand for high throughput, high-quality sequencing on the NovaSeq X. In research, conditions continue to be measured. Customers remain cautious with their purchasing decisions, though we are seeing signs of stabilization, including greater clarity around US policy and the funding environment. Longer term, we believe our research business can return to healthy growth, but for now, we assume similar end market dynamics in '26 as we saw in 2025. Our second pillar is scaling into Multiomics, where we're building a comprehensive set of integrated solutions that extend the Illumina sequencing ecosystem. This includes both internally developed capabilities and selective acquisitions where we see technologies that can meaningfully expand our long-term growth opportunity. As an example, we recently completed the acquisition of Somalogic, an important milestone that builds on our long-standing partnership. I want to formally welcome the Somalogic team to Illumina. We're excited about what we will build together as we further integrate our combined capabilities. Somalogic's Aptima-based affinity proteomics platform allows researchers to generate significant insight with high sensitivity, high throughput, and with thousands of protein markers in a single experiment. Our combined proteomics offerings will provide deep insights into protein function, interactions, and modifications at scale, helping to accelerate understanding of complex biology and human health. Proteomics is the frontline in multiomics, and with Somalogic now part of Illumina, our position in this key growth market is significantly stronger. By applying the scale of NGS to proteomics, we can accelerate innovation by reducing the time and cost of protein analysis. Across genomics, proteomics, single-cell, and epigenomics, these capabilities are now being brought together through our recently launched Illumina Connected Multiomics. This software addresses a long-standing challenge in the field: integrating and interpreting data across different data types by simplifying multiomics analysis and making workflows more scalable and easier for customers to use. Looking ahead, we remain on track to introduce our spatial transcriptomics solution in 2026 along with our Constellation MAP Read technology over the same time frame. Together, these advances extend our ability to deliver integrated end-to-end workflows that support customers as multiomics moves further into both research and clinical settings. Our third strategic pillar is expanding our services, data, and software capabilities. In the fourth quarter, we launched BioInsight, an important step to expand how Illumina supports discovery and drug development through data, software, and AI. For the first time, four key enabling capabilities are converging: sequencing at scale, tools to perturb biology using CRISPR at genome-wide levels, dedicated compute power to analyze it, and AI to build predictive biological models. BioInsight brings together our leading capabilities in these four areas to fundamentally change drug discovery. Instead of relying on years of iterative wet lab experiments, pharma and biotech companies can increasingly build, test, and refine biological models digitally, accelerating timelines and improving success rates. Last month, we introduced BioInsight's first data product, the Billion Cell Atlas, which will be the most comprehensive map of human biology for drug discovery. Built using single-cell approaches, CRISPR-based perturbation, and AI, the Atlas helps partners better understand disease mechanisms and improve target validations. This Billion Cell Atlas was met with strong interest from biopharma partners, and we announced initial collaborations with AstraZeneca, Merck, and Eli Lilly. We continue to see growing engagement from additional partners as data-driven approaches gain traction in drug discovery. Taken together, BioInsight expands how customers generate and act on biological insight and strengthens Illumina's position in biopharma, a growing segment of our research end markets. The next opportunity for our customers to see how our strategy and innovation come together will be later this month at AGBT. As this year's gold sponsor, we will be joined by customers and key opinion leaders who will share how our new platform enhancements and genomic and multiomics assays are being applied in real-world research and clinical settings. A key theme we will showcase is the value of our complete end-to-end solutions for our customers. The conversations we are having with customers have shifted from cost per gigabase to the total cost of workflow, from sample preparation through analysis and interpretation, where integrated workflows and data quality matter most. This approach, continuing to innovate as the market evolves, gives customers confidence in the long-term durable value of our flagship sequencing instruments while supporting them where the field is headed, including deeper adoption of genomic and multiomics approaches. Now let's turn to our 2026 outlook. Building on the momentum we saw in 2025, we expect organic revenue growth of 2% to 4% in 2026, excluding China, with overall demand similar to what we saw in 2025. Clinical consumables grew approximately 16% ex-China in the second half of the year, and we expect robust growth to continue into 2026. Our outlook assumes double-digit to mid-teens clinical growth in 2026. We expect no fundamental change in the academic end markets in 2026, resulting in mid to high single-digit revenue declines in our research and applied consumables revenue. Instruments are expected to be roughly flat to slightly down, resulting in a total company revenue of $4.5 to $4.6 billion, representing reported growth of 4% to 6%. Operating margins are expected to be 23.3% to 23.5% in 2026, up approximately 130 basis points excluding the acquisition impact. EPS guidance is $5.00 to $5.20, including $0.18 of dilution from the Somalogic acquisition. Excluding dilution, this represents year-over-year growth of 10%. Before turning it over to Ankur for more details on our Q4 results and 2026 guidance, I just want to say that I'm confident that our long-term strategy is working, reinforced by the progress we made in 2025 and where Illumina stands today. Over the past year, we have advanced the strategy we laid out in 2024 and delivered meaningful progress across the business, entering 2026 with very encouraging momentum. We proved resilience, and we are a stronger company today, and we remain on track toward achieving our long-term financial targets for 2027. I want to thank our employees for their commitment and performance this past year. I'm very proud of the Illumina team for staying focused through a dynamic year and delivering for our customers and the patients they serve. With that, I'll turn it over to Ankur to walk through the financial details before we move to Q&A. Thank you, Jacob. And good afternoon, everyone. Ankur Dhingra: I will give you an overview of our fourth quarter financial results, provide more color on revenue, expenses, earnings, and updates on our balance sheet and capital deployment, and then discuss our outlook going forward. Before I get into the details of the financial performance, let me provide a high-level view of how the fourth quarter played out. During the fourth quarter, Illumina's revenue of $1.16 billion came in above our expectations, driven by strength in our clinical consumables revenue, better-than-expected NovaSeq X placements, and outperformance in China. We also saw a small benefit from some year-end budget purchasing. The higher revenue resulted in margins and EPS both coming in ahead of our guidance while also reflecting the benefits of the cost actions we took earlier in the year. Now let me provide you the details. During the fourth quarter, Illumina's revenue of $1.16 billion was up 5% year over year on a reported basis and 4% on a constant currency basis. Greater China revenue of $55 million was ahead of expectations and represented a $25 million decline from 2024. Excluding Greater China, Illumina revenue was up 7% year over year. Sequencing consumables revenue of $755 million was up 8% year over year and up 11% excluding China. High throughput volume growth drove the strength in consumables as customers across research and clinical ramped utilization of their NovaSeq X instruments. More broadly, the clinical market maintained its momentum, growing 20% outside of China, driven by broader adoption of NGS-based testing and customers converting current assays to ones that require significantly more sequencing data, such as transitions from whole exome to whole genome sequencing in oncology and genetic disease. Consumable sales in research and applied markets were roughly flat year over year in the quarter, a notable improvement versus Q3, but still below historical levels due to continued uncertainty in the funding environment. Roughly 80% of the volumes and year-over-year pricing dynamics related to conversion to the X. As of Q4, 55% of the revenue has transitioned to the NovaSeq X. The research transition is nearing its end, as now roughly 90% of the high throughput sequencing volumes for these customers have transitioned to 2026. Clinical volume is now more than two-thirds converted to the X, and we believe pricing dynamics going forward will be tied more to new applications like whole genome sequencing adoption, which drives higher volumes. Given these two dynamics, near-complete conversion within research, clinical volume growth driven by X, we expect the conversion to be substantially complete by 2026. On sequencing activity, total sequencing GB output on our connected high and mid throughput instruments grew at a rate of more than 30% year over year, driven by robust strength in clinical, but more muted growth among our research customers. Sequencing instruments revenue of $154 million was approximately flat year over year in Q4 and up 3% ex-China, driven by strong placements of NovaSeq X and the 100. Similar to our consumable mix, over 60% of X systems placed in Q4 were to clinical customers. In Greater China, our instruments business was down 55% due to export restrictions. Globally, we placed over 100 NovaSeq Xs, including about five on rental or lease contracts, bringing our total active installed base to 890 instruments. Sequencing service and other revenue of $157 million was up approximately 3% year over year and up 4% ex-China. Strategic partnerships and the timing of data deals have been lumpy in 2025, and we were pleased to see a return to growth in Q4. Moving to the rest of the P&L, non-GAAP gross margin of 67% for the fourth quarter was down 40 basis points year over year, primarily from the tariff impact of 205 basis points. Excluding tariffs, gross margins improved by 165 basis points sequentially. Q4 margins reflect the typical instruments non-GAAP operating expenses heavy quarter in Q4. Operating expenses were $502 million, down 5% or $24 million year over year, reflecting the results of the multiyear cost reduction programs and prioritization of key growth investments. Non-GAAP operating margin was 23.7% in Q4, expanding 400 basis points year over year. Operating profit grew approximately 26% year over year, reflecting increased operating leverage from the improved cost structure. Looking at our results below the line, non-GAAP other expense, which is largely comprised of net interest expense, was $16 million, and the non-GAAP tax rate was 19.5%. We continue to assess long-term tax structure optimization to balance US R&D benefits with efficient credit utilization across jurisdictions. Our average diluted shares were approximately 154 million, 6 million lower than '24, reflecting share repurchases throughout the year. Altogether, non-GAAP EPS of $1.35 per diluted share grew approximately 42% year over year and came in above our guidance range and was higher than our initial estimate disclosed in January. Moving to cash flow, balance sheet, and capital allocation items for the quarter. Cash flow provided by operations was $321 million for the quarter and $1.1 billion for the year. Capital expenditures were $54 million, and free cash flow for the year was $267 million for Q4. CapEx was $148 million, and free cash flow was $931 million. In Q4, we repurchased 337,000 shares of Illumina stock, approximately $42 million at an average price of $124.12 per share. At quarter end, we had $643 million remaining on our share repurchase authorization, and we intend to continue to repurchase shares opportunistically. Subsequent to the end of Q4, we closed the acquisition of Somalogic on January 30, for an upfront payment of $350 million plus potential royalties and milestone payments subject to customary adjustments. We funded the upfront payment with cash on hand. We ended the quarter with approximately $1.63 billion in cash, cash equivalents, and short-term investments, and gross leverage of approximately 1.6 times gross debt to last twelve months EBITDA. So recapping the full year 2025, starting with revenue. We returned to growth ex-China in Q3 and grew sales about 4% in the second half of the year. I'm extremely proud of the whole Illumina team for navigating through a very dynamic year to end the year on a high note. Through disciplined execution and cost optimization, we were able to expand margins nearly 200 basis points in 2025 despite approximately 200 basis points in macro-related headwinds. And finally, grew EPS by 16%, and our 2025 EPS of $4.84 came in above the original guidance we gave at the start of the year. The way we closed out 2025 gives me confidence about the progress we are making towards our long-range targets, and I'm excited about our momentum going into 2026. Now moving to guidance for the year 2026. Starting with revenue, we're expecting revenue of $4.5 billion to $4.6 billion, representing ex-China organic growth of 2% to 4%. Organic growth excludes the impact of currency, which is expected to add roughly one point to our reported growth, and revenue associated with the Somalogic acquisition, which is expected to add 1.5 to two points of revenue growth in 2026. China sales are expected to be a one-point headwind to total company revenue growth. On a reported basis, overall revenue is expected to be up 4% to 6%. For the rest of the world, organic sequencing revenue growth, we're expecting low to mid-single-digit growth in consumables, with clinical growing double-digit to mid-teens driven by continued strong volumes from our clinical customers. We're excited about the significant progress our customers are making with growth in their on-market tests and new sequencing-intensive whole genome approaches. We expect research declining mid to high single digits. Recent NIH budget announcements are a welcome development, and as fund flow resumes, could provide a more favorable environment relative to what we are assuming in guidance. Instrument sales are expected to be down low single digits to flat year over year, and we believe our goal of placing 50 to 60 NovaSeq X instruments per quarter on average will continue through 2026. Our pull-through assumptions by platform can be found in our earnings presentation. In China, we expect sales of $210 to $220 million with little or no step-up in instrument sales in the first half of the year. We will revisit our assumptions as we work with the government about our ability to import instruments into the country. Moving to operating margins, excluding Somalogic, we are guiding for operating margins to expand 130 basis points next year, at midpoint. Somalogic is expected to have a 100 basis point impact on margins. All in for 2026, we are expecting operating margins of between 23.3% and 23.5%. We've made significant progress in improving Illumina operating margins and remain focused on achieving our 2027 targets. Now moving to EPS. Excluding Somalogic, we're projecting EPS to grow 10% at the midpoint. Somalogic is expected to be dilutive by $0.18 at midpoint. Hence, total Illumina 2026 EPS guidance is in the range of $5.00 to $5.20. For Q1 2026, we're expecting rest of world organic revenue growth of 1% to 3%, equating to between $1.06 and $1.08 billion. We're expecting Q1 EPS of $1.02 to $1.07, including $0.04 of dilution. Rest of the details of our Q1 and 2026 guidance can be found in our earnings presentation. One housekeeping item: Starting in January 2026, we changed the geographical reporting segments to better align with the respective commercial organization structure. Beginning in Q1, we will report our new geographical segments and will provide historical financial reconciliation for the new structure. In closing, I want to once again express my sincere appreciation to the Illumina team for their continued focus and disciplined execution throughout the quarter. We enter 2026 with a lot of momentum, and I'm extremely encouraged by the progress we've made in returning Illumina to long-term sustainable revenue and earnings growth. Thank you for joining our call today. I will now invite the operator to open the line for Q&A. Operator: Hi. If you would like to ask a question, please click on the raise hand button, which can be found on the black bar at the bottom of your screen. To give as many analysts as possible the opportunity to ask a question, please limit yourself to one question. If you have additional questions, please raise your hand again to be put back into the queue. We will now pause a moment to assemble the queue. Thank you. Our first question will come from Doug Schenkel with Wolfe Research. Your line is now open. Please go ahead. Doug Schenkel: Hey. Good afternoon, guys. And I'm just going to ask a couple of financial questions, and then I'll get back in the queue. First, on operating margin. Does guidance embed an assumption that you essentially end the year at 26% to 27% operating margin? And building off of that, is there any change to your 2027 margin target factoring in Somalogic? And then the second topic is really on capital deployment. The balance sheet is really clean at this point. You're generating about a billion dollars of free cash flow. Clearly, the business has stabilized. How are you thinking about capital deployment? And specifically, what is your M&A criteria and priorities? Thank you. Jacob Thaysen: Thanks, Doug. And let me start by addressing your first question, which I believe is around our long-term targets. And we feel definitely still great about those targets. Just as a step back, in '24, we were out there presenting that we would bring the business back to high single-digit growth by '27 and also delivering 500 basis points as you bring us to 26% operating margin. We feel really good about what we have done the last year. We have stepped ourselves into growth, and we believe we are in the right direction to deliver on the high single-digit growth in '27 in our core business. We also are seeing that we have moved substantially on our operating margins with 200 basis points last year in really a tough environment where we had approximately 200 basis point headwinds from tariffs and other things. And now we are committing to another 130 basis points. So we are well on that trajectory. Obviously, now with the acquisition of Somalogic, it will be, as we mentioned also, it's dilutive as a starting point. We are working through the opportunities for synergies, and we will get as close to the 26% operating margin as possible in '27 also. But more, we will keep you updated on the way. We are doing everything we can. Ankur Dhingra: So this is Ankur. So, Doug, your premise that next year, excluding Somalogic, that the exit rate operating margin for 2026 is higher than the average is that's usually our cyclicality in the business. So our full-year guide is 24.5%, and the exit rate in Q4 generally tends to be higher than that. Operator: Your next question will come from Vijay Kumar with Evercore ISI. Vijay Kumar: Hey, guys. Thanks for taking my question, and congrats on a nice sprint here. Maybe one on guidance here. Jacob, or Ankur for you guys. The organic for Q4, when you look at clinical performance, ex-China 6.5%, overall company 3.5%. Your guidance, you know, ex-China basis for fiscal '26, you're looking at 3%. And what drives that step down from 6.5% exit rate in Q4? You know, when you Q4, clearly, clinical was standard. Was there anything one-off about Q4? Any pull forward of revenues, etc., that perhaps calls for some moderation in '26 outlook? Thank you. Jacob Thaysen: Hey, Vijay. So thank you. First and foremost, we are super excited about how we ended out the year. Clearly, 2025 was a challenging year. So the momentum we started to build up here in the second half is really encouraging. And we truly believe that momentum is continuing into '26. As you could see, we ended out the year with very strong performance on clinical with 20% clinical consumables growth in Q4 in '25 here. And we expect that momentum overall from the second half to continue. So we believe that what we're building in is that we have high mid-teens growth for our clinical business. But we also continue to see the channeling in the research academic environment. It is definitely a good step forward that we are now seeing a line of sight to the NIH budget. But if you dig a little bit deeper, there's still a lot of uncertainties for the institute for how grants are being distributed and who's actually getting these grants. So that's what we see. There's still a muted environment, and I think during the year we will hopefully see that come out better, which could continue performance or improve our performance. But we're not seeing any substantial step down. We know Q4 is always a strong quarter, and therefore, we feel good about how we're guiding at this point. Ankur Dhingra: Vijay, let me just frame the 2% to 4% China when we approach the guidance. As Jacob said, we're not seeing any change in the momentum, especially in the clinical business. Our customers continue to do very well, both from the adoption of the on-market test as well as working on bringing new tests to the market. The way we have approached the guidance is to look at the half of 2025 as we played out during our Q3 earnings call. Within Q3, our growth was 2% ex-China. In Q4, it's ramped up to 7%. And so we took the average for the second half to bracket our overall guidance. The 2025 is what we're using as the low end. Right, where clinical still grew in the double-digit rate. The research was dying down in the high single-digit rate. As kind of a framework towards the low end. And then if research does improve, that certainly provides an upside. Q4 just one quarter didn't feel like using as a base for a full-year guide per se. But momentum's momentum's. Operator: Your next question will come from Puneet Souda with Leerink Partners. Puneet Souda: Yeah. Hi, guys. Thanks for the question. On the instrumentation, can you provide how the split was with research versus clinical? I appreciate the momentum you're seeing on the clinical side, but on the research side, can you provide a little bit of context and, you know, how are you thinking about the overall competition just beyond the academic pressure that we have seen in the market? How much of that is baked in just on the research side, both on the mid throughput end and the high throughput end? Jacob Thaysen: Yeah, Puneet. Thank you. And we're very pleased with the performance we had in Q4 with more than 100 instruments placed on the X instruments. And as expected, more than 60% of those placements were related to clinical. And we expect that to be the case, that the dynamic to continue into '26 where clinical will be the majority of the placements of instruments. So we continue to see that customers building their assays on the X instruments, and we are not seeing any slowdown in that part of the business. As you mentioned also, we have a mid throughput business. That has been more, as we talked about before, had been more challenged by some of the macro trends where some of our customers may be more conservative in how they have spent their funding over the past years also in the research and academic market. So I think that market is still a little more muted than but not really a change from what we have seen in '25. So that's how we think about the business right now. Ankur Dhingra: From a competitive perspective, Puneet, no. We didn't see much in Q4. As Jacob said, very strong instrument placements quarter overall across clinical and research as well. We're getting very good interest in the new launches. We've launched the five base. Our spatial is in early access. And the demand and the interest on the research side looks very good. Our thinking on the research from 2026 perspective is more based on the funding environment and the evolution of the funding environment per se. Operator: Your next question will come from Tycho Peterson with Jefferies. Tycho Peterson: Hey. Thanks, guys. A couple quick ones. Just on clinical, Jacob, you know, you talked about growing use of whole genome, whole exome. Can you just talk on, you know, delineate how much of the growth is, you know, mixed versus maybe volume? So that's kind of the first question. Second is on Onso. Just curious if you can touch on that. And you know, thought process, how quickly could you incorporate that technology, if you're planning to? And then, maybe just lastly on adjacencies, a little bit more color on, you know, what you're baking in for spatial constellation and five base. Jacob Thaysen: Okay. So no. Thanks for that, Tycho. And if you look at the opportunity with the X and what our customers are using it for, clearly, we continue to see a you can see, many of our clinical customers are, of course, seeing a significant uptake in volume. Many more physicians are starting to use genetic profiling for the cancers, but also for monitoring disease. So that is a strong momentum. But we're also seeing that our customers are choosing to make larger and larger panels. As you mentioned, some of them are going from exome to whole genome. That's more in the genetic space. But we're also seeing that customers are building larger panels for therapy selection. And the next thing here is to expand the panels for MRD. So we see all that. We're not spreading it down into the pieces at this point in time, but I would say over time, I think, actually, the intensity meaning the larger panels, is going to be the main growth driver going forward. We see a lot of opportunities there. For the acquisition of the IP from PacBio, we saw that as a great opportunity to strengthen our portfolio. We're very bullish about our SPS technology, so we believe there's a lot of options in that still. But we felt it was a great way to keep optionality. And then I think the last one you had was on how much we built in for the five base. And for Constellation and others. This is still early days. We have seen a very, very strong interest for the products we brought to market already. I don't think it's going to be meaningful here really in '26, but it will start to be meaningful as we talked about before in '27 and beyond where we believe one or two basis of growth one or two percent growth will come from our new assays in multiomics, both multiomics and our data the BioInsight business. Operator: Your next question will come from Michael Ryskin with BofA. Michael Ryskin: Great. Thanks for taking the question, guys. I want to dive into some of the pieces of the 2020 in terms of the sequencing consumables, sequencing instruments. You know, a little bit surprised that you got them as close. I would have thought that sequencing and consumers would've been a little bit better as you're, as you said, as you're moving past some of the headwinds from the price transition. At the same time, sequencing instruments, I thought it could have been a little bit worse. So if you could just dive into some of the moving pieces there, you know, are you expecting something similar in terms of NovaX placements next this next year in, in the, you know, mid to high 200s range? And just maybe talk about some of the other platforms that make that up, you know, the NextSeq, the mid throughput platforms, the NovaSeq 6K. Just we'd love to get more color on the moving pieces there. Thanks. Jacob Thaysen: Hey, Mike. So thank you for the questions. And I would say, first and foremost, on the high throughput consumables, especially in the clinical, as we mentioned, we continue to see very strong performance in that. So we don't think that is going to change. We actually think that potential upside in that, obviously, if the market continues to be as strong as we have seen in the last part of the year. We do see, of course, in the consumables, if you blend consumables that both for the research segment but also for the mid throughput, there's still some headwinds in that space. So that's why you see the blend is where it is. I would put it this way. If you think about it, the low end of the guide in the consumables is probably what we saw in Q3, and then we started to see momentum. So there's probably more in the higher end of the guide that we expect us to be for. So that's how to think about it. On the instruments, I mean, we continue to see a lot of momentum in instruments. Right now, we are guiding 50 to 60 placements, but many of our clinical customers continue to expand their placements. So we continue to believe that there are strong moment opportunities here. Ankur Dhingra: Mike, on the instrumentation side, as I mentioned in my script, for Xs, yes, about 200 to 240 for the year. Said on average, 50 to 60 a quarter is still quite good. The Q4 placements were phenomenal. We got quite a few multipack orders. We do look at several of our customers trying to expand their fleets, sometimes thinking about tens of Xs scenario. So good instrument demand. As you all know, we made a major software upgrade into X in 2025. The performance there has been running above the spec for a very large part of our customers. So X is performing at an extremely high level. For our clinical customers, and the research customers are super excited about some of these new multiomic technologies that get enabled the next. So very pleased and quite good so far. Operator: Next question will come from Kyle Mikson with Canaccord. Kyle Mikson: Hey, guys. Thanks for the questions. Congrats on an impressive fourth quarter. The clinical side, especially. On that note, I know you're not splitting out clinical into the applications, but could you just speak a bit just for some context, it looks like oncology was just under $1.2 billion. Then you have genetic, which was just under $500 million. So which of these will, I guess, grow faster in '26? Just help us frame the different drivers split it out just a bit more for us. Then just secondly, you spoke to some of the multiomics aspects before, maybe BioInsight. Is that a needle mover this year? Thanks. Jacob Thaysen: Yeah. Thanks, Kyle. I think overall, we, of course, are very pleased with clinical. And from the highest level, clinical is growing from all dimensions. Both on the different type of applications, but also from the different regions and different customer types. So a really broad-based performance in clinical, and we expect that to continue as we've mentioned a few times here. We are still seeing that oncology is the main driver and the main growth driver. But the rare diseases are definitely also growing at a healthy speed. So I do think that over the next year, also oncology will be the main growth driver for us and for our customers. Operator: Your next question will come from Dan Arias with Stifel. Dan Arias: Hi, guys. Thanks for the questions here. Jacob, I wanted to ask about messaging the customers as we get ready to head down to AGBT here. You guys have talked pretty consistently about the fact that the labs really should focus on full workflow and that when you look at it that way, it becomes advantageous to use Illumina products. The question is really when and where should we look to see that in action? Will you be able to lay out for people, you know, how the economics of using Fluent plus the NovaSeq plus Dragon gives you a better outcome? Or do people just sort of have to figure that out for themselves? Because if the idea seems logical, but I don't get the sense that customers can see it or that they can do the math that has them arriving at that conclusion. Is that something that we should expect to change here? Jacob Thaysen: Yeah, Dan. I think, actually, this is the conversation we have with our customers. We are looking forward here also to the AGBT conference coming up in a few weeks where, as I mentioned also in prepared remarks, we have the gold sponsorship, which gives us a great platform to speak to, not only us, but also key opinion leaders to speak to the usage of the different technologies and how to think about them from the highest quality insight with the lowest end-to-end. Obviously, a part of that is to also show that you can actually do this in a more cost-efficient way, but also creating the highest insight. So it depends a little bit on the different assays. If you think about our Constellation MAP Reads where you have really no hands-on on the workflow upfront and you receive a lot of insights with very little workflow, you know, hands-on on the workflow. So I think that is an element where you can start to eliminate the cost of library prep out and also getting much more insight out. So it's a good example of how you can think about that where you will actually have great transparency on the pricing from our end because it's really just the cost of sequencing where others have to also do library prep and other things. So that's one example, and we'll talk more about that at AGBT. But the same goes now with the Somalogic business we have just acquired where we will go out there and present the cost per sample, the cost per experiment, which I think will be another one that is going to be very important. So those conversations are already happening with the customers. We will continue to educate all of you on that also. Operator: Next question will come from Jack Meehan with Nephron. Jack Meehan: Thank you. Good afternoon, guys. Hey, Jack. Wanted to build on Dan's question there. Just continue on the path of AGBT. It seems like on the competitive front, you know, at least one competitor's talked about the $100 price point per genome. Understand you're trying to change the conversation around that, but I was just curious like, you know, investors see headlines like that what does that mean for you? I'm not sure how we know your list pricing, but you're you know, there's discounts to that. Like, you know, can you just talk about what that would mean for Illumina if we start to see those headlines? Jacob Thaysen: Yeah. I think we are we're looking forward to AGBT. I think that it will be the conference, of course, that all our competitors will put their best foot forward. We will do the same. As I've mentioned, our customers are thinking way beyond just one parameter, one feature. They are more sophisticated than just looking at one element. So I think you will see also us really highlighting some of the things that our customers are really excited about from the whole workflow perspective. That said, I would say that we feel we have the portfolio. We have the pipeline. We have the capability to compete on all parameters. So I feel really good about where we are and what we can do. Obviously, if there are opportunities for us to address market segments with a different price point where there's a significant number of elasticity, we all fought, and we have those conversations with our customers on a regular basis. And we continue to do so. Operator: Next question will come from Casey Woodring with JPMorgan. Casey Woodring: Hi. Great. Thank you for taking my questions. So I guess you said you would revisit your China assumptions as you work with the government on. Maybe just walk us through how conversations are going there and the range of outcomes. And then, you know, my follow-up is just on BioInsight. I was hoping you could elaborate on some of the comments you made earlier there just given how much airtime AI is getting currently. You know, curious how you plan to monetize these capabilities over time. The level of enthusiasm you're seeing from pharma customers, and any sort of way to quantify the revenue opportunity over the next few years? Thank you. Jacob Thaysen: Yeah. Thanks, Casey. So for the first for the first thanks for the questions on China here. So we as just a reminder, it's still less than 5% of our business. I'm actually very pleased with what Jenny and the team have been able to do, our general manager in China. And the Chinese team have been able to serve our customers over the past year and continue to do so. As we have also updated all of you on over the last period of time, we have had great conversations and collaboration with the Chinese regulators to ensure that we can continue to run our business in China. But we're still on the UAL. We feel good about our relationship and how we can work through to be able to import or export the instruments back into China. Now, of course, when you for a long period of time, have not sold an instrument, it takes time to build up a funnel again, and I think that's more the reflection of what we are seeing right now. But as Ankur mentioned also, we have a target for China, but I think if there's a way to get off the list or improvements in that, I think there's upside to the China business. But we do believe that we have good line of sight at least to '26 at this point. If you think about the BioInsight business, we are very excited about the opportunity. It's still in the early days. But as we came out presenting the Billion Cell Atlas last year at JPMorgan, and it was very well received. As I mentioned also, there has been a lot of conversation with pharma companies that want to get access to the Cell Atlas. It provides deep insight for the drug discovery for them to choose the right targets to work on. So we clearly see momentum in that space. As we mentioned also earlier, we do believe that this will, together with our multiomics business, start to create at least a 1% to 2% growth in '27. But if you think that that relaxes be an accelerating momentum at this point. Ankur, maybe you have more to share? Ankur Dhingra: Yeah. On BioInsight, a couple more things as Jacob was saying. We do think our intention on BioInsight is to work directly with our pharma customers and effectively adding a third customer base here. And we think we take a five-year view. That's a very meaningful opportunity. The Billion Cell Atlas has been received very well, and the interest since the conference has been tremendous. So we're very pleased with some of the early steps that we've taken here. Monetization strategy here would be in two or three different ways. One is around very specialized data and AI tool constructions. And then over time, we see significant subscription-based models where we can help pharma companies both on the discovery as well as on the development side of things. But that's a multiyear opportunity there. Operator: Your next question will come from Dave Westenberg with Piper Sandler. Dave Westenberg: My bad. So you can hear me now. Right? Alright. Perfect. Yes. Perfect. Alright. Can you discuss the conversations you're having with Academic Core Labs in terms of investments in instruments? I have to imagine you were they weren't the biggest buyers of instruments in 2025. What is the assumption in your guidance for academic both consumables and instruments? And you did hire Eric Green. So is there anything he can do to spur kind of confidence in your academics? I know the NIH is slightly up. Are they gonna actually believe it? And sorry. They're gonna tag one more on to Jack and Dan's question on pricing versus competitors. You are seeing much better specs, I believe, which means more output. That is a direct cost reduction to a lot of your customers in terms of cost per gigabase. Right? So even if they're getting 25 gigabases at $200, they're actually getting less than that because the output has been greater. It might just wanna ask if that assumption is correct. Thank you. Jacob Thaysen: So, Dave, thank you for your one question. Let me start with the first one here. We have, I think, the last eighteen months, really built out our relationship with the academic core labs and really focusing on ensuring that we can support them also, of course, in a very tough environment. So, obviously, though they have been challenged with, of course, the impact from NIH funding and other types of funding. But we have done a very good job, I think, and that's also the feedback we're getting from them to support both from when they have opportunities to acquire instruments. We have made sure that we can place Xs in those types of labs also so they can get all the benefit from the Xs. And I do think now with Dr. Eric Green on board here, there's more opportunities to help them and navigate all through a challenging situation. As we said, and you also mentioned, you know, at least now we have better line of sight to NIH funding, but there's still some in the details still things that need to get into place before we really start to see the different institutes, different core labs continue to move ahead. You are right that if you look at we have, and this is our we have a tradition for going out and delivering on power better than our specs. This is something we're proud of, and something that our customers know from Illumina is that we're not chewing on and commit to something we can't keep. We will actually keep it and also outperform. And I think that is something that many could learn from. So we will continue to do so. And in the meantime, customers are enjoying those benefits. Operator: Your next question will come from Subhalaxmi Nambi with Guggenheim. Subhalaxmi Nambi: Hey, guys. Thank you for taking my question. It appears that 6,000 pull-through is holding up a lot better than expected. Has that leveled off moving forward, or is that still a material headwind? And then my separate question is, there has been a lot of focus on US clinical strength for good reasons. But can you speak to how Europe and Asia might look this year from a growth perspective? And are there any differences you would expect from the US market throughout this year? Thank you so much. Jacob Thaysen: Yeah. So, Subbu, let me start on the 6Ks. And what you are seeing is that we've spoken to that before that many of our customers that are transitioning are either building their new assays on the X platform, and then they keep the NovaSeq 6K for their traditional assays that are already built, they have already validated, and they want to keep that. So that's also what you're seeing the customers that have decided to stay with assays on the platform. Keep running those assays on that platform, and that's why we continue to see a pull-through. There's, of course, customers that have shifted away from the 6Ks, and it's now moving on to the X, and they are seeing substantial growth on the X platform. So that's why we're seeing the pull-through continue to be sitting up there. But we still believe, of course, that there will be fewer and fewer 6K customers over time. Ankur Dhingra: Subbu, on the 6Ks, and the transition, as you know, we've substantially on the research side, the transition's substantially complete. And clinical is now moving into the latter part of the transition here. Our expectation is by the time we get to the end of 2026, the 6K transition should be mostly substantially done. From a volume perspective similar to the trends that we have been seeing. So that's how we're looking about it. Jacob Thaysen: Geography. Yeah. I mean, Europe has done tremendously well. I think, holding up very nice growth over the past years, and we continue we expect that to continue here into 2026. And we also expect that our APAC region, MER meeting will rebound somewhat. Operator: This concludes the Q&A section of the call. I would now like to turn the call back to Conor McNamara for closing remarks. Conor McNamara: Thank you for joining us today. A replay of this call will be available in the Investors section of our website. This concludes our call, and we look forward to seeing you at upcoming events. Operator: This concludes today's call. We thank you for your participation. You may disconnect at this time, and have a great day.
