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Operator: Ladies and gentlemen, welcome to the Fourth Quarter and Full Year 2025 Conference Call. I'm Vicki, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Aritz Larrea, President and CEO. Please go ahead, sir. Aritz Uribiarte: Thank you very much. Good morning, everyone, and welcome to the fourth quarter and full year 2025 presentation for Loomis. My name is Aritz Larrea, and I'm the CEO of Loomis. And with me here today, I have our CFO, Johan Wilsby; and Jenny Bostrom, our Head of Sustainability and Investor Relations. I'll start by providing a quick summary of our fourth quarter as well as our full year performance, and we'll also talk about our accomplishments for the first year of this strategic period before taking questions. Let's start the presentation by turning to Slide 2. We delivered a solid and positive performance in the fourth quarter with revenues reaching SEK 7.7 billion despite a 10% negative impact from changes in exchange rates. Currency adjusted growth reached 7.5%, driven by 4% organic growth, solid despite the headwinds in our ATM business and a solid contribution from acquisitions. In the quarter, we saw very strong growth within the International and FXGS business lines due to an increased demand for the movement of precious metals, driven in part by geopolitical uncertainties. Our performance was driven not only by market conditions, but also by our expansion of the addressable market through the opening of new geographic lanes and our ability to capture global demand. We also continued to deliver strong growth within the Automated Solutions line of business during the quarter. The business mix, along with higher efficiency resulted in an increased operating margin of 13.2% versus 12.9% in prior year, with an operating income of above SEK 1 billion. This is the highest EBITA we have achieved for fourth quarter, and I'm pleased to see that the restructuring and efficiency initiatives we have taken, successfully growing the business without increasing headcount are supporting the margin expansion. We delivered another quarter of strong operating cash flow with a cash conversion of 99% for the year, and the free cash flow in the quarter was close to SEK 1.2 billion. This robust cash generation enables us to continue investing in the business while also delivering attractive returns to our shareholders. In the fourth quarter, we completed the acquisition of the precious metal storage facility in Toronto that was announced in the third quarter. This acquisition strengthens our local presence in Canada and expands our depository services and storage capacity within the International business line. During the year, we remained active in M&A while maintaining a disciplined approach to capital allocation. Despite continued investments in the business and the execution of our share repurchase program, our net debt-to-EBITDA ratio improved year-over-year. This discipline is also reflected in a return on capital employed of above 16% in the quarter. During the quarter, we repurchased about 540,000 shares for a value of SEK 200 million. In total, during 2025, we have repurchased close to 1.5 million shares for a value of SEK 600 million. The Board of Directors has proposed a record high ordinary dividend of SEK 15 per share to the Annual General Meeting. And in addition, the Board of Directors has proposed an extraordinary dividend of SEK 5 per share in an extraordinary dividend. This brings a total distribution to shareholders above SEK 1.3 billion. Let's now turn to our reporting segments, starting with Europe and Latin America. Our European and Latin American segment delivered a solid performance in the quarter with revenues reaching close to SEK 3.7 billion. We achieved an organic growth of 1.9%, which was strong considering the communicated decline in the ATM business line. The uncertain geopolitical climate has increased global demand for secure logistics and the management of physical assets such as precious metals, and our teams have successfully grown the business in this environment. It's impressive to see that the International business line grew over by 30% in the quarter compared to prior year. The operating margin increased by 40 basis points to 12.5%. And for the full year, we increased our operating margin by 0.7 percentage points to 11.8%, demonstrating that our focus on operational efficiency yields positive results. Let's move on to the next slide to talk about the U.S. The U.S. segment delivered another strong quarter. If we adjust for the currency impact, which was negative 13%, the U.S. achieved record high revenues and operating profit. Organic growth was 5.5%, and the acquisition of Burroughs contributed positively to the overall growth. The International and Automated Solutions lines of business had notably strong performance in the quarter. It's worth highlighting that it was the 16th consecutive quarter that the Automated Solutions business line has achieved double-digit organic growth. Our implemented operational efficiency measures continue to show results, allowing us to grow the business without adding employees. At the same time, we have secured a high service quality and maintained customer satisfaction. The integration of Burroughs into our U.S. operations and our Loomis culture is progressing as expected, and we are still early in the integration process. Burroughs is a strong strategic fit, and it allows us to provide a fully integrated ATM and Automated Solutions service offering to our customers. We are actually working on stabilizing the revenue and on improving our service quality. Once this is achieved, we will shift our efforts to improving operational efficiency and over time, focus on gaining market share. The volume growth, combined with improved efficiency contributed to the improvement of operating margin. The operating margin surpassed 17%, which is a new record for us. Let's turn to the next page and talk about SME/Pay. Revenues in the SME/Pay segment increased to SEK 71 million in the quarter. Nearly 40% of this revenue now comes from core and adjacent business lines, demonstrating that our strategic focus on SMEs is delivering both growth and margin. The reduction in the operating loss compared to the previous year is in line with the strategic priorities for the segment. Transaction volumes within the Loomis Pay business line increased 24% in the quarter compared to the previous year and reached SEK 2.3 billion. The migration to new POS platforms allows Loomis Pay to focus on larger SME customers in additional customer verticals. In this process, Loomis Pay has chosen to not migrate nonprofitable customers, which somewhat impacts settled transaction volumes going forward. Let's now move to the next slide, where I'll share a few updates on our sustainability progress. I'm pleased to share that we are progressing well towards our strategic sustainability targets. We have reduced our recordable work-related injury rate by 10% in 2025 compared to 2024. While this is in line with our target, we have never done and will continue our efforts to keep our employees safe. The Board has adopted a new group operational health and safety policy. This program will be rolled out during 2026, strengthening our group-wide focus on employee safety. Compared to 2024, we have reduced our Scope 1 and 2 emissions by 4%, if we exclude the emissions from the acquisitions of Burroughs and Kipfer-Logistik. Including these, we reduced emissions by about 2%. Continuing to grow the business while reducing emissions is, of course, challenging, but something we are committed to. And we, of course, aim to do so in a cost-efficient way that also supports our business. Efforts are already ongoing to include Burroughs in a carbon reduction plan by renewing their vehicle fleet. To put this in perspective to our CO2 targets, with the restated baseline for acquisitions, we have reduced our emissions by close to 26% compared to 2019, which is a step in the right direction to reaching 34% reduction by 2027. Now let's turn to the income statement slide, where I'll begin by noting that despite a significant negative impact from exchange rate fluctuations, we have achieved strong currency adjusted growth. This quarter includes costs classified as items affecting comparability, primarily related to the communicated impairment of goodwill as well as provisions for the ongoing legal case in Denmark. The impairment also had an impact on the effective tax rate since this was largely nontax deductible. For 2026, you can expect an effective tax rate of about 30%. Our financial net has declined compared to the previous year, following lower financial expenses driven by declining interest rates. I would also like to highlight that also our net debt-to-EBITDA ratio has declined year-over-year and is well below our ambition to be below 2x. Now let's move on to the next slide, where I'll summarize our 2025 performance in relation to our history. As we can see, we have a stable and resilient business model that continues to deliver. We ended 2025 with a record high operating margin of 12.7%. Despite the significant currency headwinds, we maintained the level of SEK 30 billion in 2025. Our currency adjusted growth was 6%, fully in line with our financial targets for the strategic period. If the exchange rates had been at the 2024 levels, our revenue would have been above SEK 32 billion for the year. 2025 was the beginning of a new strategic period for us. It has been a year characterized by macroeconomic uncertainties, a heightened emphasis on societal resilience and an increase in demand for security services amid a shifting and volatile global geopolitical landscape. In this environment, we made significant progress against our strategic priorities and delivered on our commitments, positioning the group well for the remainder of 2025-2027 period. Before opening up for Q&A, I want to remind you of what we have committed to last year at our Capital Markets Day and what we have achieved after the first year of the strategic period. Here, you see our 4 strategic priorities for '25 to '27, and I want to share my perspective on where we stand in relation to where we said we would be. Starting with growing in our established markets, a clear focus here is to accelerate growth within the SME customer segment. We are seeing healthy revenue momentum and solid margin contribution from SMEs across our key markets. We have also seen strong performance within International and Automated Solutions. However, as you know, we have been managing the impact of ATM business losses and are in the process of restructuring certain markets in Europe. Cash infrastructure is increasingly being called out as being an important piece in crisis preparedness and societal resilience, and we are a key part in keeping cash flows functioning in society. At the same time, we keep diversifying and our noncash-related services keep growing as well. In this environment, we have adapted and grown our addressable market within precious metals by opening new geographical lanes and expanded our storage capacity. While we have some more to do over the next couple of years, I'm confident about our journey. Moving to the second pillar. We have been very active in M&A during the year. Within core, we have acquired expertise and capacity within temperature-controlled logistics for pharmaceuticals as well as acquired a new storage facility in Toronto. Within adjacent, we have expanded into first and second-line maintenance of ATMs and Automated Solutions. And lastly, we have strengthened our digital offer on the POS side in Spain. We will continue to focus on generating both geographical presence but also diversifying our product and service portfolio through value-creating acquisitions. Our margin expansion is a clear demonstration of our progress within the third pillar, driving operational excellence and scalability. Our restructuring initiatives in Europe and Latin America are showing results, and we've been seeing clear margin improvements over recent quarters. In the U.S., the staffing planning measures and efficiency programs within CIT and CMS that were implemented since last year have consistently contributed to our profitability. And lastly, as I already touched upon earlier, we are advancing on our sustainability initiatives. We are dedicated to focus our efforts on where we have the most impact and where it also makes sense from a business perspective. We have submitted climate reduction targets to the science-based targets initiative for validation, taking a clear step towards focusing on reducing our Scope 3 emissions. This concludes my summary of the quarter and the year. Operator, we are now ready for questions. Operator: [Operator Instructions] We have a question from Simon Jonsson, ABG. Simon Jönsson: I hope you can hear me. A few questions from my side. First, on the International business, I think, obviously, it was one of the positive surprises on the report. Taking a step back, you have been clear before that comps will become tougher. And you also said before that some of these volumes should be viewed as temporary or short-term oriented. Of course, a lot has changed here in the recent months regarding the precious metals prices and so on. But my question is, where do you think we stand now from a broader perspective for your business? And do you think the long-term market dynamics have changed in any way? And I mean, what should we expect here in the coming quarters? Was there -- you said it before that we should view it as temporary, but I mean, was it even more temporary this quarter? Or yes, can you say anything about that? Aritz Uribiarte: Simon, thank you for your question. First of all, as you said, we need to understand that these businesses are cyclical in nature. But it is true that we have worked on growing our addressable market, as I said before, within the VIT. We have diversified our portfolio, expanding into the pharmaceutical. And we still have other areas like mining, let's say diamond and jewelry, low-value packages. When it comes to the trend, we were saying that we had difficult comps because we had a big increase last year in fourth quarter due to the U.S. tariffs. But the shipments, especially of silver have remained strong. And then both the prices of gold and silver have increased, and that benefits us. How do we see this trend is difficult to say, but we think it will remain very similar during the first quarter, first 2 quarters. And then I don't have a view on how it will end up the year. But we will keep increasing and try to grow the business organically. Simon Jönsson: Got it. And then moving on to other business areas. I mean, Automated Solutions also remains a very good growth driver, remain at good levels here. It looks like the growth is mainly coming from the U.S., but also from a broader perspective, can you maybe give us an update about the market for Automated Solutions mainly, I think, smart safes, for example, which you comment about on the CMD, for example. So maybe an update on what's going on in the market for -- in the U.S. specifically on smart safes. And do you think you're growing in line with the market? Or do you think you're taking market shares, or yes? Aritz Uribiarte: Here, it varies, as you said, when you look at the different regions. So I would say the first thing is we still have a strong pipeline in Automated Solutions in both regions. I would say that we have been growing -- gaining market share in both regions as well as in the U.S. and in Europe. In Europe, although we started the year a bit slower, I think the last -- the second half of the year has been really good when it comes to Automated Solutions. At the same time, we've taken advantage of the acquisition that we did with CIMA. CIMA is now our main supplier, not just in Europe, but also we're also exporting safes and recyclers and front office machines to the U.S. where we plan on growing. And that's what we said at the Capital Markets Day, Simon. I mean it's not only smart safes. We're talking about recyclers. We're talking about front office machines. We're talking about kiosks. So everywhere where we could add the cash component to the digital or the technology-driven solutions, we will be there. And as I said before, in the U.S., it's been 16 consecutive quarters growing at double-digit growth. As I said, we still have a strong pipeline, and that will remain strong in the following year. Simon Jönsson: All right. Do you think it makes sense to assume that you expect double-digit growth to continue then? Aritz Uribiarte: We will continue being strong, yes. Simon Jönsson: All right. But your view is that the underlying market is growing double digits? Aritz Uribiarte: Yes. Simon Jönsson: Yes. Moving on to maybe my last question here on capital allocation or a two-part question basically. You didn't announce any buybacks. I know sometimes you don't do it on every quarter, but I mean, it can be obvious reasons for it. But can you say anything on the buybacks and why you don't announce the program here? Or how should we view it? So yes, maybe start there. Aritz Uribiarte: Yes. To summarize, let me tell you that our capital allocation priorities remain exactly the same. Our aim is to use our capital in the best way to generate return and to maximize distribution to shareholders. That has not changed. So we will continue maximizing distribution to shareholders. That's what I would say. Simon Jönsson: Yes. All right. Do you think it's fair to say that you're also balancing the buybacks with -- now you have extra dividend. So should we keep that in mind that you are viewing it as a total pool of capital return? Aritz Uribiarte: Share buybacks are always in our mind, and we will continue doing share buybacks in the future. Simon Jönsson: Yes. All right. And then lastly on acquisitions. I think you made it clear that you will continue to look for value accretive acquisitions. But can you say anything about what is going on with the pipeline right now? Do you think it's -- is the pipeline building? Are you changing any sort of areas you're prioritizing? Have you made further shifts into how -- into what you look for, for example, do you look more into international areas to broaden that business? Or yes, where are you currently looking? And where do you think the M&A pipeline is more tilted towards? Aritz Uribiarte: So the M&A pipeline remains the same. It's a strong pipeline. We have not shifted. I mean when we presented our strategy at the Capital Markets Day, we did talk about not only investing in CIT, CMS, we were looking into the VIT and VMS areas as well, and we've proven to do that with the facility that we acquired in Toronto and the pharmaceutical business company as well. And we have those in our pipeline as well. So we haven't made a shift, the pipeline remains the same and our strategy remains the same as what we communicated. And it's both cash and noncash companies that we're looking into. And then as I always tell you, I mean, it all depends on meeting the seller expectations when it comes to price because obviously, we want these acquisitions to be accretive to us. But no major shift. And yes, we're focused on the International business as well. Simon Jönsson: All right. And in terms of price development, what have you seen here in recent quarters or in 2025 in general, what did you see in terms of shifts? Aritz Uribiarte: I think it's pretty stable. I mean I talked about in the past that before COVID, everybody had very high expectations. Then after COVID, those have come down. As I told you, we need to meet the seller and us regarding the price, and prices are more or less stable. That has not changed either. If you look into international, for example, obviously, with such a strong quarters in international business companies, the price is higher, obviously. But due to that it's cyclical, we need to do the right analysis. Operator: [Operator Instructions] Mr. Larrea, there are no more questions registered at this time. I would like to turn the conference back over to you for any closing remarks. Thank you. Aritz Uribiarte: Thank you very much all for listening in. And please reach out if you have any follow-up questions. Thank you. Bye-bye. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Tom Foss-Jacobsen: Good morning, everyone, and welcome to the fourth quarter 2025 presentation for Borregaard. My name is Tom Erik Foss-Jacobsen. I'm the CEO of the company. And I'll be joined today by our CFO, Per Bjarne Lyngstad. Together we will take you through this agenda. I will start with the key highlights for the quarter and give an update on the market situation across our business segments. I'll then summarize the outlook for 2026 and finally present our dividend proposal for 2025 before handing over to Per Bjarne, and he will then take you through the financial performance in more detail. And before we begin, I'd also like to remind those of you that watch the webcast live that you are welcome to submit questions any time during the presentation, and we will address them at the end. Let's begin with the highlights for the quarter. EBITDA came in at NOK 405 million, slightly up from NOK 398 million in the same quarter 2024. BioSolutions delivered a solid quarter, supported by high biovanillin deliveries and continued growth in sales to agriculture, a trend we have now seen for the 2 last years. BioMaterials delivered good results, driven by higher specialty cellulose prices and increased sales volume. In Fine Chemicals, our Fine Chemical Intermediates delivered a strong performance. Bioethanol sales prices remained at the lower levels that we've been seeing throughout the year. Wood and energy costs were down in the quarter and partly offset the increases we saw in other costs. We also recorded impairments of, in total, NOK 245 million of the bio-based start-ups we are invested in. This is due to delays and increased capital needs. In the coming period, we will focus on our current positions in bio-based start-ups. We had a strong cash flow in the fourth quarter. Looking at the full year, we delivered another all-time high EBITDA, reaching NOK 1,878 million, just etching past last year's record of NOK 1,874 million. In BioSolutions, sales to agriculture were strong throughout the year, and we also saw higher sales of biovanillin products. In BioMaterials, sales prices increased and the product mix improved, supported by higher sales of high-purity cellulose. Fine Chemical Intermediates also delivered a strong result. And again, sales prices for advanced bioethanol declined significantly during the year, mainly due to a significant increase in market supply driven by favorable incentive schemes in Europe. Wood costs increased during the year and the increase in other costs exceeded general inflation. Net currency effects were positive. The cash flow was strong in 2025. Overall, we are pleased to present another all-time high EBITDA, driven by a strong momentum across our business segments. And this is despite the sharp decline we have seen in the advanced bioethanol sales prices and higher costs. Now let's turn to the fourth quarter in BioSolutions. This was a solid quarter with the average price in sales currency 6% above Q4 2024, driven by an improved product mix. We saw high deliveries of biovanillin and continued growth in sales to agriculture. The anti-dumping duties on vanillin from China continued to have a positive, though limited impact on our vanillin business. The average gross sales prices in NOK are impacted by a weaker U.S. dollar compared to Q4 2024. Sales volume was 3% lower than the same quarter last year, which was at the high end of our Q4 guidance and on level with what we see as a more normal fourth quarter volume. For the full year, BioSolutions delivered solid performance. Average price in sales currency increased 2% and sales volume increased 1% compared to 2024. Strong sales to agriculture continued across both specialty and industrial applications. We saw rising demand for multi-active ingredient solutions in crop protection and the reauthorization of Borregaard's lignin for use in EU, animal feed, helped us gain additional business. We also recorded higher demand for biovanillin and a positive but overall limited impact from the anti-dumping duties on the vanillin from China in both the U.S. and EU. The average gross sales prices in Norwegian kroner are impacted again by a weaker U.S. dollar compared to the previous year. Moving on to BioMaterials and the fourth quarter. This was a strong quarter with the average price in sales currency up 6%, primarily driven by price increases. The average gross sales prices in Norwegian kroner were impacted by a weaker dollar compared to Q4 previous year. Sales volume increased 5% compared to the same quarter 2024. As we informed last quarter, specialty cellulose exports from Norway and Brazil are subject to an ongoing U.S. anti-dumping investigation. A preliminary decision is delayed and now expected at the end of May 2026, with a final decision towards the end of 2026. And here, any duties may apply retroactively for up to 90 days. Looking at the full year for BioMaterials, the segment delivered a solid result with average sales prices up to -- up 9% and sales volume down 9% compared to 2024. The main drivers here were increased sales prices and an improved product mix, including increased sales of high-purity cellulose to regulated applications, food, pharma, personal care and also to bio-based plastics. The highly specialized share increased with 4% from 83% to 87%. The average gross sales prices in Norwegian kroner were also here impacted by the weaker U.S. dollar compared to previous year. Sales to the Construction segment declined as the European cellulose ether producers, typically our customers, were negatively impacted by increased imports from Chinese cellulose ether producers, and they are based on cotton linters as their raw material. The disruption we had in specialty cellulose production in Q3 2025 also affected the sales volume in the quarter. Now moving to Fine Chemicals Q4 and full year. We continue to see a significant decline in sales prices for the advanced bioethanol throughout the year. And this was due to the significant increase in market supply driven by the favorable incentive schemes in Europe. Prices have now returned to levels that we considered normal before these incentives were introduced. For Fine Chemical Intermediates, we saw higher sales prices and a strong product mix, both in the quarter and for the full year. Then I would like to share our outlook for 2026. In BioSolutions, we expect the sales volume to be approximately 340,000 tonnes with continued growth in the agriculture segment. First quarter sales volumes are expected to be around 80,000 tonnes. In BioMaterials, the full year sales volume is forecast to be in the range of 155,000 to 160,000 tonnes. Sales volume of highly specialized grades is expected to be slightly above the 2025 level. The average sales prices in sales currency is expected to be 3% to 4% lower in the first half of 2026 compared to the second half of 2025, and this is partly due to mix on customers and products. The European cellulose ether producers are expected to continue facing competition from the Chinese cellulose ether producers within the Construction segment. First quarter sales volume in BioMaterials is expected to be in the range of 37,000 to 39,000 tonnes. In Fine Chemicals, sales prices for bioethanol are expected to be largely in line with the levels we have seen in 2025. Sales volume for Fine Chemical intermediates is expected to increase compared to 2025. On the cost side, the wood costs in the first half of 2026 are expected to be around 15% lower than in the first half of 2025. We continue to monitor global uncertainty related to tariffs, war and geopolitical tensions, which may affect our markets and costs. The final outcome of the U.S. anti-dumping case may also affect several specialty cellulose markets. Before I conclude, I would like to present the dividend proposal for 2025. The Board of Directors has decided to adjust the dividend policy to a target range of 40% to 60% of the net profit compared to the previous range of 30% to 50%. We will continue to pay regular and progressive dividends, reflecting expected long-term earnings and cash flows. For 2025, the Board proposes a dividend of NOK 4.75 per share, an increase of NOK 0.5 or plus 12% compared to last year. This represents 55% of our net earnings before impairments, corresponding to a dividend yield of 2.4% based on the year-end share price. The total payment amounts to NOK 474 million. With that, I will hand over to our CFO, Per Bjarne Lyngstad, who will take you through the financial performance and key figures for the quarter and for the full year. Thank you. Per Bjarne Lyngstad: Thank you, Tom Erik, and good morning, everyone. Borregaard's operating revenues in the fourth quarter were 5% higher compared with the fourth quarter of 2024, mainly as a result of higher sales prices and sales volume in BioMaterials. EBITDA increased to NOK 405 million, NOK 7 million above the fourth quarter of 2024. BioMaterials had an improved result, while BioSolutions and Fine Chemicals had a lower result. Net currency effects were slightly positive by NOK 5 million compared with the fourth quarter of 2024. An 8% weaker U.S. dollar compared to the Norwegian kroner was offset by reduced hedging losses. The EBITDA margin ended at 22.1% in the fourth quarter, 0.7 percentage points below the corresponding quarter in 2024. In the quarter, as Tom Erik has mentioned, Borregaard has recorded NOK 245 million of impairments on investments in bio-based start-ups. Excluding the impairment, earnings per share ended at NOK 1.64 compared with NOK 1.30 in the fourth quarter of 2024. As I said, Borregaard has made impairments totaling NOK 245 million on its investments in bio-based start-ups. The impairments reflect recent development in these companies and is recorded under financial items in our profit and loss statement. The major part, NOK 225 million is an impairment of the investment in Alginor, where recent information indicated project delays and additional capital needs. The impairment is based on an impairment test in accordance with IFRS. After the impairment, the remaining book value of Alginor is NOK 250 million, about NOK 10 per share. In addition, a total impairment of NOK 20 million has been made on the investments in Kaffe Bueno and Lignovations. The Danish bioscience company, Kaffe Bueno faces delays in its project, and Borregaard has decided not to exercise its warrants to subscribe for additional shares, but we will participate in a minor convertible loan to the company. The Austrian technology start-up, Lignovations has also had delays and consequently faced lack of funding. On the 27th of January 2026, Borregaard received a notice of decision from the Financial Supervisory Authority of Norway following their regulatory financial reporting review of Borregaard's financial statements for 2024. Borregaard has been required to perform a new calculation of the value of Alginor at the end of 2024. If a correction is deemed necessary, figures for 2024 will be restated in Borregaard's annual report for 2025. Borregaard is currently in the process of preparing documentation for the valuation at year-end 2024 as requested by the Financial Supervisory Authority. Then turning to the full year for Borregaard. Operating revenues increased by 1% to NOK 7.7 billion. EBITDA had a marginal NOK 4 million improvement and ended at NOK 1.878 billion. Both BioSolutions and BioMaterials had an improved result, whereas Fine Chemicals had lower results compared with 2024. Strong sales to agriculture and higher sales of biovanillin in BioSolutions, increased sales prices and improved product mix for BioMaterials and positive net currency effects contributed strongly to the all-time high EBITDA in 2025. The result was negatively impacted by a significant reduction in bioethanol sales prices and cost increases exceeding the general inflation. The additional cost increases were mainly related to increased manning in Norway, mainly and also in the U.S. in addition to higher costs for certain chemicals and insurance and reduced government grants, among other things. EBITDA margin ended at 24.3%, close to the margin in 2024. Return on capital employed ended at 15.7%, below the 2024 level, but above our targeted level of minimum 15% pretax. Excluding the impairment, earnings per share were NOK 8.67 compared with NOK 8.24 in 2024. Operating revenues in BioSolutions were in line with the fourth quarter of 2024 and 4% above for the full year. EBITDA was NOK 245 million in the fourth quarter compared with NOK 251 million in the fourth quarter of 2024. High deliveries of biovanillin and sustained growth in sales to agriculture were more than offset by increased costs at the U.S. manufacturing sites in addition to general cost inflation. The net currency effect were insignificant in the quarter. For the full year, EBITDA reached an all-time high of NOK 1.209 billion, NOK 105 million higher than in 2024. Strong sales to agriculture also for the full year were the main driver of the improved result. This was partly offset by increased costs, the same explanations as for the quarter with the U.S. manufacturing sites and the general cost inflation. The net currency impact was positive compared with 2024. The fourth quarter EBITDA margin was 24.3%, 0.7 percentage points below the margin in the fourth quarter of 2024. For the full year, the EBITDA margin was strong and improved to 27.5%, 1.5 percentage points higher than in 2024. In BioMaterials, operating revenues in the fourth quarter were 11% above the fourth quarter of 2024 as a result of higher sales prices and sales volume. For the full year, higher sales prices were the main contributor to a 3% increase in operating revenues. EBITDA reached NOK 127 million in the fourth quarter, NOK 25 million above the same quarter in 2024. The improved result was due to higher sales prices and increased sales volume, together with the lower wood and energy costs in the quarter. This was partly offset by an increase in other costs, including certain chemicals, costs of the anti-dumping case in the U.S. and the general inflation. Net currency effects were positive in the quarter. For the full year, EBITDA ended at NOK 495 million, an improvement of NOK 61 million compared with 2024. For the full year, higher sales prices and improved product mix were the main reasons for the improved result, partly offset by lower sales volume and higher wood costs and the net currency effects were positive for the full year. The EBITDA margin ended at 18.7% in the fourth quarter, 2 percentage points above the same quarter in 2024. For the full year, the EBITDA margin was 18.4%, close to 2 percentage points also there above 2024. Improved product mix and sales prices for Fine Chemical Intermediates, partly offset by lower bioethanol sales prices were the main reasons for a 13% increase in operating revenues for Fine Chemicals in the fourth quarter. For the full year, operating revenues decreased by 16% due to lower sales prices for Borregaard's advanced bioethanol. EBITDA was NOK 33 million in the fourth quarter compared with NOK 45 million in the fourth quarter of 2024. Lower sales prices for bioethanol were partly offset by a strong result for Fine Chemical Intermediates. Fine Chemical Intermediates had a favorable product mix and increased sales prices in the quarter. Net currency effects were insignificant for Fine Chemicals in the quarter. For the full year, EBITDA ended at NOK 174 million, NOK 162 million lower than in the fourth quarter of 2024. The reduced result for the full year was due to lower sales prices for our advanced bioethanol. Fine Chemical Intermediates improved compared with 2024 due to improved product mix and increased sales prices. The net currency impact was positive for Fine Chemicals for the full year. The EBITDA margin was 21% in the fourth quarter, about 11 percentage points below the same quarter of 2024. The EBITDA margin for the full year was 26% compared with 42% in 2024. The net currency impact on EBITDA was positive by NOK 5 million compared with the corresponding quarter in 2024. Driven by a weaker dollar, the Norwegian kroner strengthened by 6% -- about 6% in the quarter using Borregaard's currency basket. Hedging losses were NOK 24 million in the fourth quarter compared with a loss of NOK 93 million in the fourth quarter of 2024. For the full year, the net currency impact on EBITDA was positive by about NOK 115 million. Hedging losses amounted to NOK 174 million compared with a loss of NOK 365 million in 2024. Using currency rates as of yesterday, the net currency impact for the full year 2026 is estimated to be positive by about NOK 55 million compared with 2025. The corresponding impact for the first quarter this year is estimated to be negative by about NOK 5 million compared with the first quarter of 2025. Borregaard had a strong cash flow from operating activities of NOK 419 million in the fourth quarter with a positive impact from a reduced net working capital. Also for the full year, the cash flow from operating activities was strong and close to NOK 1.4 billion an improvement of close to NOK 300 million compared with 2024. A more favorable development in net working capital was the main reason for the strong cash flow from operating activities. Investments were NOK 383 million in the fourth quarter. The largest expenditures in 2025 were related to environmental investments and debottlenecking at the Sarpsborg site, specialization projects within BioSolutions and participation in capital raises in Alginor. Net interest-bearing debt increased by NOK 18 million in the fourth quarter. For the full year, net interest-bearing debt was reduced by NOK 150 million to NOK 2.90 billion. At the end of 2025, Borregaard is well capitalized with an equity ratio of 61% and a leverage ratio of 1.11 compared with 1.2 at the end of 2024. Finally, I'll go through an updated investment forecast for 2026 and 2027. Borregaard has a financial objective to keep replacement investment at depreciation level, excluding depreciation from leasing. In 2025 to 2027, targeted CO2 and COD reductions and general cost increases explain replacement investments above target level. These environmental investments will also support specialization and value growth investments. The largest project is the debottlenecking at the Sarpsborg site, where we now expect a production output to increase gradually from the second quarter of 2027 instead of the second half of 2026. The delay is due to unforeseen challenges with buildings layout. However, the cost estimate for the project is unchanged at about NOK 800 million. The delay in the debottlenecking project is the main reason for lower-than-expected investments in 2025 and a slight increase in the forecast for 2027. Additional investments in bio-based start-ups are not included in this forecast. There are, of course, uncertainties in these estimates related to final decision, execution time, payment schedules, among others. And that concludes today's presentation. Tom Erik and I will now be ready to answer any questions, both from the audience present here in Oslo and from those who follow the webcast. Our Vice President, Finance, Veronica Skevik will moderate the webcast questions. Veronica Skevik: We have received some questions. The first one is related to U.S. legal costs. It comes from Mr. Niclas Gehin at DNB Carnegie. Could you give us a ballpark figure on how much you have spent on U.S. legal costs in Q4? And how much is the total sum that you expect to use? Per Bjarne Lyngstad: We have now passed in total NOK 10 million in costs for these investigations, most of it in the fourth quarter. We have answered a lot of questionnaires. So hopefully, that process is coming towards the end. It's still difficult to estimate how much more, but it will be somewhere, I think, between NOK 15 million and NOK 20 million as the end cost here as our best estimate as of today. Veronica Skevik: Next question is regarding the specialty cellulose competition from China. It comes from Mr. Magnus Rasmussen from SEB. Has the competition from China or on specialty cellulose intensified in recent months? Or is it on par with 2025? Tom Foss-Jacobsen: I would say that there has always been some imports from China, either cotton linters as a raw material, cotton linters pulp to blend in, but also exports of cellulose ethers in the low-end segments, typically construction because it's non-GMO origin and cannot be used for other applications. But I think we have gradually seen over the past 5 years that exports has been gradually increasing. But now over the last year, also with tariffs in U.S. and also with low construction activity in China, we see -- what we see in many other industries that the overcapacity in China is being exported. And now it can't be exported to U.S. without tariffs, even more is coming into Europe. So I think we definitely are seeing an increasing trend of imports of the cellulose ether products from China into Europe. Per Bjarne Lyngstad: But also remember that Borregaard's strategy has been to move more of our cellulose production going into ethers to food and pharma applications, and we have succeeded quite well with that over the last years also. So that's been our strategy. We've seen this coming, and we've changed our strategy. Tom Foss-Jacobsen: Yes. And it proves why this strategy is very sensible. Yes. Veronica Skevik: Thank you. Next question is related to developments in markets within BioSolutions. And it also comes from Mr. Magnus Rasmussen from SEB. You continue to refer to strong agriculture markets in BioSolutions and improvements in biovanillin, yet, except from Q1 EBITDA in 2025 has not been much stronger than 2024. What can you say about the developments in other markets than agriculture and biovanillin? Tom Foss-Jacobsen: Yes. I think, first, we have to bear in mind what has been said here on the cost side for Borregaard and for BioSolutions. We have seen increased -- significantly increased costs throughout the year. And specifically BioSolutions was mentioned both the wood cost, but also that we have cost in the U.S. and that they exceeded the general inflation, the other costs. But on the market side, agriculture is clearly one of the main driving segments for the growth. We have said before, this is roughly 1,000 customers, 200 products. So there's definitely a mix also within that portfolio. We have also seen weaknesses in certain markets. I would say, construction market should be no surprise that there are weaknesses in certain markets within construction and also oil throughout the year 2025 has been weaker. Veronica Skevik: Thank you. Next question is related to the price reduction in specialty cellulose and the mix effects. It comes from Mr. Elliott Jones at Danske Bank. With regards to BioMaterials, 3% to 4% price declines in the first half versus second half last year. Can you shed some more light on the mix effect? And if you only partly due to mix, what are the other reasons for the drop? Tom Foss-Jacobsen: Yes. First of all, it's important to notice that we are referring to that is partly explained by mix, which means mix of products and customers. And we sold about -- was it, 146,000 tonnes in 2025. We have in our outlook that we will sell 10,000 to 15,000 tonnes more. So that means also an additional volume with a mix with different pricing. And also the -- within the Construction segment to sell ethers, we have done some selective price adjustments. And we also have the 4,000 to 5,000 tonnes we need to sell to the market during the year from the production disruption we had in the last quarter. And I think these things together explains why the average sales price will be impacted in the range of 3% to 4%. Veronica Skevik: Thank you. Next question, and so far, the last I have here, also comes from Mr. Elliot Jones from Danske Bank related to costs. With regards to costs, excluding wood and energy that have exceeded inflation this year, 2025, can you provide some more rationale as to why this is? And how do you expect this to develop in 2026? Per Bjarne Lyngstad: Yes. I mentioned a few key factors there. Manning is one, we have increased our manning mainly in Norway, but also in the U.S. entities. So that gives an increase above inflation. We have had quite an increase in insurance premiums. That's also due to that we have chosen to improve our coverage on some of the insurance. And then we have given -- or we have gotten less grants from -- to our innovation activities in 2025, which normally is booked as a reduction in fixed costs. So these are some of the explanation. It's a lot of different things on the cost side, but we've seen. Also we have, in addition to manning at the U.S. manufacturing sites, the upgrade of the facility in Wisconsin and also an upgrade of the competence in the organization has led to additional costs there. Veronica Skevik: Thank you. There are no more questions on the web. So I'm not sure if there are any questions from the audience. Tom Foss-Jacobsen: That's concludes our presentation. Thank you very much. Per Bjarne Lyngstad: Thank you.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fubo First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Ameet Padte, SVP of Financial Planning and Analysis, Corporate Development, Investor Relations. Ameet, please go ahead. Ameet Padte: Thank you for joining us to discuss Fubo's First Quarter Fiscal 2026 Results. With me today is David Gandler, Co-Founder and CEO of Fubo; and John Janedis, CFO of Fubo. Full details of our results and additional management commentary are available in our earnings release and letter to shareholders, which can be found on the Investor Relations section of our website at ir.fubo.tv. Before we begin, let me quickly review the format of today's call. David will start with some brief remarks on the quarter and our business, and John will cover the financials. Then we will turn the call over to the analysts for Q&A. I would like to remind everyone that the following discussion may contain forward-looking statements within the meaning of the federal securities laws. These include statements regarding our financial condition, anticipated financial performance, expected synergies and benefits from our recent business combination, business strategy and plans, including our products, subscription packages and commercial agreements, market, industry and consumer trends and expectations regarding growth and profitability. These forward-looking statements are subject to certain risks, uncertainties and assumptions, which could cause actual results to differ materially from our current expectations. For further information, refer to the earnings release we issued today, our letter to shareholders and our SEC filings, all of which are available on our website at ir.fubo.tv. During the quarter, we closed our business combination with Hulu + Live TV. As a result, our reported results for the current period reflect the results of the Hulu Live business prepared on a carve-out basis for the period from September 28, 2025, to October 28, 2025, and excludes Fubo's results for this period. For the period from October 29, 2025, through December 31, 2025, the results include the combined Fubo and Hulu Live businesses. The reported prior year period fiscal Q1 2025 also reflects Hulu Live financials prepared on a carve-out basis and excludes the results of the historical Fubo business. To facilitate comparability between periods, we will discuss certain results on a pro forma basis, giving effect to the transaction as if it had been completed at the beginning of the first period presented. We will also refer to certain non-GAAP measures during the call. Please refer to our Q1 fiscal 2026 letter to shareholders available on our website at ir.fbo.tv for a further description of the pro forma presentation and reconciliations of these non-GAAP measures to the most directly comparable GAAP measure. With that, I will turn the call over to David. David Gandler: Thank you, Ameet, and good morning, everyone. Q1 marked our first as the owner of Hulu Live, and it validated the strategic rationale behind the combination, offering greater scale, broader distribution and improved economics. On a pro forma basis, over the past 12 months, the Fubo and Hulu Live businesses generated $6.2 billion of revenue and ended the period with 6.2 million subscribers in North America. This firmly establishes us as a scaled and relevant player in the Pay TV market and one focused on growing. On a trailing 12-month pro forma basis, adjusted EBITDA was $77.9 million. As a combined company, we believe there are meaningful opportunities ahead to unlock synergies and efficiencies that will support sustained growth and improved profitability. Since closing the Hulu Live combination in late October, our priority has been execution to expand reach, scale and monetization across all of our services. And just a few months in, we are converting strategy into action. We are nearing completion of Stage 1 of our integration plan, migrating Fubo's ad tech into the Disney ad server. Once live later this month, Fubo inventory will be sold alongside Disney+, ESPN+ and Hulu. We expect this integration to drive a meaningful uplift in both CPM and fill rates. Stage 2 of our plan is focused on the consumer. We've experienced strong market traction for our well-priced Fubo sports service. It resonates with value-oriented consumers and complements our broader content offering. Fubo Sports includes major networks such as ESPN, ABC, CBS and Fox, among others. Building on this momentum, we are pleased to announce that we are working with ESPN to include Fubo Sports in ESPN's commerce flow. Customers will be able to purchase Fubo Sports alongside offerings such as ESPN Unlimited and the ESPN, Disney+, Hulu bundle and then watch directly on the Fubo app. This opportunity is particularly exciting given ESPN's scale. Per comScore, ESPN's digital and social properties reached 4 out of every 5 U.S. adults in November of 2025, representing hundreds of millions of unique fans. It allows us to market Fubo Sports directly to a sports-centric audience and drive subscriber growth more efficiently with meaningfully lower customer acquisition costs. We continue to focus on our Spanish-speaking audience. And in fiscal 1Q '26, we delivered record high subscribers on Fubo's Latino product. In January, Hulu Live launched the Spanish language bundle, meaning that Spanish-speaking customers now have 2 plan options within the Fubo and Hulu Live ecosystem. Stage 3 of our plan focuses on achieving content cost efficiencies commensurate with our increased scale and applying greater portfolio discipline as we evaluate which content best supports flexible pricing and affordability. As major distribution agreements for the Fubo services and the Hulu Live service come up for renewal, our objective is to move towards market-based pricing and penetration that reflects our combined increased scale. In the near term, I want to address NBCUniversal as we've received questions from investors and subscribers. Through November, our teams were engaged in renewal discussions with NBCU. Following the confirmation of the Versant spin-off, we paused discussions to allow the separation process to proceed. Beginning in early January, Comcast ceased engagement in renewal discussions despite multiple outreach attempts. Comcast indicated that they are satisfied with their existing Hulu Live arrangement and do not intend to engage in renewal discussions on the Fubo side at this time, preferring to reengage closer to the Hulu Live expiration. Given that most commercial terms have been largely aligned prior to the Versant spin-off, this position is very difficult to reconcile. Importantly, the subscriber impact to date has been modest since the removal of NBC content and better than our expectations. We believe this reflects the resilience of our sports-focused value proposition, the actions we took to preserve consumer value, including our decision to lower prices and customers' ability to supplement Fubo with Peacock. While we remain open to constructive engagement, we will review the role of the NBCU and Versant portfolios as we continue to evaluate content alignment for our 6 million-plus subscriber base. Looking ahead, our 2026 North Star is simple: growth. We are focused on expanding our subscriber base through differentiated sports offerings, scale distribution partnerships and improved monetization, driving long-term value for consumers and shareholders. I will now turn the call over to John Janedis, CFO, to discuss our financial results in greater detail. John? John Janedis: Thank you, David, and good morning, everyone. Fiscal Q1 2026 marked our first quarter reporting as a combined company following the completion of our business combination with Hulu Live in late October. As a reminder, because the transaction closed mid-quarter, to aid an analysis of the combined business, we will also discuss our results on a pro forma basis, giving effect to the combination as if it had been completed at the first period presented. Turning to the financial results for the quarter. In North America, reported revenue was $1.54 billion compared to $1.11 billion in the prior year period. On a pro forma basis, North America revenue was $1.68 billion, compared to $1.58 billion in the prior year, representing growth of 6%. This reflects the scale of the combined platform and continued demand for live TV streaming across both the Fubo and Hulu Live brands. On a combined basis, we ended the quarter with approximately 6.2 million North America subscribers compared to 6.3 million in the prior year. Turning to our profitability metrics. Our reported net loss for the quarter was $19.1 million, a meaningful improvement from a $38.6 million loss in the prior year period. On a pro forma basis, net loss improved to $46.4 million compared to $130.4 million last year. Importantly, we delivered positive pro forma adjusted EBITDA of $41.4 million, nearly doubling from $22 million in the prior year period. From a cash and liquidity perspective, we ended the quarter with $458.6 million in cash, cash equivalents and restricted cash. Note that operating cash flow in the quarter was impacted by working capital timing, particularly a build in accounts receivable following the close of the transaction, which we expect to normalize over subsequent quarters. Earnings per share for the quarter reflected a loss of $0.02 based on 351.9 million Class A shares outstanding with an additional 947.9 million Class B shares outstanding on a vote-only basis. We also announced today a planned reverse stock split of our common stock. The reverse split is intended to make the stock more accessible to a broader base of investors and will reduce the number of outstanding shares of common stock to a level better aligned with the company's size and scope. We aim to execute the reverse split by the end of fiscal 2Q '26. In summary, fiscal Q1 represented a strong start to the year and an important first quarter as a combined company. Our results demonstrate healthy top line growth and significant year-over-year expansion in profitability metrics, including positive pro forma adjusted EBITDA. As we move forward, we remain focused on disciplined execution, driving further efficiencies across the combined business and continuing to improve our profitability metrics and cash generation over time. With that, I'll turn the call back to the operator for questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of David Joyce with Seaport Research Partners. David Joyce: Two questions, please. First, to kind of drill down a little further on the issue with NBCUniversal . With more streamers getting more access to sports rights and industry consolidation out of the way, what's your view to being able to retain or regain sports rights, to keep that focus going forward? And do you think that Comcast is not reengaging because they're driving the Peacock service in the near term because of the Olympics? Can you return to the table with TelevisaUnivision for soccer? When does the Peacock -- or when does the Comcast NBC deal with Hulu Live come up for renewal? Any further thoughts on that, please? David Gandler: Yes. Why don't I take that, John? So David, thank you. This is David. I mean there was a bunch of questions in there. So let me start with, if I remember, with the NBC question. First, I want to say that, obviously, going forward, we're not going to separate out the numbers for Hulu Live and Fubo. But just to be very clear, we were up 3% year-over-year versus the prior year in subscribers despite the fact that we were down with NBC for, I believe, over 4 weeks. So it speaks to the quality of the team, our ability to market on platform and to really understand the type of consumers we have. We also were able to drive some traffic to Hulu Live TV. As it relates to the programming, look, we have strong relationships with the leagues. We have an excellent relationship with Major League Baseball. We've been working with them closely as teams begin to migrate to the MLB platform. But for the most part, I think the major content deals and partnerships that we have with -- obviously, with Disney, Fox, CBS, those are still active. And let's not forget, NBC is still on Hulu Live, and we're working with Disney and the Hulu team to ensure that we can drive traffic to NBC on Hulu Live. As it relates to Univision, again, just want to be very clear here, we've exceeded our own expectations. We've reached an all-time high on our Latino package. And in the same vein, Hulu Live now has its own skinny package, which does include Univision. And so going forward, we should be thinking about our sub base in totality. So we're north of 6 million subscribers, which is the second largest VMVPD in the United States, and we think that we'll be very focused on continuing to provide flexibility, optionality and affordable packaging. Operator: Your next question comes from the line of Clark Lampen with BTIG. William Lampen: John, I know you guys aren't providing guidance for the year, but maybe with regard to sort of '26 and if we refer back to the old forecast that you provided as part of the proxy, can you remind us whether those targets included any revenue and expense synergies? You guys have laid out a couple of things that seem potentially interesting with ad server integration and consumer packaging flows that could be accretive. Was that a part of the old guidance? And then maybe second question, for your fiscal Q2, the March quarter, should we expect that assuming nothing changes with NBC, do you anticipate positive year-on-year growth with subscribers? Or is there any context that you could provide directionally for how we should think about the impact maybe for fiscal Q2 or fiscal Q3? John Janedis: Yes. Sure, Clark. So let me handle the first question, and then I'll go on to the one about the March quarter. So on synergies, when we put the deck out last January, what was in there, what we stated was that we expected and assumed $120 million plus in synergies. In that deck, we also stated that the assumption was those took place on day 1 in terms of when the deal closed. That was more or less a simplifying assumption. In terms of the time line around that, maybe just give a little bit more color. In the short term, to David's point around the Disney ad server, that will come first in terms of the synergies. That's a combination of fill and CPM. And maybe a little more color on that. If you think about our ad numbers at Fubo stand-alone historically, call it, there around, say, $100 million-ish. And so I would say that the CPM and the fill opportunity is both in the double digits. The second piece was the content/programming synergies, those are, I call more medium to long term because those take place as contracts renew. There's a third piece that we didn't speak to a year ago, which was, I'd say, call it, procurement. We're in the very early stages of that now, and I would say I'm optimistic that, that could be a needle mover. And so those are the 3. But again, none of those assume day 1 -- sorry, they all assume day 1, but they will clearly flow in over time. David Gandler: Sorry, John, just one more thing. Clark, this is David. Just around NBC, I understand that it's a concern. But as I mentioned before, we believe that it's very important for us to be able to provide various packaging across a spectrum where we're able to offer consumers enough flexibility. And it's very important to note that the Fubo Sports service which is a linear version of our legacy Fubo package, which includes NBC, is actually performing very well. We haven't been marketing it very hard. It continues to grow. Trial conversion rates are very high. And more importantly, when you look at -- I think that package is now in the third or fourth month. When you look at it from a retention perspective, retention is actually about 30% above what the legacy plan is. And so when I think about a future in the short term that might or may not include NBC, I think this package has a significant opportunity to grow. It fits very nicely into the overall ecosystem with YouTube TV sitting in that sort of $80-plus range. And then you have the ESPN, FOX One bundle, which, if I'm not mistaken, is in that sort of high 30s range. And with our promotional pricing of $45.99 or $44.99, this is a very attractive entry point to get access to local NFL games, college football and a very strong portfolio of programming. So again, basically, what we're seeing now is just strong KPIs across that package. And as I mentioned before, with ESPN, if we can -- I mean if we can figure out very quickly, which as you've heard we're doing, we should be able to drive a tremendous amount of traffic at some point when we go live with them. There are 2 different opportunities that we've been focused on. The first really is around marketing. Think of what YouTube is able to do for YouTube TV from a top of the funnel perspective. ESPN engages with 4 out of 5 adults in the United States. So if we can just leverage that, that should have a significant impact on our blended SAC numbers. And frankly, we could be a lot more measured and disciplined around how we market. So that's just one angle. And the second one in the commerce flow, again, this is another area where not only it would open up the funnel, but at the same time, I think it would have a pretty significant retention metrics around it, just given the fact that this would be part of an ESPN umbrella or ID. So all of these things, I think, are positive. And I think this gives us a chance to continue to grow. We've demonstrated our ability to grow, losing partners in the past. And our goal is to continue to grow this product and reach new highs. John Janedis: And Clark, maybe one last thing or an exclamation point on David's comment. As it relates to growth going forward, whether it's the March quarter, June quarter or beyond, let me just add a couple more things. One is, again, we've been pleased to date with the results. But clearly, we'll know more following the Super Bowl and then the Olympics. And just as a reminder, traditionally, we don't spend much against the Olympics because those subs don't retain well. But our goal is to grow and to grow profitably. Operator: Your next question comes from the line of Brent Penter with Raymond James. Brent Penter: First one for me, David, you talked about your North Star being growth. And with the merger closed and now you have more scale and a bigger balance sheet, how do you think about your priorities in terms of investing for subscriber growth versus as a stand-alone company, I think you're a little more focused on just generating free cash flow now. How can you -- how does the merger increase your ability to invest? And then second, just any quantification for the benefits you might have seen from the Disney YouTube TV blackout in the quarter? David Gandler: Yes, sure. So first, on the profitability front, I think -- we have now seen 3 consecutive quarters of profitability. I think this was a major concern dating back 3 or 4 years. So I think we've resolved that. The balance sheet, as John will likely talk about shortly, is very strong. And we are very well positioned to be able to take advantage of various tailwinds. You did mention the fact that we're in a much stronger position. I think the beautiful thing about where we sit right now and the potential of the flywheel within the Disney ecosystem is that they reach hundreds of millions of people every year. And so if we can figure out, which we're in the process of doing, what are the most efficient and effective marketing channels, it really shouldn't impact our cost structure very much. And so I think that flexibility does give us the chance to invest more into growth. But I will say, if you look at our -- again, on a stand-alone basis, we spent less on marketing in the fourth quarter despite losing NBC and still been able to sort of maintain solid numbers on the Fubo side. So from that perspective, we'll be working closely with the various teams within Disney. I want to say that the relationships have been great. Let's not forget, this deal closed on October 29, right before the holiday season. And we're just getting to know the various folks who run different teams and everyone has been very supportive. So we look forward to building those relationships and driving value for the overall subscriber base. And then last question, I think, was around YouTube TV? John Janedis: Yes. So I'll take that one. I'd just say the impact from the YouTube TV going dark with Disney was immaterial to the overall platform. And then, Brent, maybe just circling back again, just going back to the balance sheet and priorities, like I think it's important, again, to look at the balance sheet evolution. And so David spoke to the priorities. But just as a reminder, if you look at where we were 2 years ago, call it, the end of '23, we had about $400 million of debt outstanding with a maturity of February '26. Now we have, call it, $320 million outstanding with virtually all of it maturing in '29 and '31. And then our adjusted EBITDA for '24 was a loss of $86 million. And now on a pro forma basis, we just reported that $78 million for calendar '25. So some pretty major improvements. And so to the investment priorities, I would just say that the free cash flow generation should be an output of those investments. Operator: Your next question comes from the line of Patrick Sholl with Barrington Research. Patrick Sholl: Just on the advertising front, is there any sort of ramp period after you merge the tech stack with Disney for the ad sales relationship until you get that, I think you said double-digit improvement in fill rates and CPMs. And then just on the variety of service offerings that you guys have in market now, could you maybe talk about the different seasonality trends and how to think about those as we model out growth over the course of the year? David Gandler: Yes. Pat, why don't I start on the ad ramp? Look, this is a very straightforward business. The beautiful thing about the advertising integration is that essentially, Disney is selling ads. They've been selling ads for a very long time. They've been selling against live networks that they own themselves. They've been selling against Hulu Live. This is basically the same service with just more inventory. Our ad inventory will roll right into that ad server and will sit alongside these other channels and programs. And so our sense is that we should see an impact as soon as it's integrated towards the end of the quarter or maybe slightly thereafter. John Janedis: And Patrick, maybe I'll just quickly hit on the seasonality. Just as a reminder, to David's earlier report, we're not really going to break out the various services, but I can give you maybe a couple of high-level comments. One is that I think you know that the Hulu Live service tends to be and has historically been far less seasonal than the Fubo service. Within the Fubo service, as you know, it's been highly seasonal around fall sporting season. And so the one thing we don't know yet is how seasonal the skinny sports service will be. But then again, as it relates to that as a percentage of total subs, I don't think there'll be any visible incremental seasonality as it relates to those smaller services for the foreseeable future. Operator: Your next question comes from the line of Doug Arthur with Huber Research. Douglas Arthur: Just a couple of geeky financial questions. John, the difference between sort of reported revenues and pro forma revenues is around $134 million, give or take. Is that the impact of closing Hulu Live late in October? That's question one. John Janedis: Yes. Yes, sure. Doug, that's correct. And so it's a little bit quirky there in the sense that because Hulu Live was the accounting acquirer, it actually -- we reported the 3 months of Hulu Live and then call it the 2 months and a couple of days of Fubo. And so the delta there is just you have that Fubo revenue more or less for the 28 days of October. Douglas Arthur: Okay. So when I look at the 8-K on Page 6, where you kind of break down not the pro forma, but the actual reported revenue breakdown between subscription related party advertising, et cetera, the Fubo live numbers are sort of a stub period there. I'm trying to just back out in terms of how Fubo did ex Hulu Live. John Janedis: Yes. Doug, let me say a couple things. One, I don't have the 8-K in front of me, so we can talk about that offline. What I can tell you, though, broadly speaking, is that if we want to isolate the Fubo business, what I can tell you to the points we made is, number one, that we had a better subscriber outcome than we expected, and that flowed through the P&L. So I'd say we're pretty pleased with the outcome on the Fubo business. Douglas Arthur: Okay. We'll disaggregate that later. Operator: Your next question comes from the line of Laura Martin with Needham & Company. Laura Martin: My first one is breaking news. After this call started, Disney did announce that it is confirming the appointment of Josh D'Amaro, the next CEO to succeed Bob Iger. So this is the second time the Board of the Walt Disney Company is telling us that Disney is a parks company and not an entertainment company. So my first question to you, David, is, how does that affect your world if Disney going forward is going to be really focusing on the real world, which is its parks assets and not its, let's call it, traditional TV and streaming assets. David Gandler: Yes. Well, first of all, congratulations to Josh. We didn't know about that. So thank you for letting us know. As it relates to, I think, the business, Disney is a very large company. It takes a lot of time. for them to decide on what their priorities are going to be. And I think from what I heard on the last earnings call, Bob was very focused on highlighting the fact that they are still working on their technology stack, unifying their platform into one app. So I don't know what the impact will really be on us. We're having conversations with the various teams, as I mentioned, strong conversations with ESPN. We have announced some of the things that we plan to do with ESPN. We've spoken to Dana and others, the Hulu team. And our Board has been very focused on trying to make sure that we're talking to the right people to really grow the business. So from my perspective, I don't really see any changes in the short term, but obviously, that's yet to be determined. Laura Martin: Okay. And then my second one is, I was really intrigued in your shareholder letter that you said you are investing in the next generation of consumer-centric innovation. And it sounded like your goal is to close the gap with YouTube Live TV, which has about 10 million subs as your biggest competitor now that you guys are 6.2 million subs. What kinds of things are on that road map for the next generation of consumer-centric innovations that would help you close that subscriber gap? David Gandler: Yes. So look, there's lots of things that we're focused on. We think that there's a huge opportunity around mobile. We see a significant number of subscribers, trial users that enter our ecosystem through the mobile app. And so we'll be relaunching that experience shortly. And again, we're continuing to review some of the amazing capabilities that Disney and ESPN have. And when you look at their fantasy business, which has over 10 million users, you think about their betting capabilities. And when you sort of look at all of the ways in which that we can engage a very large funnel, we start thinking about ways in which we can really sort of develop our technology, our consumer apps and features around that. So there'll be more to come on that front. But yes, we're very focused on product. Laura Martin: Okay. And I'm going to violate the rule, and I'm going to drill down on the betting. One of the things you did early on, David, is really -- you really wanted to go into betting and then we couldn't afford the cost. Could you get back into the betting business through ESPN? David Gandler: So again, I don't think anything is off the table. It's still early. Like I said, we've only been talking with Disney and ESPN for a couple of months. So we're trying to navigate the different teams. But I do think that we have a very strong engineering team. We have a strong product DNA at Fubo, and we'll be looking to bring ideas that we can deliver to Disney across the Fubo platform. But as I think about Disney, generally speaking, I would say it's akin to being a kid in a candy store. We're a sports platform. And when you look at the size, the reach that they have, the different elements and touch points that they use to drive engagement, I think that we can really develop a strong business there. And just some of the things that you and I already talked about, I believe, were highlight generation, which that we've been really focused on as well. I think there's an area to improve as well. And then the DVR experience related to sports, I think, is another area where we continue to innovate given the number of events that we carry and the level of personalization that we afford consumers. So I'm very excited, generally speaking. It's just a matter of meeting with the right teams and focusing on delivering value for our consumers. Operator: Your next question comes from the line of David Joyce with Seaport Research Partners. David Joyce: I appreciate the follow-ups. There's a lot to digest here with the new Fubo. Two things. One, people were concerned when they saw Disney shelf filing for Fubo shares, but could you please confirm that, that 2-year standstill is there and why the filing came out? And then secondly, what's your philosophy on guidance metrics from here? Normally, that's something you did Fubo stand-alone, but any sort of projections or guardrails you would put up for us? John Janedis: Yes. Sure, David. Thanks for the question. So on the first one, look, the short answer is that's correct. So the 2-year lockup remains in place. Look, the shelf, it was a routine housekeeping item following the Hulu Live closing that required us to just put up a new shelf, including registering Disney shares. But Disney remains subject to the 24-month lockup period and the filing does not change that restriction in any way. On the guidance, I would say no guardrails yet. Look, the comment in the letter around guidance suggests like there are just some factors that we're in the process of refining in terms of timing and sizing, and that's going to impact our subs and therefore, our subscription and therefore, the ad revenue. Just as an example, today's agreement with ESPN, the timing on that, for example -- or the NBC programming. But look, we're only 98 days into this combination. So it's just going to take us a little bit more time. David Gandler: Yes. And just to add one more point on the reverse split. Again, I think we've been very transparent from the onset. People, of course, get nervous around hearing reverse splits. But the reality is it was important for us to align with our operational scale. We wanted to reduce volatility and also attract institutional investment. These are natural things that have to take place, and it really is part of the corporate hygiene that we're trying to put in place, particularly after we've dealt with the convert. So again, all of this is sort of trying to prepare Fubo for a very bright future, and this is just one of those steps. Operator: That concludes our question-and-answer session. Ladies and gentlemen, this concludes the Fubo First Quarter 2026 Earnings Call. Thank you all for joining. You may now disconnect.
Operator: We'll now begin the LY Corporation Fiscal '25 Third Quarter Financial Results Briefing. Thank you very much for joining us today. In this briefing, we will use the financial results briefing presentation materials available on the LY Corporation website. Today's briefing is attended by the following members of LY Corporation: Representative Director, President and CEO, Takeshi Idezawa; Senior Executive Officer and CFO, Ryosuke Sakaue; Senior Executive Officer, Media and Search Domain, Domain Lead, Hiroshi Kataoka; Senior Executive Officer, Commerce Domain, Domain Lead, Makoto Hide; Senior Executive Officer, Corporate Business Domain, Domain Lead, Yuki Ikehata. First, Sakaue will provide an overview of the fiscal '25 third quarter financial results. After that, we will have a question-and-answer session. The entire briefing is scheduled to last about 1 hour. This briefing is being live streamed. If you experience any audio or video issues during viewing, please use the link displayed at the bottom of the screen and move to another server. Now let us begin. Ryosuke Sakaue: This is Sakaue from LY Corporation. Thank you very much for taking time to join our fiscal '25 third quarter financial results briefing today. I will give you the overview of our third quarter financial results. So this is the overview. At our subsidiary, there was a system outage due to a ransomware attack. So to show the underlying business performance in an easy-to-understand manner, we will present figures, excluding ASKUL for both the previous and current fiscal years. First, excluding ASKUL, third quarter performance showed steady business growth. And as you can see, we had double-digit year-on-year increases in both revenue and profit. I will present following the agenda. First, the consolidated financial results. So third quarter results. Consolidated revenue declined 0.7% year-on-year. But as I said, excluding ASKUL, it was 15.7% year-on-year increase. Adjusted EBITDA was down 2.3% year-on-year, but excluding ASKUL, it was up 11.2% year-on-year. So this is the third quarter. So for the fiscal '25, we show our outlook, and we show also the outlook for next fiscal year. For fiscal '25, reflecting the impact of ASKUL's system outage, revenue is projected at about JPY 2 trillion. Adjusted EBITDA is expected to be around JPY 500 billion even after factoring the system outage impact. Revenue growth in Strategic segment and company-wide cost reductions are supporting the overall performance. The Media segment has been on an improving trend since bottoming out in the first quarter. Adjusted EPS is also expected to land within the initial guidance range. For fiscal '26, we aim to achieve for adjusted EBITDA, 10% to 15% increase compared with the fiscal '25 outlook of approximately JPY 500 billion, driven by business growth and cost reductions. So on a consolidated LY basis, we're targeting JPY 550 billion to JPY 575 billion. So as I explained, the underlying business has remained solid. Next. So, EBITDA year-on-year analysis in the middle, this shows excluding ASKUL last and this fiscal year. Revenue increased driven by expansion in the Commerce and Strategic businesses. Although SG&A increased due to PayPay consolidated and Commerce, they were absorbed by revenue growth. We had 11.2% increased profit. So this is ad-related revenue. Commerce, advertising grew 20.1%, supported by the expansion of transaction value and company-wide ad revenue grew 3%. Next, about the e-commerce transaction value. Reuse, due to growth of Yahoo! Flea Market and consolidation of BEENOS achieved double-digit growth. For shopping. So in Q2, there was a spike in hometown tax payments. So there was a shift from Q3 to Q2. And last year, there was a high level of tax payment in Q3. So reflecting that, it was a 2% year-on-year growth. Even including ASKUL, consolidated e-commerce transaction value was up 2.5% year-on-year. Next, performance by segment. For Media, revenue achieved a slight positive growth year-on-year. Adjusted EBITDA declined 2.8% year-on-year, but the growth rate bottomed out in the first quarter and has continued to improve. Margins increased due to changes in the revenue mix. Next. So this is the Media revenue and EBITDA year-on-year comparison. Revenue saw search advertising declined 9.5% year-on-year. Account ads rose 13.8% and display ads also posted positive growth. Total advertising revenue grew 0.4%. Adjusted EBITDA was down 2.8% year-on-year as decreases in costs such as outsourcing expenses were offset by increases in sales promotion and Gen AI-related expenses. As we have shared in the previous earnings results, this is a mid- to long-term business development plan leveraging on OA, OA: LINE Official Account. The first point is capitalizing on OA's expanding customer base. And then we will build up services and layer structure from MINI Apps to SaaS to be offered from the first half of FY '26. So from #1 to #3, I will give you the progress to date. So regarding the account advertisement, both Pay-As-You-Go Billing Accounts and Plan Revenue accounts increased. On the back of that, on the right-hand side, you can see that the sales grew by 13.8%. So this is regarding the second point, the MINI Apps. The number of MINI Apps grew by 57.8% year-on-year. And the MAUs, it continue to grow at a high rate of 63.8% Y-o-Y. The promotions, growth in development partners and improved convenience of MINI Apps led to increase in usage. So this is the third point regarding SaaS. For SaaS, we are starting with the SMB sector and the beauty category. For solutions targeting restaurants, we are acquiring Toreta to build a reservation capability, which was a missing piece for us. And this was recently announced. This acquisition, it covers the functionality required for store operations, i.e., the reservation functions. Toreta services, as you can see on the right-hand side, have a proven track record. And it's a reservation log or strong in table management, and it is used mainly by casual restaurants. In the future, together with official accounts and reservations log, they will be linked to provide a one-stop solution from customer attraction to customer management and CRM. Through these efforts, we aim to enhance the ARPU. Next page, please. This is regarding the Commerce business. Consolidated revenue and profits were down. Excluding ASKUL, impact of new consolidation and strong reuse business contributed. And as presented on Slide 4, excluding ASKUL, revenue grew by 31% year-over-year and adjusted EBITDA grew by 15.5%. So this is again the Commerce business. On the left-hand side and the right-hand side, both excludes the numbers from ASKUL. For revenue for LINE Yahoo! Commerce, it increased by 64.4% Y-o-Y due to the consolidation of LINE MAN and BEENOS. A higher promotion expenses for Yahoo! JAPAN Shopping and Yahoo! JAPAN Flea Market was absorbed by revenue growth, as you can see on the left-hand side. So the impact of the consolidation is JPY 1.1 billion as shown on the right-hand side. But excluding that, the EBITDA grew by 11.9% Y-o-Y, and we were able to achieve organic growth. This is a Strategic Business. Revenue rose sharply by 30% year-on-year. We are achieving high growth. Adjusted EBITDA also expanded significantly. Steady growth continues with more margin expansion to 22.2%. Next, this is the year-on-year comparison for the Strategic Business. PayPay consolidated revenue growth by 24%, and it is driving the segment growth. In Other Fintech subsegment, LINE Bank Taiwan, which was consolidated in the current fiscal year contributed. Higher SG&A expenses was offset by revenue growth, and we achieved growth in adjusted EBITDA. This is focusing on the PayPay consolidated business. In addition to continued growth in QR code payments, interest income increased at banks on the back of loan book growth, leading to growth in both Payments and Financial Services. As a result, both consolidated GMV and revenue grew at a high rate of more than 20% year-on-year. Consolidated EBITDA grew 59.1% year-on-year to over JPY 30 billion for the quarter. So, this will be my last slide. And that concludes my presentation on the Q3 earnings results. To wrap up, in Q3, despite the impact on earnings stemming from ASKUL system outage, the fundamentals were solid with double-digit growth in both revenue and profit. Our focus areas such as Official Accounts and MINI Apps are also growing steadily, and we aim to maintain this growth trend and increase profit by 10% to 15% next fiscal year for FY '26. Thank you very much for your attention. Operator: Now we would like to move on to the Q&A session. [Operator Instructions] So now without further ado, we'd like to begin the Q&A session. The first question, please. From Goldman Sachs Securities, Munakata-san. Minami Munakata: Munakata from Goldman Sachs Securities. So, I'd like to ask two questions. Should I state the two questions together? Ryosuke Sakaue: Yes, please. Minami Munakata: So, with the Media business, so it seems to be bottoming. But ad demand, how has it trended past 3 months? Was it in line with expectations? In what areas was it not? And also SG&A, what's the ratio of the AI in SG&A? So that's the first question. Second question, maybe getting ahead to ourselves, but next fiscal year -- this fiscal year, ad business was in a tough situation, but you did renewable LINE apps and you introduced AI agents. So I think you are quite aggressive on those fronts. So next fiscal year, 10% to 15% adjusted EBITDA increase is what you're expecting. But -- so things -- measures you've taken this year, how is that going to contribute next year? What is going to drive the growth next fiscal year? Ryosuke Sakaue: Let me respond to the first question, and Ikehata will follow up. So, for the search ads improved quite a bit compared with Q2. So search ad product has been improved. We have improved it. And so the negative number has shrunk somewhat. Display ads, Q2, there was a special demand from hometown tax. And so it was just the same as Q1, but display ads is strong. It's moving into the higher revenue direction. For account ads, it seems that globally, account ads using points not so active, not so vibrant. So Y-o-Y, a little less than Q1, Q2. But account ads using points, not so profitable, not high margin. So in terms of profit impact to the segment, not so big impact. And for SG&A, AI for Media segment, it's about JPY 1 billion plus alpha. Ikehata, please. Yuki Ikehata: This is Ikehata. So throughout the fiscal year, ad business, so you asked, was it in line with expectations? So let me give you our impressions. So Sakaue has explained, and so I may be repeating some parts, but the three major things about the account business. And well, there's account and display and the search ads. So for account ads was in line with expectations. So for next fiscal year, as was mentioned in the presentation, we are taking various measures for next fiscal year. So we are prepared for expansion, and we're able to maintain growth rate. For display ads, this fiscal year, it was negative, but now it's becoming flat. And then single-digit growth is what we would like to realize. We've been saying that for some time. And looking back in terms of numbers, so from flat to single-digit growth, we are able to show for display ads. And so the ad platform construction that we've been working on and data sharing to increase ad performance, we are starting to see results. And so, we've finally been able to come flat and entering the single-digit growth. So it's based on our plan, it's going. So next fiscal year, is it going to dramatically increase the growth rate? Maybe not. So let's be conservative. We will aim for flat or higher. That's what we will aim for. And one thing that may be out of line with expectations and something that we have to take measures is search ads. So in terms of numbers, you can see and Sakaue also mentioned -- commented about this as well. So for next fiscal year, certainly, the existing search ads and the new shopping search ads and AI initiatives, those new challenges going to be pursued to improve the search ad business itself. That's how we look at this. So that's my supplemental explanation. Ryosuke Sakaue: So for the next question about our image for next fiscal year, for Media, so I think we have become leaner, and we are improving productivity and raising margin. And so next fiscal year, we would like to solidly make profit increases. That's one thing. For Commerce, so this fiscal year, we have taken various measures for Flea Market and Others. So reuse part, I showed you the number, including BEENOS. And the reuse part is getting on a growth trajectory. So next fiscal year in terms of profit, we are expecting it to boom. So Media Commerce, JPY 10 billion each profit increases is what we'd like to achieve. For ASKUL, some uncertainties. So, we would like to get plus alpha with a rebound. And for Strategic segment, it's still growing around PayPay. So about JPY 20 billion increase in profit we'd like to achieve, mainly around PayPay. And Others, well, JPY 15 billion reduction in fixed cost is what we explained last time. And so that's outside of the three segments and JPY 15 billion reduction in fixed costs. So if you add that, that would be JPY 50 billion plus. And then ASKUL, we're going to provide strong support if sales recovers. Well, if it can contribute more to profit, I think we can create strong numbers. Minami Munakata: For the first one about the Media business, if I may follow up a bit, SG&A increased, so the ratio of AI, not so big was the impression I got. But the AI search usage rate, any changes in such numbers in the third quarter? Ryosuke Sakaue: Comparing Q2 and Q3 in search, the ratio of AI ads hasn't changed so much, 10-plus -- a little less than 20%, 10-plus percentage, we're controlling at that level. Operator: Next question is from Maeda-san from SMBC Nikko. Eiji Maeda: I have two questions. The first question is regarding the AI search that you just explained. So you said that you're managing that in 10-plus percent range. But going forward, by using the AI search, would you try to improve the impact of the ad, so that it can eventually lead to revenue per ad. Google has been quite successful in that space. So to grow your search ad business, would AI be a driver for that growth? And do you have any good feeling for that right now? So are you managing that at 10%? Or do you just manage to have it used at 10% or so? So if you could just give us some nuance to that. And also for next fiscal year on Page 13, you talked about the rollout of OA and MINI Apps. So, you talked about the market outlook. But for your revenue and profit, what are going to be the impact on your numbers? And also the timeline and addressable market and the scale, can you elaborate on those points as well for those strategies? Ryosuke Sakaue: Yes. So I will respond to both of the questions. So Kataoka-san and Ikehata-san will follow up. For AI search, as a major direction, the AI search proportion will be increasing in the search result. So we are now doing some tests and trying to incorporate the ad for the AI results as well. So, on top of the genuine search advertisement, we will have the AI portion, which will be an uplift on the revenue. And Kataoka-san, please? Hiroshi Kataoka: Yes, I will follow up. So, first on the search ad, we have the existing search ad, shopping search ad. And what we're testing right now is the AI ad. So, we have the mix of the three, so that we can improve the decline we're seeing with the search ad business. So right now, AI results account for roughly 10-plus percent, and we are now planning to add new initiatives. So within the ad search, the AI results -- AI usage will be increasing. And we are now testing the AI ads so that we can monetize on that opportunity. So we will be growing the AI ads. And on top of that, with the existing search ad business, the shopping ad business, we are now rolling out measures to improve. So all-in-all, we aim for growth. So we are intentionally managing that to just 10%, I mean the AI ad. And this is because we're still pushing up the functions for AI ads to be as competitive as the other ads. So as we push up the functionalities, we will be able to raise the proportion from 10-plus percent. And on your second question, as we have shared in the previous earnings results for FY '28, we are now trying to double the revenue from the current JPY 140 billion to JPY 280 billion. And in terms of the mix, in the first layer, which is the official account, we are expecting 10% to 15% stable growth. And then what's short to the doubling of the revenue, maybe JPY 100 billion, that would be covered by the second layer, the MINI App and also the third layer SaaS business. And in terms of the margin, for the first layer for the official account, the margin will be the highest. And then SaaS and for the MINI App, we have to think about the mix between the ad and the payment. But if the payment is larger, then the margin may not be that high. So, Ikehata-san, do you have any follow-up? Yuki Ikehata: Yes, this is Ikehata. Thank you for the question. So maybe let me put this into the context of the timeline. For FY '28 that target remains unchanged. And for next fiscal year, for FY '26 and also beyond '27, '28, first, looking at FY '26. For the existing official account, the first layer on this diagram, we aim to achieve further growth. And that is going to drive the revenue growth. And on top of that, simultaneously from this fiscal year to next fiscal year, we are going to be working on the monetization of the second layer MINI App and also doing the marketing for SaaS. So for monetizing FY '27, FY '28 will be the timing for incremental revenue for the MINI App and the SaaS business. At the same time, for Toreta coordination is something that we have in the plan. So then the SaaS product launch may be happening earlier than expected. So for the FY '27, '28 timeline and the impact on profit, as we get more clarity, we will be sharing our outlook. But at this point, this is the timeline that we are expecting for the monetization opportunities. Operator: Next, from Okasan Securities, Okumura-san. Yusuke Okumura: This is Okumura from Okasan. Two questions. First, clarification of the previous question. Next fiscal year, JPY 10 billion profit growth for Media is what you're aiming for. And MINI Apps and SaaS as of Q3, you don't have revenue yet. So in increasing JPY 10 billion profit, MINI Apps and SaaS, what's the contribution expectation for next fiscal year? Should we not expect much in the next fiscal year? Second question, several years ago, there was a security incident and talking about the response to that. So end of next month, those measures are to be completed. Is that the understanding correct? And from April onwards, any restrictions to be removed? So PayPay implemented in LINE app or the kind of more collaboration within the group, is that going to be strengthened? Are you going to enter that phase? So what are the measures you have in mind with the ending of the measures against the incident? Ryosuke Sakaue: So I'd like to respond to both questions. So Media numbers for next fiscal year. So as Ikehata mentioned, in Q3, we had no revenue. And for next fiscal year, MINI Apps and SaaS, so will be single-digit billion. So JPY 1 billion to JPY 1.5 billion. It's very small, and it should be tens of billions in '27, '28. So we're preparing to achieve those numbers in terms of sales for '27, '28. So it will be mainly around official account and we're going to increase margin to achieve profit growth. As for the security incident, so end of March, we are planning to end the measures. So going forward after that, PayPay and LINE, Yahoo!, ID Link, some parts that have not been completed, those areas we would like to work on and prepare for those measures. That's all. Operator: Nagao-san from BofA Securities. Yoshitaka Nagao: This is Nagao from BofA. I have one question. At the outset, you talked about the next year's outlook and aiming for 10% to 15% growth. So thank you for sharing that. So that would mean the profit growth will be JPY 50 billion to JPY 75 billion profit growth. And I would like to confirm, as for Media plus JPY 10 billion, Commerce with the existing business, plus JPY 10 billion. And for the remaining, how do you aim to grow by 10% to 15%? You have the cost reduction and also recovery of ASKUL. Did you say that together will be JPY 30 billion? Can you clarify those numbers once again, please? Ryosuke Sakaue: Yes. As I'll be repeating my answer. So Media, Commerce were JPY 10 billion plus each. Commerce does not include ASKUL. Strategic businesses, plus JPY 20 billion is my image. And Media, Commerce and Strategic segment, outside of that cost reduction, it will be roughly JPY 15 billion cost savings across the organization. Yoshitaka Nagao: So, sorry for repeating my question. But -- and these numbers does not incorporate ASKUL's performance recovery? Ryosuke Sakaue: That is correct. Yoshitaka Nagao: I see. That's clear. Operator: From Nomura Securities, Harahata-san. Ryohei Harahata: Harahata from Nomura. Two questions. So Media business, the business environment change next fiscal year on ChatGPT. That's going to be a trial and Gemini also. So that may expand to Japan. So how do you see the change in the competitive environment? And second, there was a reporting in Nikkei in January. So the system foundation integration between Yahoo! and LINE. So Nikkei said several tens of billions yens of savings with the integration. So when are you going to see the impact of the cost reductions based on that? Thank you. Ryosuke Sakaue: To answer your first question, the Media competitive environment change may be including ads, so Kataoka will answer that one. Hiroshi Kataoka: This is Kataoka. Let me respond. So GPT and Gemini, number of users are increasing in the market. So there is the user need. And so there's going to be further usage. In addition to that, we are also doing testing. So with the increased number of users, there will be ad space and the testing has started to add ads to those spaces. So ad market, we think will grow gradually. That's our expectation. So there will be more users and ads will grow for them. But from existing search ads, is it going to simply switch from there to that? Well, the market itself is growing now. So the overall pie is growing. And so in terms of the weight, there's going to be this search ad. So in terms of how we understand the market, Well, there's going to be various solutions. So we consider that a positive thing. That's all. Ryosuke Sakaue: The second question. Next fiscal year, I talked about the three segments. And outside of that, there will be JPY 15 billion cost reduction. And one part of that is the LINE and Yahoo! technology foundation integration, lowering the infrastructure cost. So that is included in that JPY 15 billion. So that's going to bring about the impact over several years. So next fiscal year, yes, we would like to achieve impact so that there will be several tens of billion as of yen total. So I don't have the numbers at hand about what's the specific number for next fiscal year, but that's my response. Operator: [Operator Instructions] Next from Jefferies Securities, Sato-san, please. Hiroko Sato: This is Sato from Jefferies. Can you hear me? Ryosuke Sakaue: Yes, we can. Hiroko Sato: I have one question. In Q3, vis-a-vis the internal plan, how did you do? For Media for the internal target, was your result in line with the internal target? How about e-commerce, excluding ASKUL? And also for Strategic businesses, I think you outperformed the original plan or maybe in line with your internal projections. Also briefly, compared to the internal target, how did you do with the Q3 results? Ryosuke Sakaue: Yes. For Commerce, it was pretty much on par with the plan. For Media, it's difficult to say which point. But about a year ago, from that base point, compared to the internal original target, we were slightly short, but that was offset by strategic segment and others. Hiroko Sato: So if that's the case for Q3, compared to the internal target, Media was slightly weaker than your projection. Is that correct? Ryosuke Sakaue: Yes, just very slightly. Operator: From Daiwa Securities, Kumazawa-san, please. Shingo Kumazawa: For the EC service, so foreigners, maybe Chinese people may not be able to come to Japan. And EQ and hotel reservation, what's the expectation for January, March quarter and onwards? What's your current outlook? Ryosuke Sakaue: Hide will respond. Makoto Hide: This is Hide. EQ and Yahoo! Travel, so the current users are mostly domestic users. So Chinese people not come to Japan, leading to lower reservation, that's not going to happen because it's our main user base is Japanese users. Where there will be impact is inventory of hotels. So until recently, there were many inbound customers and so there was competition, strong demand. And so unit price have gone up. But in some areas, the unit price is coming down. So there is some impact there. Overall, not such a big impact. But in some areas like Toreta in Okinawa, we see a slight decline in unit price of hotels. Operator: [Operator Instructions] It seems that there are no further questions. So we will complete the Q&A session. So lastly, we would like to have Mr. Sakaue give a closing remark. Ryosuke Sakaue: Yes. So I have explained the presentation. So I will hand over to Idezawa-san for the closing remarks. Takeshi Idezawa: Yes, this is Idezawa, and thank you very much for your time today. As we reported, we had the ASKUL impact. But setting that aside, the businesses fundamentally have been making steady progress. For next fiscal year, we are aiming for 10% to 15% growth, and we are now putting together the plan for next fiscal year. And important thing is going to grow with the product. So we are now working on AI agent and also working on all the other services. So focusing on that and also with the ad business we will try to revive that for -- to achieve growth. So we would like to achieve multifaceted growth, and we hope to continue to enjoy your general support. Thank you very much for participating today. Operator: So with that, we would like to complete LY Corporation's Q3 earnings results for FY '25. Thank you very much for joining us today. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Welcome and thank you for joining Oaktree Specialty Lending Corporation's First Fiscal Quarter 2026 Conference Call. Today's conference call is being recorded. I'll now turn the call over to Alison Mirmy, OCSL's Head of Investor Relations. Our first quarter 2026 earnings release, which we issued this morning, along with the accompanying slide presentation, can be accessed on the Investors section of our website oaktreespecialtylending.com. Before we begin, I want to remind you that the comments on today's call include forward-looking statements reflecting current views with respect to, among other things, future operating results and financial performance. Actual results could differ materially from those implied or expressed in the forward-looking statements. Please refer to the relevant SEC filings for a discussion of these factors in further detail. Oaktree undertakes no duty to update or revise any forward-looking statements. I'd also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in an Oaktree fund. Investors and others should note that OCSL uses the investor section of its corporate website to announce material information. The company encourages investors, the media, and others to review information that it shares on its website. Now I'll turn the call over to Matt Pendo, President of OCSL. Matt? Matt Pendo: Thanks, Allison, and good morning, everyone. I'll begin the call with an overview of our first quarter results. Armen Panossian, our CEO and Co-CIO, will then share some commentary on the current market environment. And Raghav Khanna, our Co-CIO, will provide details on our portfolio and investment activity. Our CFO and Treasurer, Christopher McKown, will then review our financial performance before we open the call for questions. This year is off to a good start, and we delivered solid results for 2026. Adjusted net investment income for the quarter was $36.1 million or 41¢ per share, up modestly from the prior quarter. Once again, we fully covered our quarterly dividend with earnings. These results reflect our team's disciplined capital deployment into income-generating assets as well as the actions we took last year to optimize the liability side of our balance sheet. Importantly, this was the first full quarter reflecting the impact of the September rate cut. And despite lower base rates, earnings remained stable. Consistent with our dividend policy and first-quarter earnings, our board declared a quarterly cash dividend of 40¢ per share payable on 03/31/2026 to stockholders of record as of 03/16/2026. As discussed on our fiscal 2025 year-end call, we have several levers to help offset lower base rates and support net investment income. One of the key levers is our ability to prudently deploy capital into attractive investment opportunities. To that point, new funded investments, including drawdowns from existing commitments, totaled $314 million, up from $220 million in the prior quarter. The average all-in spread and yield of new private investments was 525 basis points and 9%, respectively. We have ample financial flexibility to continue deploying capital as we ended the quarter with over $576 million available liquidity. We are intensely focused on reducing nonaccruals and equity positions as another key lever for improving earnings power. In the first quarter, nonaccruals were relatively stable sequentially and down nearly 85 basis points year over year. At quarter-end, nonaccruals represented 3.1% of the total debt portfolio measured at fair value. For several of our nonaccrual positions, we are optimistic about the potential outcomes and are actively working to maximize recovery value. This quarter, we restructured our investment in Avery and put a portion of the loan back on accrual status, which is consistent with the broader objective of converting non-earning assets into income-producing assets. Avery continues to sell units, and it appears to be happening at an increased pace. Any proceeds from monetization, nonaccruals, or equity positions will be reinvested into income-generating investments. We will continue to evaluate these levers and their potential contribution to our earnings and dividend. As always, we remain committed to strong alignment with our shareholders as we navigate the evolving credit landscape. Now I'll turn the call over to Armen for an update on the market environment. Armen Panossian: Thanks, Matt. Current trends in private credit mirror the bifurcation we're seeing in the broader economy. Macro factors, including persistent inflation, tariffs, and ongoing technology disruption, are amplifying structural strengths and weaknesses, creating a clear divide between the winners and losers. Companies with scale, profitability, and financial stability have ample access to capital, and those that are struggling have limited or no access at all. Over the past few years, sponsors have favored recapitalization over exits in a muted M&A environment, creating a backlog of transactions waiting to come to market. With rate pressures easing, sponsors are increasingly turning to the M&A market to deliver much-needed liquidity for their LPs. While large-cap activity accelerated in December, middle-market volumes were still below historical averages. That said, we are starting to feel more confident that middle-market M&A activity will improve over the course of the year. Since the Fed rate cut in September, we have seen greater price discipline in the market and believe that spreads in private credit have now bottomed out at SOFR plus 450 to 475 basis points. We think this may be supported by elevated redemptions in the perpetual BDC space, easing the demand for new paper. We are cautiously optimistic that spreads will remain stable in 2026, with the potential to widen. Importantly, direct lending transactions continue to offer an approximate 150 basis point spread premium relative to broadly syndicated loans with similar credit quality. Pick interest remains prevalent in direct lending transactions, underscoring sponsors' preference for flexible capital structures. We continue to stay extremely disciplined in our use of PIC. In the first quarter, PIC as a percentage of adjusted total investment income was 6.3%, which is below the public BDC industry average. Even with tighter than normal spreads and looser terms, we are still seeing compelling investment opportunities as reflected in our strong level of originations this quarter. In the current market environment, we are prioritizing loans to businesses with resilient models, defensible market positions, and durable long-term outlooks that align with our bottoms-up, value-driven approach to underwriting. One area we are monitoring closely is the impact of AI on private credit and the broader economy. Software and applications have consistently been the primary secular beneficiaries of major technology shifts, and we believe AI will increase the total addressable market for software. That said, we expect outcomes to be uneven, increasing dispersion between players, as success depends heavily on execution and speed of adoption. For 2026, we see an active backdrop supported by robust hyperscale investment and a more active software M&A environment as incumbents look to consolidate amid public valuation multiples that are at multi-year lows. At the same time, we are mindful that current levels of AI-related spending are a meaningful driver of broader economic growth, and that disappointment in realized returns or adoption timelines could result in a pullback in AI investment. Against this backdrop of increasing dispersion and uncertainty, we believe our scale global investment platform positions us well. While US middle-market direct lending remains the foundation of Oaktree's global private credit platform, our expertise across multiple strategies and our ability to underwrite complex transactions expand our opportunity set and allow us to be highly selective. Specifically, the depth and breadth of our sponsor, corporate, and adviser relationships provide access to proprietary deal flow across asset-backed finance, European direct lending, infrastructure lending, and capital solutions. We remain constructive on the long-term outlook for private credit. In this environment, disciplined underwriting, selectivity, and active portfolio management will remain critical drivers of long-term performance. Raghav will now talk more about our portfolio and new investments. Raghav? Raghav Khanna: Thanks, Armen. Before turning to a standard discussion of portfolio activity, I want to build on Armen's comments on software and spend a few minutes outlining our approach to investing in the software sector. Our foundational approach to software investing has not changed in light of AI, but we have become more selective in the sector. At its core, our framework focuses on software providers that are deeply embedded in customers' daily workflows and business processes, require meaningful buy-in from multiple stakeholders, and have high switching costs. AI has raised the quality bar for software investments, and as a result, we have added incremental criteria to our underwriting for both new investments and existing portfolio companies. We prioritize software businesses with multiple control points, data gravity, business context, high mission criticality, and a coherent and credible AI roadmap. This has contributed to a higher pass rate on new opportunities relative to prior years. In addition, over the past twelve months, approximately 18% of our total software positions have been repaid, underscoring the quality of our underwriting decisions. Further details of the software portfolio are shown on page eight of the earnings presentation. As of December 31, software represented approximately 23% of investments at fair value across 28 issuers, and 94% of our software positions are first lien term loans, and we have only two ARR-based loans representing approximately 2% of fair value. Turning to the broader portfolio, as of December 31, 85% of the total portfolio was comprised of first lien senior secured debt, and the weighted average yield on debt investments was 9.3%. We remain committed to a diversified portfolio. The average position makes up less than 1%, and no position makes up more than 2% of our portfolio at fair value. Portfolio company weighted average leverage and interest coverage remain unchanged at 5.2 times and 2.2 times, respectively. Our team delivered a meaningful increase in investment activity, which grew our portfolio size by approximately $100 million to $2.95 billion. Newly funded investment activity totaled $314 million, up 42% sequentially. Paydowns and exits were stable at $179 million, resulting in $135 million of net new investments for the quarter. This increase in deal flow reflects the breadth of Oaktree's private credit platform combined with recent targeted investments in global sourcing and origination and specialized investment talent, which have meaningfully expanded the top of our funnel despite still lower volume in US middle-market direct lending. We continue to prioritize first lien senior secured investments in resilient, market-leading businesses supported by disciplined underwriting. First lien loans represented 92% of our new originations, and the all-in weighted average spread on new originations during the quarter was approximately 500 basis points. One transaction I want to highlight this quarter is our investment in Premier Inc., a healthcare services company that operates a large national group purchasing organization for a network of hospitals and healthcare providers. The company also provides a range of complementary offerings such as healthcare software, supply chain management, data and analytics, and consulting services. In November, PatientSquare Capital completed the take-private transaction of Premier at a total enterprise value of $2.6 billion. Oaktree has been growing its relationship with the sponsor and was deeply involved through the complex underwriting and negotiation process. Oaktree funds acted as joint lead arranger, providing nearly 40% of the first lien term loan and 30% of the revolving credit facility. The term loan carries an all-cash coupon of SOFR plus $6.50 and has two points of original issue discount. We were attracted to this transaction based on Premier's strong competitive positioning, secular tailwinds for healthcare spending, and high customer switching costs. During the quarter, there was one new addition to our non-accrual list. We placed a second out terminal approval site on non-accrual. Our prior position was restructured in August 2024, and this quarter we placed the restructured loan on non-accrual due to the ongoing challenging industry dynamics and the company's softer than expected outlook. At quarter-end, there were 11 investments on non-accrual, and as Matt noted, they represented 3.1% of the total debt portfolio measured at fair value. We continue to actively manage these positions with a goal of converting non-earning assets into income-producing investments over time. I'll now turn the call over to Chris to review our financial results. Christopher McKown: Thank you, Raghav. In our first fiscal quarter ending 12/31/2025, we delivered adjusted net investment income of $36.1 million or $0.41 per share as compared to $35.4 million or $0.40 per share in the prior quarter. This increase reflects lower levels of Part One incentive fee expense, which offset lower total investment income quarter over quarter. NAV per share was $16.30, down from $16.64 in the fourth quarter due to unrealized depreciation on certain debt and equity investments. The largest detractor in our portfolio was Pluralsight, which Raghav discussed in his remarks. We marked the equity position down to zero and marked down the second out term loan to reflect this challenged position. Adjusted total investment income decreased to $74.5 million. This compares to $76.9 million in the fourth quarter and was primarily driven by lower interest income due to lower reference rates and lower original issue discount acceleration, which was partially offset by higher fee income largely from higher prepayment and exit fees. Net expenses declined modestly compared to the fourth quarter, primarily reflecting a $4 million reduction in Part One incentive fees primarily as a result of our total return hurdle. OCSL continues to be cautious around the usage of payment in kind, with PIC representing 6.3% of total investment income in the quarter. Approximately two-thirds of our 1.07 times, up from 0.97 times last quarter, and total debt outstanding was $1.6 billion. The increased leverage mirrored our strong deployments during the quarter. Our long-term target leverage ratio of 0.9 times to 1.25 times remains unchanged. As of December 31, the weighted average interest rate on debt outstanding was 6.1%, down from 6.5% from the prior quarter, primarily driven by lower reference rates. Unsecured debt represented 59% of total debt at quarter-end, down slightly from the prior quarter. We have ample dry powder to fund investment commitments with liquidity of $576 million, including $81 million of cash and $495 million of undrawn capacity on our credit facility. Unfunded commitments, excluding those related to the joint ventures, were $247 million. Turning to our two joint ventures, together, the JVs currently hold $111 million of investments, primarily in broadly syndicated loans spread across 135 portfolio companies. During the first fiscal quarter, the JVs generated ROEs of 12% in aggregate. Leverage at the JVs was 1.7 times, unchanged from last quarter's. In addition, we received a $525,000 dividend from the Kemper JV. With that, I'll turn the call back to the operator for Q&A. Operator: Your first question comes from Finian O'Shea with Wells Fargo. Finian O'Shea: Hey, everyone. Good morning. On the portfolio, I'm not sure if you guys give one of those performance, you know, one through five kind of category breakdowns. But in any case, can you give us the picture of the portion of the portfolio at this point that is sort of underperforming its current security or underwrite? And where you know, sort of where we are in migrating out of the legacy type issues. Raghav Khanna: Hey, Ben. It's Raghav. So I point you to page 13. Oh, no. Sorry. It's not on there. So the way we think about our underperforming assets are, obviously, we have the nonaccruals, which you can see. The restructured equities. Then the third thing we monitor are positions that are trading or have been marked well below par. And that's obviously an indicator of stress. And in that portion, most of the loans and positions we have that are under, considerably below par are actually public positions, some of which we actually bought around in the high eighties to nineties and have traded down a few points below that. Most of them, we expect to rebound. There are a couple of names which are in the technology space that are, you know, as I'm sure you can see in the market, that are facing a little bit of pressure. On that point, by the way, you know, when we speak to our trading desk, a lot of those technology names are trading down on, like, $2 and $3 million trades, mostly from CLO sellers who are trying to manage their work tests and rating tests. We're not seeing huge selling in those positions. So we're watching those names, in particular, the technology names that are broadly syndicated loans and upgraded down. But there's not a lot of trading actually happening. There's not a lot of selling. It's mostly small selling from CLO sellers. Finian O'Shea: Okay. I guess that I'll pull it up. I guess, follow-up sticking with that topic. You gave some helpful views or color on AI. Risk to software, are you, you know, let's say to the extent there is volume, are there interesting names on the screen that looked like you had a good amount of liquid this quarter? Should we expect that to continue? Raghav Khanna: Yes. So one of the benefits we have is, we obviously have a large public markets business in our high yield business and in our senior notes business. So we're actually triaging all of the software names and technology. In addition to, obviously, very closely monitoring our private positions by developing AI scorecards and other types of scorecards to, again, triage. Because I think your sentiment is right that there is a bit of a baby out with a bathwater situation. And that's something we are looking at. Again, you know, when we look at what is the right point to step in, it doesn't feel like that right now. Just because, again, you know, the trading volume we've seen is either small ticket sales from CLOs or dealers trying to make a market. And these, like, $23 million trades are basically being used to mark positions down, you know, two, three points. So it looks very attractive when you look on a screen, at least for some of these names where the AI risk is low, but there isn't enough volume to actually want to step in and try to be a buyer. Finian O'Shea: Awesome. Thanks, everyone. Operator: Your next question comes from Ethan Kaye with Lucid Capital Markets. Ethan Kaye: Hey, guys. Thanks for taking the question here. So you disclosed median portfolio EBITDA increasing from $150 million to $190 million sequentially. I know, it feels like a pretty big change for one quarter. You did talk about there being maybe some more activity in the upper middle market, you know, as compared to the core middle market. But wondering really kind of what drove that. Was it, you know, a strategic result or more so, you know, a byproduct of the deal environment and company growth? Raghav Khanna: Yeah. So you're right. So it was really driven by our new originations that we funded in the fourth quarter, which were pretty large companies. They were all large cap, mostly on the sponsor side, mostly in the US. There were a couple of non-sponsor situations and a couple of non-US, really just European situations that we funded in the fourth quarter, but they were typically much larger EBITDA. So most of the growth in the median EBITDA, I would say, was a mix shift from those originations in the fourth quarter. But the overall portfolio EBITDA has also been growing. That, I would say, was a smaller portion of the increase you're seeing in the median EBITDA. Ethan Kaye: Got it. Great. And then one other. So I'm hoping you can kind of walk through the $32 million or so of unrealized appreciation. You know, we talked about Pluralsight, which appears to be about a third of that net number. But can you kind of talk through whether there was, you know, maybe any other themes or drivers of kind of the markdowns in the quarter? Christopher McKown: Yeah. Hey. It's Chris. I'll make a few comments and add any color. So you're right. You know, Pluralsight was the single largest driver, you know, accounting for about 38% of, you know, the total mark. Beyond that, you know, we did take some smaller marks in, you know, a few other private positions. And then we did see some of the quoted names trade down, which impacted some of the names that hold on balance sheet, yeah, as well as some of the JVs. Ethan Kaye: Okay. Great. Thank you, guys. Operator: Your next question comes from Paul Johnson with KBW. Paul Johnson: Hey, guys. Thanks for taking my questions. I mean, just a little bit more in terms of your sort of perspective on software, you know, I guess, how would you kind of characterize at this point, you know, top-line growth and EBITDA trend sort of broadly, you know, have you, you know, noticed any sort of change in the growth rates there? You know, back up in any sort of new activity for deals? I mean, how has that impacted the market, I guess, beyond kind of the weakness in some of the secondary loan prices? Armen Panossian: Thanks for the question. This is Armen. Look. I think big picture, I would say that it's too early to actually see performance degradation in any software name, and it's probably gonna take a fair bit of time to actually see any sort of dispersion in performance due to AI or disruption in performance to the AI. There've been a lot of splashy headlines, but it has not translated big picture into a widespread issue across the names. The reason for the concern isn't necessarily near-term weakness in performance. It's more that the concern around the long run calls into question the refinance ability of these loans when they mature. And that's why everybody should be looking at their software exposure because to the extent that a subset of software names, whether they're in your private equity book or in your private credit book, to the extent some of them are more susceptible to long-term dislocation due to AI, the more likely it is that the private equity sponsor fails to support them when maturity occurs. Even in advance of a real issue in performance. The other thing I would say is if some number of these software businesses are eventually disrupted by AI, it may turn out to be that they are binary in their outcomes. What I mean by that is if a business appears to be at risk of a meaningful AI competitor, you could see, depending on the nature of the contract and the nature of the business, you could see a pretty rapid degradation of performance in those businesses over time. Therefore, from an equity perspective and from a credit perspective, the recoveries could be quite problematic. So it is a significant reason to be concerned about in the medium to long term, but it's not gonna really emerge in the short run. And on this point, I think it's worth mentioning real quick, the concept of covenants in software deals. You know, covenants in software deals mirror the same sort of condition as just large cap versus core or small cap private credit. What I mean by that is this, there are software deals that have covenants. EBITDA covenants, and they tend to be smaller or midsized companies. But as businesses become large cap and as they are possibly financeable in the broadly syndicated loan market, those software loans do not have any covenants. So it's like Cub Lite, as you would imagine in another industry outside of software, in a large cap deal, you don't see covenants. In a smaller midsized deal, you do see covenants typically. And the covenants in software deals are usually one of two types. One is an EBITDA-based covenant as you would see in a normal business that is financed off of a leverage multiple. And the other would be ARR or annual recurring revenue. And those transactions that are recurring revenue-based, again, if they're middle market or lower middle market, they will have typically an ARR covenant whereby they have a total debt to ARR cap and that covenant usually falls away in about three years. And it converts into a more traditional leverage-based covenant. So the covenants can become a problem for ARR deals as they approach that three-year anniversary typically, and those deals that have such a covenant, again, large cap is less likely to have it than small. But it is yet sort of an additional factor that may ring the alarm bell a little bit sooner or earlier than the maturity. So in our case, by the way, in terms of OCSL, we really only have two ARR deals in our portfolio. Period. And one of them is already free cash flow positive and expected to repay imminently. The other is a very large transaction, a very large company with a very large private equity sponsor. We think it's pretty well insulated from AI competition, but we think we've done a we think we've been pretty forward-looking on the ARR side at least to avoid those situations that do not cash flow and therefore need some sort of access to the public markets or some sort of availability in the financing markets. We wanted to avoid those situations now for several years, and so that's not really an issue in our portfolio. Matt Pendo: I think, Paul, it's Matt. We put a new page in the deck, page eight, that breaks out our software disclosure in OCSL. Which I think is give us any comments if you have on it. But when we lay out there, we're gonna be a question on kind of performing in the business. So if you look at the EBITDA growth since we funded the deals, adds up about 20%. So it gives you a sense of we've had growth there. EBITDA margin is around 40%. So these are EBITDA positive companies. And about 18%, almost 20% of our software loans have repaid over the last twelve months. So a reflection of thoughtful and hopefully successful underwriting. But so we laid all those out on page eight, which is what we posted. Hopefully, that's helpful as well. Paul Johnson: It is. Yeah. Thank you for that. It's very good color there. And, Armen, appreciate, you know, the helpful answer there as well. One more bigger picture question, if I may, on this topic. Sort of two-part. But on that slide you mentioned, there's a 47% weighted average LTV ratio. I'm just curious, is that an LTV ratio at underwrite? Is that a more, you know, a current LTV ratio, obviously, based on valuations and leverage today? That's the first part of the question. And then as the other part of the question is bigger picture. You know, how much of a valuation sort of reset do you think that, you know, broadly the software space can absorb in the equity multiples before we do start to see, you know, widespread sort of restructurings and losses and bigger trouble within the software industry? Just given that, obviously, these are companies that are typically financed with lower LTV ratios at underwrite. And I'll hand it off there. Thanks. Armen Panossian: This is Armen. I'll answer that, Paul. I mean, so first of all, on that slide, that is the LTV at underwrite. Not a current estimate LTV. It's 12/31. Raghav Khanna: The current one. It's the current one at 12/31? Yeah. Okay. So 12/31, it would so that is our estimate of the LTV as of 12/31. And then in terms of the amount of degradation in the equity multiple that it could sustain, I would say, generally speaking, if you do see LTVs rise to 60%, that's getting to the point where it calls into question the refinance ability of the loan. Generally speaking today, outside of software, when there is an LBO, you're seeing something like 50 to 55% LTV at the max. You're not seeing 70% or 65% LTV deals generally. So what would happen theoretically assuming these businesses aren't burning a terrible amount of cash, and they get to within a reasonable time frame of maturity, if once the sponsor, you know, calls up the market and says, hey. You know, I want to refinance, and the response is going to be you're gonna need to put in more equity to kind of make this closer to a fifty-fifty LTV. Again. And the sponsors will then have to judge whether it makes sense to do that or not. Based on the future sort of risk factors and earnings potential of the business. But also the stage of deployment of the fund that those investments are in. If a fund cannot call capital, well, you can't then that sponsor can't support the business. If the fund is already a winner and has already returned a lot of capital, then it's more likely to let go of, you know, those straggler businesses that need additional capital to kind of punch through a refinancing or a maturity. And so the sponsor is less likely to support the business in that event. So there's a lot of economic and non-economic factors that come into play to judge the sponsor's willingness to support a business if and when the LTV of the loan exceeds, again, probably that 60, 55, or 60% LTV threshold level. Paul Johnson: Appreciate it. That's all for me. Thank you very much, guys. Operator: Again, if you would like to ask a question, press 1. There are no further questions at this time. I'll now turn the call back over to Alison Mirmy for any closing remarks. Alison Mirmy: Thank you all for joining us on today's call. Please feel free to reach out to me and the team with any questions you may have. Have a great day. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the DSV Annual Report 2025 Conference Call. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Jens Lund, Group CEO. Please go ahead, sir. Jens Lund: Good morning. Thank you for joining us here on this investor presentation that we will have in relation to the publication of our 2025 results. Today, I'm joined by Michael Ebbe, and we will basically go through the presentation as we normally do. And once we've completed the presentation, we'll be happy to take your questions. If we skip to Slide #1, there's just the reference to the forward-looking statements that I would like you to pay attention to and then, of course, the agenda as well. The highlights of the year, I think, is clearly, of course, for us that basically, we now can announce that we complete the Schenker integration at the end of 2026. I would say that the -- both the feedback from the employees and certainly also from the customers has been very constructive because we managed to take out the uncertainty, both for our employees, but also for our customers. I'll say a little bit more about the integration on the next slide. So I'll move on to the financial performance. It's been a tough market. You can also see from the reporting in the last quarter that there's a lot of headwind on FX, plus all the geopolitical issues as well and also yields, of course, under pressure as well. So very happy to deliver on our guidance. Furthermore, of course, we can see that actually we do have good progress both on the Road side and also on the Contract Logistics side as well. So we're very pleased with that. On the cash flow, I mean, at the end of the day, we have to transform what we're doing into cash flow, and it's really great to see that all the efforts we put in there also are visible in our cash flow statement. Of course, the EPS growth, this is what we're aiming for as well, and we are well on track to deliver on that in '26. So also here, we are pleased. On the outlook, DKK 23 billion to DKK 25.5 billion. I think if you take into consideration the significant headwind on FX, I think actually that we are satisfied with the guidance. Of course, it's a tough market. But overall, we think it gives a good indication that we managed to drive the company forward also in '26. And then the synergies, we're going to achieve the DKK 9 billion. We are confident about that. As we speak, we have actually already now made significant progress on the countries where we go live also here in '26. So we have a high certainty or conviction that we're going to deliver on those numbers. And here's just a little slide on the Schenker integration so that it's clear that, I mean, in '25, the numbers, they include almost DKK 1 billion in impact. And then, of course, there's going to be impact here also in '26, as you can see. And then we will have sort of the full impact in '27. You have to remember when you integrate a country that it may be that we go live in the country, but it will take some months, sometimes 3, 4, 5 months before the integration is actually completed in the country, and we've moved everything together. And that's also when we then realize the synergies. Sometimes we also have to go through due procedure with the employees because sort of the arrangements that you would have in the different jurisdictions. So it's always a little bit back-end loaded, the impact of the synergies, and that's also what you see in this table here. If we look at the financial highlights, I think we've managed to basically grow our GP and also grow basically our EBIT as well. The guidance is also mentioned over here to the right in the column. And I think the presentation here is fairly self-explanatory. So I won't necessarily mention the numbers. But sort of skip on to the Air & Sea slide, where you can see that the significant headwind on the Air & Sea side, if you look at the numbers, it's clear that the GP is very much being, what can I say, a little bit under pressure because of the yields not least on ocean freight, but also on airfreight. Here, you have to think about a little bit the FX as well that plays a role. Conversion ratio, of course, due to the full year impact of Schenker sort of coming in so that it will come down to the trough, and then it will start to go up. This is quite normal for an integration. And of course, that then drags the margin down, as you can see. There's nothing in the things that we are seeing that indicates that we're not going to get the productivity back to the levels that we have seen before. If we look at the Air freight market, I think you can see the GP here, of course, on the left. And on the right, there's been some discussions also about the yield of 7,600. Of course, there's some Schenker impact that -- where there's been lower GP than we have, mainly because of a lower VAS component, so less value-added services. And then, of course, also the FX impact as well. So I think that's probably, what can I say, the most important takeaway from this slide. If we look at the ocean freight, of course, you can see the GP takes a hit. The VAS element of what we're doing to the value-added services, it's been fairly stable throughout the period. But of course, the freight markup when the rates, they compress, then the markup on the freight side, it also compresses as well. And that's really what we see and what we're doing. Here, of course, the FX part also plays a role, but you will also have the -- of course, the fees at origin or post landed depending on how the trade lane looks that might be in currency where it doesn't have an FX impact. But the line haul and typically either at origin or at destination, you will have FX impact for both of them. So that's a little bit on the Sea freight. I think on Road, it's -- you see we are almost 1.5x up on the revenue, of course, also on the GP. You have to remember that Schenker has more groupage so more system freight. So there's more infrastructure. So the GP also has to be higher. And then, of course, that we managed, what can I say, to convert an important part to EBIT, is definitely important for us as well. I think if we look at sort of the gross margin, it will continue a little bit up in the next quarter because you get the impact of basically Schenker being included in the numbers as well and the conversion ratio on a good trajectory. And of course, operating results are also trending upwards. They also have to because we have significant infrastructure in relation to the whole network product that we have. I would just like to mention as well on the Road side that we managed to divest USA Truck. It was an operation -- hard asset operation in the U.S. and we couldn't operate that with a satisfactory financial outcome. So we found a new owner for it, and we hope that it will be successful there, and we're very pleased that we managed to finish or complete this transaction. On Contract Logistics, you can also see that we are not 1.5x up on size, but almost and definitely growing our business significantly. Also on the GP side, doing really well. And then, of course, the conversion from GP to EBIT here is also some economies of scale and plus that we have actually sanitized also some of our contracts, et cetera. so that we manage to produce the outcome that we all really need to see from Contract Logistics where you need to improve the return on invested capital. So one thing is actually that we have a plan to reduce the number of facilities. We're working on that, but also then that we drive the operational results up through a very intense focus on productivity. So really happy to see that this development is going in this direction because I think that's something that we've all been looking for. So now I will hand over to Michael, and he will tell you a little bit about the numbers. Michael Ebbe: Thank you, Jens. A quick run-through of the numbers. Yes, just short comments on the slide that we have here. For some of the KPIs of the -- that we have, it's clear that when we have the annual report, you have seen the, well, nice annual report, was announced this morning, that's clearly impacted by the Schenker integration and contribution. We can see that on the earnings, as Jens mentioned. You can also see it here on the transaction costs, which relates to integration cost of DKK 2.6 billion more or less. It's a little bit bigger Q4 due to the fast pace of integration that we have had. And then also, like Jens mentioned, the USA Truck business that we have divested is presented at discontinued operations as was the case for the last quarter. You also mentioned, Jens, that a thing that needs to be taken into consideration here is the headwind that we have predominantly in Air & Sea and the U.S. dollar and the dollar-related currencies. I think that also is notable here is the tax rates. Luckily, it's not -- every quarter we see a tax rate of 40% like we have this quarter. And this is, of course, not the long or even midterm tax rate, but this is due to the integration that we have progressed so fast. So this quarter is very, very, you can say, unusual for that one. Good to see that on our EPS that we are still on track for EPS creation in 2026. We jump to the next slide from the cash flow. You also already mentioned, Jens, and thank you for that, that we have had a strong cash flow both in the quarter and also on the year. This is something that has enabled us to repay some of the debt that we took when we acquired legacy Schenker. I think for the year, we've repaid DKK 7 billion and in the quarter, more than DKK 2 billion. So we are on track on reducing our debt. Another thing that is worth mentioning here is, of course, I'm very pleased with the improvement of net working capital. But I think we also said it last quarter that this is most likely not sustainable to have it at around 0%. Of course, we work hard to have it as low as possible, but the run rate will most likely be in the area of 2% to 3% as we have talked about earlier. Yes. And also last comment on that side is, of course, the gearing ratio is 2.8x. We are -- as I said, we have already paid back quite a significant amount, and we continue on that journey, so we can head down to a lower gearing ratio than what we see so far. Then what's more likely interest you the most. This is the outlook for 2026. Jens already mentioned that we have between DKK 23 billion and DKK 25.5 billion in outlook. Of course, it's an uncertainty period that we have had in the quarter and also what we look into with all the volatility that you mentioned, Jens. So this is the best, you can say, guidance that we believe that we can give right now. We expect the air freight and sea freight market to grow around 2% to 3%, in line with the GDP. Then, of course, the yield is something that we are working on. Of course, we'd like to have it as high as possible. We work, like you also mentioned, Jens, implementing the way that we produce in the DSV to focus on the value-add services, and that is hopefully something that will bring us to reach the guidance, obviously. But again, there are uncertainties, which is important to notice. And the tax rate also this year, in '26, will be impacted by the integration, again, coming back to the fast pace of integration, it will have an impact on the tax rate. And then also, again, Jens, and you have already said it all, but it's important that you are aware that the U.S. dollar-related headwind also, of course, impact our guidance. I think it's -- when we estimate, it could be around DKK 500 million. So that is something that we have to consume or assume into that numbers that we have. So last page before we go to the Q&A, some of the key takeaways. Fast progression on our most complex integration to date and still maintaining solid financial performance in challenging market environments. Also updated, you can say, time line on the Schenker integration will be done end of year 2026, with full financial impact on the synergies in 2027. The financial performance is challenging, but very well driven, especially by the Contract Logistics and Road business, which have a, you can say, higher ratio of our total EBIT than what we have been used to back in the days. And then the guidance that we have announced today, DKK 23 billion to DKK 25.5 billion. That was it, and then we have left quite some time for the Q&A session. So yes, please don't hesitate to press 1 and then ask the questions. Operator: [Operator Instructions] Our first question comes from Alex Irving from Bernstein. Alexander Irving: Two from me, please. First is on reconciling your messages on the gross profit yields. The 2026 guide of flat in Sea, slightly up in Air is clear, but you also state your ambition to raise yields to pre-deal levels. So there's a 2-part question on that ambition. How will you do it? And when will you do it? My second question relates to the IT stack in Air & Sea. How are you currently thinking about TANGO and the relative merits of investing in and adopting that platform globally versus eventually retiring it and using CargoWise One globally? Jens Lund: Good. Well, I can have a go at it. I think the GP yields if we sit and look at them, I think all the freight contracts are being renegotiated now. When we looked into it in the past, I think there was a clear tendency on ocean freight that we produced significant higher level of value-added services than you did on the Schenker side, and Schenker had more focus on the freight markup if we look at it. So of course, we want to introduce our way of working and then phase that in so that we basically do more work at origin, produce more services but also at destination. So that will phase in over the year, but we should have the full year impact of these changes, I guess, up towards the summer holiday. Then of course, the freight markup, if that is basically related to the container rates, then, of course, that will be under pressure. So it will be impacted by that. And I don't really see that the rates, they are coming up, at least not in the short to medium term. So we will see the yields. They will not necessarily be the 5,000 that you had seen almost, but it will definitely be somewhat less. And then if we take the Air freight I think it's a little bit the same. We have, what can I say, it's not that big a gap on the VAS side that you have on the value-added services on the Air freight. And then you see the freight markup, basically, when we took over Schenker, they had contracted longer than we had. So I think some of these things will impact it. A little bit that these contracts, they taper off, and then we can procure at market. And then we will see how that translates in. But we still believe that, what can I say, the figure around the 8,000 is realistic. Of course, the FX can also play a trick here, which is also part of us being at 7,600 right now. So there are many moving parts, but I think that gives you a pretty good idea. Then when it comes to TANGO and CargoWise One, I think we had also written in the annual report that we have a data platform behind the platforms that allows us basically to keep both platforms in sync. So today, now, we then produce -- because it is -- we have the customer integrations more already on the DSV setup, but we still keep TANGO running in certain areas. And then I think, as you say, we will have to make a choice which platform to go to. And it's very likely that we will, over time, gravitate towards our own solution. And that's what we're working on right now. Operator: The next question comes from James Hollins from BNP Paribas. James Hollins: Jens, just on the synergies, I mean, clearly, everyone in the -- so and so talking about the DKK 9 billion, how high is it going to go. Are we officially having to move on from talking about what the DKK 9 billion might be, whether it's DKK 10 billion, DKK 11 billion, DKK 12 billion? And really just think about cost efficiencies, or whatever the hell you want to call it, beyond 2026 and the impact on '27. Or ultimately, is there scope for that DKK 9 billion to be guided, indicated or rather much higher as we go through kind of this year? The second one, just on asset sales. Clearly, congratulations on the USA Truck. Are we still heading towards sort of DKK 1.5 billion? I think you've talked about historically. Maybe give us some update on the speed of asset sales generally and obviously, how that links to the trajectory for the return of buybacks maybe in H2 this year? Jens Lund: I think I'll answer the synergies. Michael, he can talk a little bit about the asset disposals afterwards. So if we take the synergies first, normally, when we do an integration, you are fairly right, then we have the initial plan, which we present to you and which we are working on right now. Then, of course, once the business plateaus, and we've done the integration, of course, there's an extra, what can I say, step in relation to that, actually, we would like to combine that step with also what we call AI and tech as well because we then take the platform that we've created and basically work on the transformation of that. If you follow some of us on LinkedIn, you can see that we're actually already moving ahead on that and mobilizing our leadership. We had the whole team -- the whole management team from the top 300 at an event where we start basically to mobilize for introducing transformational ways of working in our company. And it's always hard. Then do you want to label that Phase 2 synergies? Or do you want to label that AI and tech? We're actually going to talk to you on the Capital Markets Day about that. And we can also label it both, if you want, because it requires that basically we have a solid platform in place and that we can then develop that so that we drive the productivity out. Given our volume, the investment we make in this should, of course, be something that makes a material difference also for the company. Then the asset side, Michael? Michael Ebbe: Yes, it's correct. Yes, we have mentioned before that we want to -- on the legacy Schenker, we want to implement the DSV asset-light methodology to a wider extent that has been the case in Schenker. That also means that we have a divestment of around EUR 1.5 billion to EUR 2-ish billion that we are looking at. I think it's important to notice that much of it relates to sale and leaseback, so we'll implement the flexible model with leases that we have on facilities and terminals. That also means that you cannot take for granted that this EUR 1.5 billion to EUR 2-ish billion will reduce debt 1:1. There will, of course, be some, you could say, impact that we take on the leases as well. And it is predominantly sale and leaseback transactions that we're working with currently. James Hollins: Jens, if I could, is there any chance -- I guess you might say wait till May. If you were to move the DKK 9 billion to a new number based on, let's call them, additional synergies from AI and just working the business together, would you be happy to put a number on what the DKK 9 billion would be at in 2028 these days? Jens Lund: I think we also look into something that is material. I think we are still, what can I say -- we actually have implemented some of it, but we are also, what can I say, mobilizing for the different business areas so that we can project the outcome. But we see that there is room for significant improvement. And it's -- I can put as much on as it's measured in billions. I can say that, but I don't really want to go too far into it now. But of course, the technology today, it allows us to basically perform many of the tasks that we do in a much more efficient way than we could before. And it's clearly something that we embrace. Operator: The next question comes from Cristian Nedelcu from UBS. Cristian Nedelcu: The first one, if I could come back to the Air yield in Q4. You've mentioned this -- the contract duration mismatch at Schenker. Could you help us quantify a bit how much of a drag on the yield in Q4 that was? And in relation to your -- as you mentioned on the slide, the aspiration on the midterm to lift the combined yields in Air, could you give us an anchor, what would an appropriate level be, 8,500, more or less, any indication? And secondly, if you allow me on Road -- on the 2 divisions, Road and Air & Sea, could you please help us? If we focus on the white-collar employees only, could you give us a rough split between production or revenue generation employees versus support and operational employees? What's the rough split in these divisions? Jens Lund: I think if we look at the Road figures, you will have to speak to the IR team to get that level of detail. I think they'll be happy to give you some kind of a guidance on that. If we look at the Air yield, there are certain contracts that drag the yield down. I don't know exactly. I haven't calculated what part of the 8,000 down to 7,600 or whatever that is. Right now, we have 7,600, I think it is in yield in the quarter. So we've not made that calculation. You can get that perhaps from the IR team as well. What I can say is that right now, we are out contracting for volumes that we have to produce here in '26. And then many of -- some of the contracts actually, they continue all the way into '27. There's been certain trade lanes where Schenker have been very, very long. We've never been as long as that. And these contracts, obviously, given the market conditions, the rate has declined. So they're out of the money. Then you can say, is it an onerous contract? At the end of the day, then Michael can probably provide a little bit for it, but he cannot take the full pain away. And that's basically what you see reflected in the numbers. Then when we work on it, of course, you have the FX drag. And it's very difficult to put a hard number on it. We've tried it before. But there's a lot of moving parts in that number. So let's say the dollar goes down to below -- we've measured towards Danish kroner, it's now -- DKK 6.33 it was yesterday. So it costs DKK 6.33 to buy $1. But if let's say, it goes below DKK 6, then that will impact the yield. Last year, in Q1, it was more than DKK 7 to the dollar. So when you translate the income into Danish, it means a lot. So the yield guidance here, we can see that there's less VAS, we can lift it on that. We're going to do that over the next couple of quarters. And then, of course, the rest is moving parts. Cristian Nedelcu: Can I have a quick one on your production cost per unit. If we look pre-Schenker over the last 5 years in Air & Sea, your production cost per unit has increased 25%, 30%. And this is despite the fact that your volumes in Air & Sea have almost doubled before the Schenker acquisition. And this is totally in contrast with the historical operating leverage you were showing when volumes increased. Could you help us understand what explains this development? Is it fair to assume there are some low-hanging fruits in terms of improving productivity in Air & Sea or not really? Jens Lund: I'm not really sure what period you're measuring on right now. Is the baseline the last quarter? Because then, of course... Cristian Nedelcu: The last 5 years, the sort of 2019 to 2025 before the Schenker integration. Jens Lund: Before the Schenker integration, I don't know what your numbers are, how they look. I think if we look at the number of shipments per person per day, we've been driving it up. Then, of course, there are other factors if you sit and look at it over this period. I don't know exactly what the baseline is for this calculation. So we have to get the numbers. It's really difficult to comment on, what can I say this -- so I think we will have to get the details in, and then we'll be happy to provide you with an answer and also break it down so that you get, what can I say, the proper response. Operator: The next question comes from Alexia Dogani from JPMorgan. Alexia Dogani: Just firstly, can we go back again a little bit on the yields for Q4? Clearly, that was a disappointment versus kind of what the market was expecting. Can you help us understand what really drove this? Was it kind of the Schenker underlying, which was driven by the purchasing decision? And customer loss, you're saying there hasn't been anything significant, but GP is coming weaker than expected. So can you help us understand again the moving parts? And then secondly, very encouraging your comments, Jens, about kind of the AI and tech opportunity. Going through the accounts, you also highlighted, however, as a higher risk to the business. How should we kind of see those 2 parts given what you just said in terms of kind of potential earnings upside? Jens Lund: I think if we look at the GP down, if you sit and look at it, it's clear. If we look at the customer base, just to get this, what can I say, clear, we don't really see any customers that have left us. But let's say, for example, that you work in automotive. It's not a small vertical for us. And let's say, you are a German OEM that produces cars in China. Then, of course, the demand for foreign cars in China has declined quite a bit, and they now procure local cars instead. So of course, if you sit with that customer, you still have to trade lane. You still have the volume, but there's less volume to move. So that is what we see on some of the accounts that they are down trading quite a bit. So here, of course, automotive is probably the vertical where we've had the most headwind. So it's not that we lose the customer, but that there's less work to be done. Also, many industrial companies have some headwind, of course, not the ones that are related to the technology boom that we see with data centers, but there are many other industrial companies that face some headwind. Retailing has been fairly subdued as well. I think that's fair to say. We serve some of the luxury brands. They're very important customers for us. I think you're probably also well aware that some of them perhaps have had a period where it's plateaued a little bit for them and perhaps even some of them contracting as well. So some of these areas, you haven't lost a customer, but they ship a little bit less. So that's something that we are feeling. Then on top of that, for the GP, I think it's fair to say that it's crunch time when it comes to, for example, ocean freight and then, of course, also the FX impact. So if I look at all this, then it really becomes material when you look at the numbers. So I would probably say this is what is going on. It's -- in a way, it's a very rewarding market because you really have to earn it now, and your service has to stand the test. And then Michael, do you want to say something? Michael Ebbe: There is also another thing that you need to bear in mind when we talk about yield. We also have some economies of scale for the yield. If we are able to push more volume through, that should also have a higher yield. So I would be careful to draw too much attention to Q4 isolated. But again, we can talk with Investor Relations of some of the building blocks. But lower volume will also sometimes be pressure a little bit on yields because there are some of the facilities that we cannot use to the extent that we want to. Jens Lund: Al and tech, I think it's clear that we have to drive the productivity up when it comes to this. There are domains where we're already doing that, and we want to continue basically to have a significant focus on that because at the end of the day, when the business is consolidated, then we have a certain GP. And then, of course, we have to convert that into EBIT. And here, it is important that we basically embrace technology for that. It's been something that we've been doing for years. It's also part of our ability to acquire a company like Schenker and integrate it. It is, because of the back end. So we're going to continue on that. Alexia Dogani: And just to help us a little bit with the math, can you give us an indication of the combined sea exposure to VAS, to value-added services, including Schenker? Because if I read your comments correctly, you expect ocean rates to soften in '26, but that softening is offset by an increase in value-added services for the Schenker portion. So if you can just give us the split roughly, would be very helpful. Jens Lund: I would say the VAS that we typically would have given the yield that we have now is probably 2/3 of the GP and then 1/3 of the GP would then be, what can I say, the freight markup in what we have, roughly. Sometimes the VAS has been perhaps down to the 60%. But now I think it's at a higher part because the freight markup is lower. So that would probably be a good indication for you to look at. Then if you look at the Schenker part, it's probably had 60-40, the other way around for the business. So we then have to lift that up. But I think also the freight markup might decline a little bit on the Schenker part as well. But they would have had a lower GP per unit than we've had overall. So I think that's the building blocks I can give to you. Operator: The next question comes from Ulrik Bak from Danske Bank. Ulrik Bak: Just a question on your guidance. So given the full year impact from Schenker and the synergy uplift in '26 versus '25, the '26 guidance midpoint suggests negative EBIT growth for the organic business or the existing business that you also had last year. In that context, are you planning any cost measures to the existing parts of the business on top of the, yes, cost synergies? And then the second question is on the guidance sensitivity on the USD FX. Can you give some ballpark estimates if it deteriorates another 5% to 10%, the USD, what it would mean for your guidance? Jens Lund: Yes. I think if we look at the negative growth, you're completely spot on. This is why we have to drive the productivity up and, of course, introduce more technology, so that we get a higher productivity. I don't know if -- so it's -- we can call it whatever we want, Phase 2 synergies, AI and tech, or if we want to call it something else. It's, in reality, the same we are talking about. We need to increase the productivity, and that's where our main focus is. Michael will take the other one. Michael Ebbe: Yes. Of course, there are many moving parts for the USD, but roughly, if we take, you can say, 4% decline compared to what we have in our base right now, that will mean maybe DKK 500 million. So of course, there are some uncertainty. Operator: The next question comes from Jacob Lacks from Wolfe Research. Jacob Lacks: So with the integration now expected to be complete this year, can you give an update on how you're thinking about capital allocation? Is there a hope that there can be another deal in '27? And then one on AI. Your U.S. -- one of your U.S.-based competitors just talks a lot about AI and is showing particularly strong labor productivity within the truck brokerage business. What segments do you think are the biggest opportunity for you? And are there any applications you're trialing to date that you're able to discuss here today? Jens Lund: Yes. I mean, we would hope there would be a deal in '27. So it's clear we have, many years ago, laid out the way we allocate capital. So let's say we have too much debt compared to our aspiration. We have a target of 2x EBITDA. Then we focus on repaying that debt. The next thing that we do is -- we can also, of course, look at it sooner, but we really prefer that we get the debt down to 2x. Then if we can do something to develop the business and invest in the business and allocate the capital, then, of course, that has a significant focus as a #2 on that list. And then the remaining capital, we want to pay that back to the shareholders at the end of the day. And I think this capital allocation policy, I don't know, we wrote it more than 20 years ago. And I think we've stuck to it, and I think we've got a great alliance with basically all our shareholders. So I think that's -- yes. So that's basically where we add on that. And what was the other question? Michael Ebbe: AI. Jens Lund: AI. There's a lot of talk, of course, of AI. I think if you look into the numbers of many of those companies, I was in Davos, they had AI and then they had another thing they talked about, it was called ROAI, so return on the assets invested. And I think we still need to see that in the numbers of many companies. I think the company you're referring to, you can probably see a little bit on the land-based business in the U.S. You can see that the productivity has come up. I think if we sit and look at it, where we can get the productivity up is in domains where there's a lot of labor. So for example, for us, we are on the custom side, introducing what we call the AI Factory, where we globalize the way we do customs formalities. We have more than 5,000 people doing that in the group today. We could take a booking domain, which is also an area that we are working on right now and getting in control of and where we can introduce technology like that. Then we transform the business. We can take a quote domain. It's another domain that is very important as well when you run the business. And take it domain by domain through the flow and basically get yourself organized so that you embrace the technology, not on a personal level. When you introduce technology, you have to understand you can do it on an enterprise level, regional level, you can do it on cluster, country, branch, department, person level. The further you go down into the stack, the less benefit you get of it. This is the reason why I think it's very wrong when people they say, "Well, we got thousands of agents." Because the improvement, if they replicate the same process, is very slim. It has to be something that is done on an enterprise level. This is the only way we've managed to create value. This is also how you transform the business. So that's a little bit of AI, but I think I'll save the rest for the Capital Markets Day. Otherwise, there will be nothing to talk about. Operator: The next question comes from Kristian Godiksen from SEB. Kristian Godiksen: A couple of questions from my side. So to start off with, wondering about the situation in the Red Sea, how that plays out. So yes, both on your assumption and your guidance and also what to think about it? If you assume a return, what is the opportunity for the increased volatility and complexity that will -- I guess, that will mean? And then I guess, on the back of that, potential further pressure on freight rates from overcapacity and hence the pressure on the markup? That would be the first question. And then the second question would be on the -- just wondering on what are the main delta in the guidance range in terms of parameters? Is it where you see the most uncertainty? Is that yields, phasing of cost takeouts, volumes or other? That would be good to know. Michael Ebbe: I'll give it a go. On the Red Sea and how it impacts, I agree that, that will free up some capacity, obviously, if you get the transit time reduced quite a bit. So that will free up additional capacity of the fleet and the vessels. So that will, of course, like you maybe allude to, put additional pressure on the freight rates, coming back to the discussion we had just some minutes ago with Jens and the value add versus the freight pass-through part. But of course, the pass-through part that can come under pressure. What also though remains to be seen is whether if everybody of the carriers start to reroute again, I think that will put some temporary pressure on some of the ports in Europe. So it remains a little bit to be seen how the impact will be, the way I see it, at least. And then the main drivers for the guidance, it is predominantly the yield factor. I would though say we talk a lot about the yield now, and that is, of course, very clear. And of course, for obvious reasons, right now, our -- roughly 60% of the business is now Air & Sea and 40% is Contract Logistics and Road, which has Contract Logistics and Road, which we've seen quite good pace in Q4. It's a little bit more stable, you can say, environment. But of course, the yield is the biggest swing factor in the guidance that we have. Kristian Godiksen: Just one follow-up on the Red Sea part, just to make sure. So what are your assumptions in the guidance? Is that just as is now? Or what is the assumption there, sir? Michael Ebbe: Yes, that is as is. That, when we prepare the guidance, that is as is. Our base scenario is as is. Kristian Godiksen: And if you were to give some kind of sensitivity, if you have -- I guess that would be fairly okay to assume that you will have a reopening of the Red Sea, then on the margin, what would that mean? As I hear you, potential more value-added services, but obviously, pressure on markup. So what would that do to your expectations for 2026? Michael Ebbe: I think you need to put it into spreadsheet because this will be then 60% of the business, and then it will be 50% of the GP, and then it will be 1/3 of the GP. I cannot answer specifically on that one. Jens Lund: Let's put it like this. Of course, if the freight rates come down, it puts a pressure on the freight markup. Then you'll probably have an assumption for what happens and then perhaps you can try to model it like this. Yes. Kristian Godiksen: Yes. But I guess some offsetting factor from potential value-added services and all, the complexity that would mean from the congestion in European ports and the likes, I guess, there's some offset there -- offsetting factor. Jens Lund: I mean a custom export declaration, if you do that. It's an export declaration. A local collection is a local collection. So these things, they are not necessarily impacted by the freight markup. So that's fairly stable, what you're doing, consolidation of freight, freight documentation, preparation in the gateways, et cetera, et cetera. All these things that we get fees for, they are services. So they should be reasonably stable, I would say, or highly stable actually. So -- yes. Michael Ebbe: And lastly, of course, it remains on how the carriers, they react. They're the ones setting, you can say, the rates on the sea. Operator: The next question comes from Marco Limite from Barclays. Marco Limite: I've got 2. One is on the '26 guidance. So in your guidance, let's say, by division, the moving parts by division, you are saying yields stable in Sea, up in Air, volumes up, Road sequentially improving, Contract Logistics continues to grow. So directionally, all the divisions are improving. Now if I look at your guidance like-for-like, take out FX, take out synergies, basically, you are guiding for '26 like-for-like down DKK 1 billion to DKK 2 billion, but all the divisions are improving. And then also, if I, let's say, do the fourth quarter, DKK 5.6 billion EBIT times 4 plus the extra synergies, I get close to DKK 26 billion. So yes, why you are basically guiding for EBIT down year-over-year at group level, but all the divisions are improving and the Q4 exit rate is not that bad? This is the first question. And the second question is on Q4. Now out there, there are some concerns that the quality of your Q4 earnings was not amazing because there was a big beat in CL and Road, miss in Air & Sea. And people are -- some people are stressed that this is -- the quality of the earnings is not sustainable. Can you please explain what is behind the big beat in Contract Logistics and the miss in Air & Sea? Is this group cost allocation more into Air & Sea, less in CL? How we can be relaxed that profitability in CL and Road is sustainable? Jens Lund: Yes. I think, Michael, he can at least start with the guidance and the quality of earnings. Perhaps I can just allude to that beforehand. I think the quality of earnings, if you sit and look at it, I think we have explained what happens in the Air & Sea side right now. I think if we look at the quality of earnings in Road and CL, if you look at it last year, actually, we had a pretty bad quarter on the Road side in DSV. So the baseline is pretty good. The business is 1.5x larger. So if you adjust that, I think more or less that we are operating at the same profit margin as we've done before, perhaps even a little bit lower. Right now, we are rightsizing 2 networks and basically combining them. So I think it's -- there should be some improvement possibilities within the road side when we come to that. If we look at CL, it's not exactly 1.5x up. but there's not much missing before that. So if you look at the DSV side, where we had been a little bit under pressure, now we are cutting costs, and we are rightsizing the business. We have a margin around, 10% on the CL side. So I'm not sure what the people they are talking about. Then I think if we look at the Air & Sea side and the yields, I think the yields and the volumes for that sake, as we have explained, it's under pressure right now. This is the reason why the results, they look as they do. But I think we have a plan where we cut cost and then where we are facing the market and where the Schenker exposures. Either the contracts that have been entered into the customers or the procurement contracts that they have had, they run out and then they become, what can I say, DSV standard procedure and standard contracting. So I think that's, in reality, what happens in the business. There might be a lot of speculation about it, as I can understand. But this is how the business is operating. Then I think Michael can say a little bit on the guidance. Michael Ebbe: Yes. Two things. First of all, I think when you look at Q4 isolated and you benchmark towards last year, remember that last year was very strong in Air & Sea, so it's strong comparatives, whereas CL and Road were softer last year. Another thing that you need to bear in mind is that with the acquisition of Schenker, the typical DSV seasonality changes a little bit. So we should have higher earnings in Q4 than what you traditionally in the legacy DSV have seen. In terms of the guidance, basically, I think it already has been answered earlier in the call where it was roughly around 1 point something miss, you could say, on less EBIT. And I think we have touched upon the reasons of the pressure that we have seen in Air & Sea. And I think that it is -- we have embedded, you can say, slightly reduction in EBIT on, you can say, what you call organic or whatever. Operator: The next question comes from Patrick Creuset from Goldman Sachs. Patrick Creuset: Just on Road, a couple, please. Just firstly, on the cycle, if you could comment a little bit what you're seeing on the volume side? And also pricing, both from the outside, seem a little bit firmer, firming up into 2026? And then maybe also what you're seeing going into this year in Road from a cyclical point of view, given the low point we're coming from? And then secondly, I mean, looking at your Road margin at this early stage of the integration in Q4, seasonally low quarter, you're exceeding 4% margin already. And then someone else mentioned your U.S. peer now pushing more into the high single-digit margins. Historically, you've performed comfortably in line, if not above, with said peer when it comes to productivity and EBIT margin. So more structurally, I mean, where can you take this division, I mean, at least directionally without taking sort of -- previewing the CMD. But what's the opportunity here in terms of step change in margins, specifically in Road? Jens Lund: Yes. I think if we look at Road right now, I think it's -- I mean, we have some exposure in the U.S., but it's limited. We have some exposure in Asia, the Middle East, a little bit in South Africa as well. So I'll probably say around 90% of the volume is actually here in Europe, if we sit and look at it. So it is very exposed to the European market. What we've seen is actually, as we talked about it actually in the last quarter of '24, we saw a lot of pressure, and that sort of went into '25 as well, and I think all the rates they had adjusted at that time. And right now, we don't see that there's a new wave because the margins are so slim, so the market has reached the bottom. So now the volumes, it's perhaps growing 1% or 2% road as we speak. And there's something that tells us that many of these investments that are going to be made in Europe, money being pumped out into the economy. It could lead to a situation where there would be a potential -- a little bit better situation for Road during '26. Right now, we've not factored that in, but that would be a little upside that we could get. And that might even drive the rates a little bit up because I think much capacity has gone out of the market because it's really compressed quite a bit. If we then look at the Road margin, I mean, if we sit and look at it, we take 2 networks. We take, what can I say, one of them basically out and produce it in the other one. So of course, if you then sit with fixed infrastructure and cost, there's going to be a margin expansion because of that. And I said before that we need to create, what can I say, a solid return on the invested capital on the Road side. And in order to do so, you have to gravitate towards something that is double digit. It might sound a little bit, what can I say, ambitious, but that is what we need to do. And I can tell you right now, what we are working on is actually a strategic, what can I say, plan where we say we use this zero-principles thinking where we said, "How should the network look?" And then try to not think about what we have today, but which terminals do we actually need to operate the volume that we have. Because you come out of legacy, you come out of 2 legacy companies, and the infrastructure is probably not sort of matching the requirements that we are having. And here, we see that we should be able to take out additional terminals, additional infrastructure so that we could leverage on what we have, get a higher throughput and then, of course, have less invested capital. And I mean that's why we're all here to reduce, what can I say, the capital that we deploy and maximize the throughput of it so that we get the return that everybody wants. So that's probably the -- what you're going to hear a little bit more on the Capital Markets Day, but I gave you a little teaser on it. Michael Ebbe: Maybe it's a little bit audacious, but I remember at the last Capital Market Day where how you referred to the Road business, if you set it up correctly. But let's see what you will say next time we have the Capital Markets Day. Operator: The last question for today's call comes from Cedar Ekblom from Morgan Stanley. Cedar Ekblom: A follow-up question on AI. I know you don't want to talk too much about it and save it for the Capital Markets Day. But your share is moving quite strongly as the call is going on. And I expect that that's got something to do with you sort of mentioning that there is potentially billions of savings to come from AI. And my question relates to how we think about the retention of those benefits, because freight is an industry where historically, at least, when you've lowered your cost to serve, you've had at least some of that being passed on to the customer. So maybe it's a bit more of a medium-term question, but I'd like to understand how you think about sort of differentiating the DSV strategy as it relates to AI, productivity, automation, et cetera, relative to what I'm sure others in the industry will also be looking to achieve. Jens Lund: I think I actually answered that question a little bit, because you can introduce AI in many different ways. I think the way we want to do it is we want to transform the business. So it means that we organize ourselves in a different way on enterprise level. So let's continue on the customs example. So beforehand, customs could be handled either on a desk or by a person, sometimes in a department, sometimes on a branch level, sometimes on a country level. Today, we move these people that do that into a hardline organization that basically uses technology that is very advanced. And then the people that sit at the fore water, they get an SLA. So they get a service from somebody else instead of producing the thing themselves. It's very hard to drive those changes in 90 countries and get -- create a global organization for that. So here, we use the change capacity and the governance model that we have to create that. I think many people are reluctant to make those kind of changes, but this is the only way you can capitalize on the technology. So then it's how much change capacity do you have. We have to get there first. And the people that don't make that, they will have -- it's not AI that is the problem. It is your colleague that embraces AI in a better way that is the problem. And we believe this is the better way. So we want to be the problem for everybody. Okay. No. I've got a little cough, but I actually wanted to finish off by thanking for your interest. I would also like to thank all the DSV employees for their hard work, all their efforts. It's been a remarkable quarter and a remarkable year, and I can't thank you enough and also our customers for their trust. And we look forward to catching up again and speaking to you after Q1. Have a good day.
Operator: Welcome to the Fourth Quarter Investors Conference Call. Today's call is being recorded. Legal requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risks, and actual results may be materially different from any future results, performance, or achievements contemplated in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's annual information form as filed with the Canadian Securities Administrators and in the company's annual report on Form 40-F as filed with the US Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is February 4, 2026. I would now like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir. Thank you, Tanya. D. Scott Patterson: Good morning, everyone, and welcome to our fourth quarter and year-end conference call. Thank you for joining us today. Jeremy Rakusin is on the line with me, and we'll follow my overview comments with a more detailed review of our financial results for the quarter and the full year. We're pleased with how we closed out the year in an environment that continues to challenge us across several of our businesses. Our fourth quarter results in aggregate were modest than our expectation that we communicated at the end of Q3, with revenues up 1%, EBITDA flat with the year ago, and earnings per share up 2% to $1.37. For the year, we reported solid results that we're proud of in the face of tough macro headwinds. Revenues finished 5% up over the prior year, Consolidated EBITDA was up 10%, double the revenue growth, reflecting a 40 basis point improvement in margins. And earnings per share reflected further leverage, with year-over-year growth at 15%. Looking now at the separate divisions for the quarter. Revenues at FirstService Residential were up 8% in aggregate with organic growth at 5% matching our expectations and the results for Q3. The growth was broad-based across North America generally reflects net contract wins versus losses. Looking forward, we expect organic growth to continue in the mid-single-digit range. There could be modest movement from quarter to quarter, with seasonality and fluctuation in ancillary services, but on average for 2026, we're expecting mid-single-digit organic growth similar to our full-year result for 2024 and 2025. We will face organic growth pressure early in the year relating to declines in certain amenity management services that we provide to some of our managed communities but primarily to multifamily rental and other commercial customers. These services include pool construction and renovation, which is being impacted by the same economic headwinds we're seeing in roofing and home services. It also includes contracts to provide custodian and front desk concierge labor. Several contact contracts primarily with multifamily apartment owners were not renewed at year-end. Some voluntary and a few involuntary all primarily due to pricing. These cancellations will impact our revenue, but have little impact on profitability. We expect to be at the bottom end of our mid-single-digit range at 3% or 4% for Q1. This is unrelated to our core community management business which we believe will carry the division to mid-single-digit organic growth for the year. Moving on to FirstService Brands. Revenues for the quarter were down 3% in aggregate, and 7% organically, with organic growth at Century Fire more than offset by organic declines with our restoration brands and our roofing platform. Looking more closely at restoration, Paul Davis and First On-Site together recorded revenues that were flat sequentially compared to Q3 and down 13% versus the prior year. Somewhat better than expectation, due to our pickup in claim activity during the quarter with our Canadian operations. We benefited in the prior year quarter from Hurricanes Helene and Milton, and generated about $60 million in revenue from the storms. Excluding these specific events, our restoration brands were up modestly year over year. As I described on last quarter's call, revenues from named storms have on average exceeded 10% of our total restoration revenue since 2019. For 2025, revenues from named storms amounted to less than 2% of total restoration revenues. We finished the year down 4% in restoration, relative to an industry that we believe was down over 20%. Our platform investments and focus on day-to-day service delivery continue to drive gains in wallet share with key national accounts and overall market share. Looking forward, we expect to show growth for the full year 2026 assuming we return to historic average weather patterns. Our restoration brands have grown on average by 8% organically since 2019 and we expect that to continue on average going forward. Our backlog at year-end was down from the prior year, pointing to a revenue decline for Q1. However, we've seen an uptick in activity over the last week from the expansive winter storm. It's still very early, but based on activity levels, and the nature of the quick response mitigation work, we expect to show Q1 results that are modestly up over the prior year. Moving to our roofing segment. Revenues for the quarter were up a few percentage points the result of tuck-under acquisitions made during the year. However, as expected, revenues were down organically by over 5%. The demand environment in roofing remains muted. New commercial construction outside of the data center and power is down significantly. On the reroof side, we continue to see tighter capital expenditure budgets amongst our customers and delays with some larger projects. As I noted last quarter, we're confident that our market position and relationships remain strong. Bid activity is solid, and our backlog is stabilized. Our expectation is that we will show modest organic growth this year with sequential improvement quarter to quarter. Looking to Q1, we expect revenues to be up mid-single-digit versus the prior year, and approximately flat organically. Now to our home service brands where revenues were up by 3% over the prior year, better than expectation, and a result we're proud of in an environment where consumer confidence remains depressed. The consumer index was down again in December, marking five months of sequential decline. As I said out on the last few calls, our teams are doing more with less. By incrementally improving lead to estimate ratios, close ratios, and average job size. Current economic and industry indicators do not suggest an improved environment through 2026. Our lead flow the last several weeks is flat to slightly down with the prior year. If this continues, our current conversion metrics would suggest that we will drive higher revenue year over year in the low to mid-single-digit range for Q1 and 2026. And I'll finish with Century Fire where we had a strong Q4 and finish to the year. Revenues were up over 10% versus the prior year with high single-digit organic growth. Century continues to experience solid growth on both sides of its business. That is installation, and repair service and inspection. The growth is broad-based across almost all our branches at Century. We're benefiting on the installation side of our business from solid activity in multifamily and warehouse with some positive exposure to data center construction. Our backlog is strong, and activity levels remain buoyant. Looking forward, we expect another year of 10% growth or more spread evenly across the quarter. Let me now call on Jeremy to review our results in detail and provide a consolidated look forward. Thank you, Scott. Good morning, everyone. Jeremy Rakusin: As you just heard for the fourth quarter, we delivered on our expectations provided on our Q3 call which culminated in solid annual operating and financial performance. As we look back at our consolidated annual results for 2025, we are pleased with the growth we delivered on the earnings lines. Notwithstanding the top-line headwinds we are facing throughout the year. I'll first walk through a summary of these financial metrics and then move on to reviews of our segmented divisional performance as well as our cash flow and balance sheet. Note that my upcoming comments on our adjusted EBITDA and adjusted EPS results, respectively, reflect adjustments to GAAP operating earnings and GAAP EPS, which are disclosed in this morning's release. And are consistent with our approach in prior periods. During the fourth quarter, our consolidated revenues were $1.38 billion, up 1% versus the prior year period. Our adjusted EBITDA of $138 million was in line with Q4 2024, yielding a margin of 9.9% slightly down from the 10.1% level during the prior year. Our Q4 adjusted EPS was $1.37 up from $1.34 in last year's fourth quarter. For the full year, consolidated revenues increased 5% to $5.5 billion and adjusted EBITDA came in at $563 million, up 10% over the prior year, and delivering a 10.2% margin up 40 basis points compared to 9.8% in 2024. Adjusted EPS for the 2025 fiscal year was $5.75, up 15% versus 2024. This five, 10, and 15% top to bottom line annual growth profile reflects the exceptional efforts of our operating leaders across every brand. As they emphasize efficient jobs, execution, the face of market challenges and drove margin improvement where possible. Turning now to a segmented walk-through of our two divisions. For FirstService Residential, revenues during the fourth quarter were $563 million, up 8% and the division reported EBITDA of $51.5 million, a 12% increase over the prior year period. Our margin for the quarter was 9.1%, modestly up from the 8.8% in Q4 2024. The quarterly performance largely mirrored the full-year growth profile for the division, We closed out the year with annual revenues of $2.3 billion up 7% over 2024, including 4% organic growth. Annual EBITDA increased 13% with our full-year margin at 9.8% up 50 basis points over the 9.3% margin for 2024. In summary, the FirstService Residential division achieved key financial targets for the year, getting back to mid-single-digit annual organic top-line growth, while also driving profitability to the upper end of our 9% to 10% annual margin band. Looking next at our FirstService Brands division, the fourth quarter included revenues of $820 million down 3%, compared to Q4 2024. And EBITDA came was $88.5 million down 12% year over year. These year-over-year decreases were due to declines in organic top-line performance and the related negative operating leverage at our restoration and roofing brands partially offset by another strong quarter of organic growth and profitability at Century Fire Protection. The brands division margin during the quarter was 10.8% down 110 basis points from 11.9% in the prior year quarter. For the full year, revenues were $3.2 billion and EBITDA came in at $354 million, both up 4% over the prior year. As a result, our full-year brands margin remained in line with the prior year. At 11%. Finally, two remaining points to highlight regarding profitability below the operating division lines that contributed to the 15% annual EPS growth. First, we reported significantly lower corporate costs both during the current fourth quarter and annually for 2025, versus the comparable prior year periods. Most of the variance was attributable to the positive impact of noncash foreign exchange movements largely reversing the negative impacts we saw in 2024. Second, our annual interest costs will lower throughout all periods in 2025 compared to the prior year due to lower debt levels on our balance sheet and declining interest rates. I'll now summarize our cash flow and capital deployment. During Q4, operating cash flow was $155 million a 33% increase over the prior year quarter. And contributing to annual cash flow from operations of more than $445 million which was up 56% versus 2024. Our capital expenditures during 2025 totaled $128 million and we expect 2026 CapEx to be approximately $140 million an increase proportionate to the collective growth of our businesses. Our acquisition spending during the year totaled $107 million as we remain selective and disciplined in a competitive acquisition environment. Finally, we announced yesterday an 11% dividend increase to $1.22 per share annually in US dollars up from the prior $1.10. Beyond financing these capital outlays, our strong free cash flow contributed to further strengthening of our balance sheet throughout the year. At 2025 year-end, our leverage sits at 1.6 times. Net debt to adjusted EBITDA down from two times at prior year-end. With cash on hand and undrawn capacity within our bank revolving credit facility, aggregating to $970 million we maintain significant liquidity to direct towards attractive investment opportunities as they emerge. Finally, in terms of our outlook, Scott has already provided detailed commentary on the top-line growth indicators for the individual brands. On a consolidated basis for the upcoming first quarter, we are forecasting revenue growth to be in the mid-single-digit range. In subsequent quarters, throughout the year, we expect to see an uptick with high single-digit year-over-year increases in revenue primarily driven by organic growth. Any tuck-under acquisitions during the year will contribute further to this top-line growth profile. In terms of consolidated EBITDA for the first quarter, we expect to be roughly in line with Q1 2025. For the balance of the year, we anticipate EBITDA year-over-year growth in the high single digits at similar rates or slightly better than revenue growth. Consolidated EBITDA margin for the full year is expected to be relatively flat compared to the 10.2% annual margin we just reported for 2025. Operator, this concludes the prepared comments. Can now open up the call to questions. Thank you very much. Operator: Thank you. As a reminder, to ask a question, please press Our first question will be coming from Frederic Bastien of Raymond James. Your line is open. Frederic Bastien: Hi. Good morning, Scott and Jeremy. Just wanna talk about M and A. I mean, cracks appear to be showing in private equity various reports suggesting that mid-market firms are holding on to investments they can't sell and then struggling to raise capital. To buy businesses. Is that you know, that in theory should be positive for strategic buyers like FirstService. From your perspective, are you seeing any change? Is the company is the competitive landscape improving from, say, you know, where it was three, six, twelve months ago? D. Scott Patterson: We haven't seen it yet, Frederic. It's definitely a slower market than, say, twelve months ago. Particularly in roofing, but really across the board. You know, we know of a number of opportunities that have been pulled or delayed until the environment improves. And there's no indication that multiples are trending higher or lower. They still remain high across the board. We haven't seen mid-market private equity deals come to the market you know, I'm just I'm just thinking about it. Really, it's we haven't seen it yet. I