Operator: Greetings, and welcome to the Griffon Corporation Fiscal First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Brian Harris, CFO. Please go ahead, sir. Brian Harris: Thank you. Good morning, and welcome to Griffon Corporation's first quarter fiscal 2026 earnings call. Joining me for this morning's call is Ron Kramer, Griffon's Chairman and Chief Executive Officer. Our press release was issued earlier this morning and is available on our website at www.griffon.com. Today's call is being recorded, and the replay instructions are included in our earnings release. Our comments will include forward-looking statements about Griffon's performance. These statements are subject to risks and uncertainties that can change as the world changes. Please see the cautionary statements in today's press release and in our SEC filings. Finally, some of today's remarks will adjust for items that affect comparability between periods. These items are explained in our non-GAAP reconciliations included in our press release. With that, I'll turn the call over to Ron. Ronald Kramer: Thanks, Brian. Good morning, everyone, and thanks for joining us today. Earlier this morning, we announced exciting news regarding the creation of a joint venture, including AMES North America and Venanpri Tools, along with other strategic actions related to Griffon. Allow me first to summarize our results for the quarter, then I'll comment further about the strategic actions that are underway. We are pleased with our first quarter results, highlighted by free cash flow of $99 million, continued solid operating performance at Home and Building Products and improved profitability at Consumer and Professional Products. We're off to a good start and are on track to meet our updated financial targets for the year. For the quarter, Home and Building Products, HBP, revenue increased 3% compared to the prior year, and EBITDA margin was 30.1%. Revenue benefited 7% from strong price and mix across both residential and commercial products, which was partially offset by reduced residential volumes. Consumer and Professional Products, or CPP, first quarter revenue increased 2%, driven by price and mix with increased volume in Australia and Canada, offset by reduced volume in the U.S. as consumer demand remains soft. CPP EBITDA in the quarter increased by 19% to $22 million, driven by the increase in revenue. We're pleased to continue to see year-over-year improvement in CPP EBITDA despite persistently weak demand in the U.S. Turning to capital allocation. During the first quarter, we repurchased $18 million of our stock or 247,000 shares at an average of $73.21 per share. At December 31, $280 million remained under the repurchase authorization. Since April 2023 and through December, we've repurchased $578 million of stock or 11.1 million shares at an average price of $52.27 per share. These repurchases have reduced Griffon's outstanding shares by 19.3% relative to total shares outstanding at the end of the second quarter of fiscal 2023. Also yesterday, the Griffon Board authorized a regular quarterly dividend of $0.22 per share payable on March 18 to shareholders of record on February 27th, which marks the 58th consecutive quarterly dividend to shareholders. Our dividend has grown at an annualized compounded rate of 19% since we initiated dividends in 2012. These actions reflect the strength and resiliency of our businesses as well as our continued confidence in our strategic plan and outlook. Let me comment on our strategic actions. Earlier this morning, we announced the formation of a joint venture with ONCAP, the middle market private equity platform of ONEX Corporation, which will create a leading global provider of hand tools, home organizational solutions and lawn and garden products for professionals and consumers. The joint venture will combine Griffon's AMES businesses in the United States and Canada with ONCAP's global portfolio of hand tool businesses, including Corona in the United States, Burgon & Ball in the United Kingdom and Bellota hand tools operating in Europe and Central and South America. Through this transaction, we are creating a global leader in professional and consumer hand tools, home organizational solutions and lawn and garden products with sufficient scale and scope to compete in the global marketplace. The joint venture is comprised of leading professional and consumer brands, including AMES, Bellota, Burgon & Ball, ClosetMaid, Corona, Garant, Razor-Back and True Temper. ONCAP and Griffon both recognize the benefits created by merging leading diversified professional tool brands with global reach. We are very excited about this business combination and the prospects for the joint venture. We see significant opportunities to streamline operations across the businesses and capture the benefits of economies of scale. For Griffon, the formation of the joint venture will generate immediate shareholder value and additional liquidity as well as provide a path for realizing more value in the longer term through the second lien debt from the joint venture and our significant equity interest. We're looking forward to working with ONCAP to make this joint venture a success. In addition to the joint venture, we also announced three other strategic actions that, once completed, will transform Griffon into a pure-play building products company, positioning us as the leading provider in North America of residential and commercial garage doors, rolling steel doors and grill products as well as a leading brand of residential and commercial ceiling fans. So our actions, a comprehensive review of strategic alternatives for AMES Australia, a review of strategic alternatives for the AMES United Kingdom and the combination of Hunter Fan with our Home and Building Products segment. To offer a bit more detail, our AMES Australia business has grown from a small operation that was part of our original AMES acquisition into a category leader in Australia. This business is led by an exceptional team with a demonstrated track record of growing both organically and through acquisition, while consistently generating solid operating performance. We're confident there are a number of strategic alternatives available for AMES Australia that will position the business for continued growth, while providing value to Griffon shareholders. We'll report back regarding our progress. Finally, we're combining Hunter Fan with our Home and Building Products segment. Both Clopay and Hunter maintain exceptional positions with industry-leading brands and best-in-class technology and innovation. We see many opportunities for the two businesses to leverage their complementary sales channels across residential and commercial building products. The two teams already know each other well, have collaborated over the past three years and are excited about bringing them together. I'll turn it over to Brian for a bit more detail on the financials, and he'll provide additional detail regarding the strategic actions. Brian Harris: Thank you, Ron. First quarter revenue of $649 million increased 3% in comparison to the prior year quarter and adjusted EBITDA before unallocated amount of $145 million was in line with the prior year. EBITDA margin before unallocated amounts was 22.3%. Gross profit on a GAAP basis for the quarter was $267 million compared to $264 million in the prior year quarter. Gross margin was 41.1%. First quarter GAAP selling, general and administrative expenses were $153 million compared to the prior year of $152 million. Excluding adjusting items from the prior period, SG&A expenses were $153 million or 23.6% of revenue compared to the prior year of $151 million or 23.8% of revenue. First quarter GAAP net income was $64 million or $1.41 per share compared to $71 million in the prior year quarter or $1.49 per share. Excluding items that affect comparability from both periods, current quarter adjusted net income was $66 million or $1.45 per share compared to the prior year of $66 million or $1.39 per share. Corporate and unallocated expenses, excluding depreciation in the quarter were $15 million compared with $14 million in the prior year. During the quarter, we had capital expenditures of $8 million compared with the prior year gross capital expenditures of $17 million and de minimis prior year net capital expenditures as proceeds from asset sales offset the capital investment made in that quarter. Regarding our segment performance, as Ron mentioned earlier, revenue for Home and Building Products increased 3% from the prior year quarter, reflecting strong price and mix of 7% for both residential and commercial, which was partially offset by reduced volume of 4% driven by residential. Home and Building Products adjusted EBITDA decreased 3% compared to the prior year quarter, resulting in an EBITDA margin of 30.1%. The positive effect of increased revenue in the quarter was more than offset by unfavorable material costs, labor costs and operating expenses, along with the adverse impact of reduced volume on absorption. Consumer and Professional Products revenue increased 2% from the prior year quarter to $241 million. Favorable price and mix during the quarter, along with increased volume in Australia and Canada was partially offset by the impact of reduced volume in the U.S. CPP adjusted EBITDA increased 19% from the prior year quarter to $22 million, primarily due to the increase in revenue. Regarding our balance sheet and liquidity, as of December 31, 2025, we had net debt of $1.26 billion and net debt-to-EBITDA leverage of 2.3x as calculated based on our debt covenants compared to 2.4x leverage at the end of last year's first quarter and the end of fiscal year 2025. We paid down $60 million of term loan B during the quarter. Our net debt and leverage decreased from our year ended September 25 and the prior year quarter, even with returning $29 million of capital to shareholders via stock repurchases and dividends during the quarter. Regarding our strategic actions, under the terms of our master transaction agreement, ONCAP will own 57% of the joint venture, and the joint venture will be operated as an ONCAP portfolio company. Griffon will receive $100 million of cash proceeds at closing, along with $160 million of second lien debt from the joint venture. Griffon will have a 43% ownership stake. As a result of our strategic actions, starting in our second quarter 2026, we will report AMES U.S., Canada, Australia and U.K. as discontinued operations. Hunter Fan's financial results, which historically have been included in CPP segment will be reported as part of the Home and Building Products segment. The expected fiscal year 2026 EBITDA for discontinued businesses is $60 million, comprised of $25 million for AMES North America, $40 million for Australia and with U.K. operating with negative EBITDA. In terms of our updated outlook for our continuing operations, we now expect full year fiscal 2026 revenue from continuing operations to be $1.8 billion and adjusted EBITDA to be $520 million, excluding unallocated costs of $62 million. Free cash flow from continuing operations, including capital expenditures of $50 million, is expected to exceed net income. Depreciation will be $27 million and amortization will be $15 million. Fiscal year 2026 interest expense is expected to be $93 million, and Griffon's normalized tax rate is expected to be 28%. This guidance, as stated, is consistent with our expectations for legacy Home and Building Products and Hunter Fan as we originally outlined in November. Now I'll turn the call back over to Ron. Ronald Kramer: Thanks, Brian. From a financial and operational perspective, 2026 is off to a good start with strong free cash flow and continued solid operating performance. Our results continue to reinforce our confidence in our outlook for the year and beyond, especially given our resiliency to what continues to be a mixed and uncertain market backdrop. We remain optimistic about a turnaround in the residential and commercial markets and believe that we will realize substantial leverage as activity improves. Our capital allocation priorities remain unchanged. We'll continue to use the strong operating performance and free cash flow of our businesses to drive a capital allocation strategy that delivers long-term value for our shareholders. This strategy includes continuing to focus our resources on growing organically, while opportunistically repurchasing shares, paying dividends and reducing debt. This is an exciting time for Griffon. Our strategic actions taken together will streamline the company's portfolio and enhance shareholder value. When completed, Griffon will be a premier pure-play North American residential and commercial building products company with a very exciting future. In closing, I'd like to express my sincere gratitude to our Griffon employees around the world whose dedication and effort have driven our financial success. Our strategic activities have created additional challenges for our global teams. And as usual, they've stepped up to make it happen. Operator, we're now ready for questions. Operator: [Operator Instructions] And our first question will come from Tim Wojs with Baird. Timothy Wojs: Congrats on all the announcements. Maybe just to start, bigger picture, Ron, I'm just kind of curious in terms of kind of the timing and the thought process and kind of why now? Maybe some of the alternatives that you were kind of considering in this and kind of how this JV kind of came together? Ronald Kramer: Well, we have always said that we thought there was a disconnect between the market value of our stock and the intrinsic value of our businesses. We've been looking at two very different segments. Our Home and Building Products business is a 30% EBITDA margin business, and our consumer businesses have been operating at a 9% margin. We see the performance of our businesses as being differentiated and the ability for us to take our consumer businesses and strengthen them by combining it with a leading global provider of tools, brands, giving us the leverage to be able to take the AMES companies and its footprint in North America and Canada and fit it in with the partner who's able to scale that business. So we continue to be a significant investor in the consumer business at 43%. We have a very strong belief that ONCAP and the Venanpri businesses fit hand in glove with the AMES business, and that, we'll be able to continue to create value in that business as a separate investment for Griffon. Now what that does is this is an ability for us to unlock value. And the consumer side of our business, we believe, has been mispriced in our sum of the parts. By doing this, we are putting a spotlight on the value in the AMES, U.S. and Canada. The value of the $40 million EBITDA business that we have in Australia. And Hunter is a synergistic combination with our Home and Building Products business, and we have high expectations that the development of the industrial fan business can grow faster under the Home and Building Products Clopay umbrella. So for us, this is a set of moves that we believe significantly improves our valuation. And that's, again, without any growth coming out of the HBP side of the business as we believe we're getting closer to a recovery in the housing market in the U.S. So we've got a very strong HBP business with growth, and we believe that these actions strengthen the consumer businesses that we own and positions us to unlock meaningful value to our shareholders. Timothy Wojs: Okay, okay. Great. Yes. No, that's very helpful. And then, Brian, just maybe on like some of the details. So the go-forward financials of this go away, what would you guys kind of expect minority interest contribution to be from an earnings perspective? And then any sense on the rate on the second lien debt because I would assume that's effectively income for you. Brian Harris: Correct. So that second lien debt is at a 10% PIK rate. And as far as our portion, our minority interest of the net income of the JV, I do not expect a significant impact from that as it's a private company with debt on it and amortization. So net income will not be material. Operator: Our next question will come from Bob Labick with CJS Securities. Lee Jagoda: It's actually Lee Jagoda for Bob. So I guess starting with the JV, can you give us a sense for the EBITDA that's being contributed from ONCAP or maybe the expected fiscal '26 EBITDA for the combined entity? Brian Harris: Yes, the combined entity results are not something we're disclosing at this time, but they are slightly smaller than we are. Lee Jagoda: Okay. And then on -- as it relates to Hunter, can you kind of give us a sense for the revenue that Hunter was contributing? And then once it gets combined into the HBP segment, how should we think about your margins in that segment relative to the 30% or above that you've been running for the last several years? Brian Harris: Sure. So in fiscal '25, Hunter Fan had $211 million of EBITDA -- sorry, of revenue rather. And as far as margin, you just heard the guidance, which is roughly 29%. But ultimately, this is still a 30% plus business going forward. Operator: And our next question will come from Collin Verron with Deutsche Bank. Collin Verron: Congratulations on all the announcements. I guess just following up on that, any sense of just like maybe the EV to EBITDA multiple that the proceeds and the second lien debt imply for the business? And then any sense on sort of the time line to sort of establish the JV and for the sale or other strategic action for Australia and U.K. Brian Harris: Sure. So as far as a multiple, it's on the cash, just the cash, $100 million of cash, it's roughly a 4x multiple. And of course, larger if you include the second lien debt. As far as timing, we expect the JV to close by the end of June. And timing for the rest of the actions for Australia and U.K., we'll have to keep you posted, and we'll update you as they progress. Collin Verron: Okay. Understood. And then I guess just with proceeds, any sense -- any comments around capital allocation going forward? Ronald Kramer: Well, I've said it, and I'll continue to underline, we believe that our stock is the best acquisition we can make. Our balance sheet has never been stronger. We finished the quarter at 2.3x. We've got a significant amount of liquidity, and we will have more as a result of these transactions, and you should expect us to continue to be an active buyer of our stock, deleveraging from free cash flow and being an increased dividend payer in the future. Operator: Moving next to Trey Grooms with Stephens Incorporated. Trey Grooms: Congrats on the announcements, pretty exciting stuff. So we've talked a lot about the portfolio actions. But shifting gears here just a little bit on to the kind of the HBP business, the remaining business. You mentioned, Ron, I think, twice that '26 is off to a good start. But if you could maybe talk about, volume was down a little bit, which you mentioned lower res, no surprise there. But maybe you could update us on kind of the demand outlook here for the HBP business, kind of the remaining business here as we go into calendar '26, maybe looking across both the res with remodel and then also commercial. Ronald Kramer: Yes. I'll start by saying that the macro environment for housing, the political support for housing is clearly better than we went into this fiscal year. So our performance in the fourth -- in the first quarter with a decline in residential improvements in the commercial. But on price and mix is -- shows you the story that there is still a very good part of the repair and remodel in the premium side of the market, which is where we are positioned. And Clopay and our management team has done an extraordinary job of both bringing in new products, using technology with our dealer network. And that was before we went into '26 and the winds of an improving housing market started. So we're very optimistic about that the recovery in housing is still ahead of us. Our performance is as good as it's been, is going to get better in terms of both units and in volume as the housing markets recover in the United States. Interest rates will come down. Mortgage markets are going to have to get repaired for new home construction and for volume of activity. But all of those things are going to help -- what's already a very efficient, highly profitable Clopay to become bigger. And the commercial side of our business, which is the result of an acquisition of CornellCookson that we made 7 years ago is proving to be the balance to that business. We're hoping over the next few years that our commercial business is as big as our residential business. And with the infrastructure spending that's going on, we continue to believe that Clopay is an excellent business that has growth in front of it. Trey Grooms: Okay. That's all super helpful. And then you mentioned you mentioned price mix, very good in the quarter. I know you guys implemented a price increase in '25. Maybe if you could kind of -- is that, I guess, still kind of the flow-through there of the price increase plus some benefits from mix? Is that the right way to think about that? Brian Harris: Yes, that is correct. Operator: And we'll go next to Sam Darkatsh with Raymond James. Sam Darkatsh: So most of my questions have been asked and answered. I just got two or three quickies. So why a JV and not an outright sale would be the first question. Second question, I know you're mentioning that Hunter has some connectivity with HBP, but I don't know if it's immediately intuitive externally for us. So if you could be more specific in terms of why you did not include Hunter in the JV contribution. And then finally, you mentioned, Ron, that you're putting a spotlight on the HBP under evaluation. Why not do a strategic review then on the whole shoot and match as opposed to just looking at the European and Aussie businesses at this point? Brian Harris: Sure. So I'll start off. The structure of a joint venture for Griffon, it enables us to unlock substantial value now and additional value in the future as we still have a minority interest in it. The current market for consumer companies is not a very good one. And this allows us to accomplish bringing two companies together, increase the economies of scale and get future benefit, still get future benefit for our shareholders as the JV progresses. As far as Hunter, we see stronger strategic alignment and upside potential with HBP, and we believe the combination of that business is the best way to maximize shareholder value. It has -- this is an iconic consumer brand, has a great management team. It's highly recognized, has an asset-light model. And even though the past few years have seen weak consumer, it still has double-digit EBITDA. But there's a lot of upside to that business. And again, in a weak consumer environment to sell it now would seem poor timing. Ronald Kramer: And as far as your comment about the whole shooting match, we like our company, and we believe that we're going to stay and run this and build it for the foreseeable future. Operator: Moving on to Julio Romero with Sidoti & Company. Julio Romero: Congratulations on the exciting announcements. I wanted to also ask about the RemainCo going forward. And I know you talked a little bit about Hunter and HBP combined. But I believe in the prepared, you mentioned that they've worked together in the past. Can you maybe cite an example or two of Hunter and HBP working together? And then also speak to any potential cross-selling opportunities or any opportunities as a combined go-to-market entity? Brian Harris: Sure. So I'll start on the commercial side of the business. Of course, with our rolling steel and commercial sectional products, we are often dealing with large warehouses and entities and industrial type facilities that have large commercial fans that Hunter sells and so -- and vice versa. So Hunter knows about other projects, it shared with the Clopay legacy HBP side of the business and vice versa. And on the residential side, actually, Hunter came out with a pretty clever product that allows fans to be installed in the garage and deals with where outlets may be in the garage. So those are just two early examples. Julio Romero: Okay. Perfect. And then as we think about the RemainCo, you've always historically been a very strong free cash flow generator. How should we think about the cash conversion cycle of RemainCo relative to the historical portfolio? And should we expect your business to flow cash at a faster or slower rate going forward? Brian Harris: Yes. So overall, we'll still be a very highly cash flow generative company. The cash flow, if you're looking at it over the course of the year, the first half will be more positive than in the past under the new construct, but still a little weaker than the second half. Operator: And we'll take a follow-up from Collin Verron with Deutsche Bank. Collin Verron: I just wanted to touch on the HBP business a little bit more. I know you called out mix being a good guide. I was just curious how sustainable you think that is going forward, just given the trend in commercial and residential. And then maybe just talk about the margin pressure a little bit, like the order of magnitude of inflation in material costs versus labor costs just so we can get a sense of how that's tracking? And then my last question is just on the legacy HBP guidance. Was there any change to that, or was the guidance change only related to the announced strategic actions? Brian Harris: Sure. The guidance change is only related to -- yes, the legacy guidance we gave is still the guidance included in what we said today for HBP. There's a lot of questions there. So as far as outlook for HBP, really, our guidance stays the same. We continue to see pressure on residential volume, mostly driven by the lower end of the market, where the high end of the residential market continues to be buoyant and strong. For commercial, it's -- we said we would have flat volume this year. We still expect that to be the case already -- that is what we saw in the first quarter already. What was the last question? I'm sorry, Collin, repeat it. I seem to have lost him. If there are more questions. Operator? Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to Ron Kramer for closing comments. Ronald Kramer: We're very proud of the track record that this management team has created over a long period of time. And with the actions that we've taken today, we look forward to continuing to deliver superior shareholder value in the future. So thank you, all, and we'll be speaking to you soon. Operator: And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to Compass Minerals' First Quarter Fiscal 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Brent Collins, VP, Treasurer & Investor Relations. Please go ahead. Brent Collins: Thank you, operator. Good morning, and welcome to the Compass Minerals' Fiscal First Quarter 2026 Earnings Conference Call. Today, we will discuss our most recent quarterly results. We will begin with prepared remarks from our President and CEO, Edward Dowling; and our CFO, Peter Fjellman. Joining in for the question-and-answer portion of the call will be Ben Nichols, our Chief Commercial Officer; and our Chief Operations Officer, Pat Merrin. Before we get started, I'll remind everyone that the remarks we make today reflect financial and operational outlooks as of today's date, February 5, 2026. These outlooks entail assumptions and expectations that involve risks and uncertainties that could cause the company's actual results to differ materially. A discussion of these risks can be found in our SEC filings located online at investors.compassminerals.com. Our remarks today also include certain non-GAAP financial measures. You can find reconciliations of these items in our earnings release or in our presentation, both of which are available online. I'll now turn the call over to Ed. Edward Dowling: Thank you, Brent. Compass Minerals had a strong start to the year. For the first time since 2023, we're reporting positive quarterly net income. For the first quarter of 2026, reported net income of $0.43 compared with a net loss of $0.57 a year ago. Adjusted EBITDA doubled to $65 million. We took leverage down year-on-year by nearly 2 turns to 3.6x, and we raised the midpoint of our full year adjusted EBITDA guidance range to $224 million based on solid results in the Salt business and positive momentum in the Plant Nutrition, partly offset by the planned sale of our Wynyard SOP operation. Absent the Wynyard sale, the midpoint of our revised guidance would have been up about 4%. Let me begin today where we are in the Salt business. There's been steady winter weather this year across many of our North American markets we serve, excluding the Western part of the U.S. Year-over-year, Compass Minerals saw sizable increases in sales volumes. We also benefited from price increases in both highway deicing and C&I parts of the business. With a strong start to the winter, short-term market for the entire salt industry is really tight. Compass Minerals continues to focus on efficient and safe delivery of every ton of salt possible, understanding the critical role that we and others in the industry play in the communities we serve. In any given season, our ability to service excess market demand in season can be limited by the compressed timing of regional winter weather and any associated demand surge. We forward deploy salt throughout the year across our depot network as there is meaningful lead time across our production and supply chain to reach many of the regions we serve, particularly mid-season. For reasons I'll discuss more in a moment, our ability to meet excessive demand if it materialize in this specific season was always going to be limited. We do not plan our business assuming that we will have above-average winters, and we've been very clear about our commitment to managing inventories, maintaining financial discipline and focusing on value over volume. I'll make a few comments on the changes to our outlook in the Salt segment as we recognize that they may not be intuitive to the midst of a strong winter. What I want to make clear upfront is that our guidance does not represent "a new normal for this kind of winter." Our plans for the business are expected to allow for more flexible operations in the future, and we have more work to do to get there. I'd first reiterate why we put our back-to-basic strategy in place beginning in '24. The company's prior approach was to operate so that never missed the big winner. I won't bore you this morning with the details of how that ended, but suffice to say that it directly led to excess inventory over multiple years, a stressed balance sheet with all the adverse impacts on market value we expect it to bring. We're committed not to repeat the mistakes of the past. We made the right decision to align the business more closely with anticipated market demand and have managed inventories accordingly. Over time as the balance sheet continues to improve and market dynamics adjust to historical norms, the optionality within our inventory management strategy will evolve. We've been very open that our inventory management plan could preclude our ability to meet excessive demand in fiscal 2026. Our inventory production planning are informed by 3 factors: the first 2 I just discussed. First, the customer level commitments and our desire to keep inventory levels closely aligned to market demand; and second, effective placement of salt inventories via our salt supply chain. Third factor is production reach and capabilities at the mines, which I'll now comment to. Goderich mine is in a period of high development. The mine is currently developing a number of new mining panels, which require the construction of new underground infrastructure and ground support. New development panels inherently have higher costs and lower production rates than panels that are in full production. This is not a new issue and was incorporated in our initial guidance for the year. The development sequence is important as it governs our ability to produce at the higher end of historic production levels. Advancing these development panels will improve the optionality and flexibility within the production plan at Goderich mine. But in the near term, the mine's ability to produce at the higher end of the historical rates will be limited. Within this context, the production ramp-up at Goderich mine in mid-fiscal 2025 later than anticipated due to uncertainties around the applicability of the USMCA and subsequent hiring and qualifying our miners. Currently, Goderich is producing significantly higher rates year-on-year, and we're generally pleased with the direction of travel regarding our production level. That being said, we have some more work to mitigate greater than anticipated unplanned downtime as well as to further improve operating efficiencies. These factors are somewhat limiting in our ability to service incremental in-season demand, creating headwinds for production cost per ton, working our way through these issues, including improvements to preventive maintenance and overhaul programs to name a few. Despite these challenges, we still have a solid quarter in salt. Moving over to Plant Nutrition business. We continue to see momentum in our story. Over the last year or so, we've talked a lot about improving the performance of the business, which is largely premised on restoring the health of the pond complex at Ogden. This is succeeding. As the pond complex continues to improve, the quality of the feedstock that goes into Ogden also improves, provides benefits on how the plant operates, drive cost down. We continue to make progress on this initiative, and we've seen product costs trend down. On the pricing front, our team has done a good job for maintaining market value of our SOP portfolio. We're seeing a $20 improvement in price compared to our expectation. The decrease in anticipated sales volume relates to us prioritizing having SOP available to pursue additional domestic business over lower-margin export opportunities. We announced in our press release yesterday that we have entered into an agreement to sell our Wynyard SOP operation in Canada for $30.8 million, subject to customary closing conditions. Considering the improvements we're seeing in our Ogden operation, coupled with our read on future market conditions, we believe now is an opportune time to pursue this transaction, allowing us to further focus our efforts on North American leading producer of SOP. Improvements that we're seeing at Ogden are allowing us to increase our adjusted EBITDA guidance for the Plant Nutrition business by 8% in a midpoint of $37 million, despite the sale of the Wynyard operation. We've talked before about the importance of returning this business to a level where it consistently carries a $40 million EBITDA handle. Absence of Wynyard sale, we would have grinded to this value in this quarter. We think that we have line of sight to getting there in the coming quarters without Wynyard. Next phase of improvement involves capital project to upgrade the dryer compaction plant at Ogden, which we expect to boost operational efficiency and financial performance. As we look to the remainder of the year, we are focused on people, processes and systems and focused on executing our back-to-basics framework. This approach is anchored in 5 core priorities: improving operational efficiencies and capabilities to enhance performance and reliability across the organization; reducing capital intensive by deploying resources in a disciplined manner; simplifying processes and eliminating unnecessary complexity to accelerate decision-making and improve accountability; maximize cash flow generation to support long-term value creation; and reducing leverage to reinforce financial resiliency and provide capital allocation flexibility. The balance sheet and financial health of the company continue to improve. So I mentioned at the beginning of my remarks, our leverage ratio has improved significantly over the last year. We've grown confidence in continuing improvement in our leverage profile. We plan to begin conversations with the Board about approaches around capital allocation. This is all consistent with the progression of our back-to-basics framework. As the first quarter results demonstrate, we are clearly making positive strides in improving our operational, commercial and financial performance. Some of these improvements are visible now, such as the strong results we're seeing in Plant Nutrition business, and the continuing improvement in our leverage profile. Some, as fully optimized production in our Salt mines, will take more time to fully manifest themselves. We're committed to becoming a top-tier operator, grounded in financial strength and operational excellence. As a leadership team, we're focused on building a company with resiliency and flexibility to thrive over the long term. Our responsibility is to deliver consistency against our back-to-basics framework. Journey isn't finished, but progress is unmistakable. We're moving confidently towards the organization we know we can be. With that, I'll turn the call over to Peter for a review of our first quarter results. Peter Fjellman: Thanks, Ed. I'll begin by discussing our quarterly financial performance. As Ed noted earlier, this quarter marked the first time in several years that the company has reported quarterly net income and adjusted EBITDA more than doubled from the year before. In the Salt segment, operating earnings improved year-over-year to $14.33 per ton, up $2.54 or 22% and adjusted EBITDA per ton increased 2% to $19.61. Total salt volumes were up 37% compared to the prior year period. Highway deicing volumes increased 43% year-over-year, while C&I volumes increased 14% over the same period. A higher proportion of highway deicing sales volume in the current period resulted in overall Salt segment pricing being relatively flat year-over-year, despite realizing higher highway deicing and C&I sales prices of 6% and 2%, respectively, year-over-year. Salt segment revenue in the first quarter was $332 million compared to $242 million a year ago. Product cost per ton declined 7% to $50.20, while distribution cost per ton increased 6%. SG&A attributable to the Salt segment improved by $1 million. Moving on to the Plant Nutrition segment, where we had a very positive business performance that is resulting in strong financial results. Year-over-year, operating earnings increased approximately $9 million, while adjusted EBITDA improved by $8 million. This was driven by improvements in both pricing and cost structure, despite the anticipated decrease in sales tons we saw year-over-year. In addition, the average SOP sales price was up 13% to $687 per ton. Product cost per ton declined 2% to $520, while distribution cost per ton increased 2% to $93. Corporate overhead year-over-year was down 24% to $19 million for the quarter and is a reflection of the momentum in our multiyear cost control and continuous improvement initiatives focusing on back-to-basic process optimization and system utilization. Moving on to the balance sheet. The previously announced settlement related to Ontario mining tax dispute resulted in some meaningful changes on the balance sheet at the end of December. The increase in other current assets and the decrease in other noncurrent assets and other noncurrent liabilities are a result of that settlement. Those movements also impacted changes in working capital in the statement of cash flows. With respect to the company's financial position, at quarter end, we had liquidity of $342 million, comprised of $47 million of cash and revolver capacity of around $295 million. Ed mentioned our focus of delevering, and we continue to make good progress there. The ratio of total net debt to trailing 12-month adjusted EBITDA at the end of the quarter was 3.6x. It's Down from 5.3x from the comparable prior period. Looking ahead, I'll now make a few comments on the updated guidance for 2026. The range for Salt segment adjusted EBITDA in 2026 is now $230 million to $252 million. Ed previously commented on the operational dynamics within the Salt segment. Our guidance reflects an increase in expected sales tons, the benefit of which is being muted by headwinds and production costs mentioned earlier. Additionally, severe winters tend to put pressure on distribution costs as surges in network demand create suboptimal logistical conditions. It's important to note that notwithstanding these factors, adjusted EBITDA margin is expected to increase by approximately 200 basis points year-over-year. For the Plant Nutrition segment, the range for adjusted EBITDA in 2026 is now up to $34 million to $39 million on stronger margins and an improved cost structure, partially offset by lower expected sales volume and the impact of the Wynyard sale. At the midpoint of the guidance, we expect a more than 300 basis point improvement in adjusted EBITDA margin year-over-year. The guidance range for adjusted EBITDA related to corporate overhead is unchanged as is the range for our capital expenditures. As a result of these changes, the range for guidance for total company adjusted EBITDA for 2026 is up to $208 million to $240 million or a 2% increase at the midpoint. I'll now turn the call over for questions. Operator: [Operator Instructions] Your first question comes from the line of Evan McCall with BMO Capital Markets. Evan McCall: It's Evan on for Joel Jackson. Just wondering about the salt market and if the market is well supplied for the strong winter? Or are we seeing a rush for any imports? And is there a larger spot market than normal? And does Compass have any excess tons to sell into it? Edward Dowling: This is Ed. As we said in our release and our just completed call that the market is very tight as a result of winter so far. When we do our planning, there's a variety of things that we consider in terms of our -- how we manage that, which could include some imports from time to time. Ben, do you want to pick that up? Ben Nichols: Yes. Evan, I think the market is exactly what Ed said. It's become tight. Winter has certainly trended ahead in terms of a straight calendarization. So that's something that the market hasn't seen in quite a few seasons. The ability for imports and opportunistic supply to play a role mid-season is difficult just given the lead time of supply in transit. And so I think our anticipation is if the winter continues as it has up to date, the market will remain tight. Evan McCall: If I could sneak one more in. How are the plans progressing for the new mill at Goderich? And also, when would you make a decision on this? And has the strong winter emboldened your decision to make the investment? Edward Dowling: Well, there's really 3 projects associated with the new mill at Goderich mine. The first that we've been working on for some years is the -- what we call the East Mine Drive, where we connect the current mining areas directly driving access directly to the East to tie into existing infrastructure. The second -- and that's been going on for some period of time, some years. Second is what we call the [ 3B108 ] project, which is really connecting the shafts and the infrastructure itself to the East Maine Drive. That project is really just getting underway and it will take a little while to complete that, but that's moving ahead. In terms of the new mill itself, it's in engineering. We've got a project team coming together on that. We're currently in the value engineering stage of that, and we should have things that we can talk about here over the next quarters. Operator: [Operator Instructions] Your next question comes from the line of David Silver with Freedom Capital Markets. David Silver: I wanted to maybe start with a question about the Salt segment economics during the quarter and in particular, on the cost side. So if I was to kind of lay things out on a per ton basis, I guess, production costs and also shipping and handling or logistics were higher, I guess, than a year earlier despite the higher volume. And I think you did in your prepared remarks, Ed, I think you talked about the development panels and whatnot. But I was curious, I mean, what would be driving up the logistics costs, the shipping and handling such that it seemed to have kind of a meaningful impact on your per ton margins this quarter? Was there anything going unusual there? Or is that something that will improve, I guess, as we move through the balance of the winter? Edward Dowling: Thanks, David. Appreciate that. Let me just say, as long as we're in the development sequence, which you measure in quarters, not years and start improving the production to development ratio in the mine, this is normal course things for mining. And the costs are always going to be a little bit higher just because of what we do to set up infrastructure, et cetera. But for the quarter itself, to answer your question directly, unit costs that were down about 6% in terms of production and distribution costs were up about 6%. I'll pass this over to Peter and Ben to see if they've got anything else they'd like to add. Ben Nichols: David, I think as you look at the distribution cost, there's 2 factors in play. One are just some basic inflationary pressures on rates, which was clearly identified in our guidance. The other big thing that's occurring is because Q1 of this year was so robust compared to prior year, we're shipping salt across a much wider network to service the business. And so essentially, we're pushing salt and shipping it to further away destinations to meet the demand, which results in a little higher rates. So that's what you're seeing come together. David Silver: And just to follow up on that briefly, but you don't have to scan news sources very long before you read about salt shortages in particular metropolitan areas, in December and January in particular. And I'm just wondering if that had an unusual kind of impact. In other words, were you forced -- did you find yourself without enough salt in the right locations? Or were you supporting maybe another supplier who was tapped out and maybe tapped into your supply or whatever in a pinch? Just anything unusual in the field that you would call out that might have impacted the margin profile this -- the per ton margin profile this quarter, but especially on the logistics side. Edward Dowling: Ben just spoke a little bit to the logistics side and really the delivery from further places away. We take a lot of pride in meeting our obligations as a company in terms of serving our customer base. And we operate to meet the commitments that we've made, shortages, et cetera, and we have a lot of people who would be approaching us for more salt. I think the net result of that is we'll see how the rest of the winter shakes out. But looking forward, then kind of, let's just say, industry-wide, deicing inventories, which are low, is very constructive as we look forward and start planning for '26, '27 winter. David Silver: Okay. If I could just ask a question, I guess, about tax rates, and I guess that would be both nominal and also cash tax as well. So during the quarter, you did have the unusual situation where your tax rate was, I guess, negative in the first quarter. And I know you've got kind of an evolving tax situation from the point of view of you should be solidly profitable this year. On a reported basis, a little bit different than the last couple of years. But can you just speak to kind of how you see your tax positioning evolving this year? I'm thinking about the valuation allowances, will you be able to claim some offsets, some profit with losses that maybe in the last couple of years you weren't able to do? And if you had an idea of what your cash tax situation looks like for full year 2026, that would be great. Edward Dowling: David, I think in part, you're asking about the impact of the Ontario mining tax settlement that we met earlier this year. Recall, that's been something hanging around the company for decades. We're very pleased to get that behind us. And that, of course, had impact on some of the footnotes you'll see in the release. Let me pass it over to Peter to give you a bit more detail on that. Peter Fjellman: Sure. And on that Ontario mining, you'll see it in both the balance sheet and cash flow and cash tax, which is where a lot of what you're referring to. As to the full year, obviously, we're still early in the year. We know that the swings in the effective tax rate, it's a function of income in Canada, losses in the U.S. and it's relatively a small number for tax purposes, right? And that's causing, obviously, lots of swing. We have to look at that post valuation allowance as well and then let that thing roll through. Still early in the season as to utilization and also looking at that valuation as well. So it's yet to be determined. Operator: I will turn the call back over to Edward Dowling, CEO, for closing remarks. Edward Dowling: Thank you, Kate. Thank you again for your interest in Compass Minerals. We're excited to see the advances that we're making under our back-to-basics framework. As I mentioned earlier, the company has had a solid quarter. We have positive momentum in a number of areas. We reported positive net income for the quarter, the first time in a long time. Quarterly adjusted EBITDA more than doubled. Total net trailing 12-month debt decreased by almost 2 turns. And lastly, we increased our guidance for the full year. The journey isn't finished, but we're making unmistakable progress of being the company we know we can be. Please don't hesitate to reach out to Brent if you have any follow-up questions. We look forward to speaking to you next quarter, if not before. Make it a safe day. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Tiffany: Good afternoon, everyone. This is Tiffany, and I will be your conference coordinator today. Welcome to Roblox Corporation's Fourth Quarter and Full Year 2025 Earnings Call. All lines are on mute. After the speakers' opening remarks, if you would like to ask a question, during that time, simply press star then the number one on your telephone keypad. Now I would turn the call over to Jamie Morris, Roblox Corporation's head of investor relations. Jamie, thank you. Jamie Morris: Good afternoon, everyone. I'm very happy to be here for my first earnings call at Roblox Corporation. Thank you for joining us to discuss our Q4 and full year 2025 results. With me today is Roblox Corporation's Co-Founder and CEO, David Baszucki, and our Chief Financial Officer, Naveen Chopra. Before we begin, I would like to remind you that our commentary today may include forward-looking statements which are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those described in our forward-looking statements. A description of these risks, uncertainties, and assumptions are included in our SEC filings, including our most recent reports on Form 10-Ks and Form 10-Q. You should not rely on our forward-looking statements as predictions of future events, and we disclaim any obligation to update these statements except as required by law. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics can be found in our shareholder letter and supplemental slides, which are available on our Investor Relations website. With that, I will turn the call over to Dave. David Baszucki: Thank you, and good afternoon, and thank you all for joining us today. One year ago, we shared our goal of growing year-on-year bookings at 19% to 21%. We talked about our goal of capturing 10% of the $200 billion global gaming content market on Roblox Corporation. The results we are sharing today for Q4 and the full year 2025 demonstrate the incredible progress we have made. In 2025, we significantly exceeded our guidance both on revenue, where we grew by 36%, and on bookings, where we grew by 55% year-on-year. We saw the emergence of viral hits that broke concurrency records at a platform peak in August 2025. We hit 45 million concurrents on Roblox Corporation. We saw new records for individual games on Roblox Corporation, including in September 2025, Steel of Brain Rot peaked at 25.4 million concurrent players at the same time. We saw strong engagement and bookings growth across a long tail of content driven in part by search and discovery advancements, and we made great progress on the technical end of underpinnings of our platform that drives genre expansion. We took safety a step further in just the last two months, rolling out facial age estimation across our platform, and we are unique in large platforms with over 100 million DAUs. In doing this, we completed the global rollout in January. Today, we continue to be bullish about our future. We are at about 3.4% of the global gaming content market. As you know, we are aiming for 10%, and internally, we have even more ambitious goals for the US market. Now diving into Q4, where we delivered another quarter of outperformance, Q4 revenue was $1.4 billion, up 43% year-on-year. And our Q4 bookings were at $2.2 billion, which is up 63% year-on-year. We saw strong growth across all regions, US and Canada grew 41% year-on-year, APAC grew 96% year-on-year, with a couple of key strength points. Japan at 160% year-on-year, India 110% year-on-year, and Indonesia at over 700% year-on-year. On DAUs in Q4, we saw growth at 69% year-on-year, really strong growth across all regions. And our engagement hours in Q4 of last year were at 35 billion hours, that's up over 88% year-on-year. Quarterly, monthly unique payers were nearly 37 million, which is close to a double from a year ago and up sequentially, and this was strong across the globe, US and Canada up 34% year-on-year. In Q4, DevEx was at $477 million, which was up 70% year-on-year. This increase in DevEx reflects our 8.5% increase rate in September, and for 2025, creators earned over $1.5 billion for the first time. If we take a look at our top thousand creators, they earned an average of $1.3 million, which is up over 50% compared to a year ago. Our results reinforce our conviction in our long-term vision. We believe the future of gaming is part of a bigger vision around human co-experience. Our mission is to connect a billion people every day with optimism and stability, and we remain bullish about this vision. In the shareholder letter, we outlined some areas of innovation and investment we believe will fuel growth in 2026 and beyond. First, we introduced the concept of novel game expansion, which is how we talk about expansion in the genres and footprint to our older audiences. You will note now that we are age-checking all users who participate in communication on our platform, we have been able to find a really bigger growth opportunity in the 18 demographic than previously assumed. We estimate our 18 and over cohort is growing at over 50%, and this cohort monetizes 40% higher than younger cohorts. We are optimizing our platform technically to facilitate growth of high-monetizing genres popular with older users, such as shooters, RPGs, and sports and racing. And we believe our technical opportunity on the platform is enormous. When we look at the gaming industry as a whole, in a sense, there is enormous room for advancement. Right now, typically, where we are going with our platform is a focus on vertical integration from cloud to engine to tooling, to our clients on many devices to discovery economy and safety. As opposed to what typically and often happens in the gaming industry as in a bespoke way putting together different cloud, different engine, different social communication. We have an enormous amount of high-fidelity AI training data. That we will share more with you, and you can watch on our main X as far as what we are doing with it. And we are pushing the notion for studios that the exact same game and experience should run very well and at high performance on low-end two-gigabyte Android. And at the same time, blossom into high res on a PC or console. And that includes running on every language or most languages with auto translation as well. Our stack from top to bottom is multiplayer. And we run that extremely efficiently in our own data centers. And, of course, we auto scale. And we believe for cost, it is very important to run the majority of your world on your own bare metal but be able to burst in the cloud. Finally, we will talk more about our advances in safety that are built in. A couple of highlights on critical innovations we are introducing to support genre expansion. We have now are in the middle of a full cloud rollout of native streaming of both 2D and 3D with various LODs. We are doing that automatically in our cloud. We have introduced Slim, which is our nickname for dynamically compositing very complex assets in our cloud and delivering those at various levels of detail for performance on all devices. We have announced that we are bringing native server which is very necessary and popular in competitive gaming, and we have rolled out custom matchmaking, which our creators can use to optimize either latency, age, or social connection. In the first half of this year, stay tuned. We are doing a complete release of an expansion of our Avatar system, including higher fidelity and more articulation. And finally, really, we have seen over the last few years the definition of what is a game expands. The more infra and platform technology we provide, the more we see experiences that are not typically thought of as a game. For example, dress to impress and grow a garden, and we are sharing more and more the AI tech we are building on top of our enormous data to continue this expansion with the use of AI. This week, we launched 4D generation, which allows experiences to include creation of new objects simply by users prompting and creating by AI. We shared earlier our vision on using our training data to create higher and higher quality NPCs. We are now working on photo upsampling in our cloud on both 2D and 3D for higher photorealism. And we shared really yesterday the work we are doing on our internal world model as a service and as a service that could be used both for creation by walking around and painting potential worlds, as well as something we look forward to potentially integrating with Roblox Corporation moments. In addition to this AI future, AI is really driving creation, safety, discovery, translation, in addition to these potential areas of user growth on our platform. Every day, we capture roughly 30,000 years of human interaction data on Roblox Corporation in a PII and privacy-compliant way. We are actively using this data to develop and train AI models that continue to bring our vision to life. I want to highlight that we are internally now running over 400 AI models. This includes, of course, cube 3D, which is recently expanded to do 4D or functional interactive type simulation. We have our own facial tracking client-side model that we use for avatar facial animation. Our voice safety model has been open-sourced and is open-sourced with part of the Roosk consortium. Our text filter is constantly updated, and we believe one of the best, if not the best in the world. Our text and voice translations are supporting publish once. And chat in multiple languages. And, of course, we highlighted our internal world model team and our internal NPC efforts as well. We see a future of creation in Roblox Corporation Studio, that is enhanced not just by cogen, and not just by experience gen, but ultimately agentic iteration and testing in our cloud once again powered by our 4D foundational and 3D foundational cube models. Some other AI highlights, and then I will turn it over to Naveen. In discovery, AI has been driving personalization. In Q4, AI drove a double-digit increase in the number of unique experiences that are surfaced in our recommended for you algorithm. In 2025, on average, users engage with over 24 unique experiences per month. This is up double digits from 2024. And I want to note we have done this all relatively by sharing with our creators the factors we use for discovery. Of course, critically, in safety, we have been using AI not just for our voice model, but with state-of-the-art models like Roblox Corporation Sentinel and Roblox Corporation Guard. And I want to highlight in safety the continued focus on our goal to lead the world in online gaming safety and stability. We shared a few months ago what we believe is the gold standard. We continue to innovate in this direction. Of course, no image sharing on Roblox Corporation. Of course, monitoring text for critical harms. But in addition, moving to the estimation of age of everyone on our platform, and the use in how we support chat. In Q4, we started a global rollout of age verification for access to communication in the US, Australia, New Zealand, and the Netherlands. I am pleased to report adoption has been strong with approximately 60% of DAUs age-checked in these markets. We completed our global rollout in '26, and as of January, we have achieved 45% penetration of global DAUs. We are bullish about continued adoption with Australia, New Zealand, and as a model, we are also rapidly enhancing our platform to make both age check adoption and to improve its reliability. And then kind of a fun full circle here. That as part of our age estimation release, we are really going up and down our system. We have enhanced our matchmaking to cluster users based on their age and skill level. We are moving to continuous age estimation, which will use additional signals such as play patterns, the social graph, economic activities to supplement facial age estimation. And over the coming months, we have more product launches, including always continuous refinement of our text and voice filters. We are ambitious, and we believe these types of enhancements really give us the opportunity to enable even higher level of engagements than what we saw prior to our age check rollout. From a commercial and financial standpoint, our flywheel continues to accelerate. We believe having all ages on our platform is a long-term strategic opportunity that many other platforms are not confronting as they claim 13 and up users. We are seeing the growth we saw in 2025 in combination with fixed cost discipline to reinvest in our creators and our infrastructure all really with an eye to fueling continued growth and long-term margin expansion. We are excited about the innovations we are developing and executing across all areas of our platform, which we believe will ensure our ability to continue to deliver on our long-term vision and deliver growth over a multiyear period. With that, I will turn it over to Naveen. Naveen Chopra: Thank you, Dave, and good afternoon, everybody. Dave obviously shared a lot of the highlights from Spectacular 2025 and a strong end of the year in Q4. I am going to share a few reflections on the business based on what we have observed over the last few months. And then also share some additional color on our expectations for 2026. We have more conviction than ever in the ability for Roblox Corporation to grow in excess of 20%. Our platform is healthier than ever. In fact, if you look at Q4, we saw very strong growth rate, 63% growth in bookings, without the benefit of a big new viral hit. Our age check data, as Dave mentioned, showed that we have an even larger opportunity to grow with older audiences than previously imagined. That's especially true in the United States, where the 18 and over cohort on our platform is growing at more than 50%. We have an international business that is still relatively nascent and growing at close to triple-digit rates. And the pace of innovation in AI is a tremendous accelerant and has the potential to help us grow beyond gaming as we develop even deeper connections into communication, entertainment, and commerce. In addition to the tailwinds on the top line, all the ingredients for long-term margin expansion are in place. Now that margin expansion may not be linear, as you can see with investments that we are making in 2026. But in the long run, we expect to capture operating leverage from COGS infrastructure, and our fixed costs. So as I said, our conviction in the ability to drive very healthy top-line growth and bottom-line margin expansion continues to grow. Now at the same time, we have learned that it is difficult to predict exactly where this business will land twelve months out. I mean, if you look back at 2025, when Roblox Corporation set guidance, Steel of Brain Rot, and Grow a Garden had not even launched. And that's created a situation where the company has had to provide relatively conservative guidance. I do not think that's helpful to investors, and it's certainly not helpful to the day-to-day operation of our business. So we are going to get out of that cycle. We are going to give everyone a long runway. We are providing detailed guidance for 2026. But as we get into 2027, you will see us starting to guide one quarter at a time. So let's talk about 2026. We are expecting bookings growth of 22% to 26%. Those estimates are informed by the quality of the users that we saw come to our platform in 2025. It's informed by recent content trends that we have seen in early 2026. It reflects our confidence in the adoption of our age-checking technology, and a number of things that we have planned in our roadmap related to our economy, discovery capabilities, and many other features. Now importantly, our bookings guidance does not assume we would not be able to predict it, another viral hit of the magnitude of a Grow a Garden or a Steel of Brain Rot. Now when it comes to margins, we are expecting at the high end of our bookings guidance margins to be relatively flat year over year. At the low end of bookings, we are estimating a slight year-over-year decline in margin. That's driven by the increase in the DevEx rate that we announced last year, and we will see a full-year impact of that in 2026. It incorporates investments that we have talked about related to continued growth in users and engagement and also AI workloads. And we are also planning to invest more aggressively in safety marketing to better educate our users, parents, and other constituents about everything we are doing to ensure that Roblox Corporation remains a leader in online safety. And we are funding a decent chunk of those investments through operating leverage on COGS and fixed costs. Our guidance also implies another year of strong free cash flow growth. In fact, at the midpoint of our guidance range, we are estimating 26% year-over-year growth in free cash flow. That includes a slight uptick in CapEx spend relative to last year, as we are continuing to land GPUs in our own data centers and also navigating the recent inflation in memory prices. So overall, we see 2026 as another year of strong growth on top of a spectacular 2025. We are making investments in our creators, in our infrastructure, in our safety, all of which sets us up for future shareholder value creation in the form of long-term growth and margin expansion. With that, open the line for questions. Tiffany: Thank you. At this time, if you would like to ask a question, press star. Then the number 1 on your telephone keypad. To withdraw your question, simply press 1 again. Once your line is open, we ask that you present all questions upfront to our speakers. We will pause for just a moment to compile the Q and A roster. We'll take our first question from the line of Kenneth Gawrelski with Wells Fargo. Please go ahead. Kenneth Gawrelski: Thank you very much for the opportunity to ask questions. Appreciate it. Two, if I may. First, maybe one, could you talk about do you give a little bit more color on, you know, the elements that inform your outlook for the bookings outlook for the year, I think it was it certainly has been a bit better than, you know, than feared. Could you talk about I know you are saying that you do not assume any big viral hit. But, like, how much visibility do you have kind of beyond the first quarter into content schedules and releases? And kind of what informs your conviction in that guidance? And then the second one, maybe just could you elaborate a little bit more on the you said the increased the better opportunity to target the 18 plus. And maybe within that kind of if you could please if you could please talk a little bit about, you know, the recent developments with Genie and AI gaming. Just how does that inform your view? And help hurt you know, how are you going to use AI to make the platform better for developers? Thank you. David Baszucki: Hey. It's Dave. I'll kick off a little on the first question, pass it over to Naveen, and then come back on the second question. You know, we have a lot of internal leading indicators. We can see that in the, you know, somewhat correlate to the health of our system. And part of that is content diversity, content distribution, content velocity, and types of content that are hitting different age ranges and genres. And we see a lot of health in that. So from just the high-level predictive view, that is one confidence-inspiring thing we would see. I'll hand it over to Naveen on more of the modeling and the makeup of our bookings forecast. Naveen Chopra: Yeah. Thanks, Dave. I mean, I'll really kind of put a finer point on what Dave said and then a little bit of what I said in my opening remarks. You know, the content dynamic that Dave mentioned, I mean, we saw both in Q4 sort of an increasing diversity of content. We noted in our shareholder letter that experiences outside of our top 10 are growing at an even faster rate than they were in Q3, and that's true both with respect to engagement and bookings. So that's something we really like to see just, you know, spreading the growth around, if you will. And we've continued to see similar trends in early 2026. And we like both the diversity of content, but also the freshness of the content. So there have been, you know, even not necessarily something as big as a Grow a Garden or Steel of Brain Rot, but there have been new titles come in that have grown in a healthy way, which, you know, gives us a lot of confidence in the power of the platform. I also mentioned the quality of the users that we saw in 2025. You know, there was some uncertainty in that period of very high growth. You know, are these sort of low-calorie users that are going to come in and disappear? But when we look at what has happened on the platform, the behavior of the new users that came to Roblox Corporation in Q3, Q4, you know, they largely look like our core users, and that's true when you think about, you know, how they engage, how they spend, how they retain. So that gives us confidence in, you know, how to think about the business over the next few quarters. You know? All that being said, there is still uncertainty trying to predict exactly where things are going to land twelve months out. That's the reason we do not think annual guidance is the right approach long term. We are using a slightly wider guidance range for 2026 than what we've used in the past, which kind of reflects some of that uncertainty. And then importantly, as I said, we are not building into our guidance an assumption of a massive viral hit the size of a Grow a Garden or a Steel of Brain Rot. We're optimistic that things like that will happen again, but we can't predict them, they're not built into our guidance. David Baszucki: Dave, you want to take the second question? Hey. And then just on the AI future, and I highlighted a little that we're optimistic we're going to see an expansion of the definition of really what is gaming, and AI is going to power that. I'll step back, though, to our mission, and our mission is to connect a billion people every day with optimism and civility. And I'll highlight the word connect, which means bring multiple people together to play, to learn, to work. And for the last really, since we've gone public, we've been sharing the visionary spec we've been building, which is many, many people coming together in physically simulated environments within games to play. We've started adding the notion of adding both NPCs as well as people to those environments, making those environments more and more photorealistic, and finally, making those environments one in which in real-time, people can create, modify, and change the environment. So we are staying with that stack, that spec, and we're, you know, as we showed on X yesterday, starting to use AI up and down the stack, upsampling, 3D to bring things more to life, training NPCs with the 13 billion hours of not just video data, but intrinsic 3D world data. And we highlighted yesterday our internal world model team what they've done using not just video data, but internal Roblox Corporation data to build internal world models that we think we can use both for creation and whatever. I will highlight one thing, and that's very important to the spec we're designing. We're building multiplayer platform technology. We're building stuff that brings people together. And a lot of the current work that you see out there is operating in video latent space, rather than synchronized 3D multiplayer cloud space. I would just cautiously highlight investors to understand the difference of that. You can read our recent tweet on X. That said, we continue to be optimistic about hybridizing and putting together many AI components to build the stack we're talking about. Tiffany: Thank you. Your next question comes from the line of Eric Sheridan with Goldman Sachs. Please go ahead. Eric Sheridan: Thanks so much for taking the question and appreciate all the disclosure in the materials and especially the shift around the guidance philosophy. Dave, I have one for you. The journey you've been on with respect to discovery, on the platform over the last twelve months, what have been the key lessons you've learned about the opportunity that sits in front of you based on what you've learned about the evolution of discovery, and how does that align with your strategic priorities either for the platform or individual products as you look out over the next couple of years? Thanks so much. David Baszucki: Discovery is a really hard problem to do right. And we believe being transparent in it is very important. We're as much as possible trying to optimize discovery not for short-term gain, but for long-term gain. And that's both long-term gain in user engagement as well as long-term gain in platform health and creator health. And any efforts to optimize discovery in the short term may not be optimal for long-term enterprise value and the health of our system. So figuring out how to personalize discovery for every user in a way that connects great users with great content in the long term is what we've been focusing on. What we've seen as a result, as I mentioned, is more good content reaching more great users. An increased robustness in the diversity of our content mix, in a way that we believe is very, very healthy. And, also, future opportunities. So stay tuned with moments. We believe for many users, browsing in-game experiences will more and more be a complement to our discovery. It's a long-term journey, and we'll keep getting better at it. Eric Sheridan: Thanks so much. Tiffany: Our next question comes from the line of Matthew Cost with Morgan Stanley. Please go ahead. Matthew Cost: Great. Thanks so much for taking the questions. I have two, maybe for Naveen to start. I think the gross margins that you showed in the quarter were, I think, the second strongest that we can see going back even to 2020. I think it's the only time you did better. When we think about that improvement to gross margin, is that a function in the fourth quarter of a shift towards direct payments or any other moving pieces? And could you just give us an update on kind of the direct payment initiative? And then, a second one for Dave. If I could. I think the detail on the blog post that you've shared so far on the call about the work you're doing with AI and world models is incredibly helpful. And I want to put a finer point on the concerns that we've seen coming up in the market over the past week about the potential for, you know, disruption to your business from other, you know, advances from with AI coming from other companies out