would say, Frederic. Frederic Bastien: Okay. Thanks for that. Now obviously, recognizing it's still tough out there, where do you see the best place to deploy future capital? Is it in newer platforms like roofing or restoration or you know, or go back to the more long-dated franchises like California Closet. I know you bought, like, the twenty or so largest franchises in, you know, early probably ten years ago, five, ten years ago. Where do you stand on potentially consolidating the rest of the California Closet franchises? D. Scott Patterson: Yeah. I mean, definitely, we wanna own the major markets. Over time. Particularly if they're underperforming. But it you know, that that will be sort of one step at a time as those families are ready to sell. It's been it's been a few years since we pulled in a California Closets franchise. But I think on average, we would expect to pull in one a year. And I think the same at Paul Davis. Too. You know, it it in the best interest of the brand, if there's an underperforming market, we will look to pull that franchise in and operate it. And, we would expect to see you know, one or two of those a year as well. Otherwise, it would be tuck-unders within our existing platforms. That's our focus. I would say that we are being very patient in the current environment. Multiples are high, and and they there aren't high number of quality companies coming to market. So we are focused on picking our spots and finding the right partners. If there's a situation where the founder is looking to exit that's not a great fit for us. We're focused on partnering and then driving sustainable growth. Frederic Bastien: Thank you. I appreciate your comments. That's all I have. And our next question will be coming from Stephen MacLeod of BMO Capital Markets. Your line is open. Stephen MacLeod: Thank you. Good morning, guys. Lots of great color on the call, so thank you. I just wanted to just just focus on the margins a little bit. With respect to the outlook. Would be fair to say that margin outlook in kind of both segments is is sort of flattish through the year. Presumably, sounds like not much movement in the FSR margin, but maybe you'll see some headwinds in Q1. But on a full-year basis in brands, would you expect both segments to be sort of flattish year over year? Jeremy Rakusin: Yeah. Hi, Stephen. It's Jeremy. Correct. Full year both divisions, roughly in line, and and hence the consolidated margin in line. You know, the the first quarter we expect residential margins to be roughly in line again, consistent with the full year. And the a decline in brands margins in the first quarter. And hence the sort of flat EBITDA with a little bit of revenue growth in the first quarter. Right. So branch margin is a little declining and then picking up in sequential quarters as we see you know, commensurate uptick in revenue growth. Stephen MacLeod: Okay. That's great. Thank you. And then just with respect to you know, Scott, you you you talked about, just the recent freeze that we saw through North America. And and, you know, potentially an uptick in activity. Is I know early days, but is there any way to kinda quantify you know, what that potentially could could look like as the year progresses? D. Scott Patterson: No. It's it's It's it's still very early and taking shape. And some of the areas are impacted. They're still frozen. So there is an opportunity when when the thaw starts. But very hard to quantify at this point. I mean, if we've we've just based on attempted it for Q1, on some of the activity. You know, as I said, we we expect our revenues to be up modestly. Our backlog at year-end was down because we didn't have a carryover from from Q4 storms. which was pointing to a soft Q1. We do think the activity will take us back to you know, through prior year. Modestly. But you know, mitigation work comes in We respond and and move on. And for the most part, the jobs are smaller at this point, and the unknown is the reconstruction. You know, will there be any? Will we get the work, and and how much revenue will it generate? So that will evolve in the coming in the coming weeks and months, but it's still too early to really give you any more than that. Stephen MacLeod: Yeah. Yeah. That's fair. I I I figured that would be the case. And would it be fair to assume that, in Q4, you had basically zero revenues from named storms relative to $60 million last year. Is that right? D. Scott Patterson: Right. Yep. Yeah. Yeah. Okay. Stephen MacLeod: And then maybe just finally, just speaking of capital allocation, would you consider sort of being active on the buyback given given where the stock is and and and given the NCIB you have out outstanding? D. Scott Patterson: That is that is not something that that we've discussed. Stephen MacLeod: Okay. Would be a board-level discussion, and it hasn't come up. Stephen MacLeod: Okay. Okay. That's great. Thanks, guys. I appreciate it. Operator: And our next question will be coming from Stephen Sheldon of William Blair. Your line is open. Stephen Sheldon: Hey, Scott and Jeremy. Thanks for taking my questions. First, just on on kind of margins, great year-over-year margin trends in residential once again this quarter. And then full-year results came in closer to the high end of that 9% to 10% margin range. You've historically talked about there. Can you unpack some of the levers driving that? Is that still mainly being driven by some of the offshoring and AI leverage and things like that and call center operations? And and has your thinking on the margin trajectory over the next few years changed at all? I mean, you already talked about kinda flattish for 2026, but is there an opportunity down the road, you think, where you could potentially get the margin in residential into the double-digit range above 2%? Jeremy Rakusin: Yeah. It's Steven. Jeremy again. The progression, we've we've done a lot of the heavy lifting in those areas. In fact, they started in '24 and really started to play out on the margin improvement in '25. We're starting to lap those now. You know? So a lot of the the and you saw the margin start to taper. Towards the the margin expansion start to taper towards the back end of the year, which is indicative that, you know, we we've squeezed a lot of the the low-hanging fruit. Team's always working on on related initiatives to to those, that you just called out, as well as others. And, again, we don't see much for '26. But, in terms of going above 10%, yeah, that's an opportunity over a multiyear time horizon for sure, and, we'll continue to to evaluate the team's progress in that and then know, call out the opportunities as we see them coming through. Stephen Sheldon: Got it. That's helpful. And then wanted to ask about just the roofing side. And I guess from your view, I get the new construction piece, you know, the that's something that, yeah, you can look at permits and starts with either that's you know, it's been been very weak, and and not not a lot of pickup that we're expecting here over the next year or two. But I guess on the reroofing side, you know, what could it take for that to pick up? You know, I guess the question would really be, how long can commercial properties wait and push out reroofing as I would assume that that that can only be delayed for so long before that owner or manager takes on bigger risks related to it with a bigger loss potential. So I guess, yep, how, you know, how long can can rerouting really stay kinda depressed? Thanks. D. Scott Patterson: Certainly, it it you know, it can't be deferred for for long, Steven. And and we do think the market has stabilized. Our backlog certainly has stabilized, and it's heavily weighted towards reroof as you would expect. You know, historically, we've been two-thirds reroof and one-third new construction, and so we're very much focused on the reroof side of that. So the overall market has shrunk certainly but our momentum in reroof has stabilized. And as I said, we expect to grow this year. And look for sequential improvement quarter to quarter. And you know, generally, feel optimistic. We're bidding work. We feel good about our market position. We believe in our leadership. Locally. Branch to branch. And certainly, we we will continue to invest in the platform this year. And hopefully in further tuck-under acquisition. So we we're feeling we're feeling optimistic that know, we'll we'll start to see quarter over quarter and year over year growth from here. Stephen Sheldon: Very helpful. Thank you. Operator: And our next question will be coming from Erin Kyle of CIBC. Your line is open. Erin Kyle: Hi, good morning, and thanks for taking the questions. I just want to stick on the roofing segment here. Maybe start with more of a macro question. I I guess, your your views as it relates to the new construction cycle in The U. S. And the question is kind of on the basis of you know, if new construction remains depressed here as it it's looking to be do you anticipate competition in, like, the reroof segment just anything you can to intensify further than it's already been? Or I know you mentioned it's stabilizing, but add to speak to just competition in that space would be helpful. D. Scott Patterson: Yeah. I mean, the competition has intensified. Certainly, there are fewer opportunities and and more companies bidding. And it, it has, compressed gross margins. And so we we don't expect that to alleviate in the near term until there is an uptick in the in the new construction market. And I I don't know that I can give you more than that, Erin. Erin Kyle: No. That's helpful there. Maybe I'll switch gears on M and A as well. And you mentioned it in response to your previous question. But I for 2026, is roofing still a focus area for tuck in M and A? And then maybe more broadly here, if we think about your commercial maintenance businesses that you currently operate in, what is the appetite maybe for another large platform deal in an adjacent space or any any larger M and A? D. Scott Patterson: I think we're we're focused primarily on tuck-unders right now and certainly roofing. Is an area where we're we're committed to. Again, you know, I I said we're picking our spots. We're very patient, and it's about the the leadership and the partnership. We're open-minded to larger acquisitions, certainly, and I it would be you know, an adjacency and I'm not sure it would would be a platform per our description, which would be sort of a separate operating team, it's more likely to be within restoration or within roofing or within fire. But we're we're open-minded certainly. But also being cautious around around valuation and in a market that's still you know, in our mind, over. Overheated. Erin Kyle: Thank you. That's helpful. I will pass the line. Operator: And our next question will be coming from the line of Tim James of TD Cowen. Your line is open. Tim James: Thank you. Thank you for the time. My first question, going back to M and A for a minute, appreciate the comments on kind of the the competitiveness in that market. Can you talk about if valuations do remain high, whether it's, you know, through '26 into '27, does that change your approach at all? And what what I'm thinking about rather simplistically is do you change the risk profile of the businesses you buy, or do you, you know, pay higher valuations? How how do you approach it as as multiples, and as the competition for M and A remains relatively elevated. D. Scott Patterson: We would approach it the same way we did this past year. You know, as as Jeremy said, we allocated over $100 million on tuck-unders. But these are these are solid good add-ons. With with great leadership that fills white space for us or or adds to our service line. And these are at valuations that we're we were were comfortable with. And in most cases, we were able to differentiate ourselves from private equity and and increasingly, we're seeing opportunities to do that. With families and owners that want to be in a family where they're not resold. They want a they want a forever owner. And so we're seeing more opportunities like that. And and so I would we're we're not going to, change our risk profile unless the returns change to to hit our hurdle rates, We'll continue to to work hard, and and if if you know, I would think that in 2026, it may well be a capital allocation year similar to '25 in what we're we're comfortable with that. Tim James: Okay. That's helpful. And then, you know, is there any sort of silver lining here potentially in the roofing business with you know, you talked about it being very competitive gross margin pressure. Are you seeing any silver lining in that that may be is kind of shaking out some businesses to to look for, a sale opportunity, or is it too early to to to see that yet in the marketplace? D. Scott Patterson: No. I think that's true. I think that's true. There are we're seeing opportunities that they're they're reluctant to transact because their revenue and and EBITDA may be down from from previous years. But it's you know, the market's not gonna change dramatically in in '26, certainly. So we are seeing we are seeing opportunities. Where the the seller comes to grips with a lower valuation based on on results that that are lower. Than the past few years. Tim James: Okay. That's great. Thank you very much. Operator: And as a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. Our next question will be coming from Daryl Young of Stifel. Your line is open. Daryl Young: Hey, good morning, everyone. Just wanted to circle back on margins for a second. I might have expected to see more margin expansion as opposed to the the guide for flattish this year. Just given the operating efficiencies you've had. And I wonder if possibly you're toggling between the price volume equation and some of your end markets and maybe giving away some price in order to to keep the growth going. Is that the right way to think about it, or is is there something else going on that's keeping margins call it, know, lower for longer? Jeremy Rakusin: Daryl, I assume you're talking more on the brand segment? Daryl Young: Well, even within with even within resi as well. Jeremy Rakusin: Okay. Well, I'll touch on Brent. You know, Scott touched on it in roofing. The the competitive environment. A lot of our competitors that were accustomed to getting a lot of new construction work migrating to reroofs and putting pressure on bidding and and gross margin. So we're gonna see roofing margins notwithstanding the uptick in the top line through the year, a compression on margins in that business. And that will be offset in the brand segment by you know, better margins year over year in '26 for restoration. Again, a function of higher normalized activity levels, higher revenue growth, and so forth. So that's really the puts and takes for the most part in the year in brand. And then at residential, we don't get a lot of pricing in that business. It's a very high variable cost business. So, you know, growing revenues and EBITDA in lockstep is is the typical path we happen to garner a lot of efficiencies in in in '25 in the areas that we've spoken about through the year. And starting to lap that now. Again, I mentioned it earlier, we'll continue to look at other opportunities for efficiencies. But I I, you know, I wouldn't be baking in a lot of that into the baseline model for 2026. Daryl Young: Got it. Okay. Thanks. And then you touched on data centers in in one of your remarks. Are these projects getting big enough and, fast enough that that you could potentially have a cross-sell or a go-to-market approach between, say, Century Fire and roofing and and maybe even restoration where you you you kinda create national account strategies across all your divisions? To to tackle the data center build-out? D. Scott Patterson: No. We're not, we're not approaching it that way. Darryl. Century has long-term relationships with a few large general contractors that you know, are involved in new construction of warehouses and also engaged in data center contracting construction. So Century is is benefiting from the from the data center boom. But definitely, picking their spots and being cautious about balancing this work and these customers with other day-to-day customers, and I don't see us tilting more to data centers than the current current mix reflects. Roofing doesn't have the same relationships. And you know, it it I think we're very cautious about really leaning in sustainable growth. rather than focusing on durable, We've seen a few of our competitors jump in and it it really consumes them. And they let down they've they're you know, they've let down their day to day. So we're we're approaching it in a different way. And only at Century Fire at this point. Daryl Young: Good context. Thanks very much. That's it for me. Operator: And this concludes today's program. Thank you for participating. You may now disconnect.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to the Atmos Energy Corporation Fiscal 2026 First Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Dan Meziere, Vice President of Investor Relations and Treasurer. You may begin. Daniel Meziere: Thank you, Janie. Good morning, everyone, and thank you for joining us. With me today are Kevin Akers, President and Chief Executive Officer; and Chris Forsythe, Senior Vice President and Chief Financial Officer. Our earnings release and conference call slide presentation, which we will reference in our prepared remarks, are available at atmosenergy.com under the Investor Relations tab. As we review our financial results and discuss further expectations, please keep in mind that some of our discussion might contain forward-looking statements within the meaning of the Securities Act and the Securities Exchange Act. Our forward-looking statements and projections could differ materially from actual results. The factors that could cause such material differences are outlined on Slide 29 and are more fully described in our SEC filings. I will now turn the call over to Kevin. John Akers: Thank you, Dan. Good morning, everyone, and thank you for joining us today. I wanted to begin today's call by thanking every one of our Atmos Energy employees for their preparation, focus and dedication to safely providing natural gas service to our customers and communities during the very challenging weather conditions of Winter Storm Fern. And for their dedication throughout the year to execute upon our system modernization strategy as we continue our journey toward our vision to be the safest provider of natural gas services. During Winter Storm Fern, all segments of our business, Distribution, Transmission, Atmos Pipeline Texas, our underground storage systems, gas supply plans and our customer support operations all performed very well and to design expectations. I am very proud of our team and their efforts. I would also like to thank the first responders, emergency responders and emergency management services teams across our service territory for what they do every day for our communities. Yesterday, we reported fiscal 2026 first quarter net income of $403 million or $2.44 per diluted share. Our first quarter capital expenditures totaled $1 billion with over 85% of these investments focused on enhancing the safety and reliability of our distribution, transmission and underground storage systems. As a reminder, we rebased our fiscal 2026 guidance to reflect the passage of Texas House Bill 4384. As we stated on our November earnings call and in our investor material, our rebased fiscal 2026 earnings per share guidance is in the range of $8.15 to $8.35 per share. Additionally, we rebased the fiscal 2026 annual dividend to $4 per share, and we plan to grow our dividend in line with our earnings per share growth of 6% to 8% annually. Moving to our Atmos Pipeline-Texas division. We achieved several project milestones during the first quarter. We completed the installation of approximately 55 miles of 36-inch pipeline from APT's Bethel storage facility to our Groesbeck compressor station. This provides additional pipeline capacity to transport gas from our Bethel storage into the growing DFW Metroplex and the Interstate 35 corridor between Waco and Austin. We continue to work on Phase 2 of APT's Line WA Loop project as we have placed 13 miles of this project into service. As a reminder, this project is designed to install approximately 44 miles of 36-inch pipeline to the west of Fort Worth to support growth in this area of the DFW Metroplex. The remaining 31 miles is expected to be placed in service this spring. In addition to the enhanced supply capacity of those projects, we completed a project that more than doubles the takeaway capacity at our Bethel Salt Dome storage facility, providing additional peak day deliverability into the APT system for our LDC customers. Finally, we enhanced APT supply optionality, reliability and system versatility with the completion of 2 interconnect projects, adding 700,000 Mcf per day of additional natural gas supply to the APT system. Across our service territories, we continue to see steady customer growth. For the 12 months ending December 31, 2025, we added nearly 54,000 new customers with approximately 42,000 of those new customers located here in Texas. And during the first quarter, we added over 1,100 commercial customers and 3 new industrial customers. This continued demand from all customer classes demonstrates the value and vital role natural gas plays in economic development across our service territories. The Texas Workforce Commission reported that at the end of December that the seasonally adjusted number of employees was 14.3 million. Texas once again added jobs at a faster rate than the nation over the last 12 months ending December 2025. Our customer support associates and service technicians continue to provide exceptional customer service, achieving customer satisfaction ratings of 98% for the quarter. And our customer advocacy team and customer support agents continued their outreach efforts to energy assistance agencies and customers during the first quarter. Through those efforts, the team helped over 11,000 customers receive nearly $3 million in funding assistance. Recently, our team's customer service efforts were recognized by J.D. Power and Escalent. In December, the J.D. Power 2025 Gas Utility Residential Customer Satisfaction Study ranked Atmos Energy #1 in customer satisfaction in the South and Midwest among large utilities. This is Atmos Energy's fourth consecutive year to receive this honor for the Midwest region. And in January, Atmos Energy was named an Escalent 2025 Utility Customer Champion in both the South and Midwest regions. More than 96% of our customers are located in these 2 regions, and we are very proud of our entire team for their ongoing focus and dedication to providing exceptional customer service. Congratulations, and thank you all. I'll now turn the call over to Chris for his update. Christopher Forsythe: Thank you, Kevin, and good morning, everyone. We appreciate you joining us this morning. Our fiscal '26 first quarter diluted earnings per share of $2.44 represented a 9.4% increase over the prior year quarter. Our first quarter results include $35 million or $0.16 of the impact of Texas House Bill 4384. $20 million was recognized in our Distribution segment and the remaining $15 million is recognized at APT. Our first quarter performance was also influenced by several other factors. Rate increases in both of our operating segments totaled $68 million. Operating income increased by an additional $24 million due to residential commercial customer growth and increased customer load. Finally, APT's through system revenues net of Rider REV increased about $7 million. During the quarter, APT's through system volumes declined approximately 2 Bcf as we performed more maintenance during this quarter compared to the prior year quarter. However, spreads widened significantly to an average of $3.99 compared to $1.56 in the prior year quarter due to rising associated gas production, constrained takeaway capacity and lower demand due to unseasonably warm weather during the first quarter. Partially offsetting these increases was a $23 million increase in consolidated O&M expense. We experienced a $12 million increase in compliance and safety-related spending associated with increased leak survey work in our distribution segment and the timing of maintenance work at APT that I mentioned a moment ago. Additionally, employee-related costs increased approximately $5 million, primarily due to increased headcount to support company growth and higher overtime and standby costs driven by increased service work. From a regulatory perspective, since the beginning of the fiscal year, we have implemented $123 million in annualized operating income increases in our distribution segment. Currently, we have 5 filings in progress seeking approximately $81 million in annualized operating income increases, and we plan to make an additional filing this fiscal year, seeking approximately $400 million in annualized operating income increases. During the quarter, we completed over $1 billion of long-term debt and equity financing, highlighted by the $600 million long-term debt financing we completed in October 2025. Additionally, we settled $472 million in equity forward agreements. Our equity capitalization as of December 31 was 60%, and we do not have any short-term debt outstanding. We also had $4.6 billion in available liquidity. This amount includes approximately $1.1 billion in net proceeds available under existing forward sale agreements, which is expected to satisfy the remainder of our anticipated fiscal '26 equity needs and a portion of our anticipated equity needs for fiscal '27. Our first quarter performance has us well positioned to achieve our rebased fiscal '26 earnings per share guidance in the range of $8.15 to $8.35 per share, and we remain on track to achieve our capital spending plan of $4.2 billion. Thank you for your time this morning. I will now open the call for questions. Operator: [Operator Instructions] And your first question comes from Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Nicely done, I got to say, as always. Maybe just to kick things off, you just commented in your remarks and in the Q here about the $35 million benefit for the quarter. Can you talk a little bit about how we should think about that ratably through the year here? And just ultimately, what that might imply as you think about like an annualized benefit relative to the guidance you guys gave? It seems like it puts you guys in a good place. So I'd love to get your thoughts. Christopher Forsythe: Yes. Julien, thank you for joining us this morning. And yes, we're off to a good start for the fiscal year. As we talked about before, the influence or the impact of the deferrals under House Bill 4384 will be influenced by the timing of our spending, the timing of project closings and the underlying operational activities of the company. So it's right now, off to a good start, $35 million quarter-over-quarter. And we are still holding firm right now on our earnings per share guidance of $8.15 to $8.35, and we'll see what the second quarter brings for us. Julien Dumoulin-Smith: Got it. But just pining down a little bit further, would you assume that that's a good run rate, at least for the purposes this year? I know it's CapEx timing driven. Any reason why you wouldn't, for the purposes of our conversation, start to do that or at least do some kind of ratio relative to CapEx against annualized targets? Christopher Forsythe: I think it's going to depend upon the flow of spend in the quarter. As we've had here in the last couple of weeks, they're very busy operationally focused around supporting Winter Storm Fern. So construction activities were down a little bit. Obviously, we're now beginning to ramp that back up. And I think it would be dangerous to say take 35 and multiply it by 4. As a reminder, year-over-year, we did have the impact of the House Bill 4384 in the fourth quarter last year. So I would probably steer clear of just going too strong at this point and just saying 35 times 4 moving forward. Julien Dumoulin-Smith: Yes. No, no, fair enough. And then just as it pertains to the winter storm, I mean, obviously, folks are zeroed in on and certainly cognizant of the impact to customers. How do you think about the preliminary financial impacts here, if you can break that down a little bit. I mean, obviously, there's working capital consideration and ultimately, there's a few other moving pieces. Do you care to elaborate a little bit further just given the history? John Akers: Yes, Julien, maybe rephrase your question because I'm not quite following either where you're talking about gas costs. Julien Dumoulin-Smith: Yes. I was thinking about the just the balance sheet and the earnings impact from the winter storm in the last couple of weeks cumulatively. John Akers: Yes. So let's start with the winter storm itself. It was very significant. As you saw the icing across all of the country. I think 40 states were impacted at one point by the storm. But the storm was not nearly as significant as Uri. I think the upstream supply as we've reported, and I think you'll hear from some of the other folks that do upstream of us, supply performed very well. We had minimal supply issues. And what we did have, we were able to backfill with storage itself to keep a steady, reliable supply of natural gas flowing. And with that, we had an exceptional gas supply plan laid out from baseload to peaking contracts to some spot purchases to our storage supply. So again, I don't think you're going to see the impact as you did in Uri, both on the operational nor a financing from gas supply cost related to Winter Storm Fern. Operator: Your next question comes from the line of David Arcaro with Morgan Stanley. David Arcaro: I was wondering if you could maybe touch on what you're hearing maybe on the ground and in some of your regulatory proceedings going on with regard to affordability pressures. Is this an issue that you're seeing migrate into the gas LDC space? Is it coming up politically surrounding the cost of natural gas? What are you seeing on the ground right now? John Akers: It's always a part of what we talked about with our commissions. It's always top of mind for us. And I'll point you back to our deck in Slides 15 through 17, I believe, that's in the deck there and how we look at the metrics around affordability, but it's always a topic we continue to have with our regulators. They understand the need for our investment just as it helped us get through Winter Storm Fern. You have to start these things a year in advance in prepping your system, putting on additional supply upstream of that, increasing your capacity on your pipelines, bringing on more additional supply points, all those go into that equation for reliability on a go-forward basis for our customers. But again, it's more of the conversation. We're not getting any sort of negative feedback or impression from our regulators at this point as they understand the need to maintain reliability and safety across the system. David Arcaro: Okay. Got it. Understood. And I wanted to check in to see whether you're seeing any inflection or meaningful projects on the gas power side of things, either major power plants moving forward or what we're seeing is on-site power using natural gas at data centers at pretty high volumes. So are you seeing more activity or opportunities there? John Akers: As we said before, we continue to get inquiries around large loads, whether they're data centers themselves or additional power generation. We'll share more about those once we have a signed contract. We don't want to get out in front and have to walk any of that sort of load back at this point. But we continue to get inquiries. Our engineering, our operations teams continue to investigate those and respond to those data requests. But when we have something to report, we'll bring those forward. And as you know, APT already serves some power gen facilities across its transmission footprint as well today. Operator: Your next question comes from the line of Jeremy Tonet with JPMorgan. Elias Jossen: This is Eli on for Jeremy. I wanted to start on the special election that was just recently happened in Texas. There was a Democrat seat, I believe, that flipped. Is there any impact overall? Or I mean, how do you guys kind of see that outcome in relation to the business? John Akers: Yes. We're apolitical. We work with R's and D's and I's or anybody to share our stakeholder strategy, why we do the things we do, why it's important for our communities, why natural gas is important for our customers, why it's important for economic development. And we've been around for 43 years now, and we've been through many administration changes, both at the federal, state and city level, county level as well. And again, we see ourselves as an essential energy source for our communities, and we'll work with anybody that is in public office today or has an interest in what we do. Elias Jossen: Awesome. And then maybe just shifting to the Mississippi rate case outcome and kind of the process going forward. How do you adjust your plan for outcomes in that jurisdiction going forward? John Akers: Well, one, there's -- and I'll let Chris follow up here in a second. There's not an adjustment to plan. Remember, we say on our November call when we lay out our 5-year plan, we update it every quarter. Chris and I both mentioned it on this call. 85-plus percent of our investment goes towards safety and reliability. That does not change our plan. It is all driven by the needs of our system, the growth on our system, the demand across our system, the safety across our system. That's what drives our plans out there. And that's what's going to continue to fuel our plans in the state of Mississippi. Christopher Forsythe: Yes. I would add to that, Jeremy (sic) [ Eli ]. I mean, since the outcome, we have been in regular dialogue with the commission, first, working to implement the tariff that to reflect the order that came out late last year. That tariff was filed in early in early January. We're expecting a decision potentially today on that. Included in that tariff is also a request for deferral like mechanisms as well as other opportunities to potentially mitigate or reduce lag going forward. We still have an annual filing mechanism in the state. It's now on a historical test basis. So we're evaluating and model the impact of shifting that from a forward look back to historical look. And as we've also -- you've probably seen in the public notice in early January, we filed a public notice of our intent to appeal the decision to the State Supreme Court in Mississippi, and we are working through that process as we speak. So a lot going on that we're taking to evaluate, but it's also stepping back in a bigger picture, Mississippi is roughly 5% of the business. So we believe we've got the ability to absorb whatever outcome comes through in our plans going forward. Operator: Your next question comes from the line of Fei She with Barclays. Nicholas Campanella: It's actually Nick Campanella on. I hope you can hear me. I hope everything is well. So I just wanted to ask just the $0.21 Texas benefit in the quarter. Is that something that we can annualize? Or just how would you kind of frame that against the $0.40 guide that you originally pointed to? Christopher Forsythe: Yes. So Nick, so the impact on the quarter was approximately $0.16. And as I was chatting with Julien at the top of the call, it's to say that you can just simply take a run rate, multiply by 3 or 4 to get through that because the underlying operations are impacting the timing of those deferrals. So we said a few minutes ago, we'll just take it quarter-by-quarter as we work through this first year of implementation, and we'll see where the second quarter brings us, and we'll have an update for you at that point. Nicholas Campanella: Okay. Okay. And then just I just wanted to make sure I was just directionally understanding the benefit it's kind of a similar benefit than what was booked in fourth quarter last year. Like would it be kind of like 3x the benefit given you did about $1 billion of the $4 billion of CapEx this quarter. Just is that the right way through this? Christopher Forsythe: Yes. I mean, again, 25% through the year. A lot needs to occur between now and then operationally. As Kevin talked about, we've been focused the last couple of weeks on winter operations, which has put a capital on the back burner. So as we come through that right now, we get back up to speed, we'll see what the impact is on deferrals. But again, I would caution against just taking a simple number and multiply it by 3 or 4 at this point in time. Nicholas Campanella: Okay. Okay. And then just you kind of brought up the strength in spreads. Is there a way to explicitly quantify what the margin benefit was from Waha spread this quarter? Christopher Forsythe: Well, quarter-over-quarter, we attributed about $7 million operating income increase as a result of those activities. Operator: [Operator Instructions] And your next question comes from Ryan Levine with Citi. Ryan Levine: Given the recent Storm Fern and increasing gas demand in your service areas, do you see incremental opportunities to add gas storage? And can you give us some updated color around that opportunity set? John Akers: Ryan, as you've heard us talk about before, we have 15 storage fields placed across Kentucky, Kansas, Mississippi and here in Texas. Additionally, we have third-party contract storage and then we have storage as part of our upstream interstate pipeline capacity as well. That's something our gas supply team and our operations team look at post winter. We'll do a rigorous review of system performance, gas supply plan performance and overlay that with a third-party consulting engineering firm to overlay with customer growth and demand expectations, and then we'll evaluate how that may impact additional needs for gas supply where those may need to come in and any future needs for storage. But it's something we always continue to look at based on past performance, historical weather and customer growth across the system. Operator: There are no further questions at this time. I will now turn the call back over to Dan Meziere for closing remarks. Daniel Meziere: We appreciate your interest in Atmos Energy, and thank you again for joining us this morning. Have a good day. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the Ambu Q1 2026 Conference Call. I am Valentina, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Britt Meelby Jensen, CEO. Please go ahead. Britt Jensen: Thank you very much, and good morning, everyone. Welcome to this Q1 2025-'26 quarterly call. I'm here this morning with our Chief Financial Officer, Henrik Skak Bender, and we will go through our results, and I'll start with a business update. So if we look at Page 3 as a start and then moving into Slide 4, starting with the headlines for this call. So on the back of a strong Q1 and even a strong H1 last year, we have delivered a very solid Q1 for this year with strong revenue growth. In particular, on our endoscopy business. We said in November that our growth was going to be stronger in the last part of this fiscal year compared to the first part of this year, but we are quite satisfied with the strong start of the year that we have had. In particular, what I want to highlight is that we have had very strong momentum across all our endoscopy business areas. We continue to see a very strong underlying momentum in conversions from reusable endoscopy to single-use, where we are both winning new customers on a very high rate, as well as we are increasing the penetration with existing customers. In particular, we had a strong quarter on respiratory, but also the other areas look strong. I'll comment on that in a short while. On margins, Henrik will come back to this, but we continue to drive a very high operational leverage while we invest in growth. So that's the balance that we continue to focus on. And then we are adjusting for temporarily high tariff costs that we have seen and also some FX headwind. Finally, what has been a highlight for this quarter is that we launched our ZOOM AHEAD growth strategy. We see that this is being well adopted, and we see strong early momentum as we continue to be on track for delivering on our full year outlook. Please turn to the next page and let us then look at the financial results from Q1. And if we look at our overall business, we now have Endoscopy Solutions making up 63% of our total revenue and Anesthesia Patient Monitoring 37%. Overall, the business grew 8.6% on the quarter. And that is a split between Endoscopy Solutions of 14.4%, and then almost flat -- as anticipated -- on Anesthesia and Patient Monitoring, with minus 0.1% growth. On the profitability side, we delivered DKK 164 million EBIT margin before special items, and that corresponds to a 10.5% EBIT margin. And then we had a free cash flow of DKK 13 million. Before diving into the segments, if we move to the next slide, I'd like to talk a little bit about the market that we operate in. And here, I have 2 key points that I would like to highlight. The first one is that we, as a company, are benefiting from an overall trend towards an increase in global procedures performed with an endoscope, whether it's reusable or single-use. And when at our Capital Market Day, we communicated an underlying growth rate of around 5%. And if we look at the quarter that we just exited, we see also an endoscopy volume growing at around that number. So I think that's one thing that, of course, affects our business. If we then look at what is a stronger growth driver for us, then it's the single-use endoscopy penetration. And here, we see across all 4 areas that we are in a very strong increase. If we take respiratory first, here, we see efficiency and economics is really supporting the conversion from reusable to single-use. And we do also have some flu-related demand that is increasing the penetration in this segment. Then in urology, we also see the accelerated conversion in particular with cystoscopes, but also with our newly launched ureteroscopy market. And this is again driven by efficiency and economics among the customers. And on the ureteroscopy side, also a move towards single-use because of the tough procedures and the scopes being more fragile by nature. Then on the ENT market, this is a market for single-use that is in particular strong in the U.S. and in the U.K. And here, we continue to see a strong growth in single-use endoscopy penetration, very much driven by moving from reusable to single-use when performing the procedures. Then -- gastroenterology, this is a market that has not really converted to single-use. It's the lowest single-use penetration of just below 1%. However, where what we track is some niches that are out of the suite, where we see a very nice and solid conversion to single-use as they are seeing the benefits of these solutions in the clinics. So if we then move to the portfolio and some of the highlights on the next slide of progress across our portfolio. Then I'm excited about our respiratory area, where we have recently introduced our SureSight Mobile. So this I'll come back to later, but it's basically a handheld and much more mobile version of our video laryngoscope solution. And this one, we have introduced so far in North America and Great Britain. Then when it comes to urology, what we see here is two things. One, we see a continuous penetration increase of our advanced solutions, aScope 5 Cysto and also aScope 5 Uretero. And then what we have launched in the quarter is aScope 4 Cysto in China, which is locally manufactured at our factory in China. And this is the first time we're introducing this solution in China. Then when it comes to our EndoIntelligence, we are also continuing to focus on this as an area of growing importance; and here, we have, in the quarter, advanced our documentation to help optimize efficiency for our customers and reduce the administration burden. And we are also continuing to expand our capabilities that can support our hospitals in integration to the EMR systems at the hospital, where they can upload pictures and videos to the patient files. Now let's look at the results in the different areas, starting with respiratory. So this is an area where we continue to see very strong momentum across respiratory. We saw organic growth in the quarter of 8.3% against a very strong Q1 last year. And if we look at where the growth is coming from, it's actually driven by the broad bronchoscopy portfolio we have with different sizes, both across aScope 4, but also strong growth with our aScope 5, where we see customers being willing to pay for these premium solutions. And then we have SureSight, the SureSight video laryngoscope that we launched around a year ago that, that is starting to generate meaningful revenue. So when we take a step back and look at some of these strong trends that we see in this market and to guide a little on what to expect when you look ahead, we expect an acceleration in our growth levels in this segment for the coming quarters, which will be driven by both the aScope 4 and aScope 5 increased penetration and also driven by increased adoption of our SureSight solution and cross-selling of that into bronchoscopes. Talking about SureSight, let's move to the next page and look at the launch of our mobile version, which is expanding our overall portfolio in respiratory. So maybe a short recap on what we have shown before that the video laryngoscope market, if we look at the U.S. where the market is largest, this represents a DKK 4 billion market in the U.S. alone. If we then look at laryngoscopy, it's also a method that is increasingly done using a video laryngoscope instead of direct laryngoscope. So that's basically using a laryngoscope with a camera. And in the U.S., this method represents now 50% of all intubations that are done in the U.S., and it's a number that we see growing with around 20%. Then moving to our own solution. So we have launched the SureSight Mobile, which is basically the solution that you see at the top picture here on the slide. And what this supports is very much emergency airway management because it's a product that you can basically see the picture from the intubation directly on the screen. It means that you can have it in the pocket in an ambulance at different parts of the hospital and then have easy access to that, which opposites the Connect version that you put into and connect with 1 of our 2 screens, the aView 2 Advance or the aBox 2. So overall, this is a very strong addition to the already attractive portfolio that we have in respiratory. It works with the same 10 blades that we have launched for the SureSight Connect, where we launched, as a reminder, 5 blades together with the Connect version around a year ago. And just before summer, we launched the additional 5 blades. So we now have 10 blades that both support this SureSight Mobile version as well as the SureSight Connect. So now let's move to the other endoscopy segment on the next slide, which is Urology, ENT, and GI, which is a segment that has become slightly higher than the respiratory segment now with a 21% growth in the quarter versus last year. So momentum is strong, as I mentioned in the beginning, across all the different areas that we have here with urology being the largest and biggest growth contributor, something we also expect will continue. When we look at urology, growth was primarily driven by continued penetration of our aScope 4 solution, where, again, revenue is coming from continued new customers being added as well as increasing penetration with existing customers. And then we also see revenue increasing from our more newly launched solutions, and that is our aScope 5 Cysto and our aScope 5 Uretero, reflecting also -- I mean, the speed of the uptake of these solutions in particular -- when it comes to our ureteroscope, reflect the length of the sales processes that is slightly longer for these at the hospitals because these are more complex procedures by nature. So in these segments, we -- if we look at what we expect as we look ahead, we did see a strong underlying momentum, which we expect to continue. What we also saw was that towards the end of the quarter, we saw a slight increase in the number of orders that came in before year-end, which also means that we think that there are good reasons why the growth in the coming quarter can be slightly lower than the 21% that is highlighted here. But I do want to say that this is more the timing of orders that is a result of that, and it's not related to the underlying growth momentum that we see in urology as well as the other segments represented here. So before leaving endoscopy, maybe on the next slide, let me briefly comment on EndoIntelligence, which is our area of growing importance that supports our endoscopes across all the areas that we operate in within endoscopy. Because where we really stand out is that we have one software platform, our EndoIntelligence, that all our endoscopes connect to. So that basically means, and we see health systems paying more and more attention to this that we -- that they can have our -- either our aView 2 Advanced or our aBox 2 and then basically, they can use our full endoscopy portfolio on these monitors. And it's exactly the same user-friendliness, the same functionality that you have for a number of the functions. So it's very easy to use across all the different areas. And this is where we are unique with our broad portfolio. Then it also has a lot of benefits and scale advantages because as we invest in advanced software features, we can also easily apply these across all the different areas that we are in. And an example here is also that we are working on, and that we launched for training purposes, is the AI bronchoscopy navigation training, where basically you can use the solution to see where in which parts of the lungs you have expected, something that is not available on our aView 2 Advanced or aBox 2 yet, I should say, but which is again part of our overall EndoIntelligence offering. When we then look ahead, there's a lot of development ongoing within this area, where we are looking at how we can -- solutions that can improve our navigation, detection, and documentation in the different areas, as we see a clear need and demand for among our customers. Also, we see increasing benefits of using technology to improve our image quality across the different areas, which again is a key lever to improve detection rates. Then last but not least, the whole integration with connected devices and with the hospital systems is also something that we see is remarkably increasing or easing the workflow at the hospitals, which is a key focus as they are overburdened with a lot of administration and still face in many countries, staff shortages. So overall, an area that we will continue to talk more about and integrate in the solutions that we have. Then let me briefly also comment on the next slide on our Anesthesia and Patient Monitoring business, because this was more or less flat versus last year when we look at it organically. Our Anesthesia declined by 1.2% and Patient Monitoring grew then on the other hand, 1.1%. We still see the same dynamics in these markets as previously. And you may remember that last year, we grew in the quarter 18%, very much driven by selective high price increases. So we are more back to normalized growth levels now, where you should expect going forward growth around 3% to 5%, as we have communicated. Also, you should expect the growth coming a lot from volume increases, but also still have some price increase development, although much more modest that we have seen in the past couple of years. And looking at the coming quarters, we remain very confident around, again, the dynamics in this segment and that we continue to see nice growth rates driven by already very strong solutions as well as a highly loyal customer base. So before handing over to Henrik, let's move to the next slide and let's -- well finish with a few highlights on the key focus areas of our strategy. So customer centricity remains a key area where we are doing a lot of initiatives to continue to serve our customers better. What I want to comment on in this quarter specifically is our Recircle Program. So our program, where we take back endoscopes for recycling, which is live in 4 markets and where we have now expanded to cover 50 hospitals and over 100 clinical departments. And in the quarter, we also expanded this to not only include the endoscopes, the full range of endoscopes, but also now the SureSight blades. On innovation relating to the EndoIntelligence, that we discussed, we continue to also strengthen our capabilities within software and AI technology and have some very strong capabilities to drive the innovation in this area specifically. Then on the business platform, an important point here is that we continue to invest in expanding our commercial execution to support the high-growth agenda that we have. And then also what we do is that we continue to also have our Mexico factory improving both utilization and output, which is very much supporting specifically the growth in North America. So with that, let's move to the next slide. This concludes my presentation, and I'll hand over to Henrik to go through the financials. Henrik Bender: Thank you, Britt. Good morning, and welcome to the call, everybody listening in. Happy to take over and take you through a couple of key notes on the financial review. Before we go to the next page, I just want to reiterate what Britt also opened the call saying we are very happy with the solid start of the year and very satisfied both with the results, but also in particular on the strategic progress. With that note, let's take us to Page 15. So overall, as Britt opened was saying earlier, we had a growth of 8.6%. Adjusting for FX, the reported growth was 3.2%. We continue to still be impacted by a U.S. dollar/DKK depreciation, which impacts our reported growth, particularly for North America, but also with the mix of FX, the growth in the Rest of World, something that I'll come back to later. Overall, the growth is particularly driven by Endoscopy Solutions now representing 63% of our total revenue and a total growth for the quarter of 14.4%. Anesthesia, as Britt just mentioned, had a negative growth, while Patient Monitoring had a slightly positive growth, meaning that overall, that segment was more or less flat. With that, let's have a closer look at the geographical split of our growth on the next page. Overall, we're still on a very, very solid growth trajectory for our key markets in North America and for EMEA, both growing close to double digits. The solid growth in North America, particularly driven by Endoscopy Solutions and for EMEA, driven by both Endoscopy Solutions and actually also still our Anesthesia and Patient Monitoring business. For Rest of World, we did see a decline in organic growth, mainly driven by order fluctuations, as we do see in some of these markets, very big orders for one quarter or the other, as many of these markets are still covered by distributors, which means that there will be order fluctuations across the year. Looking at the same numbers in reported currency, North America growth was almost flat because of the USD/DKK depreciation, and the Rest of World had a higher negative growth again in reported currency because of the negative FX effect. If we then turn to margin and start with gross margin. Overall, our gross margin was in line with expectations. We had a solid first quarter at 60.8%, which is lower than last year same quarter, but higher than the average for the full year last financial year. The overall gross margin is continuing to increase, driven by a combination of higher endoscopy sales versus A & PM, continued stronger and strengthened price governance and as Britt mentioned on the strategic update, and increasing utilization, particularly of our Mexico factory, which helps us ensure that we have lower production overhead and therefore, supports an increase in gross margin. Overall, we therefore feel well on track on how gross margin should develop both for this financial year, but also towards our long-term targets, supporting our EBIT margin expansion journey. Speaking about EBIT margin, let's go to the next page. Overall, the EBIT margin for Q1 landed at 10.5% reported, which was a decline of 5.6 percentage points versus the same quarter last year. We did, as communicated in our Q4, expect and also report a significant cost of tariffs, which is driving down the EBIT margin for the quarter. And combined with that, we also had a negative development in FX, meaning that if we adjust for the combination of the two, we saw an underlying adjusted EBIT margin of above 15%, which actually is very well in line with our EBIT margin expansion plan for this year and again, also for the long-term targets. Overall, therefore, we feel on a solid start. As Britt said also in our opening, we communicated that we see a lower EBIT margin for the first half, and we are going to see a higher EBIT margin for the second half of this fiscal year, and this represents a solid start in accordance with our plans. Turning to free cash flow. We did report a low free cash flow for the first quarter. Overall, this is fully in line with the typical pattern of our free cash flow, where we always pay bonuses and tax in the first quarter. And therefore, this is also in line with expectations. Specifically, the free cash flow for the first quarter was impacted by negative development in net working capital, in part due to us lifting some of our safety stocks across the world to manage and mitigate some of the political uncertainties we see. Furthermore, the free cash flow was also impacted, of course, particularly by the higher tariff costs for this quarter, specifically if you compare this quarter to the same quarter last year. But overall, on free cash flow, also a solid start. Speaking about solid start and then looking at our outlook on the next page, we therefore also -- as Britt also said in her opening, maintaining the outlook for the full year with a solid growth of 10% to 13% organic driven in particular by Endoscopy Solutions at plus 15% growth. We see still further acceleration in respiratory. As Britt said, for the first quarter, the respiratory growth was impacted by the very high comparables for the same quarter last year, but we see that accelerating throughout the quarter. On Urology, ENT, and GI, we see a continued momentum versus where we landed full year last year. We had a good first quarter. We are seeing some order patterns that are benefiting Q1, which means that we are seeing slightly lower growth expected for Q2, but overall across the year, a continued momentum versus the same growth levels we saw for the last financial year. For Anesthesia and Patient Monitoring, despite a flat growth for the first quarter, we still maintain a guidance of mid-single digit as the first quarter was mainly impacted by high comparables. On EBIT margin, the impact from the external factors, particularly tariffs, we are still seeing playing out, as expected, and these will mainly impact the first half of the financial year. So the first quarter, as we just saw, but also now into second quarter. Overall, we feel on a solid track on delivering on the 12% to 14% guidance despite the tariffs and despite the FX headwinds. Last but not least, as I said, the first quarter had a lower cash flow and therefore, also lower cash conversion, fully in line with expectations; and we also still feel very comfortable that we'll be able to deliver on the cash conversion guidance for the full year. So overall, again, a solid start of the year, something we are very happy with and also a lot of great progress on our strategic focus areas. With that, I hand it back to the operator and open for questions. Operator: [Operator Instructions] The first question comes from Thyra Lee from UBS. Thyra Lee: I just have two, please. Firstly, I wanted to follow up on your comment about the pull forward into Q1 within the Urology, ENT, and GI business. Could you just give us a little more color on why you saw this customer behavior? If you could size the benefit that it contributed in Q1, and also how you expect Q2 growth to be impacted from this? Then the second, please. You saw an absolute tariff impact of over DKK 50 million. On my math -- and please correct me if I'm wrong -- this suggests an impact from tariffs only of almost 3.5 percentage points on the margin this quarter, which sits significantly above the average 2 percentage points that you're flagging for this year. Could you just tell us whether we should expect Q2 to also see an impact of above 2 percentage points to a similar quantum, or should it be more in line with 2 percentage points? Britt Jensen: Thank you for good questions. Let me answer the first question on Urology, ENT, and GI, and then I'll let Henrik answer on your tariff question. So I think overall, I think I want to take a step back and say that if we look at the overall business, Urology, ENT, and GI -- and let's maybe focus on urology, which was where your focus was in the question, we see very strong momentum in our urology business. So that means that we continue to see our new -- an inflow of new sizable customers, and we also continue to see an increasing penetration with the customers that we already have. So I think that makes me very confident. If we look at the past year and as you also see in the slides, the way that we show it and measure internally, we very much focus on the rolling 12 months because we do see some fluctuations quarter-over-quarter. And what we saw, and this is basically also what we are highlighting here. In the last 4 quarters, we have had growth between 16% and 21% roughly. So that also illustrates that and this quarter, it was 21%. That illustrates some of the fluctuations we have because orders are placed in one quarter relative to another. And we, of course, track our orders, and I do want to highlight that we do not, I mean, encourage with rebates or anything like that customers to buy in one quarter versus another. So let me just make that clear. But what we did see towards the end of Q1 that we are reporting on, we did see a stronger order -- number of orders coming in. So this is basically also when we then look at the overall rolling 12 months and look at how we see the pattern of new customers and increased penetration, that leads us to believe that there could be a slightly lower growth rate in Q1. So this is basically just what we are -- in Q2, sorry, yes, in our Q2. So this is basically what we are flagging and what to expect. But again, I want to highlight, it doesn't take anything away from the underlying momentum where we see aScope 4 Cysto continuing to be very strong performing and a product that we are selling a lot. And then we do see the growing momentum on aScope 5 Cysto, where actually customers are willing to pay a premium for that product. And then we also see a very good increase in our aScope 5 Uretero. But again, with longer evaluation times and thereby longer selling cycles than we see in the scopes targeting simpler procedures. So I hope that that explains a bit what we see. Again, highlighting that we don't see any cautious or any need to be negative -- have a more negative view on this segment. It's simply the quarter-over-quarter fluctuations here. Henrik Bender: To follow up on the second question and perhaps just a final note on the first, Thyra. I think for us also, we are illustrating this as a symbol and a signal of how we are becoming better and better at understanding the dynamics with our customers and predicting what patterns we should see, exactly, as Britt said, not pushing order flows into the customers, but rather managing it together with the customers. On the absolute tariff cost, you are right with an above DKK 50 million tariff cost realized in the first quarter. That means an above 3 percentage point negative impact in the first quarter on EBIT margin. And yes, you should expect also an above 2 percentage point tariff cost for the second quarter. That basically brings me back to when we -- as we explained earlier or end of last financial year, the tariff cost impacts our P&L with about a 1 quarter delay. And given that we are still in the tariff regime, where we are moving production to Mexico and thereby compensating for the tariff costs, and we've been doing so for the last 6, 9 months, then there will still be an above average for the year tariff cost impacting us in Q2, which will then go down further in Q3 and Q4. Operator: The next question comes from Jesper Ingildsen from Carnegie. Jesper Ingildsen: So I have a couple of questions as well. On the other Endoscopy business, I don't think you've called out specifically how much this phasing is equivalent to, but also whether we should see this in context of the 21% growth you delivered in Q1 or more like against the 20% trend line that we are typically seeing for this segment? Then maybe on margin, even when adjusting for the tariffs, it seems like you have a pretty big step-up in OpEx here in Q1, and particularly in the administration cost. Anything to call out here in terms of one-offs? Or how should we think of this for the rest of the year? Then lastly, on the margin side as well. You have updated your FX table in your report as well. So you're obviously assuming more pressure from FX, both on top line and on margin. Maybe if you could specify what kind of pressure we're talking about? And then maybe also similarly, what kind of potential impact we could see from increasing silver prices when it comes to your single-use electrodes? Britt Jensen: Thank you, Jesper. I'll maybe take the first one. And I'm not sure. I mean, please correct me if I'm not fully answering your question. But again, the 21% that we -- growth that we had in Urology, ENT, and GI, that -- I mean, we focus mostly on the urology because that is the largest part of this segment. But actually, what -- when we look across, we actually see solid growth across all of these 3 areas. So that's just one thing to be clear about. Then I think your question was around the effect on the order flow, when we had a higher-than-normal order flow in -- towards the end of December. And maybe just a comment on that also relating to what I said before. I think -- why did we see this, you may ask. I think what -- some of the dynamics that -- I mean, that we expect is that, as you know, many are finalizing their fiscal years of our customers, the 31st of December. And sometimes depending on where hospitals and clinics are in their own budgets and that has actually, we have seen in previous years also has an effect on how they place their orders. So that is what we have seen. It's -- I mean, we are monitoring this obviously very closely into this quarter. It's not because we are flagging a big concern that we see right now, but it's more as we try to predict the inventories that we know are at the customer levels and when we should expect orders. This is basically where we see some of the quarter-over-quarter fluctuations and which is also why we are -- I mean, we are not really concerned because the key numbers that we track internally, and I know we don't share this is that we see a steady flow of new customers coming in, and we also see when we have the customers in that their penetration. So the share of procedures where they use our scope relatively to typically a reusable scope that, that is going up. And we do not see anything of concern here. So this is also why we feel quite comfortable around the growth here. So hopefully, this clarifies the answer. And that -- I mean, that is not only for -- that trend for urology, it's also when we talk about ENT and the customers we have in GI. Jesper Ingildsen: If we were talking about like, let's say, 1 to 2 percentage point that was -- that supported the growth in Q1 or we're talking a significantly larger contribution. Henrik Bender: Yes. So I think we don't size it explicitly, but it's a few percentage points. So I think this is why we want to be a little bit more clear on the impact and therefore, how you should interpret the 21%. On the margin question, Jesper, then I guess the 2 points you asked about was one on OpEx, OpEx ratio development and second, the impact from FX and other commodity prices. So on OpEx overall, you're right, there was an increase in the OpEx level, both on selling and distribution costs, where you see obviously the tariff cost impacting. But also on top of that, even if you adjust for that, you can see, as Britt explained also in the strategy update, our investments in commercial execution, i.e., salespeople in the front line, but also the whole infrastructure around our commercial execution still materializing. And this is a part of the plan of expanding our footprint of driving further organic growth and ensuring we have a strong field force in place. Specifically on admin costs, there's not anything particular to call out. There's a few extra costs related to some of our transfers and implementation of the changes that impacts the quarter 1, but there's not anything other structural to point out and neither a structural higher cost level than what we have been indicating before. In terms of external factors, you are right. We also in the table called out the FX developments between where were the -- when we reported Q4 last year, i.e., beginning of November and now we start of February. And most notable from that table in the report, of course, is the U.S. dollar drop, which is also what we monitor the closest. And of course, therefore, further drop in the U.S. dollar depreciation versus the DKK would still have a negative impact on our business. Net-net, the business is still, you can say, naturally hedged with the fact that we have our production across China, Malaysia, and Mexico. but that hedge comes with about a quarter delay, as we also explained in quarter 3 and quarter 4 last year. So there are still some FX fluctuations, and with the geopolitical uncertainty, that is still a topic that we will follow closely, but might impact one quarter over the other structurally over time. Not something that we are concerned with versus our '27, '28 or '29, '30 targets. On silver price explicitly, obviously, there's been quite some fluctuation in silver price over the past weeks and even this week. I think the short and the long is that, yes, it impacts our -- some of our BlueSensor business within Patient Monitoring. It's not a significant impact, as I think I explained to a number of you on the call also during the last few months and therefore, not something that we point out specifically. Jesper Ingildsen: So in terms of the FX drag and then potentially from silver, it's not like we're looking more towards the lower half of the EBIT margin target for the full year at this point in time. Henrik Bender: We don't guide where we are in the range, but just maintain our view that this is still the range despite what we've seen in terms of external headwind. Operator: The next question comes from Martin Brenoe from Nordea. Martin Brenoe: I actually have a few, but I'll just start with two questions, and then I'll jump back in the queue again. Maybe just catching on what you said in the prepared remarks, Henrik, I noticed that you said that there was an acceleration of respiratory in the quarter. So could you maybe help me explain how that development or trajectory looked like and what the exit rate was in Q1? Let's start there and then take the second question after that. Henrik Bender: Sure. So as you correctly noted, both Britt and I talked about an expected acceleration in respiratory. We don't comment on what was it 1 month versus the other. But what we're clearly pointing out is that Respiratory had a, relatively speaking, lower growth in Q1 at the 8.3%, particularly given the high comparables. For the quarters ahead, we are expecting an acceleration from a combination of the underlying conversion to single-use of aScope 4 and aScope 5, the pickup in a higher ratio of aScope 5 share of that bronchoscopy sales and then specifically the SureSight launch, which now with the mobile increases our ability to do conversions, full conversions at hospitals, which both drive SureSight sales and also drive even more bronchoscopy sales. And that acceleration we expect to see continue throughout the rest of the financial year, not commenting on how we should see one quarter versus the rest, but more commenting on you should see an acceleration across the year. I just want to remind you all that we also guided for this financial year as part of our guidance, which we released in Q4 that we are expecting an acceleration of the respiratory overall growth, where last year landed at 11.4%, and we're expecting that to accelerate for the full financial year. Martin Brenoe: Then with the risk of sounding a bit like a stalker here on this call, I noticed, Britt, that you have been in the very East in China, and you also flagged the aScope 4 Cysto launch in China. So I'm just a bit curious about this move that you're making here. Can you maybe just talk a little bit about the sort of the timing of the launch? What is the ASP versus your global ASP of the aScope 4 Cysto in China? And potentially not holding it up against you, but when should we expect China to become a meaningful contributor to your urology franchise? Britt Jensen: Yes. No, and thank you for those questions, and happy to comment on China. So basically, maybe where I should start is that China is quite a small part of our business. It's significantly below 5% of our total business. So it's a very small market now. But obviously, I mean, it's a market where we -- despite health care reforms and volume-based procurement, we actually see opportunities. And I think that's really where we have spent some time diving into that to understand more from a -- more the long-term potential and is correct. I was in China last week also to understand a little further and to follow up on some of the decisions we made based on previous visits there. I would actually say that, I mean, when we look at the market, I mean, despite some companies really being significantly challenged in China, we actually see a healthy potential for our solutions in China. And the key difference relative to other companies, you could say, is that we have actually products that are serving a real need and that are also innovative. And we have spent quite some time understanding the situation with the volume-based procurement before we invest. I would also say, coming from a very low base, I mean, it will take a number of years before this is meaningful revenue. But we -- as part of the strategy, we also said that we invest in selected markets in Asia. China is one of them. India is another one, again, coming from a low base. But on a longer term, we believe that this is the right thing. We have a manufacturing facility in China that is -- that we have had for over 25 years that is actually running very well. So we can actually leverage that also to -- for our position in China and in urology, where we are very competitive with the solutions that we have. I think, again, what we are really leveraging here is that we have very strong and attractive manufacturing costs because of our scale relative to many other players. So that also means that we can be competitive. And then we also have solutions that are differentiated on a number of areas, and we continue to invest in innovation to a different level than other players. So that's actually what makes us quite confident. But let me just finish by pointing out that U.S. and Europe will continue to be the biggest opportunity when you -- and where you will see most of the DKK growth coming from in the future. Operator: The next question comes from Tobias Berg Nissen from Danske Bank. Tobias Nissen: I just have two questions. Also, you mentioned the order pull forward in Urology, ENT, and GI, like suggesting some budget flushing in this area. What kind of similar patterns have you seen, or have you seen a similar pattern in respiratory? And what are the underlying, you can say, customer dynamics here? And also in terms of flu, anything specific to call out here also into year-end and perhaps something you've seen here in January? That would be my first question. Britt Jensen: Yes. Thank you, Tobias. I can take that. So I think in respiratory, we have seen more of a what I would call a normalized order pattern. So I think that -- I mean, we have not seen anything that -- I mean, where we think that there has been an increased buying for customers' own inventories. So that -- I mean, that's number one. Number two, in terms of flu levels, I mean, there has been -- I mean, the flu levels peaking also here around year-end with increased hospitalizations in the U.S. in particular. Now it has in the last couple of weeks been going down again. I think -- I mean, we do benefit from hospitalizations from flu, but we -- it's in a lower and lower driver of our respiratory business because our scopes are increasingly used for other purposes. So that's also why, I mean, a couple of years ago, this took up much more space than it does now. So -- but we do have some impact that I will not quantify overall. I think when both Henrik and I talk very positively about the respiratory segment, that's not something that should be seen as a short term or as the next quarter momentum. This is actually more of a longer-term underlying momentum that we see because we simply see, I mean, number one, an increased conversion to single-use endoscopy from reusable where we see very strong win rates of our -- from our solutions. So this is number one. And then number two, with an expansion of our portfolio with SureSight, I mean that is tapping into a new market, but it's also helping boost the bronchoscopy sales, both of aScope 4 and aScope 5 Broncho. So that's more of an overall positive effect that is less driven by some of these short-term elements. Tobias Nissen: Just as in terms of -- you mentioned your high strong win rates here. Have you seen those go up after you expanded that portfolio, both with SureSight and also the newest SureSight Mobile might be a little bit too early to comment on that one. Britt Jensen: Yes, exactly. Yes. So I mean, the SureSight Mobile, I mean, it's too earlier to say, because we are introducing it, and we are doing that just to clarify, where we are testing it with some customers to make sure before we do the broader commercial launch. So we are not at the broader commercial launch of that yet. But we definitely see that -- I mean -- and this was also very much our expectation with the launch of SureSight that, in particular, after we launched this -- I mean, the full set of blades, so early summer where we had 10 blades available, we have seen actually a stronger momentum because many of our customers actually like that we have: the full solution where they can use both the aScope 4, aScope 5 Broncho and SureSight on the same monitor and system. So this is actually very much something we see as a positive, and that we see also helping our win rate and our general penetration in the hospitals. Tobias Nissen: I just have two short ones here. Perhaps just on Rest of the World, here, organic growth was a bit on the softer side, around minus 2%. And just looking at Q4, it was slightly up at 1%. Anything specific to call out here? Or is there some order fluctuation? What's going on? Then just on Anesthesia and Patient Monitoring on a bit softer side this quarter due to these tough comps. But what are you seeing like in terms of leading indicators that should underpin this mid-single-digit growth you're guiding for the full year? Henrik Bender: So I can take both, Tobias. So on Rest of World, if we start with that, then it's a mix of two things. So first, as I noted in my presentation, part of Rest of World beyond the markets, as Britt say, where we are deliberately focusing China and India are 2 examples, which are part of this category. Then this category or these geographies also represent a number of distributor markets, where you will see 1 or 2 orders a year. And therefore, depending on whether it is one quarter or the other, that will, of course, impact the growth rate quite significantly. Specifically, if you go back and look at the same quarter last year for Q1, we had a number of big orders in this Rest of World geography last year same period, and that's a big driver of why you're seeing a lower growth now. On top of that, these markets are also still relatively speaking, more linked to our legacy business, Anesthesia and Patient Monitoring, relatively speaking, less to our endoscopy business. And therefore, they are also more impacted on where are we on A & PM versus where are we on ES, something that we are trying to change. And frankly, back to the question from one of your colleagues on the China visit, one of the reasons why we are pushing this agenda in these -- the endoscopy agenda in these markets because, of course, we see the same potential, though only at an earlier stage of the maturation curve. So that also means -- to follow up on your question, that Rest of World, we believe, will be a very nice growth driver over time once we are through the change of the legacy business and even more focus on endoscopy. Then ending on A & PM and the softer growth, I think as we explained, again, the growth for the quarter is mainly actually related to comparables. Comparables will become easier across the year. So that's one part of the answer to why we still feel comfortable about the mid-single-digit outlook for this business group. The other one is that we also still see us winning volume and also still see some areas, though much smaller for potential price increases. One of your colleagues again asked about raw materials. Obviously, when we see these raw material prices increase, we also go out and work on price increases on our products. So it's a combination of those 2 things that means that we still feel comfortable with a mid-single-digit growth for this segment or business group despite the low growth in Q1. Operator: The next question comes from Yiwei Zhou from SEB. Yiwei Zhou: It's Yiwei from SEB. I have two left here. Firstly, on the -- just follow-up on the tariff payments impact in Q2. I previous got impression that the payments would be a similar level as in Q1. So there will be a bit more than DKK 50 million, but less than DKK 60 million. I was just wondering in Q2, can you confirm that it will be the case? So the margin impact would be more than 2 percentage points or 3 percentage points instead of 2 percentage points. Henrik Bender: So I think it's nice that you're trying to make us become more specific, but I think I will just repeat my answer from before and say, as we communicated earlier, tariff costs will be higher in H1. Now you saw a level for Q1 alone. I'm not going to comment specifically on Q2 relative to Q1, but just repeat what I said earlier, being that we do expect tariff cost to be above the level for the full year also for Q2, i.e., above 2%. Yiwei Zhou: Now in this context, if we calculate, I mean, you guide 2 percentage point for the full year, and you are confident to mitigate when you go into next year. So how should we understand the second half? I mean, if I understand correctly, first half, you already have like more than DKK 50 million in Q1. Q2 will also be pretty high. Then you need to deliver a step-up in the second half sort of to mitigate and also to ramp up the production. But we understand, I mean, this production ramp-up will take effect gradually through the year. So how should we understand the step change in the sort of the margin impact here in the second half? Henrik Bender: So two clarifications. I think, one, we are guiding around 2% for the full year. So not explicitly 2% exactly, but around 2%. I think the second thing I will say is that, as you correctly note, the production transfers are a gradual process, but particularly the products that have the highest cost impact in terms of tariffs are the ones that are now really ramping up and have actually been ramping up for the last few months. Because as I also said earlier, the realization of the tariff cost happens with about a 3-month delay in our P&L. In other words, therefore, I feel very comfortable in terms of the momentum shift, to use your word there, i.e., drop in tariff costs that we are expecting to see in Q3, Q4 because it's driven by the production transfers we are seeing happening right now and the ramp-up that have been started and are in the middle of taking full effect as we speak. So in that sense, those are the main drivers of that cost momentum shift, i.e., drop in tariff costs between Q2 and into Q3 and ultimately Q4. Yiwei Zhou: Then next question to Britt. Also, on the cystoscope potential in China. To my knowledge, this market segment in China has been very competitive and there has been a lot of conversion post COVID. And there's also a number of Chinese single-use players competing to each other pretty intense. Britt, what gave you the confidence to enter this market? Britt Jensen: Yes. No, this is a good question. And I think you're absolutely correct that there are a number of players in this market. However, I think -- and I mean, you know a lot about this market, obviously. But I think if you're in a position like we are, where you have number one very competitive, low manufacturing cost relative to competition. And then number two is a company that invests in innovation, then you can actually have a strong position in the marketplace. And it is also a large and attractive market. So far not -- I mean, it has not been included in the volume-based pricing. I think when you look at China overall, the market that is slightly more competitive, I would say, is the market for ureteroscopy specifically. So I think that with our experiences in the Broncho segment with our bronchoscope, where we are actually -- I mean, where we are -- despite also competition, we are by far market leaders in the segment and some of the -- I mean, the benefits that we have in terms of a competitive solution, we believe that there is -- I mean, we will not be the only player in this market, that's for sure. But -- but I think we should be able to gain a sizable position winning over competition also over time. Yiwei Zhou: I just want to follow up on this. I mean in the Chinese endoscopy market in general, we know that the Japanese reusable manufacturers used to have a very high market share and China has always been their main focus. But given sort of the increased geopolitical tensions now between China and Japan, I mean, based on your learnings from the trip, are you seeing that -- do you think this will potentially push sort of a faster market conversion to the single-use in China? Britt Jensen: Yes. No, it's a good -- this is actually a good point. And I discussed, I mean, with a couple of different, I mean, local out there around the whole Japan situation. I'm not -- I mean, I'm not fully convinced to be honest, around how much that will impact. I think what will more drive the market growth is, I mean, there's a need in China for health care to a broader part of the population and the fact that we are able actually to support with our solutions delivering that they can do more procedures less -- I mean, more at lower cost and also the whole investments into the capital equipment that is -- that some of them also struggle with. I think that is more one of the drivers. I'm not -- and it could be the whole China, Japan issue can have an effect, but I'm not fully convinced that that's more maybe based on the mixed signals that I got, but it's a good perspective. Operator: The next question comes from Delphine Le Louet from Bernstein. Delphine Le Louet: Just a quick follow-up effectively on the tariff, and specifically to the Mexico ramp-up and actual levels of manufacturing and production and the one we can expect over the course of the year. So I really understand, and thank you for the precision regarding the lag effect in between the manufacturing and in a way, the invoicing. The second question will be -- and will deal with the CapEx allocation, probably broadly and just thinking about the free cash flow. And so thinking about the CapEx when it comes to allocation to innovation and when you think about the innovation in between the products and also in between the, let's say, EndoIntelligence you've been axis on. So that would be interesting to see and also if there is a bit of a seasonality here. Finally, can we get a broader view, Britt, on the sales force organization in North America, how that has changed over the course of Q1? What is left to be made? Any comments on that would be appreciated. Britt Jensen: Yes. Thank you, Delphine, for good questions. Let me start with the last one, and then I'll hand over to Henrik. So I think we have -- I mean, we have definitely -- while we have a strong presence in North America in terms of our own commercial field force that is actually working well, we have -- based also on the growth and the demand, we've seen a number of areas where we could optimize. And as you also know, we brought in a new leader, Scott Heinzelman, who joined us end of August. And together with the team, he has been implementing a number of initiatives that can basically support also our way of serving the customers and improve how we do that. So you can say one thing is, I mean, slightly restructuring how we approach the customers, not only in terms of territory restructuring of our product focus, but very much also in terms of how we are set up to better address the health systems rather than the individual doctors, given how the U.S. market is evolving. And then, I mean, we already have a pretty good position and set up with -- to work with IDNs and GPOs, but that's also where we have seen some ways that we can further strengthen our presence. So I think some of what we are doing to just sum up is that we are adding some more headcount and as we are -- we have been adjusting the structure a bit to make sure that we have enough feet on the ground to serve our customers. And then some of it is also improvements in how we operate. That will also give us some more ability to serve the customers. So I feel confident we have -- to your question on timing, we have done some of these initiatives in Q1, but that will -- I mean, it will actually be more something that we are focusing on in this quarter and next quarter. Henrik Bender: So on your other two questions, I'm not sure I fully understood what exactly you're looking on in tariff costs specifically. But I think the ramp-up, as I understood your question, I think it was mostly related to the ramp-up in Mexico, the timing effects and how much further we can ramp up. I think the overall message there remains that we have a very big factory, fortunately. In Mexico, we feel very good about that and particularly now under the USMCA trade agreement with U.S. that is, of course, has been and remains a very critical strategic site of ours in North America next to our factory in Noblesville. We are still have plenty of extra space in Mexico. And I think I've been quoted before for saying we only take up about 50% of the physical space there. I think now we're starting to go a little bit above 50%, but not much. So there's still a lot of space left. And that ramp-up is a continuous ramp-up at the same efficiency level, as we also discussed before, as we see in Malaysia, when you account for slightly higher direct production costs, but on the other hand, of course, lower distribution costs between Mexico and Malaysia. So it's happening at a net 0 gross margin impact when we transfer our product. So overall, we're really comfortable about that. And that ramp-up is happening. And as per an earlier question, particularly now on some of the higher-value products that have been driving higher tariff costs. And therefore, as we see that happening right now, that will also flow into the P&L, not in this second quarter, but particularly in the third and fourth quarter of this financial year. So I hope that answered the question on tariff costs and the link to Mexico. On CapEx allocation, you are right that we are continuing to increase our CapEx allocation or CapEx investments in general. I think they mainly fall in 3 categories. So there's, of course, the serving of the existing hardware portfolio of particular endoscopy products, which is the vast, vast majority of the focus of our R&D investments. But a larger and larger share of this also goes towards EndoIntelligence, i.e., software, AI, but also the monitor and the monitor processing itself. I'm not going to split that in detail, but those are taking up a higher and higher portion. And as you can see also in the notes of the quarterly announcement where you can see R&D costs adjusted for depreciation and amortization and then added back CapEx, you see quite a significant higher investment R&D-wise this quarter versus same quarter last year. The only last thing on CapEx is, of course, we are also then looking at what are other investments across the company, they fall in the category of, like, Britt said, some of the systems and tools we're doing for commercial investments and ultimately, also what are the inorganic opportunities we see next to all of this that could accelerate our innovation road map and could, you can say, yield further growth potential on top of our organic growth ambition. Delphine Le Louet: All right. But please, just to be back into this production ramp-up, can we think about a 60% by the end of the year in Mexico? Or is it too -- in a way too aggressive? Henrik Bender: I think that's probably a little bit too aggressive in the sense that the physical space is so big. So I think the way you should rather see it is that we want a higher and higher share of the North American market to be served by Noblesville and Mexico. Again, we're not giving specific percentage ratios, but there is a substantial step-up happening that has actually been undergoing for the last 12 months, but now is still undergoing right now as we speak. Operator: We now have a follow-up question from Jesper Ingildsen from Carnegie. Jesper Ingildsen: Just have a question on the Section 232. I wondered if you had a view on the timing of potential outcome here and whether you think that the U.K. -- USMCA would still stand in if this goes through. Just wonder if you had any insight to that and maybe on the back of discussions with the AdvaMed. Britt Jensen: Yes. No, thank you for that. And I think it's -- we are, of course, in close contact with people that are close to the matter. And I think it's a little premature to speculate too much. However, I think -- I mean, the signs at least that we see now, and obviously, we are preparing for different scenarios is that it's, number one, it's likely that it will come out in the next month or maybe 2. I think that seems to be the case. Then you could say also in terms of USMCA, that seems to be so fundamental in terms of how -- I mean -- and important to the U.S. market. So it seems also, again that this setup is expected to continue. So I think we, of course, prepare for different outcomes, but it seems to go in a direction like that. And then, of course, on top of the Section 232, there's also the whole court case around tariffs in general. And we are a little unsure right now about whether they're waiting for that before the 232 conclusions. But I think it looks -- I mean, with the different scenarios that we have been planning for, it looks very likely right now that -- I mean, that it will end in a way that supports our ongoing plans. Operator: We have a follow-up question from Martin Brenoe from Nordea. Martin Brenoe: Actually, most of my follow-ups were taken in the previous follow-up, but just one simple question. When you are doing these mitigation actions, can you just verify for me whether you are behind the plan in terms of the mitigating actions, you are on the curve or you are ahead of the plan here end of Q1 would be very helpful. Henrik Bender: That was a clear and simple question. We are on plan, neither ahead or behind. So we are on plan. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Britt Meelby Jensen for any closing remarks. Britt Jensen: Thank you very much. And my only closing remark will be a thank you for listening in on today's call and also thank you for very good questions. So we wish everyone a good rest of day from here. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Ladies and gentlemen, welcome to the Ambu Q1 2026 Conference Call. I am Valentina, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Britt Meelby Jensen, CEO. Please go ahead. Britt Jensen: Thank you very much, and good morning, everyone. Welcome to this Q1 2025-'26 quarterly call. I'm here this morning with our Chief Financial Officer, Henrik Skak Bender, and we will go through our results, and I'll start with a business update. So if we look at Page 3 as a start and then moving into Slide 4, starting with the headlines for this call. So on the back of a strong Q1 and even a strong H1 last year, we have delivered a very solid Q1 for this year with strong revenue growth. In particular, on our endoscopy business. We said in November that our growth was going to be stronger in the last part of this fiscal year compared to the first part of this year, but we are quite satisfied with the strong start of the year that we have had. In particular, what I want to highlight is that we have had very strong momentum across all our endoscopy business areas. We continue to see a very strong underlying momentum in conversions from reusable endoscopy to single-use, where we are both winning new customers on a very high rate, as well as we are increasing the penetration with existing customers. In particular, we had a strong quarter on respiratory, but also the other areas look strong. I'll comment on that in a short while. On margins, Henrik will come back to this, but we continue to drive a very high operational leverage while we invest in growth. So that's the balance that we continue to focus on. And then we are adjusting for temporarily high tariff costs that we have seen and also some FX headwind. Finally, what has been a highlight for this quarter is that we launched our ZOOM AHEAD growth strategy. We see that this is being well adopted, and we see strong early momentum as we continue to be on track for delivering on our full year outlook. Please turn to the next page and let us then look at the financial results from Q1. And if we look at our overall business, we now have Endoscopy Solutions making up 63% of our total revenue and Anesthesia Patient Monitoring 37%. Overall, the business grew 8.6% on the quarter. And that is a split between Endoscopy Solutions of 14.4%, and then almost flat -- as anticipated -- on Anesthesia and Patient Monitoring, with minus 0.1% growth. On the profitability side, we delivered DKK 164 million EBIT margin before special items, and that corresponds to a 10.5% EBIT margin. And then we had a free cash flow of DKK 13 million. Before diving into the segments, if we move to the next slide, I'd like to talk a little bit about the market that we operate in. And here, I have 2 key points that I would like to highlight. The first one is that we, as a company, are benefiting from an overall trend towards an increase in global procedures performed with an endoscope, whether it's reusable or single-use. And when at our Capital Market Day, we communicated an underlying growth rate of around 5%. And if we look at the quarter that we just exited, we see also an endoscopy volume growing at around that number. So I think that's one thing that, of course, affects our business. If we then look at what is a stronger growth driver for us, then it's the single-use endoscopy penetration. And here, we see across all 4 areas that we are in a very strong increase. If we take respiratory first, here, we see efficiency and economics is really supporting the conversion from reusable to single-use. And we do also have some flu-related demand that is increasing the penetration in this segment. Then in urology, we also see the accelerated conversion in particular with cystoscopes, but also with our newly launched ureteroscopy market. And this is again driven by efficiency and economics among the customers. And on the ureteroscopy side, also a move towards single-use because of the tough procedures and the scopes being more fragile by nature. Then on the ENT market, this is a market for single-use that is in particular strong in the U.S. and in the U.K. And here, we continue to see a strong growth in single-use endoscopy penetration, very much driven by moving from reusable to single-use when performing the procedures. Then -- gastroenterology, this is a market that has not really converted to single-use. It's the lowest single-use penetration of just below 1%. However, where what we track is some niches that are out of the suite, where we see a very nice and solid conversion to single-use as they are seeing the benefits of these solutions in the clinics. So if we then move to the portfolio and some of the highlights on the next slide of progress across our portfolio. Then I'm excited about our respiratory area, where we have recently introduced our SureSight Mobile. So this I'll come back to later, but it's basically a handheld and much more mobile version of our video laryngoscope solution. And this one, we have introduced so far in North America and Great Britain. Then when it comes to urology, what we see here is two things. One, we see a continuous penetration increase of our advanced solutions, aScope 5 Cysto and also aScope 5 Uretero. And then what we have launched in the quarter is aScope 4 Cysto in China, which is locally manufactured at our factory in China. And this is the first time we're introducing this solution in China. Then when it comes to our EndoIntelligence, we are also continuing to focus on this as an area of growing importance; and here, we have, in the quarter, advanced our documentation to help optimize efficiency for our customers and reduce the administration burden. And we are also continuing to expand our capabilities that can support our hospitals in integration to the EMR systems at the hospital, where they can upload pictures and videos to the patient files. Now let's look at the results in the different areas, starting with respiratory. So this is an area where we continue to see very strong momentum across respiratory. We saw organic growth in the quarter of 8.3% against a very strong Q1 last year. And if we look at where the growth is coming from, it's actually driven by the broad bronchoscopy portfolio we have with different sizes, both across aScope 4, but also strong growth with our aScope 5, where we see customers being willing to pay for these premium solutions. And then we have SureSight, the SureSight video laryngoscope that we launched around a year ago that, that is starting to generate meaningful revenue. So when we take a step back and look at some of these strong trends that we see in this market and to guide a little on what to expect when you look ahead, we expect an acceleration in our growth levels in this segment for the coming quarters, which will be driven by both the aScope 4 and aScope 5 increased penetration and also driven by increased adoption of our SureSight solution and cross-selling of that into bronchoscopes. Talking about SureSight, let's move to the next page and look at the launch of our mobile version, which is expanding our overall portfolio in respiratory. So maybe a short recap on what we have shown before that the video laryngoscope market, if we look at the U.S. where the market is largest, this represents a DKK 4 billion market in the U.S. alone. If we then look at laryngoscopy, it's also a method that is increasingly done using a video laryngoscope instead of direct laryngoscope. So that's basically using a laryngoscope with a camera. And in the U.S., this method represents now 50% of all intubations that are done in the U.S., and it's a number that we see growing with around 20%. Then moving to our own solution. So we have launched the SureSight Mobile, which is basically the solution that you see at the top picture here on the slide. And what this supports is very much emergency airway management because it's a product that you can basically see the picture from the intubation directly on the screen. It means that you can have it in the pocket in an ambulance at different parts of the hospital and then have easy access to that, which opposites the Connect version that you put into and connect with 1 of our 2 screens, the aView 2 Advance or the aBox 2. So overall, this is a very strong addition to the already attractive portfolio that we have in respiratory. It works with the same 10 blades that we have launched for the SureSight Connect, where we launched, as a reminder, 5 blades together with the Connect version around a year ago. And just before summer, we launched the additional 5 blades. So we now have 10 blades that both support this SureSight Mobile version as well as the SureSight Connect. So now let's move to the other endoscopy segment on the next slide, which is Urology, ENT, and GI, which is a segment that has become slightly higher than the respiratory segment now with a 21% growth in the quarter versus last year. So momentum is strong, as I mentioned in the beginning, across all the different areas that we have here with urology being the largest and biggest growth contributor, something we also expect will continue. When we look at urology, growth was primarily driven by continued penetration of our aScope 4 solution, where, again, revenue is coming from continued new customers being added as well as increasing penetration with existing customers. And then we also see revenue increasing from our more newly launched solutions, and that is our aScope 5 Cysto and our aScope 5 Uretero, reflecting also -- I mean, the speed of the uptake of these solutions in particular -- when it comes to our ureteroscope, reflect the length of the sales processes that is slightly longer for these at the hospitals because these are more complex procedures by nature. So in these segments, we -- if we look at what we expect as we look ahead, we did see a strong underlying momentum, which we expect to continue. What we also saw was that towards the end of the quarter, we saw a slight increase in the number of orders that came in before year-end, which also means that we think that there are good reasons why the growth in the coming quarter can be slightly lower than the 21% that is highlighted here. But I do want to say that this is more the timing of orders that is a result of that, and it's not related to the underlying growth momentum that we see in urology as well as the other segments represented here. So before leaving endoscopy, maybe on the next slide, let me briefly comment on EndoIntelligence, which is our area of growing importance that supports our endoscopes across all the areas that we operate in within endoscopy. Because where we really stand out is that we have one software platform, our EndoIntelligence, that all our endoscopes connect to. So that basically means, and we see health systems paying more and more attention to this that we -- that they can have our -- either our aView 2 Advanced or our aBox 2 and then basically, they can use our full endoscopy portfolio on these monitors. And it's exactly the same user-friendliness, the same functionality that you have for a number of the functions. So it's very easy to use across all the different areas. And this is where we are unique with our broad portfolio. Then it also has a lot of benefits and scale advantages because as we invest in advanced software features, we can also easily apply these across all the different areas that we are in. And an example here is also that we are working on, and that we launched for training purposes, is the AI bronchoscopy navigation training, where basically you can use the solution to see where in which parts of the lungs you have expected, something that is not available on our aView 2 Advanced or aBox 2 yet, I should say, but which is again part of our overall EndoIntelligence offering. When we then look ahead, there's a lot of development ongoing within this area, where we are looking at how we can -- solutions that can improve our navigation, detection, and documentation in the different areas, as we see a clear need and demand for among our customers. Also, we see increasing benefits of using technology to improve our image quality across the different areas, which again is a key lever to improve detection rates. Then last but not least, the whole integration with connected devices and with the hospital systems is also something that we see is remarkably increasing or easing the workflow at the hospitals, which is a key focus as they are overburdened with a lot of administration and still face in many countries, staff shortages. So overall, an area that we will continue to talk more about and integrate in the solutions that we have. Then let me briefly also comment on the next slide on our Anesthesia and Patient Monitoring business, because this was more or less flat versus last year when we look at it organically. Our Anesthesia declined by 1.2% and Patient Monitoring grew then on the other hand, 1.1%. We still see the same dynamics in these markets as previously. And you may remember that last year, we grew in the quarter 18%, very much driven by selective high price increases. So we are more back to normalized growth levels now, where you should expect going forward growth around 3% to 5%, as we have communicated. Also, you should expect the growth coming a lot from volume increases, but also still have some price increase development, although much more modest that we have seen in the past couple of years. And looking at the coming quarters, we remain very confident around, again, the dynamics in this segment and that we continue to see nice growth rates driven by already very strong solutions as well as a highly loyal customer base. So before handing over to Henrik, let's move to the next slide and let's -- well finish with a few highlights on the key focus areas of our strategy. So customer centricity remains a key area where we are doing a lot of initiatives to continue to serve our customers better. What I want to comment on in this quarter specifically is our Recircle Program. So our program, where we take back endoscopes for recycling, which is live in 4 markets and where we have now expanded to cover 50 hospitals and over 100 clinical departments. And in the quarter, we also expanded this to not only include the endoscopes, the full range of endoscopes, but also now the SureSight blades. On innovation relating to the EndoIntelligence, that we discussed, we continue to also strengthen our capabilities within software and AI technology and have some very strong capabilities to drive the innovation in this area specifically. Then on the business platform, an important point here is that we continue to invest in expanding our commercial execution to support the high-growth agenda that we have. And then also what we do is that we continue to also have our Mexico factory improving both utilization and output, which is very much supporting specifically the growth in North America. So with that, let's move to the next slide. This concludes my presentation, and I'll hand over to Henrik to go through the financials. Henrik Bender: Thank you, Britt. Good morning, and welcome to the call, everybody listening in. Happy to take over and take you through a couple of key notes on the financial review. Before we go to the next page, I just want to reiterate what Britt also opened the call saying we are very happy with the solid start of the year and very satisfied both with the results, but also in particular on the strategic progress. With that note, let's take us to Page 15. So overall, as Britt opened was saying earlier, we had a growth of 8.6%. Adjusting for FX, the reported growth was 3.2%. We continue to still be impacted by a U.S. dollar/DKK depreciation, which impacts our reported growth, particularly for North America, but also with the mix of FX, the growth in the Rest of World, something that I'll come back to later. Overall, the growth is particularly driven by Endoscopy Solutions now representing 63% of our total revenue and a total growth for the quarter of 14.4%. Anesthesia, as Britt just mentioned, had a negative growth, while Patient Monitoring had a slightly positive growth, meaning that overall, that segment was more or less flat. With that, let's have a closer look at the geographical split of our growth on the next page. Overall, we're still on a very, very solid growth trajectory for our key markets in North America and for EMEA, both growing close to double digits. The solid growth in North America, particularly driven by Endoscopy Solutions and for EMEA, driven by both Endoscopy Solutions and actually also still our Anesthesia and Patient Monitoring business. For Rest of World, we did see a decline in organic growth, mainly driven by order fluctuations, as we do see in some of these markets, very big orders for one quarter or the other, as many of these markets are still covered by distributors, which means that there will be order fluctuations across the year. Looking at the same numbers in reported currency, North America growth was almost flat because of the USD/DKK depreciation, and the Rest of World had a higher negative growth again in reported currency because of the negative FX effect. If we then turn to margin and start with gross margin. Overall, our gross margin was in line with expectations. We had a solid first quarter at 60.8%, which is lower than last year same quarter, but higher than the average for the full year last financial year. The overall gross margin is continuing to increase, driven by a combination of higher endoscopy sales versus A & PM, continued stronger and strengthened price governance and as Britt mentioned on the strategic update, and increasing utilization, particularly of our Mexico factory, which helps us ensure that we have lower production overhead and therefore, supports an increase in gross margin. Overall, we therefore feel well on track on how gross margin should develop both for this financial year, but also towards our long-term targets, supporting our EBIT margin expansion journey. Speaking about EBIT margin, let's go to the next page. Overall, the EBIT margin for Q1 landed at 10.5% reported, which was a decline of 5.6 percentage points versus the same quarter last year. We did, as communicated in our Q4, expect and also report a significant cost of tariffs, which is driving down the EBIT margin for the quarter. And combined with that, we also had a negative development in FX, meaning that if we adjust for the combination of the two, we saw an underlying adjusted EBIT margin of above 15%, which actually is very well in line with our EBIT margin expansion plan for this year and again, also for the long-term targets. Overall, therefore, we feel on a solid start. As Britt said also in our opening, we communicated that we see a lower EBIT margin for the first half, and we are going to see a higher EBIT margin for the second half of this fiscal year, and this represents a solid start in accordance with our plans. Turning to free cash flow. We did report a low free cash flow for the first quarter. Overall, this is fully in line with the typical pattern of our free cash flow, where we always pay bonuses and tax in the first quarter. And therefore, this is also in line with expectations. Specifically, the free cash flow for the first quarter was impacted by negative development in net working capital, in part due to us lifting some of our safety stocks across the world to manage and mitigate some of the political uncertainties we see. Furthermore, the free cash flow was also impacted, of course, particularly by the higher tariff costs for this quarter, specifically if you compare this quarter to the same quarter last year. But overall, on free cash flow, also a solid start. Speaking about solid start and then looking at our outlook on the next page, we therefore also -- as Britt also said in her opening, maintaining the outlook for the full year with a solid growth of 10% to 13% organic driven in particular by Endoscopy Solutions at plus 15% growth. We see still further acceleration in respiratory. As Britt said, for the first quarter, the respiratory growth was impacted by the very high comparables for the same quarter last year, but we see that accelerating throughout the quarter. On Urology, ENT, and GI, we see a continued momentum versus where we landed full year last year. We had a good first quarter. We are seeing some order patterns that are benefiting Q1, which means that we are seeing slightly lower growth expected for Q2, but overall across the year, a continued momentum versus the same growth levels we saw for the last financial year. For Anesthesia and Patient Monitoring, despite a flat growth for the first quarter, we still maintain a guidance of mid-single digit as the first quarter was mainly impacted by high comparables. On EBIT margin, the impact from the external factors, particularly tariffs, we are still seeing playing out, as expected, and these will mainly impact the first half of the financial year. So the first quarter, as we just saw, but also now into second quarter. Overall, we feel on a solid track on delivering on the 12% to 14% guidance despite the tariffs and despite the FX headwinds. Last but not least, as I said, the first quarter had a lower cash flow and therefore, also lower cash conversion, fully in line with expectations; and we also still feel very comfortable that we'll be able to deliver on the cash conversion guidance for the full year. So overall, again, a solid start of the year, something we are very happy with and also a lot of great progress on our strategic focus areas. With that, I hand it back to the operator and open for questions. Operator: [Operator Instructions] The first question comes from Thyra Lee from UBS. Thyra Lee: I just have two, please. Firstly, I wanted to follow up on your comment about the pull forward into Q1 within the Urology, ENT, and GI business. Could you just give us a little more color on why you saw this customer behavior? If you could size the benefit that it contributed in Q1, and also how you expect Q2 growth to be impacted from this? Then the second, please. You saw an absolute tariff impact of over DKK 50 million. On my math -- and please correct me if I'm wrong -- this suggests an impact from tariffs only of almost 3.5 percentage points on the margin this quarter, which sits significantly above the average 2 percentage points that you're flagging for this year. Could you just tell us whether we should expect Q2 to also see an impact of above 2 percentage points to a similar quantum, or should it be more in line with 2 percentage points? Britt Jensen: Thank you for good questions. Let me answer the first question on Urology, ENT, and GI, and then I'll let Henrik answer on your tariff question. So I think overall, I think I want to take a step back and say that if we look at the overall business, Urology, ENT, and GI -- and let's maybe focus on urology, which was where your focus was in the question, we see very strong momentum in our urology business. So that means that we continue to see our new -- an inflow of new sizable customers, and we also continue to see an increasing penetration with the customers that we already have. So I think that makes me very confident. If we look at the past year and as you also see in the slides, the way that we show it and measure internally, we very much focus on the rolling 12 months because we do see some fluctuations quarter-over-quarter. And what we saw, and this is basically also what we are highlighting here. In the last 4 quarters, we have had growth between 16% and 21% roughly. So that also illustrates that and this quarter, it was 21%. That illustrates some of the fluctuations we have because orders are placed in one quarter relative to another. And we, of course, track our orders, and I do want to highlight that we do not, I mean, encourage with rebates or anything like that customers to buy in one quarter versus another. So let me just make that clear. But what we did see towards the end of Q1 that we are reporting on, we did see a stronger order -- number of orders coming in. So this is basically also when we then look at the overall rolling 12 months and look at how we see the pattern of new customers and increased penetration, that leads us to believe that there could be a slightly lower growth rate in Q1. So this is basically just what we are -- in Q2, sorry, yes, in our Q2. So this is basically what we are flagging and what to expect. But again, I want to highlight, it doesn't take anything away from the underlying momentum where we see aScope 4 Cysto continuing to be very strong performing and a product that we are selling a lot. And then we do see the growing momentum on aScope 5 Cysto, where actually customers are willing to pay a premium for that product. And then we also see a very good increase in our aScope 5 Uretero. But again, with longer evaluation times and thereby longer selling cycles than we see in the scopes targeting simpler procedures. So I hope that that explains a bit what we see. Again, highlighting that we don't see any cautious or any need to be negative -- have a more negative view on this segment. It's simply the quarter-over-quarter fluctuations here. Henrik Bender: To follow up on the second question and perhaps just a final note on the first, Thyra. I think for us also, we are illustrating this as a symbol and a signal of how we are becoming better and better at understanding the dynamics with our customers and predicting what patterns we should see, exactly, as Britt said, not pushing order flows into the customers, but rather managing it together with the customers. On the absolute tariff cost, you are right with an above DKK 50 million tariff cost realized in the first quarter. That means an above 3 percentage point negative impact in the first quarter on EBIT margin. And yes, you should expect also an above 2 percentage point tariff cost for the second quarter. That basically brings me back to when we -- as we explained earlier or end of last financial year, the tariff cost impacts our P&L with about a 1 quarter delay. And given that we are still in the tariff regime, where we are moving production to Mexico and thereby compensating for the tariff costs, and we've been doing so for the last 6, 9 months, then there will still be an above average for the year tariff cost impacting us in Q2, which will then go down further in Q3 and Q4. Operator: The next question comes from Jesper Ingildsen from Carnegie. Jesper Ingildsen: So I have a couple of questions as well. On the other Endoscopy business, I don't think you've called out specifically how much this phasing is equivalent to, but also whether we should see this in context of the 21% growth you delivered in Q1 or more like against the 20% trend line that we are typically seeing for this segment? Then maybe on margin, even when adjusting for the tariffs, it seems like you have a pretty big step-up in OpEx here in Q1, and particularly in the administration cost. Anything to call out here in terms of one-offs? Or how should we think of this for the rest of the year? Then lastly, on the margin side as well. You have updated your FX table in your report as well. So you're obviously assuming more pressure from FX, both on top line and on margin. Maybe if you could specify what kind of pressure we're talking about? And then maybe also similarly, what kind of potential impact we could see from increasing silver prices when it comes to your single-use electrodes? Britt Jensen: Thank you, Jesper. I'll maybe take the first one. And I'm not sure. I mean, please correct me if I'm not fully answering your question. But again, the 21% that we -- growth that we had in Urology, ENT, and GI, that -- I mean, we focus mostly on the urology because that is the largest part of this segment. But actually, what -- when we look across, we actually see solid growth across all of these 3 areas. So that's just one thing to be clear about. Then I think your question was around the effect on the order flow, when we had a higher-than-normal order flow in -- towards the end of December. And maybe just a comment on that also relating to what I said before. I think -- why did we see this, you may ask. I think what -- some of the dynamics that -- I mean, that we expect is that, as you know, many are finalizing their fiscal years of our customers, the 31st of December. And sometimes depending on where hospitals and clinics are in their own budgets and that has actually, we have seen in previous years also has an effect on how they place their orders. So that is what we have seen. It's -- I mean, we are monitoring this obviously very closely into this quarter. It's not because we are flagging a big concern that we see right now, but it's more as we try to predict the inventories that we know are at the customer levels and when we should expect orders. This is basically where we see some of the quarter-over-quarter fluctuations and which is also why we are -- I mean, we are not really concerned because the key numbers that we track internally, and I know we don't share this is that we see a steady flow of new customers coming in, and we also see when we have the customers in that their penetration. So the share of procedures where they use our scope relatively to typically a reusable scope that, that is going up. And we do not see anything of concern here. So this is also why we feel quite comfortable around the growth here. So hopefully, this clarifies the answer. And that -- I mean, that is not only for -- that trend for urology, it's also when we talk about ENT and the customers we have in GI. Jesper Ingildsen: If we were talking about like, let's say, 1 to 2 percentage point that was -- that supported the growth in Q1 or we're talking a significantly larger contribution. Henrik Bender: Yes. So I think we don't size it explicitly, but it's a few percentage points. So I think this is why we want to be a little bit more clear on the impact and therefore, how you should interpret the 21%. On the margin question, Jesper, then I guess the 2 points you asked about was one on OpEx, OpEx ratio development and second, the impact from FX and other commodity prices. So on OpEx overall, you're right, there was an increase in the OpEx level, both on selling and distribution costs, where you see obviously the tariff cost impacting. But also on top of that, even if you adjust for that, you can see, as Britt explained also in the strategy update, our investments in commercial execution, i.e., salespeople in the front line, but also the whole infrastructure around our commercial execution still materializing. And this is a part of the plan of expanding our footprint of driving further organic growth and ensuring we have a strong field force in place. Specifically on admin costs, there's not anything particular to call out. There's a few extra costs related to some of our transfers and implementation of the changes that impacts the quarter 1, but there's not anything other structural to point out and neither a structural higher cost level than what we have been indicating before. In terms of external factors, you are right. We also in the table called out the FX developments between where were the -- when we reported Q4 last year, i.e., beginning of November and now we start of February. And most notable from that table in the report, of course, is the U.S. dollar drop, which is also what we monitor the closest. And of course, therefore, further drop in the U.S. dollar depreciation versus the DKK would still have a negative impact on our business. Net-net, the business is still, you can say, naturally hedged with the fact that we have our production across China, Malaysia, and Mexico. but that hedge comes with about a quarter delay, as we also explained in quarter 3 and quarter 4 last year. So there are still some FX fluctuations, and with the geopolitical uncertainty, that is still a topic that we will follow closely, but might impact one quarter over the other structurally over time. Not something that we are concerned with versus our '27, '28 or '29, '30 targets. On silver price explicitly, obviously, there's been quite some fluctuation in silver price over the past weeks and even this week. I think the short and the long is that, yes, it impacts our -- some of our BlueSensor business within Patient Monitoring. It's not a significant impact, as I think I explained to a number of you on the call also during the last few months and therefore, not something that we point out specifically. Jesper Ingildsen: So in terms of the FX drag and then potentially from silver, it's not like we're looking more towards the lower half of the EBIT margin target for the full year at this point in time. Henrik Bender: We don't guide where we are in the range, but just maintain our view that this is still the range despite what we've seen in terms of external headwind. Operator: The next question comes from Martin Brenoe from Nordea. Martin Brenoe: I actually have a few, but I'll just start with two questions, and then I'll jump back in the queue again. Maybe just catching on what you said in the prepared remarks, Henrik, I noticed that you said that there was an acceleration of respiratory in the quarter. So could you maybe help me explain how that development or trajectory looked like and what the exit rate was in Q1? Let's start there and then take the second question after that. Henrik Bender: Sure. So as you correctly noted, both Britt and I talked about an expected acceleration in respiratory. We don't comment on what was it 1 month versus the other. But what we're clearly pointing out is that Respiratory had a, relatively speaking, lower growth in Q1 at the 8.3%, particularly given the high comparables. For the quarters ahead, we are expecting an acceleration from a combination of the underlying conversion to single-use of aScope 4 and aScope 5, the pickup in a higher ratio of aScope 5 share of that bronchoscopy sales and then specifically the SureSight launch, which now with the mobile increases our ability to do conversions, full conversions at hospitals, which both drive SureSight sales and also drive even more bronchoscopy sales. And that acceleration we expect to see continue throughout the rest of the financial year, not commenting on how we should see one quarter versus the rest, but more commenting on you should see an acceleration across the year. I just want to remind you all that we also guided for this financial year as part of our guidance, which we released in Q4 that we are expecting an acceleration of the respiratory overall growth, where last year landed at 11.4%, and we're expecting that to accelerate for the full financial year. Martin Brenoe: Then with the risk of sounding a bit like a stalker here on this call, I noticed, Britt, that you have been in the very East in China, and you also flagged the aScope 4 Cysto launch in China. So I'm just a bit curious about this move that you're making here. Can you maybe just talk a little bit about the sort of the timing of the launch? What is the ASP versus your global ASP of the aScope 4 Cysto in China? And potentially not holding it up against you, but when should we expect China to become a meaningful contributor to your urology franchise? Britt Jensen: Yes. No, and thank you for those questions, and happy to comment on China. So basically, maybe where I should start is that China is quite a small part of our business. It's significantly below 5% of our total business. So it's a very small market now. But obviously, I mean, it's a market where we -- despite health care reforms and volume-based procurement, we actually see opportunities. And I think that's really where we have spent some time diving into that to understand more from a -- more the long-term potential and is correct. I was in China last week also to understand a little further and to follow up on some of the decisions we made based on previous visits there. I would actually say that, I mean, when we look at the market, I mean, despite some companies really being significantly challenged in China, we actually see a healthy potential for our solutions in China. And the key difference relative to other companies, you could say, is that we have actually products that are serving a real need and that are also innovative. And we have spent quite some time understanding the situation with the volume-based procurement before we invest. I would also say, coming from a very low base, I mean, it will take a number of years before this is meaningful revenue. But we -- as part of the strategy, we also said that we invest in selected markets in Asia. China is one of them. India is another one, again, coming from a low base. But on a longer term, we believe that this is the right thing. We have a manufacturing facility in China that is -- that we have had for over 25 years that is actually running very well. So we can actually leverage that also to -- for our position in China and in urology, where we are very competitive with the solutions that we have. I think, again, what we are really leveraging here is that we have very strong and attractive manufacturing costs because of our scale relative to many other players. So that also means that we can be competitive. And then we also have solutions that are differentiated on a number of areas, and we continue to invest in innovation to a different level than other players. So that's actually what makes us quite confident. But let me just finish by pointing out that U.S. and Europe will continue to be the biggest opportunity when you -- and where you will see most of the DKK growth coming from in the future. Operator: The next question comes from Tobias Berg Nissen from Danske Bank. Tobias Nissen: I just have two questions. Also, you mentioned the order pull forward in Urology, ENT, and GI, like suggesting some budget flushing in this area. What kind of similar patterns have you seen, or have you seen a similar pattern in respiratory? And what are the underlying, you can say, customer dynamics here? And also in terms of flu, anything specific to call out here also into year-end and perhaps something you've seen here in January? That would be my first question. Britt Jensen: Yes. Thank you, Tobias. I can take that. So I think in respiratory, we have seen more of a what I would call a normalized order pattern. So I think that -- I mean, we have not seen anything that -- I mean, where we think that there has been an increased buying for customers' own inventories. So that -- I mean, that's number one. Number two, in terms of flu levels, I mean, there has been -- I mean, the flu levels peaking also here around year-end with increased hospitalizations in the U.S. in particular. Now it has in the last couple of weeks been going down again. I think -- I mean, we do benefit from hospitalizations from flu, but we -- it's in a lower and lower driver of our respiratory business because our scopes are increasingly used for other purposes. So that's also why, I mean, a couple of years ago, this took up much more space than it does now. So -- but we do have some impact that I will not quantify overall. I think when both Henrik and I talk very positively about the respiratory segment, that's not something that should be seen as a short term or as the next quarter momentum. This is actually more of a longer-term underlying momentum that we see because we simply see, I mean, number one, an increased conversion to single-use endoscopy from reusable where we see very strong win rates of our -- from our solutions. So this is number one. And then number two, with an expansion of our portfolio with SureSight, I mean that is tapping into a new market, but it's also helping boost the bronchoscopy sales, both of aScope 4 and aScope 5 Broncho. So that's more of an overall positive effect that is less driven by some of these short-term elements. Tobias Nissen: Just as in terms of -- you mentioned your high strong win rates here. Have you seen those go up after you expanded that portfolio, both with SureSight and also the newest SureSight Mobile might be a little bit too early to comment on that one. Britt Jensen: Yes, exactly. Yes. So I mean, the SureSight Mobile, I mean, it's too earlier to say, because we are introducing it, and we are doing that just to clarify, where we are testing it with some customers to make sure before we do the broader commercial launch. So we are not at the broader commercial launch of that yet. But we definitely see that -- I mean -- and this was also very much our expectation with the launch of SureSight that, in particular, after we launched this -- I mean, the full set of blades, so early summer where we had 10 blades available, we have seen actually a stronger momentum because many of our customers actually like that we have: the full solution where they can use both the aScope 4, aScope 5 Broncho and SureSight on the same monitor and system. So this is actually very much something we see as a positive, and that we see also helping our win rate and our general penetration in the hospitals. Tobias Nissen: I just have two short ones here. Perhaps just on Rest of the World, here, organic growth was a bit on the softer side, around minus 2%. And just looking at Q4, it was slightly up at 1%. Anything specific to call out here? Or is there some order fluctuation? What's going on? Then just on Anesthesia and Patient Monitoring on a bit softer side this quarter due to these tough comps. But what are you seeing like in terms of leading indicators that should underpin this mid-single-digit growth you're guiding for the full year? Henrik Bender: So I can take both, Tobias. So on Rest of World, if we start with that, then it's a mix of two things. So first, as I noted in my presentation, part of Rest of World beyond the markets, as Britt say, where we are deliberately focusing China and India are 2 examples, which are part of this category. Then this category or these geographies also represent a number of distributor markets, where you will see 1 or 2 orders a year. And therefore, depending on whether it is one quarter or the other, that will, of course, impact the growth rate quite significantly. Specifically, if you go back and look at the same quarter last year for Q1, we had a number of big orders in this Rest of World geography last year same period, and that's a big driver of why you're seeing a lower growth now. On top of that, these markets are also still relatively speaking, more linked to our legacy business, Anesthesia and Patient Monitoring, relatively speaking, less to our endoscopy business. And therefore, they are also more impacted on where are we on A & PM versus where are we on ES, something that we are trying to change. And frankly, back to the question from one of your colleagues on the China visit, one of the reasons why we are pushing this agenda in these -- the endoscopy agenda in these markets because, of course, we see the same potential, though only at an earlier stage of the maturation curve. So that also means -- to follow up on your question, that Rest of World, we believe, will be a very nice growth driver over time once we are through the change of the legacy business and even more focus on endoscopy. Then ending on A & PM and the softer growth, I think as we explained, again, the growth for the quarter is mainly actually related to comparables. Comparables will become easier across the year. So that's one part of the answer to why we still feel comfortable about the mid-single-digit outlook for this business group. The other one is that we also still see us winning volume and also still see some areas, though much smaller for potential price increases. One of your colleagues again asked about raw materials. Obviously, when we see these raw material prices increase, we also go out and work on price increases on our products. So it's a combination of those 2 things that means that we still feel comfortable with a mid-single-digit growth for this segment or business group despite the low growth in Q1. Operator: The next question comes from Yiwei Zhou from SEB. Yiwei Zhou: It's Yiwei from SEB. I have two left here. Firstly, on the -- just follow-up on the tariff payments impact in Q2. I previous got impression that the payments would be a similar level as in Q1. So there will be a bit more than DKK 50 million, but less than DKK 60 million. I was just wondering in Q2, can you confirm that it will be the case? So the margin impact would be more than 2 percentage points or 3 percentage points instead of 2 percentage points. Henrik Bender: So I think it's nice that you're trying to make us become more specific, but I think I will just repeat my answer from before and say, as we communicated earlier, tariff costs will be higher in H1. Now you saw a level for Q1 alone. I'm not going to comment specifically on Q2 relative to Q1, but just repeat what I said earlier, being that we do expect tariff cost to be above the level for the full year also for Q2, i.e., above 2%. Yiwei Zhou: Now in this context, if we calculate, I mean, you guide 2 percentage point for the full year, and you are confident to mitigate when you go into next year. So how should we understand the second half? I mean, if I understand correctly, first half, you already have like more than DKK 50 million in Q1. Q2 will also be pretty high. Then you need to deliver a step-up in the second half sort of to mitigate and also to ramp up the production. But we understand, I mean, this production ramp-up will take effect gradually through the year. So how should we understand the step change in the sort of the margin impact here in the second half? Henrik Bender: So two clarifications. I think, one, we are guiding around 2% for the full year. So not explicitly 2% exactly, but around 2%. I think the second thing I will say is that, as you correctly note, the production transfers are a gradual process, but particularly the products that have the highest cost impact in terms of tariffs are the ones that are now really ramping up and have actually been ramping up for the last few months. Because as I also said earlier, the realization of the tariff cost happens with about a 3-month delay in our P&L. In other words, therefore, I feel very comfortable in terms of the momentum shift, to use your word there, i.e., drop in tariff costs that we are expecting to see in Q3, Q4 because it's driven by the production transfers we are seeing happening right now and the ramp-up that have been started and are in the middle of taking full effect as we speak. So in that sense, those are the main drivers of that cost momentum shift, i.e., drop in tariff costs between Q2 and into Q3 and ultimately Q4. Yiwei Zhou: Then next question to Britt. Also, on the cystoscope potential in China. To my knowledge, this market segment in China has been very competitive and there has been a lot of conversion post COVID. And there's also a number of Chinese single-use players competing to each other pretty intense. Britt, what gave you the confidence to enter this market? Britt Jensen: Yes. No, this is a good question. And I think you're absolutely correct that there are a number of players in this market. However, I think -- and I mean, you know a lot about this market, obviously. But I think if you're in a position like we are, where you have number one very competitive, low manufacturing cost relative to competition. And then number two is a company that invests in innovation, then you can actually have a strong position in the marketplace. And it is also a large and attractive market. So far not -- I mean, it has not been included in the volume-based pricing. I think when you look at China overall, the market that is slightly more competitive, I would say, is the market for ureteroscopy specifically. So I think that with our experiences in the Broncho segment with our bronchoscope, where we are actually -- I mean, where we are -- despite also competition, we are by far market leaders in the segment and some of the -- I mean, the benefits that we have in terms of a competitive solution, we believe that there is -- I mean, we will not be the only player in this market, that's for sure. But -- but I think we should be able to gain a sizable position winning over competition also over time. Yiwei Zhou: I just want to follow up on this. I mean in the Chinese endoscopy market in general, we know that the Japanese reusable manufacturers used to have a very high market share and China has always been their main focus. But given sort of the increased geopolitical tensions now between China and Japan, I mean, based on your learnings from the trip, are you seeing that -- do you think this will potentially push sort of a faster market conversion to the single-use in China? Britt Jensen: Yes. No, it's a good -- this is actually a good point. And I discussed, I mean, with a couple of different, I mean, local out there around the whole Japan situation. I'm not -- I mean, I'm not fully convinced to be honest, around how much that will impact. I think what will more drive the market growth is, I mean, there's a need in China for health care to a broader part of the population and the fact that we are able actually to support with our solutions delivering that they can do more procedures less -- I mean, more at lower cost and also the whole investments into the capital equipment that is -- that some of them also struggle with. I think that is more one of the drivers. I'm not -- and it could be the whole China, Japan issue can have an effect, but I'm not fully convinced that that's more maybe based on the mixed signals that I got, but it's a good perspective. Operator: The next question comes from Delphine Le Louet from Bernstein. Delphine Le Louet: Just a quick follow-up effectively on the tariff, and specifically to the Mexico ramp-up and actual levels of manufacturing and production and the one we can expect over the course of the year. So I really understand, and thank you for the precision regarding the lag effect in between the manufacturing and in a way, the invoicing. The second question will be -- and will deal with the CapEx allocation, probably broadly and just thinking about the free cash flow. And so thinking about the CapEx when it comes to allocation to innovation and when you think about the innovation in between the products and also in between the, let's say, EndoIntelligence you've been axis on. So that would be interesting to see and also if there is a bit of a seasonality here. Finally, can we get a broader view, Britt, on the sales force organization in North America, how that has changed over the course of Q1? What is left to be made? Any comments on that would be appreciated. Britt Jensen: Yes. Thank you, Delphine, for good questions. Let me start with the last one, and then I'll hand over to Henrik. So I think we have -- I mean, we have definitely -- while we have a strong presence in North America in terms of our own commercial field force that is actually working well, we have -- based also on the growth and the demand, we've seen a number of areas where we could optimize. And as you also know, we brought in a new leader, Scott Heinzelman, who joined us end of August. And together with the team, he has been implementing a number of initiatives that can basically support also our way of serving the customers and improve how we do that. So you can say one thing is, I mean, slightly restructuring how we approach the customers, not only in terms of territory restructuring of our product focus, but very much also in terms of how we are set up to better address the health systems rather than the individual doctors, given how the U.S. market is evolving. And then, I mean, we already have a pretty good position and set up with -- to work with IDNs and GPOs, but that's also where we have seen some ways that we can further strengthen our presence. So I think some of what we are doing to just sum up is that we are adding some more headcount and as we are -- we have been adjusting the structure a bit to make sure that we have enough feet on the ground to serve our customers. And then some of it is also improvements in how we operate. That will also give us some more ability to serve the customers. So I feel confident we have -- to your question on timing, we have done some of these initiatives in Q1, but that will -- I mean, it will actually be more something that we are focusing on in this quarter and next quarter. Henrik Bender: So on your other two questions, I'm not sure I fully understood what exactly you're looking on in tariff costs specifically. But I think the ramp-up, as I understood your question, I think it was mostly related to the ramp-up in Mexico, the timing effects and how much further we can ramp up. I think the overall message there remains that we have a very big factory, fortunately. In Mexico, we feel very good about that and particularly now under the USMCA trade agreement with U.S. that is, of course, has been and remains a very critical strategic site of ours in North America next to our factory in Noblesville. We are still have plenty of extra space in Mexico. And I think I've been quoted before for saying we only take up about 50% of the physical space there. I think now we're starting to go a little bit above 50%, but not much. So there's still a lot of space left. And that ramp-up is a continuous ramp-up at the same efficiency level, as we also discussed before, as we see in Malaysia, when you account for slightly higher direct production costs, but on the other hand, of course, lower distribution costs between Mexico and Malaysia. So it's happening at a net 0 gross margin impact when we transfer our product. So overall, we're really comfortable about that. And that ramp-up is happening. And as per an earlier question, particularly now on some of the higher-value products that have been driving higher tariff costs. And therefore, as we see that happening right now, that will also flow into the P&L, not in this second quarter, but particularly in the third and fourth quarter of this financial year. So I hope that answered the question on tariff costs and the link to Mexico. On CapEx allocation, you are right that we are continuing to increase our CapEx allocation or CapEx investments in general. I think they mainly fall in 3 categories. So there's, of course, the serving of the existing hardware portfolio of particular endoscopy products, which is the vast, vast majority of the focus of our R&D investments. But a larger and larger share of this also goes towards EndoIntelligence, i.e., software, AI, but also the monitor and the monitor processing itself. I'm not going to split that in detail, but those are taking up a higher and higher portion. And as you can see also in the notes of the quarterly announcement where you can see R&D costs adjusted for depreciation and amortization and then added back CapEx, you see quite a significant higher investment R&D-wise this quarter versus same quarter last year. The only last thing on CapEx is, of course, we are also then looking at what are other investments across the company, they fall in the category of, like, Britt said, some of the systems and tools we're doing for commercial investments and ultimately, also what are the inorganic opportunities we see next to all of this that could accelerate our innovation road map and could, you can say, yield further growth potential on top of our organic growth ambition. Delphine Le Louet: All right. But please, just to be back into this production ramp-up, can we think about a 60% by the end of the year in Mexico? Or is it too -- in a way too aggressive? Henrik Bender: I think that's probably a little bit too aggressive in the sense that the physical space is so big. So I think the way you should rather see it is that we want a higher and higher share of the North American market to be served by Noblesville and Mexico. Again, we're not giving specific percentage ratios, but there is a substantial step-up happening that has actually been undergoing for the last 12 months, but now is still undergoing right now as we speak. Operator: We now have a follow-up question from Jesper Ingildsen from Carnegie. Jesper Ingildsen: Just have a question on the Section 232. I wondered if you had a view on the timing of potential outcome here and whether you think that the U.K. -- USMCA would still stand in if this goes through. Just wonder if you had any insight to that and maybe on the back of discussions with the AdvaMed. Britt Jensen: Yes. No, thank you for that. And I think it's -- we are, of course, in close contact with people that are close to the matter. And I think it's a little premature to speculate too much. However, I think -- I mean, the signs at least that we see now, and obviously, we are preparing for different scenarios is that it's, number one, it's likely that it will come out in the next month or maybe 2. I think that seems to be the case. Then you could say also in terms of USMCA, that seems to be so fundamental in terms of how -- I mean -- and important to the U.S. market. So it seems also, again that this setup is expected to continue. So I think we, of course, prepare for different outcomes, but it seems to go in a direction like that. And then, of course, on top of the Section 232, there's also the whole court case around tariffs in general. And we are a little unsure right now about whether they're waiting for that before the 232 conclusions. But I think it looks -- I mean, with the different scenarios that we have been planning for, it looks very likely right now that -- I mean, that it will end in a way that supports our ongoing plans. Operator: We have a follow-up question from Martin Brenoe from Nordea. Martin Brenoe: Actually, most of my follow-ups were taken in the previous follow-up, but just one simple question. When you are doing these mitigation actions, can you just verify for me whether you are behind the plan in terms of the mitigating actions, you are on the curve or you are ahead of the plan here end of Q1 would be very helpful. Henrik Bender: That was a clear and simple question. We are on plan, neither ahead or behind. So we are on plan. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Britt Meelby Jensen for any closing remarks. Britt Jensen: Thank you very much. And my only closing remark will be a thank you for listening in on today's call and also thank you for very good questions. So we wish everyone a good rest of day from here. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to today's Uber Q4 and Full Year 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Alax Wang, Senior Director of Investor Relations. Alax? Alaxandar Wang: Thank you, Greg. Thank you all for joining us today, and welcome to Uber's Fourth Quarter and Full Year 2025 Earnings Presentation. On the call today, we have Uber's CEO, Dara Khosrowshahi; CFO, Prashanth Mahendra-Rajah; and incoming CFO, Balaji Krishnamurthy. During today's call, we will present both GAAP and non-GAAP financial measures. Additional disclosures regarding these non-GAAP measures, including a reconciliation of GAAP to non-GAAP measures, are included in the press release, supplemental slides and our filings with the SEC, each of which is posted to investor.uber.com. Certain statements in this presentation and on this call are forward-looking statements. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we make today, except as required by law. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today as well as risks and uncertainties described in our most recent Form 10-K and in other filings made with the SEC. We published our quarterly earnings press release, prepared remarks and supplemental slides to our Investor Relations website earlier today, and we ask you to review those documents if you haven't already. We will open the call to questions following brief opening remarks from Dara, Prashanth and Balaji. With that, let me hand it over to Dara. Dara Khosrowshahi: Thanks, Alax. Q4 was another great quarter for Uber. Trips on our platform accelerated again to a 15 billion annual run rate, and our audience grew to more than 200 million monthly active users. These healthy inputs drove exceptional outputs with gross bookings up 22% year-on-year. Looking at 2025 in full, we had our fifth consecutive year of annual gross bookings over 20%. We generated $8.7 billion in adjusted EBITDA, up 35% and a phenomenal $9.8 billion in free cash flow, up 42%. We started 2026 with a ton of momentum, a scaled and profitable platform and a clear operating framework to generate durable growth. This gives us the confidence to make targeted growth-oriented investments aligned with the 6 strategic areas of focus that we outlined last quarter. Of course, one of these areas is autonomous. At this time last year, we laid out our views on AVs in more depth, and we've done that again this quarter. With the benefit of learning from multiple AV deployments around the world, we're more convinced than ever that AVs will unlock a multitrillion-dollar opportunity for Uber. AVs amplify the fundamental strengths of our platform, global scale, deep demand density, sophisticated marketplace technology and decades of on-the-ground experience matching riders, drivers and vehicles, all in real time. We also understand that there are reasonable questions being asked and a debate being had about what autonomy means for Uber, both in the short term and the long term. I'd encourage everyone to read our prepared remarks and take a look at our supplemental slides where we lay out our latest views and why we believe our approach is proving to be the right one. Finally, I want to take a moment to say thank you to Prashanth, who we announced this morning will be stepping down as CFO on February 16, whether it was getting to us the investment-grade status, spearheading our first share repurchase program or steering us through several acquisitions, Prashanth has been a great partner to me and the management team. I wish him all the best in a very exciting new opportunity that he will share more about very soon. I'm also thrilled that Balaji will be stepping up as CFO. Balaji won't be a stranger to many of you on the call. I've worked closely with him for a long time, and I'm confident that he is the right person for this job. He knows our business inside and out. He's a bold thinker and brilliant strategist, and I'm super excited to have him join the management team at this important time for Uber. Now I'll hand it over to Prashanth and Balaji to say a few words, and then we'll take your questions. Prashanth Mahendra-Rajah: Thank you, Boss. First, I want to say thank you to Dara and the entire Uber management team. And of course, my heartfelt congratulations to Balaji, who I know will do a terrific job. Uber is a once in a generation company. It's a dynamic, fast-moving and innovative place, and I have loved every moment of my time here, and I am extremely bullish about its future. Over the holidays, I had a chance to take stock of where we were and all that we had achieved from delivering phenomenal growth at scale, achieving investment-grade status and returning significant cash to shareholders. At the same time, a new opportunity presented itself where I could serve America and get back to the country that has given me and my family so much. I look forward to sharing more on that soon. And in the meantime, I'll be working with Dara and Balaji to ensure both a successful and seamless transition. Now let me hand it over to Balaji. Balaji Krishnamurthy: Thank you, Prashanth, for everything you've done for Uber, and thank you, Dara, for the trust you're putting in me. It's an honor to step into this role at this moment. I'm lucky to be building from such a strong base and accelerating core business supported by a huge and increasingly active consumer, owner and merchant base, large and growing cash flows, which we can use strategically to invest into our future, and world-class talent that is innovating and executing at scale with a GO-GET it culture that is always pushing ahead. I look forward to working with Dara, the management team, our board and with all of you to solidify Uber's position as a once in a generation company that stands the test of time. With that, we'll take your questions. Dara Khosrowshahi: All right, operator. Operator: [Operator Instructions] All right. It looks like our first question today comes from the line of Justin Post with Bank of America. Justin? Justin Post: Great. I guess I'll ask about the competitive environment on AVs and really appreciate all the slides and prepared remarks. Just wanted to think in the context of 30% of your bookings coming from major cities, which you outlined, how do you think about the impact of AV ramps from, say, Tesla or Waymo in those cities on market share and your profitability? Just high level on those things. Dara Khosrowshahi: Yes, definitely, Justin. So I think the good news on AV for us is that we view the introduction of AVs as actually an overall growth driver for the markets in which we operate, right? So San Francisco gross bookings for us have accelerated, where we are in Austin and Atlanta as well, our bookings have accelerated. New riders to the platform has -- is growing faster than the rest of the country. Frequency is super strong as well. So AVs in the marketplace whether they're competitive in SF or whether they're on our platforms like Austin and Atlanta are turning out to be net positives in growing the overall economic pie or the economic pie available to boom in, so to speak. So from that standpoint, when we look at AVs, it's fundamentally a positive opportunity as reflected in Waymo's latest valuation of $110 billion, which is pretty incredible on a pre-money basis. But this is not kind of a technology that is going to replace, it's going to augment. And then when we see our own performance as it relates to AVs, we're seeing AVs on our platform at significantly higher utilization than kind of 1P stand-alone platforms based on the publicly available data in that trips per vehicle per day are 30% higher, ETAs are better as well. So we know that the best product today out there in the market is an AV on the Uber platform as well. And then if you look at the partnerships that we are setting up, whether it's a partnership with Waymo, or NVIDIA or newest partner, Waabi or Avride or Nuro and Lucid, which kind of have a production-ready car out there, we expect to be in 15 cities by the end of this year and then expanding beyond that as well, which should actually increase kind of the wave of kind of the AV business that we're seeing behind us. So from a top line basis, we see AV as a net positive for the ecosystem. In terms of margins, I think AV is going to be very similar to other products out there, which is any time we introduce a newer product, we introduce it at a lower margin than, let's say, UberX or Uber Black or Uber Reserve as we're building our liquidity. And then over a period of time, margins improve. And for example, in the deals that we're striking today with various partners, with AV partners at scale, we are going to have healthy economics based on current consumer fares and healthy economics mean positive economics. And these are deals that we're striking right now. So from a margin standpoint, structurally, we think the AV kind of ecosystem, it will -- it will be a net positive to mobility generally. The margins that we're getting now are good positive margins, and they are fair for our partners, and they're fair for us as well. And from a competitive standpoint, at this point, AVs really haven't scaled, right? We added 50x the trips on the Uber platform this last year than kind of the entire AV industry added. As it scales up, we expect it to be competitive. We think a lot of these players will be on our platform as they realize that utilization is structurally higher in a 3P platform. And listen, competition is nothing new for us. We're the multiproduct player. We are everywhere. We are global as well. And then with the membership program that really gets people highly, highly engaged with our platform, we're very confident in terms of what we will do in a competitive market, and we're very confident that we're going to be the first choice for kind of AV manufacturers and technology companies to put their assets on our platform. Balaji Krishnamurthy: And Justin, this is Balaji. One additional thing I'd add there is, while you asked about the top market, it's important to remember that 70% of the U.S. is outside of the stock markets and nearly 75% of our U.S. profits come from those markets. And that -- those numbers have been growing because those markets are growing faster than the top 20 cities. I think this is a very, very common misconception. We've heard many times that Uber's profit pools are concentrated in the top cities, and it could not be further from the truth. And as you think about where AVs go in the near term, those non-top 20 markets are going to be unlikely to be addressed by AVs for a long time to come as well. So from our perspective, not only are we going to be well positioned in those markets to be the platform of choice for our AV partners. But for the remainder of the U.S., it is going to be played by traditional ridesharing operators such as Uber. Dara Khosrowshahi: And also, just remind investors that 60% of our mobility gross bookings are international outside of the U.S. as well. So we have a big business in the U.S. outside of the big cities, and we have an even bigger business outside of the U.S. as it relates to mobility. Operator: Our next question comes from the line of Eric Sheridan with Goldman Sachs. Eric Sheridan: First, wishing you the best going forward, Prashanth and congrats Balaji on the new role. I wanted to drill down a little bit in the shareholder letter, you talked about customer growth and the momentum you have coming out of 2025. Can you lay out some of the strategic priorities and growth investments that are top of mind for you guys in terms of maintaining that momentum in terms of new users across your products? And then also reflect on how Uber One can continue to evolve the customer lifetime relationship you have looking out over the next 12, 18 months? Dara Khosrowshahi: Yes, absolutely. So we have been very, very happy in terms of our user growth. And in terms of the strategy behind the user growth, I'd laid out in terms of there's products, there's use cases, there's demographics and then there's geographies. And we are introducing products along each of those different segments. If you look at the products, for example, our Moto product, it's a 2-wheeler product. It is much more -- it's a lot cheaper and more affordable that is bringing on significant new segments to our audience. And then we're seeing on occasions, those Moto users, if it's raining, if they're on a date at night, they will upgrade to an UberX or other use cases. So just introducing newer products is one area where we get new consumers. And then there's new use cases. A new use case might be Reserve where we thought that Reserve was actually going to serve people who wanted higher reliability. But it's also -- there's a whole customer base, much of them in the suburbs outside of the big cities that didn't find previously Uber reliability high enough for an airport trip for a time-sensitive trip. Now they do because we offer the Reserve product. And so that is a product that has higher margins, has higher earnings for our drivers as well. At the same time, is introducing new customers into the flow. Same thing for women preferred. Same thing for teens, same thing for older demographic, kind of the simpler product that we have. All of these are introducing our kind of newer use cases or different demographics that are coming to the platform. And then last but not least, I'd say international and the growth that we see in the less dense markets that Balaji just referred to. This is growth outside of the mainline cities. Generally, growth in less dense markets is about 1.5 to 2x more than growth in the middle of the big cities. This is a result of, again, new supply coming on first and then new audience coming on after that supply as well. So we're very, very happy with the customer growth. And at this point, we don't see any signal of it slowing down. And then, of course, what I started with, which is AVs are an entirely net use case. There are people who are curious about the product and then there are people who absolutely love the product, and we think AVs can be another opportunity for customer acquisition. Anything to add, Balaji, to that? Balaji Krishnamurthy: I'd just say just adding some quantitative lens on everything Dara said. If you think about where the crux of our growth is coming from, it's still audience growth, which is very encouraging for where this business will go over the next few years. And looking at 2025, we started the year with MAPC growth at about 14% year-on-year. We ended the year with MAPC growth at 18% year-on-year, which is a very, very strong step up. And there's a lot of runway in front of us still as you look at that MAPC number at over 202 million monthly actives, our annual active base is over 450 million, and we are continuing to improve our penetration of that base. As we're doing that, frequency, while it is growing at a slower rate, that is more a function of our cohorts coming on and maturing from there. What we are seeing is our new rider cohorts, new eater cohorts are exhibiting much stronger retention than prior U.S. cohorts. And part of it is driven by our focus on early life cycle investments, we're ensuring that consumers were acquiring, retain better through the early part of their engagement with Uber's platform. Then as we introduce them to multiple products that we are serving our consumers with, which at this point, 40% of consumers in Q4 were using more than one Uber product. And then finally, our membership program, which has been a key investment area and still is growing 55% year-on-year, that then supercharges that cohort that we are acquiring. So there's a lot of runway here, and we feel pretty good about the investments we're making, we are being quite deliberate in measuring the LTV to CAC ratios on that. Operator: And our next question is from the line of Brian Nowak with Morgan Stanley. Brian Nowak: I have 2. One on autonomous, one on capital returns. Dara, I appreciate all the color on autonomous in the letter. I wanted to give you one more shot to kind of refute one of the other concerns. The history of technology with capital-intensive, heavy investment technologies often kind of shows the technology will migrate toward winner-take-most at scale. Can you just sort of walk us through why you don't think AV will go that way when safety is so important to scaling AV the next 3, 5, 10 years? That's the first one. And then the second one, maybe for Balaji or Prashanth. I think throughout 2025, you talked about sort of a 50% free cash flow commitment to shareholders. Are you still sort of maintaining that philosophy? Or what is sort of the reinvestment versus capital return philosophy as we look at 2026? Dara Khosrowshahi: Yes, absolutely. As it relates to AV and winner-take-most, listen, I think this is true of technology platforms, and I would remind you that as it relates to Mobility and now increasingly Delivery, Uber is the winner who has taken most. And that wasn't always the case. It is because of how we built, the fact that we have this international footprint, the fact that we go broader than our competitors and the fact that we are a multiproduct and have built those products organically within the system. So we are the winner-take-most kind of product as it relates to Mobility and Delivery certainly outside of the U.S. I think hardware is fundamentally different in that if you look at the OEM industry, there are many, many car manufacturers, manufacturing is local, you have local champions, et cetera. And if you look at the trend as it relates to AV, it looks more and more like our vision of the future, which is 10 years from now, every single car -- a new car sold, is going to have L4 or L3, full L3 and L4 software attached with it. In that kind of a world, we think we will have many, many suppliers, not just 1 or 2 suppliers. And if you look at AV now, there are multiple players who are getting to the finish line. Obviously, Waymo is -- while they're not finished, they are safer than humans, which is terrific. You have players like Pony, you have WeRide, you've got Baidu in China who has developed AV-ready technology, whom we are partnering with outside of the U.S. as well. And then there are many other partners in the U.S., Waabi, Wayve in the U.K., Waabi in Canada, Wayve in the U.K., Nuro here in the U.S. and Avride in the U.S. And then, of course, the biggie, NVIDIA that is developing a hardware platform, sensor stack, compute stack, which we believe will be industry standard and now is actually building out full self-driving software as well. So with all of the players in the space, the fact that it has been solved multiple times by multiple software providers with NVIDIA kind of setting an industry standard as well, we're very confident that, one, AVs will be a net positive to the Mobility sector. In other words, it will expand the category. And we are the winner-take-most player as it relates to 3P, and we think that the 3P kind of marketplace will be very, very large and will be very, very healthy. Balaji, do you want to take the second? Balaji Krishnamurthy: Sure. So we did lay out our capital allocation priorities in quite a lot of detail. But just to quickly summarize how we think about this. Our first priority is to ensure that we are making appropriate reinvestments behind the opportunity we're seeing in our core business. We are in a good position where even as we make those investments, we are throwing off a lot of cash as we said, we were already generating about $10 billion of free cash flows, growing 40% as of the last year. So that gives us a lot of room to make investments in ensuring that we are advancing our AV strategy and potentially evaluating any selective bolt-on M&A opportunities as they come along. And then that still leaves us with a significant amount of cash that we can return to shareholders. So this is not a trade-off for us in the sense that we are choosing one or the other. We're able to do all of these things in parallel. As to your question on whether we would be returning 50% of free cash flows, based on our current visibility into what we're seeing as well as the fact that our stock remains really cheap, we will continue to be aggressive buyers of our stock, and you should expect that it continues at a steady cadence, and we are on track to reducing our share count by a healthy amount as we go forward. Dara Khosrowshahi: And I think the good news here is with our free cash flow generation and our expectation of the free cash flow generation increasing going forward, we can do both. We can invest appropriately as it relates to growth. And then at the same time, we are going to continue reducing the share count because ultimately, all of us are shareholders, and we think right now the opportunity to buy back shares is pretty awesome. Operator: And our next question comes from the line of Mark Mahaney with Evercore. Mark Stephen Mahaney: Two questions. You talked about acceleration in the U.S. trips and gross bookings in '26. So that's a little bit unusual. You don't normally seek businesses at scale -- at your scale accelerating. So just go through a couple of factors. The biggest reasons for confidence in that acceleration. And then I know this question has come up in the past, your willingness to deploy capital into AV fleets like how capital -- any changes in your thinking about how capital intensively you want to run your AV business going forward? Balaji Krishnamurthy: Sure. Thanks, Mark. I'll take U.S. acceleration and Dara will take the second question. So when you think about our U.S. business, what we have been seeing for the last few years up until the beginning of 2025, we had a lot of inflationary impacts from insurance, in particular, in the U.S., which had -- which we had passed on to the market in the form of consumer pricing, and it was driving a slowdown in the business. But throughout the last year, we have held prices relatively consistent. And as we look forward with the amount of insurance reform and product-driven hundreds of millions of dollars of cost savings that we are seeing, we are in a position where insurance is going from a deleveraging cost item to something that gives us leverage, and that allows us to hold prices flat or better in certain markets. So that price consistency has a huge impact on long-term elasticity of demand. And the longer we can do this, the better the outcomes for us are, and we feel pretty good about our core business accelerating in the U.S. as we do that. In addition to that, there is our barbell strategy that is also having a pretty meaningful impact on opportunities that we see here. We talked about both the low end and the high end, growing 40% in the last year. And that's true even in the U.S. and products like Wait & Save are showing a lot of momentum as well as products on the other side, XXL, shuttle expansion at airports. So I think there's a lot of opportunity on those products. And then finally, our expansion into sparser markets, which Dara already referred to earlier, which are growing as much as 1.5x faster than dense markets, but only 20% of global mobility trips, there's a lot of opportunity in the U.S. for us to improve reliability and target our product offerings in the sparse markets. Dara? Dara Khosrowshahi: Yes. And Mark, in terms of the investments that we're making in AV and the capital efficiency, one is, we're certainly investing in the players in AV in terms of the software players in AV. So our latest investment was, for example, in Waabi, which is a leading AV provider of trucks and is getting into passenger mobility as well, which is terrific. And for example, as part of that investment, the first 25,000 passenger vehicles that they produce on their platform will be exclusive on Uber as well. So we are putting our capital up in order to guarantee supply going forward. And as I said, much of that supply is going to be on profitable economics, which is terrific. And we will continue making these kinds of commitments, Nuro, Lucid, for example, and others to come. At the same time, we're talking with financial players. And the statistics that we're seeing as it relates to the production of AVs in terms of trucks per vehicle per day, in terms of the utilization, the revenue generation of each vehicle and then, of course, the profitability of each vehicle, we work with fleet partners to run the fleet, clean them, keep them charged up, et cetera, repair them. We have the largest fleet ecosystem in the world. And as a result, we will be able to scale those operations in a way and have a lower kind of variable cost basis, we believe, and the largest global footprint than any player because we already are global. As part of that, we are talking to financial institutions, private equity players, banks, et cetera, who are already, in some cases, lending to our fleet partners, these fleet partners usually are going out and buying EVs, and that will transition to AVs as well. So this is something that is absolutely going to happen. You will see news on kind of fleet financing for both AVs and EVs going forward. So while we will make commitments, and these commitments are for profitable economics, we do think that we will have a very, very healthy financing ecosystem, both in terms of equity and debt. Just like Marriott doesn't have to own its hotels, you've got REITs that own their hotels and kind of making an appropriate return on equity, you will see the same thing in the future on fleets. We're very, very early on that path, but we're quite confident we're going to get there and the whole ecosystem is going to financialize just as you see data centers financialize as well. Mark Stephen Mahaney: Congratulations, Balaji. Wishing you all the best, Prashanth. Operator: And our next question comes from the line of Doug Anmuth with JPMorgan. Douglas Anmuth: Just on AVs, can you talk about how you see data and simulation accelerating the path to market for those kind of AV 2.0 software players? And then on the 15 markets that could be deployed by the end of this year, what are the key unlocks or hurdles just to get those up and running either through regulatory, manufacturing or safety or anything else? Dara Khosrowshahi: Yes, absolutely, Doug. So we're very, very excited on the data and simulation space, generally, SIM capabilities with larger models with stronger compute, SIM capabilities in the industry are getting much, much stronger. Waabi, for example, who I talked about is one of the leading players as it relates to simulations. And what the newer SIM capability is able to do is take a piece of data and then run thousands of different SIM scenarios so that you can create the long-tail cases that can be so difficult in the real world, you can create them in simulation. You can have multiple kind of instances and branches to train your models and prepare them for the real world. Now the real world is different and the real world can create unexpected circumstances, like, for example, the San Francisco blackout where Waymo had a very, very difficult time negotiating, so to speak. So getting real-world data is incredibly important. And the good news is we're incredibly well positioned to do so. We're partnering with NVIDIA to kind of build a real-world data collection factory that's looking to collect over 3 million hours of real-world specific data to passenger AV, pickups, drop offs, all of the things that Uber drivers have to -- all the complexity that Uber drivers have to deal with. We and NVIDIA are going to be collecting that data and then providing it to our partners as well. So if there's one area where the smaller player has a disadvantage, it is data, but we and NVIDIA are teaming up to democratize AV data, real-world data and provide it to the entire AV ecosystem. You combine that with advanced simulation capability that many of our partners are developing or have and you get to a road map, a very fast road map to AV readiness for many, many players. In terms of the 15 cities that we expect to be in, listen, these are -- you got to strike a deal with partners. Obviously, you have to make sure that there's capital for the vehicles. We are setting up depots, acquiring real estate, making sure we have the charging infrastructure in place. And of course, our government relations team is working with the regulators on the ground to make sure that we're ready to go. And then, of course, we have to work with our partners on the safety case. Safety is incredibly important as it relates to AV. Usually, we will launch with a driver in vehicle and then over a period of time, like we have in Abu Dhabi, we will take drivers out of the vehicle and kind of have full AV capability. So we -- this is kind of machinery that we have built, and we're learning on, and I think that we're going to get faster as we go along here. Balaji Krishnamurthy: And I would just add that while you're thinking about what it takes to launch, in parallel, we have to think about what it takes to scale as well. Launching will have all of the impediments and work that Dara talked about, but this is going to be a game of avoiding bottlenecks down the road. So in parallel, we need OEMs to start ramping capacity. And as you've seen us talk about tens of thousands of vehicles already announced in a few partnerships, we will have a lot more of those kind of OEM relationships coming down the pike. And over time, we expect those commitments to get financialized and for asset owners to take ownership of those. But in the first few years, we are going to be stepping in with some vehicle purchases as well. Operator: And our next question comes from the line of Michael Morton with MoffettNathanson. Michael Morton: Congratulations on the new seat, Balaji. I was wondering, AVs require investors to think about things long term. If you could talk about the different stages and the duration in which you expect them to play out. We're in Stage 1 today, like launching in small launches in markets like San Francisco. Can you talk about how we get to the tens of thousands of AVs on Uber's networks over the next several years? And I know it's a moving target, but how the market should expect that to play out? Balaji Krishnamurthy: Sure. Thanks, Martin. I'll take this one. So as you think about these deployments, especially on Uber's network, what we are going to be solving for initially is to get baseload supply from AVs to meet the demand at the trough of the weeks demand curve. So as you saw in the slide, we have on the deployment in Austin, we are, at this point, able to deliver very, very consistent demand to the AVs on the roads in the market. And if you think about the Saturday to Monday drop for our network, which is about 45%, for AVs, that number is much more consistent, right? So we are able to do that and the first stage will be launching in multiple markets and getting to that kind of a consistent baseload supply. As we move from that to larger scale, the goal for us there is going to be that the vehicle platform cost needs to come down, and it needs to be able to expand the TAM for us in a meaningful way because we should be able to lower cost to consumers at that stage. And at that point, we can go beyond the trough level demand and start moving towards more medium levels there. Eventually in a very long term, we can think about a majority of supply coming from AVs in certain markets. But that future is far, far away given where the OEMs are on their production ramp curves. So I think, again, going back to the question of how do we get to tens of thousands of vehicles? That question, the answer is going to be common for every player out there. It will come down to how quickly OEMs can ramp production here. And for OEMs, this is going to be a challenge where they have to think through a novel new use case where they're thinking through tens of thousands of vehicles versus the millions of vehicles that they produce on their traditional cars. And offtake commitments like the ones we are talking about with our partners will come in to play a big role there and financialization of those assets is important from there. Dara Khosrowshahi: And Mike, just one thing that I would add, if you really think about the long, long game, one of the key elements is going to be what companies are able to utilize these cars in the troughs where they will largely not be busy and are having delivery and freight as part of our logistics ecosystem gives us an opportunity to actually use these vehicles at a structurally higher utilization than anyone else. We have the network utilization. We've already dominated that our network is driving higher utilization even in a circumstance where supply is really low. As supply increases, the utilization advantage that we have, both on the mobility-only network, but then for delivery, for freight, for last mile delivery is going to be super interesting, and it's a structural advantage that we have that's not available to any other player. Alaxandar Wang: Greg, we'll take one last question, please. Operator: Okay. And the final question then comes from the line of John Colantuoni with Jefferies. John Colantuoni: Starting with advertising. The advertising business has continued to see impressive growth with penetration in delivery now exceeding your prior target of 2%. Maybe you can update us on how you're thinking about the long-term potential of delivery advertising and any key opportunities you see to keep growing that business at a fast pace? And second, with delivery growth accelerating to multiyear highs, maybe you could just talk about drivers of that faster growth and provide your perspective on sustainability in the coming quarters? Balaji Krishnamurthy: Thanks, John. I'll take ads and Dara will take delivery. So on ads, we're very, very pleased with the momentum that we are seeing. As you rightly pointed out, we had many years ago talked about 2% as the potential ceiling for penetration with delivery advertising. What we are seeing is that the opportunity size here is potentially much larger. And as we think through where we are on the journey with enterprises versus SMBs. SMBs -- SMB ad penetration is a lot higher than 2% and enterprise year-on-year growth is now outpacing SMBs by a lot more. So in a way, enterprise advertising is catching -- playing catch-up, and that means there's going to be a lot of runway here. At the same time, our products on grocery and retail and mobility are a lot more nascent, and there's going to be opportunity for us to grow there as well. Dara, you want to take delivery quickly? Dara Khosrowshahi: Yes, absolutely. So in terms of delivery, I'd say there are 5 factors as it relates to the growth rate. First, I would say, just the basics of selection. Our selection still in many countries is 30%, 40% of the addressable market. Our selection in the U.S., especially in less dense markets, in small and medium businesses is not where we want to be. So you will see -- you already saw an increase in terms of the acceleration in the number of merchants that we have on the platform. You should expect to continue to see that. We are continuing to invest in the sales force, obviously enabled by AI, et cetera. So it's as efficient as it can be. But our selection growth is accelerating. And as you grow selection, you have more items to sell. You have newer restaurants bring new audience, and at the same time, you increase conversion. So selection is #1, and we have plenty of selection to go through. Second is growth in less dense areas, especially in the U.S., our category position in the suburbs is significantly lower than category position in the big cities, and we are making progress there as it relates to selection. And as it relates to just the reliability of the service, we are growing significantly faster in less dense areas and dense areas, both in the U.S. and outside of the U.S. Third is newer products that we're selling on Eats. I talked about this. Going into grocery retail, that's another $1 trillion opportunity, and we continue to add grocery partners. We've got 5 of the top 10 in the U.S. That is going to expand. We'll have announcements coming up. And then for example, we have newer announcements like multiyear exclusive with Kohl's that is the largest grocer in Australia that we're very happy to be partnering with. So newer products along with selection is the third. Fourth for us is membership, 46 million members, growing faster than 50%. Our members overall on the platform, this is not just delivery, but overall on the platform are getting close to 50% of our gross bookings. We're not quite there, but we will pass 50%. And these members are super sticky, whether it's ordering food or ordering groceries or getting a charger or Best Buy or getting an AV ride. These are very, very sticky members. And then last but not least, there is continued expansion into newer markets. Our international footprint on Eats is not quite what it is with our mobility business. Every time we launch Eats along with mobility, we just have a structural advantage over the other players. And we're able to grow category position. We were the #3 in the U.K. We're #1, all organic. We launched from scratch in Germany and now are neck and neck with a top player in Germany in a lot of individual cities. So we have kind of -- Japan was another organic launch, and we're by far the #1 player in Japan. So there's still some international growth behind delivery, and I think those 5 elements, selection, less dense areas, newer products, grocer and retail membership and then some new international launches are going to position us to continue to grow top line at very healthy rates and increase our margins at the same time. All right. I think that is it. So thank you, everyone, for joining us on the call. Huge thank you for the Uber team on delivering another great, great year. And then another big thank you to Prashanth for helping us get through this journey [indiscernible] it's a very different company than it was when you joined. And a lot of that is because of your leadership. And then I think you have prepared Balaji very, very well to carry on kind of what you started and get us to the next level. So big congrats to Balaji.