there in the space. And I wonder if you could respond to those concerns and, you know, what you see as the differentiating factor that protects Roblox Corporation. I think the commentary you made a moment ago about, you know, multiplayer versus non was really helpful, but if you could expand on that. Thank you so much. Naveen Chopra: Yeah. Hey, Matt. Thanks for the question. I'd really point to two things in relation to your question on gross margin in the quarter. One, as you hypothesized, we did get some tailwind from COGS. I think as we've spoken about in the past, we are doing a number of things in the product to try to steer the purchase of Robux to lower-cost platforms, and that honestly performed better than we anticipated in Q4. And that was very helpful from a margin perspective. The other source of margin expansion in the quarter was really bookings. Bookings came in also better than expected, which gave us powerful leverage against fixed costs. When we look forward, and I think I spoke about this in relation to 2026 margins, we do continue to expect improvement in COGS rates as we are able to shift more and more of the business to lower-cost platforms. You know, that's not going to be necessarily linear. There will be, you know, places and points in time we're able to be more or less aggressive on that. But in the long run, we do see that as a source of additional margin expansion in the business. Dave, on AI? David Baszucki: Yeah. I would hey. This is a great question. I would flip it and share how we think about it internally, which is an opportunity for disruption in the opposite direction. Which is an opportunity for the expansion of the Roblox Corporation vision beyond gaming into the future mix of what is entertainment and where does gaming end and where do other points begin. You know, ten years ago, a lot of people in the market used to talk about how is video going to get interactive, and there's been a lot of experiments on that that have been very difficult. But the other direction to think about is how does gaming expand and become part of entertainment. So I would say stay tuned on that. We feel what we're building, which is multiplayer technology that runs in the cloud, that more and more can load instantly, that more and more can be consumed in smaller bite-sized nuggets. More and more start to blur those two visions. World models are interesting. I would say not initially in many of the ways that I think many think, but we do think they have an opportunity for walking around and painting a world, for example, have a really interesting opportunity to think about where does video end and snapshots end and interactivity begin. And so we have developed our own models there, but the core of our technology will continue to be the very difficult problem of 3D cloud synchronization and building communication type technology. Tiffany: Our next question comes from the line of Omar Dessouky with Bank of America. Please go ahead. Omar Dessouky: Hi. Thanks for taking my question. I wanted to ask more of a financial question. Specifically, how do you think about dilution stock-based compensation in 2026? With your stock price significantly down compared to last year, could you explain how having that stock-based comp flexibility is helping you make long-term strategic investments? For example, what investments besides headcount have a higher ROI that you would use that cash for? Thanks. David Baszucki: I'll go first, and then I'll hand it over to Naveen. You know, internally, we're always running a multiyear model on stock-based comp and dilution at a very, very wide range of stock prices. And running the business in a way we feel comfortable. So do think about these things and model many dimensions. I'll hand it over to Naveen. Naveen Chopra: Yeah. Not a ton to add to that, Omar, but, you know, number one, I would say we look at this at a pretty long-term horizon. I mean that both with respect to the share price and dilution. I mean, sure, dilution at various points in time might spike just because of what's going on with the stock price. But ultimately, we think we're going to create shareholder value and, you know, that will cause dilution to come down over time. If you look at what's happened over the last few years, that's definitely been the case. So some would pay attention to, but we're much more focused on the operating results of the business because dilution's going to get solved by that. Omar Dessouky: Thanks a lot. Tiffany: Our next question comes from the line of Brian Pitz with BMO Capital Markets. Please go ahead. Brian Pitz: Thanks for the questions. Maybe a quick update on your ramping advertising ambitions and how you're thinking about the potential growth contribution from advertising in 2026. And then any additional detail about the age verification rollout, which maybe was not as smooth as you hoped? Can you comment on specific challenges and adjustments the team has made to ensure a better transition? Thanks. David Baszucki: I'll go first. We sure do not think about it that way. We're very excited and proud of the way our age verification rollout has gone, and we're very optimistic that the result of it has been expanded thinking within our team on long-term how to be unique in being a platform that can have all ages on the platform, can monitor and help how communication happens on the platform. I'll say that we gave our internal teams an ambitious goal of rolling this out eventually with no friction. And I would say by doing this, we've found so many other opportunities for optimization that I'm very pleased and happy with the way the rollout's gone. Naveen Chopra: And then on advertising, you know, we expect our advertising business to show pretty healthy growth in 2026. That being said, it is still modest. It's not a major contributor to the top line as you've heard me say in the past. It is going to take some time to grow. I think the long-term opportunity is very given the scale and engagement of our platform. But it is going to take some time. And we are executing carefully with respect to building out those products, the integration of the technology in our platform, working with our creators to expand the amount of inventory, that is available and we're going to continue to be very methodical about that. To make sure we're building the business in the right way. Tiffany: Our next question comes from the line of Cory Carpenter with JPMorgan. Please go ahead. Cory Carpenter: Hey. Thanks for the question. I had two. Maybe first, there's been some reports of interest in maybe building your presence in China. Anything you can comment on there in the type of opportunity that you see? And then just on the age of users, you know, framed it as the large opportunity. Given, in novel game experiences, given, you know, more younger users than previously reported. You know, the half glass empty view of that, of course, could be that younger users have been tougher to age up on the platform than you expected. So, you know, what's giving you the confidence to invest there that you can age up more with users? David Baszucki: I'll go first on China. We continue to be a great partner with Tencent, and we continue to see a huge opportunity in China. We've revamped the way we look at China. If we were to go live in China, we would do it in an air-gapped way. And we think our infrastructure is built and designed in a really unique way. We can abstract and deploy it in multiple places. On our, you know, a couple of things about age checking and getting detail on estimated age. The first thing is it highlights the level of cultural phenomena that Roblox Corporation has become. And so yes, age checks slightly younger than self-reported. But if anything, it highlights a success. I, you know, I look to a couple of things. First, over 50% growth year-on-year eighteen plus. Two, the platform and technical advantages we've used to get to where we are in 18 are exactly the same eighteen plus vertical integration all the way from cloud to apps to discovery to social graph and beyond, we believe, rather than saying, ultimately, the tech as well, supporting more and more realistic experiences. So I, I continue to be absolutely bullish on our eight and up opportunity. Tiffany: Our next question comes from the line of Shweta Khajuria with Wolfe Research. Please go ahead. Andrew: Hi. This is Andrew from Shweta. Thanks for taking the question. Just kind of one on the age check rollout. You know, you talked a lot about the penetration that seems to be going well, but any change in behavior or engagement levels for those who have completed a check or if not yet. And then maybe when you think about the derivative impacts of paycheck, is it possible to think about how the older cohorts may be viewing this as a quality of life update, and that might be contributing to the engagement levels that you're seeing? David Baszucki: Yeah. I'll give one example on why excited about this, and that is the more we get into age check interacting with communication, the more we can more accurately match make different age bands together. That's one of the factors that makes me so optimistic is that age, you know, banding our matchmaking in ways that brings the average, you know, older user together as well as the average 15-year-old together. We believe can be a long-term growth aspect. So think this is going to become it's why we call it the gold standard, actually. And what we've seen after we did this is another very large gaming company announced they're going to do it. A communication platform announced. They're going to do it. We just see this as ultimately the way the world's going to work. We're proud to be one of the first big platforms to do it. Tiffany: Our final question comes from the line of James Heeney with Jefferies. Please go ahead. James Heeney: Yes. Great. Thanks, guys. Naveen, if we look at the Q1 bookings guide, it looks like a sequential decline greater than 20%, which I think would be one of your bigger sequential slowdowns. Is there anything you're calling out there specifically, or is it just kind of the conservatism that you called out? Anything specific and even maybe what you're seeing so far in Q1. Thanks. Naveen Chopra: Yeah. I mean, I guess I look at it pretty differently. You know, this is a quarter where we do not have at this point, a big new viral hit. And so, you know, to put up 40% to 44% top-line growth in the absence of that, I think we should all be very, very excited about what that says about the health of the platform. You know, we said last quarter, that as we started to move past this period of time with huge viral hits, that growth would slow. So I do not think anyone should be surprised by the sequential trend there. If anything, I think we should be really excited about what we're seeing early in the year. I'm going to turn it over to Dave to close that. David Baszucki: Hey. Thank you all for joining us on our call today, and we appreciate the really interesting and thoughtful questions. Thank you all, and we'll look forward to seeing you in a quarter. Tiffany: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, everyone, and welcome to Knowles Corporation's Fourth Quarter and Full Year 2025 Earnings Conference Call. At this time, I would like to hand the conference over to Ms. Sarah Cook. Please go ahead, Sarah. Sarah Cook: Thank you, and welcome to our fourth quarter and full year 2025 earnings call. I'm Sarah Cook, Vice President of Investor Relations, and with me today are Jeffrey Niew, our President and CEO, and John Anderson, our Senior Vice President and CFO. Our call today will include remarks about future expectations, plans, and prospects for Knowles Corporation, which constitute forward-looking statements for purposes of the safe harbor provisions under applicable federal security laws. Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company sales, expenses, and profits, and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations. The company urges investors to review the risks and uncertainties in the company's SEC filings, including, but not limited to, the annual report on Form 10-Ks for the fiscal year ended 12/31/2024, periodic reports filed from time to time with the SEC, and the risks and uncertainties identified in today's earnings release. All forward-looking statements are made as of the date of this call, and Knowles Corporation disclaims any duty to update such statements except as required by law. In addition, pursuant to Reg G, any non-GAAP financial measures referenced during today's conference call, please note in our press release posted on our website at knowles.com and in our current report in Form 8-Ks filed today with the SEC. This will include a reconciliation to the most directly comparable GAAP measure. All financial references on this call will be on a non-GAAP continuing operations basis, with the exception of cash from operations or unless otherwise indicated. We've made selected financial information available in webcast slides that can be found in the Investor Relations section of our website. With that, let me turn the call over to Jeffrey Niew, who will provide details on our results. Jeff? Jeffrey Niew: Thanks, Sarah, and thanks to all of you for joining us today. 2025 was a breakthrough year for Knowles Corporation, marked by the completion of our portfolio transformation at the end of 2024 and the beginning of our journey as an industrial technology company. Our organic growth in 2025 exceeded our Investor Day expectations and demonstrates our strategy of leveraging our unique technologies to design custom-engineered solutions and then deliver them at scale for blue-chip customers in high-growth markets that value our solutions. Before I discuss this a little more in detail, let me cover our Q4 2025 results. Q4 was another quarter of strong financial performance. Revenue was $162 million, up 14% year over year, exceeding the high end of our guided range. EPS was $0.36, up 33% year over year and above the midpoint of our guided range. Cash from operations was $47 million, also exceeding the high end of our guided range. On a full-year basis, revenue of $593 million was up 7% year over year, and EPS was $1.11, up 21% compared to 2024. As I said last quarter, I believe our results continue to demonstrate that our focus on markets and products where we have significant competitive advantages results in increased organic growth and positions us well for future growth. Now turning to our segment results. In Q4, medtech and specialty audio revenue was $73 million, up 4% year over year. Full-year revenue was $264 million, up 4% from 2024 and at the high end of the organic growth target of 2% to 4% we presented at our Investor Day in May. In hearing health, Knowles Corporation is known for its superior technology and reliability. Our customers depend on our ability to deliver unique solutions to improve comfort of fit and performance with extremely low power. Our unique technologies coupled with strong intimacy with our customers' applications is allowing us to win next-generation designs for MEMS microphones as well as balanced armature speakers. We also see the opportunity to increase our content for the device in next-generation hearing health products. Beyond the hearing health market, we remain optimistic about the future growth opportunities within our microsolutions group that we detailed at our Investor Day. In the Precision Device segment, Q4 revenue was $90 million, up 23% year over year. As channel inventory levels are now normalized, and orders are matching end-market demand, we saw strength across all our key end markets, leading to an acceleration of revenue in the second half of the year. Total year revenue grew 10% year over year, exceeding the high end of the organic growth target of 6% to 8% we presented at our Investor Day in May. Within precision devices, as I stated earlier, we saw growth in all our end markets: medtech, defense, industrial, EV, and energy, with revenue growing year over year. Let me provide a little color by end market. In the medtech market, we have new design wins ramping and repeat orders in production spanning across multiple product lines such as high-performance ceramic capacitors and pulse power film capacitors. The number of medical devices being used to extend life expectancy and to ensure sustained quality of life is on the rise. Our custom high-reliability capacitors can be found in a multitude of implantable devices, medical imaging, and life-extending treatments. Our defense business continues to be strong. As a sole source supplier on a number of key programs, order volumes continue to grow. As I mentioned on our last earnings call, our capacitors and RF microwave solutions serve a wide variety of military applications, spanning from radar communications to munitions. Defense spending is increasing and shifting toward electronic warfare, and our products are in high demand. In the industrial markets, we have seen inventory levels normalize with our distribution partners. Our high-performance ceramic film electrolytic capacitors serve a diverse set of applications from robotics to welding and induction heating in the industrial sector. The energy market continues to be an exciting opportunity for growth in 2026 and beyond, with our new specialty film line expected to start producing and delivering high-volume horsepower capacitors late in the second quarter of this year. On a more quantitative basis, to summarize, we saw another quarter of healthy bookings even with extremely strong shipments in Q4, with a book-to-bill greater than one in our Precision Devices segment. Our continued collaboration with our customers has led to a robust pipeline of new design wins as our customers continue to choose our innovative and differentiated solutions. This, coupled with strong secular growth trends in the markets we serve, gives me confidence in our ability to continue to grow revenue throughout 2026 and beyond. Across the company, we are leveraging our unique technologies, creating custom products through our customer application intimacy, and then scaling into production with our world-class operational capabilities for end markets with strong secular growth trends. Our 2025 results demonstrate this is a winning combination leading to revenue and EPS growth on a year-over-year basis. I would like to reiterate what I had previously said. I'm excited about the momentum and strength of our business. We have entered 2026 positioned well for continued strong organic revenue growth above historic levels. While the first quarter of the year is typically seasonally low, I expect to see strong year-over-year growth in the first quarter. New design wins are ramping, we have a very healthy backlog of existing orders, and we are seeing increased demand for our products. Our organic growth and increasing EBITDA continue to produce robust cash generation resulting in a very strong balance sheet which will allow us to pursue synergistic acquisitions and continue to buy back shares while keeping our debt levels at very manageable levels. To close, we are laser-focused on what we do best: designing custom-engineered products and delivering them at scale for customers and markets that value our solutions, positioning us well for growth in 2026 and beyond. Now let me turn the call over to John Anderson to detail our financial results and provide our Q1 guidance. John Anderson: Thanks, Jeff. Reported fourth-quarter revenues of $162 million, up 14% from the year-ago period and above the high end of our guidance range. EPS was $0.36 in the quarter, up $0.09 or 33% from the year-ago period and above the midpoint of our guidance range. Cash generated by operating activities was $47 million, also above the high end of our guidance range, driven by both increased EBITDA and lower than expected net working capital. In the medtech, Specialty Audio segment, Q4 revenue was $73 million, up 4% compared with the year-ago period, driven by increased shipment volume. On a full-year basis, revenue increased by 4% over prior year levels, due primarily to growth in specialty audio and an increase in shipment volume of stamped metal cans. Q4 gross margins were 51.9%, up slightly from the year-ago period. As expected, segment gross margins for full-year 2025 were above 50%. The Precision Devices segment delivered fourth-quarter revenues of $90 million, up 23% from the year-ago period. On a full-year basis, revenue increased by 10% over prior year levels, driven by strength across all our end markets and product lines. Revenue accelerated throughout the back half of the year as inventory levels normalized at our distribution partners. Segment gross margins were 40.1%, up 230 basis points from 2024 as higher end-market demand and production volumes in ceramic capacitors and RF microwave product lines resulted in increased factory capacity utilization. This was partially offset by higher scrap costs and production inefficiencies in connection with our specialty film line. For the full year, segment gross margins improved 140 basis points from 2024 levels despite headwinds from our specialty film line. We experienced production volume increases in RF microwave products and ceramic capacitors driving the gross margin improvement. I'm confident in our ability to continue to improve segment margins further in 2026 as capacity utilization increases and efficiencies in connection with our specialty film line are realized. On a total company basis, R&D expense in the quarter was $9 million, flat with Q4 2024 levels. SG&A expenses were $27 million, up $2 million from prior year levels driven primarily by higher incentive compensation costs. Interest expense was $2 million in the quarter, and down $2 million from the year-ago period, as we continue to use cash generated by operations to reduce our debt levels. Now I'll turn to our balance sheet and cash flow. In the fourth quarter, we generated $47 million in cash from operating activities, and capital spending was $15 million. During the fourth quarter, we repurchased 451,000 shares at a total cost of $10 million. We exited the quarter with cash of $54 million and $114 million of borrowings under our revolving credit facility. Lastly, the net leverage ratio based on trailing twelve months adjusted EBITDA was 0.4 times, and we have liquidity of more than $340 million as measured by cash, plus unused capacity under our revolving credit facility. Before turning to Q1 guidance, I want to briefly highlight our performance relative to our full-year 2025 outlook and five-year targets that we provided at our May 2025 Analyst Day. Full-year revenue was $593 million, up 7% versus 2024, which was above the high end of our outlook of $560 to $590 million. Revenues exceeded the high end of our organic growth target of 4% to 6%. From a segment perspective, medtech and specialty audio revenue grew by 4% and precision device revenue grew by 10%, with both segments meeting or exceeding the organic revenue growth targets of 2% to 4% and 6% to 8%, respectively. Adjusted EBITDA from continuing operations was $140 million, up 9% from 2024, driven by higher gross profit margins and increasing operating leverage, and within the outlook range we provided. Cash from operations was $114 million or 19.2% of revenues, above the midpoint of our full-year outlook. Moving to our Q1 guidance. For 2026, revenues are expected to be between $143 and $153 million, up 12% year over year at the midpoint. R&D expenses are expected to be between $9 million and $11 million. Selling and administrative expenses are expected to be within the range of $25 million to $27 million. We're projecting an adjusted EBIT margin for the quarter to be within the range of 18% to 20%. Interest expense in Q1 is estimated at $2 million, and we expect an effective tax rate of 15% to 19%. We're projecting EPS to be within a range of $0.22 to $0.26 per share, up $0.06 or 33% year over year at the midpoint. This assumes weighted average shares outstanding during the quarter of 88 million on a fully diluted basis. We're projecting cash from operating activities to be within the range of negative $5 million to $5 million. Capital spending is expected to be $10 million. We expect full-year capital spending to be approximately 4% to 5% of revenues as we continue investments associated with capacity expansion related to the large energy order we received in 2025. In conclusion, we delivered strong year-over-year revenue, earnings, and cash flow growth in the fourth quarter and for full-year 2025. As we exited the year, we have a robust backlog and increased order activity, which gives me confidence in our ability to continue to achieve revenue, earnings, and cash flow growth, which is expected to drive shareholder value throughout 2026 and beyond. I'll now turn the call back over to the operator for the Q&A portion of our call. Operator: Thank you, sir. And everyone, if you would like to ask a question, please press star one on your telephone keypad. Once again, that is star one if you have a question today. We'll take the first question from Christopher Rolland from Susquehanna. Christopher Rolland: Hi, guys. Thanks for the question. And yeah, I guess the large energy order and the thin film capacity products, I guess, first, an update there. Have you guys seen a broadening in new customers for that product? And if you could remind us on your capacity addition plans, and timing of revenue, and any TAM detail or something around that would be great as well. Thank you, Jeff. Jeffrey Niew: Yeah. So, you know, first on the energy order, being no different than we've kinda talked about earlier last year, which we expect this to be in the neighborhood of $25 million, north of $25 million revenue this year. And really getting going in the back half. Well, we should have it fully ramped by the end of Q2. So, you know, I think you'll see more of that, a big portion of that $25 million in the back half of the year. Overall, for the specialty film line, you know, I think we are seeing a definite broadening of the customer base, you know, beyond some of the medical applications, you know, defib, radiotherapy, downhole, fracking, military applications like rail guns, a definite broadening of the applications. And I think, you know, we've talked about this a few quarters ago. That overall, including the energy order, our expectations were in that, I would say, $50 to $65 million range for revenue off this product category in 2026. You know, I think that still holds that we're still in that range for this year. So I think what I kinda see here is, you know, that the specialty film line, including energy, really has a bright future as we look toward the future, Chris. Christopher Rolland: Excellent. Great. And then as we start thinking about the future, kind of what your next big hit might be. I guess, first of all, do you have some prospects that you've identified organically or internally, some next kind of big hits? And or are you really looking outside? You know, you did mention acquisitions. If you could give us an update there, are you finding some high-value targets here and speaking of valuation, are they reasonable? Jeffrey Niew: Yeah. I mean, obviously, it's very hard to comment, like, specifically, but, you know, our pipeline continues to be good on the acquisition front. But to be honest with you, our organic opportunities, you know, over the next twenty-four to thirty-six months look pretty promising. And I'll just kinda go back to beyond the energy order, you know, situation and of the Pulse Power specialty film line, a couple of other things that, you know, that we talked about on the Investor Day to give a brief update. First, our microsolutions in within MSA. Where we are taking our existing technologies, our existing capacity, our existing R&D capability that we use for our hearing health and putting that into other medical applications. I would say I'm incrementally more positive about this than I was, say, two quarters ago. We got a lot of new medical applications where we're collecting NREs at this moment that, you know, we should start ramping into higher volume production in 2027. I mean, it's not gonna generate a ton of revenue this year, but, you know, remember, these medtech designs are typically three to five-year design windows. And, you know, we're getting to the beginning of that, that three years in the 2027 year time frame when we started this. So that's pretty positive. You know? Defense spending, you know, I just sit there and I see you read it every day. You know, we're well-positioned with the defense spending. With our RF and our capacitive products. I think that's more of a secular growth trend where we have some very differentiated products. And then lastly, I think we're doing some work in terms of ceramic caps, you know, in terms of, you know, doing, I would say, in defense under munitions, doing some assembly work. There's a lot of good stuff going on here. And so generally speaking, you know, I think I've been pretty positive. We said our organic growth of 4% to 6%, our first year out the gate, we're at 7%. I think we're pretty excited about, you know, how we think about our organic growth opportunities over the next twenty-four to thirty-six months. Christopher Rolland: Thank you so much, guys. Congrats. Jeffrey Niew: Yep. Operator: The next question today comes from Anthony Stoss, Craig Hallum. Anthony Stoss: Jeff, John, and Sarah. First off, John, maybe I missed it. Gross margin guide for March, I think in the past, you were thinking about 42%. You maybe just confirm that. And then just curious what you think the June gross margin might look like if the ramp is gonna occur until late Q2? Does that spill into the June gross margins? Thanks. John Anderson: Yes, Tony, we really we kind of moved away as we transitioned to an industrial tech company. We kinda moved away from gross margin. So the guide, the focus on our guide is, obviously, revenue, EPS, and cash flow. I would say from if you give a little detail on gross margin, you know, we're at, call it, full-year 2025, we're at 45.5%. And MSA was, as I mentioned, above 50%. I think the MSA margins are gonna kinda hold in that area in '26, but there is potential for margin expansion, especially in the back half of 2026 as we get to higher production volumes or ramped-up production volumes on that specialty film line. So I think there's, again, an opportunity to increase above that 44.5% in '26 by, you call it, 50 to 75 basis points, but weighted toward the back half of the year. Anthony Stoss: Got it. Thanks for that. And Jeff, I'm curious if you could kind of highlight the fastest-growing markets or what you expect in 2026. I got to believe it's military, and I'm curious if you have exposure on the satellite side as well. Jeffrey Niew: We do have some exposure in satellite, but just a comment. You know, I think I mentioned in the prepared remarks that we had a very strong PD and a very strong bookings quarter. And even with that, the book-to-bill was 1.06. Even with that very strong shipment quarter, and, you know, I think we're already cut we're already through January. We had a very strong January bookings month as well. And so and it's pretty broad-based. You know, we tried to cut this up a number of different ways. You know, in terms of your key markets of being defense, med, industrial, then we put EV and energy together. All of them are looking pretty strong right now. The bookings have been strong in supporting that. And so I think from our perspective, it's very broad-based, and I look, you know, OEM versus distribution, same thing. Both our OEM business and distribution business is doing very well. And so I think to pick one out and sit there and go, this one is doing the best, I mean, is doing well, but so is MedTech. Our MedTech business is doing well. You know the energy story. And I think the one that we're seeing more and more momentum in is energy. Sorry. Sorry. Industrial. We're seeing more momentum in industrial than we did six months ago. So I think that that seems to be a pretty big positive change since the last six months. Anthony Stoss: Perfect. Congrats. Nice execution. Jeffrey Niew: Thank you. Thanks, John. Operator: The next question comes from Robert Labick from CJS Securities. Robert Labick: Hey. This is Will on for Bob. I know you talked about the timeline of the energy orders, but can you talk more specifically about the production build-out? Has the new capacity been completed? Tested? Where does it stand? Jeffrey Niew: Yeah. So, I mean, you know, we get we have weekly calls with the team. This is obviously happening in, you know, outside of Greenville, South Carolina. And so we have weekly calls. It's like every week there's something new. A couple of weeks ago, we got the permits to start producing product in the facility. The equipment's being moved in. You know, we've got a team actually, you know, in Greenville from all over the world to help support this ramp-up of Green in manufacturing engineering team from across the globe to help with the ramp-up. So there's a lot going on. Plus, at the same time, we're still delivering, you know, low volume units on this order. But, you know, the goal here, you know, is we're gonna ramp this up, like, 10x in the next five months from where we are today. So, you know, I think we're on track, you know, a lot to be done here, but we're on track in order to get to by the end of Q2. The full volume production that we committed to. And, again, I think it depends a lot about auto orders and the rest of the specialty film business. You know, exactly what we deliver on this energy order, but, you know, I think we're thinking in that, you know, $50 to $65 million range from, you know, in the twenties. This year. For 2025. And, Will, I would just say very modest amount in Q1. So it will help drive sequential growth from Q1 to Q2. As we ramp up. Robert Labick: Yeah. So I think that's a good point. I think obviously, we're guiding to pretty decent organic growth year over year, but that's not being driven by the energy order, obviously. That's very helpful. Thank you. And can you remind us, can that capacity be used for other pulse power applications beyond the energy order if the demand arises? Jeffrey Niew: Yeah. I mean, like, how we're setting this up, you know, quite frankly, is setting it up probably in the same facility, but a little separated. Because the normal specialty line is much higher mix. This is essentially, you know, a low mix production and we're working on a lot of things. That will make the standard specialty line film line more productive over time too. Like automation, you know, we're doing a lot of things. That will help longer term with the standard specialty film line, but we're setting them up right next to each other as opposed to trying to build, you know, one high volume customer against more of, like, I call higher mix customers. Robert Labick: That's all for me. Thank you. Operator: As a reminder, everyone, please press 1 if you have a question. We'll go next to Tristan Gerra from Baird. Tristan Gerra: Hi. This is Tyler Bomba on for Tristan. Thanks for taking the questions. Touched on it briefly already, but could you give us a more detailed update on the supply-demand dynamics in industrial? You expect the second half to see industrial revenue rebounding if the first half is kind of back to supply and demand balance. Jeffrey Niew: Yeah. So, you know, when I look at, like, our numbers, you know, in our forecast here, you know, I think we expect in the first half right now we expect pretty strong industrial shipments in the first half. Off of, you know, what was pretty strong in 2025. And then I would sit there and say, right now, the back half of the year looks more like, now it looks more flattish to the back half of 2025. For industrial. For industrial specifically. But overall, we expect growth for industrial for the full year. So, you know, like, you know, obviously, if you go back to, Tyler, to when we were talking earlier last year, the 2025 was still relatively, you know, meagerly weak. We're seeing a fair amount of growth. In 2026. And then I think, you know, it's a little early. Industrial is a lot more turns business. The lead times are shorter. But right now, you know, I think what I see here is, you know, we're gonna it's gonna be flattish year over year in the back half. Tyler Bomba: That's very helpful. A quick follow-up. Starting to hear about shortages of components across the industry. Is this impacting your demand? And are the supply constraints expected to positively impact price in the second half? Jeffrey Niew: Well, I mean, we're always looking at price, Tyler. So I think, you know, I think you're absolutely right. I mean, there are a number of things here and dynamics that I think are going on. And we continue to see, I mean, like I said, in a previous question, with the book-to-bill, when we were having these strong book-to-bills in the front half of 2025, it was off of weak shipments. So you could you gotta take that book-to-bill with a grain of salt. But when you look at, you know, the Q4 numbers in terms of the revenue being $90 million and we still booked, you know, at a book-to-bill of 1.06. And I said, January's already in the books, and the bookings in January were already strong again. And so it's definitely a topic here, about capacity, capacity utilization, pricing. It's all intermixed. And to be honest with you, I would sit there and say, we are starting to see some concerns as we enter towards the back half of the year that we got to make sure we're prepared for all the orders we're receiving. So, you know, I think, you know, if this demand keeps continuing at this rate, great. Tyler Bomba: That's all for me. Thanks. Operator: And everyone, at this time, there are no further questions. That does conclude our conference for today. We would like to thank you all for your participation. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to LiveRamp Holdings, Inc.'s Fiscal 2026 Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And to withdraw your question, simply press star one again. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Drew Borst, Vice President of Investor Relations. Please go ahead. Drew Borst: Thank you, operator. Good afternoon, everyone, and thank you for joining our fiscal 2026 third quarter earnings call. With me today are our CEO, Scott Howe, and CFO, Lauren Dillard. Today's call and the earnings press release may contain forward-looking statements. Drew Borst: That are subject to risks and uncertainties that could cause actual results to differ materially. For a detailed description of these risks, please read the risk factors section of our public filings and the press release. A copy of our press release and financial schedules, including any reconciliation to non-GAAP financial measures, is available at investors.liveramp.com. Drew Borst: Also, during the call today, we'll be referring to the slide deck that is also available on our IR website. With that, I'll turn the call over to Scott. Thank you, Drew, and thanks to everyone joining us today. Scott Howe: You'll hear three main themes during my remarks today. First, our business continues to demonstrate durability, predictability, and scalability, as evidenced by our solid performance in Q3. Second, AI is a tailwind for our business since we provide critical foundational infrastructure that allows our partners to utilize AI more effectively. And third, our focus on rule of 40 is unwavering, and we intend to achieve membership in this exclusive club in FY 28. Let's start with the quarter. Yet another proof point of the durability, predictability, and scalability of our business. We delivered a solid third quarter with revenue and operating income exceeding our guidance for the eleventh consecutive quarter. Overall, our team is executing well, and we made notable progress with several key growth initiatives, including expanding our data marketplace to include AI models, agents, and applications, and strengthening our go-to-market by expanding our usage-based pricing model to reseller customers. More on these in a minute. First, let me hit the highlights from Q3. Q3 revenue growth was 9%. Scott Howe: Inclusive of a four-point acceleration in subscription revenue also to 9%. ARR increased $11 million quarter over quarter and 7% year over year, driven by use cases for commerce media, CTV, and cross-platform measurement. Total customer count increased by quarter over quarter, the largest increase in more than three and a half years. And our million-dollar-plus customers increased by eight to a high of 140. In Q3, we signed several million-dollar-plus upsell deals, including with the world's largest e-commerce retailer, a major social media platform, and a leading QSR. The deals were mostly for expansions for connectivity and clean room insights. We had record quarterly operating margins on both a non-GAAP and GAAP basis, and record quarterly free cash flow. We continue using the bulk of our free cash flow for share repurchases. Clearly, there was much to like about the Q3 results, and we'll provide additional details. While the quarter's performance highlighted our durability and predictability, I'm bullish on the future. In contrast to what Wall Street may believe about the software overall, we believe AI is a tailwind, a true force multiplier for our platform as the advertising ecosystem looks to adopt AI in a trusted, secure way. While AI is capturing headlines, its real-world impact in advertising depends on something far less visible but absolutely essential. A trusted data network that allows AI to operate across partners, clouds, and platforms, while meeting rising privacy and regulatory expectations. And this is where LiveRamp Holdings, Inc. plays a critical role. We are starting from a position of strength, with competitive advantages that become even more powerful in an AI-driven world. Some of you will recall the four strategic moats we outlined at our Investor Day just last year. Each of these directly maps to what AI systems require to function effectively in marketing environments. First, identity. We have the largest, most accurate consented identity graph in the industry, enabling a precise consumer view across channels. And this is foundational for AI-driven personalization targeting and measurement. Second, interoperability. We operate the industry's only truly interoperable platform, connecting data from anywhere to everywhere, across any cloud and any partner. As AI workflows increasingly span platforms, and data collaboration becomes the norm, this interoperability becomes even more critical. Third, data governance. We provide enterprise-grade data controls and protection, and we are a leader in privacy-enhancing technologies, including clean rooms and advanced encryption. These capabilities are prerequisites for deploying AI responsibly in regulated environments. Finally, and most importantly, network scale. We operate the largest data collaboration network in the industry, with thousands of interconnected customers and partners, stretching from advertisers to publishers and commerce media networks and all the major ad tech platforms in between. Our network scale provides the data AI needs for relevance, reach, and compounding value. Each of these competitive modes is difficult to replace at the scale we have achieved, and even more so collectively. Enter AI, which is fundamentally resetting the advertising landscape. For LiveRamp Holdings, Inc., AI doesn't replace our platform; it amplifies it by increasing the velocity, frequency, and value of the data moving across our network. Simply put, our value proposition is increasingly differentiated in an AI-driven world. Our customers and partners are focused on two major dimensions of AI adoption. First, on the consumer side, AI is creating new context-aware services that are reshaping how consumers discover, evaluate, and transact with brands, shifting the moments of awareness, consideration, intent, and conversion. Second, enterprises are adopting AI-powered applications to run their marketing organizations more efficiently and more effectively, delivering faster execution, lower cost, and better outcomes. AI is streamlining, if not eliminating, manual workflows, accelerating the iterative advertising cycle: plan, activate, optimize, measure, plan, activate, optimize, measure. Rinse and repeat. AI enables this loop to run faster, more frequently, and with increasing precision. Both dynamics directly benefit LiveRamp Holdings, Inc. because they result in more data moving across our network, and our revenue scales with this data activity without a proportional increase in cost. Our revenue model is not seat-based; it never has been. And we're taking steps to embrace even more usage-based pricing. AI services, applications, and agents become new nodes in our network. AI-powered workflows are sending far more data, more quickly, more frequently, and delivering better marketing outcomes. At the impression level, every exposure can be more personalized and context-aware. At the portfolio level, entire media plans can be continuously optimized and budgets dynamically allocated and reallocated based on real-world outcomes such as reach and frequency, conversions, that is actual sales, and customer lifetime value. In short, AI improves outcomes. Better outcomes drive spend. Increased spend drives more data across our network, and that drives our revenue. A real flywheel. Our platform, with our four competitive advantages, is exceptionally well-positioned to serve as the core data network for AI-powered marketing. While still developing, we are making steady progress. We have enhanced our architecture so AI applications and agents can securely access our network alongside humans and APIs. Expanding our network to new advertising services is something we've always done, like we did with social media, retail media, and CTV, helping emerging advertising platforms scale their advertising businesses more quickly and responsibly. We are actively partnering with the AI ecosystem, having signed over 20 AI partners to date. Now this group includes AI natives, where a representative example would be the startup scout, which offers AI tools to optimize advertising in major walled gardens. It also features established incumbents such as Google, where we are connecting brand loyalty data to deliver a better consumer experience in its AI shopping mode. Right now, no one truly knows who the winners and losers in AI will be. But like we've done throughout our history, we're taking a portfolio approach, partnering with a broad array of companies, so we help power which emerges as the winning use cases and AI providers. Our value proposition is strong, and it's differentiated. AI tools depend on scaled, trusted data to deliver impactful results, making us a desirable partner for innovators. We have a robust pipeline of additional AI partners that we expect to bring onto our network in the coming quarters. We've also expanded our data marketplace to support data licensing for AI training, as well as licensing third-party AI models, applications, and agents. This transforms our data marketplace into a centralized hub for AI-powered marketing, helping our customers quickly and easily deploy AI. For example, we work with a gaming company that is licensing data to build AI models that predict gamer behavior and deliver a more personalized experience. Another example is Chalice, a nascent data company that will be on stage at our ramp-up conference next month. They're licensing AI models to help brands build higher-performing audience segments for customer acquisition and other marketing outcomes. To better capitalize on greater data volume, we continue our pivot towards a usage-based pricing model to unlock incremental revenue growth. We are in the final quarters of a year-long pilot with our brand direct customers, and we are seeing benefits to both our land and expand sales motions. The new model enhances our land motion with a lower cost of entry and a more flexible usage-based structure, which is of particular interest to midsized brands. It also accelerates our expand motion by utilizing fungible usage tokens that can be seamlessly applied across all of our platform capabilities and are valid across the entire twelve-month contract period rather than being limited monthly. Given the positive customer feedback from the pilot, we're excited to deploy this usage-based pricing model more broadly in FY 27. We are also implementing usage-based pricing with our reseller customers, such as ad agencies and ad tech platforms. Our recently expanded partnership with Publicis exemplifies this shift. This new agreement is a significant expansion, functionally and financially covering all of our platform capabilities, moving beyond just connectivity. Since it came up on the recent Publicis earnings call, I'll highlight a few key points that really reflect how we're thinking about industry partnership more broadly. First, our subscription usage revenue will now be more directly linked to the growing use of our platform by the partners and customers. Consequently, we are now economically neutral on whether a customer uses LiveRamp Holdings, Inc. directly or indirectly. Second, we're encouraging partners to innovate using our foundational technology. For instance, the Publicis partnership integrates their AI model library with our measurement solutions to deliver off-the-shelf cross-platform measurement and optimization solutions. This is potentially a really nice benefit for their clients and one that should stimulate incremental demand for our clean room products. Perhaps most importantly, as we've upgraded our capabilities in recent years, we're able to work more flexibly across all partners, agencies, ad tech platforms, data platforms, where we provide the foundational components of identity, clean room, and a scaled network, while each partner brings their own unique capabilities and services to differentiate their offering to customers. Another example of this partnership model is Uber advertising, who also mentioned us in their earnings call this week. Our technology underpins its new Uber intelligence platform, a new planning tool that allows brands to close the loop with data-driven audience insights. We are in active talks with a handful of others about implementing this expanded usage-based model. It will take some time to negotiate and integrate these deals, but we believe this will both unlock greater value for clients and also accelerate our future growth. So let me end my prepared remarks by returning to our rule of 40 ambitions, where our focus is on unwavering. Let me reiterate. Our target is to achieve rule of 40 by FY 28, consisting of revenue growth of 10% to 15%, and a non-GAAP operating margin of 25% to 30%. Our operating plan and goals are almost maniacally focused on accelerating revenue growth and improving long-term operating margins. With one quarter remaining in this fiscal year, we expect to achieve rule of 31 in FY '26 with 9% revenue growth and a 22% operating margin. Given the strong momentum in ARR, growing tailwinds from AI, and our pivot to usage-based pricing, we are confident that we can get back to ten-plus percent revenue growth. With that level of revenue growth, our operating margins should naturally expand because our costs are highly fixed. Plus, we have ongoing cost efficiencies from our offshoring initiatives. We have a strong track record of driving operating margin under a range of top-line conditions. Over the trailing five years inclusive of FY '26, our operating margin has expanded annually by an average of three points. In the current fiscal year, we are on track to deliver four points of margin expansion while still prudently investing in key growth initiatives to support future top-line growth. In summary, we remain firmly on track to reach our rule of 40 target by FY '28. So in closing, let me reiterate my key takeaways. First, amid seeming market anxiety about everything, we're doing what we've always done. We tune out the noise, we focus on the performance of our clients and partners, and we just keep grinding away. Our business is durable, it's predictable, and it's scalable. And our Q3 is just another proof point. We posted strong customer growth, meaningful net new ARR for a second consecutive quarter, record quarterly operating margin, free cash flow, while continuing to prudently invest to support future revenue growth. Second, as Wall Street works to decipher the winners and losers in an AI world, we like our position. AI is a tailwind for our business, creating new nodes for our network, and accelerating data volume growth. To better capture this, we continue our evolution to usage-based pricing models with brand direct customers as well as with reseller customers such as agencies, ad tech, and data platforms. Finally, we're not satisfied. Not even remotely satisfied. We're unwavering in our commitment to achieve our rule of 40 goal by FY '28, an increase from rule of 31 this year fueled by incremental revenue growth from AI and ongoing cost efficiencies. Before turning the call over to Lauren, let me mention two last points. First, I would like to personally invite all of you to attend our annual customer and partner conference ramp-up, taking place in San Francisco on March. This is a perfect opportunity for our investors to see LiveRamp Holdings, Inc. and so many marquee advertisers, publishers, and partners throughout the marketing ecosystem who benefit from using LiveRamp Holdings, Inc.'s data collaboration network. Please reach out to Drew if you are interested in attending. Second, I just came back from the IAB's annual convention. It's a gathering of thousands of clients and partners in the advertising industry. While there, the IAB gave me some really nice recognition. A lifetime commitment award for impact to the advertising industry. To me, it's really an acknowledgment of the impact LiveRamp Holdings, Inc. has made on the ecosystem we serve. And all of our achievements are simply the result of the company we keep. So many thanks to our exceptional customers, partners, and all of my colleagues here at LiveRamp Holdings, Inc. We only succeed by making the industry around us successful. With that, I'll turn the call over to Lauren. Thanks, Scott, and thank you all for joining us. Lauren Dillard: Today, I'll review our Q3 financial results and then discuss our updated outlook for FY '26 and Q4. Unless otherwise indicated, my remarks pertain to non-GAAP results and growth is relative to the year-ago period. I will be referring to the earnings slide deck posted to our IR website. Starting with Q3, in summary, we delivered strong results exceeding our expectations on the top and bottom line, reflecting strong execution by the team, and continued sales momentum. Revenue increased by 9% and was $1 million above the midpoint of our guide. Non-GAAP operating income increased by 36% and was $6 million above our midpoint. GAAP operating income more than doubled for a second consecutive quarter, net new ARR was $11 million plus, and finally, we had strong growth in total subscription customers as well as million-dollar-plus customers. Let me provide some additional details. Please turn to slide six. Total revenue was $212 million, up 9%. Subscription revenue was $158 million, also up 9%. Within subscription revenue, fixed grew 8%, accelerating by two points and solidly in the high single-digit range. And usage increased by 13% year over year. ARR increased by $11 million quarter over quarter, and 7% on a year-over-year basis. Our million-dollar-plus subscription customers increased by eight, quarter on quarter to a new high of 140. Total customers increased by 15, the best performance in the past twelve quarters. This improvement was driven by both lower customer churn and higher gross ads. Next, subscription net retention was 101%, in line with our 100 to 105% near-term expectation. Total RPO or contracted backlog was up 23% to $710 million and current RPO was up 9% to $471 million. RPO and CRPO increased nicely sequentially, consistent with the historical pattern driven by seasonality in contract renewals which skew to our fiscal second half. Turning to the selling environment. We delivered a strong quarter overall with healthy demand across the business. While performance naturally varied by product and sales channel, we saw notable strength in our reseller channel, including the Publicis upsell Scott highlighted, and continued momentum in our clean room insights offering, which is increasingly supporting commerce media and measurement use cases. Customer churn remains a bright spot reflecting the durability of our relationship. And we maintained stable average deal cycle and conversion rates sequentially, underscoring consistency and execution. Marketplace and other revenue increased 8% to $54 million, landing modestly below our expectation due to timing-related dynamics, including slower data marketplace growth early in the quarter, and the sequencing of certain services projects. Importantly, data marketplace demand reaccelerated meaningfully in mid-November, returning to a double-digit growth territory that has persisted through December and into January, reinforcing our confidence in the underlying demand environment. In addition, we expect services revenue to show strong growth this quarter, based on the projects coming online. Moving beyond revenue, gross margin was 74%, a few ticks higher than expected due to the timing of customer migrations to our upgraded back-end platform. Operating expenses were $95 million, down 6% year on year, and lower than expected due mostly to the timing of project-related spending. Operating income was $62 million, up 36%, and our operating margin expanded by six points year over year to a record of 29%. Staff operating income was $40 million, up from $15 million a year ago, and the margin expanded by 11 points to 19%, driven in part by a more disciplined approach to stock comp. Free cash flow was a record $67 million, of which $39 million was used for share repurchases in the quarter. Fiscal year to date, we repurchased $119 million in stock, compared to $108 million in free cash flow. We have $137 million remaining under the authorization that expires on December 31. Our balance sheet remains in a very strong position with cash and short-term investments of approximately $403 million, and we have zero debt. In summary, Q3 was solid, coming in ahead of our guidance on the top line and especially on the bottom line. Record operating margin and free cash flow, a second consecutive quarter of strong net new ARR, strong growth in subscription customers, and ongoing returns to shareholders through our buyback. Let me now turn to our financial outlook for FY 26 and Q4. Please turn to Slide 12. Please keep in mind, our non-GAAP guidance excludes intangible amortization, dot com, and restructuring and related charges. Starting with the full year, we're increasing our FY 26 revenue guidance by $1 million at the midpoint, passing through the Q3 beat. With just one quarter remaining in the fiscal year, we've narrowed the range mostly by lifting the low end. We now expect revenue of between $810 million and $814 million, which equates to roughly 9% growth. We expect gross margin to be in the 72-73% range, down one to two points as we complete the final phases of our back-end platform upgrade in Q4. We expect non-GAAP operating income to be $180 million, unchanged from the midpoint of our prior guide, reflecting the push out of some project spending from Q3 to Q4. Operating income is growing 33% this year, and the margin is expanding by four points to 22%. The combination of offshoring and general cost discipline continues to afford us the ability to invest in key growth areas while at the same time driving significant margin expansion. Stock comp is now expected to be approximately eighty-one, a 25% decline year on year, again reflecting a more disciplined approach to stock-based comp. We now expect that GAAP operating income to be approximately $84 million, equating to a record margin of 10%, up 10 points year over year. Lastly, we continue to expect free cash flow to be up slightly this year, with savings from the new federal tax legislation, offsetting a normalization in working capital compared to Q4 of last year. Our EBITDA conversion rate is expected to be above our 75% target rate. We will deploy a substantial portion of this year's free cash flow towards share repurchases, consistent with our recent practice. And as always, we will be opportunistic depending on market conditions. Like last year, our repurchases will more than the shares issued for f SBC, driving a reduction in our share count. Now moving to Q4. We expect total revenue to be between $203 and $207 million, non-GAAP operating income of approximately $38 million, and an operating margin of approximately 18%. A few other call outs for Q4. We expect subscription revenue to be up high single digits. Marketplace and other revenue is expected to be up in the low double digits, reflecting the growth rebound in the trailing two months. And finally, we expect gross margin to be approximately 72% as we complete our platform upgrade and customer migration effort. Let me wrap up before Q and A. In summary, we delivered a strong quarter, exceeding our expectations, posting record margins and free cash flow, strong ARR, and notable growth in customer count. We are seeing strong and broad-based sales momentum, driven by a value proposition that is increasingly differentiated in an AI-driven world, and by continued improvement in our go-to-market execution. Beyond product market fit, initiatives like our new pricing model are helping us sell more effectively and consistently, giving us clear visibility into 10% plus growth next year if current execution holds. Finally, we're on track for 33% operating income growth this year and four points of margin expansion. We continue to balance margin with investing in growth initiatives, like our new pricing model and platform upgrades, to support future top-line growth. The strong OI growth is resulting in strong free cash flow, which will be primarily used for share repurchases, underscoring both our confidence in the business and our commitment to long-term shareholder value. Thanks again for joining us. We're excited for what's ahead and grateful to the customers and teammates who make it possible. Operator, will now open the call to questions. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. At this time, I would like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. And if you would like to withdraw your questions, press star one again. Our first question comes from the line of Jason Kreyer with Craig Hallum. Please go ahead. Jason Kreyer: Great. Nice quarter, guys. Good to see the growth in customer count. Scott, I wanted to double click on your comments on Publicis. Maybe if you can just talk about what key features or functionality that LiveRamp Holdings, Inc. brings to the table that was kind of the reason why they selected to work with you guys. Scott Howe: Yeah. Well, first, Craig, thank you. And I would tell you that this is probably a few years in the making, not with Publicis, but just our readiness for really expanding our partnerships with all potential resellers. If you recall over the last few years, I've talked a lot about our efforts in terms of modernizing our platform. And then more recently, over the last year, we've been rolling out changes to our pricing model. And the combination of those two things really makes us ready to work in a different way with these reseller partners and not have any fear of cannibalizing ourselves. And in particular, you know, Craig, if you remember the old Intel Inside campaigns from I don't know what fifteen, twenty years ago. I mean, we kinda have a similar philosophy here at LiveRamp Holdings, Inc. We want every major platform and agency to use our modular composable platform and innovate on top of it. And so, you know, I talked about how they are working with us in a really different way that's gonna add value to their clients. And Jason, I think that there's an opportunity to do this with dozens of these kinds of partners, each of whom are already competing in their own unique way. But by building on top of LiveRamp Holdings, Inc., by building using LiveRamp Holdings, Inc. pieces, they can deliver better products to their customers. Jason Kreyer: That's great. Thank you. Maybe a Lauren question here. So we're solidly into the back of your fiscal year. We know that you've got a lot more customer renewals in the back half of the fiscal year. Maybe you can just give us a little bit more on what kind of the upsell cross-sell conversations, how those progress. And, again, you know, what kind of capabilities, like cross-media intelligence or what kind of capabilities customers are looking for. Thank you. Lauren Dillard: Yeah. Happy to. And maybe just to re-highlight something in my prepared remarks. Q3 was a very strong sales quarter for the business. In fact, our bookings were up in the quarter strong double digits, and this was mostly driven by expansion with existing customers. And specifically, to your question, the cross-sell of our clean room to support things like cross-media intelligence, but also just to support broader commerce media use cases as well as other measurement use cases. So we continue to see clean room be a catalyst for expanding with existing customers upon renewal. Jason Kreyer: Great. Thank you. Operator: Our next question comes from the line of Shyam Patil with Susquehanna. Please go ahead. Shyam Patil: Hey, guys. Congrats on the results, really appreciate all of your commentary on AI. I wanted to focus my question there. Scott, with all of the AI partnerships that you guys have, and just kind of you know, how you talked about the importance of it and being a tailwind. Can you just talk about your approach to prioritizing these different opportunities, especially given kinda how large and dynamic the market is? Scott Howe: Yeah, Shyam. You know, on this, we are remarkably consistent. Because we have always been all about client and partner-led innovation. And so in this case, we already know what we need to do. And that's ask our clients and partners what use cases they find most important. And so we prioritize that. Not surprisingly, as a result, if you look at the 20 or I guess 21, different live partnerships that we have active. You know, the majority of them, call it two-thirds, are kinda legacy companies that you've heard of that have built AI. And so there's just an opportunity when you're talking about, you know, Google is the example I gave in the prepared remarks. Our clients are already working with companies like that, they're spending a lot of money there. And so naturally, those are the first priorities in terms of AI adoption. But at the same time, we're also making a real effort to prioritize some of the native use cases. And so those count for about a third of the partnerships that we've signed, and we have a lot more of those in the hopper. Those are things that either our clients tell us are important or we believe are going to grow in importance as they roll out their advertising models. And so we think you have to have a portfolio approach here because across the incumbents versus the new start-ups, I don't think anybody in the market has evidence by the chaos on Wall Street this week, knows who the winners and losers are gonna be. The good news is we're betting on all of them, and so we know that we will be affiliated with the folks who emerge as the winners. Shyam Patil: Great. Thank you, guys. Thank you, Scott. Operator: Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Lucas: Hey, Scott. Lauren, this is Lucas on for Elizabeth Porter. Thanks for taking my questions here. So the first is, as you expand commerce media with new partners like Uber and PayPal, in which other verticals are you seeing the most growth? And then could you talk about the revenue opportunity from these non-retail commerce networks compared to the traditional ones? Thanks. Scott Howe: Yeah, I think these are gonna grow very fast because they're coming off a smaller base right now. And we're seeing it in a few areas. So travel, nearly every major airline has launched a commerce media network. It just makes sense because they already have their travel partnerships in place, they have a captive audience when you're flying with the feedbacks. So that's one. A second would be kind of the food delivery, the Uber's DoorDash's of the world. Once again, they have a captive audience. Sometimes when you're traveling where you're looking at the back of a screen, or you're looking at your phone and maybe potentially ordering food. So there's a lot they can do there. And then finance is a really nice one for us. Now, in each case, it exposes us to very different type clients than we've historically worked with. And this is what gets us back to why the pricing model we talked about, super important for the resellers, it's also really important for all these commerce media networks who we look at as potential reseller partners as well. Because so often, they have smaller SMB type clients with food delivery. It might be the local or chain restaurants. And travel, it could be any number of different hotels or travel partners. And in payments, it's anything any vendor that a merchant that a user spends money with. So all of those become potential clients. Historically, we couldn't have served those clients. Because our product didn't have enough self-serve capabilities, nor did we have the pricing model. But the things that we've done over the last couple of years, we feel have positioned us to really take advantage of this. And so I think those three areas will be really for us in the next couple of years. Lucas: Great. That's super helpful. Then I was hoping you guys could talk a little bit more about CTV. With the Netflix integration gaining strong momentum over the past couple of quarters, great if you could share, you know, more about how many brands are leveraging the integration, the typical spend levels, and then how it compares to other CTV platforms in the network. Lauren Dillard: Sure. I'm happy to take that. And I would just note that CTV continues to be a very strong growing component of both our data marketplace and then just traditional activation network. We talked about, you know, Netflix earlier in the year as well as a handful of other new CTV integrations. They continue to perform very well for us. Scaling nicely, albeit off small bases. Today. With respect to our data marketplace, we continue to expect CTV data purchased off our marketplace to outpace the growth of overall Data Marketplace growth. And of course, this is just one of many areas where CTV is benefiting our business. As an example, across our activation or connectivity network, about 70% of our largest our 50 largest integrations today are either pure play CTV providers or ad tech or media platforms enabled to buy CTV. Then a final point I would just make is it continues to also be a catalyst for clean room adoption, especially for measurement use cases. So, you know, taken together, it's a nice tailwind for our business this year and one we expect to continue in FY '27 and beyond. Lucas: Thanks, guys. Operator: Our next question comes from the line of Timothy Nolan with SSR. Hi, everyone. Sorry for the background noise. Warren, hope you can hear me okay. Scott Howe: Yeah. It's fine, Tim. Timothy Nolan: Okay. Great. Thanks. I've got a couple if I could. One is a follow-up on the AI topic. Again, appreciate you addressing it head-on, Scott. I'm curious. One of the concerns, I guess, is that AI will disrupt, you know, the software subscription business model. But that's gonna be a very general statement. I just wonder if you could maybe give us some assurance that your customers are doing well. Everything is going well. Spending looks intact. Just any comments you could make as to that concern? To help maybe ease some of the worries that are out there? And, actually, indeed, maybe if you could talk to any acceleration that you may be able to see in your business, to respond to that. My second question is to come back on the topic of AgenTik AI. And the universal complex protocol. I remember the name right, UCP that you've developed and made available to organizations like the IAB. Can you just talk if there's any progress toward commercialization of these and what the status of those efforts might be? Because I think it's very important for the future of ad transactions. Thanks. Scott Howe: Yeah. Tim, we agree. So handling your questions in turn, first off, on AI, I think 40 and what our targets are, you know, I'm very firmly committed to getting back to double-digit growth. I think AI helps us do that. Because after all, even if AI does disrupt elements of software, for AI to perform you need to have data. In the marketing space. And if all you're doing is using models that are based on the world's publicly available information, then you're gonna be accessing the same models that everyone else is. And there will be no competitive advantage. The advantage comes from every client's ability to bring their own first-party data. But to bring your own first-party data, you better be darn sure that you have control and visibility over it. And that is what we do. And so you should think about us as an enabler of AI. We are essential for safe AI usage. And so as these AI use cases expand, we think that is really good for our business. Now in your second question, you get to, you know, what are the conditions of more widespread adoption of AI in the marketing space, and that is standards control and visibility. We developed something that we gave to the IAB, which has continued to commercialize it. They talked about that a lot in their annual meeting this week that I was at. In addition, there's another standard out there called ADCP that one of my board members has developed, Brian O'Kelly. I will tell you we don't care which standard is adopted. It is good for the industry to have common standards about how data is going to be organized such that it can be ingested by large models. And so, yeah, again, there are at least two, there may be more, we don't care. As long as one standard emerges. And the fact that we have line of sight to two of them suggests that one of those, if not a combination of them, is ultimately going to emerge as the standard of choice. Lauren Dillard: And, Tim, I might just provide a little bit of quantitative color against your first question, which is around whether or not we're seeing AI impact demand for our products. The short answer is we're not. As I mentioned in my prepared remarks, we had a remarkably strong sales quarter in the third quarter. Conversion rates, deal cycle length, consistent sequentially, our average deal size was up double digits. Individual rep productivity up as well. And so we're simply not seeing that dynamic right now. Scott Howe: Yeah, and you know, the last data point that might be useful, and it's a little squishy. There's a little squishy math, I'll tell you. But we tried to look at all of our different activations and say, all right, what percentage of the activations are already going to things that we would consider AI? And if you look at either AI partnerships or AI-enabled partnerships, because we don't always have visibility into what algorithmic logic is driving a decision at a partner. We think there's probably 10% of our activations already going to AI. Again, it's a little bit of a squishy number, but we just wanted to get a sense of what that looks like and start to extrapolate what that looks like over time because I think it's gonna be an important stat to share with Wall Street, something like that. Because, you know, we don't see a threat here, and we wanna make sure our understand that this is a tailwind, not a headwind. Timothy Nolan: K. Thank you both. It just seems like you could be a good gauge on this health of the market here. And so to hear those comments from you is helpful. Operator: Our next question comes from the line of Mark Zgutowicz from Benchmark Company. Mark Zgutowicz: Thank you. Good evening. I wanted to maybe address the, you know, just the pricing tests that you're doing. And maybe you could just back up a second and just talk about sort of the go-to-market there. Like, how are you, you know, going after these clients? What's the what are the I guess, the challenges there in terms of finding those clients, acquiring those clients versus the pricing itself. And then if you think about next year, in ARR incrementality from SMB, if you have something that you're targeting or if there's a point in time where you think you might have better visibility on what kind of incrementality you expect from SMB, that'd be helpful. Scott Howe: Yes. And I'll start here and then Lauren will, I'm sure, come in with some analytical support. But I would tell you, that since we launched the pilot, we've taken a very methodical approach to how we are communicating this. And more specifically, you know, we're not going to clients who are under contract and retrading their deals. Rather, our priority to date has been new logo opportunities. And the new pricing has helped us land those new logos. What we found historically is one of the sticking points in a conversation has been the presence of a large fixed upfront commitment. And so to the extent that we can lower that and have more of the ultimate value be usage-based, then we win together. And they can scale into the opportunity. Over time, we think that will improve our churn as well because we're not gonna be in the position where we're, you know, renegotiating with a client that signed up for a large fixed price contract and then grow into that. This is particularly important as we approach those smaller type clients. And in fact, you see that in the numbers like so far, like the average contract for someone on one of these new usage-based pricing is a lower ACV than a legacy contract. Well, stands to reason because they tend to be smaller and they're newer and we haven't grown them over time yet. Now, based on what we've learned, it's gonna be it's gonna put us in a position to again be very methodical as how we roll this out with existing clients. So as clients come up for renewal, in the coming year, then we will introduce this as part of the renewal process to existing clients, and we'll continue to use it as a I think a really attractive feature for new clients. Lauren Dillard: And then just with respect to revenue incrementality, Mark, I would expect we'd have more to share on our May call. It's certainly gonna take a few quarters for this to play out in our results, but we do expect some modest upside in the back half of next year as a result of this pricing initiative. Mark Zgutowicz: That's helpful. Thank you. And maybe just a couple quick follow-ups so I could. Lauren, your OpEx guide looks like upper teens sequentially. I'm just curious what may be driving that. In this course specifically. And then if you can or else we can take it offline, just curious if you look at your SNR and adjust that for the two large clients that churned earlier in the year, what that might look like in might have looked like in the quarter? Thanks. Lauren Dillard: Yeah. Happy to. And you're right. Sequentially OpEx is growing about $15 million quarter on quarter. And this is very consistent with the step up we've seen in prior years. So in FY '25, that sequential increase was about $12 million in 'twenty-four, 'eighteen. So as a reminder, Q4 is our seasonally high expense quarter. Due to events and conferences like ramp-up as well as just some compensation-related step up. This accounts for the majority of the sequential increase. In addition, and I noted this in my prepared remarks, we also had some projects spend related to our growth initiatives that shifted from Q3 into Q4. You know, all that said, we're still projecting very healthy year over year growth in OpBank north of 50% in the fourth quarter. And a six-point margin improvement year on year in the fourth quarter. And for the full year, expect op inc to grow north of 30% and for a four-point margin expansion. So, you know, rest assured, we're in a good position to deliver on our operating margin targets and, you know, continue to do so as we look ahead to FY twenty-seven. And then on SNR, I would expect if you normalized for the couple large events in the early part of the year, SNR would be closer to the high end of our 100 to 105% near-term range. Mark Zgutowicz: Perfect. Super helpful. Thank you both. Operator: Our next question comes from the line of Alec Brondolo with Wells Fargo. Please go ahead. Alec Brondolo: Trade Desk is implementing a new data pricing model. You white-labeled their current data I think both their model and the broader industry trend to be shifting from purchasing data on an a la carte basis to data and audiences automatically being appended to campaigns by AI. Could you help us what that trend means for the data marketplace business, either on kind of a Trade Desk specific basis or the broader industry trend? Thanks. Lauren Dillard: Yeah. I think you're referring to some of the changes that Trade Desk announced in the fall of last year, which I believe were implemented in December. So not really a factor in Q3 and would likely take some time to scale. At a high level, you know, we're aligned with Trade Desk on these initiatives to stimulate incremental demand from customers who didn't historically purchase data either because it was too complicated or costly in their view. From our perspective, if the scales, it would represent incremental transaction volume above our base case. And shouldn't change our take rate. So potential upside but not anything we're seeing in our numbers today. Operator: Thank you. Next question. Our next question comes from the line of Peter Burkly with Evercore ISI. Please go ahead. Peter Burkly: Yeah. Thanks, guys. This is Peter Burkly on for Kirk Materne. This guy's maybe just to start with you, kind of on the topic of AI again. You've talked fairly explicitly in the past about not being an AI company, but rather being the pipe and the plumbing that sort of enables your customers to have success with AI. Just given the increased volume and velocity of data that AI requires. So I'm curious if you could just give us any updated thoughts on that front. Any change in your thinking there that sort of continue to be the core strategy? And then, Lauren, maybe for you, you know, really nice solid accelerating ARR growth sounds like really continued strong bookings. Just curious with the CRVO growth sort of bit. And, again, understanding that, you know, you're up against tougher comparing at three q. So mechanically, that's an impact. But I'm wondering if you could help bridge that gap, maybe if it's the mix shift towards the usage-based pricing that's not being captured in CRPO or if there's anything with timing of renewals or any duration changes that might be impacting that. Thanks. Scott Howe: Yeah. Boy, Peter, I hesitate to make the comparison I'm about to make. And you'll realize why when I talk about Apple. And when they launched the iPhone, you'll remember that you know, they built an app store. And you could access anything. And, you know, they enabled all kinds of functionality on top of the iPhone. But at the same time, what did they have like seven or eight organic native apps that they built? And in part, it was because they thought it was core, or no one else was building them. And so, I would tell you our philosophy is very similar that, you know, the vast majority of the AI functionality we think our clients are going to unlock is going to be through our partners. It's their business. And what we do is enable the data utilization of the signals that make the models better, into those AI applications. At the same time, don't for a second think that we don't talk about AI all the time internally in our own product builds. In fact, I am pulling up on my own computer screen a slide that someone gave me yesterday right now of the twelve Hack Week projects that we have underway that our engineers are working on. And all of them are improving our core capabilities and allow our clients to extract better value from working with LiveRamp Holdings, Inc. Things like, you know, automated error signaling. So if someone like writes the wrong query, immediately flags it and corrects it, or I talked in my prepared remarks about building more AI models into data marketplace. So there's a lot we can do internally. And, you know, I'll talk about that if it's interesting to people. But make no mistake, I don't want anybody to think that we're trying to out AI companies that specialize in AI, we're trying to accelerate their growth. We're trying to catalyze their success by connecting to them. Lauren Dillard: And then, Peter, with respect to CRPO, as we've discussed in the past, our RPO metric is very sensitive to the timing of renewals and the length of contracts. I mean, you called those two factors out. Specifically, quarter, CRPO was impacted by the runoff of some large multiyear deals that are in their final year. Expect these deals will renew ahead of their next renewal cycle, and we Importantly though, I would point you to the strength of total RPO, which was up 23% in the quarter and reflects the recent sales momentum Scott and I talked about today. Peter Burkly: Very helpful. Thank you both. Operator: Thank you. At this time, we have no further questions. I will now turn the call back over to Lauren Dillard for closing remarks. Lauren Dillard: Great. Well, thanks again for joining us today. We're very pleased with the quarter we reported and with our building top-line momentum. As Scott mentioned, investors and analysts are invited to join us at Ramp Up San Francisco on March. Where we plan to host a Q and A session for analysts and investors. We'd love to have you. Please reach out to Drew for more information and to RSVP. So with that, appreciate your time today and look forward to catching up over the coming days and months. Thanks. Operator: This concludes today's conference. You may now disconnect your lines.
Krista: Afternoon. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to Reddit, Inc.'s Fourth Quarter 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw that question, again, press star one. Thank you. I would now like to turn the conference over to Jesse Rose, Head of Investor Relations. Jesse, you may begin your conference. Jesse Rose: Thanks, Krista. Hi, everyone. Welcome to Reddit, Inc.'s fourth quarter and full year 2025 earnings call. Joining me are Steven Huffman, Reddit, Inc.'s Co-Founder and CEO, Jennifer Wong, Reddit, Inc.'s COO, and Andrew Vollero, Reddit, Inc.'s CFO. I'd like to remind you that our remarks today will include forward-looking statements, and actual results may vary. Information concerning risks and other factors that could cause these results to vary is included in our SEC filings. These forward-looking statements represent our outlook only as of the date of this call, and we undertake no obligation to update any forward-looking statements. During this call, we will discuss both GAAP and non-GAAP financials. Reconciliation of GAAP to non-GAAP financials can be found in our letter to shareholders. Our fourth quarter letter to shareholders and earnings press release are available on our Investor Relations website Investor Relations subreddit. And now I'll turn the call over to Steven Huffman. Steven Huffman: Thanks, Jesse. Hi, everyone, and thanks for joining our Q4 earnings call. 2025 was a breakout year for Reddit, Inc. We surpassed both targets, built real momentum across our business, and improved our unique community model at scale. We crossed $2.2 billion in revenue, up 69% year over year, and delivered $530 million in net income. In Q4 alone, we welcomed over 121 million daily active users to our platform, up 19% year over year, and over 471 million weekly active users, up 24%. None of this would be possible without our team. Thank you to our employees for a phenomenal year. The momentum we're seeing across the business, especially in all three sections of our ad funnel, is the result of years of foundational work coming to life. I know we are all eager to build on this success. The numbers tell just a small part of an important story. Reddit, Inc. is at the center of a once-in-a-generation shift. And it's not a coincidence. We're now operating in a fundamentally different Internet. One shaped by opaque algorithms, generative content, and growing distrust. And yet, amid this shift, more people are turning to Reddit, Inc. Not just to aimlessly scroll, but to connect, learn, and research. That's because Reddit, Inc. is the most human place on the Internet. In a world flooded with AI swap, people are seeking real community, lived experience, and trusted opinions. That's Reddit, Inc.'s differentiator. To put it simply, more people than ever are coming to Reddit, Inc. because Reddit, Inc. is for everyone. One of the main reasons Reddit, Inc. is the go-to place for community is the candor of our conversations. This authenticity is rare. And it's what makes conversations on Reddit, Inc. uniquely helpful and influential. But in the age of AI, you can't easily distinguish a real person's thoughts or recommendations from a bot that trust erodes. That's why we're actively working on ways to preserve our authenticity and conversation quality. Then we'll quickly move to bot verification and labeling next. This begins the launch of verified profiles for brands and individuals in Q4. We're making good progress here, and we're excited to share more updates in the coming weeks. Our consumer product work remains a top priority. Particularly driving user growth, retention, and deeper engagement through more seamless experiences. Two areas of especially high priority are improving new user onboarding and integrating our search interfaces. Let's dig into how these are going. On the onboarding side, we deployed numerous experiments in Q4. We're actively iterating on these learnings and working fast to improve retention for new and casual users. That retention supports growth, engagement, monetization, and more effective marketing. Next, search. In Q4, we made significant progress in unifying our core search with Reddit Answers, our AI-powered search feature. Together, they drive more search volume and queries per user with over 80 million people searching directly on Reddit, Inc. every week in Q4, up from 60 million just a year ago. We released Reddit Answers in five new languages with more on the way, and are piloting dynamic agentic search results that include media beyond text. Reddit, Inc. is already where people go to find things. Making our platform an end-to-end search destination is how we meet that demand. As the industry evolves, how we think about our product and users must evolve too. We've historically reported logged-in versus logged-out users, as some of our work to streamline onboarding, instant personalization, for example, blurs the line between these states, the distinction between them makes less sense. As such, we plan to phase out reporting on logged-in and logged-out later this year. In 2026, we're focused on making Reddit, Inc. faster, more relevant, and more accessible to everyone, everywhere. A big part of this effort is improving feed relevancy. Using AI and machine learning to make Reddit, Inc. feel more personalized and useful from the second you open the app. These are high-impact investments that help shape how new users experience Reddit, Inc. and how often they return. I'm encouraged by the team's focus and velocity, I'm confident we'll feel the impact of the work this year. To rise to this occasion, leveling up our execution, and that starts with leadership. I'm thrilled to welcome Maria Angella Dew Smith as our new chief product officer. She brings a solid track record in scaling product organizations, and is already helping us move faster and focus on the highest impact areas for users and growth. I have full confidence that Maria will be a great partner to the business and significantly up-level our pace and quality of results. We're seeing strong commercial momentum right now and are confident in where we're headed. We have a special business model that is generating a lot of cash. Which is why we're excited to announce a $1 billion share repurchase program today. It's a testament to our growth and our commitment to delivering for our shareholders as we continue to invest in the business. Our work ahead is ambitious, and that's by design. We have the right team, the right road map, and the right moment. Now it's about execution. As always, thank you to our employees, communities, partners, and investors for being a part of this journey. With that, I'll pass it to Jennifer Wong to share more about the business. Jennifer Wong: Thanks, Steve. Hello, everyone. It was a strong quarter and finish to the year for Reddit, Inc. Our unique community proposition and ad platform investments continue to drive differentiated growth, and positive outcomes for our advertisers and partners. Total revenue in Q4 grew 70% year over year to $726 million. And for the full year, revenue grew 69% year over year to $2.2 billion. In Q4, the advertising business grew 75% year over year to $690 million driven by broad-based strength across objectives, channels, verticals, and regions. Four revenue drivers fueled our growing. First, performance ads outperformed. And revenue from lower funnel objectives such as purchase conversions and app installs doubled year over year. As we see the benefits of our investments in ML and new ad formats like shopping ads, start to pay off. Second, we saw strength across channels. With year over year growth ranging from mid to high double digits within both our large customer segment and scaled segment. Which includes mid-market and SMBs. SMB revenue doubled year over year. Third, we saw broad strength across verticals, 11 out of our top 15 verticals grew revenue by 50% or more year over year. Led by retail, pharma, financial services, and tech. And fourth, we saw strength across geographies. U.S. Revenue grew 68% and international revenue grew 78% year over year. Our ML and signals optimization efforts are making every impression work harder. In Q4, impression growth was the main driver of revenue growth. While pricing grew year over year as we delivered more outcomes and efficiency for advertisers. We also continue to expand our advertiser base. Total active advertiser count grew by over 75% year over year in Q4. As we added new accounts across all channels, including large, mid-market, and SMBs. Now moving to our ad stack. Our strategy focused on making all businesses successful on Reddit, Inc. By, one, driving performance of our ad solutions across the funnel, two, improving usability for advertisers and productivity of our sales force, through automation, and three, offering Reddit, Inc. unique solutions and ad formats. We made meaningful progress against each of these areas in Q4. First, our investments in ML signals and models are driving for advertisers to bring more outcomes and lower cost per action. In Q4, click volume in the mid-funnel grew over 60%, and lower funnel conversion volume doubled year over year. One example of our optimization improvements was our Q4 beta launch of campaign budget optimization for the mid-funnel traffic objective. CBO dynamically allocates budgets and reduces manual adjustments, to maximize performance and lower cost per click for advertisers. Our shopping solution, dynamic product ads or DPA, emerges a lower funnel driver in Q4. Fueled by strong performance during the Black Friday and Cyber Monday period. While we are still early in our shopping ads journey, we are growing advertiser adoption and improving performance. Since last year, enhancements to our shopping ad ML models delivered over 75% improvement in advertiser ROAS. To strengthen our lower funnel strategy, we continue to make it easier for businesses of all sizes to adopt our measurement tools including pixel and conversion API. Q4, CAPI covered conversion revenue tripled year over year. Like it has done each quarter in 2025. Second, improving usability for advertisers and productivity of our sales force through automation. At CES, we announced the public beta launch of Reddit Max campaign, our AI-powered campaign platform that uses Reddit, Inc. community intelligence to optimize performance for middle and lower funnel objectives. In testing, Max campaigns delivered an average 17% CPA reduction and a 27% conversion volume validating it as a performance driver for our partners. We're encouraged by this progress and believe Reddit Max campaigns can be a powerful tool to unlock performance, make it easier to onboard new customers, and deliver valuable business insights for advertisers from large brands to SMBs. Third, offering advertisers Reddit, Inc. unique solutions and ad formats. We continue to grow our suite of Reddit, Inc. unique ad products in high engagement formats, including free form, AMA, and conversation summary add-ons. In Q4, we launched interactive ads to beta through our partnership with Paramount, to promote their movie Running Man and debuted reminder ads to beta, which is a tool for advertisers to drive performance and engagement around product launches and events, including live streams and AMAs. To expand our Reddit Pro tools, we launched verified profiles, that empower businesses and professional entities to build trusted identities and relationships with their audience on Reddit, Inc. For example, global brands ask Reddit, Inc. communities for product reviews and feedback, and then they use that as a foundation for their marketing campaigns. Early results from verified profile tests show that verification helps drive content creation and community trust. Verified users post over 10% more in their first week and generate more consumer engagement. Now looking ahead, we believe we are well positioned for 2026. And our ad strategy this year will be focused on a few key themes. The first is scaling automation through our ads manager in Reddit Max. We plan to use Reddit Max as a foundation to streamline advertiser onboarding particularly for smaller customers and enable them to leverage the AI-powered tools and automation to simplify campaign creation from setup to creative, and augment performance from optimization to campaign insights. And through 2026, we plan to expand access and build automation that leverages Reddit, Inc.'s 24 billion posts and comments turning them into powerful signals to drive further improvements in ad performance. The second theme is delivering more advertiser value across the full funnel. In the upper funnel, we'll drive more outcomes and efficiency with our investments in brand auto bidding and video view objectives. In the lower funnel, we have a lot of headroom to scale our ML models and drive more outcomes and performance. For shopping ads or DPA, we're improving relevancy in ad formats to improve advertiser ROAS and the user experience. And for app ads, we're optimizing the ads to drive more in-app action that can translate into higher lifetime value users. We're also expanding our measurement capabilities, including first-party measurement tools, third-party partnerships, and enhanced attribution capabilities to show Reddit, Inc.'s impact. And the third theme is expanding the Reddit for business ecosystem. Our strategy is to build partnerships around our Reddit, Inc. unique community insights and tools to expand our connection to global brands and businesses. Building on our API partnerships with Smartly and WooCommerce, we are expanding our partner ecosystem to scale audience reach, creative automation, and full funnel measurement. And finally, as more businesses leverage Reddit, Inc. as a signal for the ever-evolving consumer intent, AI-powered insights from Reddit, Inc. community intelligence can accelerate how brands turn community conversation into actionable media strategies. Facilitating faster product feedback and more strategic consumer customer relationships. Overall, I'm incredibly proud of the progress this year. As we turn our attention to 2026, we're excited about the opportunities ahead for Reddit, Inc. Thank you for joining us and for your continued support. Now I'll turn the call over to Andrew Vollero. Andrew Vollero: Thank you, Jen, and good afternoon, everyone. Q4 was a solid finish to a standout year for Reddit, Inc. Both the strength and the consistency of our results continue to shine. These strong results included, first, total Q4 revenues grew 70% year over year. That's a particularly solid result given the tougher comp of 71% in 2024. Second, profitability hit a new high. Net income reaching $252 million, 35% of revenue. And adjusted EBITDA hit $327 million, 45% of revenue, making us a rule of 115 company this quarter, also a high. Diluted EPS reached $1.24, up more than 3x 2024. And third, for the first time, cash flow crossed $2.5 billion in a quarter, reaching $264 million in Q4. Free cash flow was 36% of revenue this quarter. The consistency of the results is also worthy of review. First, Q4 was Reddit, Inc.'s sixth consecutive quarter of over 60% revenue growth. Next, it was also Reddit, Inc.'s sixth consecutive quarter of 90% gross margins. Third, stock-based compensation expense was below 20% of revenue the third consecutive quarter. Hitting 13% in Q4. It was nice to see negative dilution for the year, with total shares outstanding falling slightly to 206.1 million, well below our medium-term dilution guide of 1% to 3%. These strong and consistent results enabled our business to scale successfully in 2025. On a full-year basis, 2025 revenues were $2.2 billion, up 69% and gross margins were 91.2%, up 70 basis points. Total adjusted costs grew 35% for the year, about half the rate of revenue growth. Full-year net income was $530 million, 24% of revenue, and adjusted EBITDA was $545 million at 38% margin. Reddit, Inc.'s incremental adjusted EBITDA margins for the year were 60%. Full-year free cash flow was $684 million, more than triple 2024. Diluted earnings per share reached $2.62, up from a loss last year. Now provide more color on our Q4 results. Q4 revenues of $726 million grew 70% year over year driven by a ramp in ad revenue, which grew 75% in Q4 to $690 million. As we saw broad-based strength across all three sections of the ad funnel. Other revenue, which includes revenue from our content licensing business, reached $36 million, up 8%. U.S. revenues were up 68%. International revenues were up 78%. Average revenue per user or ARPU grew 42% year over year. To $5.98. Moving to expenses. Our Q4 total adjusted costs, which included both our adjusted cost of revenue and adjusted OpEx, were $399 million in Q4, up 46% year over year. The expense growth rate was slightly elevated from the prior two quarters, which had averaged about 38% and the full year where costs were up 35%. Building on that thought, the main cost driver continues to be operating expenses, which on an adjusted basis were $340 million in Q4, about 85% of total adjusted expenses. Adjusted OpEx costs grew 41%, driven by investments in two areas: hiring and marketing. On hiring, our pace was similar to prior quarters. The company ended with 2,555 total headcount. Up 14% versus last year and up about 3% sequentially from Q3, the same pace as the prior quarters. In Q4, we added slightly less than 70 net people. With hires continuing to be focused in revenue-generating functions. Our ROI from sales and ad tech investments remains strong, multiples of the cost. G and A headcount was lower than last year and about the same as year-end 2023 as we continue to leverage back-of-house resources. And secondly, on marketing, we invested more this quarter. The spend was in the mid-single digits as a percentage of Q4 revenues. We target our spend in two areas. User marketing and brand marketing. To drive traffic and awareness. On user marketing, spend levels were sequentially higher than in Q3, driven by increases in volume and price. Price increases were driven by both seasonality as media costs rose in Q4 versus Q3, and geography, as most of the spends were targeted in the U.S. Market. On the brand side, we launched new audience campaigns focused in areas like parenting, entertainment, and sports, which had some encouraging results, but there's more to do. So rounding out Q4 with a few more numbers, Reddit, Inc. remains capital light. Continue to benefit from AI in many ways without the AI costs. CapEx was $3 million. We ended the year with a strong cash and liquidity position, Cash and cash equivalents on the balance sheet ended at nearly $2.5 billion, up $250 million sequentially and over $630 million from last year. So that covers Q4 and the full-year results. Let me speak to a couple of additional items. First, earlier today, we announced that our board of directors authorized a share repurchase program of up to a billion dollars with no set expiration date. For many leading companies, strategic capital deployment has been an important driver of their total shareholder returns, And specifically, repurchasing shares could be an attractive incremental tool to drive TSR, the medium and long term. For Reddit, Inc., we're proving our ability to grow durably at scale with our inflecting profitability underscoring the attractive incremental margins inherent in our business. As we think about our three capital allocation priorities, we will continue to prioritize investing in our core business first. Next, we'll look to do M and A where it makes sense, both tuck-ins and more scaled opportunities. Looking to buy capabilities, technologies, and companies. And third, when it makes sense, we'll repurchase shares. Our differentiated financial profile gives us the opportunity to invest in all three priorities. We plan to be in the market from time to time to buy shares opportunistically, We'll continue to be prudent about the financial management targeting to keep over a billion dollars of cash in the balance sheet consistent with our capital framework. So switching gears to the second item, I'll now share an update on our user reporting. Big picture, we want to make sure the metrics we share align with how we're managing the business. As you heard from Steve, product strategy is evolving. We're focusing on making it easier for all users to engage with content on the platform and find immediate value regardless of whether users logged in or logged out. Our goal is to grow all users. As a result, the distinction of whether a user is logged in or logged out has become less of a management focus and less important to how we think about and manage the business. As a result, we were updating our disclosures starting in 2026. To better reflect the metrics we use to run the business and evaluate our operating performance as we scale. Specifically, starting with Q3 2026 disclosures, we'll continue to report The US and international DAUQ and WAUQ numbers as we've done historically. But we will no longer report logged in and logged out metrics. Between now and Q3, we will continue to report logged in and logged out metrics for the 2026. Turning now to the outlook. We'll share our internal thoughts on revenue and adjusted EBITDA for the 2026. As well as some additional thoughts on stock-based compensation. In the 2026, we estimate revenue in the range of $595 million to $605 million representing 52% to 54% year over year revenue growth with a midpoint of about 53%. Adjusted EBITDA in the range of $110 million to $220 million representing approximately 82% to 91% year over year growth and an adjusted EBITDA margin of 36% at the midpoint. The Q1 guide implies a total adjusted cost base of $385 million which would be down sequentially to Q4 expenses. I'll also share a thought on the full-year stock-based compensation expenses SBC was $387 million or about 18% of revenue in 2025. Similarly, in 2026, we're aiming for stock-based compensation to be in the high teens as a percentage of revenue. Similar to our historic revenue trends, expect nominal SPC expenses to increase each quarter. We'll target dilution at the lower end of our medium-term guide of 1% to 3%. So overall, it was a strong finish to a solid 2025 for the company, and our attention now turns to 2026 as we continue to focus on converting our leading revenue growth and high margins into meaningful cash flow and returns for our shareholders. That concludes my comment. Let me turn the call back over to Steven Huffman. Steven Huffman: Okay. Thanks, Drew. Normally, we will take a couple of questions from the community. First, I want to acknowledge the R Reddit stock community and their earnings call bingo card. I just want to confirm, I will refer to everything bad as an opportunity that's what they are. And Drew will use the word corpus many times. Thank you all. Love you. Okay. Question from the community. Why do a buyback instead of putting that money towards future growth, product initiatives instead? Andrew Vollero: Yep. Take that one, Steve. I think the short answer is we can do all of our three capital priorities. That's the idea. The strategy here is really to return capital to our shareholders, and that's the right strategic decision for the company. I think if you look at your great companies, your leading creators of total shareholder returns, It's obviously the revenue growth and the margin expansion that drives the bulk of it. But the good companies that are the leaders in TSR for their shareholders also have capital allocation strategies. And so this is a strategic move being made by the company to return capital to shareholders. Our priorities haven't changed, Steve. We've got three priorities here. First and foremost, it's investing in the business. Second, it's M and A. Third is share repurchase where it makes sense. I think by the numbers, now have $2.5 billion on the balance sheet in cash or very close to it. We want to keep a working capital on the balance sheet as it were of about a billion dollars in cash. So you now have an ability to do all three priorities, which we haven't had before. Obviously, the business last quarter had a terrific quarter. Cash flow was $264 million. What you're seeing is the model is starting to inflect, and you're seeing the model really shine. You know, CapEx for the full year for this company is under $10 million. So you're really seeing the model start to throw off cash. And so I think that just gives us the ability to execute on all three dimensions. First priority, investing in the business. Second priority, doing M and A where it makes sense. And then third, share repurchases will be opportunistically in the market from time to time when it makes sense. Great. Thanks, Drew. Thanks, Steve, Jen. Krista, let's please open up the line for questions from the folks there. Thank you. Krista: Thank you. Your first question comes from Ron Josey with Citi. Your line is open. Ron Josey: Hey, thanks for taking the questions. Maybe one for Steve. On product and one for Jen on Reddit Max. So Steve, given the amount of commentary and focus on the consumer product work, I want to understand a little bit more based on what you've seen around the revamped onboarding as well as incorporating answers in the web. Just talk about early benefits maybe on the onboarding flow change, around retention. And then on search in integrating search with Answers, any impact there? Talk about the impact of user experience. So that's on product. And then, Jen, you mentioned, Reddit Max to use to streamline onboarding. I'd love to see how you believe that that might pan roll out throughout the year. And if that and how that channel mix might evolve across vetted advertisers being large, medium, and SMBs. Thank you. Steven Huffman: Okay. Thanks, Ron. Because Consumer products. So let's start with onboarding. We ship a bunch of stuff in Q4. Some worked. Some did not. Lots of learnings across the board. I'd say that the core thesis remains the same. Streamlining that process does improve retention. Think we've got some interesting things about using LLMs to how to help triangulate users' interest. I think one of the other learnings also, I think it's pretty straightforward. Bringing users into the feed faster requires the feed to be better. And so we'll be making pretty good investment into ML to improve that kind of cold start feed for new users. So I think lots of lots of opportunity there and more to come. And then on search, we did bring the search bars together for the most part. So you're on search bar. You can go into ask. And then if you run a traditional search, we'll often pop an answer there. Red answers queries, I believe we're up from 1 million to 15 million queries over the last year. And then 60 to 80 million overall search queries. So we're seeing nice growth there. Then as I mentioned in my remarks, we're gonna continue to invest in Answers. And you know, I think where this is going is we'll just handle more and more queries with answers. Because it lets us respond in a more flexible way to the kind of wide range of things that users ask. Okay. And then, Jen, the question to you was on RedMax. Jennifer Wong: Yeah. So thanks for the question. So right now, we're in the process of converting our lower funnel advertisers into Reddit Max. Obviously, there are thousands of advertisers that need to be converted. That's you know, an effort. So that's where we're focused first for existing customers to have that experience. They're very familiar with Reddit, Inc. And then, you know so I'd say it's still you know, quarters out to really start to do the new onboarding. Of new advertisers on because we're so focused on conversion right now. But if I pull up you know, I think Reddit Max will make onboarding easier think it will drive productivity and performance gains. For folks coming into the lower funnel for the first time and get that in the benefits to creative. And the optimization. So you know, I think this is we think this will take out more friction and help us, you know, continue with our acquisition growth. Your next question comes from the line of Benjamin Black with Deutsche Bank. Your line is open. Benjamin Black: Great. Thank you for taking my questions. Steve, in the letter you spoke about Reddit, Inc. being a source for humans, but I'll be curious to hear your thoughts on AI-generated content on the platform. Know, how do you see that evolving from here? Could it ultimately prove additive and support engagement in certain instances? Just interested to hear your thoughts there. And then secondly, you know, in a world where we're moving closer and closer to potentially going to agentic commerce, I'd love to feel and sort of I would love I'd love to sort of hear how you think you're positioned. Right? Mean, I can imagine the value of your data or your content goes up dramatically, but how do you think about the impact to users, you know, contribution rates, and certainly the ad side of the business? Thank you. Steven Huffman: Thanks, Benjamin. Okay. So first question. AI-generated content, how do we think about it? Could it be additive? Well, look, Depending on how you look at it, right, machine translation is AI-generated content. So there's certainly a role for using like, AI to communicate better. Right? We do that. Our users do that. I think there's also a version of this where know, there's a you know, we see more and more of this, I think, just on the Internet, where people write with AI. And I think we're going through this transition right now. It's my opinion. It's kind of annoying. But there's still a human behind the prompt. And then there's, like, full, like, bot-like behavior. The latter, don't want on Reddit, Inc. And to the extent that is automated uses of Reddit, Inc., we want those basically to be part of our developer program apps. And so we do see things like this on Reddit, Inc., like the remind me bot and the haiku bot and things like that. So think the answer to questions like these for Reddit, Inc. is almost always in transparency and intentionality. At the end of the day, Reddit, Inc. is for humans to talk to other humans. So to the extent that there's anything know, automated or generated, that needs to be very well labeled. It doesn't mean we have to outlaw entirely. Just needs to be you know, marked as what it is because there are times when it's helpful. Okay. Jen, the question to you is Agentic Commerce and how we think about that. Jennifer Wong: Sure. I think Reddit, Inc. is very well positioned for the changes, you know, the ever-evolving consumer decision journey and very well positioned for what's coming in Agenda Commerce. You know, Reddit, Inc. is the point of trusted recommendations. It's where the human who actually has to deploy resources and make decisions is actually searching for what it is that they're interested in buying. I think the layer after that, which is when you do the price comparison and when you do the last click and the execution of that, could be commoditized, frankly, because that's where the agent will get the job done. But the human, the last point of decision making of what to buy and allocating resources is at the recommendation, and Reddit, Inc. has the best recommendations for products and services and that's present on Reddit, Inc. and in our partnerships with LLM. So I think we're really well positioned because marketers are always going to want to talk to the customer, and the customer is going to be the one to deploy the resources and make those decisions. And that position is very, very important for all marketers, I think, for any business. Your next question comes from the line of Thomas Champion with Piper Sandler. Please go ahead. Thomas Champion: Thanks very much. Good afternoon, everyone. Steve, can you talk about the monetization opportunity with logged-out users? Does removing the reporting distinction imply monetization can come closer to parity between logged in and logged out? And maybe you could just talk about mechanisms to get there, if so. Thank you. Jennifer Wong: Thanks, Tom. I can take that. Sure. So logged-in users and logged-in users both see ads. And on an impression basis, the value of those impressions is the same. There's actually no differential between them. The real differential is around engagement. So our strategy is to increase engagement. Right? So what we want is the weekly users that we have to become daily users. And we don't want having to be logged in to be a criteria for personalization to get the best to get a better Reddit, Inc. experience. And that's why, you know, this change to remove the log in, log out metric because it'll be blurred. It's about this creation of increasing the engagement. And as they, you know, want to say, the LogDot user in gets a more personalized experience, and, you know, increases engagement, that's where you can get more value because every imprint you'll be able to see more impressions with that engagement. So the opportunity is an engagement via those product improvements that Steve talked about. Your next question comes from the line of Justin Post with Bank of America. Your line is open. Justin Post: Great. Thank you. Maybe a couple of Steve, just wondering if you could talk a little bit about the AI deals with Google and OpenAI. How are they using their data? And you think it's it's really growing in importance for for their models? And and second, you kicked it off with some comments on bots. Do you expect any user impact, or is there any revenue opportunities around? Thank you. Steven Huffman: K. So on thanks, Justin. So on the AI deals, really, our partnerships with Google and OpenAI I think we can see the growing importance of Reddit, Inc. Reddit, Inc. per profound is the number one cited source in AI answers. Our relationships with both companies are very healthy. The conversation is shifting from know, a purely business deal to you know, more of a product partnership. And so you know, I think the exchange will be we help you build the best version of your products. You help us build the best version of our products. Specifically, what we're looking for in any relationship like this is can we bring users into the community parts of Red? Right? Red is product. Is human connection, is conversation, is communities. And we want to bring users into that experience on Reddit, Inc. That, of course, generates more conversation, and makes that whole kind of partnership flywheel work