Operator: Ladies and gentlemen, welcome to the DSV Annual Report 2025 Conference Call. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Jens Lund, Group CEO. Please go ahead, sir. Jens Lund: Good morning. Thank you for joining us here on this investor presentation that we will have in relation to the publication of our 2025 results. Today, I'm joined by Michael Ebbe, and we will basically go through the presentation as we normally do. And once we've completed the presentation, we'll be happy to take your questions. If we skip to Slide #1, there's just the reference to the forward-looking statements that I would like you to pay attention to and then, of course, the agenda as well. The highlights of the year, I think, is clearly, of course, for us that basically, we now can announce that we complete the Schenker integration at the end of 2026. I would say that the -- both the feedback from the employees and certainly also from the customers has been very constructive because we managed to take out the uncertainty, both for our employees, but also for our customers. I'll say a little bit more about the integration on the next slide. So I'll move on to the financial performance. It's been a tough market. You can also see from the reporting in the last quarter that there's a lot of headwind on FX, plus all the geopolitical issues as well and also yields, of course, under pressure as well. So very happy to deliver on our guidance. Furthermore, of course, we can see that actually we do have good progress both on the Road side and also on the Contract Logistics side as well. So we're very pleased with that. On the cash flow, I mean, at the end of the day, we have to transform what we're doing into cash flow, and it's really great to see that all the efforts we put in there also are visible in our cash flow statement. Of course, the EPS growth, this is what we're aiming for as well, and we are well on track to deliver on that in '26. So also here, we are pleased. On the outlook, DKK 23 billion to DKK 25.5 billion. I think if you take into consideration the significant headwind on FX, I think actually that we are satisfied with the guidance. Of course, it's a tough market. But overall, we think it gives a good indication that we managed to drive the company forward also in '26. And then the synergies, we're going to achieve the DKK 9 billion. We are confident about that. As we speak, we have actually already now made significant progress on the countries where we go live also here in '26. So we have a high certainty or conviction that we're going to deliver on those numbers. And here's just a little slide on the Schenker integration so that it's clear that, I mean, in '25, the numbers, they include almost DKK 1 billion in impact. And then, of course, there's going to be impact here also in '26, as you can see. And then we will have sort of the full impact in '27. You have to remember when you integrate a country that it may be that we go live in the country, but it will take some months, sometimes 3, 4, 5 months before the integration is actually completed in the country, and we've moved everything together. And that's also when we then realize the synergies. Sometimes we also have to go through due procedure with the employees because sort of the arrangements that you would have in the different jurisdictions. So it's always a little bit back-end loaded, the impact of the synergies, and that's also what you see in this table here. If we look at the financial highlights, I think we've managed to basically grow our GP and also grow basically our EBIT as well. The guidance is also mentioned over here to the right in the column. And I think the presentation here is fairly self-explanatory. So I won't necessarily mention the numbers. But sort of skip on to the Air & Sea slide, where you can see that the significant headwind on the Air & Sea side, if you look at the numbers, it's clear that the GP is very much being, what can I say, a little bit under pressure because of the yields not least on ocean freight, but also on airfreight. Here, you have to think about a little bit the FX as well that plays a role. Conversion ratio, of course, due to the full year impact of Schenker sort of coming in so that it will come down to the trough, and then it will start to go up. This is quite normal for an integration. And of course, that then drags the margin down, as you can see. There's nothing in the things that we are seeing that indicates that we're not going to get the productivity back to the levels that we have seen before. If we look at the Air freight market, I think you can see the GP here, of course, on the left. And on the right, there's been some discussions also about the yield of 7,600. Of course, there's some Schenker impact that -- where there's been lower GP than we have, mainly because of a lower VAS component, so less value-added services. And then, of course, also the FX impact as well. So I think that's probably, what can I say, the most important takeaway from this slide. If we look at the ocean freight, of course, you can see the GP takes a hit. The VAS element of what we're doing to the value-added services, it's been fairly stable throughout the period. But of course, the freight markup when the rates, they compress, then the markup on the freight side, it also compresses as well. And that's really what we see and what we're doing. Here, of course, the FX part also plays a role, but you will also have the -- of course, the fees at origin or post landed depending on how the trade lane looks that might be in currency where it doesn't have an FX impact. But the line haul and typically either at origin or at destination, you will have FX impact for both of them. So that's a little bit on the Sea freight. I think on Road, it's -- you see we are almost 1.5x up on the revenue, of course, also on the GP. You have to remember that Schenker has more groupage so more system freight. So there's more infrastructure. So the GP also has to be higher. And then, of course, that we managed, what can I say, to convert an important part to EBIT, is definitely important for us as well. I think if we look at sort of the gross margin, it will continue a little bit up in the next quarter because you get the impact of basically Schenker being included in the numbers as well and the conversion ratio on a good trajectory. And of course, operating results are also trending upwards. They also have to because we have significant infrastructure in relation to the whole network product that we have. I would just like to mention as well on the Road side that we managed to divest USA Truck. It was an operation -- hard asset operation in the U.S. and we couldn't operate that with a satisfactory financial outcome. So we found a new owner for it, and we hope that it will be successful there, and we're very pleased that we managed to finish or complete this transaction. On Contract Logistics, you can also see that we are not 1.5x up on size, but almost and definitely growing our business significantly. Also on the GP side, doing really well. And then, of course, the conversion from GP to EBIT here is also some economies of scale and plus that we have actually sanitized also some of our contracts, et cetera. so that we manage to produce the outcome that we all really need to see from Contract Logistics where you need to improve the return on invested capital. So one thing is actually that we have a plan to reduce the number of facilities. We're working on that, but also then that we drive the operational results up through a very intense focus on productivity. So really happy to see that this development is going in this direction because I think that's something that we've all been looking for. So now I will hand over to Michael, and he will tell you a little bit about the numbers. Michael Ebbe: Thank you, Jens. A quick run-through of the numbers. Yes, just short comments on the slide that we have here. For some of the KPIs of the -- that we have, it's clear that when we have the annual report, you have seen the, well, nice annual report, was announced this morning, that's clearly impacted by the Schenker integration and contribution. We can see that on the earnings, as Jens mentioned. You can also see it here on the transaction costs, which relates to integration cost of DKK 2.6 billion more or less. It's a little bit bigger Q4 due to the fast pace of integration that we have had. And then also, like Jens mentioned, the USA Truck business that we have divested is presented at discontinued operations as was the case for the last quarter. You also mentioned, Jens, that a thing that needs to be taken into consideration here is the headwind that we have predominantly in Air & Sea and the U.S. dollar and the dollar-related currencies. I think that also is notable here is the tax rates. Luckily, it's not -- every quarter we see a tax rate of 40% like we have this quarter. And this is, of course, not the long or even midterm tax rate, but this is due to the integration that we have progressed so fast. So this quarter is very, very, you can say, unusual for that one. Good to see that on our EPS that we are still on track for EPS creation in 2026. We jump to the next slide from the cash flow. You also already mentioned, Jens, and thank you for that, that we have had a strong cash flow both in the quarter and also on the year. This is something that has enabled us to repay some of the debt that we took when we acquired legacy Schenker. I think for the year, we've repaid DKK 7 billion and in the quarter, more than DKK 2 billion. So we are on track on reducing our debt. Another thing that is worth mentioning here is, of course, I'm very pleased with the improvement of net working capital. But I think we also said it last quarter that this is most likely not sustainable to have it at around 0%. Of course, we work hard to have it as low as possible, but the run rate will most likely be in the area of 2% to 3% as we have talked about earlier. Yes. And also last comment on that side is, of course, the gearing ratio is 2.8x. We are -- as I said, we have already paid back quite a significant amount, and we continue on that journey, so we can head down to a lower gearing ratio than what we see so far. Then what's more likely interest you the most. This is the outlook for 2026. Jens already mentioned that we have between DKK 23 billion and DKK 25.5 billion in outlook. Of course, it's an uncertainty period that we have had in the quarter and also what we look into with all the volatility that you mentioned, Jens. So this is the best, you can say, guidance that we believe that we can give right now. We expect the air freight and sea freight market to grow around 2% to 3%, in line with the GDP. Then, of course, the yield is something that we are working on. Of course, we'd like to have it as high as possible. We work, like you also mentioned, Jens, implementing the way that we produce in the DSV to focus on the value-add services, and that is hopefully something that will bring us to reach the guidance, obviously. But again, there are uncertainties, which is important to notice. And the tax rate also this year, in '26, will be impacted by the integration, again, coming back to the fast pace of integration, it will have an impact on the tax rate. And then also, again, Jens, and you have already said it all, but it's important that you are aware that the U.S. dollar-related headwind also, of course, impact our guidance. I think it's -- when we estimate, it could be around DKK 500 million. So that is something that we have to consume or assume into that numbers that we have. So last page before we go to the Q&A, some of the key takeaways. Fast progression on our most complex integration to date and still maintaining solid financial performance in challenging market environments. Also updated, you can say, time line on the Schenker integration will be done end of year 2026, with full financial impact on the synergies in 2027. The financial performance is challenging, but very well driven, especially by the Contract Logistics and Road business, which have a, you can say, higher ratio of our total EBIT than what we have been used to back in the days. And then the guidance that we have announced today, DKK 23 billion to DKK 25.5 billion. That was it, and then we have left quite some time for the Q&A session. So yes, please don't hesitate to press 1 and then ask the questions. Operator: [Operator Instructions] Our first question comes from Alex Irving from Bernstein. Alexander Irving: Two from me, please. First is on reconciling your messages on the gross profit yields. The 2026 guide of flat in Sea, slightly up in Air is clear, but you also state your ambition to raise yields to pre-deal levels. So there's a 2-part question on that ambition. How will you do it? And when will you do it? My second question relates to the IT stack in Air & Sea. How are you currently thinking about TANGO and the relative merits of investing in and adopting that platform globally versus eventually retiring it and using CargoWise One globally? Jens Lund: Good. Well, I can have a go at it. I think the GP yields if we sit and look at them, I think all the freight contracts are being renegotiated now. When we looked into it in the past, I think there was a clear tendency on ocean freight that we produced significant higher level of value-added services than you did on the Schenker side, and Schenker had more focus on the freight markup if we look at it. So of course, we want to introduce our way of working and then phase that in so that we basically do more work at origin, produce more services but also at destination. So that will phase in over the year, but we should have the full year impact of these changes, I guess, up towards the summer holiday. Then of course, the freight markup, if that is basically related to the container rates, then, of course, that will be under pressure. So it will be impacted by that. And I don't really see that the rates, they are coming up, at least not in the short to medium term. So we will see the yields. They will not necessarily be the 5,000 that you had seen almost, but it will definitely be somewhat less. And then if we take the Air freight I think it's a little bit the same. We have, what can I say, it's not that big a gap on the VAS side that you have on the value-added services on the Air freight. And then you see the freight markup, basically, when we took over Schenker, they had contracted longer than we had. So I think some of these things will impact it. A little bit that these contracts, they taper off, and then we can procure at market. And then we will see how that translates in. But we still believe that, what can I say, the figure around the 8,000 is realistic. Of course, the FX can also play a trick here, which is also part of us being at 7,600 right now. So there are many moving parts, but I think that gives you a pretty good idea. Then when it comes to TANGO and CargoWise One, I think we had also written in the annual report that we have a data platform behind the platforms that allows us basically to keep both platforms in sync. So today, now, we then produce -- because it is -- we have the customer integrations more already on the DSV setup, but we still keep TANGO running in certain areas. And then I think, as you say, we will have to make a choice which platform to go to. And it's very likely that we will, over time, gravitate towards our own solution. And that's what we're working on right now. Operator: The next question comes from James Hollins from BNP Paribas. James Hollins: Jens, just on the synergies, I mean, clearly, everyone in the -- so and so talking about the DKK 9 billion, how high is it going to go. Are we officially having to move on from talking about what the DKK 9 billion might be, whether it's DKK 10 billion, DKK 11 billion, DKK 12 billion? And really just think about cost efficiencies, or whatever the hell you want to call it, beyond 2026 and the impact on '27. Or ultimately, is there scope for that DKK 9 billion to be guided, indicated or rather much higher as we go through kind of this year? The second one, just on asset sales. Clearly, congratulations on the USA Truck. Are we still heading towards sort of DKK 1.5 billion? I think you've talked about historically. Maybe give us some update on the speed of asset sales generally and obviously, how that links to the trajectory for the return of buybacks maybe in H2 this year? Jens Lund: I think I'll answer the synergies. Michael, he can talk a little bit about the asset disposals afterwards. So if we take the synergies first, normally, when we do an integration, you are fairly right, then we have the initial plan, which we present to you and which we are working on right now. Then, of course, once the business plateaus, and we've done the integration, of course, there's an extra, what can I say, step in relation to that, actually, we would like to combine that step with also what we call AI and tech as well because we then take the platform that we've created and basically work on the transformation of that. If you follow some of us on LinkedIn, you can see that we're actually already moving ahead on that and mobilizing our leadership. We had the whole team -- the whole management team from the top 300 at an event where we start basically to mobilize for introducing transformational ways of working in our company. And it's always hard. Then do you want to label that Phase 2 synergies? Or do you want to label that AI and tech? We're actually going to talk to you on the Capital Markets Day about that. And we can also label it both, if you want, because it requires that basically we have a solid platform in place and that we can then develop that so that we drive the productivity out. Given our volume, the investment we make in this should, of course, be something that makes a material difference also for the company. Then the asset side, Michael? Michael Ebbe: Yes, it's correct. Yes, we have mentioned before that we want to -- on the legacy Schenker, we want to implement the DSV asset-light methodology to a wider extent that has been the case in Schenker. That also means that we have a divestment of around EUR 1.5 billion to EUR 2-ish billion that we are looking at. I think it's important to notice that much of it relates to sale and leaseback, so we'll implement the flexible model with leases that we have on facilities and terminals. That also means that you cannot take for granted that this EUR 1.5 billion to EUR 2-ish billion will reduce debt 1:1. There will, of course, be some, you could say, impact that we take on the leases as well. And it is predominantly sale and leaseback transactions that we're working with currently. James Hollins: Jens, if I could, is there any chance -- I guess you might say wait till May. If you were to move the DKK 9 billion to a new number based on, let's call them, additional synergies from AI and just working the business together, would you be happy to put a number on what the DKK 9 billion would be at in 2028 these days? Jens Lund: I think we also look into something that is material. I think we are still, what can I say -- we actually have implemented some of it, but we are also, what can I say, mobilizing for the different business areas so that we can project the outcome. But we see that there is room for significant improvement. And it's -- I can put as much on as it's measured in billions. I can say that, but I don't really want to go too far into it now. But of course, the technology today, it allows us to basically perform many of the tasks that we do in a much more efficient way than we could before. And it's clearly something that we embrace. Operator: The next question comes from Cristian Nedelcu from UBS. Cristian Nedelcu: The first one, if I could come back to the Air yield in Q4. You've mentioned this -- the contract duration mismatch at Schenker. Could you help us quantify a bit how much of a drag on the yield in Q4 that was? And in relation to your -- as you mentioned on the slide, the aspiration on the midterm to lift the combined yields in Air, could you give us an anchor, what would an appropriate level be, 8,500, more or less, any indication? And secondly, if you allow me on Road -- on the 2 divisions, Road and Air & Sea, could you please help us? If we focus on the white-collar employees only, could you give us a rough split between production or revenue generation employees versus support and operational employees? What's the rough split in these divisions? Jens Lund: I think if we look at the Road figures, you will have to speak to the IR team to get that level of detail. I think they'll be happy to give you some kind of a guidance on that. If we look at the Air yield, there are certain contracts that drag the yield down. I don't know exactly. I haven't calculated what part of the 8,000 down to 7,600 or whatever that is. Right now, we have 7,600, I think it is in yield in the quarter. So we've not made that calculation. You can get that perhaps from the IR team as well. What I can say is that right now, we are out contracting for volumes that we have to produce here in '26. And then many of -- some of the contracts actually, they continue all the way into '27. There's been certain trade lanes where Schenker have been very, very long. We've never been as long as that. And these contracts, obviously, given the market conditions, the rate has declined. So they're out of the money. Then you can say, is it an onerous contract? At the end of the day, then Michael can probably provide a little bit for it, but he cannot take the full pain away. And that's basically what you see reflected in the numbers. Then when we work on it, of course, you have the FX drag. And it's very difficult to put a hard number on it. We've tried it before. But there's a lot of moving parts in that number. So let's say the dollar goes down to below -- we've measured towards Danish kroner, it's now -- DKK 6.33 it was yesterday. So it costs DKK 6.33 to buy $1. But if let's say, it goes below DKK 6, then that will impact the yield. Last year, in Q1, it was more than DKK 7 to the dollar. So when you translate the income into Danish, it means a lot. So the yield guidance here, we can see that there's less VAS, we can lift it on that. We're going to do that over the next couple of quarters. And then, of course, the rest is moving parts. Cristian Nedelcu: Can I have a quick one on your production cost per unit. If we look pre-Schenker over the last 5 years in Air & Sea, your production cost per unit has increased 25%, 30%. And this is despite the fact that your volumes in Air & Sea have almost doubled before the Schenker acquisition. And this is totally in contrast with the historical operating leverage you were showing when volumes increased. Could you help us understand what explains this development? Is it fair to assume there are some low-hanging fruits in terms of improving productivity in Air & Sea or not really? Jens Lund: I'm not really sure what period you're measuring on right now. Is the baseline the last quarter? Because then, of course... Cristian Nedelcu: The last 5 years, the sort of 2019 to 2025 before the Schenker integration. Jens Lund: Before the Schenker integration, I don't know what your numbers are, how they look. I think if we look at the number of shipments per person per day, we've been driving it up. Then, of course, there are other factors if you sit and look at it over this period. I don't know exactly what the baseline is for this calculation. So we have to get the numbers. It's really difficult to comment on, what can I say this -- so I think we will have to get the details in, and then we'll be happy to provide you with an answer and also break it down so that you get, what can I say, the proper response. Operator: The next question comes from Alexia Dogani from JPMorgan. Alexia Dogani: Just firstly, can we go back again a little bit on the yields for Q4? Clearly, that was a disappointment versus kind of what the market was expecting. Can you help us understand what really drove this? Was it kind of the Schenker underlying, which was driven by the purchasing decision? And customer loss, you're saying there hasn't been anything significant, but GP is coming weaker than expected. So can you help us understand again the moving parts? And then secondly, very encouraging your comments, Jens, about kind of the AI and tech opportunity. Going through the accounts, you also highlighted, however, as a higher risk to the business. How should we kind of see those 2 parts given what you just said in terms of kind of potential earnings upside? Jens Lund: I think if we look at the GP down, if you sit and look at it, it's clear. If we look at the customer base, just to get this, what can I say, clear, we don't really see any customers that have left us. But let's say, for example, that you work in automotive. It's not a small vertical for us. And let's say, you are a German OEM that produces cars in China. Then, of course, the demand for foreign cars in China has declined quite a bit, and they now procure local cars instead. So of course, if you sit with that customer, you still have to trade lane. You still have the volume, but there's less volume to move. So that is what we see on some of the accounts that they are down trading quite a bit. So here, of course, automotive is probably the vertical where we've had the most headwind. So it's not that we lose the customer, but that there's less work to be done. Also, many industrial companies have some headwind, of course, not the ones that are related to the technology boom that we see with data centers, but there are many other industrial companies that face some headwind. Retailing has been fairly subdued as well. I think that's fair to say. We serve some of the luxury brands. They're very important customers for us. I think you're probably also well aware that some of them perhaps have had a period where it's plateaued a little bit for them and perhaps even some of them contracting as well. So some of these areas, you haven't lost a customer, but they ship a little bit less. So that's something that we are feeling. Then on top of that, for the GP, I think it's fair to say that it's crunch time when it comes to, for example, ocean freight and then, of course, also the FX impact. So if I look at all this, then it really becomes material when you look at the numbers. So I would probably say this is what is going on. It's -- in a way, it's a very rewarding market because you really have to earn it now, and your service has to stand the test. And then Michael, do you want to say something? Michael Ebbe: There is also another thing that you need to bear in mind when we talk about yield. We also have some economies of scale for the yield. If we are able to push more volume through, that should also have a higher yield. So I would be careful to draw too much attention to Q4 isolated. But again, we can talk with Investor Relations of some of the building blocks. But lower volume will also sometimes be pressure a little bit on yields because there are some of the facilities that we cannot use to the extent that we want to. Jens Lund: Al and tech, I think it's clear that we have to drive the productivity up when it comes to this. There are domains where we're already doing that, and we want to continue basically to have a significant focus on that because at the end of the day, when the business is consolidated, then we have a certain GP. And then, of course, we have to convert that into EBIT. And here, it is important that we basically embrace technology for that. It's been something that we've been doing for years. It's also part of our ability to acquire a company like Schenker and integrate it. It is, because of the back end. So we're going to continue on that. Alexia Dogani: And just to help us a little bit with the math, can you give us an indication of the combined sea exposure to VAS, to value-added services, including Schenker? Because if I read your comments correctly, you expect ocean rates to soften in '26, but that softening is offset by an increase in value-added services for the Schenker portion. So if you can just give us the split roughly, would be very helpful. Jens Lund: I would say the VAS that we typically would have given the yield that we have now is probably 2/3 of the GP and then 1/3 of the GP would then be, what can I say, the freight markup in what we have, roughly. Sometimes the VAS has been perhaps down to the 60%. But now I think it's at a higher part because the freight markup is lower. So that would probably be a good indication for you to look at. Then if you look at the Schenker part, it's probably had 60-40, the other way around for the business. So we then have to lift that up. But I think also the freight markup might decline a little bit on the Schenker part as well. But they would have had a lower GP per unit than we've had overall. So I think that's the building blocks I can give to you. Operator: The next question comes from Ulrik Bak from Danske Bank. Ulrik Bak: Just a question on your guidance. So given the full year impact from Schenker and the synergy uplift in '26 versus '25, the '26 guidance midpoint suggests negative EBIT growth for the organic business or the existing business that you also had last year. In that context, are you planning any cost measures to the existing parts of the business on top of the, yes, cost synergies? And then the second question is on the guidance sensitivity on the USD FX. Can you give some ballpark estimates if it deteriorates another 5% to 10%, the USD, what it would mean for your guidance? Jens Lund: Yes. I think if we look at the negative growth, you're completely spot on. This is why we have to drive the productivity up and, of course, introduce more technology, so that we get a higher productivity. I don't know if -- so it's -- we can call it whatever we want, Phase 2 synergies, AI and tech, or if we want to call it something else. It's, in reality, the same we are talking about. We need to increase the productivity, and that's where our main focus is. Michael will take the other one. Michael Ebbe: Yes. Of course, there are many moving parts for the USD, but roughly, if we take, you can say, 4% decline compared to what we have in our base right now, that will mean maybe DKK 500 million. So of course, there are some uncertainty. Operator: The next question comes from Jacob Lacks from Wolfe Research. Jacob Lacks: So with the integration now expected to be complete this year, can you give an update on how you're thinking about capital allocation? Is there a hope that there can be another deal in '27? And then one on AI. Your U.S. -- one of your U.S.-based competitors just talks a lot about AI and is showing particularly strong labor productivity within the truck brokerage business. What segments do you think are the biggest opportunity for you? And are there any applications you're trialing to date that you're able to discuss here today? Jens Lund: Yes. I mean, we would hope there would be a deal in '27. So it's clear we have, many years ago, laid out the way we allocate capital. So let's say we have too much debt compared to our aspiration. We have a target of 2x EBITDA. Then we focus on repaying that debt. The next thing that we do is -- we can also, of course, look at it sooner, but we really prefer that we get the debt down to 2x. Then if we can do something to develop the business and invest in the business and allocate the capital, then, of course, that has a significant focus as a #2 on that list. And then the remaining capital, we want to pay that back to the shareholders at the end of the day. And I think this capital allocation policy, I don't know, we wrote it more than 20 years ago. And I think we've stuck to it, and I think we've got a great alliance with basically all our shareholders. So I think that's -- yes. So that's basically where we add on that. And what was the other question? Michael Ebbe: AI. Jens Lund: AI. There's a lot of talk, of course, of AI. I think if you look into the numbers of many of those companies, I was in Davos, they had AI and then they had another thing they talked about, it was called ROAI, so return on the assets invested. And I think we still need to see that in the numbers of many companies. I think the company you're referring to, you can probably see a little bit on the land-based business in the U.S. You can see that the productivity has come up. I think if we sit and look at it, where we can get the productivity up is in domains where there's a lot of labor. So for example, for us, we are on the custom side, introducing what we call the AI Factory, where we globalize the way we do customs formalities. We have more than 5,000 people doing that in the group today. We could take a booking domain, which is also an area that we are working on right now and getting in control of and where we can introduce technology like that. Then we transform the business. We can take a quote domain. It's another domain that is very important as well when you run the business. And take it domain by domain through the flow and basically get yourself organized so that you embrace the technology, not on a personal level. When you introduce technology, you have to understand you can do it on an enterprise level, regional level, you can do it on cluster, country, branch, department, person level. The further you go down into the stack, the less benefit you get of it. This is the reason why I think it's very wrong when people they say, "Well, we got thousands of agents." Because the improvement, if they replicate the same process, is very slim. It has to be something that is done on an enterprise level. This is the only way we've managed to create value. This is also how you transform the business. So that's a little bit of AI, but I think I'll save the rest for the Capital Markets Day. Otherwise, there will be nothing to talk about. Operator: The next question comes from Kristian Godiksen from SEB. Kristian Godiksen: A couple of questions from my side. So to start off with, wondering about the situation in the Red Sea, how that plays out. So yes, both on your assumption and your guidance and also what to think about it? If you assume a return, what is the opportunity for the increased volatility and complexity that will -- I guess, that will mean? And then I guess, on the back of that, potential further pressure on freight rates from overcapacity and hence the pressure on the markup? That would be the first question. And then the second question would be on the -- just wondering on what are the main delta in the guidance range in terms of parameters? Is it where you see the most uncertainty? Is that yields, phasing of cost takeouts, volumes or other? That would be good to know. Michael Ebbe: I'll give it a go. On the Red Sea and how it impacts, I agree that, that will free up some capacity, obviously, if you get the transit time reduced quite a bit. So that will free up additional capacity of the fleet and the vessels. So that will, of course, like you maybe allude to, put additional pressure on the freight rates, coming back to the discussion we had just some minutes ago with Jens and the value add versus the freight pass-through part. But of course, the pass-through part that can come under pressure. What also though remains to be seen is whether if everybody of the carriers start to reroute again, I think that will put some temporary pressure on some of the ports in Europe. So it remains a little bit to be seen how the impact will be, the way I see it, at least. And then the main drivers for the guidance, it is predominantly the yield factor. I would though say we talk a lot about the yield now, and that is, of course, very clear. And of course, for obvious reasons, right now, our -- roughly 60% of the business is now Air & Sea and 40% is Contract Logistics and Road, which has Contract Logistics and Road, which we've seen quite good pace in Q4. It's a little bit more stable, you can say, environment. But of course, the yield is the biggest swing factor in the guidance that we have. Kristian Godiksen: Just one follow-up on the Red Sea part, just to make sure. So what are your assumptions in the guidance? Is that just as is now? Or what is the assumption there, sir? Michael Ebbe: Yes, that is as is. That, when we prepare the guidance, that is as is. Our base scenario is as is. Kristian Godiksen: And if you were to give some kind of sensitivity, if you have -- I guess that would be fairly okay to assume that you will have a reopening of the Red Sea, then on the margin, what would that mean? As I hear you, potential more value-added services, but obviously, pressure on markup. So what would that do to your expectations for 2026? Michael Ebbe: I think you need to put it into spreadsheet because this will be then 60% of the business, and then it will be 50% of the GP, and then it will be 1/3 of the GP. I cannot answer specifically on that one. Jens Lund: Let's put it like this. Of course, if the freight rates come down, it puts a pressure on the freight markup. Then you'll probably have an assumption for what happens and then perhaps you can try to model it like this. Yes. Kristian Godiksen: Yes. But I guess some offsetting factor from potential value-added services and all, the complexity that would mean from the congestion in European ports and the likes, I guess, there's some offset there -- offsetting factor. Jens Lund: I mean a custom export declaration, if you do that. It's an export declaration. A local collection is a local collection. So these things, they are not necessarily impacted by the freight markup. So that's fairly stable, what you're doing, consolidation of freight, freight documentation, preparation in the gateways, et cetera, et cetera. All these things that we get fees for, they are services. So they should be reasonably stable, I would say, or highly stable actually. So -- yes. Michael Ebbe: And lastly, of course, it remains on how the carriers, they react. They're the ones setting, you can say, the rates on the sea. Operator: The next question comes from Marco Limite from Barclays. Marco Limite: I've got 2. One is on the '26 guidance. So in your guidance, let's say, by division, the moving parts by division, you are saying yields stable in Sea, up in Air, volumes up, Road sequentially improving, Contract Logistics continues to grow. So directionally, all the divisions are improving. Now if I look at your guidance like-for-like, take out FX, take out synergies, basically, you are guiding for '26 like-for-like down DKK 1 billion to DKK 2 billion, but all the divisions are improving. And then also, if I, let's say, do the fourth quarter, DKK 5.6 billion EBIT times 4 plus the extra synergies, I get close to DKK 26 billion. So yes, why you are basically guiding for EBIT down year-over-year at group level, but all the divisions are improving and the Q4 exit rate is not that bad? This is the first question. And the second question is on Q4. Now out there, there are some concerns that the quality of your Q4 earnings was not amazing because there was a big beat in CL and Road, miss in Air & Sea. And people are -- some people are stressed that this is -- the quality of the earnings is not sustainable. Can you please explain what is behind the big beat in Contract Logistics and the miss in Air & Sea? Is this group cost allocation more into Air & Sea, less in CL? How we can be relaxed that profitability in CL and Road is sustainable? Jens Lund: Yes. I think, Michael, he can at least start with the guidance and the quality of earnings. Perhaps I can just allude to that beforehand. I think the quality of earnings, if you sit and look at it, I think we have explained what happens in the Air & Sea side right now. I think if we look at the quality of earnings in Road and CL, if you look at it last year, actually, we had a pretty bad quarter on the Road side in DSV. So the baseline is pretty good. The business is 1.5x larger. So if you adjust that, I think more or less that we are operating at the same profit margin as we've done before, perhaps even a little bit lower. Right now, we are rightsizing 2 networks and basically combining them. So I think it's -- there should be some improvement possibilities within the road side when we come to that. If we look at CL, it's not exactly 1.5x up. but there's not much missing before that. So if you look at the DSV side, where we had been a little bit under pressure, now we are cutting costs, and we are rightsizing the business. We have a margin around, 10% on the CL side. So I'm not sure what the people they are talking about. Then I think if we look at the Air & Sea side and the yields, I think the yields and the volumes for that sake, as we have explained, it's under pressure right now. This is the reason why the results, they look as they do. But I think we have a plan where we cut cost and then where we are facing the market and where the Schenker exposures. Either the contracts that have been entered into the customers or the procurement contracts that they have had, they run out and then they become, what can I say, DSV standard procedure and standard contracting. So I think that's, in reality, what happens in the business. There might be a lot of speculation about it, as I can understand. But this is how the business is operating. Then I think Michael can say a little bit on the guidance. Michael Ebbe: Yes. Two things. First of all, I think when you look at Q4 isolated and you benchmark towards last year, remember that last year was very strong in Air & Sea, so it's strong comparatives, whereas CL and Road were softer last year. Another thing that you need to bear in mind is that with the acquisition of Schenker, the typical DSV seasonality changes a little bit. So we should have higher earnings in Q4 than what you traditionally in the legacy DSV have seen. In terms of the guidance, basically, I think it already has been answered earlier in the call where it was roughly around 1 point something miss, you could say, on less EBIT. And I think we have touched upon the reasons of the pressure that we have seen in Air & Sea. And I think that it is -- we have embedded, you can say, slightly reduction in EBIT on, you can say, what you call organic or whatever. Operator: The next question comes from Patrick Creuset from Goldman Sachs. Patrick Creuset: Just on Road, a couple, please. Just firstly, on the cycle, if you could comment a little bit what you're seeing on the volume side? And also pricing, both from the outside, seem a little bit firmer, firming up into 2026? And then maybe also what you're seeing going into this year in Road from a cyclical point of view, given the low point we're coming from? And then secondly, I mean, looking at your Road margin at this early stage of the integration in Q4, seasonally low quarter, you're exceeding 4% margin already. And then someone else mentioned your U.S. peer now pushing more into the high single-digit margins. Historically, you've performed comfortably in line, if not above, with said peer when it comes to productivity and EBIT margin. So more structurally, I mean, where can you take this division, I mean, at least directionally without taking sort of -- previewing the CMD. But what's the opportunity here in terms of step change in margins, specifically in Road? Jens Lund: Yes. I think if we look at Road right now, I think it's -- I mean, we have some exposure in the U.S., but it's limited. We have some exposure in Asia, the Middle East, a little bit in South Africa as well. So I'll probably say around 90% of the volume is actually here in Europe, if we sit and look at it. So it is very exposed to the European market. What we've seen is actually, as we talked about it actually in the last quarter of '24, we saw a lot of pressure, and that sort of went into '25 as well, and I think all the rates they had adjusted at that time. And right now, we don't see that there's a new wave because the margins are so slim, so the market has reached the bottom. So now the volumes, it's perhaps growing 1% or 2% road as we speak. And there's something that tells us that many of these investments that are going to be made in Europe, money being pumped out into the economy. It could lead to a situation where there would be a potential -- a little bit better situation for Road during '26. Right now, we've not factored that in, but that would be a little upside that we could get. And that might even drive the rates a little bit up because I think much capacity has gone out of the market because it's really compressed quite a bit. If we then look at the Road margin, I mean, if we sit and look at it, we take 2 networks. We take, what can I say, one of them basically out and produce it in the other one. So of course, if you then sit with fixed infrastructure and cost, there's going to be a margin expansion because of that. And I said before that we need to create, what can I say, a solid return on the invested capital on the Road side. And in order to do so, you have to gravitate towards something that is double digit. It might sound a little bit, what can I say, ambitious, but that is what we need to do. And I can tell you right now, what we are working on is actually a strategic, what can I say, plan where we say we use this zero-principles thinking where we said, "How should the network look?" And then try to not think about what we have today, but which terminals do we actually need to operate the volume that we have. Because you come out of legacy, you come out of 2 legacy companies, and the infrastructure is probably not sort of matching the requirements that we are having. And here, we see that we should be able to take out additional terminals, additional infrastructure so that we could leverage on what we have, get a higher throughput and then, of course, have less invested capital. And I mean that's why we're all here to reduce, what can I say, the capital that we deploy and maximize the throughput of it so that we get the return that everybody wants. So that's probably the -- what you're going to hear a little bit more on the Capital Markets Day, but I gave you a little teaser on it. Michael Ebbe: Maybe it's a little bit audacious, but I remember at the last Capital Market Day where how you referred to the Road business, if you set it up correctly. But let's see what you will say next time we have the Capital Markets Day. Operator: The last question for today's call comes from Cedar Ekblom from Morgan Stanley. Cedar Ekblom: A follow-up question on AI. I know you don't want to talk too much about it and save it for the Capital Markets Day. But your share is moving quite strongly as the call is going on. And I expect that that's got something to do with you sort of mentioning that there is potentially billions of savings to come from AI. And my question relates to how we think about the retention of those benefits, because freight is an industry where historically, at least, when you've lowered your cost to serve, you've had at least some of that being passed on to the customer. So maybe it's a bit more of a medium-term question, but I'd like to understand how you think about sort of differentiating the DSV strategy as it relates to AI, productivity, automation, et cetera, relative to what I'm sure others in the industry will also be looking to achieve. Jens Lund: I think I actually answered that question a little bit, because you can introduce AI in many different ways. I think the way we want to do it is we want to transform the business. So it means that we organize ourselves in a different way on enterprise level. So let's continue on the customs example. So beforehand, customs could be handled either on a desk or by a person, sometimes in a department, sometimes on a branch level, sometimes on a country level. Today, we move these people that do that into a hardline organization that basically uses technology that is very advanced. And then the people that sit at the fore water, they get an SLA. So they get a service from somebody else instead of producing the thing themselves. It's very hard to drive those changes in 90 countries and get -- create a global organization for that. So here, we use the change capacity and the governance model that we have to create that. I think many people are reluctant to make those kind of changes, but this is the only way you can capitalize on the technology. So then it's how much change capacity do you have. We have to get there first. And the people that don't make that, they will have -- it's not AI that is the problem. It is your colleague that embraces AI in a better way that is the problem. And we believe this is the better way. So we want to be the problem for everybody. Okay. No. I've got a little cough, but I actually wanted to finish off by thanking for your interest. I would also like to thank all the DSV employees for their hard work, all their efforts. It's been a remarkable quarter and a remarkable year, and I can't thank you enough and also our customers for their trust. And we look forward to catching up again and speaking to you after Q1. Have a good day.
Operator: Good day, and thank you for standing by. Welcome to the Brookfield Asset Management Ltd. fourth quarter 2025 earnings call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Jason Fooks, Managing Director of Investor Relations. Please go ahead. Jason Fooks: Thank you for joining us today for Brookfield Asset Management Ltd.'s earnings call for the fourth quarter and full year of 2025. On the call today, we have Bruce Flatt, our Chairman, Connor Teskey, our Chief Executive Officer, and Hadley Peer Marshall, our Chief Financial Officer. Before we begin, I'd like to remind you that in today's comments, including in responding to questions and in discussing new initiatives and our financial and operating performance, we may make forward-looking statements, including forward-looking statements within the meaning of applicable U.S. and Canadian securities law. These statements reflect predictions of future events and trends and do not relate to historic events. They're subject to known and unknown risks, future events, and results may differ materially from such statements. For further information on these risks and their potential impacts on our company, please see our filings with the securities regulators in the U.S. and Canada and the information available on our website. Let me quickly run through the agenda for today's call. Bruce will begin with an overview of the quarter and the market environment. Connor will discuss our activity in 2025 and outline key drivers of our growth for 2026. And finally, Hadley will discuss our financial results, operating results, balance sheet, and dividend increase. After our formal remarks, we'll open the line for questions. To ensure we can hear from as many participants as possible, we're asking for everyone to please limit themselves to just one question. If you have additional questions, please rejoin the queue, and we'll be happy to take more questions if time permits. And with that, I'll turn the call over to Bruce. Bruce Flatt: Thank you, Jason, and welcome, everyone. 2025 was another strong year marked by continued growth across the business and consistent execution against our long-term strategy. Let me start with a few highlights. We raised $112 billion of capital during the year, reflecting strong demand from institutional, insurance, and individuals for our diverse suite of strategies. We also invested a record $66 billion of capital over the past year into high-quality assets and businesses that form the backbone of the global economy. We made these investments in areas where we have deep competitive advantages and strong operating capabilities, positioning us to generate very attractive risk-adjusted returns. At the same time, we monetized $50 billion of equity from investments at very good returns, demonstrating that stabilized high-quality assets and essential service businesses continue to attract strong demand. As a result of all of this activity, fee-bearing capital increased 12% over the year to more than $600 billion. Fee-related earnings reached a record $3 billion, up a very strong 22% year over year, driven by growth in our capital base and continued operating leverage across the business. Distributable earnings were $2.7 billion, an increase of 14% from the prior year. Our distributable earnings are almost entirely fee-based, as you know, and long duration. Our cash flows are further reinforced by the diversification of our platform across asset classes, products, geographies, and client channels. This diversity and lack of reliance on any single segment or product provides our business with many growth options, providing a platform to grow across economic cycles and varying market conditions. Turning to the broader market environment, we entered 2026 with a constructive backdrop. Interest rates have stabilized, economic growth is resilient, and transaction activity has increased due to improved confidence in valuations and market liquidity. In this environment, we are seeing renewed global demand for real assets that generate stable cash flows and provide inflation protection, areas where we have focused for decades. While near-term conditions are supportive, what matters most to our business are the long-term structural forces that shape global capital allocation. We are fortunate to remain at the forefront of the largest global investment trends. These trends remain firmly in place and continue to expand the opportunity set for private capital. An important structural shift is also taking place in how capital is allocated. Individual investors are increasingly gaining access to private assets through retirement and long-duration savings vehicles. This represents a significant expansion of the addressable market for private assets. Retirement and individual portfolios are among the largest and fastest-growing pools of capital globally, and they are naturally aligned with long-duration, income-generating real assets. With our scale, track record, and diversified platform across infrastructure, power, real estate, private equity, and credit, we are well-positioned to meet this growing demand. Our ability to invest through cycles, recycle capital, and partner with long-term investors continues to differentiate our platform. This combination positions us to deliver strong growth over time and supports our long-term objectives, including doubling the business by 2030 and generating a 15% annualized earnings growth. Now before I turn the call over to Connor, I want to touch on our leadership announcement today. As part of our long-term succession process, we announced that Connor Teskey has been appointed CEO of Brookfield Asset Management Ltd. I will continue as chair of the board as well as CEO of Brookfield Corporation. We began this process four years ago when Connor was appointed president of BAM. Over that time, Connor has taken on running virtually everything, so this title change merely matches title to substance. There is, hence, no real transition, and our partners and people have all been involved in this. Connor has played a central role in building Brookfield's investment strategies, scaling our renewable business globally, and developing many of the leaders who now run our businesses. He brings deep investment expertise, strong judgment, and a long-term mindset that is fully aligned with Brookfield's culture. He's actually closer to what the next backbone of the global economy is, and we are excited about that. I've never been more thrilled about the prospects for our business than I am now. I intend to continue supporting Brookfield, focusing my energy where I can be most useful, and will remain fully invested and involved to assist the whole team. Of course, as CEO of Brookfield Corporation, we have a substantial interest in ensuring Connor and BAM are hugely successful. With that, I'll turn the call over to Connor to discuss our performance in more detail and how we are positioned for a strong 2026. Connor Teskey: Thank you, Bruce, and good morning to everyone on the call. I'm honored to be assuming this new role, especially at such an exciting time in BAM's growth story. With Bruce's support, and the incremental approach to transition we have been taking for years, we are already fully operating under our new structure. I look forward to continuing to work closely with our team to deliver strong results for our clients and our shareholders and continue to grow our business around the megatrends shaping the backbone of the global economy. With that, now let's turn to our results. 2025 was not simply about raising capital. It was about putting that capital to work at scale and doing so with discipline. On the deployment side, we were active throughout the year across all of our businesses, investing in high-quality assets at attractive values. In renewable power, we invested in Naoen, a leading global developer with long-term contracted clean power assets, and we acquired National Grid US renewables platform, expanding our footprint in North America. In private equity, we invested in Chemilex, a global industrial technology business with mission-critical products. Our infrastructure business acquired Hotwire Communications, a leading US fiber-to-the-home operator, serving both residential and commercial customers, Colonial Pipeline, the largest refined products pipeline in the United States, and a part of Duke Energy Florida, a vertically integrated electric utility with long-duration regulated cash flows, to name only a few. Our real estate business recently acquired Generator Hostels, a differentiated hospitality platform benefiting from structural growth in experiential travel and urban tourism. And we acquired National Storage REIT, the largest self-storage company in Australia. Collectively, these investments reflect our focus on essential assets and businesses with durable cash flows, strong downside protection, and meaningful opportunities for operational value creation. 2025 was a record year for investment activity, it gives us a strong foundation as we look ahead. Turning to fundraising, 2025 was also an excellent year across the platform. Continuing our momentum to be market-leading in each of our businesses. We completed final closings for two major flagship funds, the fifth vintage of our real estate flagship and the second vintage of our global transition flagship. Both were the largest funds we've raised in their respective series and exceeded our targets, with broad and diversified support from existing investors, as well as new relationships. These fundraisers are particularly important given where we are in the cycle. In real estate, we have significant dry powder at a point in the cycle where we're seeing attractive entry points, particularly in larger, high-quality assets where there are a limited number of players with scaled available capital. In transition, demand for power continues to accelerate globally, driven by electrification, AI growth, and energy security. Together, these dynamics create a growing opportunity set for long-term capital, and we are well-positioned to capture it. While our flagship fundraisers were successful, the overwhelming majority of our fundraising this year, nearly 90%, came from non-flagship strategies, underscoring the growing breadth and durability of our fundraising engine. These complementary strategies included continued momentum across our infrastructure and private equity platforms, through a range of products, as well as further expansion of our private wealth platform. We raised capital across a wide range of funds, asset panels, demonstrating the depth of investor demand for our products and our ability to raise capital consistently across market environments and flagship cycles. A key theme this year has been the continued scaling of our credit platform. Through a combination of organic growth and strategic acquisitions, we have meaningfully expanded our origination capabilities and product breadth. When combined with our long-standing partnership with Oaktree, and the full integration of that business, we are building one of the most comprehensive global credit platforms in the industry. Spanning real asset credit, asset-backed finance, opportunistic credit, and insurance-oriented strategies. We are also preparing for a meaningful expansion of our asset management mandate with Brookfield Wealth Solutions, upon the closing of their acquisition of Just Group, which we expect in the coming months. These three initiatives alone, Oaktree, Just Group, and the credit managers we acquired in the fourth quarter, are expected to generate more than $200 million of incremental annualized fee-related earnings, which positions us well for a very strong earnings growth in 2026. As that is all before any additional fundraising from our flagships and the approximately 60 strategies we will have in the market for deployment. Looking ahead, 2026 is shaping up to be another record year for fundraising, with strong momentum across the business that we expect will drive meaningful growth, especially within both our infrastructure and private equity platforms. Starting with private equity, we recently launched the seventh vintage of our flagship fund at a time where clients value our differentiated approach. Our private equity business focuses on value creation driven by operational improvement rather than leverage or multiple expansion. We have executed this strategy for twenty-five years because it works across market cycles. However, today's environment plays directly to our strengths as a long-term owner and operator of mission-critical essential assets and businesses. Private equity was the first fund we launched more than twenty-five years ago. We've delivered some of the strongest returns in the industry. With market conditions aligned with our approach, and a deep pipeline of opportunities, we expect this vintage to be our largest private equity fund to date. Alongside our flagship fund, we continue to broaden our private equity platform. We recently launched a new strategy tailored for the private wealth market, which is well aligned with client demand. We also saw strong fundraising across our complementary strategies, including our financial infrastructure fund and our Middle East partner strategies, both of which we expect to reach final close this year, as well as our venture technology platform, Pine Grove, which recently held a final close on its inaugural fund at $2.2 billion, exceeding its target. In our infrastructure platform, we also see a meaningful step change emerging in 2026 driven by the breadth of strategies we now have in the market and the scale of the opportunity in front of us. This year, we will have all of our infrastructure strategies fundraising concurrently, including the launch of our next flagship infrastructure fund, which we expect to be our largest to date. Alongside the flagship, our infrastructure debt strategy is in the market, and both our open-ended super core infrastructure fund and our private wealth infrastructure vehicle continued to scale, with each seeing record inflows in the fourth quarter. Further, later this year, we expect to launch the second vintage of our infrastructure structured solutions strategy. Together, these strategies position us to raise and deploy capital across the full spectrum of risk and return within the infrastructure asset class, taking advantage of our leading platform and the strong market conditions and growing investment opportunity set. Building on this foundation, last year, we launched a $100 billion global AI infrastructure program, anchored by our inaugural AI infrastructure fund with a $10 billion target. The fund already has strong momentum, with $5 billion of commitments at launch, reflecting the early conviction in the opportunity. Our objective is to deploy more than $100 billion of capital across the full AI infrastructure value chain, from land and power to data centers and compute capacity. Leveraging Brookfield's existing scale and digital infrastructure and energy to deliver integrated long-duration solutions that support the global build-out of AI. We've already announced several transactions for this strategy, including most recently, a $20 billion strategic AI joint venture with QAI, focusing on developing integrated AI infrastructure in Qatar. These initiatives reflect a growing opportunity for long-term private capital to fund infrastructure that has historically sat on corporate and government balance sheets. And Brookfield is uniquely positioned to lead in this space. Taken together, our execution in 2025 and the initiatives already underway position us extremely well as we enter 2026. With strong fundraising momentum, a scaled deployment platform, and clear drivers across private equity, infrastructure, and credit, we feel very good about the growth outlook for the business and expect 2026 to be at or above our long-term targets. With that, we will turn it over to Hadley to walk through our fourth-quarter financial results and discuss the durability of our earnings in more detail. Hadley? Hadley Peer Marshall: Thank you, Connor. As mentioned, we've had a great quarter as well as year. And I'll provide an overview of these results and how we're positioned for 2026. In the fourth quarter, we delivered strong performance. Fee-related earnings or FRE were up 28% from the prior year period to $867 million or $0.53 per share in the quarter, bringing FRE for the year to $3 billion. That brings our margins to 61% for the quarter, and 58% for the year. Our business has significant operating leverage, so as our growth initiatives scale, our margins improve. That said, after buying the remaining stake of Oaktree, which operates at lower margins, it will bring down our consolidated margin, even though the transaction is highly accretive and strategically strengthens our platform. Plus, Oaktree's margins are near cyclical lows, reflecting the countercyclical nature of its business. In that same quarter, we will also enhance disclosure around our partner managers as these businesses have scaled, becoming more meaningful. Instead of reporting only our share of their FRE, given the smaller historical contribution, we will break out our share of partner manager revenues and expenses, which will not impact FRE or DE, but should provide investors with clear insights as our platform continues to evolve. Distributable earnings or DE were $767 million or $0.47 per share in the quarter, up 18% from the prior year period, bringing distributable earnings over the last twelve months to $2.7 billion. Growth in DE continues to closely track growth in FRE. This reflects the high quality, recurring, and stable nature of our revenue base, and the limited reliance on carry or transaction-driven income. The primary driver of earnings growth in 2025 was our strong fundraising and deployment activity. Over the past year, we raised $75 billion of capital that became fee-bearing, and we deployed $16 billion of previously raised capital that also became fee-bearing. As a result, fee-bearing capital grew by 12% year over year or $64 billion to a total of $603 billion. This growth reflects the strong inflows and disciplined capital deployment across the platform, even as we return capital at an accelerated pace to clients through realizations and distribution. Turning to fundraising, the fourth quarter marked our strongest fundraising quarter ever, with $35 billion of capital raised across more than 50 strategies. This success underscores the breadth, depth, and diversification of our platform that enables us to sustain consistent momentum regardless of individual fund cycles. Within our infrastructure business, we raised $7 billion, including $5 billion for our AI infrastructure fund. We expect the first close for the strategy in the coming months with a target size of $10 billion. We also raised $900 million for our super core infrastructure strategy, bringing the fund to $14 billion, and $900 million for infrastructure private wealth strategy, our largest quarter yet, which puts the strategy at $8 billion. Within our private equity business, we raised $1.6 billion, including $900 million for our private equity special situation strategy. And we had our final close of Pinegrove's opportunistic strategy at $2.2 billion, exceeding our target, a very successful outcome for a first-time fund. Within our credit business, we raised $23 billion of capital, which represented a record quarter. Driving our credit fundraising with real assets and asset-backed finance as well as our insurance channel. This includes nearly $9 billion of capital raised from Brookfield Wealth. We also raised $5.6 billion from our long-term private fund, $1.4 billion of which was for our fourth vintage of our infrastructure mezzanine credit strategy, $4 billion for our perpetual credit fund, and $3.2 billion for our liquid credit strategy. Over the past decade, we've been intentional in evolving our business to become more diversified across not only client types, but asset classes, strategies, products, and geographies, which has reduced our reliance on any single market cycle or source of capital. Along with our long-term disciplined approach, this has allowed us to compound earnings across varying economic environments and strengthen our resiliency. Today, our earnings base is well balanced across each of our businesses, infrastructure, renewable power and transition, private equity, real estate, and credit, with no single business more than one-third of our fee-related revenue. As an example, the introduction of our transition platform five years ago, and the expansion of our credit platform have meaningfully broadened our earnings mix and enhanced durability. In 2026, we will be fundraising across nearly sixty strategies compared to only four in markets just ten years ago, enabling more consistent and diversified fundraising. We now serve more than 2,500 institutional clients globally, alongside a private wealth platform reaching nearly 70,000 clients, an insurance solution business managing over $100 billion of fee-bearing capital on behalf of approximately 800,000 policyholders. Importantly, this breadth allows us to grow through different market environments by shifting capital toward asset classes and regions where opportunity is strongest, while also creating a stable, resilient earning stream that can perform consistently in different market environments and continue to grow across cycles. Looking ahead, a more balanced share of our fundraising will come from individual investors, as private wealth, annuities, and more retirement 401(k)s will be able to allocate to alternative investments. Turning to our balance sheet, we continue to operate with a strong asset-light financial profile that provides flexibility to support growth. In November, we issued $1 billion of new senior unsecured notes, including $600 million of five-year notes at a coupon of 4.65%, and $400 million of ten-year notes at a coupon of 5.3%. We ended the year with $3 billion of corporate liquidity, providing ample flexibility to support ongoing operations, strategic initiatives, and growth across the business. As we look ahead to 2026, we are positioned for another very strong year. I will emphasize again that the best is yet to come. Our performance as a disciplined investor sets us up to capitalize on the strong momentum across the business with continued capital inflows from institutional, insurance, and retail channels, and a pipeline of opportunities to deploy capital at attractive returns. Given the strong financial position and significant growth prospects ahead, I'm pleased to confirm that our board of directors has increased our quarterly dividend by 15% to $0.5025 per share or $2.01 per share on an annualized basis. The dividend will be payable on March 31, 2026, to shareholders of record as of the close of business on February 27, 2026. That wraps up our remarks for this morning. We'd like to thank you for joining the call, and we'll now open up for questions. Operator? Operator: And wait for your name to be announced. To withdraw your question, please press 11 again. In the interest of time, we do ask that you limit yourself to one question. Please standby while we compile the Q&A roster. Our first question comes from Cherilyn Radbourne with TD Cowen. Cherilyn Radbourne: Thanks very much and good morning. So clearly, manager consolidation is continuing. And the recent emphasis seems to have been on private credit and also secondary. With regard to secondaries in particular, is that an area that you consider strategically important and a gap that you might look to fill? Connor Teskey: Good morning, Cherilyn. We've made a few complimentary acquisitions in recent years, focused on areas where we wanted to expand and build out the platform. Looking ahead, we would expect probably to be slightly less active, focused primarily on the further acquisition of our existing partner fund managers. Beyond that, we'll continue to be incredibly selective and opportunistic. In terms of secondaries, it is a space we track very closely. It's growing rapidly. It's a segment of the market where our expertise would be very clearly differentiating, and it would add an additional service that we could offer to our clients. So we do track the space, but we will be very opportunistic, only looking at opportunities that would be highly additive and complementary. But you would be correct that if we were going to do something, secondaries is probably near the top of the list. And we would focus on a platform that we thought would grow significantly as part of the broader Brookfield ecosystem. Operator: Our next question comes from Alexander Blostein with Goldman Sachs. Alexander Blostein: Hi, good morning, everybody. Thank you for the question and kind of congrats. Obviously, I think well-deserved on many fronts. Question for you guys around just the growth for 2026. So like a lot of momentum in the business on multiple fronts as you highlighted. When you refer to at or above long-term targets, I just want to dig into that a little bit more. I believe your long-term targets, you generally talk about FRE, I think at the Investor Day, you talked about that being 17%. So is that what you're referring to when you think about '26? Does that include Oaktree and Just? Obviously, those are going to be additive to that FRE growth. I was hoping to just unpack that a little more and, if possible, get a sense of the sort of organic FRE growth within that statement for the year. Thank you. Connor Teskey: So we expect 2026 is going to be very strong. We had strong momentum that accelerated throughout the past year and positions us very well going into next year. You are absolutely correct. In our five-year plan, we expect growth rates in, call it, the mid to high teens, and we absolutely have an outlook today that exceeds that level. Maybe just to put some substance around that, there are three initiatives, the acquisition of the remainder of Oaktree, the closing of Just Group, and some of the acquisitions we made in Q4 that will add $200 million to FRE growth that have already been funded. Beyond that, the earnings this year and going forward will benefit from what we expect to be a further step change in our fundraising. And we thought we had a strong year this year. Next year is going to be even better. And this is driven by continued growth in credit and then outside this growth in both PE and infrastructure where each of those platforms will have all of our strategies in the market. And then the last thing just in terms of 2026 outlook, in terms of investment and monetization, obviously, will be market dependent. But based on the very constructive environment we're currently experiencing, the major trends that we continue to be on the forefront of, and the large pipeline of deals that we have in the near term, if market conditions hold, we see no reason why 2026 wouldn't also be a market step up from 2025 in terms of deal activity as well. Alexander Blostein: Excellent. Thank you very much. Operator: Our next question comes from Michael Brown with UBS. Michael Brown: Hi, good morning. So a lot of anxiety surfaced in the market yesterday around AI-driven disruption and including within the alternative space. Based on our analysis, your exposure screens below peers, but could you maybe break down Brookfield's software exposure broadly across private credit and private equity funds? And then additionally for the industry, Connor, love to hear your high-level views on how AI-related disruption could flow through the private asset ecosystem. If there are major losses, how do you think LP allocations to private assets could react? Connor Teskey: So there are really two punch lines from our side. First and foremost, this is a strong net positive for our business. It validates our focus on digital infrastructure and servicing increased power demand to support the growth and increased penetration of AI. These are some of the largest and most active platforms we have at Brookfield. And the announcements not yet yesterday, but the increasing tailwinds over the last 1% exposure to software businesses. Within our credit business, our focus has been on areas of expertise such as infrastructure and real estate credit, real asset lending, and asset-backed finance where we get the benefit from the Brookfield ecosystem. And we have no software exposure. And then within our corporate credit portfolio, we've been actively positioning to where we see the best risk-adjusted returns and as such our opportunistic credit strategies have very little software exposure and our performing credit strategies are significantly underweight relative to indices. Taking that all together, our firm-wide focus has been being positioned to benefit from increased AI penetration. And therefore, the headlines yesterday just further reinforce our conviction in that theme. And our disciplined approach to building our credit business has once again put us in a favorable position to manage through this volatility and to continue to be a net beneficiary of the impacts from AI. Operator: Our next question comes from Bart Dziarski with RBC Capital Markets. Bart Dziarski: Thanks, and good morning. Connor, also echoing the congrats on the CEO appointment. Wanted to ask around liquidity, just given you pay out most of your free cash flow. And so with the $2.5 billion of debt outstanding now, would you consider the business in a place where it's fully funded? And related to that, could you give us a high-level sense of the duration over which the $130 billion issue of uncalled commitments could get called? Thanks. Hadley Peer Marshall: Yeah. Sure. So this is Hadley. So I'll take that question. In terms of our balance sheet and liquidity, we're in a really good place. We've got over $3 billion of liquidity. Now part of that is in anticipation of funding our share of the 26% of Oaktree that we currently don't own. And so that's a critical component. So we're well-capitalized from that perspective. But then looking forward, we've been instrumental in supporting our business whether that's through initiatives around our complementary strategies and the growth there, as well as our partner managers and buying additional stakes related to our partner managers. So we're in a really good position, you know, for some time, we've benefited from the cash on hand from the spin-out. But it slowly entered the bond market earlier last year. And anticipate when we look forward in terms of our leverage, obviously, the capacity is quite ample, and we'll continue to build as our business grows. But when we look at 2026, we'll be much less active than we were in 2025, given we were off obviously in a big growth area and wanting to support that growth. When we look at our other area of liquidity, that's the capital at $130 billion. That's a significant amount of capital that can turn into fee-bearing capital. And this is a critical component of our business. We always want to be in a position where we've got liquidity to take advantage of the environment that we're in. So a good example of that is, you know, our best rep, our flagship for real estate, closed its fundraising earlier in '25. And so in a great position to have ample liquidity to be quite active. And in Peakstone, the announcement we made yesterday is a good example of that. And so our flagships obviously have built into some of that uncalled capital. But separately, our credit strategies, are also heavily in market last year and some into this year, have uncalled capital that will get deployed over time and become fee-bearing capital. So that will take a few years to get called, but it puts us in a really good position no matter what environment we have going forward. Bart Dziarski: Very helpful. Thanks, Hadley. Operator: Our next question comes from Craig Siegenthaler with Bank of America. Craig Siegenthaler: Thanks. Good morning, everyone. And, Connor, first, just big congrats on your promotion to CEO of Brookfield. And I think you're probably the youngest CEO in asset management too. Connor Teskey: Thanks, Craig. Craig Siegenthaler: So my question is on artificial intelligence. So Brookfield has really built a leading business servicing the AI industry. So, you know, like your peers, it's a lot of picks and shovels, not actually the AI models, so data center and power. Can you talk about the mix of capital being deployed today between equity and also debt? And on the equity side in data centers, is it mostly investment-grade tenants like the hyperscalers? And I'm sorry, but one more I'm gonna squeeze in if you can address this one too. And on the leases, there I think almost all fifteen-year plus leases. Are there scenarios where they can be broken early or no because there's a financial benefit to the data center provider when it's broken? Sorry about the three, but they're all kinda related. Connor Teskey: So in terms of themes across Brookfield, AI continues AI and AI infrastructure and the value chain that supports the increased penetration of AI remains at the top of the list. And this is not only the digital infrastructure, but also the energy generation that is required to support these data centers. Just as a general comment as to why, the market opportunity is so robust today, you've got three dynamics that are all compounding on themselves. One, more data centers are being built. Two, the data centers that are being built are now larger. And then the third one is historically, the financial investor in a data center typically funded the rack in the shell. Increasingly, there is an opportunity for those that have the scale and the operating capabilities to not just fund the rack and the shell, but to fund the rack, the shells, the chips, the servers, the power supply, the grid redundancy, the substation, the interconnect, the whole system, if you will. And that's creating a very large and attractive investment opportunity on both the credit side and the equity side because while that wallet is getting bigger, it's still backstopped by that same long-term take or pay off take with one of the greatest either hyperscaler or sovereign credits in the world. In terms of our pipeline today, it's as large as it's ever been, and we expect it to only continue going forward. There's two things that perhaps we would highlight that are of interest. There is the largest component of growth for AI demand is the hyperscalers. And we are absolutely leading in supporting and investing the infrastructure to support their AI initiatives. But there's also a growing opportunity to support sovereign AI. This is the AI offtakes from countries to support the national interests of those regions. Again, very high-quality credit offtakes. Large-scale investment opportunities, where our skills can be brought to bear. And this is an area where we do think we're market-leading given our announcements with Sweden, France, Qatar, etcetera. The last point I'd simply make here is this is not just an investment opportunity. We are seeing incredible demand from our clients to get exposure to this investment theme. We announced our AI infrastructure fund with a target of $10 billion. We've already secured $5 billion. We expect we'll hit our targets and expect the broader program to be well north of $20 billion when we include the co-invest given the size of some of these investment opportunities. And sorry. Sorry. You I'm just seeing here the second part of your question. These are very strong long-term off takes. Very similar to what we would expect in other infrastructure asset classes. These are take or pay where if we continue to provide the asset, the off taker is locked in. And similar to what we do on the power side, the real estate side, the infrastructure side, AI infrastructure is no different. We spend a lot of time ensuring it's a great revenue construct backed by a great high-quality credit counterparty. Operator: Our next question comes from Michael Cyprys with Morgan Stanley. Michael Cyprys: Hey. Good morning. For taking the question. Maybe just sticking with AI and data centers. Understand the U.S. Administration wants to see new data centers stand up their own power generation. Curious, how do you see that impacting bottlenecks? And as you invest in data centers, talk about how you're bringing together your greenfield power capabilities, which is a major differentiator for you. And how are you expanding your capacity there given bottlenecks? Connor Teskey: There is no question. The bottleneck to AI growth today is not capital. It is not demand. It is electricity supply. Unlocking that electricity supply and, you know, the slogan bringing your own power is a key differentiator. And, well, electricity grids around the world are doing everything they can to increase their capacity as much as possible. They very simply cannot keep up with the increased level of demand that we've been seeing in recent years, it's only gonna accelerate going forward. And therefore, our ability to bring unique solutions beyond just simply flowing power through the grid is a key differentiator. Our ability to bring quick to deliver power through our investment in Bloom Energy, longer term, our ability to use nuclear solutions through Westinghouse and then behind the meter, energy storage and renewable solutions. That can be hooked up directly to these data center complexes. All of these are different ways that we can look to this significant demand and essentially not be restricted by the growth of the grid that is not going to keep up with the opportunities that we see in front of us. Michael Cyprys: Great. Thank you. Operator: Our next question comes from Dean Wilkinson with CIBC. Dean Wilkinson: Thanks. Good morning and congrats Connor and Bruce. Just wanna circle back on credit overall. I mean, there's been concerns around private credit, I guess, going back to September. Can you comment just on what you're seeing in credit within the portfolio, a general view, and maybe a comment on some of the redemptions that you're seeing in the industry in the private wealth strategies. Thanks. Connor Teskey: So the market demand for credit continues to be very robust, and it's driven by the same drivers we're seeing across our equity business, huge capital requirements to build out assets around key themes of energy and digitalization and deglobalization. And maybe to dive into what we're seeing, we continue to see very strong demand and attractive spreads in real asset and asset-backed lending where quite frankly, demand continues to outweigh supply. And we expect that dynamic to continue going forward. We are seeing incredibly tight spreads in select pockets of more commoditized segments of the market. And while that subset specific, some uncertainty in this space is significantly increasing the pipeline for our opportunistic credit business, which we have seen increase its activity over the last couple of months. In terms of credit flows, you're absolutely right. Across the market, there were modest increases in retail redemptions or wealth redemptions late last year. For us, these were very modest and very manageable. But what they shouldn't overshadow is on the institutional side, we're still seeing very robust inflows into credit, especially those products that are well-positioned to outperform in this market. Dean Wilkinson: Great. Thanks. Operator: Our next question comes from Daniel Fannon with Jefferies. Daniel Fannon: Thanks. Just wanted to follow-up on just the outlook for wealth flows. You obviously had very good momentum exiting 2025. Can you talk about your product roadmap as you into 2026 and beyond as well as just the continued momentum? Connor Teskey: So, 2025, our growth in the wealth channel was a little bit north of 40%. We expect that to continue in 2026, particularly on the back of a number of new products we launched in the space at the end of the last year, notably in the credit and private equity segments. And those are seeing great early receptions. In terms of our outlook for the business, we're going to continue to build incrementally. This is an amazing opportunity in terms of the scale, the potential scale for our business. And we absolutely intend to capture it, but we want to go about doing it the right way. We're focusing first and foremost on getting the right products on the right platforms. Here, we're having an incredible amount of success. Secondly, we're very focused on raising prudent amounts of capital to ensure that through these wealth products we deliver the same strong and consistent returns that have defined our business for years. We feel that is the right way to build this business over time so we can lead in this space the same way we lead in the institutional space. And it's clearly not restricting our growth taking this approach, given our 40% plus CAGRs. And then maybe lastly, the one thing we are doing is taking some incremental steps in 2026 really around brand awareness for Brookfield. And also filling out, product offering most notably on the credit side. Operator: Our next question comes from Crispin Elliot Love with Piper Sandler. Crispin Elliot Love: Thank you. First, congratulations, Connor. And then just on my question, FRE margins have expanded nicely in recent quarters to 60% plus. Can you share your views on the margin trajectory from here? How do you feel about sustainability of current margins? Potential for further expansion just given some of the tailwinds that you've discussed for the business broadly? Just any puts and takes there would be great. Thank you. Hadley Peer Marshall: Sure. So I can describe that. I mean, you're absolutely right about the margins and the operating leverage that we've seen play out. As a reminder, when we close the 26% of Oaktree, that will have a shift in our margins. Just because of where they operate and the cyclicality of their business. But the other thing that we mentioned that we're going to do, which is really just a one-time presentation change, is take our partner managers, which have continued to grow as a business, and our share has grown, which is reflecting more into our numbers we're gonna actually bifurcate their revenues and expenses the portion that we own. Whereas today, we include only their FRE. So this change won't impact FRE or DE, but it'll increase the reported revenues and costs as a result impact the margins. Now the reason why we've always just shown their FRE is because they were a small part of the business. But as mentioned, they continue to grow and we're quite excited about that. So we want to provide more transparency around that. And this should also help investors better understand the components of our credit business specifically as well as the underlying fee rates for our credit strategies. But importantly, to get to really the crux of your question, the margins for our business will continue to because of that operating leverage that's built in. Across all of our platforms. And in fact, when we look forward every especially for 2026, every business should have stronger margins. Except maybe real estate only because they don't have the catch-up fees. So we're quite excited about the business in general for 2026 and onwards. And that will be reflected in the margins. Operator: Our next question comes from Mario Saric with Scotiabank. Mario Saric: Hi, good morning. I just had a quick follow-on question with respect to the emerging pursuit of the individual investor and wealth channel. I think, Connor, you highlighted three initiatives, for '26 on that front, including brand awareness. I'm just thinking from a cultural spread perspective, you know, Brookfield's culture has been very consistent. Very strong, excellent institutional culture to make Brookfield what it is today. How do you balance, you know, the drive for brand awareness on the private kind of individual wealth side with maintaining kind of that institutional culture that you've had historically? Connor Teskey: Our culture is one of our biggest and most valuable assets, and it is not going to change going forward. It guides how we operate, how we partner with our clients, how we're disciplined and take a long-term view to investing. When we speak about increasing brand awareness, one of the important things is it's about increasing the awareness of the Brookfield brand, which to your point is very distinct. It speaks to stability. It speaks to discipline. It speaks to long-term focus. And that's all we will be reinforcing. One thing we're incredibly proud of at Brookfield is everybody represents the brand. And that's really what we're gonna look to reinforce as we do increase the brand awareness. It's just ensuring that people know who Brookfield is and what we stand for. Operator: Our next question comes from Jaeme Gloyn with National Bank. Jaeme Gloyn: Yeah, thanks. Good morning, and congrats as well, Connor. On the private wealth and market as that continues to evolve and access for private markets, in 401(k)s, expands, how should we be thinking about the potential impact on BAM's key value capital and FRE in what do you need to have happen for that to become material? Connor Teskey: So when we think about the large opportunity in the future for the individual, we think about that in three parts. The retail and high net worth channel, the insurance policy and annuity holder, and the 401(k) and benefit market. In that third bucket, we do expect the opportunity set to be very, very large. But we expect it to grow incrementally over time. In terms of what's happening in the near term, we do expect guidance to come later this week, which we expect will be highly supportive of alternatives in 401(k)s and will include, we expect, initiatives that will create catalysts for increased reviews of alternatives within these portfolios. And we are very well positioned to capture opportunities in the DC channel. We are already working with leading target date fund managers to provide the best of Brookfield strategies to improve participant plan outcomes. We've been focusing on professionally managed portfolios and target date funds where we can co-develop sleeves and solutions with the existing providers of those products. And in that regard, we're very confident that we can demonstrate value for cost while meeting the regulatory requirements. And that really goes to the strength, track record, and durability of our private investment strategy. Maybe the last point just on this market because we're very excited about it. From all stakeholders, we continue to receive very positive feedback that our focus on high quality, downside protected, real that provide cash yield and inflation protection is uniquely suited to the objectives of these plan participants. And that's what we'll be looking to offer on an increasing basis going forward. Operator: Next question comes from Kenneth Worthington with JPMorgan. Kenneth Worthington: Hi, good morning. Connor, congratulations. My question is for Hadley. There was a more meaningful increase in the long-term fund in co-investment revenue in both transition and private equity businesses this quarter. For transition, it went from, like, $5 million to $28 million sequentially. In private equity, the revenue went from $4 million to $62 million sequentially. What drove the jumps here? And to what extent is this sequential jump in revenue this quarter sustainable at these levels? Or were there one-offs that we should be accounting for? Hadley Peer Marshall: So one thing to keep in mind, and we've mentioned this for PE, is Pine Grove. And they had a great first fund with a final close of $2.2 billion. And that had catch-up fees. So that's what you're seeing there. So there's some catch-up fees there, but that is capital that's now going to be earning FRE going forward. So very exciting outcome there. On the transition side, what you're seeing there is one of our partners that we have in terms of revenues that they generated from there. That is probably a little bit more one-off generated that the overall business is performing quite well. But they did have a solid win, and so that's something that you're seeing flow through there. Kenneth Worthington: Okay. Great. Thank you very much. Connor Teskey: Yep. That's exactly it. Thank you. Operator: Our next question comes from Sohrab Movahedi with BMO Capital Markets. Sohrab Movahedi: Okay. Hey. Thank you for squeezing me. Congrats to Connor as well. Hadley, can you just give us a sense of how you arrived at the 15% DV bump and whether or not you expect to be below a 100% payout ratio next year. Hadley Peer Marshall: Yeah. So, look, we do a lot of forecasting and analysis around our business. By each business, tops down, and bottoms up. So this is a thorough analysis that we conduct. It does make it a little bit easier when we've got $200 million of FRE coming in for 2026 that we can forecast with incredible certainty around Oaktree and Just Group. So that's quite supportive. And when we think about our payout ratio, over time, as you know, we target around a 95%. And so that is the goal that we're going to be leading into especially as we get in carry, which is the second leg of our growth. So what gives us that confidence around 15% is the analysis that we performed, and then the overall long-term goal from that perspective. Operator: That concludes today's question and answer session. I'd like to turn the call back to Jason Fooks for closing remarks. Jason Fooks: Okay. Great. If anyone should have any additional questions on today's release, please feel free to contact me directly, and thank you, everyone, for joining us. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Michael Pici: Large. Authorization. And as we have had every quarter since becoming a public company over fifty years ago, we paid a dividend to our shareholders. We remain committed to returning cash to shareholders while executing our strategy to drive growth and margin improvement. We continue to maintain a healthy balance sheet and debt maturity profile with no near-term refunding requirements. During the quarter, we amended and extended our revolving credit agreement, which has a capacity of $650 million and matures in November 2030. At quarter end, we had combined cash and revolver availability of approximately $779 million, and we are well within our financial covenants. The full balance sheet can be found on slide 17 in the appendix. Now on slide 11, regarding the full year outlook. We now expect FY 2026 sales to be between $2.19 billion and $2.25 billion, with volume ranging from flat to positive 3%, net price and tariff surcharge combined of approximately 11%, and we anticipate an approximate 2% tailwind from foreign exchange. The increased outlook reflects additional pricing actions related to the increase in the cost of tungsten since we provided our prior outlook. Despite the record level of tungsten, we remain confident in our ability to achieve the price. From a cost perspective, as Sanjay noted earlier, some of our EMEA restructuring actions will take a bit longer to execute. And as a result, our updated range includes $30 million of savings. Depreciation and amortization, foreign exchange, and pension assumptions are unchanged and noted on the slide. We now expect adjusted EPS in the range of $2.50 to $2.45. This outlook includes approximately a $0.95 year-over-year benefit related to the timing of price and raw material costs. On the cash side, the full year outlook for capital expenditures is unchanged, and free operating cash flow is expected to be approximately 60% of adjusted net income. This revision reflects the additional working capital required by the rising cost of tungsten as discussed earlier. Turning to Slide 12 regarding our third quarter outlook. We expect third quarter sales to be between $545 million and $565 million, which reflects the effects of the buy-ahead that occurred in the second quarter. We expect volumes to range from negative 4% to flat. If you were to adjust for the buy-ahead that occurred in the second quarter, volume at the midpoint would be positive 1% and would be the third consecutive quarter of improving volume trends. The outlook also includes price and tariff surcharge realization of approximately 13% and a 5% positive impact from foreign exchange. We expect adjusted EPS in the range of $0.50 to $0.60. This includes approximately $0.30 year-over-year benefit related to PriceRock timing. It is worth noting that the prior year's third quarter results included a $0.13 benefit from the advanced manufacturing tax credit. The other key assumptions for the quarter are noted on the slide. And with that, I will turn it back over to Sanjay. Thank you, Pat. Sanjay Chowbey: Turning to Slide 13. Let me take a few minutes to summarize. We delivered a solid 2026. Driven by price, modest improvements in a couple of end markets, project wins on the commercial side, and cost improvement actions. We continue to make steady progress on our strategic growth initiatives, lean transformation, and structural cost improvement while also exploring ways to strengthen our portfolio over time. We remain confident in our plan for long-term value creation for our shareholders. And with that, operator, please open the line for questions. Our first question comes from Steven Volkmann: Good morning, Steve. Sanjay Chowbey: Great. Steven Volkmann: Good morning, guys. Thank you for taking the question. Stephen Edward Volkmann: I guess, no surprise, maybe I will talk about Tung's a little bit here. So a couple of things that you talked about some pull forward here into the last quarter. Is there some big price increase that is about to hit that people wanted to get in front of? Yes, Steve. We had a modest price increase, you know, Sanjay Chowbey: January 1, relative to what we have done in the past, think it is in mid-single digits. Michael Pici: I would add to that I think even in places where we are not Stephen Edward Volkmann: you know, on a list price business and we have got a lot more material content, we have got customers who are informed about the direction of what the tungsten price is. Okay. And since the price of tungsten is up, I think since you started this conference call, that is only a slight joke. It is up 33% year to date. Right? So how do you like, how fast can you kinda keep up with this? Sanjay Chowbey: Yeah. So Steve, there are parts of our business where, you know, Michael Pici: the prices get affected very quickly. Those are like the spot by And also we have parts of business which are indexed to the prices. And of course, know, in metal cutting, pretty much everything is on the list price basis. So that takes a little bit more time. But based on the order pattern and the lead time, that also works out just fine for us. As you asked the first question, I made the comment modest because prices of tungsten have gone up a lot. More than almost, you know, two to three times. But by the time you look at how it affects overall, you know, price of our products, and I mentioned, yes, mid-single digit is relatively higher price. But, you know, our customers also see this dynamic. And they have been also kinda monitoring it very closely. And there were some buy ahead as Pat mentioned in his prepared remarks. If you even adjust for that, we still that overall market improved sequentially and then we are still expecting slight improvement in market from that point. Oh. Perspective. Stephen Edward Volkmann: Okay. Alright. Great. And then just the final piece here. How should we think about the supply side? I am curious. Like, are you worried about access to tungsten? Is there any chance that, you know, the market gets tight and you kinda cannot get what you need? And maybe as you answer that, Sanjay, just remind us about sort of your tungsten? And I will pass it on. Thanks. kind of internal versus external sourcing of Sanjay Chowbey: Yeah. Sure. I will also, you know, have Pat chime in here, but let me start by saying that we have multiple Michael Pici: different sources and we have things in pipeline in terms of how we work with our vendors and suppliers. We have in many cases, we have long-term agreements So we feel confident in our ability to get what we need for the outlook that we are giving you at this point. Pat? Michael Pici: Yeah. I would say, you know, obviously, in terms of sources, we use a diversified mix of Stephen Edward Volkmann: recycled materials. We have got our facility in Bolivia that pulls out material from that market. Michael Pici: And, you know, in terms of what we are using, I will say outside of China, we do not have a dependence on Chinese material to satisfy those operations. Obviously, with the ramp-up of tungsten and as we have commented before, this is really a supply-driven price increase at the moment across the industry. We are seeing additional activity. I would say, in terms of what is happening at mines and projects also in terms of government involvement in some of those things to facilitate that. And so I think if we took a longer-term view of this as well, there is ample supply that is out there that will you know, should come online. Sanjay Chowbey: Yes. Steve, I will add one more thing. Along with the supply side of the equation, we as a company based on material science and technology, we also look for ways that how we use tungsten in the most efficient way in our product. There are places where over the years, we have taken parts of our product, you know, mixed with the steel and then having the parts of the tool made by tungsten. We are also looking for as there are some pricing concerns, also the supply side concerns, how do we make our product more efficient in that regard? Julian Mitchell: Okay. Steven Volkmann: Our next question comes from Julie Mitchell with Barclays. Please go ahead. Julian C.H. Mitchell: Hi, good morning. Hi, Julian. I just want Sanjay Chowbey: I just wanted to start off with clarifying your Julian C.H. Mitchell: the volume trends just kind of through the year. I guess you have the third quarter guidance of slight volumes down year on year at the midpoint. The full year is slight growth. So maybe help us understand or remind us kind of Q on Q2 how are volumes moving then? And to understand kind of that interplay of maybe some pull forward of volume versus what you are seeing in the end market final demand? Volume wise? Sanjay Chowbey: Sure, Julian. First, let me back up a little bit from your question of the full year, and then I will come to Q2 and Q3 in a second. If you go back to the August outlook, at midpoint, we had said volume was going to be minus 2.5%. Last quarter, we said at midpoint, volume was going to be for the full year again, at plus 1%. This time we are saying, you know, volume is one and half Steven Volkmann: percent. So it gives you at least confidence Sanjay Chowbey: that volume is moving in the right direction as the year has progressed. Of course, we have, that is the 400 basis point change in six months in our volume projection for the full year. In parallel, of course, we have 700 basis point change in the price, which is a bigger driver of top line. But coming back to Q2 and Q3 dynamics, In Q2, we had a buy ahead, as Pat alluded to that earlier. About $13 million by the time you add both segments. Now if you adjust for that, Q2 will be flat. And then if you adjust for that also, Q3, rather than showing as negative, will be plus one. So we are showing you also Q1 was minus one. Q2 was plus and a flat and then Q3 getting plus one. So volume overall is moving forward in the direction for us. Julian C.H. Mitchell: That is really helpful. Thanks Andrew. And maybe just my follow-up. If we focus on, I suppose, two markets in particular that are very relevant for you, general engineering and then transportation. So transportation, I suppose, has been pretty soggy updates on auto production ex China, general engineering, I think, understandably, people getting excited because of the manufacturing PMI move a couple of days ago. Just give us sort of your perspectives on those two markets and again the volume demand picture, please. I know you have guided the sales assumptions on Slide 11. Sanjay Chowbey: Yes, sure. So let me start with transportation first, then I will come to general engineering. In transportation, as we had in our prepared remarks that EMEA improved slightly. Still in negative territory, in low single-digit territory. Asia Pacific improved. This is again data coming out of the IHS. That has had quite a bit of improvement in almost 200 basis points. America is essentially flat, slightly negative, but essentially flat in terms of transportation. So overall, we said was that transportation was minus one last time. Now it is about flat. For us, again, is just the market. For us, of course, is we are winning projects and we have also seen some comp issues with projects that we had, you know, in EV couple of years ago. In last twenty-four months, you know, where we got good stocking orders and all that. That has, you know, some other dynamics going on. As you know, some of the programs have not taken off as much. So overall, we expect transportation to help us, you know, with this slight improvement in the trend. Sanjay Chowbey: Now, Sanjay Chowbey: coming to general engineering. As said in the prepared remarks, Americas is where we have seen tangible Sanjay Chowbey: difference. Sanjay Chowbey: Other areas, like EMEA and also in APAC, essentially flattish. Or similar outlook that we had before. In the recent outlook, I think the PMI, you know, ISM PMI report that came out earlier this week. We saw that was, you know, above 50 for the first time in twelve months. but So that is a good sign know, that is just one month. We got to see that translate into the sentiment, translate into real orders. And hopefully that happens. So that can give us a little bit upside. But in our view right now, we have assumed slight improvement in Americas and essentially flattish, you know, for other two regions. Julian C.H. Mitchell: That is very helpful. Thanks so much. Steven Volkmann: Our next question comes from Steven Fisher with UBS. Please go ahead. Steven Fisher: So just to talk about the cadence a little bit more. Thanks for giving that adjusted progression on the volumes adjusted for the pull forward. Michael Pici: I guess just looking at what is implied in Q4, it seems like a lot of the year's upside is really falling into Q4. Can you just talk a little bit about what is driving such a big uplift in Q4 And then I guess related to that, how should we think about carryover into the second half of this calendar year, both from a kind of a price and volume and price cost perspective? Michael Pici: Yeah. A couple of things, just to kinda walk you through there, Steve. The way I look at the progression here in terms of the second half and if I, you know, if I strip away a couple elements Here, and that is, you know, we obviously had some trends between Q2 and Q3. On some buy ahead. And then if we think about the incremental price that is going into the business here in the back half, you pull that out at the midpoint, look pretty normal from a sequential volume perspective. As you think about that change then, which is pretty significant Q3 to Q4, what is driving that pretty significant step up in terms of where pricing is, you know, and that is just a dynamic that is associated with the timing of when we have seen tungsten prices rise here. The month of January alone, tungsten was up nearly $340. Right? And so much of that will hit us then in fourth quarter. And then as you think about in your question in terms of what is the first half of our fiscal twenty twenty-seven kind of look like, yeah, where we are kinda sitting now, you would anticipate right, some bleed over into early part of FY 2027 in terms of favorability of price raw. Obviously, as we talked about in the scripted remarks, there is a headwind out there as well at some point in time, once tungsten stabilizes. This will have the absence of some of this benefit. But, you know, when that happens, obviously, uncertain at the moment. The other two things I would think about in terms of that early part of 2027 and beyond that price raw dynamic coming into play, just keep in mind that there is additional restructuring that will be coming in place that ultimately will get us to a run rate about $125 million at the end of next fiscal year. That is a 35 excuse me, 30 million lift. And then additionally, here as we think about FY, '26, there is a little bit more than your average performance-based compensation in play. In that, and we think about '27 that is probably a 10 to 15¢ tailwind then at this point in time going into $0.02 7 Steven Fisher: That is really helpful. And then I guess nice to see that we continue to have some of these wins from your customers. Can you just talk about the competitive dynamics on that? How actively or, you know, how broad is the competitor set on these or is the pie just getting bigger in these areas that you are not facing a lot of competition? Sanjay Chowbey: Yes. Of course, we are facing competition in all areas, but I will just tell you that, no, we are using our core competencies as we have spoken before with material science, our products and solutions And also adding that with application engineering support, which is again in a lot of talent we have on the field in the frontline and our engineering team. And then our global footprint that helps us meeting customer demands anywhere in the world. I think we are using our core competencies and very approach on our growth initiatives to drive very close intimacy with customers and solving their problems and winning this project. I can tell you in a few things that we have spoken in past, but you look through the different end markets we play. In aerospace and defense, we have been definitely winning bigger share of wallet. With our, you know, major customers and also we have expanded our new customer list in that in last few years. Similarly in Earthworks, we talked about mining project wins and all that. We definitely have had, you know, some new products coming out there and also supporting our customers with good operational performance and quality and delivery. Now, I have to say that Earthworks, some of the wins we have, has been price as we have noted in past. So we know that pressure will be there on us even going forward. With respect to energy, we have talked about oil and gas customers definitely valuing our product. As they are going more, not necessarily increasing rig counts, but going more distance in horizontal ways. We have very good products there. Along with that, in energy we have had very good success with supporting our customers on the power generation for AI data centers. We highlighted that last, you know, quarter or so. Today, you know, we talked about the broader, you know, electricity and energy play and how we are well positioned to capture that, at least outperform the market. Transportation, we are very well prepared regardless of whichever way our end customers go with respect to drivetrain. We had very proven products in combustion engines Then we launched a lot of really good products on battery and hybrid Of course, there is quite a bit dynamics in the mix right now, but we are well positioned to support our customers in that. And finally, coming to general engineering, we have very strong channel partners. We work very closely with them. Along with that, in parallel, know, we have launched many initiatives in general engineering to help our smaller customers. Small to medium-sized customers. In parallel, we have also launched new initiatives on digital machining solutions. We have put in public domain our partnerships with key technology players out there. So we are taking a very comprehensive approach as it applies to our overall market. Steven Fisher: Thank you very much. Steven Volkmann: Our next question comes from Steve Barger with KeyBanc. Please go ahead. Steve Barger: Hi, Steve. Sanjay Chowbey: Good morning, Sanjay Pett. It is actually Christian Zyla on for Steve Barger. Good morning. Good morning. Steve Barger: Hi. Christian Zyla: First question, if you guys get both volume and price for several quarters, how should we think about incremental margins relative to history? Is there a range that you guys are targeting? Sanjay Chowbey: Yeah. On the volume, as we have said before, know, metal cutting is gonna have a little bit higher level, you know, incremental leverage than infrastructure. But net net, we have said mid-forties as the average. Pat, you want to add something to that? Michael Pici: No, just do not want to say that is a through the cycle type number as well. And so individual quarters, depending on where a variety of factors sit, that could move around a little bit. Sanjay Chowbey: Yes. With respect to price, obviously, have said it our first intent there is to make sure that we are offsetting the cost. So the mid-forties number is on volume. Christian Zyla: Got it. Understood. Christian Zyla: And then I guess second question, just your full year guide assumes tungsten prices remain stable from the current level. How fast do your list prices adjust in metal cutting Michael Pici: if tungsten keeps rising? And then I guess conversely, if tungsten prices fall at some point, would you have to give back the surcharges and reduce your list price? And how fast does that happen? Sanjay Chowbey: Yes. So we generally have about three months or so lag in metal cutting in terms of list price change. With respect to if the prices come down, our goal is to stay competitive in the market. So we will, you know, see when that happens and, you know, what the extent of that is. Angel Castillo: Our next question comes from Angel Castillo with Morgan Stanley. Please go ahead. Angel Castillo: Just maybe a near-term one first. Angel Castillo: I wanted to clarify, do not know if apologies if I missed this, but did you say, I guess, how much orders are kind of rising in January, just what you are seeing kind of thus far in the last month and whether that kind of aligns with what you are talking about in terms of organic growth or maybe even that or just kind of compares to that? Sanjay Chowbey: Sorry, we have not talked about January specifically. In the prepared remarks, Angel. But I can just tell you that we have good start and we are confident about the outlook we gave you. Angel Castillo: Understood. And then Sanjay, just a little bit of a bigger picture question. Back in, I think, fiscal 4Q, you had talked about some additional self-help initiatives, plant closures and other kind of changes you were making given how challenging the backdrop was and just overall demand picture. But ever since that, I feel like things have been steadily improving, you know, more tailwinds with power generation, just general kind of market share wins. Can you talk at a higher level? Is this do these changes impact how you are thinking about repositioning the business, the plant closures? What you need to target or what the business needs to focus on versus perhaps even areas of investing, so you can kind of take more advantage of those kind of higher, faster growth power gen type of markets? Just bigger picture is how it impacts your strategy. Sanjay Chowbey: Yeah. Absolutely. Angel, first of all, let me recap what Sanjay Chowbey: we have done and then, you know, I will talk about where, you know, we are going next. So in last twelve months, we have closed two manufacturing plants successfully. We divested one business. And now looking forward, we are working on projects as we have spoken, you know, after the Q4 of last year. We are going to, of course, keep an eye on where the market is and the specific to, you know, different product line, the demands. And if we have to adjust our plan, we will. Our overall goal here is to do what is best for our shareholders, our customers. And our team. But at this point, the plans that we have put together still makes sense and we are making good progress on that. Angel Castillo: Understood. Thank you. Tami Zakaria: Our next question comes from Tami Zakaria with JPMorgan. Please go ahead. Hey, good morning. Very nice results. Question on India. Could you remind us Tami Zakaria: whether you have sourcing exposure from there and how that might benefit? Should tariff rates on India come down in the coming months? Sanjay Chowbey: Yeah. Tammy, about six months ago or so when this question came up, when the tariff had gone up, we had said that we do not really bring a lot of products from India to US. You know, so for all practical purposes, the impact was minimum. And then whatever we had, you know, over the last, you know, few quarters, you know, globally, you know, not just the India impact, but as overall we have taken appropriate actions including relocating several thousand stock SKUs, you know, to different places of the world to offset that. So for all practical purposes, this change tariff coming down will not have that impact. But I do believe that it should help India where we are a good big player also. In our so domestically, it should help us. But from a tariff perspective, it is not material for us. Tami Zakaria: Understood. Very helpful. And along the same lines, should some more trade deals come through how should we think about pricing? Would tariff surcharges get automatically rolled back? Or you took permanent price increases, which might stick even if tariffs go down in the coming months? How should we think about that? Sanjay Chowbey: We have kept the tariffs as is right now. We have not converted that to a permanent price change, but we are keeping that option open. If there are some parts of the trade agreements that feel like more permanent, We will do that. That is good for everybody including our customers. But as of right now, we are keeping tariffs as tariff. And if the tariffs do come down, we will immediately adjust it down. Tami Zakaria: Understood. Thank you. Operator: This concludes our question and answer session. I would like to turn the conference back to Sanjay Chawbe for closing remarks. Sanjay Chowbey: Thank you, operator, and thank you, everyone. For joining the call today. As always, we appreciate your interest and support. Please do not hesitate to reach out to Mike if you have any questions. Have a great day. Thank you. Operator: A replay of this event will be available approximately one hour after its conclusion. To access the replay, you may dial toll-free within The United States (877) 344-7529. Outside of The United States, you may dial (412) 317-0088. You will be prompted to enter the conference ID 9456990 then the pound or hash symbol. You will be asked to record your name and company. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Operator: Thanks for holding. We appreciate your time and patience. Please stay on the line, and we'll be back in just a moment. Ladies and gentlemen, thank you for standing by, and welcome to the Lilly Q4 2025 Earnings Conference Call. Operator: At this time, all participants are in a listen-only mode. Later, we will be conducting a question and answer session and instructions will be given at that time. Should you request assistance during the call, please press 0, and an operator will assist you offline. I would now like to turn the conference over to your host, Mike Czapar, Senior Vice President of Investor Relations. Please go ahead. Mike Czapar: Good morning. Thank you for joining us for Eli Lilly and Company's Q4 2025 earnings call. I'm Mike Czapar, Senior Vice President of Investor Relations. Joining me on today's call are David Ricks, Lilly's Chair and CEO, Lucas Montarce, Chief Financial Officer, Dr. Daniel Skovronsky, Chief Scientific and Product Officer, Anne White, President of Lilly Immunology, Dr. Carole Ho, President of Lilly Neuroscience, Ilya Yuffa, President of Lilly USA and Global Customer Capabilities, Jake Van Naarden, President of Loxo Oncology and Head of Business Development, Patrik Jonsson, President of Lilly International, and Kenneth Custer, President of Lilly Cardiometabolic Health. We're also joined by Mark Heiman, Susan Hedlund, and Wes Tull of the investor relations team. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to several factors, including those listed on slide four. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent filings with the SEC. Information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decisions. As we transition to our prepared remarks, please note that our commentary will focus on our non-GAAP financial measures. Now I'll turn the call over to David Ricks. David Ricks: Thank you, Mike. 2025 was a strong year for Lilly. We delivered robust revenue growth, advanced our pipeline, expanded our manufacturing footprint, and helped over 70 million people around the world. The 2025 full-year revenue grew 45% compared to 2024, driven by our key products. We launched new medicines like Inlureo, secured new indications for Omvo and Jayperca, and entered new markets as we completed the international rollouts of both Mounjaro and Kisanlo. We generated positive clinical data in more than 25 phase three trials, including registrational trials to support two new incretins, Orforglipron and Retatrutide. We submitted Orforglipron for obesity in the US and in more than 40 countries globally. We started 14 new phase three programs over the past few months, including Oloralintide and Brenepatide, and we have one of the largest clinical stage pipelines in our company's history. We executed 39 business development transactions across all our therapeutic areas and added multiple clinical stage assets through transactions, including Scorpion, FERV, SiteOne, Adverum, and the upcoming acquisition of Ventix. We continue investing in artificial intelligence to discover and develop new medicines. In addition to our new supercomputer, we recently announced a new collaboration with NVIDIA to open a co-innovation AI lab. This project will combine Lilly's scientific expertise with NVIDIA's leading technology to accelerate drug discovery. We progressed our manufacturing expansion efforts and announced plans to build multiple new manufacturing sites in the US and Europe. We increased our manufacturing capacity and began making medicine at our new sites in Wisconsin and North Carolina. We exceeded our goal to produce 1.8 times the number of incretin doses in 2025 compared to 2024. Since 2020, we've committed over $55 billion, the largest manufacturing build-out in company history. We announced an agreement with the US government to provide access to obesity medicines to millions of Americans with insurance through Medicare and Medicaid. We're proud of our ability to bring these important medicines to patients at a cost of only $50 per month out of pocket. The number of people engaging with our US direct-to-patient platform reached 1 million patients in 2025. Our most popular offering, the Zepbound self-pay vials, now makes up one-third of new patient starts who start on any brand of obesity medication. Lastly, we distributed $1.3 billion in dividends and $1.5 billion in share repurchases. We also strengthened our leadership team with the addition of two new executives, and I welcome both Carole Ho and Anne White to this call for the first time. Now I'll turn it over to Lucas to review our Q4 results and share details on the 2026 guidance. Lucas Montarce: Thanks, David. We delivered robust financial performance in 2025. Our full-year revenue of $65.2 billion increased by 45% compared to 2024, and earnings per share grew by 86% to $24.21. Q4 financial performance was also strong, as shown on slide seven. Revenue grew 43% compared to Q4 2024, driven by our key products. Gross margin as a percentage of revenue was 83.2%, consistent with Q4 2024. Favorable product mix and improved production costs were offset by lower realized prices. R&D expenses increased by 26%, driven by continued investments in our early and late-stage portfolio. Marketing, selling, and administrative expenses increased 29%, driven by promotional efforts to support our ongoing and future launches. Our non-GAAP performance margin was 47.2%, an increase of 4.2 percentage points compared to Q4 2024. Our effective tax rate was 19.7%, and earnings per share were $7.54, inclusive of $0.52 of acquired IPR&D charges. This compares to earnings per share of $5.32 in 2024, which included $0.19 of acquired IPR&D charges. On slide eight, we quantify the effect of price, rate, and volume on revenue. US revenue increased 43% in Q4, driven by volume growth of Mounjaro and Zepbound, partially offset by a 7% decline in price. Revenue growth was strong outside the US as well, driven by double-digit volume growth in Europe, Japan, and China. In the rest of the world, volume doubled, driven by the launch of Mounjaro in new markets. On slide nine, we provide an update on the performance of our key products, which contributed over $13 billion to revenue this quarter and grew by 91% compared to Q4 2024. Beginning with neuroscience, Kisanlo recently became the US market leader in the amyloid-targeting therapy space, with more than 50% share of total prescriptions. Revenue was $109 million, driven by overall market growth, increased awareness and diagnosis of Alzheimer's disease, as well as increased prescriber adoption based on Kisanlo's clinical profile. In immunology, Eblis delivered solid performance in atopic dermatitis, where use total prescriptions increased 25% compared to Q3 2025. Omvo continued its uptake, and global revenue increased 55% compared to the fourth quarter in 2024. Jayperca posted another strong quarter of sales performance, and global sales grew 30% compared to Q4 2024. We recently received an expanded US indication to include people previously treated with a covalent BTK inhibitor, significantly increasing the number of people who can benefit from this medicine. Verzenio global sales increased 3%, driven by volume growth outside the US. Verzenio remains the market leader in its early breast cancer indication; however, overall market penetration has reached a plateau, as reflected in US trends. Finally, in cardiometabolic health, Zepbound and Mounjaro both delivered strong results. Outside the US, positive uptake trends of Mounjaro continued, particularly in our newest launch countries in Latin America and Asia. We have launched in all major markets and are now the incretin share of market leader outside the US as well. Moving to the US, as shown on slide 10, we combine incretin analog market continued its robust growth trajectory, with total prescriptions increasing by 33% compared to Q4 2024. As market penetration within the population of people with obesity is only mid-single digits, we believe there is room for market expansion and sustained market growth in the quarters and years to come. We have Zepbound revenue more than doubled compared to Q4 2024. Zepbound continues to be the market leader in the branded obesity market with nearly 70% share of new prescriptions. US total prescription growth for Zepbound was robust, both in auto-injectors and vials. We are encouraged to see sustained growth uptake of Zepbound vials, which represented approximately one-third of total Zepbound prescriptions and nearly 50% of new Zepbound prescriptions in Q4. In the US, Mounjaro expanded market leadership in the type two diabetes incretin market, exiting the quarter with over 55% of new prescriptions. On slide 11, we provide an update on capital allocation. Moving to slides 12 and 13, we share our 2026 financial guidance and highlight key factors that will impact our financial outlook. We expect revenue to be between $80 billion and $83 billion. The midpoint of our revenue range is an increase of 25% compared to 2025. We expect to deliver industry-leading volume growth driven by our key products, partially offset by lower realized prices. Price is expected to be a drag on growth in the low to mid-teens. Three factors will impact US price: the government access agreement for obesity medicines, updated direct-to-patient Zepbound pricing, and lower Medicaid prices for later life cycle medicines. Pricing outside the US will be impacted by Mounjaro's inclusion on China's National Reimbursement Drug List for type two diabetes. We believe these price concessions will be more than offset by increased volume over time as we expand the number of people who can benefit from Lilly medicines. As I shared earlier, we continue to see robust growth trends in the US incretin analogs market, and we expect a similar trajectory to continue in 2026. As seen with other new launches, we expect the launch of oral GLP-1s to expand the addressable market. We expect Orforglipron to launch for chronic weight management in the US during 2026 and to launch in most international markets during 2027. We anticipate new Medicare access to obesity medicines will become effective no later than July 1, 2026. While we anticipate a reduction in Medicaid access in 2026 due to key states like California removing obesity coverage, we expect new states will add coverage for people with Medicaid in 2027. Within revenue, we anticipate Eblis, Jayperca, Inlureo, Kisanlo, and Omvo will all contribute to growth, whereas late lifecycle products like Trulicity, Talsa, and Verzenio are expected to be flat or decline. We expect our non-GAAP performance margin to be between 46% and 47.5%. Across the P&L, there are pushes and pulls that we anticipate will impact our performance margin expectations. We expect gross margin will be relatively stable to slightly down compared to Q4 2025, as favorable product mix and increased productivity are offset by price and new facilities coming online. Consistent with our strategy to invest in innovation, we expect R&D expenses will scale up in 2026. We have 36 active Phase III programs in our pipeline and plan to initiate even more new programs in 2026. With one of the largest clinical stage pipelines in company history, we are investing to maximize the impact of these potential new medicines. Marketing, selling, and administrative expenses are expected to grow as we invest to support new launches across therapeutic areas. As we launch new medicines, we will fully invest in variable expenses while controlling fixed costs by leveraging our existing commercial footprint. We expect earnings per share of between $33.50 and $35, setting us up for another year of strong top-line and bottom-line growth. Now I'll turn the call over to Daniel to highlight our progress on R&D. Daniel Skovronsky: Thanks, Lucas. Since our last R&D update, we've made significant progress in R&D. I'll share updates by therapeutic area, including select data highlights from recent phase three announcements, a final update on key events, and the potential 2026 outcomes on which we are now focused. Beginning with immunology, just a few weeks ago, we released top-line data from Together PSA, a randomized controlled phase 3b trial evaluating ixekizumab plus tirzepatide as compared to ixekizumab alone in people with psoriatic arthritis and obesity. This first-of-its-kind study assessed whether concomitant treatment with an incretin could deliver additional efficacy when added to an existing immunology treatment. As shown on slide 14, the combination not only achieved its primary endpoint of at least 50% reduction in psoriatic arthritis activity plus 10% weight reduction, but also showed a 64% relative increase in the proportion of patients achieving a 50% reduction in psoriatic arthritis symptoms compared to ixekizumab alone. An important finding from the study was the potential effect of tirzepatide when added to ixekizumab on psoriatic arthritis symptoms via both weight-dependent and weight-independent mechanisms. These results further support existing treatment guidelines for psoriatic arthritis that recommend treatment of comorbid obesity and shed further light on how incretins may have a positive effect on other diseases independent from weight loss. We look forward to publishing these data in more detail in a peer-reviewed journal and presenting them at an upcoming medical meeting. With this important result in hand, we are encouraged about our ongoing trial studying ixekizumab and tirzepatide in psoriasis. In two separate studies of mirikizumab, receptor, Crohn's disease, and ulcerative colitis, we also advanced our new GIP GLP-1 agonist, presenphatide, into a phase II study of asthma, another serious immunologic disease that we think may benefit from dual GIP GLP-1 therapy. Moving to oncology, the FDA granted full approval for pirtobrutinib, including the expanded indication for treatment of adults with relapsed or refractory CLL, SLL who have previously been treated with a covalent BTK inhibitor. This label update significantly increases the number of eligible patients and allows physicians to extend the use of BTK inhibitors to control disease longer. We also shared detailed data from two phase three pirtobrutinib trials, BREWN CLL313 and Bruin CLL314. As shown on the left side of slide 15, in Bruin CLL313, pirtobrutinib improved progression-free survival, reducing the risk of progression or death by 80% versus bendamustine plus rituximab in treatment-naive CLL, SLL patients. This risk reduction is among the most compelling ever observed for a single-agent BTK inhibitor in a frontline CLL study. In the second study, shown on the right side of slide 15, Bruin CLL314, pirtobrutinib was compared to a covalent BTK inhibitor, ibrutinib, in treatment-naive or BTK inhibitor-naive patients. The study met the primary endpoint of non-inferiority of overall response rate. And while progression-free survival data were immature, they trended in favor of pirtobrutinib. Notably, in the early analysis of the treatment-naive subpopulation, as shown here, pirtobrutinib reduced the risk of progression or death by 76% compared to ibrutinib. Both datasets were presented at the American Society of Hematology Annual Meeting and were simultaneously published in the Journal of Clinical Oncology. We submitted these results to regulatory authorities to potentially enable the use of pirtobrutinib in earlier lines of therapy. Later this year, we expect results from an additional phase three pirtobrutinib trial, Bruin CLL322. This trial evaluates pirtobrutinib in addition to a fixed-duration regimen of venetoclax and rituximab in previously treated CLL, SLL patients. If successful, this could form the basis for an additional regulatory submission later this year. We also presented updated combination data of Imlunestrant with Abemaciclib in metastatic breast cancer, which showed additional benefit compared to Imlunestrant alone. We submitted these data to regulators and are seeking to expand the Imlunestrant label. While we're encouraged by these new data for patients with metastatic breast cancer, we're even more excited about the opportunity for Imlunestrant in adjuvant breast cancer. Our ongoing 8,000-patient adjuvant breast cancer trial, EMBER-4, is fully enrolled and will be the next phase three readout of an oral SERD for patients with early breast cancer. In other oncology updates, we advanced sofetibart, mepetekcan, our next-generation antibody-drug conjugate targeting folate receptor alpha, into phase three testing for women with platinum-resistant ovarian cancer. We believe this program has the potential to benefit a broad population of patients with ovarian cancer, regardless of folate receptor alpha expression level. It may also offer improved tolerability compared to currently available antibody-drug conjugates. We plan to initiate a study in platinum-sensitive ovarian cancer later this year. We're excited that this medicine received breakthrough therapy designation from the FDA earlier this year. We also expect to initiate new phase three programs for two other oncology small molecules. The first is tirsolecimid, our mutant-selective PI3 kinase alpha inhibitor. We believe this program could represent the next generation of PI3 kinase alpha targeting agents by selectively targeting the pathway in cancerous but not in healthy cells, thus overcoming a key limitation of currently available medicines. This approach could potentially offer better disease control through deeper pathway inhibition, as well as improved tolerability. The second is vepubratinib, an FGFR3 inhibitor we believe may improve on the tolerability profile of existing agents and enable combination therapy in first-line metastatic urothelial cancer. In neuroscience, we began several trials exploring the use of incretins to treat substance use disorders and psychiatric conditions. Last quarter, we announced plans to initiate a phase three program of brenepatide in alcohol use disorder. Since then, we've begun dosing patients in this trial, and we have also launched additional brenepatide phase two trials in tobacco use disorder and bipolar disorder. We expect to initiate several more phase II and phase III trials in 2026, exploring how brenepatide may be able to treat other conditions, including a phase three trial for major depressive disorder, testing if brenepatide can prevent relapse of disease. In Alzheimer's disease, we continue to look forward to the results from Trailblazer ALS3, our study of donanemab in people with normal cognition but a positive blood test for Alzheimer's disease. This trial screened volunteers with a blood test for p-tau and randomized participants to a nine-month course of treatment with donanemab. By moving earlier in disease, even prior to individuals having any objective symptoms of Alzheimer's disease, the goal is to reduce the risks of them ever developing any impairment due to Alzheimer's. The primary completion is projected for 2027; however, the study will read out when the target number of progression events are accrued. Moving to cardiometabolic health, we had another busy quarter. We were excited to announce positive top-line results from the INTEIN VANTAIN trial, evaluating orforglipron for weight maintenance. This unique phase three trial was designed to answer a common question from doctors and patients: Can people successfully maintain weight loss achieved on the maximum tolerated dose of injectable incretins by switching to an oral GLP-1 therapy? Participants in ATTAINMANTAIN previously on injectable semaglutide or tirzepatide then switched to orforglipron or placebo. As shown on slide 16, orforglipron helped people maintain weight loss that they had achieved on injectable therapies, and the study met all primary and secondary endpoints. People who switched from semaglutide to orforglipron maintained their previously achieved weight loss, with an average difference of just 0.9 kilograms. This suggests that as an oral GLP-1 therapy, orforglipron may provide similar weight loss maintenance as the maximum tolerated dose of injectable GLP-1 therapy semaglutide. As expected, those who switched from maximum tolerated doses of the dual GIP GLP-1 agonist tirzepatide to oral GLP-1 inhibitor maintained much of their weight, although with a higher average difference of five kilograms. We expect to share detailed results later this year. Other orforglipron updates since our last call include submission of orforglipron to the FDA for treatment of obesity, with approval expected in Q2 of this year, submission of orforglipron for obesity and for type two diabetes in a number of other countries around the world, initiation of orforglipron phase three cardiovascular outcomes trials, and initiation of orforglipron phase three for treatment of peripheral artery disease. We look forward to completing the US regulatory submission of orforglipron for type two diabetes later this year after the Achieve IV trial is complete. We also announced new data for our GIP GLP-1 glucagon triple agonist, retreutide. In the first phase three trial to complete, TRIUMPH-4, we evaluated retreutide in adults with obesity and knee osteoarthritis. Participants taking retreutide 12 milligrams lost an average of 29% of their body weight at 68 weeks. Many people will not need this level of weight loss, but we see an important potential role for molecules such as retreutide in helping people with higher baseline BMIs or with more severe obesity-related comorbidities. Accordingly, we were pleased to see that retreutide reduced WOMAC pain scores by an average of 4.5 points, representing a 76% reduction in pain, and this was accompanied by a significant improvement in physical function. Impressively, more than one in eight retreutide-treated patients were completely free from knee pain at the end of this trial. The safety profile was generally consistent with other incretins, with gastrointestinal events being most common. We observed higher discontinuation rates due to adverse events in people with lower baseline BMI, including participants who discontinued for perceived excessive weight loss. As shown on slide 17, patients with a baseline BMI of 35 or higher, which represented 84% of the trial population, had discontinuation rates due to adverse events consistent with those observed in clinical trials of other injectable incretins. We expect to read out six additional phase three trials for retreutide in 2026, including the remainder of the core registration package for both the TRIUMPH obesity program and the Transcend type two diabetes program. Also in Q4, we started a phase three trial in high-risk metabolic dysfunction-associated steatotic liver disease, MACELD, studying retreutide as well as tirzepatide for treatment of this disease. We're planning to submit the results of the Core TRIUMPH program in 2026 to support applications for overweight and obesity, obstructive sleep apnea, and osteoarthritis of the knee for retreutide. Based on the data we've seen so far, depending on these upcoming data readouts, we believe retreutide may have the potential to become a new treatment option for patients with significant weight loss with certain complications. Moving to tirzepatide, we're pleased that Zepbound was recently approved in the US in a multi-use QuickPen device. This presentation of tirzepatide is already available in many countries around the world, a convenient offering that includes four doses in a single pen. We look forward to launching this new Zepbound offering in the US within the next few weeks. Slide 18 shows pipeline movement since our last earnings call. Slide 19 shows the full list of key events achieved in 2025. Notably, we achieved positive outcomes for nearly all R&D key events in 2025, a rare set of results in this industry. Slide 20 shows key events expected in 2026, with potential for data readouts and regulatory actions across our therapeutic areas. In addition to the substantial progress we're making in immunology, neuroscience, and oncology, I want to take a moment to reflect on our growth in the incretin and amylin portfolio. Of course, there's been a lot of focus on tirzepatide and orforglipron, which I think is well warranted. Now, excitement is growing for retreutide as well. I see each of these as an example of a leading molecule within its own class. Behind these three incretin innovations, we have a robust pipeline of further inventions with potential to address patient needs, including our selective amylin agonist, oloralintide, which is currently in phase three, as well as our next-generation GLP-1 dual agonist, brinepatide, which is also now in phase three trials. Behind these, we have a number of earlier-stage molecules that could similarly lead within new mechanisms and new classes of therapeutics for the treatment of obesity. We've built a substantial scientific lead in this field, and we aim to widen the distance through our R&D. This past year was busy and productive, and we expect more of the same in 2026 as we continue to create meaningful medicines on behalf of the patients that need us. I'll now turn the call back to David for closing remarks. David Ricks: Thanks, Daniel. We're pleased with all the progress in Q4 and throughout 2025. It was a year of strong execution for Lilly. We delivered exceptional business results, invested in our future, and helped millions of people around the world improve their health. Now I'll turn the call over to Mike to moderate the Q&A session. Mike Czapar: Thanks, David. We'd like to take questions from as many callers as possible. So consistent with prior quarters, we will respond to one question per caller and end the call promptly at eleven. If you have more than one question, you can reenter the queue, and we will get to your question if time allows. Paul, please provide the instructions for the Q&A session, and then we are ready for the first caller. Operator: Thank you. At this time, we'll be conducting a question and answer session. If you have any questions, please press 1 on your phone at this time. We ask that participants limit themselves to one question on today's call. If you do have a follow-up question, please rejoin the queue by pressing 1 at any time. We also ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Operator: And the first question today is coming from Evan Seigerman from BMO Capital Markets. Evan Seigerman: Hi, guys. Thank you so much for taking my question. Congratulations. A year from now on this call, I'd love for you to characterize what you would ask for a good product launch. Specifically, what are some of the metrics that you're looking to meet? I know you're not gonna give guidance, but some qualitative kind of commentary would be most helpful. Thank you. Mike Czapar: Great. Thanks for the question, Evan. It cut out a little bit, but I think you were just asking about a year from now, what are some things we'll be tracking on for orforglipron? So I think for that question, maybe we'll go to Kenneth to maybe talk about some things that we'll be looking at. Kenneth Custer: Sure. Thanks for the question about orforglipron. We're really excited to have this medicine submitted not just in the US but now 40 countries and looking forward to launches beginning this year. You know, as I think about success factors for us going forward maybe towards the end of the year, looking at a few things. First of which is just market expansion. We're very encouraged by what we're seeing with oral Wegovy as it validates our belief that there's a substantial number of people with overweight and obesity who have been sitting on the sidelines waiting for an oral option. It looks like these are mostly new starts. That means it's expanding the market, and that's good news for Lilly. We feel really good about the competitiveness of the profile. We've talked about that a lot on previous calls. I think we're at the point now where we're gonna pivot to how do the real-world results play out. We think this is going to be about patient satisfaction, and our profile, which is simple with no restrictions on food and water intake, could make a big difference in the real world. So we're excited to get off to the races here, see this market expand, and really look at overall patient satisfaction scores and real-world efficacy with these agents. Thanks. Mike Czapar: Great. Thank you, Kenneth. Paul, ready for the next question. Operator: The next question will be from Courtney Breen from Bernstein. Courtney, your line is live. Courtney Breen: Hi, everyone. Thanks so much for taking the question today. Just building on the question around orforglipron, you mentioned that you have submitted in 40 countries. Traditionally, you tend to think about kind of a full-year cycle for most approvals in many countries around the world. Can you just help us understand if you're anticipating any kind of accelerated pathways that you might be able to access in these ex-US countries that would enable launch in 2026 for orforglipron products similar to some of the pathways that are available in the US, and you've been able to gather one of them? Thank you so much. Mike Czapar: Great. Thanks, Courtney. And so for the question about how we're thinking about OUS regulatory approval timelines, we'll go to Patrik. Patrik Jonsson: Thank you very much, Courtney. As I think we shared in the prepared remarks, outside the US, it's mainly going to be a matter of launching in 2027, with a few exceptions. There will be a few markets late in 2026, for countries like, for example, the UAE, that might reference an FDA-approved orforglipron. So mainly a play for late 2026, 2027 for international markets. Mike Czapar: Thank you, Patrik. Next caller, please. Operator: The next question will be from Christopher Schott from JPMorgan. Christopher, your line is live. Christopher Schott: Great. Thanks so much for the question and congrats on all the progress here. Can I just ask about international Mounjaro? This seemed like this was a very significant upside driver, at least relative to Street numbers in 2025. Just interested in your thoughts on the ramp from here as we think about the $3.3 billion 4Q result you just reported. I know last year was about a lot of new market launches. Now that you're in those markets, how do we think about sequential growth from these levels? Thank you. Mike Czapar: Great. Thank you, Christopher. The question on OUS Mounjaro performance and the ramp from here, we'll go back to Patrik. Patrik Jonsson: Thank you very much, Christopher. Well, you are right. Q4 was a very strong quarter for Mounjaro outside the US, and as Lucas referred to, we became the share of market leader for total incretins also internationally. When you look at 2026, I would just reflect back on 2025. We had major launches more or less in every quarter with the exception of Q4. So I would actually look for Q4 as a base for 2026 growth. Also consider that there was a slight impact in Q4 driven by the NRDL listing in China effective January 1, 2026, which slightly impacts the purchasing pattern in China in December. So see Q4 as a base for 2025 and 2026. Moving forward, our business now OUS is 75% chronic weight, and that's pretty much out of pocket. 25% is reimbursed for type two diabetes. So the priorities for 2026 will pretty much be market expansion, driving more penetration through patient activation when it comes to chronic weight management. And for type two, we are leaning in to gain reimbursement in more countries. We're currently reimbursed in nine, with the last one being China with the NRDL. And we will do that with a maintained discipline in terms of pricing. So I think overall, we are well positioned for continued growth for Mounjaro outside the US in 2026. Mike Czapar: Thanks, Patrik. Next question, please, Paul. Operator: The next question will be from Seamus Fernandez from Guggenheim. Seamus, your line is live. Seamus Fernandez: Great. Thanks so much for the question. So I'm actually gonna ask a non-obesity question. So while you can't take your eye off the ball on obesity, just wondering why you couldn't attack immunology broadly in the same way as you have obesity, investing earlier, faster, and more aggressively given the substantial generation that we're starting to see from the overall portfolio. What are the issues that would prevent you from doing something like this, whether it be by your internal efforts or perhaps a more aggressive business development approach, just because it seems like this is a cash-driven opportunity where there's a lot of spend, but a huge amount of upside opportunity with a $170 billion total market out there to access. Mike Czapar: Great. Thanks, Seamus, and extra credit for the non-obesity question. We'll go to Daniel to talk about our approaches on attacking immunology early. Daniel Skovronsky: Yeah, no, thanks, Seamus. It's a great question. And actually, I'll come to immunology in a second, but let me just first point out that across our non-obesity work, which is of course, oncology, neuroscience, and immunology, we have our thumb on the scale for investment decisions. We see lots of good opportunities in those areas, and we're reinvesting some of the proceeds from the obesity opportunity to make sure we can further accelerate growth in those promising areas. So today you heard me talk a lot about the oncology portfolio, which I think is really blossoming right now. I have high hopes for immunology behind it. I think there's really promising breaking science, including treating immunologic diseases earlier. And our research labs are doing everything in our power to harness that science. I talked a little bit about some trials that are ongoing for incretins in immunology, which I think is promising. As are a number of other combination therapies that we now have in our late clinical trials. So I'm excited both early and late. Won't give you a Great. Thank you, Daniel. Next caller, Paul. Operator: The next question will be from Terence Flynn from Morgan Stanley. Terence, your line is live. Terence Flynn: Great. Congrats on the quarter. Had a question on the guidance high level, Lucas. Just wondering if you can talk about what's embedded for Medicare volume ramp in the back half of the year and how that might drive the range we're seeing on the revenue side. And then if that's had any impact on employer opt-ins on the commercial side, I know you guys previously talked about how that might have some impact to get some of the other employers over the hurdle on coverage. So just wondering if you're starting to see that yet. Mike Czapar: Great. Thanks, Terence, for the question on guidance and kind of Medicare ramp in the back half of the year as well as if there's any commercial opt-in. We'll go to Lucas. Lucas Montarce: Yeah. Terence, thank you for the question. Maybe starting with Medicare. As highlighted in the call text, basically, we are expecting that access to be granted no later than July 1. And as I mentioned all along, this will take time to build over time. But we feel very, very positive about the opportunity to bring anti-obesity medications to patients in Medicare. As I mentioned, again, the co-pay of $50 for the patients would be a compelling value proposition. There is a bolus of patients that we have nowadays in the Lilly Direct business that we believe are also Medicare patients. So expect that bolus, I think, is between 10-20% will actually move into the Medicare space. I think that will happen relatively fast, and we will continue to build on top of that. So that's kind of the drivers to start to think about, again, the penetration, but we'll build over time. Think about, again, more about the size of the opportunity in Medicare, thinking about 2027 as well. The second part of your question was about the employer opt-in. Ilya is right next to me here as well to talk about it. But as I mentioned, of course, again, the practice on physicians prescribing this medicine will become more natural, more broader in the anti-obesity medications. And physicians will be, again, more broadly basically also thinking about prescribing this in commercial. How that will then impact the employer side, I think the message is clear. Right? Again, there is a clear recognition of the class as a chronic disease, and basically that will, in my eyes, propel also employers also to think about, again, this class and also employees to look for these class of medicines as well to be covered as well. But I don't know if there's anything else that you would like to add, Ilya. Ilya Yuffa: Yeah. Maybe just some additional context, Terence, on commercial opt-in. Obviously, we start the year roughly on balance, stable. There are some employers adding coverage, some removing some coverage. But putting additional focus in the employer space. We've stood up a team and also working with a number of third parties to actually provide alternative access channels to have some flexibility in design and transparency in the pricing. And the initial conversations and feedback have been positive. Of course, a lot of those decisions are for the following year. We anticipate having some of those decisions and increased coverage over time in the employer space as we head into the back end of this year and mostly into 2027. Mike Czapar: Great. Thanks, Lucas and Ilya. Next question, please, Paul. Operator: The next question will be from Geoffrey Meacham from Citi. Geoffrey, your line is live. Geoffrey Meacham: Great. Good morning, everyone. Thanks for the question. Congrats on the quarter. Daniel, I had one for you. The Together results are really super interesting. You're thinking about the potential for combo therapies with Zepbound and either I&I or oncology or neuro? I wasn't sure what drives the investment priorities, whether it's the drug or the indication, and if there's a clear path to labeling claim. Thank you. Daniel Skovronsky: Yeah. Thanks, Geoffrey. Again, another non-obesity question. Lots of extra credit on this call. We'll go to Anne to talk about some of the combination therapy approaches and some of the strategy there. Anne White: Sure. We see this as a significant opportunity. More than a billion people worldwide have immune diseases like atopic dermatitis, psoriasis, IBD, and asthma. Patients who have both immune diseases and obesity tend to have a higher disease burden. So we're really excited about the opportunity to find new ways to combat the underlying inflammation of these diseases and potentially unlock better, longer results for these patients. So we have broad efforts underway to look at additional combinations. We have the Together PSO trial evaluating the use of Taltz and Zepbound for adults with moderate to severe plaque psoriasis and obesity or overweight. Expect those top-line results in 2026. We're also looking at the Together Amplified PSA and Together Amplified PSO studies assessing the effectiveness of adding Zepbound after starting Taltz for adults with PSA and moderate to severe plaque psoriasis. We also have the Phase IIIb commit studies in both ulcerative colitis as well as Crohn's disease, where we're looking at the concomitant use of Omvo and Zepbound and addressing outcomes for those patients. And then the phase two study of brenepatide for people living with uncontrolled asthma. So we're excited to continue to pursue the applications of incretins and unlocking better outcomes for people with immune diseases. Mike Czapar: Great. Thanks, Anne. Thanks for the question. Next caller, Paul? Operator: The next question will be from Asad Haider from Goldman Sachs. Asad, your line is live. Asad Haider: Great. Thanks for taking the question and congrats on all the progress. Back to obesity with apologies, Mike. Maybe just given the focus on pricing dynamics, can you just talk about what you're seeing in the contracting environment broadly speaking across the incretin portfolio? And also, what's your view on pricing elasticity in the cash channel as the year progresses? Thank you. Mike Czapar: Yep. Asad, thanks for the question. To go through kind of pricing in the US and price elasticity, we'll go to Ilya. Ilya Yuffa: Yeah, sure. Thanks for the question. Maybe just for the first part in terms of the commercial access and contracting. Obviously, we start the year with similar coverages as we ended 2025. We continue to have coverage for Zepbound in two of the three large PBMs. We continue the conversations around expanding access in those PBMs for obviously the introduction of orforglipron in Q2. So we're in the discussions there. From a pricing standpoint, we've been pretty transparent on pricing for 2026 as it relates to Part D, as well as our direct-to-patient pricing, which we implemented in December. And then we have ongoing conversations with improving and continuing access in the commercial segment. In terms of price elasticity, we've seen over time, both in the US and outside the US, that affordability and opportunity on the entry as well as predictability of cost for patients matter. That's why the out-of-pocket in Part D of $50 is an affordable option, as well as we've seen an increase in utilization of even Zepbound vial at the end of the year when we implemented improved entry price of $2.99 for Zepbound. So we continue to see that, and obviously, we're seeing significant and encouraging uptake in the oral market, which is expansive and bringing new patients to obesity treatment, and we're excited to launch orforglipron soon with the entry price being similar to oral semaglutide. Mike Czapar: Great. Thank you, Ilya. Ready for the next question, please, Paul. Operator: The next question will be from Mohit Bansal from Wells Fargo. Mohit, your line is live. Mohit Bansal: Good. Thank you very much for taking my question. So a strategic one. So I would love to understand what is your latest thinking on the importance of getting obesity-related indications on the label because we kind of get a little bit of mixed messages when we talk to payers because they kind of think that these drugs are just for obesity for now. With NASH, there's coming for obesity. You know, with NASH, but do you think this could be an over time long-term differentiator here? Now that you are going into indications like I&I as well at this point? Thank you. Mike Czapar: Thanks for the question, Mohit. So to kind of think about and address our strategy on obesity and expansion of indications more broadly, we'll go to Ilya to go, and then Kenneth, you can add if you have any other development thoughts. Ilya Yuffa: Sure. Thanks, Mohit, for the question. You know, what we've seen thus far, even with Zepbound and looking at the Medicare population around sleep apnea, we're seeing an increase in utilization and thinking about obesity beyond weight and looking at outcomes related to obesity. And there's a lot of comorbidities, as Daniel had mentioned, even in our psoriatic arthritis trial with Taltz. When we talk to employers as well as payers, they think about the multiple aspects of obesity and what that means for coverage and cost long-term. So we do see a growing body of evidence to support covering obesity medications for the population and having a positive impact on public health beyond just weight. Kenneth Custer: And so thanks for the question on other potential avenues of exploration as it relates to complications and comorbidities. As our incretin portfolio and amylin portfolio expands, we're always facing the question of do we spend our resources replicating findings from previous incretins on comorbidities and complications where we know these drugs are efficacious, or do we push into new areas and generate new evidence? You've probably seen with orforglipron, we're actually starting to explore new ideas like stress urinary incontinence, peripheral artery disease, and hypertension. We'll continue to look for new opportunities in incretins in addition to what we've talked about in the I&I space. But we do also understand that with new molecules and new mechanisms, it's important to generate some data to continue to give prescribers and patients confidence that these medicines preserve the benefits of the previous class of medicine. So we continue to do that too, but very pleased, I think, with our overall balance of investment across the portfolio in both sort of established and emerging mechanisms of diseases of interest. Mike Czapar: Right. Thank you both. Ready for the next question, please, Paul. Operator: The next question will be from Umer Raffat from Evercore. Umer, your line is live. Umer Raffat: Thank you, guys. Pay, I feel like, has been a very important driver of growth among other drivers. And I'm just trying to think out loud what the long-term implications of that could look like, especially with all the competition coming. On the one side, obviously, there's gonna be tremendous brand loyalty, which is very important in cash pay. But on the other side, traditional PBM contracts and rebate walls may not apply. I'm just trying to think out loud how you're thinking about share retention and cash pay in the long run. Thank you. Mike Czapar: K. For the question, Umer. To discuss a bit about sort of the cash pay dynamics, I'll ask actually, Ilya and Patrik to discuss how it plays out internationally and what is going on in the US. So Patrik, you wanna start first? Patrik Jonsson: You know what? I think what we have been building the last couple of years, learning a lot from the US, has really been the consumer centricity. And I think some of our building platforms are on the lines as we've done in the US with Lilly Direct, where we are providing opportunity for patients both to seek start and to stay. I think that's a must that we need to continue to develop. Ilya Yuffa: Yeah. Just to add on, I think we've learned quite a bit. There are frictions in the system for a number of diseases in the US and globally. Obviously, we've seen that happen in obesity. What we've built within Lilly Direct has a pretty significant scaled direct-to-consumer platform that helps address some of the frictions. Of course, we can continue to think about how we evolve that consumer experience and make this more seamless, at the same time growing access across the different segments. And so both will play an important role, and we continue to look for ways for us to scale as well as improve on the experience over time. Mike Czapar: Great. Thanks both for the comments. Let's go to the next question, please, Paul. Operator: The next question will be from Alexandria Hammond from Wolfe Research. Alexandria, your line is live. Alexandria Hammond: Hey, guys. Thanks for taking the question. One on oloralintide. So the weight loss results you guys presented last year look really strong. But given prescribers and patients seem more interested in more favorable tolerability, how should we think about the potential for lower doses of oloralintide and lower dose combos of tirzepatide to potentially achieve a titration-free placebo-like with weight loss, let's say, comparable to monotherapy GLP-1? Thank you. Mike Czapar: Thanks, Alexandria. We'll go to Kenneth to talk about the oloralintide development strategies and different ideas we're assessing. Kenneth Custer: Yeah. Thanks for the question, Alexandria, on oloralintide and future avenues. We were really excited about the data we shared at Obesity Week where patients achieved up to 20.1% weight loss for oloralintide with excellent tolerability that was improved with titration. In fact, in the 3.9 milligram titration group, I think we only had one incidence of vomiting out of more than 50 patients. So that comparison we think is really favorable versus the existing incretin class. So we see a big opportunity for oloralintide in patients who maybe just can't tolerate incretin. We know that 5 to 10% of patients in our trials tend to discontinue on the incretin class, suggesting a pretty big opening given the size of the obesity market. Of course, we're also interested in thinking about oloralintide in combination with other mechanisms of action, and what you alluded to with GIP plus GLP-1 plus amylin as a very sort of physiological construct. Three nutrient-stimulated hormones, and we've shared that we are exploring that idea in the clinic. Nothing to share yet, but stay tuned maybe towards the end of this year. We're testing other possible combinations, including a GIP agonist mecupatide with oloralintide as well, and so really just trying to understand the range of options, and like you said, is there really an optimal very simple permutation of mechanisms that could allow minimal or no titration with competitive efficacy. Mike Czapar: Thank you, Kenneth. Paul, ready for the next question, please. Operator: The next question will be from James Shin from Deutsche Bank. James, your line is live. James Shin: Thanks, guys. Hey, good morning. One for David. For CMS' upcoming obesity demonstration, David, can you share any similarities or differences you foresee with what you went through previously during the Part D senior savings model for insulins $35 co-pay rollout? Thank you. Mike Czapar: Great. Thanks, James. And I will welcome David to get in the box score for the Q&A. Hey. Did share any similarities on the CMS obesity pilot versus the Part D senior savings? David Ricks: Yeah. I mean, I think there are quite a number of analogies to draw. I mean, first, arriving at what would be perceived as a relatively low out-of-pocket is an important fact by itself. And while we know in this case, we're not moving from high out-of-pocket to low only, moving from covered, plus low out-of-pocket. And I think patients who may be using GLP-1 and the data we have is that seniors are using these drugs at a lower rate than the general population, maybe because of income in particular, will benefit from that lower cost every month of $50. I think that's very expansionary to the class. And we'll draw a lot of interest from primary care prescribers who are concerned about the comorbidities of kind of lifetime overweight and obesity, which tend to manifest after 65 at a much higher rate. The second thing is the consistent variance. And I think when we negotiated this with the government, we wanted to make sure that we weren't just building a program that went into the normal Part D math in terms of out-of-pocket cost, but had a kind of that consistency. Independent of the absolute amount people pay, they get very frustrated with different amounts month to month. So I think that's another important feature. Thirdly, like the insulin deal, it's open to all innovators. And I think that's an important concept that the doctor and the patient choose the best therapy. Which could be one from us, one from our competitor. It could be oral. It could be injectable. It could include future therapies from Lilly or others. Like retreutide or oloralintide when they're approved. So I think that also has a parallel to what we do with insulin. If you look back at that insulin pilot, utilization rates increased pretty dramatically in Part D and frustration levels with that issue basically disappeared. I think this program has similar promise to be both enormously popular and drive a lot of new uptake. As I said, it's suppressed in the senior population. Probably benefit most, at least in the short term, from GLP-1 therapy. And I believe, and I know that CMS does as well, that within a few years, we'll demonstrate significant cost savings to the Medicare program. So that is different than the insulin part. But that's associated with, you know, new products being added. So we're excited to get going. We expect this to be effective by July 1, working through the details with the administration now, and you'll hear more maybe on our Q1 call. Mike Czapar: Thank you, David. Ready for the next question, please, Paul. Operator: The next question will be from Steve Scala from TD Cowen. Steve, your line is live. Steve Scala: Thank you so much. 2026 revenue guidance is $15 to $20 billion higher than that delivered in 2025. Mounjaro and Zepbound are doing great. But we can kind of see their trajectory. Are there scenarios where these incremental sales can be delivered without orforglipron being a $5 billion product in 2026? And does the guidance tell us that Lilly believes orals will grow the market and not cannibalize? Thank you. Mike Czapar: Great. Thanks, Steve, for the great questions as always. We'll go to Lucas to talk a bit about the revenue guide and some of the moving parts that are contained within that. Lucas Montarce: Yeah. Thank you for the question, Steve. Thinking about the guide, again, you can do the math on that perspective. But when we think about the process, maybe start from there. As always, we do a bottom-up approach on what we see in the marketplace and then across all the therapeutic areas and geographies as well. And we have, again, pointed our guidance as kind of what is our goal for the year to start with. There are many multiple pushes and pulls, and I described that during the call text as well. Talking about, again, the expansion in Medicare that David just covered. Talking about the launch of orforglipron as well, and a continuation of growth that we expect to see both in the US and our US market. I think it's fair to go back as well about the basically, the price component as well that is embedded into the guide as well. That's another component that is gonna be actually accelerated in 2026, that erosion versus 2025. And I call out basically low to mid-teens. That's a new component to basically some of the math that you were thinking about 2025. That you need to factor as when you're doing those forecasting and models that you described. In terms of your orforglipron question, I think it's important to highlight looking at even just the last four weeks of the data of the competitor launch, is mainly expansion of the market. So we are very, very encouraged from, again, the first month of seeing that data and it's very much consistent with our expectations and our guide. We will see how much, again, that class will continue to grow over the years, and we will update our guide throughout the year depending on that. Mike Czapar: Great. Thanks, Lucas. Time for a couple quick ones. So if we could do the next question, please, Paul. Operator: The next question will be from Akash Tewari from Jefferies. Akash, your line is live. Akash Tewari: So David, you mentioned that investors really understand Lilly recognize it's a consumer stock. Can you talk about some consumer analog you'd point investors towards when you're thinking about long-term penetration for both the US and OUS for your weight loss product? And then maybe just on the cannibalization point, is it fair to say your guide isn't expecting meaningful cannibalization of the oral and obesity products versus what we've seen with Novo? Thank you. Mike Czapar: Definitely a two-parter there, Akash. So we'll give David to talk about the more analogs. David Ricks: Well, I think Lucas covered the cannibalization, but it's not what we're seeing right now nor is it what we really expect. In a way, though, just strategically, it doesn't really matter to us. I think we're interested in having people on the medicine that they think and their doctor think is best for them. If it comes from Lilly, that's our goal. So not too concerned about that. I don't actually expect a ton of cannibalization, to be honest. In terms of consumer analogs, it's a difficult question. I'd be open to your feedback on this. We spent a lot of time modeling out the trajectory of the out-of-pocket business. Patrik and Ilya commented on that. I think at the JPMorgan conference, I spoke about this. I think it is a bit of a wildcard in our short and midterm outlook. Because I am hard-pressed to think of an analog where you have this many people paying out of pocket for prescription medication. People could look back at the PDE wars and the ED drugs. We were part of that. We've learned some things from that, but it's not the same as this. You can look at cosmetics and aesthetics where it's quite common, but that also has some overlap but not complete because here you have really profound health benefits. And noticeable results that really drives a success cycle for people in their lives. It's kind of different. So I think it's hard for us to think about that. What we can do is take learnings from other industries that were able to reduce consumer friction, unlock the power of first-party data in marketing, consider, you know, a platform and an interface with consumers that allows us to bring our really robust and deep pipeline that Kenneth's been talking about to market in a way that might be quite differentiated over time. Play with pricing opportunities, subscription models, these kinds of things. All that is in our future, and I think Lilly Direct, direct discussion, out-of-pocket business, all enables those things. It's pretty interesting strategically because I don't think there's a good analog in our industry. And we're working through that and excited by the potential. As you know, we already see, you know, a million people in the US, hundreds of thousands more outside the US choosing this way to buy a medicine like Zepbound and Mounjaro. Mike Czapar: Great. Thanks, David. I will do one last question, then we'll have to close the call. Operator: Okay. Final question today is coming from Michael Yee from UBS. Michael, your line is live. Michael Yee: Just wanted to ask your expectation on the orforglipron launch general view of unit volume scripts vis-a-vis the tirzepatide launch, how you think either access or other channels are different here versus tirzepatide, and how you think about the launch here versus tirzepatide for orforglipron. Thank you. Mike Czapar: Yep. Thanks, Michael. We'll go to Ilya to talk a bit about the orforglipron launch. Ilya Yuffa: Yeah. Thanks for the question. Obviously, we're excited about launching orforglipron assuming in Q2. As we think about the overall market and every launch in this space, you're launching in a larger market and more greater consumer and provider awareness. We recognize that and we look for learning from how we've launched previously. I think what's different here and people on the call have discussed this, is that there is a typically in the cycle of launches, you start with access, build access over time, and you see gradual uptake. What we've seen in this space in particular, and we have a scale direct-to-consumer platform as part of that. You also have a significant self-pay and consumer awareness in this category. And so our expectations are high in terms of what we expect for orforglipron in our launch. And we again, we expect this to be market expansive and bring new people to therapy for obesity. That's our expectation for orforglipron over time. Mike Czapar: Thanks, Ilya. David, over to you for the close. David Ricks: Great. Well, as always, we appreciate your participation in today's earnings call and, of course, your interest in Eli Lilly and Company. Please follow up with the IR team if you have any questions that we did not address today and otherwise, have a great rest of your day. Take care. Operator: Thank you. And ladies and gentlemen, this does conclude our conference for today. This conference will be made available for replay beginning at 1 p.m. today running through March 10 at midnight. You may access the replay system at any time by dialing 803-326-854 and entering the access code 331160. International dialers can call (973) 528-0005. Again, those numbers are 803-326-854, (973) 528-0005 with the access code 331160. Thank you for your participation. You may now disconnect your lines.
Operator: Good day and welcome to the Lantronix, Inc. 2026 Second Quarter Results Conference Call. All participants will be in a listen-only mode. After today's presentation, to ask a question, please press star then one on a touch-tone phone. Please note this event is being recorded. I would now like to turn the conference over to Brent Stringham, Chief Financial Officer. Please go ahead. Brent Stringham: Good afternoon and thank you for joining our fiscal second quarter earnings call. Joining me today is our President and Chief Executive Officer, Saleel Awsare. A live and archived webcast of today's call will be available on the company's website. In addition, you can find the call-in details for the phone replay in today's earnings release. During this call, we may make forward-looking statements, which involve risks and uncertainties that could cause our results to differ materially from current expectations. We encourage you to review the cautionary statements and risk factors contained in today's earnings release, which was furnished to the SEC and is available on our website, and other SEC filings such as our 10-Ks and 10-Qs. Lantronix, Inc. undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances. Additionally, during the call, we will discuss non-GAAP financial measures. Today's earnings release, which is posted in the Investor Relations section of our website, describes the differences between our non-GAAP and GAAP reporting and presents reconciliations for the non-GAAP financial measures that we use. With that, I will now turn the call over to Saleel. Saleel Awsare: Thanks, Brent, and thank you everyone for joining today's call. We continued our momentum into the second quarter through disciplined execution, delivering revenue of $29.8 million and non-GAAP EPS of $0.04, both well within our guidance range. As expected, we experienced double-digit growth year over year when excluding our MER smart grid customer Grid Expertise. Profitability remains strong driven by continued year-over-year gross margin expansion and the operating leverage created by last year's cost optimization initiatives. Overall, Q2 was another step forward in aligning financial execution with our long-term Edge AI strategy. More importantly, we are now seeing that strategy translate into tangible customer adoption across multiple end markets as several customer engagements are moving from development and pilots into broader deployment. As we discuss our end markets, it's worth noting that the government shutdown last quarter created a short-term slowdown in purchasing activity from certain federal agency customers. Despite this disruption, our teams executed well and delivered solid results. Diving into the markets we operate in, beginning with drones and unmanned systems, calendar 2026 is widely expected to mark the start of an unmanned aerial systems super cycle reflecting accelerating adoption of autonomous platforms across defense and commercial applications. This view is increasingly supported by the broader defense funding environment. The signed fiscal 2026 U.S. Defense budget already includes over $13 billion in enacted funding allocated across unmanned systems, autonomy, ISR, and counter UAS programs, including reconnaissance drone initiatives across the full range of mission profiles. While portions of this funding have yet to be released, the scale and breadth of these allocations suggest meaningful capacity to support more advanced unmanned platforms as programs move from development into execution. Looking ahead, we believe unmanned autonomous and AI-enabled platforms are well-positioned to capture a growing share of future defense modernization spending. We are also seeing a broader shift in how the Department of War engages the domestic drone supply chain, with a more commercial and partnership-oriented mindset focused on accelerating readiness and scaling production across trusted suppliers. Against this backdrop, our evolution within unmanned systems positions Lantronix, Inc. squarely in the value creation layer of the ecosystem. Since entering this market, we moved up the stack from initially providing general-purpose compute modules to delivering intelligent imaging platforms and now to enabling integrated system-level workflows that combine sensing, processing, and secure connectivity. In many deployments, our AI edge compute modules serve as the brains of the drone, enabling autonomous operation and real-time decision-making independent of a network connection. As a result, Lantronix, Inc. operates at the intersection of payload, compute, and connectivity—three of the highest value and least easily substituted layers of modern unmanned systems—where we believe value creation and customer relationships compound over time. Currently focused on Group 1 and 2 short-range reconnaissance drones, which aligns well with where a significant portion of current unmanned funding is directed. These programs typically represent multi-year engagements with strong lifetime value supporting applications ranging from surveillance to advanced payloads. Today, we are working with over 15 OEMs, and these customers are increasingly looking to deepen their engagement with us. In response to customer demand, we introduced our drone reference kit at CES last month designed to accelerate time to market for defense and commercial UAV developers. This platform reinforces our strategic shift from a component supplier to a platform partner by reducing integration complexity and development risk in regulated environments. Red CAT, with their Teal drones, continues to expand their work with us beyond hardware into software and next-generation platform development. As their production needs increase, we are expanding our support accordingly, including higher volume builds for the Teal platform and follow-on commitments that reinforce Red CAT's confidence in our capabilities. We are also partnering on their next-generation drone platform, strengthening our position as a long-term partner. Additionally, we were selected by Flightwave, a Red CAT company, to incorporate our OpenCue system and module into their new drone. Another example of the deepening trust in our technology across the ecosystem. Importantly, these engagements are not limited to design wins or early development. We have demonstrated the operational capability to support high-volume production today, and we believe we are well-positioned to scale alongside our customers as the United States and allied governments accelerate deployment of unmanned systems. In December, our Edge AI solution was selected by Trillium Engineering to power Gimbal Imaging Systems deployed across ISR, infrastructure inspection, and Wi-Fi operations, validating the performance, security, and reliability of our edge AI architecture for mission-critical deployments. We also recently secured our first design win with Flock Safety in the drone as first responder or DFR category, extending our edge AI capabilities into public safety applications. While early, this win represents growing interest beyond defense in real-time AI-enabled situational awareness at the edge. Lastly, we expanded our engagement into AI-enabled threat detection through a new collaboration with Safeco Group. Together, we are helping build an integrated edge intelligence ecosystem by combining SafePro's object threat detection models with our compute modules to enable real-time on-device detection of land mines and other ground hazards without the reliance on cloud connectivity. By allowing drones and autonomous platforms to identify threats that endanger soldiers, vehicles, and civilians on the ground, this collaboration meaningfully strengthens our role at the center of a growing network of defense and autonomous systems standardizing on AI compute technology. We are seeing clear and accelerating momentum in our drone business through 2026. Drone revenues grew meaningfully from Q1 to Q2, driven by deeper customer engagement and the early benefits of our platform-led approach, positioning us to realize operating leverage as programs scale over time. As customer programs expand and move further into execution, we are seeing continued growth through the remainder of the fiscal year and into fiscal 2027. Reflecting the strength and the pace of our momentum since entering the drone market approximately a year ago, we are raising our expectation to a range of $8 million to $12 million in drone revenue this fiscal year, an increase from the previous range of $5 million to $10 million, with drones becoming an increasingly meaningful contributor as programs scale. Now turning to critical infrastructure, an important long-term pillar of our industrial IoT strategy where our intelligent hardware, secure connectivity, and perception software come together to deliver end-to-end solutions. Moving to our Tier 1 U.S. Mobile network operator, the rollout continues to progress as expected. We recognized revenue over the last two quarters, and this deployment remains an important foundation of our recurring revenue strategy. Looking ahead, our focus is on expanding beyond monitoring generators into additional high-value applications within the tower, including backup power bands and rectifiers. Each cell tower includes systems and opportunities comparable in size to the generator deployment we support today. This program represents a step forward in building recurring revenue and scaling into a repeatable multi-year deployment model. Over the last twelve months, software and services accounted for approximately 6% of total revenue, which we view as the early innings. As we replicate this model across additional sites and applications, we see a clear achievable path to more than doubling that mix over the mid-term by layering software analytics and AI pipeline orchestration into hardware deployments already in the field. At CES, we debuted Smart Edge AI and Smart Switch AI, our new edge AI gateway and AI-powered fiber switch. Together, these solutions create a unified platform for real-time video analytics, intelligent connectivity, and multi-camera orchestration across enterprise and industrial environments. A key advantage of this platform is its ability to upgrade existing infrastructure. There are millions of deployed non-intelligent cameras and devices already in the field, and our solutions enable customers to bring AI capabilities to these environments without requiring hardware replacement. This significantly expands our addressable market and supports scalable brownfield upgrade opportunities across surveillance, smart buildings, and critical infrastructure. In summary, I'm encouraged by our performance through 2026. We are executing with discipline as we scale high-growth verticals, expand software-enabled recurring revenue, and deliver continued operating leverage from a leaner cost structure. What's most compelling is that our diversified growth vectors—unmanned systems, critical infrastructure monitoring, and enterprise connectivity—are increasingly converging around a common edge AI platform. This convergence enables efficient scaling, deeper customer relationships, and positions Lantronix, Inc. to capture long-term secular tailwinds across aerospace, defense, and intelligent infrastructure. With that, I'll turn the call back to Brent to cover the financial results. Brent Stringham: Thank you, Saleel. Let me begin by going through the financial results for our fiscal second quarter, including some of the key drivers behind our performance. I'll then provide our outlook for the third quarter ending March 31, 2026. As Saleel noted, in the current quarter, we delivered revenue of $29.8 million. Excluding Grid Expertise, we experienced year-over-year growth driven by strength in embedded compute, including our AMD and drone programs, along with solid contributions from our network infrastructure switch products. We also delivered higher SaaS-based ARR, supported by the ongoing ramp of our critical infrastructure monitoring deployment with the Tier 1 MNO we've discussed. Turning to gross margins, in the second quarter, GAAP gross margin was 43.6%, compared to over a three-year high of 44.8% last quarter, and was up from 42.6% a year ago. On a non-GAAP basis, gross margin was 44%, compared to 45.3% last quarter and 43.2% in the prior year quarter. As we mentioned previously, the prior quarter's margin partially benefited from certain inventory recoveries and royalty benefits that came in slightly above plan. Overall, our continued underlying margin performance is supported by a higher mix of premium products and the disciplined cost management that we've been speaking to. Turning to expenses and profitability, GAAP operating expenses in 2026 were $14 million, down just under 6% from the prior quarter and also down approximately 9% from $15.4 million in the year-ago period, as our P&L continues to benefit from the actions we took last year. GAAP net loss for 2026 improved to $1.3 million or $0.03 per share, compared to GAAP net loss of $2.4 million or $0.06 per share in the year-ago quarter. On a non-GAAP basis, net income improved to $1.6 million or $0.04 per share, compared to non-GAAP net income of $1.5 million or $0.04 per share in the prior quarter. Turning to the balance sheet, net inventories were $27.1 million as of December 31, 2025, compared to $26.8 million in the prior quarter and $29.1 million in the year-ago quarter. We ended the quarter with cash and cash equivalents of $23 million, an increase of approximately $800,000 from the prior quarter. During the second quarter, we also generated positive operating cash flow of nearly $2.2 million. During the quarter, we paid down about another $1 million of our outstanding debt, leaving a remaining balance of approximately $9.7 million as of December 31, 2025, which compares to $14.7 million a year ago. Our corresponding net cash position currently is approximately $13.3 million. Now moving to our outlook for 2026, which ends March 31, 2026. We expect revenue to be in the range of $28.5 million to $32.5 million. Non-GAAP EPS is expected to be in the range of $0.03 to $0.04 per share. I'll now turn the call back to Saleel for closing remarks. Saleel Awsare: Thanks, Brent. As we move through 2026, I'm energized by the momentum across our business and the clarity we have around our path forward. Our Edge AI strategy is driving real adoption across our growth vectors, and we're increasingly operating from a position of strength. There are three key takeaways I want to leave you with today. First, drones are scaling faster than we initially expected. We are seeing strong execution, expanding customer engagement, and clear momentum as programs move into broader deployment. Reflecting this progress, we increased our fiscal 2026 drone revenue outlook to $8 million to $12 million, a meaningful step up from our prior expectations. Second, we see drones becoming a material contributor to our business as we look ahead. Based on the trajectory of current programs and customer demand, we expect drone revenue to represent approximately 15% to 20% of total revenue in fiscal 2027, reinforcing our confidence in the durability and scale of this opportunity. Third, our platform-led approach is creating leverage. We are combining edge AI, embedded compute, and connectivity across drones, critical infrastructure, and enterprise markets, while maintaining a disciplined cost structure and expanding recurring revenue. This positions us to scale efficiently as demand accelerates. We are disciplined, well-positioned, and entering our next phase of growth with momentum. We believe Lantronix, Inc. is building a differentiated edge AI platform with expanding end markets, increasing mix of higher-value revenue, and a clear runway ahead. With that, we'll now open the call for questions. Operator: We will now begin the question and answer session. To ask a question, if you are using a speakerphone, please pick up your handset before pressing the keys. Operator: The first question today comes from Scott Searle with ROTH Capital. Please go ahead. Scott Searle: Hey, good afternoon. Thanks for taking my questions. Nice to see the drone momentum starting to accelerate a little earlier than expected. Maybe quick to kick off, so to calibrate on IoT systems and solutions, I think it was down sequentially. Can you just provide some commentary in terms of what happened on that front and kind of how we expect things to transition over the next couple of quarters going forward? And then on drones, I wonder if you could give us an idea about what the December quarter looked like in terms of contribution. And I want to clarify your comments in terms of fiscal 2027 raising the guidance for fiscal 2026, but in 2027 I thought you said 15% to 20% of the mix, which gets drones over $20 million in absolute dollars in fiscal 2027. So we want to make sure that that's in the ballpark. And then a lot of developments going on within the marketplace and specifically in the last day or so. I think there was commentary around the drone dominance program starting to kick into gear with awards starting in March. I'm wondering if you could provide some commentary about your participation in that. I think there are 25 entities involved and it sounds like you're working with 15 plus and just kind of give us an idea of how well you are positioned there and how defensible the opportunity is for you? Thanks. Saleel Awsare: Scott, thanks for the questions. Let me start with the drone section first, because you've got a few things there, let me unpack all of that for you. So let's do revenue. On the revenue side, as I said, our prior expectation was about $5 to $10 million for fiscal 2026, which ends in June. We have now moved it up to $8 to $12 million in fiscal 2026. So it's a meaningful increase. We're seeing a lot of momentum in the business, so we feel good where we are at. Without getting into the details, Q1 to Q2, we saw a big bump up. So we are very happy, and that's why we believe we'll continue to increase every quarter into Q3 and Q4 as I look forward. For fiscal 2027, you've done the math right. It should be 15% to 20%, so it could be anywhere from, you know, $20 million to $30 million range give or take. So that's how big a part of our company's revenue it will become. The other question you had is about the differentiation and how we are winning. Let me spend some time on that. It's really a very important point, and let's spend a few minutes on it. So first, our differentiation starts with where we operate in the drone stack. We are at the intersection of payload integration, with our edge compute, and secure connectivity. So it all goes hand in hand. Second is our long-term relationship with Qualcomm, which is a real advantage because we are able to meet the requirements, which is known as SWaP—Size, Weight, Power—compared to what's in the market right now. So we are winning using that solution, making an on-module. At CES, as you know, we announced a drone platform in anticipation of the drone dominance program, and I'll come back to that in a minute. So we announced that. We started providing a full solution and a kit, so we're providing a system solution as opposed to just a module. And I've said this in the past, we win because embedding cameras into systems is in our DNA. We've done that for a long time. This is probably one of the more complex ones where they have six to eight cameras on each drone. We know how to integrate that into a solution that the customer can use and go to market. The other thing is the market is up and coming and new, and us making it easier for our customers to get to market fast is really a big differentiator now as we are able to go out and work with a lot of customers. And over time, I believe, this creates a lot of stickiness, all the things that I talked about, and the margins are going to improve. Out of the 25 vendors who won the Drone Dominance, this is the first one, by the way. It's going to be a multi-quarter program, and then it's going to be a total of, I believe, 300,000 drones over the lifetime, over the next eighteen months. So they only did 30k in the program, which is a start. We are working with a sizable amount of them, either directly or through some of our partners where we are in the gimbal. So the list was very exciting to see. I happen to know a lot of the folks on the list. So I hope I covered all the drones questions. I'm going to have Brent take the IoT systems a little bit into detail. But just want to remind everybody, we did have a bit of a shutdown last quarter where some of our IoT system products get sold. With that, Brent, go ahead. Brent Stringham: Yeah. Scott, to build on that real quick on some of our IoT box products. You know, the quarter ending September or so, our prior quarter, is traditionally a heavier quarter with some of the Fed customers in the Fed buying season in that, you know, that summer quarter ending in September. So some of that was expected in terms of, you know, sequential decline. And, you know, we also saw a pretty meaningful ramp in our Tier 1 MNO from the prior two quarters as we shipped and deployed, you know, a big number of those boxes to them. And so here in December, we, you know, we are still shipping, but the program is nearing its endpoint on the rollout. I think those two things are kind of contributing to that category being down quarter over quarter. Scott Searle: Great. Thanks so much. Very exciting news about the drones. Get back in the queue. Thank you. Operator: Thank you, Scott. Operator: The next question comes from Christian Schwab with Craig Hallum. Please go ahead. Christian Schwab: Yes. Congrats on the acceleration of the drone business. Can you explain or give us a little bit of color on, you know, what the ASP uptake would be moving from just providing modules to an entire system? Saleel Awsare: Thank you for that question, Christian. So as we stated pretty clearly, our ASP is in the $400 to $500 range today. And this is mainly in the Class Group 2 drones that we are in. As we go to a full turnkey kind of solution, it will move up, you know, quite nicely as we do more integration. The hundreds of dollars more. And if we go, and our plan is then also to go after the FPV drones, which will have a bit of a lower ASP. So it's going beyond one kind of price point where we're now having a portfolio that we're going after. So it's going to vary, but it's a healthy ASP that we are seeing and good margins in the business. Christian Schwab: Great. And then as we look, you know, we kind of in essence gave guidance for what we think the drone business can be in fiscal year 2027. What type of growth rate do you think we should assume for the core business? Or the non-drone business in '27? And what would be the potential puts and takes to that? Saleel Awsare: Christian, we do quarterly guidance as we've said in the past. We see, let me, the drone business I think is new and exciting and you can see double-digit high double-digit growth rates in that, which is great. Also, the December, Lantronix, Inc. grew 17% year-over-year when you remove the Grid Expertise. And growth were a component of it, but the other businesses also. At the midpoint that we have put out there, the whole business is again growing. So I see fiscal 2027 to be a good year. The numbers that the analysts have us at are what we're working through. And we're not allergic to what the numbers are out there right now. Christian Schwab: Okay. And then that's fair. And then regarding operating expenses, given, you know, the growth opportunities, would you, is there anything that you're aware of that would materially change, you know, operating expenses, you know, on a go-forward basis? Or should we just assume, you know, less than revenue, obviously? Brent Stringham: Yes. Christian, on the near term next quarter or two, I think it's safe to assume OpEx kind of in the range of around $11.8 million to maybe $12.3 million a quarter. So kind of in the range of what we're seeing in the last couple of quarters. OpEx was slightly lower than that, I believe here in this quarter, but in Q3 and Q4, the range I just mentioned is probably a reasonable estimate. Christian Schwab: Okay. That's fantastic. Congrats to other questions. Thank you. Saleel Awsare: Thank you, Christian. Operator: The next question comes from Jaeson Schmidt with Lake Street. Please go ahead. Jaeson Schmidt: Hey, guys. Thanks for taking my questions. Just curious if you could quantify what the government shutdown or that impact was in December, obviously, as you noted, causes cost and friction? And then relatedly, if you're seeing any supply constraints today, obviously, with the well-known memory shortage out there. Just curious if you're seeing any other dynamics. Saleel Awsare: What I want to leave you with is the government shutdown, and I think Brent talked a little bit about the IoT systems, which is our box products, which were a bit slower than we expected because of the shutdown. But the team executed so well that we were able to make up all of it, and I'm really happy with that. So think about that from that perspective. You know, the government is starting to normalize, so we hope, I expect and hope that things will improve on that side if you think about it. On the memories, great question on the memory shortage, the way, Jaeson. Everybody's talking about it. We do see pricing and supply pressures going on. We are proactively working with our customers to alleviate this. To ensure that we are supplying them enough product, especially in some of the new businesses like our drone stuff. So we have got the supply that we have prepared for them. They are working with us closely on that. And we don't see a big issue in the short term to even the midterm. And longer term, I mean, we gotta think about all of that. But we are able to work around most of the issues that we are having, and we're working with our customers very closely to ensure there is no supply disruptions. Jaeson Schmidt: Okay. That's really helpful. And then just as a follow-up, given the momentum and upward revision to your own revenue guidance, coupled with, I mean, it sounds like the software piece of the pie is going to continue to grow going forward. How should we think about the gross margin profile? Or are you thinking about sort of the near term or medium-term gross margin profile differently given those dynamics? Brent Stringham: Yes, Jaeson. On the margins for that business specifically and to answer your question on the near term, I think we've said previously the margins are near our kind of our corporate average, maybe slightly below those levels. But longer term, as software services become a bigger part of what we're providing our customers, we would expect the margin to slightly increase. But in the near term, next quarter or two, we're not forecasting a meaningful increase in what we previously discussed. Saleel Awsare: Jaeson, let me add another point on the gross margin. You can see compared to the year ago, we are up. Last quarter, we were up. This quarter, we are up. So the trajectory is where we want it to be. And we are working on all of this as you think about it. So you know, that gives you an understanding that we're building a moat around our business. Right? That's how the gross margin is improving. And we gotta keep working it, but I'm pleased to see the upward progress that the team has made. Jaeson Schmidt: No. Gotcha. Thanks a lot, guys. Operator: The next question comes from Austin Moeller with Canaccord. Please go ahead. Austin Moeller: Hi, good afternoon. Nice quarter. Saleel Awsare: Thanks, Austin. Austin Moeller: Just my first question, now the defense budget is passed and the FCC has banned new Chinese drones. So how should we be thinking about how quickly we might see demand materialize into your backlog either from the 340,000 drone American Drone Dominance Initiative or on the commercial side for some? Saleel Awsare: Yes. So on the drone dominance and the FCC ruling on December 23, it is going to be helpful for all American manufacturers. And Austin, we are working with a slew of companies now to get them enabled and into the market faster. And, you know, I can go over the list. We've got Red CAT, multiple programs, multiple Red CAT companies. Trillium, which is big and it's in the large ecosystem there, Sightline, Grimsy. We worked with SafePro, and, you know, you're going to be seeing more announcements from us. So we are getting geared up to support this, and that's why we increased our, you know, expectations for next year to 15% to 20% of the company's revenue, which is very meaningful. The other little thing in my prepared remarks that you might have got, we got our first win in the drone as a first responder category. Which is if you would think about it as a commercial or a public safety area, now that's new and unique and because that was all held by the Chinese in the past. Now that's getting created in the United States, and we want to be a part of that also. So you know, great and exciting times ahead of us. And we are ready. We are ready. Austin Moeller: Okay. And how should we think about potential M&A that you might be eyeing to expand margins and drive ASPs beyond like the $400 to $500 range? For, like, broader systems or subsystems? Saleel Awsare: Yeah. We are looking at M&A really in two areas as I think about the company. Looking at subsystems like should we be now we're working with some companies that do a lot of the drone manufacturing already. But can we integrate more into our SOMs, we add a software layer around it? SPAR is a perfect example where we partnered with somebody who's putting their IP onto our SOM. So M&A is going to be an important feature that I think about the future as we create more of an ecosystem and a platform play, Austin. So you know, we're talking and talking to a bunch of folks in that. The other area we're also looking at M&A is around our critical infrastructure monitoring. Where we want ARR and software to be a larger portion of the company. So both of those areas are areas we're focused on. And that'll get this company to higher gross margins, higher software revenues, higher stability as I think about it. Austin Moeller: That's very interesting. Exciting time in the drone industry. Thanks. Saleel Awsare: Thank you, Austin. Operator: This concludes our question and answer session. I would like to turn the conference back over for any closing remarks. Saleel Awsare: Thank you for your questions and joining us today. We appreciate your continued interest in Lantronix, Inc. and look forward to keeping you updated as we execute our strategy. We are excited to have you with us on this journey. And we believe we are just beginning to take flight. With that, thank you very much. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, welcome to Avery Dennison's Earnings Conference call for the fourth quarter, ended on December 31, 2025. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a Q&A session. At that time, if you would like to ask a question, please press star one on your telephone keypad to raise your hand and enter the queue. As a reminder, this webcast is being recorded and will be available for replay on the Avery Dennison Relations website. I'd now like to turn the call over to William Gilchrist, Avery Dennison's Vice President of Investor Relations. Please go ahead, sir. William Gilchrist: Thank you, Miriam, and welcome to Avery Dennison's fourth quarter and full year 2025 Earnings Conference Call. Please note that throughout today's discussion, we will be making references to non-GAAP financial measures. The non-GAAP measures that we use are defined, qualified, and reconciled from GAAP on schedules A4 to A8 of the financial statements accompanying today's earnings release. We remind you that we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the safe harbor statement included in today's earnings release. On the call today are Dion Stander, President and Chief Executive Officer, and Greg Lovins, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Dion. Dion Stander: Thanks, Gillian. Hello, everyone. We delivered solid full-year 2025 results with adjusted EPS of $9.53 and $700 million of adjusted free cash flow, a performance that once again underscores the durability of our franchise and our ability to activate multiple levers across a range of macro scenarios. While ongoing trade policy changes and softer consumer sentiment have been headwinds for our business, we successfully leveraged our productivity playbook to maintain an adjusted EBITDA margin of 16.4%. Our results demonstrate the resilience of our model as we remain focused on driving outsized growth in high-value categories, accelerating innovation to advance our differentiation, delivering productivity to protect base margins, and allocating capital effectively. Turning to the fourth quarter segment results. In Materials Group, reported sales increased 5%. While sales were down slightly on an organic basis, we saw low single-digit volume and mix growth that was more than offset by deflation-related price reductions. We are continuing to advance our strategic shift towards high-value categories, which now represents 38% of the segment's portfolio, a figure we expect to expand with a full year of Taylor adhesives. Within this segment, Intelligent Label delivered high single-digit growth, underscoring its role as an important growth engine, while Performance Materials grew mid-single digits, and Graphics and Reflectives grew low single digits. High-value categories helped balance our base categories, which were down low single digits in the quarter, lower than expected on softer customer volumes. From a margin perspective, adjusted EBITDA margin was 16.6%, down 40 basis points compared to the prior year. This reflects the impact of higher employee-related costs and some one-time benefits in the prior year fourth quarter, which our team worked diligently to partially offset through the benefits of our ongoing productivity actions. In Solutions Group, sales increased roughly 1.5%. This segment continues to lead our portfolio shift, with high-value categories now representing 60% of the Solutions Group portfolio. This proved critical this quarter as our high-value categories provided a necessary offset to our base solutions, which continue to be impacted by tariff-related uncertainty. Specifically, our base apparel business was below our expectations, down roughly 7% as customers balance inventory positions with the impact of post-tariff pricing decisions. Within our Solutions Group high-value platforms, Vesprom grew more than 10%, Embellix delivered high single-digit growth, and Intelligent Labels, tempered by the consumption trends in apparel and general retail, IL grew low single digits. From a profitability perspective, our focus on our productivity playbook and a favorable high-value mix allowed us to deliver an adjusted EBITDA margin of 17.8%, which is up nearly a point sequentially and comparable to prior year, successfully offsetting high employee-related costs and our continued investments in future growth. Turning to our enterprise-wide intelligent label platform. Sales grew mid-single digits compared to prior year, in line with our expectations for a sequential improvement in the rate of growth. This is driven by our key growth market segments and a partial recovery in apparel, which grew low single digits this quarter. While apparel and general retail sales have been impacted by tariff policy changes resulting in flat full-year sales, our food, logistics, and other categories delivered outsized performance with high teens growth in Q4 and approximately 10% growth for the full year 2025. Looking ahead to 2026, we continue to anticipate growth in this platform above the pace we achieved in 2025. We expect the pace of growth to be stronger in the second half than the first half as we lap a stronger first quarter 2025, which was largely unaffected by tariffs, and as new programs roll out. In apparel and general retail, we expect to return to growth as we continue to navigate the impacts of tariff policy uncertainty. In food, adoption is set to accelerate through our major fresh grocery rollout with Walmart, with revenues ramping in 2026. Finally, in logistics, we are focused on expanding pilots with new customers, following a year of outsized growth with our largest customer. Pivoting back to the enterprise level, while I'm pleased with our ability to protect margins and earnings in this environment, I am not satisfied with our organic revenue growth. While much of this is due to cyclical challenges, we are taking decisive action to inflect this growth trajectory. As you can see on slide 10, our high-value categories have secular tailwinds and remain a key enabler of enterprise growth and portfolio strength, growing at a mid-single-digit CAGR over the past six years and expanding to roughly 45% of our sales in 2025, a 12% increase since 2019. Expanding these solutions to new customers and end markets will add to our growth trajectory. Accelerating innovation outcomes in both high-value categories and the base categories is also key to changing our growth trajectory. This allows us to expand our opportunity with existing customers and to grow into new markets. Within our Solutions Group, we're advancing this through examples such as our intelligent labels fresh solutions for food traceability, the expansion of VESCOM's stalling software platform for centralized retail execution, and the growth of Embellix's custom studio fan zones to drive in-venue fan engagement. Similarly, in Materials Group, new innovations such as the expansion of our Clean Flake portfolio to more packaging substrates to advance circularity, and the introduction of smart materials to accelerate intelligent label adoption throughout the channel. Additionally, to further enhance our differentiation, we're also expanding our digital capabilities, use of automation, and leveraging AI to enable additional operational productivity and fixed cost innovation, strengthen our service and quality, shorten our innovation cycles, and provide more data-driven solutions that our customers require to address their fundamental challenges. Stepping back, you can see on slide nine, executing on all our key strategies with proven business resilience enables us to deliver GDP plus growth and top quartile returns across cycles. In addition to investing in innovation to drive growth in our high-value categories and base businesses and positioning ourselves to lead at the intersection of the physical and digital, we will continue to relentlessly focus on productivity to strengthen our market-leading positions in both our businesses. We will also continue to be disciplined in capital allocation to deliver returns and improve our portfolio. Finally, I'm pleased to report that we achieved our 2025 sustainability goals, which we laid out in 2015. These include reducing our energy intensity and enabling more sustainable products and solutions for our customers. Similarly, we're making good progress towards our 2030 sustainability objectives we set in 2020. Moving to the outlook for 2026. In line with our recent practice of providing a quarterly outlook, we will be continuing this approach for the foreseeable future. As such, for 2026, we expect adjusted earnings per share to grow approximately 6% at the midpoint on organic sales growth of zero to 2%. Given key economic indicators remain largely consistent with 2025 levels, we are not planning for any macroeconomic tailwinds in the near term. Our performance will instead be driven by the levers within our control, scaling our differentiated solutions in high-value categories, returning our base business into profitable growth, maintaining a relentless focus on productivity, and effectively deploying capital to drive earnings. In summary, we have exited the dynamic and challenging year, not just more resilient, but structurally stronger to deliver longer-term value creation. Advancing our strategic priorities underpins our confidence in returning to stronger growth and delivering top quartile returns. We are entering 2026 with the right playbook, the right team, and the path to return to growth in line with our long-term targets. I want to extend my sincere gratitude to our global team for their dedication to excellence and their unwavering focus on executing our strategies. And with that, over to you, Greg. William Gilchrist: Thanks, Dion, and hello, everybody. The fourth quarter delivered solid adjusted earnings per share of $2.45, up 3% compared to the prior year. Earnings growth was driven by higher volume and productivity, partially offset by higher employee-related costs and targeted growth investments. From an overall sales perspective, our business continued to be impacted by a softer consumer environment and customer uncertainty due to the impact of trade policy changes. Fourth quarter reported sales were up 3.9%, with organic sales comparable to the prior year as positive volume was offset by deflation-related price reductions. As expected, we benefited from an estimated point and a half impact from our shift to the Gregorian calendar at the end of the year and one point of growth from the Taylor Adhesives acquisition. Adjusted EBITDA margin remained resilient at 16.2% in the quarter, down slightly compared to the prior year. And we again generated strong adjusted free cash flow of $300 million in the quarter, bringing our full-year 2025 free cash flow to $700 million with a free cash flow conversion rate of greater than 100%. Our balance sheet remains strong with our quarter-end net debt to adjusted EBITDA ratio at 2.4. We continue to execute our disciplined capital allocation strategy. For the full year, we returned approximately $860 million to shareholders, including $572 million in buybacks and $288 million in dividends, reinforcing our commitment to delivering shareholder value while maintaining a strong balance sheet. Now turning to segment results for the quarter. Materials Group organic sales were down approximately 1%. As low single-digit volume mix growth was more than offset by low single-digit deflation-related price reductions. Organically, high-value categories grew low single digits, while our base categories were down low single digits. Turning to regional label materials organic volume mix trends versus the prior year. In developed markets, volume mix was down low single digits in North America. As consumer product demand continued to impact volumes. Europe delivered mid-single-digit growth. In emerging markets, Asia Pacific and Latin America were both up low single digits. Our high-value categories in Materials Group delivered low single-digit organic growth. This growth was driven by intelligent labels, which delivered a high single-digit increase, performance materials, which includes our performance tapes and adhesive businesses, was up mid-single digits while graphics and reflectives were up low single digits and specialty and durable labels were comparable to the prior year. 16.6% in the quarter. While this was down slightly compared to the prior year, it reflects our ability to largely defend profitability through productivity efforts, which nearly offset the headwinds from higher employee-related costs and a lower volume growth environment. Regarding raw material costs, including the cost of tariffs, we continue to experience modest sequential raw material deflation in the fourth quarter. Capping a year where total raw material costs declined low single digits. Our teams remained agile in navigating dynamic markets, mitigating tariff costs through strategic sourcing adjustments, and the implementation of select pricing surcharges. Overall, including tariffs, our outlook is for relatively stable sequential material costs as we enter 2026. Shifting to Solutions Group, sales were up 1.3% organically. High-value categories performed well, up high single digits, with base solutions down mid-single digits. Driven by softer base apparel sales. Within high-value categories, VESCOM was up more than 10%, driven by the continued benefit from new program rollouts. Embellix was up high single digits driven partially by World Cup sales, intelligent label sales grew low single digits on lower apparel and general retail volumes. Now turning to enterprise-wide intelligent labels, sales expanded mid-single digits compared to the prior year. Growth was once again driven by food, logistics, and industrial categories, which were up high teens for the quarter and now represent approximately 30% of our total IL portfolio. Offsetting this strong momentum was the performance in apparel and general retail, which combined were down low single digits for the quarter. And these markets represent 70% of our intelligent label sales and continue to be impacted by tariff-related pressures. Solutions Group adjusted EBITDA margin was 17.8%, which was comparable to the prior year. As benefits from our continued productivity efforts and higher volume were offset by higher employee-related costs and ongoing growth investments. Now stepping back to look at our long-term financial performance, we remain focused on delivering strong results across cycles. Reflecting on our 2022 to 2025 targets, we delivered solid results despite multiple cyclical challenges by leveraging the strength of our portfolio. We successfully exceeded our top-line goals and performed well on our profitability targets. EBITDA margin ahead of our long-term objective. However, we did fall short of our adjusted EPS target, which came in at 7% ex-currency, trailing our 10% target, partially due to the impact of acquisition intangibles amortization. Additionally, ROTC, while in the top decile of our peers, finished at 15%, largely driven by the impacts of our acquisitions, including Taylor Adhesives, which closed in 2025. Turning to our 2023 to 2028 targets, we are currently in line or ahead on most of our targets. And as Dion mentioned, our focus is to shift our organic sales growth trajectory to achieve our targets for this cycle. Turning to our outlook. For 2026, we anticipate reported sales growth of 5% to 7%. Our guidance does not presume an improvement in external market conditions. This sales growth includes organic growth of zero to 2%, approximately 4% from currency translation, and approximately 1% from the Tiller Adhesives acquisition. We expect adjusted earnings per share to be in the range of $2.4 to $2.46, representing approximately 6% growth year over year at the midpoint. This earnings growth is driven by benefits of organic volume mix growth and productivity actions, which more than offset headwinds from wage inflation and growth investments. And the normalization of 2025 temporary savings, including incentive compensation, and a net benefit from combined currency share count interest, and tax. We've also outlined key contributing factors to our full-year 2026 on slide 14 of our supplemental materials. We expect an approximate $0.25 EPS benefit from the combination of favorable currency and a lower share count partially offset by higher adjusted tax rate and interest expense. We expect restructuring savings of approximately $50 million as we continue to execute our productivity playbook. And we expect the normalization of a majority of the 2025 temporary savings was largely related to lower incentive compensation costs. We remain committed to strong free cash flow, again targeting roughly 100% conversion, with fixed and IT capital spending of approximately $260 million. And we anticipate a sequential increase in earnings throughout the year, in line with our recent historical seasonal patterns. In summary, we delivered a solid fourth quarter achieving adjusted EPS of $2.45, which was up 3% compared to the prior year. And this capped off a year where we leveraged our proven playbook to protect bottom-line results. We generated over $700 million in full-year adjusted free cash flow, returned approximately $860 million to shareholders while maintaining a strong balance sheet. For the first quarter, we expect at the midpoint an improvement in organic sales and earnings, as we continue to deliver actions to increase the pace of our earnings growth, and we remain well prepared for a variety of macro scenarios. We're positioned to execute our profitable growth and disciplined capital allocation strategies to deliver superior, long-term value for our stakeholders. Now we'll open up the call for your questions. Operator: Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please raise your hand now using star one on your telephone keypad. If your question has been answered, and you would like to withdraw your registration, please press the pound key. To accommodate all participants, we ask that you please limit yourself to one question and then return to the queue if you have additional questions. Please stand by as we compile the Q&A roster. Our first question comes from George Staphos, Bank of America Securities Incorporated. George Staphos: Good morning. Thanks for the details. Ian, Greg, Gilly. Good to talk with you. My question will be on materials. You called out a few things that made comparisons difficult this fourth quarter versus last fourth quarter. So we appreciate that. But I was wondering if you could parse a bit further the puts and takes, the pluses and minuses behind the 40 basis point drop in margin. It was a little bit worse than we were expecting. In that regard, the higher employee-related costs were, you know, we can guess at what that is, but if you could provide a bit more color. And last thing, was there any impact from higher raws in that number? I know you said there was deflation, particularly though around paper pricing and the like. Thank you. Gregory Lovins: Thanks, George. This is Greg. So I think there is, of course, a number of factors. We talked about our base volumes were a bit soft in the quarter. And when we look at every year, we have wage inflation year over year, and we need a bit of volume growth to offset that wage inflation. When our base volumes are down, a lot of our productivity actions are going in to offset wage inflation and some of those headwinds. At the same time, we did have a little bit of small one-time items last year. Nothing major, but a couple of items that added up to a few cents were a headwind then year over year for us as we look at prior year Q4 2024 to Q4 2025. And then in addition to that, we did have the extra calendar days this year. And those were four extra calendar days that come with fixed costs for those days, but pretty soft shipping days because they're the days right before New Year. So the flow through on those is typically well below our average as well. So it's a number of impacts there. Now when I look at our sequential margins from Q3 to Q4, I think it's largely in line with our historical seasonality. Historically, we do see a 60 basis point or so drop in Q3 to Q4 margins in materials. Largely due to the holiday impacts as well as the mix of our VI labels in the fourth quarter versus the third quarter. And in addition to that, as I said, we have the calendar shift impacts in the quarter. So overall, pretty much in line with historical seasonality from a margin perspective. And year over year had some one-time items in the prior year that impacted the year-over-year comparison. Operator: Your next question comes from Ghansham Panjabi, Robert W. Baird. Please proceed with your question. Ghansham Panjabi: Yeah. Thanks, operator. Good morning, guys. Guess on intelligent labels, and the low single-digit growth during 2025, how are you at this point thinking about growth for 2026? And related to that, can you share your view on growth expectations for some of the other higher value categories, you know, VESCOM and Embellix, etcetera? And then, Dion, you know, on your decision to only give quarterly guidance for now, where do you lack specific visibility in the context of a portfolio that's relatively diverse both by business and geographically? What would need to change for you to kind of go back to that annual guidance construct? Dion Stander: Gus, let me start with the first question on IL. We had low single digits in 2020 growth in 2025, and we're anticipating our growth rate in 2026 to be above what we delivered in 2025. In 2025, I'd say largely the biggest impact was on apparel and general merchandise. That really tightened tariff activity that was happening. And I still fundamentally continue to believe in the significant growth opportunities this platform has. Just to restate, and this is a 300 billion unit plus opportunity, $8 billion plus opportunity. And we're really at the nascent stage. And what gives me that level of confidence we're gonna continue to see that growth during 2026 and beyond is the fact that we are already seeing, as you've seen, more adoption in these individual segments. More apparel customers continue to adopt the technology as well as extend the use of the technology, for example, in loss prevention. We now have we're working through the planning and the execution as we go to the second half of the year. On the second grocery customer, which I think itself will be a significant inflection point for that segment. And then in logistics, we're gonna continue to really lean into more pilots, expanded pilots with a number of our other customers and with our large customer where we drove outsized growth in 2025 largely on our execution as some of the other competitors struggled and began some share. Anticipating that large customer has also provided, you know, lower output volume guidance in this year, and we're gonna factor it in. We'll see how that goes in logistics overall. As it relates to the other high-value categories, let me just reinforce again. For us, high-value categories are critical because they provide both a growth catalyst and acceleration for growth. Most of our high-value categories are typically high growth in our base business and have a typically high margin profile. So as we accelerate that portfolio mix, we're gonna get natural mix accretion both on our growth and on our margin profile as well. Typically, we expect Ghansham the majority of these high-value categories to be at kind of mid-single-digit plus. They vary by individual ones across materials and solutions. In VESCOM and Embellix, as you ask specifically, we're anticipating mid-single-digit growth, all things being equal, assuming no fundamental change in the environment, for those two categories as we continue to see new customers for VESCOM, the rollout of their Stallink software that really will enable, you know, install productivity, for the existing customer base. And then on Embellix, while we are up against the headwind related to World Cup last year, we also believe that depending on how the in-arena goes during World Cup, we could benefit from some of that as well. So we'll wait and see how that plays out overall. To your final question around, you know, quarterly guidance. I think Q4 demonstrated we continue to a very dynamic environment, which limits our visibility really on the market side of the growth piece. I just want to remind everybody over the last five years, we've seen a number of largely one-off cyclical events negatively, pandemic, inflation, supply chain destocking, tariff consequences. And as a short-term cycle business, it makes it having a long-term perspective during these types of events very challenging. I remain really confident, very high confidence in our strategies, the actions we're taking to drive growth and differentiation to deliver value creation. But I'm not planning for any macro tailwinds in 2026. And so for the foreseeable future, we're gonna continue to provide updates and outlooks on a quarterly basis. Operator: Our next question comes from John McNulty, BMO Capital Markets. Please proceed with your question. John McNulty: Yeah. Thanks very much for taking my question. And appreciate some of the color and the historical perspective around the high-value categories. Maybe digging into that a little bit more deeply, I guess, you help us to think about the margin differential for the high-value categories versus kind of the core. And also, has that shifted or changed much as we've progressed from, say, 2019 to 2025, either gotten higher, or has it contracted at all? How should we be thinking about that? Gregory Lovins: Yeah. Thanks, John, for the question. I think, you know, we haven't talked specifically about margins by specific category. But in general, of course, as we talked about for a product category to be a high-value category, it's gotta have higher variable margins than the rest of the portfolio. And that's a big part of our focus there is as we grow faster in these high-value spaces, it allows us to continue expanding margins as well. So, typically, they are a number of points above our average, certainly above significantly above the base categories as well. When you go back and look over the last few years, you can see our gross profit margins over the last few years have gone up a couple of points. And a big part of that is this shift towards high-value categories that you can see on the slide that we laid out. In addition to the productivity actions and other things that we've been driving as well. But this shift towards more and more high-value category growth is definitely showing up in our gross profit margins as we've expanded those over the last few years. Dion Stander: And, John, I'll just add that our high-value categories right across the business I think, really enable us to have a resilient portfolio. Allows us to pull multiple levers should things happen. I'll also say from a high-value category perspective, which you saw grow more than 6%, since 2019 on an organic basis, really resonates with customers because we're providing differentiation at the point that a solution or problem is being solved. These examples include, you know, what we do with adhesive tapes in the automotive industry, not just to bind things together, but for example, to provide additional noise and sound vibration dampening. So they provide utility beyond the simple application. That extends also then to some of the examples we coded in our intelligent labels platform where we brought new innovation, for example, in food to enable protein but extends also to other areas, for example, our materials group where we've really launched new innovation on our CleanFlake portfolio, which enables recyclability, not just historically on, for example, PPE for PE, but HDPE, now glass, other packaging as well. And so for us, a final constituent component of our high-value categories is the need for constant innovation outcome acceleration. Because that continues to bolster margins. Typically, when you bring a new product that's highly differentiated, we're able to extract more value from that because we create more value. And that's been a very big part of the focus over the last couple of years, and it will be so moving forward as well. Operator: Our next question comes from Jeff Zekauskas, JPMorgan. Please proceed with your question. Jeff Zekauskas: Thanks very much. Two-part question. Since you signed your agreement with Walmart, have you had more inquiries from other sellers of grocery items? And secondly, on slide 14, you talk about the majority of 2025 temp savings, including incentive comp, being a headwind. How large is that headwind? Dion Stander: Yes, Jeff. I think the Walmart announcement with our partnership, I think, is added an additional catalyst to interest and inquiry within our pipeline. We've always known that bringing a digital identity to physical objects, particularly, for example, in the grocery space, will be able to allow you to reduce waste because you're able to manage your best before expiry date in a much better way. Reduce labor efficiency, reduce labor and increase efficiency that goes with it. And finally, also provide a better consumer experience. At the end of the day, freshness is one of the biggest drivers in net promoter score in the grocery environment. And the fresher items are, the more they're available, that typically grows as too bad in the ground. That's the basis of what Walmart's expansion with us on that. Since we've seen that announcement, our pipeline has actually grown with a number of other grocers or and or both on the bakery and protein side, continuing to approach us. This is both domestic in the United States as well as in Europe. And so I'm confident that as we go through this year, we're going to see more pilots and trials through that. I'm not anticipating another rollout during the start of this year, but certainly setting the framework and the groundwork for us to be able to do so as we move forward. Gregory Lovins: Yeah. And on your second question, Jeff, those temporary savings, again, which is largely an incentive compensation, impact year over year, obviously, incentive comp in 2025 as we perform below our original expectations was a tailwind in '25 and will be a headwind in 2026. On an order of magnitude basis, probably pretty similar to the size of the restructuring actions. That $50 million that I highlighted there. Now on top of that restructuring, that isn't the only productivity we're driving. We continue to drive ongoing productivity all the time in terms of ELS savings, looking at reducing scrap, being more efficient in our operations. Dion touched on digital investments to continue to get more efficient in our G and A type of functions as well. And then in the prior year, we talked about in 2025 having some network-related to some of the tariff shifts of production in parts of our portfolio as well. So we would expect other productivity actions on top of that restructuring to help give us a benefit in 2026 versus '25. Operator: Our next question comes from Josh Spector from UBS. Please proceed with your question. Josh Spector: Yeah. Hi. Good morning. I wanted to ask on just the apparel market in general. I think the declines that you saw in the fourth quarter were more than we expected. And as you show in your appendix, the sell-out from apparel has been semi-resilient. Your volumes have been down. I guess, how are you thinking about the trajectory from here? I guess, our view is there's probably a tough comp in 1Q, then easier comps in 2Q. But you have a better ear to the ground on how, you know, apparel producers are gonna be producing and if that's gonna be a tailwind or not at this point. Dion Stander: Yeah, Josh. Let me just spend a bit of time digging into that. You know, at the high level, I'd still say there's a high degree of tariff uncertainty. So while largely tariff rates seem to be in place, as you've seen, I think everybody has seen that can pretty dramatic change depending on what the administration decides to do with the broader tariff policy. And that can have an impact at any one point in time until these tariffs are actually formally ratified. That said, as we went into the fourth quarter, we anticipated to see the low single-digit apparel-based volumes. We actually saw greater than that, around about a 7% decline. I think a couple of factors played into that. I remember saying last time on this call that what we've seen is a change in the way apparel retailers have been managing their supply chains given this volatility and uncertainty. Historically, apparel retailers would typically place a season's orders 60% in advance and then typically chase 40 as this concern around how much tariff policy would impact end retail prices and the likely impact on consumer demand, they were starting to have less forward placing and chasing more. Our anticipation as we ended the third quarter, given what we saw during that sequentially during the quarter, was that that volume would slightly continue to do that. As we know now, it was a case of, I think, some of that volume in Q3 was in the anticipation of the holiday season, a slight stock up, but then they didn't chase as much volume as they went into the fourth quarter. I think focusing on what we've heard from our customers, focusing much more on protecting margins on overall lower volumes and not as much price discounting. The growth that you saw in retail is largely price-related. It's not necessarily unit-related. And that's also underpinned if you look at one of the attaching schedules we have. If you look at the images sales ratios, for example, in the United States, they're one of the lowest points ever since the pandemic as well. As we look forward, given that performance, I would anticipate seeing growth during this year, certainly not in the first quarter will be challenging because we lap against that non-tariff impacted first quarter 2024 '25. But as we move forward, all things being equal, we should see some growth. I caveat that only with I think there's going to be continued uncertainty and continued caution on our apparel retailers' part. They're gonna continue to watch how post-holiday consumer spending and the consumer sentiment relates to discretionary items like apparel. I think it's gonna be a watch and see the price impacts that they've had to put up on those garments overall. And so if that plays out with more volume, then we'll certainly be benefited by that. But I'm not yet certain that's gonna be the case, and we'll give an update when we get to the end of the first quarter and what we're seeing from apparel customers generally. Operator: Our next question comes from Matt Roberts from Raymond James. Please proceed with your question. Matt Roberts: Hey. Good morning, Dion, Greg, and Gilly. Could try to dig just a bit deeper into some of the non-apparel intelligent labels category. First, on general retail in 2025, I believe there were some positives in compliance rollouts at a major customer. Is that compliance enforcement coming back in 2026? Or are you expecting any incremental volumes from that customer with further category rollouts? And then on logistics, again, I know you talked to the major customer and their revenue outlooks and puts and takes there, but any benefit from them rolling out automation to further facilities, are you fully deployed there? And the pilots you mentioned in logistics, is that new pilots or expanding pilots that have already been in place? For taking the questions. Dion Stander: Sure, Matt. Let me go through those sequentially. So in general retail, what we saw general retail impacted last year as we called out quite significantly by really the tariff environment. Most general merchandise was orientated out of China and the surrounding areas, and so there was quite a drop-off in demand, at least from retailers for that product as they were thinking through the supply chains. The second piece in this is because there was such difficulty in that, you know, you do sense that some of the compliance that was in those categories is probably held back a bit to make sure that could work through the supply chain issues. All things being equal, that should return and that should be partly a tailwind for us in that regard as we look forward. Again, that's with the caveat that we don't see any of the other changes on tariffs as we move forward. I think in terms of logistics, you know, we've seen the benefit that has come from automating effectively their last mile performance centers. And, Matt, we're actually fully automated across those over here. Now what we're in discussion with that particular customer around is how do they extend that to some of their international operations that's as we work through that during this year, and then the secondary piece is is there other opportunities they think about moving to what we call the first mile, the shipper side of it as well. In terms of the other pilots and trials, we're engaged in discussions. They have been piloting and trialing with almost every other major logistics company both in the United States and in Europe. And what we see this year is an expansion of some of those pilots being, you know, again, from a certain limited number of fulfillment centers, inbound fulfillment centers to a broader range also looking at different use cases they think through, for example, dangerous goods, managing, you know, highly valuable goods as well. So we'll keep you all updated on our anticipation of those pilots will expand as we go through the year. Operator: Our next question comes from Anthony Pettinari from Citigroup. Please proceed with your question. Anthony Pettinari: Good morning. Understanding you're not giving full-year guidance, is there a way to think about the quarterly cadence of the timing of the $50 million restructuring benefits throughout the year? And then I guess, well, the roll-off of the temporary benefit headwind that Jeff asked about, and then just guess, while I'm at it, you know, you talked about Walmart sales benefiting really in the second half of the year. Should we think of that as like a step up from 3Q to 4Q with kind of a strong exit rate into '27? Or is there anything you can say about, you know, the cadence of that rollout? Gregory Lovins: Yes. Thanks, Anthony. So I think restructuring a good chunk of that, about two-thirds of that would be carryover of projects we executed at some point during 2025 or at least kicked off near the end of the year in 2025. So I would expect from that perspective, to be somewhat balanced across the year on that restructuring benefit. As we have carryover savings in the first part or first few quarters of the year, and then new programs kicking in as we move through the remainder of the year. So overall, largely balanced across the quarters. From a headwind perspective, I think when you look at incentive comp, you know, we're really starting to see bigger impacts on that, I would say, in the second quarter and beyond. There's a bit of a headwind in the first quarter, but I think that picks up a little bit as we go into the middle quarters of the year. Dion Stander: Yeah, Anthony. On the Walmart question specifically, recall we said that the rollout if it took place over the next couple of years, '26 and '27, would be worth, you know, for us somewhere between low double digits to sorry. High single digits to low double digits in value for us based on our 2025 sale. Our working assumption has always been that we would start this roughly in the third quarter, ramp up in the fourth quarter and then continue accelerating during 2027 as you go through both the departments, this is, you know, bakery protein and deli, as well as geographically rolling out through the stores, and that's still our current working assumption. Operator: Our next question comes from Mike Roxland of Truist Securities. Please proceed with your question. Mike Roxland: Thank you, Dion, Greg, Gilly for taking my questions. Dion, can I Hey, guys? Yeah. In your comments, you mentioned not being happy with the organic growth and that you intend to drive better growth, especially in the high-value categories. Can you share what you started to do or what you're looking to do early this year? To drive that growth? And what type of incremental growth you're expecting in 2026 from higher growth in the high-value categories? And then just following up quickly on the apparel and general comments that you made about your confidence in getting in that accelerating. Are your customers telling you about their plans for 2026? And is it a matter of new adoption continuing to increase, or is it more related to existing customers extending their use? Dion Stander: Thank you. Okay. Let me see if I can cover all those in Mike. Yeah. From a, you know, I'm not happy with the way our organic growth trajectory has been over the last couple of years. I know that we can and we've demonstrated this repeatedly, managed through any environment, and we demonstrated our ability to manage and deliver margin and earnings in that regard. But we fundamentally need to make sure that we're gonna continue to significantly outperform the market. And that's our focus as we've gone through the back end of last year into this year. And I touched on really four elements, I think that sorry, three elements that will really deliver on that. The first is clearly our high-value categories when they are able to solve customer issues, have an ability to accelerate growth. They typically deliver higher growth rates. And as Greg said, at higher margins. We're focused on making sure that a broader range of new customers understand the value they can bring, whether it's not tapes business, getting new tapes distributors and end customers, whether it's in apparel getting new loss prevention customers, whether it's in our materials business benefiting from our Cleanplate portfolio. Our focus there is generating new customers and also identifying new segments that we can move the technology. And food is just one example of that that we've done during the back end of last year and moving forward. So there's a focus on new customer acquisition for high-value categories. The second area for me is actually a more important one. It'd be less visible as we, you know, over the next of this near term, certainly more visible as we go longer term, which is accelerating our innovation outcome. So this is not just having more new products and solutions, but actually commercializing them quicker. And in that regard, I listed a whole number of those whether they are around our IL solutions, our digital the materials group, our ability to leverage our material science capability and our digital identification capability with the insights that we have through the supply chain, whether it's at retailer, at manufacturer, at converter, allows us to ultimately be able to really design more innovation at a quicker rate that solves problems for customers. And then the third element which I touched on was in addition, is can we leverage the progress we made in our own digital journey and the more automation we're putting into the business as well as our learnings that we've had over the last year or so and artificial intelligence and the use of that technology. And I see those actually being able to provide even more differentiation that we could then ultimately express in driving new customers and getting into new segments. I think the application of those three combined in different ways will allow us to, for example, drive more automation in some of our manual finishing that we currently have across our businesses. You know, automate finishing, automate packaging. A small example of that. Another example would be using AI and IoT sensors we apply them, to some of our large, for example, coating assets, we're able to make real-time in-line coat weight adjustments across the web, which allows for less downtime and then it would save us more money in that regard and that we're able to use to seek new customers as well. And then the third one really is we've actually started to use a lot more AI to shorten some of the innovation cycle. I'll give you a real example of that. It historically has taken us anywhere from eight to ten weeks to design a new inlay in intelligent labels. We built with a partner, a proprietary AI model that takes all of our learnings around the physics of designing inlays and what it takes now we're able to reduce that cycle down to roughly two weeks. That allows us to produce new products and new solutions much quicker than our previous capacity had the ability to do. And then finally, I think Greg touched on this as well. We're certainly taking all the learnings we're seeing both on automation and increasing on AI how do we actually leverage and automate some of the more manual tasks across our SG and A that our business. We've multiple examples. Now I will say we're at the start of the journey. In that regard from a particularly from the AI perspective. I think we've learned a lot over the last year or so I think has really allowed us to see the value that we can create. In addition, we've also recruited and added to our leadership, the chief digital officer, because I fundamentally believe that capability will also be an accelerant to the way we move forward. And to your second question around apparel and general retail, you know, the way I think about that overall is that we continue to see new apparel customers adopt IL. We went through this late stages of a rollout last the fourth quarter with a large power retailer. We continue to see significant interest in leveraging the technology just not just for inventory accuracy, but also for loss prevention. The work that we did were the proprietary work with, for example, the Inditex Group. And in addition, I continue to see a pipeline where we get new apparel customers continuing wanting to use. So overall, those rollouts, as I mentioned earlier, will part as we go through the year and ramp through the year well. Operator: Our next question comes from the line of John Dunigan from Jefferies. Please proceed with your question. John Dunigan: Thanks for all the information thus far. I wanted to start off with just looking at your inventory levels. I mean, you touched on some of your customers in response to Josh's question and how they're managing their inventories. But I noticed that inventories to sales ratios are elevated compared to where they were at pre-pandemic levels. So with the modest demand, at least starting off here in 2026, is there an ability to drive inventories lower to better match the current demand environment? And then just kind of building on that, you know, I noticed that you had stepped up your CapEx to about $260 million here in 2026. Wondering if that's more tied to growth projects, maybe some delayed maintenance since you pulled it down a little bit in '25 or cost savings initiatives. Just, you know, how that money is being spent would be helpful. Thanks. Gregory Lovins: Sure. Thanks for the question. So if I look at our inventory turns over a few years, they've been fairly steady at least at the end of the year, with where we've been. I think part of what's happening across the businesses, we do have a little bit of a mix impact as we grow faster in the high-value categories. Typically, those categories are a bit more working capital intensive. And similar in emerging markets where we have a little bit higher working capital percents as well than we do in the US businesses, for instance. So, typically, we're seeing a little bit of upward pressure on working capital driven by the growth in those areas. Now we're driving a lot of productivity elsewhere to help offset that as we've gone across the years, and that's been a focus and we saw that even from the middle of this year think we talked about our working capital being a bit high and driving that down by the end of the year. And I think we did a good job delivering that. So we've got some kind of mixed pressure that we're offsetting through a number of initiatives there. Think when we look at CapEx, as you said, in 2025, it was $200 million. I will say there's another about $30 million of cloud technology-related investments that show up in the section of the cash flow statement. So it's about $230 million when you add to the rest of the CapEx for 2025. We pulled that down from our original guidance for 2025 as we saw the softer volumes. So we're increasing that a bit in 2026. Still, I think, below where it was a couple of years prior to that. But continuing to drive productivity initiatives as well as continue to prepare for capacity for the future as well. Operator: Our next question comes from George Staphos from Bank of America Securities Inc. Please proceed with your question. George Staphos: Dion, you mentioned, I think in answering Mike's question, in trying to accelerate innovation that you're trying to spend more if you will, capital at acquiring customers and getting them to try the products. Obviously, there's a mixed benefit from HVC, but do you see the customer acquisition cost being at such a rate over the next couple of years where it sort of dilutes the impact of HVC on your margin mix on a going forward basis, how should we think about that as a way to parse that at all? Separate question, just in general, paper supply any concerns on that for this year relative to the materials business? As capacity has been coming out of the market or you feel relatively with your supply position for 2026? Thanks, and good luck in the year. Dion Stander: Thanks, George. Yes. Just on the sort of the customer acquisition costs, I don't anticipate and not expecting any increase in customer acquisition costs as we move forward. We already have go-to-market teams prepared and ready, and I argue that they've been somewhat underutilized as we went through the last year relative to volume. So as we step up in some of the learnings that we've taken, they've helped sharpen our mechanisms for customer acquisition, shorten the cycles for both proving our benefits, shorten the cycle for how we position and print. And then on the back of that, continue to leverage a little bit of automation to help improve that as well, George. So I'm not anticipating an increase in customer acquisition cost moving forward. Should have no real impact on margins. Second piece is to paper supply. We've continued to make progress in making sure following that significant supply chain disruption that we had a couple of years ago, that we are as appropriately balanced from a risk perspective in terms of paper supply overall. And so we have made sure that our supply, particularly as it relates to paper glassine and price stock, we have multiple sources that we can use largely geographically centered, but not exclusively. And we continue to make sure that what we've done in that regard with our procurement team, which is being we put a lot of focus over the last couple of years is making sure we've driven from some what transactional approach of the smaller supplies to much more strategic where we now have much more certainty about the capacity we have available to us. That we can call on as we need as well, George. Operator: Our final question today comes from the line of John McNulty from BMO Capital Markets. Please proceed with your question. John McNulty: Yeah. Thanks for taking my follow-up. In the past, it seems historically that pricing was pretty much used to offset raw material-related inflation. It seems like right now, your employee costs are kind of a new level of inflation that we really haven't seen before. And I know in the past, you've largely tried to offset that with efficiency. Do we get to a point if the inflation around employee cost continues the way that it has where you start trying to work that through as part of your pricing asks as well? And how should we think about that in 2026? Gregory Lovins: Yeah. Thanks, John. So to your point, typically, our pricing is following our raw material input cost. And obviously, as we've talked about, as we've seen some deflation in 2025, we've had price down to go with that largely in sync with the deflation that we've seen there. And, really, we're continuing, or I guess I should say is we've also talked about with our material reengineering a period where we have an inflationary period, we use that to help offset the inflation in addition to price. A deflationary period, we're typically looking at that productivity from material reengineering help offset things like wage inflation as an example. So I think we look at that material reengineering as a bucket that helps over a cycle. In a flatter or more deflationary period to help offset some of those costs like wage inflation that come into the business. Operator: Mister Gilchrist, there are no further questions at this time. I will now turn the call back to you for any closing remarks. William Gilchrist: Thanks, Miriam. To wrap up, we navigated dynamic 2025 to deliver solid results. The fourth quarter and full year. Our focus and execution on our strategic priorities drive our confidence in returning to stronger growth and underscore our ability to deliver superior value across the cycle. Thank you all for joining today. This now concludes the call. Operator: Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.
Emily: Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to The Timken Company's Fourth Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star. Thank you. Mr. Frohnapple, you may begin your conference. Neil Frohnapple: Thank you, operator, and welcome, everyone, to our fourth quarter 2025 earnings conference call. This is Neil Frohnapple, Vice President, Investor Relations for The Timken Company. We appreciate you joining us today. Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link. With me today are The Timken Company's President and CEO, Lucian Boldea, and Michael Discenza, our Chief Financial Officer. We will have opening comments this morning from both Lucian and Michael before we open up the call for your questions. During the Q&A, I would ask that you please limit your questions to one question and one follow-up at a time to allow everyone a chance to participate. During today's call, you may hear forward-looking statements related to our financial results, plans, and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the timken.com website. We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by The Timken Company, and without express written consent, we prohibit any use, recording, or transmission of any portion of the call. Finally, note that we are planning to host an Investor Day on Wednesday, May 20, in New York City. We hope that you will join us either virtually or in person. Please stay tuned for more details. With that, I would like to thank you for your interest in The Timken Company. And I will now turn the call over to Lucian. Lucian Boldea: Thanks, Neil, and good morning, everyone. We appreciate your interest in The Timken Company and for joining us today. I'd like to start by thanking our Timken team for their hard work and resilience. While 2025 presented a challenging market environment, our team executed with discipline, and we finished the year strong. Turning to our results in the fourth quarter, we achieved adjusted earnings per share of $1.14, which exceeded the high end of our guidance range. Total sales in the fourth quarter were up 3.5% from last year. Organic revenue was up more than 1%, driven by higher pricing and volume growth in the Industrial Motion segment. We increased free cash flow to $141 million, enabling us to return $36 million of cash to shareholders and reduce debt by more than $100 million during the fourth quarter. The company ended the year with a strong balance sheet with net leverage at only two times, enabling us to continue our balanced approach to capital allocation. Michael will take you through the details of our 2026 outlook, but we expect to generate organic revenue growth, strong free cash flow, and higher margin. Overall, we expect adjusted EPS to increase around 8% at the midpoint of the guidance range. We see encouraging order activity across several industrial markets, and our backlog at the end of 2025 was up from the prior year. These trends support our expectation that customer demand will improve compared to 2025, and our outlook for organic sales to be up 2%. This reflects higher pricing and modest volume growth. Given the volatility of the ongoing trade situation, despite macro uncertainty, our team is operating with urgency to execute our strategic initiatives and fulfill our commitments to delivering stronger performance in 2026. We're making good progress on our near-term strategic initiatives, including the 80/20 portfolio work. Over time, we expect to exit underperforming businesses and prioritize our focus and resources on actions that will have the greatest impact on company margins and growth. Based on early results from this work, we have decided to extend the 80/20 discipline across our entire enterprise. This will include simplification of the portfolio and process optimization. We are still early in the process, but it has become clear that applying this 80/20 approach more comprehensively will be a major driver of value creation. I am very excited about the potential, but please keep in mind that it will take some time for the benefit to flow through to the bottom line. As we shared last quarter, I see plenty of opportunity to raise Timken's organic growth trajectory by focusing on the fastest-growing verticals and regions. We will also continue to integrate acquisitions and drive synergies through global expansion of our acquired business. To support this objective, we recently announced targeted strategic leadership appointments to better align the organization with our primary growth drivers and serve customers more comprehensively as one Timken. New positions include a Chief Technology Officer, Vice President of Marketing, and Regional President. These additions to our leadership team directly support our growth strategy, will fuel innovation, strengthen commercial execution, and position us to capture greater share in key markets, verticals, and regions. Together, we're energized by the many opportunities ahead to leverage Timken's strength and create new ways to drive improved performance. With that, let me turn over the call to Michael for a more detailed review of the results and outlook. Michael Discenza: Thanks, Lucian. And good morning, everyone. For the financial review, I'm going to start on slide seven of the materials with a summary of our fourth quarter results. Overall, total revenue for the quarter was $1.11 billion, which is up 3.5% from last year. Adjusted EBITDA margins came in at 16%, and adjusted earnings per share for the quarter was $1.14. Turning to slide eight, let's take a closer look at our fourth quarter sales. Organically, sales were up 1.3% from last year. The increase was driven by higher pricing across both segments and higher volumes in the Industrial Motion segment, which more than offset lower demand in engineered bearings. Looking at the rest of the revenue walk, foreign currency translation contributed more than 2% growth to the top line. On the right, you can see fourth quarter performance in terms of organic growth by region. In The Americas, our largest region, we were flat as growth in North America was offset by lower revenue in Latin America. In Asia Pacific, we were up 4% from last year, as growth in India and other parts of the region more than offset lower revenue in China. And finally, we were up 4% in EMEA, led by solid growth from the Industrial Motion segment. Turning to slide nine, adjusted EBITDA of $178 million was flat with the prior year. Adjusted EBITDA margins came in at 16% of sales in the fourth quarter, compared to 16.6% of sales last year. Excluding the impact from currency, margins would have been nearly flat with the prior year. Let me comment a little further on a few of the different drivers on the EBITDA bridge you can see on this slide. Starting with the impact from mix, it was a notable headwind as OE shipments outperformed distribution in the quarter. And you may recall we were lapping favorable mix in our defense business in the prior year. With respect to pricing in the quarter, it was positive $25 million and added more than 2% to the top line in the quarter, as we continue to put through pricing actions to mitigate the impact from tariffs. As you can see on the slide, tariffs were a $30 million headwind versus last year, and costs were also higher sequentially, as expected. Looking at material and logistics, costs were notably lower versus last year, driven mostly by savings tactics in the engineered bearings segment. Moving to the SG&A and other line, expenses were down from last year, driven by cost reduction initiatives and lower accruals for bad debt. Now let's move to our business segment results. Starting with engineered bearings on slide 10, engineered bearings sales were $714 million in the quarter, up 0.9% from last year. Currency translation added nearly 2% while organic sales were down 1%, as higher pricing was more than offset by lower volumes. Among market sectors, off-highway and renewable energy achieved the strongest gains versus last year. We also posted growth in aerospace and general industrial, while revenue was lower from last year across the distribution, on-highway, heavy industries, and rail sectors. Engineered Bearings adjusted EBITDA was $115 million or 16.1% of sales in the fourth quarter, compared to $122 million or 17.2% of sales last year. Margins in the quarter were negatively impacted by unfavorable mix, as well as incremental tariff costs, which continue to disproportionately impact the segment. On the positive side, cost savings and the benefit of higher pricing helped mitigate these margin headwinds. Now let's turn to Industrial Motion on slide 11. Industrial Motion sales were $397 million in the quarter, up 8.4% from last year. Organically, sales increased 5.6% driven by higher demand across most sectors and higher pricing, while currency translation was a benefit of 2.8%. The segment saw growth in the quarter across all product platforms, led by strong regional gains in The Americas and Europe. Among market sectors, automation and aerospace achieved the strongest gains versus the prior year. We also generated growth in the off-highway and heavy industry sectors, while solar and distribution sales were down. The increase in segment margins reflects solid operational execution by the team in the quarter, as well as the impact of higher volumes and pricing, which more than offset incremental tariff costs and unfavorable mix. Moving to slide 12, you can see that we generated operating cash flow of $183 million in the fourth quarter. And after CapEx of $43 million, free cash flow was $141 million, up from last year. This brought our free cash flow to $406 million for the full year, an increase of $100 million from the prior year. Looking at the balance sheet, we reduced net debt by over $130 million during 2025 and ended the fourth quarter with net debt to adjusted EBITDA at two times, which is at the middle of our targeted range. Now let's turn to the outlook for full year 2026 with a summary on slide 14. Starting on the sales outlook, we're planning for full year revenue to increase 2% to 4% in total. We're planning for currency to contribute around 1% to our revenue for the year, which reflects the weaker US dollar. Organically, we expect revenue to be up 2% at the midpoint, driven by higher volumes and pricing in both segments. On the bottom line, we expect adjusted earnings per share in the range of $5.50 to $6, up 8% at the midpoint versus 2025. For modeling purposes, think of the full year adjusted EPS outlook to be split roughly 54% in the first half and 46% in the second half. And the outlook assumes year-over-year earnings growth every quarter this year. This earnings outlook implies that our 2026 consolidated adjusted EBITDA margin will be in the high 17% range at the midpoint, up from 17.4% in 2025. Note that the midpoint of the ranges implies an incremental margin of approximately 30% for the full year. For the first quarter, currency is estimated to add around 3% to the top line, while we expect organic sales and adjusted EBITDA margins to be relatively flat with last year. Moving to free cash flow, we expect to generate around $350 million for the full year or approximately 105% conversion on GAAP net income at the midpoint. On slide 15, we provide an initial view on our 2026 organic sales outlook by market and sector, which includes the impact of both volumes and pricing. As Lucian indicated, we are seeing increasing order activity across several of these industrial markets, which supports our outlook for organic sales to be up 2% at the midpoint. Moving to slide 16, here we provide a bridge of the key drivers that walk our 2025 adjusted EPS to the 2026 outlook midpoint of $5.75. You can see the 25¢ positive impact from the organic sales change net of inflation, while currency is expected to add 5¢. And finally, we're estimating a year-on-year positive impact from tariffs of approximately 10¢ to 15¢ per share. The trade situation continues to evolve, but we expect that our mitigation tactics will enable us to recapture the margin as we exit 2026. Please note that this estimate does not include potential impact from the announcement earlier this week related to the new tariff agreement with India. Lucian Boldea: In summary, the company delivered better than expected fourth quarter results and the team is focused on generating stronger, top and bottom line performance in 2026. Let me turn it back over to Lucian for some final remarks before we open the line for questions. Lucian Boldea: Thanks, Michael. Our team is executing with urgency to position The Timken Company for stronger growth and higher margins in 2026. And we see significant opportunities to improve both our top line and bottom line performance. I look forward to sharing more details with you soon at our Investor Day event in May. Michael Discenza: This concludes our formal remarks. And we'll now open up the line for questions. Emily: Thank you. We will now begin the question and answer session. As a reminder, if you would like to ask a question today, please do so now by pressing star followed by the number one on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can press star followed by 2 to remove yourself from the queue. Our first question today comes from Bryan Blair with Oppenheimer. Bryan, please go ahead. Bryan Blair: Thank you. Good morning, guys. Michael Discenza: Morning, Bryan. Bryan Blair: To I guess, level set a bit on demand trends, it would be great to hear how orders progressed through Q4 whether there was any kind of a lull in December shipments you would somewhat guarded against that with guidance perhaps some of that hit took place in bearings. And then more importantly, how orders progressed into January and what your team is seeing on I guess, more of a real time basis? Lucian Boldea: Yeah. Thank you, Bryan. So, look, I think it's important to put this in context where we've come from. So you look at eight quarters of negative growth. Then Q3, we started seeing signs of life and green shoots. We said we don't want to extrapolate on that. Q4, I would say, went a little better than expected, but I'll also remind you that the comp was a little bit easier for Q4 when you compare to year over year. But I think if we look at your specific question inside and what gives us hope for 2026 is really the order book. So the order book, when you look at where we ended the year, we ended the year up high single digits. Off highway, general industrial, wind, and aero were the big contributors. And then even the sequential order movement from Q3 to Q4, there was some decline because their seasonality, but really very, very low. You could almost call it flat. So from that standpoint, I think we feel good about it overall. As to how it progressed, inside I would say the difference was that we had a very weak December a year ago. We had a more normal December this time as far as revenue. And I think the pacing of the orders was more steady throughout the quarter. As Michael mentioned earlier, there was a bit of a downturn in distribution, but that's we view that more as timing. It was a low single digit kind of movement, and so that's not a definitely wouldn't call that a trend. And then general industrial was up. So overall, I think in the quarter, it was little better than expected, and it was fairly broad based regionally. We already commented that it was really Latin America and China were the only minuses. Everything else around the world was positive. And so that's why we feel good going into Q1. I think to your question on January, you know, we were giving a guide on Q1 based on what we see today. There's still a lot of uncertainty. We read all the announcement that came out a couple of days ago in India tariff. We haven't seen anything more specific on that yet, but it just illustrates that we still live in a pretty uncertain time. The guide that we gave, we looked at that carefully for Q1 and for where volume sits versus orders. And I would tell you that January, at least up to this point, is very consistent with that guide. So that's where we are, Bryan. Bryan Blair: Okay. Appreciate the color. And understood in terms of the maybe, uncertainty of the global backdrop, but it seems trends are pretty encouraging. If we think about your full year guide, maybe offer a little more color on segment contribution, top line and margin netting to the consolidated outlook. In Q4, there's bit more divergent performance between engineered bearings and then industrial motion than we anticipated you know, in a good sense on the I'm side. Curious how your team is thinking about contemplating the moving parts going forward? Michael Discenza: Yeah. So let me maybe start with the margins, Bryan, and then I'll let Lucian comment more on the revenue outlook if you'd like. Just margins. So fourth quarter margins, you know, roughly in line with our expectations, and you noted the difference between industrial motion and engineered bearings. And I would say that was largely a mix issue inside of engineered bearings. You know, where that revenue came in. I was a little more on the original equipment side, particularly on highway, a little stronger than we expected, and that contributed to the mix issue for us in the fourth quarter and that combined with the strength we saw on the Industrial Motion revenue side volume benefit plus the mix of the portfolio there. So that's what kinda created that fourth quarter differential. As we look forward to margins, first, I want to note that we are taking margins up year on year. And we're looking at you know, call it, a 30% incremental on our volume growth. So I would say a fairly typical, incremental, organic incremental for us. Just a reminder, when things earn on us, when we start to see growth, we do tend to see incrementals at the lower end of our incremental range as we have headwinds like variable compensation, etcetera. So as we look forward to next year, I think we've still got, pricing actions that will benefit us. We are seeing the benefit of the cost savings tactics we implemented throughout the year, which we're a little bit more heavily weighted to the end of 2025. So we benefit from those. And then we do see some favorable mix as we look forward to next year as well. So you know, so that's what's leading to our high seventeens guide on the margin range. And, know, with the actions we put in place, I feel pretty comfortable that we'll be able to, to improve margins year over year. So and maybe I'll have Lucian comment on the market trends. Lucian Boldea: Yes. I think we talked about it by market here in your first question, but I think where we expect organic sales is at plus 2%. Midpoint. It's both price and volume to get to that midpoint, but we are cautiously optimistic that demand will continue to improve. Again, the early signs are that that would be the case, but at this point, this outlook only reflects modest volume growth just given all the uncertainty and the volatility that we're still seeing today in the trade situation. Bryan Blair: Understood. Thanks again, guys. Lucian Boldea: Thank you. Emily: Our next question comes from Robert Wertheimer with Melius Research. Please go ahead. Robert Wertheimer: Hi. Just a couple of clarifications. So off highway was strong. There's some mixed signals in trucks but it seems like that market is recovering. And then maybe auto's lumped in there, accounting for some of the less positivity on the outlook. So I wonder if you could talk to what you're seeing there. I think you touched on distribution a minute ago, but any headwinds from distribution inventories or anything else? Or should we expect to see that follow along if various cycles recover? Michael Discenza: Sure. So let's start with where you started. So the heavy truck market, I would say, we're seeing a lot of life there, but as you know, combined with the automotive so the whole on highway sector, not really a sign of strength for us there. So on the off highway side, it's a little bit we are seeing strength in the order book. Lucian we're strengthening, I should say, improvement. Lucian referenced. But, really, if we look inside of there, it's not entirely broad based. We still see agriculture, which is part of our off highway segment as, as being down. So while we're seeing some positive signs in mining, and construction, agriculture still is a weight in that, in that segment. And then lastly, on distribution, you know, we feel pretty good about where distribution inventories are. So, you know, we don't see, we don't see an issue. So really, selling through with the at the market rate there. Where we have visibility again. You know, we don't have visibility across the entire distribution network, but where we do have visibility feel pretty comfortable with the inventory levels. And so, you know, so, again, see that being a some growth next year. I'll say, you know, low low single digit close to neutral growth. But, comfortable with where the inventory is, so it should be a contributor next year. Robert Wertheimer: Thank you. Emily: Thank you. The next question comes from David Raso with Evercore ISI. Please go ahead, David. David Raso: Thank you so much. Quick clarification of it. I didn't hear it. Volume growth in 2026. Do you expect volumes to turn positive in the first quarter? I know for the whole company, they were still down slightly in the fourth quarter. Just making sure that's that's the starting point. Lucian Boldea: Yeah. So let me roll along. Michael Discenza: Yeah. So let me address the Q1 organic sales. We said that we expect those to be flattish year over year. And what that means, obviously, with pricing coming in up, that means volumes would be slightly lower. Again, there's a function of just the comp that we're talking about. We had a pretty strong volume in Q1 a year ago. The some timing on a couple of market segments, renewable being one of them. That drove that comp to be a little more more challenging. So a down volume up pricing, and then flat flat year over year organic growth. And then from an EBITDA standpoint, also flat year over year. From a margin standpoint. David Raso: Okay. Thank you. So my real question, you made the comment about 80/20 across the portfolio exiting some underperforming businesses, but you made the comment you know, but remember, it could take some time. When I look at the bridge for '26, you pull out the tariff relief separately, you pull off you pull out the currency. Seems like you're implying only mid-twenty percent incrementals on the organic piece. Right? The 25¢ in the bridge on slide 16. Are there costs embedded into your actions that are weighing on those margins? And just give us a sense of what you meant by take some time. I'm just trying to make sure I understand Is 26 a year of cost? And we don't see benefits till '27. I'm just trying to get a sense of the cadence Yeah. Of what you were implying. Lucian Boldea: Yeah. Okay. I appreciate the question. And so, you know, we introduced 80/20 in the last conference call as really being directed at the portfolio. And the idea there was let's critically examine the portfolio, and look at where do we want to double down on investment. Again, the intent is to invest more in growth but with a finite set of resources, that also means walk away from certain things. And so that process is well underway. We've identified the parts of the portfolio that we want to deemphasize. Obviously, to deemphasize those, there's really two ways of doing that. You're either having to extract yourself or exit a piece of business, or you have to go through an M&A transaction. In any event, those need to be handled confidentially. And, obviously, when we have something to announce publicly, then we will. What we've also communicated this morning was that we're expanding that 80/20 discipline now the entire enterprise. And so what that means is really now looking at our operation. So looking at not only our customer and product mix, and how do we simplify that, looking at our supply chain, our footprint, how do we simplify that. The latter part, so this broader 80/20 naturally has an upfront investment and then has a benefit if you look at companies typically who have done this, I would say there's a couple of quarters of cost then the benefits start. And so you've kinda have a couple of quarters of cost, a couple of quarters where the cost and the benefit may be neutralized each other, and then you get into net benefit. That's usually what Now we're very, very early in this process. We're just using the experience of our partners that we work with. We have an external firm that we're working with, and their experience is very aligned with what I'm saying in terms of the timing. But at this point, what I would say is there's not a significant amount of cost or a significant amount of benefit baked into what we're giving you today. Between now and Investor Day, we plan to have all this fleshed out, and so that's one of the things that we do we do plan to communicate at that point. It's really a road map not only on the portfolio, but also a road map on the cost actions that we're taking and really the simplification. And, again, the motivation for the simplification is twofold. One is think there's opportunity for margin, but, two, really, to free up resources for growth. David Raso: And at the meeting, would we expect or maybe you haven't decided, to get multiyear targets when it comes to sales and earnings and I assume, obviously, some quantification around the savings you just discussed. Lucian Boldea: Yeah. I can maybe foreshadow a little bit the table of contents because that much we know, I think we're still working on the content. But we're clearly now laying out a very disciplined transformation for the zero to thirty-six months time frame, and that involves the portfolio 80/20. That involves the simplification. That involves the doubling down regionally. To grow our acquisitions, that we already have. So that transformation road map will be very clearly laid out with the timeline, with what the objectives are. And then obviously, that's the bridge to something, and then we also will share with you what that something is and how we envision the company transforming as we move forward. So that second piece is a little more forward looking, but the first piece, that thirty-six months certainly will have not only growth algorithms for top line for bottom line, but then, obviously, financial targets for ourselves. But as much visibility and transparency as we can, we will give you so that you can follow along with us and obviously hold us accountable to delivering what we tell you. David Raso: Alright. That's great. I appreciate the color. Thank you. Lucian Boldea: Sure. Emily: The next question comes from Stephen Volkmann with Jefferies. Please go ahead. Stephen Volkmann: Thank you. Thank you. Good morning. Maybe I'll just run with that for a second. The evolution, I don't know if you're if you're willing to comment on this, but, you know, a lot of 80/20 and sort of simplification does involve exiting certain products and maybe even certain businesses and you know, the PLS impact of 80/20 is kinda usually the first step. And, you talked about the cost but I'm just wondering, is there a scenario where there's significant portion of revenue that gets exited as part of this process before we go forward? Lucian Boldea: Yeah. Thanks for the question. If we look at sizing, even what's in scope, so if you start with the portfolio itself, you know, we're talking about a single digit percentage of the company that we're considering. Some of the product lines that we're talking about, you know, we've communicated before. Our intent to look at our auto OEM business. So that would be part of that total. So you know, in the end, we're not looking to shrink to the perfect company. That's for sure. We're looking to grow the company. So the entire objective of 80/20 is to reposition ourselves, simplify ourselves, lean ourselves out, have really robust processes for growth. If you look at the organizational announcements, that's we've made the first thing we put in place was the Chief Technology Officer, head of marketing, to really look at macro trends, what happens in the industry, and how do we align our portfolio for growth, how do we align ourselves with higher growth verticals than maybe where we've been historically that ultimately will align our M&A portfolio as well. With that. But the answer to your question is no. We don't intend to shrink significantly, and we intend to also work very hard on these regional growth opportunities that we have in the short term to offset some of those exits to the extent that it possible. Again, we'll have to get the timing just right, and sometimes you don't control that. But in the end, it's not the intent to shrink. Stephen Volkmann: Got it. That's helpful. And then just to pivot as you're thinking about 2026, I mean, it sounds like you're fairly optimistic and your slide 15 shows a fair amount of growth end markets there. But you have this 2% organic growth target. I would think you could do, frankly, better than 2% just on pricing. So I guess I'm a little surprised that that are you do you think about this as conservative? Is there some reason that pricing would be this low as you start to capture things like steel costs and, tariffs and so forth. It just feels like I would have expected more than that. Lucian Boldea: Yeah. Look. I'll let Michael walk you through the through the waterfall in a minute, but let me maybe make a few high level comments. So I think if you look at the price and what we've said with price around tariff cost, we said that we will recapture the margin by the end of the year. So when you're looking at a whole year versus a whole year, that obviously doesn't show you the true run rate picture of where we're gonna end 2026. It just gives you the area under the curve. And so there's that comment I would have on pricing. And certainly, we're all awaiting or where the Supreme Court decision comes on tariffs. And so all those things certainly have an impact in what additional pricing is warranted or not depending on where we where we end up with the with pricing as the year progresses. So you know, on volumes themselves, you know, where we sit today, I would say, is what we see. As we look we look out, as far out as we can see. The visibility into the back half of the year, obviously, is way more limited, and we can all speculate on scenarios or look at history where our recovery would have been better. But this, we view as realistic based on what we see today. I'll also remind you that there is a limit to how fast whether it's ourselves or the entire supply chain, can ramp up with increased demand because everybody has kind of rightsized their operations to the demand. So if you see a big snapback, then that certainly will result in some growth on the more growth on the order book but the translation into revenue will also take take a little bit of time. And ramp up. So that's where that's where it sits. You know? Is it conservative? Is it not? I would say we've done our best to try to be try to be realistic, but we're also cautious here given the dynamic environment. So, Michael, if you wanna comment on the margin, maybe Yeah. Well, just maybe elaborating a little more on on price volume. I think you know, we say 1%, and I would say 1% plus pricing. And I the important thing to know is that we have consistently over time achieved solid pricing. And, we expect another year of solid pricing, and we'll continue to push price higher, where and when we have the opportunity. So, you know, so as Lucian said, starting the year, maybe, with what we have visibility to, both on the volume and pricing side, but, it doesn't mean that, we're not gonna continue to look for opportunities throughout the year. So I would that's how I'd characterize that. Cautious, with what we can see and, continuing to look for opportunities as we move forward. Stephen Volkmann: Got it. Okay. Appreciate the color. Emily: Our next question comes from Angel Castillo with Stanley. Please go ahead. Angel Castillo: Just wanted to continue on the price cost conversation a little bit. Obviously, you talked a lot about uncertainty with tariffs and a lot of moving pieces there that we won't know for a little