better. So that's where our head's at right now. But both relationships are great. On things like bots, no user impact. We remove and have the lifetime of this company. Know, anything that we believe is a bot, we remove from our users. Before we share anything. But we do see more and more agentic usage of Reddit, Inc. specifically somebody might be writing a comment with ChatGPT and that sort of thing. There is a culture of labeled bots on Reddit, Inc. already. So this is what I mentioned before, the remind me bot, the HaiQ bot, some things like that. And I think with the Reddit, Inc. developer program, there's more opportunities to expand the functionality of Reddit, Inc. But that means that those sorts of interactions need to be well labeled. But the default assumption on Reddit, Inc. has been and should be you're talking to humans because that's what Reddit, Inc. is for is people talking to people. The AI version of this challenge is just a new chapter in this challenge. We've seen this sort of challenge. Right? It's just spam in general, really, is what we're talking about. The spam challenge has been something we've been fighting for two decades on Reddit, Inc. So this is really an evolution of that challenge, which we'll continue to stay vigilant on. Krista: Your next question comes from the line of John Colantuoni with Jefferies. Please go ahead. Your line is open. John Colantuoni: Okay. Great. Thanks for taking my questions. I have two. As you've seen more users engaging with Reddit Answers, and search, I'm curious how you've seen that impact monetization in the near and long term with your ad products within search still at nascent stages? And, number two, Jen, you mentioned pricing has been a driver of revenue growth. I was wondering if you could put a finer figure on how much pricing contributed to revenue And as you think about what drove pricing, I'd be curious to get your perspective if pricing's contribution will remain low or start to grow over time and how you see that impacting advertiser adoption if your pricing starts to converge with other platforms? Thanks. Jennifer Wong: Sure. Okay. So the first one was about Answers and Search. I know there's a surfaces where we don't have monetization on, but, obviously, is an enormous market and opportunity for us. The behavior of searching, both navigational and agentic, right now seems incremental and additive to the existing engagement. And so that's great because that's an opportunity for us to have another touch point and a very specific touch point that often has a shopping, lower funnel, high intent, you know, converting mindset to it. So it's something that we're really excited about. And I think, you know, that opportunity is ahead of us. But it's, you know, it's incremental to our opportunity today. The next was a question about pricing. So we, you know, we don't break out impressions and pricing numerically, but it was a growth driver. You know, what's driving pricing is our strategy. Right? So our strategy is to make every impression more valuable by delivering more hard marketing outcomes per impression to our advertisers increasing the click-through rate and response rate so we have more traffic, to advertisers for research, you know, in consideration. More conversions, more app installs, more app in-app events. Right? And so that's what's driving you know, the competition and the pricing is the value of those outcomes. Obviously, you know, when you increase when pricing increases, it's a result of the demand for those outcomes. And what matters is the ROAS equation. It's the return on ad spend. So you know, if I'm getting a high LTV quality user, Is that customer incremental to what I had? So the measurement piece becomes very important. In, in supporting those gains. And that's why measurement's been a big focus for us. It's constantly demonstrating the unique value of Reddit, Inc. You know, you're getting incredible marketing outcomes with great with improving returns from all the ML and signals work. That's actually what's driving, you know, our strategy. In in in in driving the the success of the marketplace. Your next question comes from the line of Richard Greenfield with LightShed Partners. Your line is open. Richard Greenfield: Hi. Thanks for taking the question. I got a couple. So first, on Reddit, Inc. search, Steve, you know, I when I click on the small magnifying glass, I see the new experience where it kind of dynamically expands across the screen, and I've got the ask button as an option. But search overall is still this, like, little magnifying glass in the upper right corner. I'm wondering, as you think about sort of the starting point or how you think about using the home page real estate specifically on the app to make it more especially if you've improved the search experience, and it seems like such a key part of you know, in terms of the growth of usage. How do you make it more visually focal focused on by consumers from a homepage standpoint over the course of 2026. And then just to follow-up on the the commentary you had around Google and OpenAI in terms of, the renewal or the how you're talking about them in terms of more of a partnership going forward. The way that these companies sort of cite not just you, but everybody on the Internet is they paraphrase the content, and then they put a little circle with a number, you sort of click to get more information from where the sources are. How do you like, if if you could wave a magic wand or on your blackboard, like, what do you want it to look like so that you have a way to drive people more deeply into the Reddit, Inc. conversational content? Steven Huffman: Okay, Rich. Thanks. On the search bar, you are in one of the variants. There's another variant, the one that I happen to be in. Has a big fat search bar at the top. So you can go on the natural journey or if you want to follow-up after a can put you in the big search bar there. Anyway, we're testing lots of things there. I like the bigger one. On Google and OpenAI, how we feel about the citations, look, I think there's a lot of movement there. You know, if I could wave a magic wand, I think what we really want is to you know, say I go to some other platform I say, what's the best speaker? Reddit, Inc. helps you you know, get a few options for what the best speaker is. I'd like to make that user aware, hey. You can go to the R audio file community and talk to other speaker geek. I think that's the sort of thing that really differentiates Reddit, Inc. and would be additive to, you know, that user's experience. But there's so much movement in both of these products. On the other part of my brain, I just have some empathy for product people who are moving really, really fast. So we're in close connection with them. Relationships are healthy. Obviously, there's a lot of movement there, and I expect there will continue to do continue to be. But, you know, we'll continue, I think, to evolve together through this. Thanks. Krista: Your next question comes from the line of Vasily Karasyov with Cannonball Research. Your line is open. Vasily Karasyov: Hi. Good afternoon. I wanted to follow-up on what you said earlier about the new advertising solutions across the funnel that you're launching. So it seems like brand and performance growth rates in 25 converged. And yet in 24, performance was outgrowing brand by a lot, two to three times. Right? So given all the solutions you're launching, DPA, Max, and so on, should we expect performance to outgrow brand again given the brand has upper comps too? Or are there any solutions on the brand side that should have said that? Thank you very much. Jennifer Wong: Yeah. Thanks for asking. We are a full funnel solution. So that's the you know, Reddit, Inc. delivers value for marketers from the top to the bottom of the funnel. And brand, you know, is absolutely a piece of that of that full funnel solution. We've actually been investing in brand as well. And when I think about 2026, it's an area we'll continue investing in. So the first is around Reddit, Inc. unique experiences. So, you I've mentioned the interactive ads that we started to test in Q4. I think there's a nice road map there for, you know, high impact engagement, engaging ad units that are Reddit, Inc. unique. The second is, last year, we invested in video and deeper video views and video view optimization. And I think we're gonna go deeper on that. For video forward advertisers, they can run campaigns on Reddit, Inc. For maybe even longer video links. It's something we're interested in. And then just raw optimization automation. You know, we're we want to get auto bidding adopted broadly. Gonna work on things like auto targeting. Some of those optimizations that we have at the lower funnel, we want to do for the brand experience. And then finally, measurement. Is another area that's really important to us. We're gonna be really focused on the measurement partners and, you know, demonstrating Reddit, Inc. brand value. So, yeah, this it'll be work in brand. Again, we're a full funnel solution. We care about delivering value across every piece. Your next question comes from the line of Mark Mahaney with Evercore. Your line is open. Mark, your line is open. Your next question comes from the line of Jason Helfstein with Oppenheimer. Your line is open. Jason Helfstein: Thanks for taking the question. Jen, just can you elaborate a bit more or maybe help us understand around the progress as far as hiring, training, sales and support, to catch up with basically what seems like more advertiser demand than you could handle. So just like, I guess, how long does it take to catch up and just kinda where are you in that journey and just any color you wanna share? Thanks. Jennifer Wong: Sure. Yeah. I mean, look. We have a process, like, which we continually invest in our Salesforce, you know, and we continually work on their productivity as well through tools and technology. And when we see an opportunity, I mean, the ROI is so high that you know, we'll invest behind new verticals, new geographies, you know, expanding channels. So something that we do, frankly, all the time. I you know, I there is you know, maybe the maybe the behind the question is, like, you know, could you grow faster if you added more resource something like that? You know, I think, again, all of this is a process by which you take these products to market and customer digestion. And adoption. That's just the reality. And that we have you can see we have so much going on in our road map across the funnel. In terms of new products and services and adoption. Think the team's doing a great job, you know, shouldering something like Cappy that doesn't drive revenue today. While also, you know, servicing marketers' needs know, in the marketing platform. So really are very thoughtful about that digestion. I think, you know, six quarters of 60% growth, like, we are fueling this business, you know, as much as we can, and we're always looking for opportunities to do it more. Andrew Vollero: I don't if you had anything to No. I I think that's right. I think there's a really good partnership, and I I think you're talking about you know, are we chasing demand? I mean, at times, but it's really about the enabler. Like like, we really gotta work cross functionally, but but Jen and I are looking at it We're meeting multiple times a month on this very topic. And when we see an opportunity, mean, it really behooves us to to go and make investments, with the margin profile that we have here. It it's really easy to make this invest these investments. It's getting, you know, three to six times our our return out in that in one calendar year. Like, you can really and I love the fact that it's, you know, immediate returns and and easy to track. You know, you added this account or you you can see the sales in this geography or vertical. So, anyway, we're we're really pleased with it. It's really the enablers and and sometimes the enablers in our control, and sometimes we're waiting for customers on some of the enablers. Krista: Your next question comes from the line of Josh Beck with Raymond James. Josh Beck: Thank you for taking the question. I wanted to ask a little bit about the large advertiser category, kind of where you are with respect to wallet share and kind of how much headroom you think there is with some of these large advertisers? Obviously, you're having great momentum bringing on a bunch of advertisers, but kind of interested in that segment specifically. And then, you know, with respect to the outlook for Q1, I think going back to last quarter, you aired a little bit conservative because of some of the tariffs dynamics. Is there anything to be mindful of just with respect to the broader environment relative to Q1? Thank you. Jennifer Wong: Sure. I can take the first one on the large customer. So how much you know, from a share perspective, I think that there's opportunity to go deeper with these partners when I look at it. You know, some know, often start with us in The US territory but can become global partners, and some are just you know, still mid-flight in that journey. Think the other is, you know, some of these large customers, they have like, a portfolio of a 100 different brands. And still haven't penetrated all those brands. It's still in the minority percentage. That we've covered at this point. So there's a lot more ground to cover in terms of the LOBs and lines of business. Then finally, I'll say, you know, we with the large customers, we typically started at the top of the funnel, you know, in in in a lot of cases, the opportunity is to move into the lower funnel. A lot of the lower funnel groups is actually fueled by the scaled segment, more and more by the large customer segment, but that's still an opportunity for us. And some of the reasons why is just because laying down CAPI and some of that infrastructure for lower funnel just takes a little longer with larger advertisers. We're making good progress. But there's still headroom there. So, I mean, these advertisers are are are massive. And, we're still, I think, scratching surface in terms of our opportunity given the footprint, you know, of Reddit, Inc. that keeps growing 20% year over year, really settled. Andrew Vollero: Josh, hey. On the guide, let me give you a a couple of kind of pieces of information. Let me specifically address your question. Like, what's different? Is there anything different in first quarter? I think the guides that we gave for this quarter, of 52% to 54%, very similar to the last couple of quarters. We've been in kind of a low to mid 50 range in Q3 and Q4. So very similar, you know, kind of profile on the guides. I think the double click on the quarter itself is we were pretty strong from start to finish in in Q4. Like, we we had a good October. Had a good November. We had a good December. Like, it was it was a good quarter for us. So so we end with with momentum in the business. Think in the margin, you know, we're still on the on the forecasting side, we still ran around quarter with work to do. We still have, you know, 40 to 50% of our orders to write in quarter. I think, specifically your question, in the first quarter, your business comes a little bit later. March tends to be your biggest month. And so you you you gotta you gotta make March happen. And that, for us, in a lot of cases, can happen intra quarter. That's really the only dynamic on the margin. But overall, very similar guide to the last couple of quarters. And there was momentum as we were leaving the fourth quarter kind of toward the holiday season. Does that make sense? Krista: Your next question comes from the line of Naved Khan with B. Riley Securities. Naved Khan: Thank you very much. I have a two-part question, if I may. So maybe just on the on the user marketing I'm curious how you're looking at the ROI on the on the user marketing spend. And what are your thoughts on scaling this further and and as we enter 2026? And then the other question I have is just on the on the M and A. Drew, you mentioned includes even scale. Yeah. Acquisition scale capabilities, I'm just thinking what what what these kind of what these might be. So just any color would be helpful. Thank you. Andrew Vollero: Sure. Sure. Let me let me take that. On the on the ROI side, I mean, pretty consistent with how others are are modeling it. We're looking at the costs for particular advertising, and then we're looking at the users that bringing in, and then we're looking at a retention curve. Pretty similar to, I think, how other companies look at it. I think the longevity of our model tends to be a little kinder than most because of the high gross margins that that that a user can bring here at Reddit, Inc. But overall, you know, pretty linear model, really valuing on sort of the income statement basis, what's the value that it creates. And and a pretty straightforward ROI payback in, you know, a relatively short period of time. So not a whole lot different than than most of the other models that you may see in the business. I think we do have a little bit of an advantage because of the high gross margin. So the revenues that we are able to bring in with the user do give us a little bit better ability to to pay back. Okay. On the second one, on the M and A side, look. I'm trying to say there is we continue to look at a lot of opportunities. I probably wouldn't overthink scaled opportunities. I would just at it as sort of a spectrum of opportunities. We're looking at capabilities. We're looking at companies. Looking at technologies. Think, you know, we've we've been successful here tucking in a number of technologies. It's actually relates to Jason's question a couple of minutes ago. It's really been one of the secrets of our success on the revenue side. The ad tech team has done an outstanding job in how they've been able to really kinda drive our business. One of the ways is they tech in technologies rather than build it themselves. Saves us six months to market, saves us twelve months to market, and you have a proven product. So we we have been able to kinda tuck things in successfully, particularly on the ad tech side. It's really helped us in the monetization journey. I would say that's really been the primary focus of where we are today. But we're not ruling anything off the table. That's why I mentioned the scale and the setup. Krista: Your next question comes from the line of Andrew Boone with Citizens. Your line is open. Andrew Boone: Thanks so much for taking the question. Jen, I wanted to ask about your shopping ads. What do you need to do from either a tool or an ad format perspective to grow that vertical faster? And then, Steve, going back to Seekers and some of the generative AI tools that are now available, can you flesh out what your view is or what the experience is that you're trying to build in terms of people coming to Reddit, Inc. and looking for x y z? Thanks so much. Jennifer Wong: Sure. I can take, I can take personal on DPA. So I think that we have been our our product today is competitive certainly with like, say, tier two peers. Pretty consistently, both on a prospecting and retargeting basis. But when you think about tier one, you know, companies, I think we want to do more work on ML in terms of the signals that I think can improve our ROAS to be even more competitive. I mean, shopping is a pretty numerical return exercise. But we are quite competitive today with, you know, very quickly. You know, we only released it in April with a number of peers, and that's allowed us to grow shopping. The second piece is just raw work on adoption. So with shopping, you have to get product feeds in You want Capi, you know, because you want that real-time signal. So there's a little there's definitely more work in the setup, for our sales team that we are the team is doing a really good job working through, but they're, you know, just working through the customer list. Yeah. I mean, you saw our strong growth in retail, That's fueled by the success we've been seeing in DPA. Now it's very early, There's a lot more advertisers and a lot more opportunity there. But it gives you a sense of, like, I think, you know, that of of DPAs possibility. Steven Huffman: Okay. And for search, you know, we spent most of last year talking about how do we unify these two search experiences. The traditional search on Reddit, Inc. and then the Gen AI search. I think the main thing that we've learned is that the Gen AI search results, I think, will just be better for most queries. There's a type of query there I think, particularly good at. I would argue, the best on the Internet, which is questions that have no answers. Where the answer actually is multiple perspectives from lots of people. Right? What should I watch? Where should I go? What's the best x y z? I think Reddit, Inc. is really great at this. When we thought about traditional search, it's more like navigation. Right? Take me to this topic, to this subreddit. But we're actually finding that the LLM search results is, in many cases, better for this as well. That's the direction we're going. Right? Search WAU in the last year is up 30% from 60 million to 80 million. The Answers WAU, so the LLM search, went from 1 million in Q1, 7 million last quarter, 15 million this quarter. So we're seeing a lot of growth there. And I think there's a lot of potential. The other thing I mentioned in my script is with the LLM answers mostly in text now, we'll start making those responses more media rich as well. So one of the primary use case I think there's three use cases that people come to Reddit, Inc. for. One of the primary ones is searching. But the other is being for the feed or for the community experience. But search is a big one, we see a ton of opportunity there. Krista: We have time for one more question, and that comes from the line of Colin Sebastian with Baird. Please go ahead. Colin Sebastian: Thanks. Good afternoon. Appreciate the questions. We're hearing that Reddit, Inc. is sort of evolving as a gateway for brands that want to surface more consistently in LLMs. And if you agree with that, does that create a pathway for more of those companies to also experiment with ads on the platform? And then secondly, maybe, Jen, do you see an opportunity to shift the perception that some advertisers still have of Reddit, Inc. as more of a niche content platform rather than an essential full funnel opportunity at their marketing or outreach you can do to sort of the market catch up? Thank you. Steven Huffman: Thanks, Colin. Jen and I are gonna try to take the we'll tag team this first one together. So it's it's really interesting when when I talk to customers so brands, increasingly, we've seen this steady increase over the years of first, what is Reddit, Inc.? Okay. What is community? Okay. I get it. How do I show up well? To now, they're like, I have to be on Reddit, Inc., and I have to show up in the right way. And I want a way to do this, not just as a paid customer but organically. I want to provide great customer service. I want to get my content there. Because increasingly, they realize that the best way to do well in external search to show up in LLMs is to show up well on Reddit, Inc. So we're actually starting to see a shift in their thinking. Multiple brands told me we're reorganizing our social media team to be the Reddit, Inc. team. So they're really starting to appreciate the differences with Reddit, Inc. And the opportunity that it brings. And, of course, I think if they can have great organic experiences, which we're trying to help them with, this is our Reddit Pro line of work. So the profiles the official accounts, the labeled accounts, even some of that app and bot labeling that I was talking about before are all ways to allow brands to show up as first-class citizens, well-labeled and intentional. And of course, this we believe, will open the gateway for the customer relationship as well. Jennifer Wong: The only thing I'll add to that is I think I think marketers really they they do they are they do understand that the reason why Reddit, Inc. is so valuable valued for its recommendations and LLMs is because, you know, LLMs don't know anything. Unless it's from humans, and Reddit, Inc. has the best know, answers and recommendations. And I think their perspective is, you know, yes. They would they would love that, but, obviously, you know, nobody knows what comes out of an LLM until it does. But the opportunity on Reddit, Inc. where that human conversation is happening is the opportunity in front of them today to engage that audience and set a conversation with them through our marketing platform. And that is the best way to do it and to take advantage of marketing outcomes with that very influential audience today. So that is that is, yes, a part of of conversations we have. The second part is I think you asked about Reddit, Inc. you know, appearing niche. You know, this is one of those myths we always had a myth bust on Reddit, Inc. because we show up as a 100,000 communities that cover every topic on the planet. But when you put it all together, we're over half a billion you know, monthly, and we're a 120 million daily. So it all adds up to a very large at scale audience. Know, it is constant education to to to remind people of that. And because we can show up in with with with those communities that can seem so so niche. I think the other piece, you know, we'll be doing is as we build on our community insights and tools, we're gonna be bringing that closer to our ads manager so that there's a nice connection between the insights the audience that you see, and the volumes that you can actually touch on Reddit, Inc. and and engage with and then the opportunity in the marketing platform. So we want to bring that all together a little bit more so that that that volume and that scale is a little more present in the insights. Steven Huffman: Great. And, Krista, I think we'll end the call there. Just want to thank everyone for joining, and look forward to speaking again soon. Thanks, all. Bye bye. Krista: This concludes Reddit, Inc.'s fourth quarter 2025 earnings call. You may now disconnect.
Operator: Good afternoon. My name is Lydia, and I will be your conference operator today. At this time, I'd like to welcome everyone to BILL'S Fiscal Second Quarter 2026 Conference Call. [Operator Instructions] Thank you. I'll now turn the call over to Jack Andrews Vice President, Investor Relations. You may begin Unknown Executive: Thank you. Good afternoon, everyone. Welcome to BILL's Fiscal Second Quarter 2026 Earnings Conference Call. We issued our earnings press release a short time ago and filed the related Form 8-K with the SEC. The press release can be found on our Investor Relations website at investor.bill.com. Joining me on the call today are Rene Lacerte, Chairman, CEO and Founder; John Rettig, President and COO; and Rohini Jain, CFO. Before we begin, please remember that during the course of this call, we may make forward-looking statements about the future business operations, targets, products and expectations of BILL that involve many assumptions, risks and uncertainties. Actual results could differ materially from those expressed or implied by our forward-looking statements. In addition to our prepared remarks, please refer to the information in the company's press release issued today, our Q2 '26 investor deck and our periodic reports filed with the SEC, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. We disclaim any obligation to update any forward-looking statements. On today's call, we will refer to both GAAP and non-GAAP financial measures. Please refer to today's press release for a reconciliation of GAAP to non-GAAP and additional information regarding these measures. With that, let me turn the call over to Rene. René Lacerte: Thanks, Jack. Good afternoon, everyone, and thank you for joining us. During Q2, we continued to build on the strong momentum of Q1 and delivered a meaningful beat on both core revenue and profitability. Our consistent and disciplined execution against our strategic priorities drove 17% core revenue growth versus last year and an 18% non-GAAP operating margin in Q2. Additionally, we're seeing encouraging signs of SMB resilience with increasing spend volumes across the platform. Our innovation defines the broad category of how businesses manage their financial operations. We are introducing new products and partnerships that extend our capabilities and reach while delivering durable growth and expanding margins. Nearly 500,000 customers trust BILL and use our software solutions to run and grow their businesses with speed, confidence and clarity. More than 9,500 accounting firms rely on our platform and over 8 million businesses are now part of our proprietary B2B payment network. This unmatched scale enriches of data, gives us broad visibility across the SMB economy and positions us to both grow and expand the intelligent financial operations category. We are seeing our massive scale and the deep trust we've built across our ecosystem translate directly into value creation. By spanning the critical workflows our customers rely on every day, we are driving higher engagement and more transaction volume across the entire platform. We've also continued to strengthen our position with accounts, through new offerings such as procurement, multi-entity support and advanced reporting in the accountant council. These tools are increasingly important as AI reshapes accounting and more specifically, the accounting profession. As the profession adapts to a rapidly changing technology landscape, our foundational knowledge of the back office for SMBs and the accounts that serve them is unique. This capability, combined with the breadth of our platform is enabling firms to transform their mundane transactional work into high-value automated advisory services. We are deeply integrated across many of the largest firms and are best positioned to support this evolution by combining modern workflows, scale and continuous innovation. AI is prompting more firms to adopt and embrace automation so that they can provide more strategic value to their clients. With BILL already trusted by nearly 90 of the top 100 firms, we're leading this transformation through innovation by rapidly deploying new agentic capabilities to eliminate workflows for accounts and their clients. A significant part of the value we provide customers is through our world-class money moving capability. We are a regulated provider that moves over 1% of U.S. GDP and supports over a dozen payment modalities. Importantly, for customers, we also optimize payment speed as a direct result of our proprietary data models and risk engine. Our ongoing investment in integrating software and payments enables us to give businesses a unified real-time view of their financial health, while helping them maximize their capital and make better strategic decisions. As businesses increase their use of BILL, they unlock more from the platform. Our momentum with multiproduct adoption demonstrates this. The number of businesses using both AP/AR and Spend & Expense grew 28% year-over-year in Q2. These customers drive significantly more revenue per customer and become stickier as they realize more combined value from the platform. We leverage our world-class payment and risk management capabilities to give SMBs what they want, the ability to maximize cash flow. Invoice financing is a fast-growing emerging payment solution that provides flexible capital exactly when it's needed, addressing a critical operating need for many SMBs. In Q2, customers using invoice financing grew by nearly 50% year-over-year and the origination volume increased by more than 30%. We increased adoption while improving unit economics at the same time. This outcome is a direct result of our powerful AI models and our evolving capability to safely underwrite a wider range of suppliers. BILL cash account is another important extension of the overall value we create to help SMBs maximize cash flow. At the core, it is an integrated operating account that makes it easier for SMBs to optimize cash flow and gain greater control and flexibility over their financial operations. We see cash account as an opportunity to bring billions of dollars of monthly offline spend onto our network, increasing our wallet share. Early indications since launching in Q2 showed that more than 70% of cash account users have increased their spend volumes on our network. Our Embed 2.0 growth strategy continues to show great progress and potential. Last quarter, we announced new partnerships with NetSuite, Acumatica and Paychex and within 3 months, all are in market, demonstrating the strength of our platform and the ability to move quickly. Our Embed 2.0 strategy is purpose built to extend our reach with SMBs and complement our other go-to-market channels. It allows us to meet growing businesses inside the systems they already use, reduce friction as complexity increases and deliver a more unified technology stack. With these 3 partnerships alone, we've unlocked the potential to reach close to 1 million businesses, showing how embedded capabilities scale our ecosystem efficiently. As businesses grow, complexity compounds, Large enterprises solve that complexity by adding layers of people, processes and systems. But for the [ Fortune 5 million ] businesses that power the economy, growth too often means more manual work, more risk and more friction. That imbalance has defined this category for decades and is exactly what we are aiming to change. Agentic AI is live across our platform today. Agents are actively running core financial workflows, eliminating manual work, reducing risk and improving reliability and accuracy. To date, we have focused on 3 areas with unnecessary friction: Vendor management, transaction entry and operational efficiency and risk management. First, let me discuss vendor management. Running a business requires spend and spend requires vendors, yet managing vendors remains one of the most manual and fragmented parts of finance. BILL'S [ W9 ] agent and our new Smart Response agent autonomously collect tax documents and manage routine vendor communications, helping customers stay compliant, build trust and keep money moving without adding overhead. Since launching in Q2, nearly 10,000 customers have turned on the W-9 agent and 40,000 W-9s have been collected. We recently added new mobile capabilities, enabling real-time compliance control from anywhere and expect our W-9 agent to collect and automate 3 million W-9s by the end of the year, saving thousands of weeks of manual work for our customers. Second, turning to transactions. BILL sits at the center of how money flows for our customers and our agents are making those transactions increasingly touchless and intelligent. We are eliminating the manual work required to code, match and reconcile transactions. Leveraging RAI, our invoice coding agent can now fully code complex invoices, which reduces the steps required by 90%. We have also expanded our transactions agent with auto-generated receipts and [ gmail ] capture, improving visibility while further reducing daily friction. Third, operational efficiency and risk management is critical for both us and our customers. Secure financial operations are core to our platform and a key reason customers trust us to run their workflows. As businesses scale, risk grows alongside complexity. Our AI-powered fraud and risk systems apply deep domain expertise and network level intelligence to protect customers at scale while reducing operational burden. In the first half, our system stopped 5.3 million fraudulent attempts and reduced manual fraud reviews by 40%. We are also reducing operational complexity for our customers through the BILL Assistant agent. This agent provides customers with real-time automated support. Prior to its introduction, 13% of customer contacts were self-serve. For customers enabled with this new agent, self-serve rates have more than tripled and now represent 40% of customer contacts. We have unique capabilities to advance agentic Finance. We are embedded in the financial operations of nearly 0.5 million businesses. Our models are trained on insights from more than $1 trillion in payment volume and billions of processed documents. Our network gives us unmatched visibility into vendor behavior, transaction patterns and operational risk protection across millions of workflows. This combination of these assets positions us to significantly amplify time savings and efficiency gains for our customers. We're seeing strong early momentum. And as we continue to launch more agents, we believe the impact will compound from saving weeks and months of work to creating the capacity of entire finance teams. We're redefining how financial operations scale, enabling SMBs to expand capability and capacity without adding costs. This is the future we are building. So every Fortune 5 million business regardless of size can operate with the power of a full finance organization. BILL holds a leading highly advantaged position in a large and growing market. We built a deeply differentiated platform at scale, powered by proprietary data, established and expanding partnerships and mission-critical workflows that are difficult to replicate. We are simplifying the financial lives of businesses in a meaningful way. And as a result, we are capturing the economic returns of our differentiation. We are very excited about our future. We are executing and delivering against our commitments while proving the durability of our model. And with that, I'll turn it over to John. John Rettig: Thanks, Rene. Q2 results exceeded our expectations with strong execution, operational leverage and improving volume trends across our platform, all having a positive impact on performance. As a reminder, we outlined 3 strategic priorities for this fiscal year on our Q4 earnings call last August. They are drive growth from our integrated platform, expand and penetrate our addressable market and innovate with AI to create incremental value for customers and productivity for employees. We are making good progress against these strategic priorities. In Q2, we delivered accelerated growth from our integrated platform, most notably in the transaction revenue stream. We are providing highly differentiated payment offerings that customers and their suppliers are adopting. Here's one great example. Customers are leveraging our BILL Divvy card as an alternative to ACH and checks to make traditional AP payments and the adoption is growing rapidly. In Q2, volume for these AP card payments grew more than 160% year-over-year. The reason behind such strong growth is simple. AP customers are realizing more value from this integrated solution, including improved efficiency, enhanced reporting and better economics. This offering is also adding to our overall card portfolio growth. In addition, we continue driving awareness and adoption of Supplier Payments Plus, or SPP, from the largest suppliers in our network. Since its introduction 2 quarters ago, early adopting Suppliers have committed to approximately $400 million in annual TPV. Several of these suppliers are multibillion-dollar revenue enterprises, such as a Fortune 500 company that provides workplace and safety products and services as well as one of the largest waste management companies in North America. These enterprises adopted our SPP solution for 1 key reason. We enable automation at scale. Our large AP footprint gives suppliers a single connection into their SMB customer base, and SPP provides a secure, trusted and efficient payment receiving experience. We expect SPP volume to be an excellent complement to virtual card payments and also address a significant portion of our ACH volume over the intermediate term. Turning to our second priority, expanding and penetrating our addressable market. On the AP side, we scaled our multi-entity capability, so larger businesses can efficiently onboard and manage hundreds of subsidiaries within a single bill environment. We also saw encouraging signals of improving core ARPU among the most recent cohorts within our direct channel, which reflects our increased focus on larger businesses. As we continue to innovate and create more value from our integrated platform for customers, we are also implementing measures to better align pricing with the value our AP customers realize. As a recent example, we have implemented targeted subscription price increases for new and existing direct channel customers. On the spend and expense side, we're balancing market penetration with focus on customer unit economics. Our go-to-market execution drove consistent customer acquisition velocity and yielded a record high card spend per business of $148,000 in the second quarter. We believe the differentiated experience of our spend and expense software solution positions us well to win in our targeted segment. For example, we consistently hear positive customer feedback on the depth and flexibility of our 2-way sync capability, our strong controls to manage cards and types of transactions and the ability to track and categorize expenses. Moving on to our partner channels. We believe our established accounting firm channel and emerging Embed 2.0 channel are highly complementary to our direct go-to-market strategy. Today, we partner with more than 9,500 accounting firms, which collectively drive a material number of our quarterly APAR net adds. As we provide an expanded set of solutions to accountants, we believe together we can further unlock market adoption. On our Embed 2.0 channel, we're pleased the solution is live and available to customers for all 3 of our newly signed partners. Over time, we expect this channel to meaningfully expand our distribution footprint and enhance our overall Embed monetization through ad valorem payment option. To illustrate, one of these partners has recently activated both virtual card and instant transfer payment methods. Over the next several quarters, we are focusing on enabling and scaling these partnerships. Turning to our third priority, innovate with AI. In addition to customer-facing agents, we are investing and deploying a agentic capabilities to improve internal efficiency. We recently introduced a [ pay for you ] agent, which autonomously executes card payments based on each supplier's preferences. This is streamlining what was previously a multistep human workflow into a single agent-driven process. In transactions where the agent has been deployed, we are already seeing significantly lower per transaction costs. We believe this agent will also enable payments beyond cards, leading to a higher adoption of our ad valorem portfolio over time. In summary, we delivered a very strong quarter. We're concentrating our investments on the priorities that will meaningfully improve outcomes for our customers and drive durable value for BILL with clear strategic focus and strong execution, we're well positioned to deliver the next phase of profitable growth and expand the opportunity ahead. I'll now hand the call over to Rohini to provide details on our financial performance. Rohini Jain: Thanks, John. We are pleased with our business momentum in Q2. These results mark another step forward in growing Bill into a larger, more profitable enterprise. In Q2, we delivered $375 million in core revenue, growing 17% year-over-year, exceeding the top end of our guidance range. This represents an acceleration of 370 basis points sequentially, driven by broad-based strength across the business. Non-GAAP operating margin was 18%, expanding both sequentially and year-over-year. The efficiency initiatives we identified this year are yielding results. Let me share some key highlights of our Q2 performance. Within our integrated platform, growth in both Bill AP/AR and Spend & Expense accelerated in Q2. AP/AR core revenue grew 11% year-over-year. In Q2, we added approximately 4,000 net new customers. We expect this number to trend down slightly in the short term as we enhance our focus on larger customers and take steps to better align pricing with the value we deliver. Early indicators of these actions are positive as subscription ARPU grew 1% sequentially. AP/AR transaction revenue was $128 million, up 14% year-over-year. TPV per customer increased modestly, which was ahead of our expectations. TPV on the same-store sales basis grew 4% year-over-year, above the Q1 level. We saw continued spend strength in manufacturing and an uptick in construction, reversing the trend in recent quarters. Transaction monetization increased 0.4 basis points year-over-year. Spending expense revenue totaled $166 million in Q2, representing 24% year-over-year growth. The revenue upside was primarily driven by accelerated card volume growth and better-than-expected ind take rate. Card payment volume increased 25% year-over-year, driven by meaningful spend uptick in advertising, retail and health care services industry. Take rate was 255 basis points, driven by volume and higher interchange verticals such as advertising and health care services. Rewards rate as a percentage of payment volume was 133 basis points, up 9 basis points compared to Q2 '25. As the initiatives to optimize rewards started to kick in, we saw the rate of increase moderating this quarter. We have updated our go-to-market incentive plan to better align rewards programs with our unit economics. Additionally, we are evaluating the contribution margin across the portfolio at the spending business level, making deliberate trade-offs as appropriate. Moving on to profitability. Non-GAAP operating margin, excluding the benefit of float expanded 70 basis points sequentially and 290 basis points year-over-year. Discontinued margin expansion reflects our ongoing focus on driving operating efficiencies. Turning to the balance sheet. We remain well capitalized to fund strategic investments, while returning value to shareholders. During the quarter, we repurchased $133 million of stock as we pursue a disciplined approach to share repurchases. Now turning to guidance. As always, we would like to provide a few assumptions upfront that underpin our guidance. First, on the AP/AR side, we are now assuming modest growth in payment volume per customer in fiscal '26. We are reiterating our previous expectation for take rate to increase from the Q2 level in second half of fiscal '26. For the year, we are reiterating a 0.4 basis points expansion. Second, on Spend & Expense, we now expect card payment volume to grow in the low 20% range year-over-year. We continue to expect the take rates to be slightly above 250 basis points for the year. For fiscal Q3 '26, we expect total revenue to be in the range of $397.5 million to $407.5 million and core revenue to be in the range of $364.5 million to $374.5 million, reflecting 14% to 17% year-over-year growth. On the bottom line for Q3, we expect to report non-GAAP operating income in the range of $62.5 million to $67.5 million. We expect non-GAAP net income in the range of $60.5 million to $64.5 million and non-GAAP EPS to be between $0.53 and $0.57. Shifting to full year guidance. For fiscal '26, we now expect core revenue to be in the range of $1.490 billion to $1.510 billion, reflecting 15% to 16% growth year-over-year. This is approximately 170 basis points higher than our previous guide. We expect float revenue of $141.5 million, an increase of $7.5 million compared to prior guidance driven by higher expected yields on funds held for customers. We now expect total revenue to be in the range of $1.631 billion to $1.651 billion. Turning to the bottom line, we expect non-GAAP operating income in the range of $274.0 million to $286.5 million. This represents a non-GAAP operating margin of approximately 17%. Our updated operating income guidance implies a year-over-year margin expansion of more than 320 basis points, excluding the benefit of float. Relative to our initial fiscal '26 guidance, this updated outlook reflects more than 130 basis points of additional margin improvement. We expect non-GAAP net income in the range of $267.5 million to $277.5 million and non-GAAP EPS to be between $2.33 and $2.41. For fiscal '26, we now expect stock-based compensation expenses to be approximately $255 million, below our previous guidance as we diligently manage the use of equity to attract and retain talent. In closing, we accelerated core revenue growth and strengthened our margin profile, proving that our disciplined investment approach and improved execution are delivering tangible results. We are extending our differentiation across mission-critical financial operation solutions. This will enable us to both price to value and deepen customer relationships. The breadth of our platform and scale of our payments network reinforce our position as a trusted long-term partner to we are highly confident in our strategy to extend BILL'S category leadership and deliver a tearable attractive financial profile. And now we'll open up the call for Q&A. Operator: [Operator Instructions] Our first question comes from Chris Quintero with Morgan Stanley. Christopher Quintero: Congrats on a solid quarter here. I wanted to ask the main question I think all of us have been getting from investors recently is how at risk is BILL from AI disruption from your perspective, at a very high level, what is your competitive moat? And how is that defensible against AI startups? René Lacerte: Thank you, Chris, for the question. Always good to talk to you. Happy to talk about this. I think it's a little bit overplayed out there. The impact of AI and software really comes down to -- it's just another tool to accelerate the democratization of software development. I've been building software for SMBs -- financial software for SMBs now for over 35 years. And every evolving language, if you will, has just made more and more people able to develop software. And that's been a great thing. That means we have a lot more capabilities for customers today than we had before. . And so when we think about developing solutions to solve real pain points and real problems for our customers, it requires expertise combined with creativity. And so our understanding of the problem that SMBs face today is rooted in a deep level of expertise with technology. And so that foundational understanding of the financial operations underlying the transactions that we drive today for our business. The deep expertise that we have at BILL actually kind of comes through, obviously, in the fact that we've created a category. Nobody was thinking or talking about financial operations before BILL came along. And now we have this category that we continuously redefine and add agentic capabilities, and that means that AI can't replace that expertise instead it will bring it to life. We have and have built a unique company. We operate where software means money movement. We have married software and payments seamlessly, automating more B2B payments than anyone else. Our scale in B2B transactions is unmatched and we have an advantaged position that will continue to grow with agentic AI. And because of the 3 differentiating factors, I think, are really important for folks to understand, that's why I have this confidence. So first, I would say there's a large quantum of highly contextual data that we have. Nobody else has done $1 trillion in spend in payments across our network, hundreds of millions of transactions, over 1 billion documents that we've digested and supported our customers on. This gives us a unique data set to understand customer behavior and to build risk models around how you move money. And like I said, no one else has this. This is not something 5 guys in a garage can just build on their own. It takes time. You have to scale. You have to grow and build the asset to be able to make these capabilities come to life. The second thing that I think is differentiating for BILL is that trust, customers trust BILL. we talked about 9,500-plus accounts across the country, trust BILL to actually build their business off of us. It's a critical intangible that allows money to move freely and quickly in society. And I just want to pause and just make sure everybody understands how important trust is when it comes to moving money. I mean when the [ precision ] bar is 100%, which it is for money, the consequences of failure can be catastrophic for an SMB. And so anything less, we know they will be out of business. And our track record having moved more than $1 trillion speaks for itself. So we have this massive amount of data. We've got a large amount of trust. And the third area that differentiates us and really defines how we will move forward as the network effects. We have a unique set of 8 million entities on our network. No one connects and understands how buyers and suppliers transact better than BILL. And I want to be clear that our network [indiscernible] enables intelligence to cross an ecosystem, not just within a single business. And we will continue to leverage this to help businesses get done across the ecosystem. So to sum it up, our assets are scarce. They're unique. Our platform is at the intersection of both software and payments. It's carefully built, it's owned with expertise and these assets are not easy, and they may be even impossible to replicate, and that will allow us to create significant opportunities with the agentic AI. So I'm pretty obviously pumped about the depth of expertise and vigorous execution that we demonstrate, and I know that will unlock the power of SMBs going forward. Christopher Quintero: Awesome, super helpful, answer there, Rene. Maybe just as a follow-up to that, on the opportunity front with AI, I think your agent strategy is really interesting because it seems to be going after more specific use cases to ultimately just reduce the amount of work that SMBs are doing. So curious to kind of get your thoughts on that strategy? Why that's the right one? And what's been the feedback from SMBs? René Lacerte: That's a great -- another great question, Chris. So I think this is what happens when you have a foundational understanding of what drives the business. This is -- this business was born out of processing and managing payments in my family and my businesses. And that understanding means that we get to actually develop capabilities that haven't been thought of before. And so agenetic AI will allow us to dive deeper into the stack of transactional confusion, if you will, and simplify it. And so what we see is an opportunity to create essentially roles that manage the different transaction levels that business is at. So as an example of this that we've talked about a bunch so far is the supplier management, what we're doing with W-9s. Nobody was thinking about, okay, well, W-9s need to be collected. They need to be entered. They need to be stored. They need to then drive at 1099. We were thinking about that. We've built that agent. We did it before anybody else. Nobody else is thinking about, okay, well, coding an invoice actually is really hard. Well, that's why we have documents at the source of our platform. That's why we started with our inbox virtual assistant. But then now we've added our coding agent that can go and take 90% of the steps out of coding to bill. That's an incredible amount of time savings that we've been able to provide. Nobody else is thinking about the fact that SMBs need help, they need assistance, and they want to be able to do it on their time. And so our ability with the Bill Assistant agent that we just launched, it's just early, right? But what we've seen is we've gone from a 13% self-serve rate to over 40%. That means customers get back to doing what they love. They get their questions answered. They're able to kind of move quickly into what they love. And that's everything that we're about at BILL is just helping business get back to work, helping them pursue their passion. So I think that our approach to kind of understand the underlying foundational challenges that a business has that's going to be what differentiates us in the market, and we have a lot more to go on this. We're super excited about what AI is going to enable us to tackle. Operator: Our next question comes from Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: Yes, nice to see the growth acceleration and the upside to the guidance. I'm just curious, from an attribution standpoint, what would you assign it to in terms of what did a little bit better? I heard the improving volume. I've been getting questions around how much of that is macro versus using some of the return on the investments that you put in, for example? René Lacerte: Yes, I'll start, and then I'll have Rohini jump in. So I mean I think, Tien-Tsin, the first thing you're seeing is the results, just the durability of building a great business. I mean we are constantly focused on actually taking care of building solutions for our customers that deliver value for them in the long term. And we're also obviously have a strong pulse on how SMBs are kind of moving through the cycles. And so we definitely see the resilience of SMBs kick in. We see the opportunity for them to drive and grow their business with our platform. And we think that the innovation that we've been bringing is creating more stickiness with the platform and creating more value opportunities for the platform. So with that, I'll let Rohini add a bit more. . Rohini Jain: Yes, absolutely. Just to add, color, and I want to start by saying that if you have a strong platform, a robust business and the right product for the customers, when there is increase in spend, we will get the benefit of that. So to unpack that a little bit more as we have said the same-store sales on the AP/AR platform grew 4%, which actually was an acceleration from the last quarter of a point, grew from 3% to.4%. What was really encouraging is some of the foundational industries like manufacturing continue to do well as well as construction actually had a nice rebound on the AP/AR side, which we are very happy to see. And on the SME side, in particular, we had resurgence of spend going into the advertising and retail, which is like the discretionary verticals we have called out for a couple of quarters to be a little bit muted. So very encouraged to see some of those trends. So overall, we were seeing some green shoots as a combination of the execution of the GTM, the product strategy as well as the spend environment coming through. Tien-Tsin Huang: Good. No, that's encouraging. So maybe as my follow-up, I'll ask on spending expense as you mentioned it there. I'm just thinking growing 2x the market. There's been some consolidation in the space. 20% growth, I think you're calling out for the rest of the year. So I'm curious how sustainable, how visible that is, what's preventing you from maybe growing a little bit faster given the shift to larger clients and the big installed base you have there? Is there a change in the credit appetite, all of that? Rohini Jain: Yes. Sure. So the way I think about it is, we talked about the reversal of trends in some of the categories that you saw in this quarter play out, especially advertising and retail. So 3 months, not relying a lot on that trend and would love to see these encouraging signs play out for a little bit longer before we break in again as we think about the guidance. It's a range as we think about all the puts and takes. We'll continue to point you to the midpoint as our highest fidelity number, but that's why we give you the range of outcomes that could play out. Operator: Our next question is from Nate Svensson with Deutsche Bank. Christopher Svensson: I wanted to follow up on the AI question, maybe with regards to pricing. I know you've talked about kind of some of the targeted actions that you're taking. But just in the context of all the headlines around AI and LLMs for writing tools or creating their own software solutions, do you see any risk to the pricing algorithm over the long term? I think we get the picture in the near term, but just any thoughts on how to think about that over the long term. And I thought the answer earlier from Rene, just on the overall competitive [indiscernible], but just wondering more specifically with regards to pricing. René Lacerte: Yes. Thank you, Nate. First, I'll start off and then I think Rohini can kind of add some comments. But at the highest level, pricing comes from the value you create for your customers. And so what we see happening with AI is that it will continue to unlock the friction that maybe is the inertia behind why more businesses don't use our solution. And so we think there are lots of opportunities to create more value inside the applications that will attract more customers. And we also see opportunities to create more services that we can price for as well. In addition, we believe that AI will be a significant helpful partner, if you will, on how we drive more consolidation of the expenses, more efficiency across the business. And so -- we've seen some of that. We talked about the BILL Assistant Agent that's actually driving self-serve, and [ eliminating ] calls with higher satisfaction for customers. These are things that we will continue to do to kind of obviously drive both the top line and the bottom line. But Rohini, what else would you like to add? Rohini Jain: Yes, nothing much. But just to reiterate the point that if the pricing followed the value that you deliver to the customers, there is always potential for growth here, right? So again, to step away for a second, about 80% plus of our revenue comes from transaction-based businesses and a little less than 20% is subscription-based. . So the pricing that we're talking about here, I'm guessing is more around the subscription based and AI and the features that we are developing to remove friction for SMBs is really giving us that advantage to be able to price in a differentiated fashion for a premium product that we have. So we will be thoughtful about that. And some of the price changes that we have done, we have seen the progress on that and overall encouraging results from that. We don't -- we actually see less churn than we were expecting. We see the stickiness of the platform play out. And overall, very close to the benefit we were expecting [ in year ] within our guidance as well. I hope that answers your question. Christopher Svensson: That's super helpful. I appreciate all the detail there. That was great. I appreciate it, Rohini. The other oen that was interesting that stood out to me was the invoice financing metrics that were interesting, customers grew 50%, origination volume over 30%. You talked about some of that in your prepared remarks, but just interested to hear more where invoice financing you're seeing good product market fit, either with specific verticals or customer groups or maybe use cases that businesses are leading on the invoice financing for? And then maybe looking forward, where do you think adoption can go for that product and how it could impact the P&L going forward? René Lacerte: Thank you, Nate, for the question. I think it brings back a couple of things I mentioned with the durable assets that we built at BILL. So one is the data that we have and 2 is the network. And so when you think about invoice financing, we're opening up the 8 million entities in the network. We're giving them a chance to get their money faster. They actually get paid maybe 4 or 6 weeks earlier than they would have been paid otherwise. And that's a huge, huge impact on how they manage their cash flow. So there is definitely demand for it. We see repeat usage. And the only reason we're able to do that is because of the huge data asset that we have. And it really matters that we're able to look at these patterns over time to be able to look at the patterns of the network at this moment in time. And That's how we're able to drive the success. And so I would say that the overall particular verticals or what not that are picking the solution. It probably varies from month to month depending on the cycles that they're in. I don't think there's anything specific that I would say other than that, this is a product that does have demand, and we're excited to keep rolling it out. And John will kind of add a few comments here. John Rettig: Yes, that makes perfect sense. And the invoice financing product is a great complement to other payment products we have that enable suppliers to get paid quickly. So we're -- access to cash is an important driver. Typically, that follows the size of the business. So we see across our large network, the smaller suppliers who might have just a handful of customers that they're working with on either service based projects or things like that and needing access to invoice-based financing in order to meet cash flow needs. So we're seeing really good uptick there. It's a product that has, I think, significant upside for the business overall but it's 1 that we're managing in a measured way in order to continue to refine and perfect our underwriting and risk models and make sure that we're delivering not just a great customer experience, but also the right economics for BILL as we scale. . Operator: Our next question comes from Darrin Peller with Wolfe Research. Darrin Peller: Going back 4 or 5 months ago when you had different investors get involved and the Board changed a bit. We talked about more of a strategic process review and I guess I'd be curious to hear an update on what findings you've had since then, whether it's on the revenue side, the cost side or the stand-alone side or anything else for that matter? Where are we in that process? And maybe what do you see us headed on it? . René Lacerte: Thank you, Darrin, for the question. I'll start, and then I'll let John kind of take some points on some of the work he's been leading looking at the business more realistically. So I mean, first and foremost, when you build a durable business, you have lots of levers at your disposal, and you continue to add to those levers over time. And so I think if you look back 6 months like you were suggesting there was a point in time when we realized we needed to be activating more of the, I guess, the efficiency across the business. And so we've been focused on that. You've seen that in the results. We continue to drive growth while balancing obviously and growing the profitability across the business. And that's just because of the levers that we have. But there are some more opportunities for us. I'll let John kind of talk broadly to that. John Rettig: Sure. We -- over the first half of this fiscal year, we spent time looking at the business bottoms up, with the goal of optimizing costs over time. We've developed a series of focus areas with some outside consulting help, including geographical diversification, so geo location strategy for our employee base, AI-driven productivity, which includes developer productivity, internal teams via automation, even go-to-market customer economic optimization as well Rohini mentioned this earlier around rewards and optimization there. So we feel like we have a good road map of opportunities. This is going to be a multiyear effort. And we think the initial benefits will start to be realized in fiscal '27. So as -- given the time line there, there's no additional impact that we're expecting in fiscal '26, but we are planting the seeds for continued optimization.. Darrin Peller: Okay. All right, guys, just one more is on the move-up market. I just want to hear a little bit more on your view of your right to win in that space. You talked about I know a slight downtick on the [indiscernible] 4,000 APA or net adds based on moving upmarket to bigger customers, that makes sense. But how should we think about this showing up in other KPIs? And again, just more and more holistically, help us understand why you believe you can succeed there versus others. René Lacerte: Yes. Thanks, Darrin. I'll start and I'll let John or Rohini add more comments. So I mean I think the first reason we believe we can win is that we've got a unique differentiated platform. We built that platform from the beginning to kind of go square at the heart of business in America. So we have businesses that are small, we have business that are medium, and we have larger businesses. We're not focused on enterprise, but we do think that our solution, if you just look at our data, already suggests that larger businesses get more value out of the platform than even smaller businesses do. So that is where the conviction comes from. I think when you look at the go-to-market motion, one of the things we talked about this quarter is that we've been able to drive more adoption of both the core ATAR and the spending expense solutions together, driving 28% growth year-over-year in that. So a lot of opportunity to tell us that the platform as a whole is quite meaningful. And that is why we will be able to drive more adoption when we get to larger businesses. So I don't know, John or Rohini have anything else you want to add? . John Rettig: Sure. So we've definitely learned over time that the depth of our platform and our sophisticated workflows really resonate with more established small businesses and these lower mid-market customers. And as a part of the overall market, 6 million employers in the U.S. 2 million to 3 million of those fall into this target category for us. So it's a huge market opportunity. We've been rolling out new product capabilities in support of this segment, enhanced multi-entity features, expanded 2-way sync integrations, procurement, some of the things that you've heard over the last few quarters on our innovation agenda. And we've evolved our go-to-market strategies to reach these larger businesses. So we've got dedicated sales teams with channel partners, including pricing strategies. And we're starting to see good signals there. We talked about with in AR and improving core ARPU in recent cohorts. That reflects the increased size of businesses and slightly more multiproduct adoption. And then with SME 2 quarters in a row of record high card spend per business. We saw that in Q2 as well. So to your question about the metric side of things, over time, we would expect this to translate into higher ARPU, increased multiproduct adoption, increased customer and revenue retention. It will take a little time for that to materialize in the numbers just given the size of our customer base. And then as far as the rest of the market, we -- our Embed 2.0 strategy is a great complement to what we're doing with our direct efforts where we can reach those smaller businesses and large businesses to partner. So we think we're really, really well positioned, Guarantee your question about winning this slightly larger segment. Operator: Our next question comes from Scott Berg with Needham & Company. Scott Berg: I want to start, I guess, asking about the pricing impact for the core AP/AR solution. Obviously, you probably needed to allow it for some of the additional value that you've added. But early trends. I know Rohin said that we should expect slightly lower customer count going forward, partially due to that impact in your move upmarket to larger customers. But just want to get a sense on maybe what you're seeing around, I don't know, win rates or customer feedback around that pricing, if there's anything to know with the change? John Rettig: Yes. Thanks for the question, Scott. First, I'd say there's 2 moving parts as it relates to expanding ARPU. One is size of customers, their payment volume, number of users and we're seeing some positive signals there. And then the other is specific pricing strategies that we implement. And we're continuing to execute on the plans that we talked about earlier this fiscal year that involve some transaction and subscription pricing, targeted changes. This is relatively small in the grand scheme of the scale of our business in fiscal '26, but we're starting to more and more create alignment between the value we deliver and the value that BILL is achieving. And it also helps us attract and retain customers that are the best fit for our product. So the overall sort of pricing optimization strategy is a journey and we're developing that approach, incorporating AI and the impact that will have as well as the customer segments that we're most focused on. We would expect the more holistic pricing optimization to roll out in fiscal '27. But as I said, we have made some changes in fiscal . Rohini Jain: Yes. And those have been actually good learning opportunities for us since we haven't done pricing for almost 3 years in terms of the customer reaction stickiness and all of that, and we are very optimistic seeing the early results. And -- just to bring it back into context for the year, we had laid out some plans at the beginning of the year incorporated into our guidance. and we are doing well, executing on that plan. So the range is still incorporating all the actions that we had committed to. . Scott Berg: Understood. Helpful. And then as a follow-up perspective, you all ton-wise sound much better on the spending on the platform, especially with Spend & Expense in the quarter. Now we've seen some volatility around that the last couple of 3 years as sentiment around the macro certainly kind of bounce up and down. . I guess your confidence or at least your tone seems to indicate this is a little bit more sustainable. Any help to maybe see here what you're seeing in Q3 so far that kind of accentuates that confidence, I guess, I think we're trying to all understand if this is something that really can continue into the balance of the calendar year. . Rohini Jain: Sure, I could take that one. So strong -- very strong quarter in Q2. When you look at the Q2 results, there are some trends that we feel really confident about that are enduring, that are continuous. So you see that even though we beat our guidance by about $11 million. We are flowing through a material portion of all of that trend into the back half as we cautiously optimistic, continue to look at certain verticals in coming back from a spending perspective. So we feel good about the early trends that we are seeing in this quarter, and that has gone into how we think about the guidance as well. So the range we provided feels solid. Operator: Our next question is from Andrew Schmidt with Key Corp. Andrew Schmidt: If I could just dig into Embedded for a moment. That saw some nice growth, and that came online much faster than we had anticipated. So it's great to see that materialize pretty quickly. Maybe talk about the sustainability of that growth, it seems still very early. And then just looking out next couple of years, how the embedded distribution compares from a scale perspective versus sort of the other channels accounting direct, et cetera. Rohini Jain: Yes. Let me start by just talking about the Embed channel revenue performance. And just to clarify, the revenue numbers you see at Embed are related to our original Embed 1.0, as we may call it. The 2.0 very nascent, [indiscernible] really early days as we announced and then took to market the products with these partners. So each one of the banks that we have in our initial version of Embed have their own revenue schedules and there is some change quarter -- on a quarter-to-quarter basis. That is showing up in the numbers -- for Embed 2.0 early days, and we really expect the numbers to start to show up closer to next year. René Lacerte: Ken, just to add to Rohini's comments, the Embed 2.0 is just now getting to market with the 3 new partners, the NetSuite, the Acumatica and Paychex. We're super excited about the pace that we've been able to launch this. It was only 6 months ago, whatever that platform was ready and we launched signed 3 partners and within a quarter to have all of them alive and in market. And just as a comment, I was up that Acumatica's Annual Conference last week and John Case, CEO, mentioned us in his keynote address. But the thing that was super motivating for me was just to actually talk to the VARs that they serve and work with the customers. And these are large, mid-market customers, some of them are in the construction vertical, if you well. And there is demand and interest about what it is that we're doing. And so I think the broad strategy with Embed 2.0 proving itself out. We have to go execute on the go-to-market now. but there is an opportunity to reach both larger customers, as John said, and smaller customers like [ [indiscernible] with Paychex. So we're super excited about it and a lot of opportunity going forward. Andrew Schmidt: Got it. I appreciate those comments. That's helpful. As we think about -- a lot of comments on sort of the sustainability of growth, and I'll kind of throw 1 more in there. As we think about just the base of growth, the core -- the base of growth for sort of core revenues, is this the right way to think about it, sort of how FY '26 is trending Obviously, there's a lot of other opportunities when we think about getting into FY '27, distribution, pricing, et cetera. But just curious to understand whether this is just sort of a a nice base to kind of work off here if there's other considerations we should be taking into account. Rohini Jain: That is correct. This is the right set of metrics that we provided initial early guidance on as inputs into our guide. So you should rely on that to build out your models and your assumptions for the year. . Andrew Schmidt: Okay. I guess we'll get into more of the out-year sort of Sustainability Analyst Day, which we look forward to. Operator: Our next question is from Kenneth Suchoski with Autonomous. Kenneth Suchoski: I wanted to ask about SPP. I mean you talked about early adopting suppliers having committed $400 million in annual TPV. It's really good traction for just a couple of quarters. I'm curious how we should think about the ramp in those commitments over the next year or 2. I mean is this initiative that you can get to, say, $5 billion, $10 billion of volume in a couple of years? And then anything you could share on the monetization rate of that volume, meaning how does it compare to other payment types like virtual cards? I'm just trying to quantify how much this initiative could impact the AP/AR take rate and the transaction revenue there? John Rettig: Yes. Thanks for the question, Ken. SPP, Supplier Payments Plus, is a really important solution that we brought to market. It adds significant breadth to our payment portfolio and it's a really nice complement to virtual card payments for large suppliers and then also a much better experience than vanilla ACH payments given enhanced reconciliation tools, more data, more efficiency. So it actually brings down the cost of payment acceptance. For suppliers, and that's part of the important value proposition here that also sets up. This is, I think, a long-term growth ad val product for us. So we feel good about the initial traction we have. As you said, it's just 2 quarters into the commercial side of things and selling. But I think that experience to date has proven our thesis that we started with, which was that at least for the contracted volume that we've seen so far, SPP is a great solution for a large suppliers. So we're optimistic about where we can take this. It's an enterprise sales motion, which is a new motion for Bill. We've been building that over the last few quarters, a little bit longer sales cycle than the SMB base. So I'd say it's going to take a while to move the needle overall for our metrics, but we did want to share some of the good early signs of progress. And I think as it relates to the multiyear impact we'll leave that to Investor Day in terms of the actual numbers. But given the size of ACH volume in our business today and even that amongst the largest 10,000 suppliers in our network, we're talking -- it's a really big opportunity for us, but it will obviously take some time to play out. Operator: We're now out of time for any further questions. So I'll pass you back over to Rene for any closing comments. René Lacerte: Thank you, Lydia. Okay. Thank you for joining us today. I want to thank our team for their focused execution during the quarter, and we delivered accelerated growth and expanded margins and reflecting the strength of our operating model and the compounding advantage of our platform. We believe this positions us well for sustained profitable growth over the long term. And thank you. Hope you have a great evening. . Operator: This concludes our call today. Thank you very much for joining. You may now disconnect your lines.