bit. But just can you talk about the other buckets, whether it's labor or materials and just your general kind of strategy in terms of how we should be thinking about any kind of material headwinds? Again, outside of tariffs? Michael Discenza: Sure. Thanks, Angel, for the question. So maybe just answering that last part first, the material. We look for there will be material inflation. So, it is an inflationary environment. But we talked about cost savings in 2025. And some of those cost savings were absolutely built around material cost savings tactics. And so we'd look for those to continue, and while we expect some logistics headwinds, I would say material and logistics costs should be a positive for us, heading into next year. We do have labor inflation across both our manufacturing and SG&A footprint. So labor inflation will be a headwind next year. Well as variable compensation. I referenced in an earlier comment, variable compensation is a headwind for us as well. You know, as we as we inflect to a year where we're projecting growth. That's typically what happens for us. So we do have inflationary pressure. We have cost savings tactics. You know, net net, we will be a positive price cost. And, as you saw on the walk, tariffs will be a positive for us. And then on the overall price cost, we see a net positive. So overall, contributing to that 30% incremental you know, is cost savings tactics to offset the inflation combined with pricing, and that's how we get there. Angel Castillo: Thank you. And then maybe just switching over to industrial automation. I think you talked about strong growth there in the fourth quarter. Can you just talk about what your order books are showing kind of exiting the year or I guess into January? Terms of the growth in automation and how that kind compares to the maybe the mid single digit outlook that you you provided for the full year. And then Lucian, you don't mind just maybe commenting maybe bigger picture, know? Given your background, I guess, do you kind of see the longer term strategic role of automation within the business as we think about accelerating growth? Your overall kind of portfolio strategy, M&A, etcetera? Lucian Boldea: Yes. Look, I appreciate the question. And I made a comment earlier that we're certainly very interested in aligning our portfolio a little bit better, and that's why we have a new CTO. That's why we have a new head of marketing with macro trends and then markets really are driven by those macro trends. And if you think about that, electrification, automation are kinda the top of the list. Of macro trends that we are already aligned with and need to further align with. So to answer the first part of your question, certainly, automation was a driver for us. In terms of increases we see, especially our exposure there on the industrial motion, linear motion in particular, where we've benefited from that. That's actually a big driver. And one of the things we talked about is taking these acquisitions. So I'll remind you that our linear motion business is primarily a European business historically. We've invested significantly in resources in The Americas to grow that, and we're up 20% in that business, it's off of a smaller base, but we're up 20% in The Americas in that business as a result of that effort and investment. So certainly, shows that there's opportunity, and a lot of that is in automation. As to your bigger question on the automation of the market itself, look. Think humanoid has gotten a disproportionate amount of press because it's obviously exciting. At some point, it will be part of our future. We are participating in that as well. We share in that excitement. Working with OEMs on key programs, and, you know, we're certainly looking forward to, to success in that, in that market. But I would say that's still our leaks, it's still at the prototyping, at the designing phase. But what is not at the prototyping and designing phase is industrial automation overall. And I think when you look at how we participate there, there's a lot of product lines where we participate. So you think about our automated lubrication systems that we have in our industrial motion portfolio. If you think about where we participate with the drive with harmonics, with our linear actuators in factory robots. Think about our medical robots through our CGI. Acquisition, our cone drives going to autonomous guided vehicles, and then, last but not least, humanoids. So really a broad product portfolio here. Across the enterprise that positions us very nicely. So you might see this as a topic at Investor Day where we would cover this in a little more detail, but we're certainly overall excited. This is a trend. This trend and then electrification utilities, power gen are certainly two that early looks says that there's an opportunity here for us to align ourselves better and to have a more comprehensive offering because we just have so much content and bringing that together into a customer solution, into an engineer solution is really the way forward. Maybe, if I could just add a reminder, and Lucian referenced CGI, but for most of 2025, CGI would have been in our acquisitions, inorganic bucket. That flipped at the end of the year and now is part of our automation segment. And, we've seen very strong growth from that acquisition and, very happy with where it is. So Lucian referred to it, but I just wanted to from a modeling perspective, remind you that it's now part of automation. Angel Castillo: Very helpful. Thank you. Emily: The next question comes from Steve Barger with KeyBanc Capital Markets. Please go ahead. Christian Zyla: Good morning, everyone. This is Christian Zyla on for Steve Barger. Thanks for taking the questions. Michael Discenza: Good morning, Christian. Christian Zyla: You mentioned at times on this call. Morning. You've mentioned a few times on this call about the CTO and executive appointments. So maybe this is a follow-up to that previous answer. But can you just talk more specifically about how those new appointments will translate to innovation and sales growth? Like, what specifically will you be doing differently with these new appointments? And what parts of your business are you focusing on initially? Is that inward facing, or is that more market facing? Lucian Boldea: Yeah. Absolutely market facing. So first thing we're trying to do is create the appropriate ecosystem and the framework and the processes and the discipline to be able to invest more. So if you look at what we invest today, in R&D, know, there is room there is room for, for increasing that potentially, but what you have to have for that is really clear, really good alignment on what are the focus areas. Be very clear with you as to what macro trends are we following, what are our focus industries where we try to bring solutions, and then that drives our innovation portfolio, and it also drives our M&A portfolio. And so really, the early days of both the CTO and the head of marketing is really to establish the growth processes, establish the growth framework, and really clarify those across the company so that we have one set of metrics, one set of language that we can compare apples to apples. We can track timelines. We can execute. And like with all innovation, we can fail fast, and pivot and move to success. So that's the intent of the early days. By Investor Day, we hope to share with you what those focus areas are, what the macro trends are, and then, as we give you our multiyear outlook, then we'll also be able to give you some glimpse into what the investment and what the outcome can be from that effort. But, you know, I'll remind you, this is not a new muscle. This is a hundred and twenty-five-year company that's built on technology that's built on innovation, that's built on patents. So this is really doubling down on our roots just focusing a little better on macro trends and recognizing that we need to align our growth a little better with high growth verticals, as we do the portfolio work and exit some of the more challenging verticals. Christian Zyla: Fair enough. And then just my second question. Kind of on M&A. M&A backdrop looks favorable, interest rate environment is positive, yet you guys haven't really added anything to your portfolio, which seems uncharacteristic for The Timken Company. You feel your portfolio is in a good spot, or is the greater priority or 80/20? Just has this fallen down the priority list Just any thoughts there. Thank you. Lucian Boldea: Yeah. I would say it's not down on the priority list. But maybe a couple of comments. So definitely, it's not because, you know, we were solely on delevering. I think that was certainly just the effect of good cash generation and good discipline and the opportunities that we had. What we do want to do and maybe the reason there was a little bit of a pause on M&A is really roll out a strategy very clearly and doing that at Investor Day. And then really rolling out that road map of what's in play, what's not, and then how we look what is our philosophy, how do we look at M&A. And I think I shared this in a prior call know, we look at this universe of good businesses, then inside of that, when businesses are transactable, and then inside of those two circles, is where are we the natural owner. So how do we define that for you so that when we explain an M&A transaction or we announce an M&A transaction, it's very clear that we're the natural owner here. I think there is still a very active pipeline that we have. We're working on that pipeline. There are new areas that we're looking to focus as we flesh out our strategy, so that exists. And then there's always the list of acquisitions that will fill our portfolio very nicely we've had for some time. Those are more of I would characterize those opportunistic because we know they fit, but it's a matter of, when are they available, when are they transacting, So in that case, call that a little more opportunistic. But, activity is not down on M&A. But I think there is more now on defining what it needs to be defining what we want, and then also, frankly some focus on the portfolio 80/20, what are the pieces that, that maybe are on the other side of the ledger, not on the acquisition, but maybe on the divestiture. Christian Zyla: Appreciate the color. Thank you. Emily: The next question comes from Kyle Menges with Citi. Kyle, please go ahead. Kyle Menges: Thanks for taking the question, guys. I was hoping if you just provide a little more color on the auto and truck outlook, just in terms of what you're seeing in the end markets for 2026? And then how is the auto OE pruning factoring into that outlook? Lucian Boldea: Yes. So I think let me start with Q4. So I think if you look at the Q4, auto and truck was down, and it was as Michael said earlier, both heavy truck and automotive OE was down aftermarket was more flattish. We don't see big changes to that, as we head into Q1 at this point, and no reason to call that very different. I think as to the pruning of auto you know, a lot of progress, I would say, in the last ninety days. Give you a little bit of color of where we are. So, you know, these are long-standing customer relationships with customers that we've done business with for quite some time. And so we had to work with them to find appropriate outcomes that work for both as we do this exit. And so those conversations are mostly complete, some still ongoing, but mostly complete. And I really have to express my appreciation to our customers they work with us, and I think we're headed to some outcomes that work for both. By Investor Day, we hope to have those finalized so that we can communicate with you a specific timeline, but I can give you a little bit of color now. Know, the arrangements that we're looking at will have us see more significant revenue decline in 2027 but both in '26 and in '27, expect to have some margin uplift from these negotiations. So again, I think that's a good outcome for all the parties involved. And it will position us to give you visibility in a way that you can track our progress on how we're doing with that pruning. Kyle Menges: Helpful. Thank you. And I it would be helpful to hear a little bit more color on expanding the 80/20 philosophy across the entire enterprise and maybe the impetus for that as you look more now at the operations and supply chain footprint. I guess, is that because you see some low hanging fruit there to go after? And, yeah, maybe just talk a little bit about what you could execute on as you look to implement 80/20 across the entire enterprise and how maybe the timing would look as well. Lucian Boldea: Yeah. I mean, look. What I can tell you at this point is we're a few weeks, maybe a month into this in the broadening the effort away from just the portfolio to the overall operation. So you can more refer to what is typical for a company our size and what you can expect. And I mentioned in terms of timing, a couple of quarters of heavy analysis, heavy training, the organization on the discipline, You know, picture big training. This is a little bit like lean where you really go through pretty extensive training. You collect a lot of data that has very specific metrics. We have done some of that. We're starting pretty broad training. Here in another week. And that's global around the world. So that is the early phases of it. The early insights from the analysis would tell you no surprise, when you apply to a portfolio this big, that the product complexity is quite high and a disproportionate amount of revenue rest on very few customers or very few product lines and then you have to ask yourself a couple of questions, which is do you really need to spend a lot of energy on a fragmented tail in the market? Or is that really valuable to customers? And can you collect more price on that? Is there another way to create value? But in the end, it is about simplifying. And the reason to simplify is to get a little more margin, but also to free resources for growth. Because in the end, the not only theory, but vast experience of firms that have done 80/20 firms like Strategix who we're working with, who are very versatile. Is as you double down on that focus on your top customers, top products, top market, you can actually create offerings for them where you can grow way more there. Than you would lose on the other side by shedding some more fragmented business that really has a higher cost to serve than maybe your accounting ledger would say. So that's where we are. Again, early, in the days for me to give you anything definitive. I'm just trying to provide color more on what is our process and where we are and what is typical in 80/20. And so far, our data says that there's no reason to believe we would be vastly different from what is typical. And so we're very, very excited about it. Which is why we're making this, this investment right now. Kyle Menges: Good to hear. Thank you. Michael Discenza: Sure. Thank you. Emily: The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead. Joe Ritchie: Thank you. Good morning, guys. Lucian Boldea: Morning. Joe Ritchie: Morning. I wanted to hey. Morning. Yeah. I just want to get a clarification on the 2026 Outlook bridge. The 10 to 15¢ that you have in there for tariffs, I'm assuming that includes the pricing that you put through for those tariffs already. And then and then also because you've kind of had this, you know, two to three quarters a headwind, is the expectation that you'll see most of this benefit in the first half of the year as well. Michael Discenza: Yeah. Sure. Thanks for the question. Yes. The answer is in that $0.10 to $0.15. It does include the price benefit of that, and we are, as you noted, putting in price actions, which were more heavily weighted in the second half. So on a year-over-year comp basis, will look a little more favorable in the first half than the second half. Having said that, we are going to continue to put pricing in throughout the year. And as we've committed to previously, we will recapture the margin on the tariffs, but we don't expect to do that until we're exiting 2026. So from modeling, the pricing benefit you know, because, we were getting that towards the second half, we'll come in stronger in the first half, and then, and then exiting the year, we'll be at call it, margin neutral on price tariff. Joe Ritchie: Okay. Great. Thanks, Michael. And then the question the other question I have is Lucian. I know that the business is short cycle. I also know that, you know, you don't have a lot of volume growth baked into your expectations. But, look, it was interesting to see the ISM print over fifty you know, just this past week. I'm just curious just, like, as you're looking at kind of, like, leading indicators across your business on where you potentially see an inflection? Like, what are you looking at really closely, and, like, where is you know, where do you see maybe some potential sources of optimism you know, given the backdrop seems to be getting a little bit better? Lucian Boldea: Yeah. I think when you look at the order book in general, you know, off highway, general industrial, renewables, wind, not solar, but wind and aerospace, those are certainly areas that would tell us to be optimistic. General industrial, we expect the sector to be up mid single digits versus 2025. So that's still strong. I think where you still see is these later in the cycle businesses, Oil and gas is kind of the poster child of that that tends to be the last one that rebounds. So those are businesses that are still still slower. Think, as I said, heavy industries, power gen, strong, aggregate, strong, but oil and gas and metals are still is still slow, and that weighs down that entire sector. So that's the that's kinda overall if you step back and look at the look at the segments. And then by region, as we mentioned, Europe was actually the pleasant surprise in Q3, and we almost didn't believe it. In Q4, it continued to do well. And US is doing okay. LATAM is down in China. Continues to be down, and solar is a big contributor to China being down. But India's more than making up for so we're certainly excited about that. Joe Ritchie: Okay. Thank you. Emily: The next question comes from Tom O'Sano with JPMorgan. Please go ahead. Tomo O'Sano: Hello, everyone. Hello? Lucian Boldea: Hi. Tomo O'Sano: Thank you for taking my questions. Question to Lucian. While we understand that the more details will be shared at the main Investor Day, could you share how you have spent your first one hundred you know, plus days as CEO, especially, like, on a process side, what approaches or activities have you undertaken to identify opportunities for organizational transformations and in what areas do you see the greatest potential for improvement, please? Lucian Boldea: Yeah. Thanks for the question, Tomo. So if I just look back at the last hundred days, the first thing I usually do when I try to learn new business is visit the factories. And so I've spent a lot of time trying to see how we operate, how we make it it teaches you a lot about the business. It teaches you about the sources of differentiation. It teaches you about how unique you are how easy is it for somebody to do what you're doing because, ultimately, strategy has to do with your competitive advantage. So I would say I overinvested there to try to understand our operations. Likewise, you alluded to it. Understand the business processes. And what I would say is both on the operations side and on the business processes side, I found opportunities. And what I found opportunities is not to invent something new, but to really do a better job at translating best practices across the enterprise. So this company has gone through a lot of acquisitions over the last few years and, really, almost anything you think about, somebody in The Timken Company is doing it very well, but how do we institutionalize that across the enterprise? And I would say that was probably the first sixty, eighty days, and then the last thirty to sixty was okay. So what? So now what do we do? And what we are working on now is really a very disciplined operating model that's based on a single version of the truth transparency, accountability, metrics that are simple enough, leaned out enough that, that they're not burdensome, and they're reflective of the size company we are. But at the same time, really rigid enough that you can operate a business of this complexity at scale operate it efficiently. So a lot of work going on right now. On the operating model. At the same time, work on 80/20 as I said, on simplifying the operations, simplifying the supply chain. So, really, tackling the entire operation tackling it so that it's nimble, it's lean, it's quick, and then as we do the 80/20 and we focus our growth into our macro trends, into our growth areas, then we can operate with agility and speed. But that's really been the first, first hundred and twenty days, and I can tell you I'm very, very excited about what I found because rarely do you find a combination of a very strong balance sheet very strong cash generation, tremendous heritage in terms of technology, excellent customer reputation and relationships, a very willing and engaged team that I'm working with, a very willing and engaged workforce overall that's very proud and very, very ready to take this to the next level. So we're really excited about May 20 to share with you what we have so far and where we're headed. And, and so yeah. Can't wait to be able to share that. Tomo O'Sano: Thank you, Lucian. And just one follow-up Free cash flow generation was pretty strong in Q4, and what are the major drivers behind this performance? And as I look forward to 2026 with the $350 million free cash flow target. Which areas will we focus on achieve this? And do you see any potential upside? Michael Discenza: Yeah. Sure. Thanks, Tomo. This is Michael. Yeah. So really, in the fourth quarter fourth quarter is typically a strong free cash quarter for us anyway. And across the board, excellent performance in working capital. The team's brought in AR, reduced days. So, really, it was working capital management on top of the earnings that contributed to the fourth quarter. You know, looking forward to next year, it's you know, it's another year of, with improved earnings, and then we are expecting CapEx in the, call it, three and a half percent range. Which is on the low end of our typical range. So that doesn't help with cash flow, but, obviously, spending on the lower end, taking less free cash flow. Or less operating cash flow. So know, so that's what we're looking for for next year is just, I'll say, continued working capital performance. And leveraging the earnings. Tomo O'Sano: Thank you, Michael. Michael Discenza: Thank you, Tomo. Emily: Thank you. We have time for one more question. And so our final question today comes from Chris Dankert with Loop Capital Markets. Please go ahead. Chris Dankert: Morning. Thanks for squeezing me in here, guys. Appreciate it. Morning. I guess, Lucian, as you've been looking around the enterprise, manufacturing footprint has been on kind of a long term move to cost optimized regions, I'm thinking Mexico, U.K, what have you. As 80/20 kind of really kicks in, are you seeing further opportunity in the manufacturing footprint How impactful are tariffs in terms of thinking about that realignment? Maybe just what the opportunity is on manufacturing footprint would be helpful. Lucian Boldea: So the one word answer to your question is yes. We see opportunity. The manufacturing footprint of the future or at least of present is very different from what it's been in the past. You know, not too many years ago, was put it in one place, have a lot of scale, and there forever. And the name of the game now is agile and nimble. And because of tariffs, primarily because of geopolitics, because of supply chain potential supply chain disruptions. And so we're very fortunate to have that nimble footprint right now, very nicely globally spread, as you said. You know, if you look at our flagship factories, there's one in every region that is very strong or more than one, frankly, in every region. We have very strong in India. We have a strong footprint in China, a good one in Eastern Europe, good one in North America. So and that's both across engineered bearings and industrial motion. But in the end, it is also about efficiency. So what that means is as we look at certain markets, and these are not general-purpose factories necessarily. They're more aligned with certain industries. As we look at doubling down in certain industries and then pulling away in others, then that also creates some opportunity. But what I want to also tell you is another way we look at this is to say what export opportunities within that macro region does our footprint create. So our India footprint has certainly been instrumental in us gaining share in India. What does it do as a base for exports in emerging regions, whether that's in Sub Saharan Africa, whether that's in Central Asia, whether that's in The Middle East, whether that's in Southeast Asia, likewise, our China footprint. Really thinking about those businesses, that's why we appointed those regional leaders too. Thinking about those almost like a local business that's looking at the regional export markets and trying to leverage that footprint, that cost position. So it's an exciting opportunity. Our regional leaders are certainly very excited about that to have a little more of that entrepreneurial spirit. But to do that, you really have to have, back to the earlier question, have to have that global framework. You have to have the processes. You have to have the operating model in place so that you can allow that, call it, global systems, regional autonomy, and decision and empowerment and, and allow that balance to happen. So that's what has me most excited is how do we leverage the footprint, but we also have room to simplify what we have, and, really, that will help us with our margins. Chris Dankert: Yeah. I mean, sounds like you're really thinking about things holistically. So looking forward to hear more about that at the Analyst Day, and I'll leave it there, but best of luck on '26, guys. Lucian Boldea: Thank you. We appreciate it. Thank you very much. Emily: Thank you. This concludes the Q&A session. Sir, do you have any final comments or remarks? Neil Frohnapple: Thanks, operator, and thank you, everyone, for joining us today. If you have any further questions after today's call, please contact me. You, and this concludes our call. Emily: Thank you for participating in The Timken Company's fourth quarter earnings release Conference Call. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us. And welcome to the Wabash Fourth Quarter 2025 Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. I will now hand the conference over to John Cummings, Senior Director of FP and A and Investor Relations. Please go ahead. John Cummings: Thank you, and good afternoon, everyone. Appreciate you joining us on this call. With me today are Brent Yeagy, President and Chief Executive Officer, Pat Keslin, Chief Financial Officer, and Mike Pettit, Chief Growth Officer. Before we get started, please note that this call is being recorded. I'd also like to point out that our earnings release, the slide presentation supplementing today's call, and any non-GAAP reconciliations are available at ir.onewabash.com. Please refer to Slide two in our earnings deck for the company's safe harbor disclosure addressing forward-looking statements. I'll hand it off now to Brent. Brent Yeagy: Thanks, John. Before turning to the fourth quarter results and outlook, I want to reflect briefly on 2025. It was a challenging year across the transportation industry, with prolonged softness in demand and heightened uncertainty affecting customer spending decisions. While these conditions pressured our financial results, they also tested and ultimately reinforced the strength and resilience of our organization. Throughout the year, we remained disciplined and proactive, preserving a strong balance sheet, maintaining liquidity, and taking actions to align our cost structure with market conditions. That financial resilience gives us flexibility as we navigate the near term and positions us well to respond when demand begins to recover. Most importantly, I want to thank our employees. In a difficult operating environment, our team stepped up with professionalism, adaptability, and unwavering commitment to our customers and each other. Their efforts enabled us to continue executing, supporting our customers, and making progress on key strategic priorities even in a down cycle. As we look ahead, we believe that the actions taken in 2025 have strengthened Wabash's foundation and improved our ability to perform through the cycle. While we continue to execute in a challenging environment in the near term, we enter 2026 with great operational flexibility, a resilient balance sheet, and confidence in our long-term strategy. As we closed out the fourth quarter, conditions across the transportation industry remain challenging and continue to pressure our near-term financial performance. While we are beginning to see early incremental signs of stabilization in certain parts of the freight transportation market, it has not reached a level of sustained magnitude to positively drive increased demand for our products and services yet. We remain cautious. Capital spending decisions continue to be highly managed. As a result, our fourth quarter performance came in below expectations. We also expect the demand environment to remain difficult as we move into the first quarter as customers seek sustainability in the current early signs of a freight market rebound. Across our end markets, demand remains soft as freight, construction, and industry activity continue to operate below normalized levels. That said, there are some encouraging indicators developing beneath the surface. Freight volumes have begun to stabilize off recent lows, dealer inventories remain lean, and fleet utilization rates are gradually improving. However, these early signs have yet to translate into increased order activity, and we do not expect them to have a material impact on our financial results in the near term. More broadly, the industry continues to work through an extended freight downturn, with replacement cycles lengthening and order patterns remaining uneven. While this environment is contributing to growing pent-up demand, as the industry has been well below replacement levels for multiple years, visibility remains limited, and the timing of a broader recovery remains uncertain. Against this backdrop, our focus remains on what we can control. We are taking additional actions to align costs with demand, preserve liquidity, and protect margins while continuing to pursue market share opportunities and invest selectively in areas that strengthen our long-term position. Notably, our parts and service business again delivered sequential and year-over-year growth in the fourth quarter, underscoring its resilience and its role in providing stability through the cycle. While near-term headwinds persist, our long-term conviction has not changed. We believe the early signs of industry stabilization combined with structural progress we've made across the organization position Wabash to respond powerfully when demand begins to normalize. Until then, we remain focused on disciplined execution and financial prudence as we navigate the current environment. During the quarter, we implemented additional cost actions in response to current market conditions, including the idling of our manufacturing facilities in Little Falls and Goshen. These actions were taken to better align our production capacity with current demand levels and to manage near-term operating costs but are also part of a longer-term play to reduce overall fixed costs and other cost drivers over the next market cycle. We continue to evaluate our manufacturing footprint and cost structure now and into the future, and we will adjust our operations as appropriate to reflect near-term reality and to improve our overall cost structure when producing at scale. The idling of our Little Falls and Goshen facilities resulted in approximately $16 million total charges during the quarter, all of which were noncash. We expect to recognize an additional $4 million to $5 million in charges in 2026, of which approximately $1 million to $2 million is expected to result in cash expenditures primarily related to severance and other exit-related costs. These actions are expected to generate approximately $10 million in ongoing annualized cost savings, primarily related to fixed manufacturing overhead and operating expenses. As we align our cost structure with current demand levels, we will continue to evaluate the timing and magnitude of these impacts as the actions are fully implemented. 2026 trailer quoting in Q4 reflected a highly competitive market as the industry navigates the bottom of the current protracted market cycle. Volume leads pricing, and we look forward to a more balanced market as we move through 2026 and into the 2027 order season later this year. Separately, the domestic trailer industry has filed antidumping and countervailing duty petitions with the US Department of Commerce and the US International Trade Commission concerning certain imported trailer products. The agencies have initiated formal investigations and are currently in the early stages. As part of the process, the Department of Commerce will evaluate whether imports are being sold at less than their fair value or subsidized, while the International Trade Commission will assess whether the domestic industry has been materially injured. The International Trade Commission's preliminary determination is currently expected on or about February 6, though the date may be impacted by a government shutdown, and preliminary determinations from the Commerce Department are expected later in the year, with final determinations following thereafter. We will continue to monitor the process as it progresses. Turning to the broader market environment, demand across both the trailer and truck body industries remains soft. While conditions on the ground are improving for our customers, we have limited visibility into the timing, pace, and sustainability of the freight market recovery. With that said, the underlying conditions for a strong trailer demand response are growing once the freight market recovery threshold is met and our customers look to recapture profitability and get back to a growth mindset. But for now, customers continue to defer capital spending decisions, and order patterns remain uneven, reflecting a highly managed near-term reality across freight, construction, and industrial end markets. Given these conditions and the current lack of visibility, we are providing guidance only for the first quarter of 2026 and are not issuing full-year 2026 guidance at this time. For the first quarter, we expect revenue to be in the range of $310 million to $330 million and adjusted earnings per share to be in the range of negative $0.95 to negative $1.05. Based on current order activity and customer discussions, we expect the first quarter to be the weakest of the year in terms of revenue and operating margins. While near-term conditions remain challenging, customer engagement around 2026 purchasing decisions is ongoing, and many fleet order commitments for the year remain open and active, a positive departure from historic norms for this period of the sales cycle for trailers. Based on these discussions and early order activity, we believe full-year 2026 revenue and operating margin are likely to be higher than 2025, even though the timing and shape of the demand recovery remain uncertain. We will continue to evaluate market conditions and customer activity as the year progresses and expect to provide additional guidance once visibility improves. As always, our focus remains on disciplined execution, maintaining liquidity, and positioning the business to recapture profitable growth as market conditions stabilize. I'll now turn the call over to Mike for his comments. Mike Pettit: Thanks, Brent. When we formed this segment four years ago, we were very clear about the role parts and services could play inside Wabash. Extending customer value beyond the original equipment sale while generating higher margin, more predictable revenue. That thesis continues to be validated. Despite a challenging freight environment, the segment delivered another solid quarter, reinforcing our belief that parts and services are becoming a more durable and resilient earnings stream through the cycle. In the fourth quarter, the segment grew 33% year over year and approximately 6% sequentially, even as the broader OE equipment market remains down more than 40% from its 2023 peak. Fourth quarter margins continued to be soft as we worked through weak demand in our higher margin OE parts business and continued to absorb startup costs associated with recent upgrade expansions. While margins remain below our longer-term expectations, the underlying trajectory remains intact. Over time, we continue to expect this business to operate in the high teens EBITDA. Let me say again. In the fourth quarter, the segment grew 33% year over year and approximately 6% sequentially, even as the broader OEM market remains down more than 40% from its 2023 peak. Growth in this environment gives us confidence that what we're seeing here is structural, not cyclical, and reinforces the strategic importance of this segment to our enterprise. Our confidence continues to grow that we are building an exciting foundation for continued and more profitable growth within this segment that will heavily leverage improving market conditions. One of the strongest proof points behind the momentum continues to be our business. Upfit allows us to deliver fully customized equipment in weeks rather than months, pairing the scale and efficiency of our manufacturing footprint with the customer service that defines parts and services. In the fourth quarter, we shipped approximately 550 units, bringing full-year volume to roughly 2,050 units. 2025 full-year volume is more than double our 2023 volume, demonstrating the growth we are experiencing in this space despite a weaker overall demand environment. As discussed previously, we opened three new upfit centers in 2025, Northwest Indiana, Atlanta, and Phoenix. These new sites materially expand our geographic reach and position us to exceed 2,500 units in 2026. And we continue to see multiple pathways for continued growth in this business well into the future. Our efforts to expand digital product enablement and our trailers as a service or TAS service concept continues to grow Wabash's innovation leadership through the generation of a much deeper understanding of challenges our customers are facing, allowing us to bring physical, digital, and business model innovation to life. We continue to expand the ledger of shippers, carriers, and brokers across North America who look to bundle preventative maintenance programs, operational and maintenance-based telematics solutions, nationwide uptime support, and repair and service management with trailer assets to enable their growth needs. We will be showcasing our cargo assurance solution at that in Las Vegas in February and at TMC in Nashville in March. We are taking a new approach to overcoming the growing cargo theft challenges with our Trailer Hawk technology platform. With this platform, we'll be highlighting how the trailer itself becomes part of a secure connected system that helps prevent theft. We've continued to invest in both physical and digital readiness during the downturn, ensuring we're well-positioned to scale when the market rebounds with more innovative and valuable solutions for our customers. We also remain convinced that flexible capacity solutions such as TAS will become increasingly attractive to our customers as they look for innovative ways to acquire capacity and operate in an increasingly challenging business liability and regulatory environment. In closing, parts and services continue to deliver connected end-to-end support that keeps customer assets running day in and day out. We're not just growing this segment. We're layering in new forms of customer value across upfit services, flexible capacity solutions, and aftermarket parts and services, all designed to work together as an integrated ecosystem. As this segment continues to expand its margin profile and cash flow contribution through extended scale and enhanced offerings, it will be a core element in Wabash's overall financial performance and resiliency into the future. We are growing in this space right now, during obviously difficult market conditions because we're finding better ways to serve our customers. This gives us great confidence that we are laying the foundation for Wabash to create mutual value far beyond the initial sale of the trailer or a truck body and throughout the life of the asset. With that, I'll turn it over to Pat for his comments. Pat Keslin: Thanks, Mike. Beginning with a review of our quarterly financial results, in the fourth quarter, consolidated revenue was $321 million. During the quarter, we shipped approximately 5,901 new trailers and 1,343 truck bodies. Lower than expected production volumes within the truck body business created operational inefficiencies, which contributed to an adjusted gross margin of negative 1.1% of sales during the quarter, while adjusted operating margin came in at negative 13%. As a reminder, our adjusted non-GAAP results exclude the impact of the noncash charges related to the idling of the Little Falls and Goshen facilities. In the fourth quarter, adjusted EBITDA was negative $26.2 million, negative 8.1% of sales, and adjusted net income attributable to common stockholders was negative $37.8 million or negative $0.93 per diluted share. Moving on to our reporting segments, Transportation Solutions generated revenue of $263 million and non-GAAP operating income of negative $31.7 million or negative 12.1% of sales. Parts and services generated revenue of $64.5 million and operating income of $5.1 million or 7.9% of sales, continuing the 2025 trend of both sequential and year-over-year revenue growth in the segment. Full-year operating cash generation totaled $12 million with negative $31 million of free cash flow in 2025, excluding the $30 million legal settlement paid in the fourth quarter, reflecting strong execution and disciplined work in capital management. Regarding our balance sheet, our liquidity, which comprises both cash and available borrowings, was $235 million ending December 31. Throughout the difficult market conditions, prioritizing liquidity and the resulting financial resilience enables us to continue navigating the near-term headwinds without losing sight of our key strategic priorities and longer-term initiatives. Turning to capital allocation during the fourth quarter, we invested $5 million via capital expenditure and invested $7 million in revenue-generating assets for our trailers as a Service initiative. We utilized $700,000 to repurchase shares and paid our quarterly dividend of $3.2 million. For the full year, we invested $25 million in traditional capital expenditures, invested $48 million in revenue-generating assets, allocated $34 million to repurchase shares, and returned $13.8 million to shareholders via our dividend. As we continue to manage through the persisting uncertainty in the market, we're maintaining a prudent and conservative approach to cash management into 2026. For our trailers as a service initiative in particular, we do not anticipate any more near-term investments as we have established the foundation and groundwork for this business in 2025. Until we have greater insight into the timing and shape of the market return, our focus will remain on preserving liquidity and maintaining financial flexibility while positioning ourselves to act quickly and intentionally when demand begins to recover. Moving on to our outlook for the first quarter, we expect revenue in the range of $310 million to $330 million, an operating margin midpoint of approximately negative 15%, and adjusted earnings per share in the range of negative $0.95 to negative $1.05. As deferred capital spending decisions and persistent carry into 2026. As previously mentioned, we expect to provide additional guidance as visibility improves throughout the year. However, we do expect the first quarter to be the weakest of the year in terms of both revenue and operating margins. While we continue to assess the shape and timing of a recovery, we remain confident that 2026 will represent an improvement from 2025. Our strategic decisions throughout 2025, continued focus on recurring revenue, and realigned cost structure will enable us to effectively manage near-term headwinds and position us to deliver improved financial performance as demand returns. As Brent noted, 2025 presented significant challenges across the transportation industry, but it also reinforced the resilience of our organization. Our employees rose to the occasion, demonstrating focus, accountability, and a strong commitment to our customers and each other. Looking ahead, we remain disciplined in our execution and focused on aligning our cost structure to today's environment while ensuring we are well-positioned to capitalize on a market rebound and continue investing in the capabilities that support long-term growth. I'll now turn the call back to the operator, and we'll open it up for questions. Operator: Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. Please stand by while we compile the Q and A roster. First question from the line of Michael Shlisky of D. A. Davidson. Your line is open. Please go ahead. Michael Shlisky: Hello? Can you hear me okay? Brent Yeagy: Yep. Michael Shlisky: Okay. Great. Alright. Thanks for all those great comments, guys. A couple of quick questions. I think the capacity in Little Falls, actually, of the facilities, I always thought that since you did the expansion in Lafayette, most of your products, whatever they were, were made in one place. So I thought Little Falls was meant for reefers. So does this mean you're not making any more reefers, at least for the time being? And or has anything changed in what product lines you're making and not making? And are you actually exiting any businesses entirely with the idling of capacity here? Brent Yeagy: Yeah. I'll take that. This is Brent. Good questions. No, we are not pulling out of the specifically the refrigerated market. As we sit here right now with the Little Falls closure, we are, what I would say, looking at how do we reposition the product going forward specifically into the improving market, which we believe will exist in 2027. It's just a prudent move that we're making right now as we kind of reenvision what our fixed cost structure will be as we position for the market upswing. So we're taking a time out to be able to let those things take place, which will ultimately put a better product on the road, have a better cost structure, and the market will be more responsive when we do that. Specifically, with refrigerated truck bodies, we retain refrigerated truck body capacity throughout our network. That is not compromised in any way, shape, or form. The removal of the shutdown of the Goshen facility is really about overhead optimization and taking advantage of structural changes that we've made over the last several years to be able to service the overall truck body market in a more efficient way. The market allows us to pull the lever on that right now. It's a move to make us stronger going forward. There's nothing that takes away our ability to serve the market as we move into what we believe will be a better market in 2027. Michael Shlisky: Okay. I only got one follow-up question, so I'll just choose carefully. I got a bunch of other questions. So maybe just maybe one from Mike. The part of services run rate that we saw in the fourth quarter, can that continue into 2026 and possibly with better margins? You know, obviously, the trailer business has pretty low visibility, but I'm kinda wondering if you can give us a little bit of additional detail on the parts and service side that might have better visibility, just some detail as to what to expect there, and could that be a very solid year shaping up for that business? Mike Pettit: Yeah. We should expect to see nice growth in 2026 versus 2025. So what we were able to deliver in Q4 from a revenue perspective, you could see that type of quarterly average continue into 2026 for sure. I would say on the margin side, the struggle we have is that the markets that we serve are still down. So while we've been able to continue to get growth, we have to fight through a market that no one's really that excited about, even sometimes buying repair parts for their equipment. So we have seen some margin compression. We've also seen some OE where we sell into the actual OE part of the industry pullback. So those things, as well as our growth and upfit, while very positive, do require a little bit of startup cost. But that will normalize probably after Q1. Q1 will be the weakest quarter from a margin perspective in parts and services. But we should see the margins bounce up off what we're seeing in the second half of the year for sure. Brent Yeagy: Yeah. I'll add a little bit to that. When you look at the second half of the year, for 2025, we had multiple moves in terms of the standing up of those upfit locations. We have other upfit locations that we will be standing up throughout 2026. We have Phoenix that will be coming online here soon. So those are all potentially additive. Let me say it differently. They will be additive to the overall revenue profile throughout 2026. So the ability of continuing to scale within the points of distribution that we have, as well as new coming online, gives us somewhat of a unique ability to continue to grow even in a difficult market. That's true for aftermarket parts. That's true for upfit. And so that gives us a tremendous amount of confidence in the way that we believe we can continue to grow in the market even when it is challenging. Michael Shlisky: Got it. Alright. Well, thanks so much. I will jump back in queue. Mike Pettit: Thanks, Mike. Operator: Your next question comes from the line of Jeff Kauffman of Vertical Research Partners. Your line is open. Please go ahead. Jeff Kauffman: Hey. Can you hear me? Brent Yeagy: Yep. You're here. Jeff Kauffman: Okay. Beautiful. Getting used to the new structure here. So with the actions that were taken, I gotta assume that follow-up on Mike's question a little bit. He was about reefer trailers. I'm asking about the refrigerated truck bodies. Is that something that is affected going forward? Does it not really affect it based on the actions taken on the factories, and kinda how are we thinking about truck bodies for '26? Brent Yeagy: Now our ability to meet, we'll call it, customer demand for refrigerated truck bodies is really not encumbered in any way, shape, or form. We retain ample capacity to do that with our existing facilities, and that's an area that we're still continuing to work to grow in. We see opportunity for that. We think 2026 and beyond. So there's no wavering in commitment or opportunity in that way. We are able to refine the manner in which we do it that we think will be more profitable for us and better positioned for the customer for consumption. Jeff Kauffman: Okay. And then a follow-up on that, more for Pat. Hey, Pat. With some of the strategic actions you've taken, it looks like the goodwill balance changed a little bit. I think the intangible amortization is similar, but how does this affect the cost structure in the trailer business? And it looked like the operating expense going from gross margin line down to operating income line was a little high this quarter. Were there other things that affected that on a temporary basis, or is $20 million a good go-forward base for kinda gross to operating margin differential on the trailers? Pat Keslin: Yeah. So we did have related to the shutdowns significant impairment of the assets at Little Falls and then a reserve taken against the remaining raw material sitting at Little Falls. So all in all, the adjustment was roughly $16 million in the fourth quarter. So you'll see that in our GAAP results, and then we adjusted out in what we reported as non-GAAP. And then related to the shutdown, we'll also see in the first quarter an additional $4 to $5 million of expense come through as one-time, which will again adjust out in our non-GAAP results. And of that Q1 expense, roughly $1 to $2 million of that will be a cash expense. But all other expenses related to the shutdown are non-cash. Jeff Kauffman: Okay. So treat those as oddity events, if you will, one-timers, and then final question, I'll get back in queue. Brent, in your initial comments, you were talking about customer optimism, some encouraging signs, but you know, nothing really come across a transom yet. I know some of the truck OEMs are getting a little more confident, and I know PACCAR called for the bottom of the cycle in one Q and then things get better. When I look at the ACT Research conversation, it looks like they're putting prebuy back into the class eight numbers, 40,000 units higher, but they're not really getting enthusiastic about trailers for 2026. And I think they're believing the trailers are kind of another lackluster year, kind of flattish on the whole year. What are you seeing that either confirms what ACT is saying or maybe suggests that things could be a little better for the industry than one would think? Brent Yeagy: Yeah. The way I look at it right now, Jeff, is that what we're seeing in terms of, we'll call it, positive initial tailwinds forming for the, I'll call it, the trailer industry as a whole, as measured by performance in the freight markets by our carriers, is really more stabilizing in terms of the initial projections that were given for trailer demand in 2026. And that's the way that we're approaching it right now. It's too early to say whether they will manifest this positivity that they're experiencing into, we'll call it, second half of the year demand. I would say if I'm a betting person, we'll see what we will see is that translate into quoting activity for 2027 as they prepare and think about deploying capital for that timeframe. If they want to run into the '27 market, they can actually utilize the asset to generate revenue. I think that's probably what's gonna happen. And so again, I don't think it's necessarily, I would say, a revisionist type activity where ACTFTR will be revising up. I think we're in a position where we're able to stabilize and somewhat have a better idea of what demand is going to be this year. Jeff Kauffman: Okay. So the positivism, I can't pronounce it today. The positive thoughts are less bad. Is the way I should think about it. Alright. Well, best of luck with everything, and thank you. Brent Yeagy: Yep. Thanks, man. Operator: Your next question comes from the line of Michael Shlisky of D. A. Davidson. Line is open. Please go ahead. Michael Shlisky: Alright. Can you hear me okay? Brent Yeagy: Yes. We do. Michael Shlisky: Second round of questions here. Just two more, if you would. Very quickly on the dumping comments you made and the issue that's outstanding, what changed? Has anything changed over the last few quarters with respect to the imported trailers and the potential dumping of those trailers? Are there any near-term costs you've got to undertake surrounding the effort to get that case resolved? And if it's resolved favorably, are you due any payments or penalties that, I don't know, the offending parties might have to pay? Brent Yeagy: Yeah. So it doesn't exactly work that way. In terms of the process that you go through, Wabash is in no position where it will be negatively impacted with fees or any type of material costs related to this. In terms of how it may or may not affect those that have been named in the process, the international located competitors. As we think about the next step in the process, if that continues to be an affirmative position, we'll see a level of duties and penalties applied at the February 6 hearing. At that time, they would be potentially subject to the enforcement of those penalties while the process goes through further review and a final determination in the second half, generally the October timeframe, of 2026. And that's an impact that would be completely on those named competitors, not with Wabash. Does that help answer the question? Michael Shlisky: Well, yeah, just to clarify. So it'll be that would happen if it were in your favor plus a more favorable environment. Post the decision, a more fair environment. Brent Yeagy: Yes, but I guess yeah. Michael Shlisky: I just wanted to go back to the root cause. Has this been, like, a few quarters in the making? Has this always been this way? You saw that recently? Or what's this No. There's nothing in the last few quarters in and of itself. Brent Yeagy: That has explicitly framed the issue. This is much more of a longer-term effect that, you know, technically would have started, you know, upon inception of when we started to see international competitors enter the landscape. Now the process itself only looks at a period of time, roughly this is directionally the case really 2022 through 2024. That's the relevant time period at which they are basing their determination. So that nothing in the last few quarters They're really gonna do it off of what have been the dynamics in the industry and what is the data say through the investigative process that must be disclosed by the international competitors to defend the position that we've taken as a set of domestic manufacturers. To counter the information that we've provided as part of the investigation. Michael Shlisky: Okay. Okay. And maybe my last one is more of just a quick modeling question, if you will, guys. If you're not investing in the fleet so much in 2026, just what's your broader CapEx outlook and is whatever you're doing this year effectively just maintenance CapEx at this point? Pat Keslin: Yeah. I would say our outlook for '26 for maintenance CapEx would look similar to what we spent in '25, which was $26 million. But we do not anticipate any near-term expenditures in the revenue-generating assets. Michael Shlisky: But, again, like, growth CapEx around the parts and service around the parts part of it, that's all been done basically at this point. Pat Keslin: No. No. So that would be included in the capital expenditures that roughly, you know, year over year of $26 million in 2025. Very similar number that we expect in 2026. That would include some growth CapEx in it. Just not anything related to TAS. Michael Shlisky: Got it. Okay. So much, everybody. Appreciate it. John Cummings: Thanks. Bye. Operator: Your next question comes from the line of Jeff Kauffman of Vertical Research Partners. Line is open. Please go ahead. Jeff Kauffman: Mute. There you go. Brent Yeagy: Alright. Am I live? Jeff Kauffman: You are. Awesome. Brent Yeagy: Awesome. Sorry. It's the Jeff and Mike show here in Q and A. So just a couple quick modeling questions. So just based on your comments on CapEx and what we're thinking about the market, I guess the good news is it looks like you should be throwing off some cash flow even after the dividend. Is your thought on capital allocation more debt reduction since you did take on some debt in 2025? Is your view that we can split it probably between share repurchase and balance sheet freeing up? I guess just kind of big picture thoughts if the environment gets less bad to neutral at some point this year, what are your thoughts on capital deployment beyond CapEx and dividends? Pat Keslin: Yeah. We're so we're $45 million pulled on the 2025, which is what you're seeing as the debt increase. So certainly as cash comes available, our primary use would be to pay down that ABL. But beyond that, we'll stick to the same capital allocation plan that we've had, is, you know, paying the dividend using it to fund our internal CapEx. And then whatever is remaining, we'll reevaluate for share repurchases or paying down of the high yield bonds that are due in 2028. Jeff Kauffman: Okay. Great. And then last question. Brent Yeagy: Jeff, if you let me add just a little bit there. Just around the framing of, we'll call it, markets. And how and it forms how we think about capital investment, how we think about liquidity management, how do we think about incremental options to use capital in the, call it, second half of the year. And it goes to your previous question, what are the markets doing and what do we see? If we're sitting here right now very, you know, in a very pragmatic way, there's a lot of reasons to believe and trust that the market fundamentally at the freight level and the drivers of that are getting substantially better. Where they've been. The rate of change of that has been fairly significant in the last ninety to a hundred and twenty days, which has peaked people's interests. If those can remain sustainable, into the second half of the year, I'm sorry, through the second quarter, it absolutely can change the feeling of what is the forthcoming market not to less bad, but the good. How we'll reflect that is how do we think about somewhat possibly pricing in the second half of the year. Still remains to be seen. There may be some specifically with dedicated related deals some positive second half of the year impact from a revenue standpoint. But the majority of it, just based on the sales cycle, the timing and the dynamics, are gonna probably find its way most likely, into the quoting and the early stage order activity as people wanted to make sure they are well-positioned to receive assets, which will and probably a relatively constrained supply chain related industry. So it can the whole definition of what's good and bad is relative to the time frame at which you are framing it. We are absolutely moving into a world that if it can sustain, is moving into good. The reality of it is it's offset a couple quarters from what it will feel in the moment. And we'll have to navigate those two conflicting stories at exactly the same time. And that will impact how we deploy capital, how we prepare for growth, how we staff the operation, as those dynamics will be very changing and fluid. As we go forward. And we're prepared to do that. Right? To operate in both those environments. We're positioning Wabash on one hand to prepare for the reality of the moment, and on the other hand, absolutely preparing for a much better environment. As we move into the second half of the year getting ready for 27. You know, just to throw that out there again. Jeff Kauffman: No. I appreciate that clarity. Thank you very much. As always, you don't wanna get over your skis, but on the other hand, you know, for the first time in a couple years, there's a reason to be enthusiastic about a couple quarters down the road. You got it. So one last question. If I look at cost of goods sold, you know, it's not going down as quickly as revenue, which would make sense with some of the tariff-related costs. Where I wanna draw that down to is, you know, tremendous growth in parts as Mike Pettit was talking about. But the margins were down about 130 basis points. How much of a structural drag is what's going on with tariffs creating for cost of goods sold and, you know, when do you think we can try to recapture that in terms of passing those increases through to customers? Pat Keslin: Yeah. We talked about this at the last call as well, Jeff. The direct impact to our material cost directly due from tariffs is pretty minimal. The phenomenon you're seeing in our financials is really more of a market price-driven reality. As things have become more competitive with fewer units out there, we've been in a pricing competition to win units, which has impacted margins when you look at 2024 to 2025. That is much more the driver of what you're seeing there, squeezing gross margins than material cost and specifically material cost driven by tariffs. Jeff Kauffman: Okay. Thank you for that clarity, and thank you for your answers. Brent Yeagy: Yep. Yes. And, Jeff, appreciate the question. One clarity point for both of you. When we think about the antidumping and countervailing duties, the next round specifically that we will go through on February 6 will be an initial determination of where do they, one, if it's affirmative, what we're talking about in terms of what the percentage penalties could actually be. Once it moves through the process and then it gets the final determination, we'll be actually implementing the physical collection of those, which because it requires everything to change in terms of tariff codes and all the things that have to be done to pull that off. But there'll be an understanding within the industry of what the impact could be sooner than later. Then that actual impact will occur later in the year. So with that said, we really appreciate all the questions, and I'll turn it back over to John to finish up. John Cummings: Thank you, everyone, for joining us today. We look forward to following up with you throughout the quarter. And have a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, and welcome to the Boston Scientific Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lauren Tengler, Vice President, Investor Relations. Please go ahead. Lauren Tengler: Thank you, Drew, and thanks to everyone for joining us. With me today are Mike Mahoney, Chairman and Chief Executive Officer; and Jon Monson, Executive Vice President and Chief Financial Officer. During the Q&A session, Mike and Jon will be joined by our Chief Medical Officer, Dr. Ken Stein. We issued a press release earlier this morning announcing our Q4 and full year 2025 results, which included reconciliations of the non-GAAP measures used in this release. The release as well as reconciliations of the non-GAAP measures used in today's call can be found on the Investor Relations section of our website. Please note that on the call, operational revenue excludes the impact of foreign currency fluctuations, and organic revenue further excludes certain acquisitions and divestitures for which there are less than a full period of comparable net sales. Guidance excludes the previously announced agreement to acquire Valencia Technologies Corporation, which is expected to close in the first half of 2026 and Penumbra, which is expected to close in 2026, each subject to customary closing conditions. For more information, please refer to the Q4 financial and operating highlights deck, which may be found in the Investor Relations section of our website. On this call, all references to sales and revenue are organic and relative growth is compared to the same quarter of the prior year, unless otherwise specified. This call contains forward-looking statements regarding, among other things, our financial performance, business plans and product performance and development. These statements are based on our current beliefs using information available to us at today's date and are not intended to be guarantees of future events or performance. If our underlying assumptions turn out to be incorrect or certain risks or uncertainties materialize, actual results could vary materially from those projected by the forward-looking statements. Factors that may cause such differences are discussed in our periodic reports and other filings with the SEC, including the Risk Factors section of our most recent annual report on Form 10-K. Boston Scientific disclaims any intention or obligation to update these forward-looking statements, except as required by law. In addition, this call does not constitute an offer to sell or the solicitation of any offer to buy any securities or solicitation of any vote or approval in connection with the proposed transaction with Penumbra. Boston Scientific will file the SEC a registration statement on Form S-4 containing a proxy statement of Penumbra and a prospectus of Boston Scientific that will contain important information about Penumbra, boston Scientific, the proposed transaction and related matters. At this point, I'll turn it over to Mike. Michael Mahoney: Impressive, Lauren. Thank you. Good morning, and thanks, everyone, for joining us today. In 2025, we achieved over $20 billion in sales and for the second year in a row, delivered mid-teens growth, surpassing our financial goals that we set at the beginning of the year. This outstanding and highly differentiated performance was fueled by innovation and execution across our business units and the winning spirit of our global team. Fourth quarter '25, total company operational sales grew 14%. Organic sales grew 13%, achieving the high end of our guidance range of 11% to 13%, with continued strength across many of our businesses, including EP, WATCHMAN, IO, Endo and ICTx. Full year '25 operational sales grew 19%, while organic sales grew 16%, exceeding our guidance of approximately 15.5%. Q4 adjusted EPS of $0.80 grew 15%, exceeding the high end of our guidance range of $0.77 to $0.79. Full year adjusted EPS of $3.06 grew 22%, also exceeding the high end of our guidance range of $3.02 to $3.04. On a full year basis, we expanded adjusted operating margins by 100 basis points to 28%, balancing drop-through on the strong revenue performance throughout the year with reinvestment back into the business to drive long-term growth. Now for our 2026 outlook. We expect our differentiated financial performance to continue and are guiding to organic growth of 8.5% to 10% for Q1 and 10% to 11% for the full year. Our Q1 adjusted EPS guidance of $0.78 to $0.80 and our full year adjusted EPS guidance is $3.43 to $3.49, representing leverage double-digit EPS growth of 12% to 14%, and Jon will provide more details. I'll now provide some highlights on Q4 and the '25 results along with comments on '26 outlook. So regionally, on an operational basis, the U.S. grew 17% in the fourth quarter and 26% on a full year basis, with exceptional performance across the business units, particularly EP, WATCHMAN and ICTx. Operationally, Europe, Middle East, Africa grew 5% in Q4 and 3% for full year. Excluding the impact of the accurate discontinuation, full year EMEA growth would have been high single digits. EP also grew strong double digits in Q4 as we continue to lead with our ecosystem approach, offering differentiated technologies and comprehensive commercial support. As we look ahead to 2026, we anticipate momentum in EP and WATCHMAN to continue in Europe and growth to be higher in the second half of the year once the impact of the accurate discontinuation is annualized. Now the Asia Pac region. It grew 15% operationally in Q4 and 14% for the full year, led by mid-teens growth across Japan and China. Japan's growth in the quarter was driven by WATCHMAN and EP fueled by OPAL Mapping System placements and increased FARAPULSE cathode utilization, where we continue to gain share. China had another quarter of double-digit growth driven by EP, WATCHMAN and ICTx, and we expect EP momentum to continue into 2026, supported by our recent NMPA approval of our [ FARAWAVE NAV ] device as well as indication expansion into the persistent AF population. Now some commentary on our business units. Fourth quarter urology sales grew 13% operationally and 3% organic on a full year basis. On the full year basis grew 23% operationally and 5% organically. Our performance in euro this year was below our expectations, and we expect that our overall business will return to market growth in '26, with supply chain issues behind us, new product launches and the strengthening of our Neuromodulation franchise. We look forward to expanding our pelvic health portfolio with the recently announced acquisition of Valencia, which is expected to close in the first half of '26. Endoscopy delivered organic growth of 8% in both Q4 and for the full year and delivered a very strong year. Q4 growth was driven by our Endoluminal Surgery, Imaging Systems and Endobariatrics franchises, with the later receiving positive reimbursement support for ESG procedures. In December, we initiated a product removal for certain sizes of our AXIOS device due to a manufacturing variation. We do understand the issue and are working to bring these unique devices back to market in full by midyear and anticipate lower Endo growth in the first half of the year as a result. Neuromodulation had an excellent quarter, growing 10% in Q4 and delivering 8% organic growth for the full year. Our brain franchise grew low double digits on a full year basis, led by the Cartesia X and Illumina 3D offerings, providing the full benefit of directional stimulation, also improving efficiency and programming time. The pain franchise continues to strengthen and grew high single digits on a full year basis. This strong growth is a result of a deliberate strategy to expand our pain portfolio to bring options to the physicians, patients and hospitals we serve. This is further strengthened by the close of the Nalu acquisition, adding Peripheral Nerve Stimulation, PNS, to our portfolio. And within the quarter, we received expanded reimbursement coverage for the Intracept Procedure and this at a full market launch of the Intracept EDGE J Stylet, designed to improve the treatment experience. Our Cardiovascular segment delivered 16% growth operationally and organic in fourth quarter and 22% operationally and 21% organic on a full year basis. In January, we announced an agreement to acquire Penumbra, which is expected to close in '26. Penumbra offers a highly differentiated portfolio that operates in high-growth segments for Boston Scientific LAAC's offerings, including mechanical thrombectomy in neurovascular. The deal is both strategically and financially attractive to Boston Scientific and deliver significant value to patients and customers globally. Within Cardiovascular, Interventional Cardiology therapy sales grew 10% in Q4 and 8% on a full year basis. We're very proud of the coronary therapies franchise delivering double-digit growth in both the quarter and full year as we have shifted our underlying business to high-growth markets. Agent DCB has been a standout performer all year with this differentiated clinical benefit and reimbursement support, lifting our Drug-Eluting Technology growth to over 20% on a full year basis. We continue to make progress in other areas of the portfolio, and we're pleased to have completed enrollment in the fracture trial, studying our seismic IVL system. We anticipate presenting data from this trial later this year and continue to expect this differentiated technology in the first half of '27. In Q4, we did reorganize the reporting structure of our Peripheral Interventions divisions and we've aligned the Peripheral Vascular business led by Cat Jennings with Interventional Cardiology Therapies to amplify both commercial and R&D opportunities across similar technologies while retaining customer call point focus. This new business unit will now be called Interventional Cardiology and Vascular Therapies. Interventional Oncology & Embolization will continue led by Peter Pattison as a stand-alone business, and this structure will enable focus on this broad and unique portfolio. The Peripheral Vascular business grew 6% organically in Q4 with operational growth of 15%. Arterial growth in Q4 was driven by double-digit performance in TCAR supported by the recent launch of ENROUTE in China. And within the quarter, we completed our first cases in the U.S. with a seismic IVL system. We're excited to add this differentiated and complementary technology to our portfolio and expect to expand our indication to include below the knee in the second half of the year. In Venous low double-digit fourth quarter growth was driven by continued strength of Varithena and EKOS, and we're pleased to have the high [indiscernible], our clinical study in EKOS versus standard of care anticoagulants, accepted as a late breaker at ACC to be presented on Saturday, March 28. Our Interventional Oncology & Embolization business grew 17% operationally and 12% organically in Q4 and achieved nearly $1 billion of full year '25 sales, operational growth of 16% and organic of 12%. Q4 organic growth was driven by our category-leading embolization in cancer therapies portfolio with ongoing strength in cryoablation, which treats a broad number of cancer types. Now as we look ahead, we expect to continue to outpace the underlying market growth supported by new product offerings such as TheraSphere 360 Y-90 Management Platform, which is a web-based platform to simplify the entire process for patients and physicians. Cardiac Rhythm Management sales grew 1% organically in both the Q4 and for the full year '25. On a full year basis, our Diagnostics franchise grew high single digits and now represents nearly 20% of our overall CRM business. In core CRM, our high-voltage business grew low single digits, and our low-voltage business was flat in the quarter. We continue to see demand for our conduction system pacing offerings. And in Q4, we began enrollment in the SYNCHRONICITY trial, evaluating bundle branch pacing compared to conventional cardiac resynchronization therapy. So as we look to 2026, we anticipate that our growth will be closer to market in CRM over the course of the year, driven by the addition of our complementary BioEnvelope and ongoing momentum within our Diagnostics business. Our WATCHMAN business delivered an outstanding 29% growth in Q4 and on a full year basis, exiting the year with strong double-digit growth across all major global markets. We are extremely pleased with the performance of this franchise with above-market growth driven by the strong adoption of concomitant procedures, and we have now treated more than 25,000 patients concomitantly with WATCHMAN. As we look ahead, we continue to invest in our portfolio of clinical evidence and driving efficiencies for physicians. In the quarter, we announced a strategic partnership with Siemens Healthineers, to develop and commercialize their next-generation 4D ICE catheter called AcuNav, intended to offer physicians an innovative imaging option for stand-alone WATCHMAN or FARAWATCH procedures. And last month, we completed enrollment in the SIMPLIFY clinical trial, evaluating 2 single drug regimens as post-procedural alternatives to dual antiplatelet therapy with data expected in the second half of '26. Importantly, our CHAMPION trial, a large randomized trial studying WATCHMAN FLX versus novel oral anticoagulation was accepted and will be presented as a late breaker at ACC on Saturday, March 28. If positive, this data would support WATCHMAN as a first-line therapy for stroke prevention as an alternative to OEC and would expand the number of indicated patients from approximately 5 million today to 20 million globally. We're extremely proud of our global EP performance in the quarter with organic growth of 35% in the fourth quarter, resulting in 73% growth on a full year basis. As we enter our third year in the U.S. with our market-leading PFA technology, we believe that approximately 70% of AF ablations in the U.S. and 25 were done with PFA, with that number closer to 50% globally. Within the quarter, global growth was driven by PFA catheter utilization supported by OPAL placements in a scaled high-performing commercial organization. We continue to invest in our ecosystem approach to innovation and recently received approval and limited market release in both Europe and U.S. for our FARAPOINT PFA catheter. NAV enabled that can create focal lesions initially indicated for atrial flutter. We're also studying FARAPOINT in the REMATCH AF trial for use in [indiscernible] procedures with data expected in 2027. We're pleased to have initiated the [ OPTIMIZE ] trial studying the Cortex OptiMap mapping technology with the FARAPULSE PFA system, which is intended to address our unmet needs and identifying sources of Afib as an alternative to traditional anatomic approaches, a capability that may be particularly important to more complex patients. As we look to 2026, we anticipate that the EP market will grow approximately 15%, and we expect to outpace that market growth led by our differentiated PFA portfolio, ongoing expansion utilization of mapping systems and continued adoption of PFA across the globe. Importantly, Boston Scientific is uniquely positioned with this leading AF Solutions portfolio and a commercial team and the value to physicians of patients with our concomitant FARAWATCH procedure supporting operational efficiency and capacity. So in closing, I'm extremely proud of our team and our performance in 2025, and we believe that our '26 guidance along with our '26 to '28 goals of sales growing 10% plus, adjusted operating margin expansion of 150 basis points and leveraged double-digit EPS growth continue to be highly differentiated. We have an incredibly strong global team that's focused on advancing science for patients globally while delivering differentiated results today, setting us up for a strong 2026 and beyond. With that, I'll turn it over to Jon. Jonathan Monson: Thanks, Mike. Fourth quarter consolidated revenue of $5.286 billion represents 15.9% reported growth versus fourth quarter 2024. And and includes a 160 basis point tailwind from foreign exchange, which was in line with our expectations. Excluding this $74 million foreign exchange tailwind, operational revenue growth was 14.3% in the quarter. Closed acquisitions contributed 160 basis points to sales, resulting in 12.7% organic revenue growth at the high end of our fourth quarter guidance range of 11% to 13%. Q4 2025 adjusted earnings per share of $0.80 grew 15% versus 2024, exceeding the high end of our guidance range of $0.77 to $0.79. Outperformance was driven primarily by our favorable adjusted tax rate in the quarter. Full year 2025 consolidated revenue of $20.74 billion represents 19.9% reported growth versus full year 2024 and includes a 70 basis point tailwind from foreign exchange. Excluding this $114 million tailwind from foreign exchange, operational revenue growth for the year was 19.2%. Post acquisitions contributed 340 basis points to sales, resulting in 15.8% organic revenue growth exceeding our full year guidance of approximately 15.5%. Full year 2025 adjusted earnings per share of $3.06 grew 22% versus 2024 exceeding the high end of our guidance range of $3.02 to $3.04 and marking our third consecutive year of 20% plus adjusted earnings per share growth. Adjusted gross margin for the fourth quarter was 70.7%, resulting in full year 2025 adjusted gross margin of 70.6%, representing a 30 basis point expansion versus full year 2024. In 2026, we anticipate full year adjusted gross margin to be roughly in line with full year 2025 as we expect favorable product mix to be largely offset by investments in our global supply chain in the annualization of tariffs. Fourth quarter adjusted operating margin was 27.3%, resulting in a full year 2025 adjusted operating margin of 28.0%, improving 100 basis points versus full year 2024. In 2026, we expect to expand adjusted operating margin by 50 to 75 basis points progressing toward our goal of 150 basis points of operating margin expansion over our long-range plan. On a GAAP basis, fourth quarter operating margin was 15.6%, resulting in a full year reported operating margin of 18.0%. These results include a $194 million litigation charge relating to the full resolution of a legacy IP-related manner. Moving to below the line. Fourth quarter adjusted interest and other expenses totaled $99 million resulting in full year adjusted interest and other expenses of $430 million, slightly favorable to our expectations, primarily driven by higher interest income. On an adjusted basis, our tax rate for the fourth quarter was 10.7% and 11.7% for the full year, which was favorable to expectations and inclusive of favorable discrete tax items. Our operational tax rate was 14.9% for the fourth quarter and 14.2% for the full year, in line with our expectations. Fully diluted weighted average shares outstanding ended at 1,496 billion shares in the fourth quarter and 1,494 billion shares for full year 2025. Free cash flow for the fourth quarter was $1.13 billion, with $1.364 billion from operating activities less $351 million in net capital expenditures. Full year 2025 free cash flow of $3.659 billion exceeded our expectations, reflecting 38% growth versus 2024 and 80% free cash flow conversion. For 2026, we expect full year free cash flow to be approximately $4.2 billion, and we continue to target free cash flow conversion in the range of 70% to 80% over the long-range plan. As of December 31, 2025, we had cash on hand of $1.96 billion, and our gross debt leverage ratio was 1.9x. Following the announcement of our agreement to acquire Penumbra, all 3 major rating agencies affirmed our A- equivalent credit rating. Additionally, Fitch Ratings upgraded our outlook from stable to positive. Our capital allocation priority remains strategic tuck-in M&A, followed by share repurchases. In alignment with this strategy, we recently closed the acquisition of Nalu Medical, which is complementary to our neuromodulation pain franchise. Additionally, we announced agreements to acquire Valencia Technologies and Penumbra, which upon close, will enable Boston Scientific to enter strategic adjacencies within our urology and cardiovascular businesses, respectively. Our legal reserve was $242 million as of December 31, with $46 million already funded through our qualified settlement funds. I'll now walk through guidance for Q1 and full year 2026. We expect first quarter 2026 reported revenue growth to be in a range of 10.5% to 12% and versus first quarter 2025. Excluding an approximate 200 basis point tailwind from foreign exchange based on current rates, we expect first quarter 2026 operational and organic revenue growth to be in a range of 8.5% to 10%, which includes an approximate 150 basis point impact from the discontinuation of ACURATE and a transient impact associated with the product removal of certain sizes of our AXIOS device. We expect full year 2026 reported revenue growth to be in a range of 10.5% to 11.5% versus 2025, excluding an approximate 50 basis point tailwind from foreign exchange, based on current rates, we expect full year 2026 operational and organic growth to be in the range of 10% to 11%. We expect full year 2026 adjusted below-the-line expense to be approximately $440 million. Under current legislation, including enacted laws and issued guidance, we forecast a full year 2026 adjusted tax rate of approximately 12.5%. In Q1, we anticipate our adjusted tax rate will be approximately 12%. We expect full year 2026 adjusted earnings per share to be in a range of $3.43 to $3.49, representing growth of 12% to 14% versus 2025, including an approximate $0.03 headwind from foreign exchange. We expect first quarter adjusted earnings per share to be in the range of $0.78 to $0.80. In closing, I'm pleased with the strong financial performance our global team delivered in 2025, and we look forward to executing on our full year 2026 guidance of 10% to 11% organic revenue growth 50 to 75 basis points of adjusted operating margin expansion and 12% to 14% adjusted earnings per share growth. For more information, please check our Investor Relations website for fourth quarter 2025 financial and operational highlights, which outlines more details on fourth quarter results and our 2026 guidance. And with that, Lauren, I'll turn it back to you to moderate the Q&A. Lauren Tengler: Thanks, John. Drew, let's open it up for questions for the next 35 minutes or so. In order for us to take as many questions as possible, please limit yourself to one question. Drew, please go ahead. Operator: [Operator Instructions] The first question comes from Robbie Marcus with JPMorgan. Robert Marcus: Great. I'll ask the question that's on everybody's mind today. Mike, there were fears that U.S. EP and U.S. WATCHMAN could come in [indiscernible] and U.S. EP was flat with third quarter, U.S. WATCHMAN missed by a hair. What exactly happened in the quarter versus your expectations versus the market? And the reason people are concerned is these are 2 of the key growth drivers. So you talked about confidence in above 15% EP growth next year of the market. The Street is sitting at around 25%. It feels like that needs to come down. hopefully, you could help us level set expectations for those 2 key products? What happened in the quarter and how to think about them in '26. Unknown Executive: Thank you, Robbie. Happy to. And I'll touch on your question. Overall, we're super pleased with the quarter. in the full year, growing 60%, EPS growing 22% for the full year. And 6 of our 8 business users growing faster than the market, growing faster than the WAMGR and setting us up for strong guide and investments for the overall company. The 2 businesses that you called out, I think you nailed it. If you look at EP, we're quite pleased. Actually, our results in Q4 exceeded our internal target and WATCHMAN grew 29%. It's pretty much similar to the third quarter as we lap the anniversary of the concomitant reimbursement a year ago. Specific to EP, really pleased with the results at 35%. Two of our larger competitors resulted -- had results of 6.5% growth, the market leader. Third place player 12.5%. We grew 35%. So we continue to gain share overall. And to your point, we think the market in Q4 was closer to 18% to 20% growth rather than with some other companies that claim to 25%. So we think the market was kind of an 18% to 20% range, similar to what we developed internally in our plan and we've called the market for 2026, about 15% growth. So we think it's an excellent market. We don't think it grew 25% in the fourth quarter. We grew faster than our peer group based on the percentage that I saw or that we laid out. We actually grew even faster outside the U.S. than the U.S. The U.S. is more highly penetrated with PFA. There's actually more competitors present outside the U.S., and we've accelerated growth outside the U.S. So our PFA performance is quite strong. The market is still healthy. We think it's 18% to 20% in the fourth quarter. And we exceeded our internal plan and we got new products approved. Our mapping footprint continues to grow. And we have a lot of clinical data that various clinical studies that are in flight. So we're very confident with our PFA business and our performance. With WATCHMAN, we grew 29%, excellent job. We pretty much are the market with WATCHMAN Concomitant continues to grow, and we did annualize the concomitant reimbursement, which happened in fourth quarter last year. So we're quite proud of the 29%. When you come to the consensus numbers, we exceeded our guidance. We actually exceeded analyst consensus. The mix of that is slightly different, but it shows the power of all of Boston Scientific being able to deliver to beat our guidance to be consensus in the quarter and the full year, and we're quite proud of the EP performance based on the commentary I just provided. Operator: The next question comes from Larry Biegelsen with Wells Fargo. Larry Biegelsen: Look, I'm sure there'll be a lot of questions on the US EP business, but I wanted to ask about WATCHMAN. So basically, my question is, can you confirm you're not seeing an impact from the 3 recent trials we saw in 2025? And I want to ask about CHAMPION since it's such an important trial. Maybe for Dr. Stein, what endpoints do you think physicians will be most focused on? And how important do you think it is to physicians to see similar rates of both ischemic and hemorrhagic stroke like we did in OPTION? And I'll leave it at that. Ken Stein: Yes. Well, again, look forward to presenting the results of CHAMPION at ACC, and we will be hosting an event for investors on that Saturday night at 5:30 p.m. central time and we can get deep into the data at that point. Again, I think the -- there are 2 co-primary endpoints: one, noninferiority for combined endpoint scope systemic embolism and [indiscernible]. One for bleeding. And just as we saw with OPTION, I think both of those are going to be important for the field. In terms of the first half of your question, it can a-- again, you just saw the numbers we reported out. It came very -- without any equification say that we have not seen any impact from those trials, closure alone AF and OCEAN. And again, we continue to see very robust uptake of WATCHMAN in general and of concomitant procedures specifically. Operator: The next question comes from Travis Steed with Bank of America. Travis Steed: I guess I want to push a little more on US EP, just because it was flat sequentially and your RF competitors grew $18 million and $26 million sequentially in the U.S. So it does like share change versus last quarter at least on a sequential basis. And I don't know if there was something that changed late in the quarter because you were pretty bullish at some December meetings with investors and so I don't know if there's anything kind of changed at the end of the quarter and especially considering the Q1 guide of 8.5% to 10% and kind of what that means for EP in the early part of '26? Unknown Executive: I think we've been pretty consistent with our messaging on EP. We do think the market is 18% to 20%, like we said, I think some maybe overshot the market growth in Q4. when you're the highest market share leader in PFA and competitors are coming out, we planned and we do expect to lose some share given their competitive launches that are coming out and giving our really dominant market share position going into 2025. So we did anticipate that. And we are also very comfortable to say, as we looked at the end of '26 that will be the clear EFA market leader with growing -- and we also think our EP business grow faster than 15%. So with new interest coming, it's not surprising that we lost some share. But the overall EP growth of 35%, I think, is quite impressive given the size of that business now and grew faster overall than our competitors. On the first quarter guide, we guided full year to 10% to 11%, which we think is strong guidance for the -- given where we are early in the year here, an 8.5% to 10% at simply 2 factors really. One is our toughest comp of the year. And secondly, we do have the about 150 bps of impact from the ACURATE discontinuation along with the Axios withdrawal -- well, not full withdrawal, but partial matrix withdrawal, which will impact the first half of the year. So we see both those products -- both those issues will be addressed as you get into, call it, June for the second half of the year with the impact of [indiscernible] being gone, AXIOS being gone, our product launches and slightly easier comps, although it's still tough but slightly easier than the first quarter. Operator: The next question comes from Rick Wise with Stifel. Frederick Wise: Mike, I hate to stick with EP. But looking at the EP discussion from another angle, maybe talk us through your expectations for how the '25-year is going to unfold. I mean maybe the cadence of the year, specifically relating to better understanding the growth acceleration that seems likely to occur as the quarters progress, helped by your innovation pipeline. And so maybe you can drill down further into what are the implications of FARAPOINT. And talk to us again about the ancillary products like ICE catheter, et cetera. And maybe any updates on the FARAFLEX timing? So we better understand how -- again, the case of and the setup as we head into -- I'm sorry, for '26 and the setup for '27. Unknown Executive: Sure. I guess as we exit '25, we're kind of 65-ish percent PFA market share position. We have a market that we think is going to grow 15%. We have high utilization in the U.S., call it, 80% -- 70%, 80% and outside the U.S., quite a bit lower. So with a healthy market, we expect to continue to grow above market, our PFA share will reduce somewhat, but we're very confident by year-end. Likely, if you add all the other competitors together, our share will be equal to them or in that area. We're not going to break out share by quarter, but we're very confident that we'll maintain a clear market leadership in PFA over the course of 2026 and beyond. And I think if you look at the drivers that continue the strong pace of growth overall, one, it's geographic scope. We continue to gain share in Japan. We just got a persistent indication. We continue to drive more account openings, utilization in Japan. China is a very, very big market, a small part of our number. We made significant investments in the past 18 months in China, and you'll see China have a more significant impact on our overall global growth. Europe is the most competitive market, but our growth rate is quite impressive there. And we just got approval for the FARAPOINT catheter. In the U.S., same thing are now more significant mapping scaled mapping commercial team continues to gain experience, continues to add more [indiscernible], more OPAL systems. The FARAPOINT product will allow us more time in the lab to expand our reach in different clinical indications. And we have a host of products in the pipeline. You mentioned a few of them. They won't impact 2026 in a meaningful way. But we'll continue to widen out the portfolio with our Cortex clinical trial work being done, the recent FARAPOINT approval and then we have a whole cadence of new catheters coming over the coming 1 to 3 years. So we have significant investments in the portfolio, and we continue to expect to be the clear market leader and have a very strong '26 growing faster than market. Operator: The next question comes from Joanne Wuensch with Citibank. Joanne Wuensch: I suspect many of us will be taking through WATCHMAN and FARAPULSE or EP for quite some time. But to drive the back half of the year, I suspect other products are accelerating and it's not just easing comps from AXIOS and ACURATE. What would you like to highlight to us that you see for a second half accelerating then into 2027, so maybe we can expand our focus just a little bit? Unknown Executive: Yes. Great. I think, again, we expect to have a great year in EP and WATCHMAN. We've got CHAMPION trial coming out. Those results coming through. Concomitant is doing terrific. We're training more EP docs on Concomitant every day. As you said, broadly, the comps do get a little bit easier. But we expect to have stronger performance in a number of our business units in '26 versus what we had in '25. We do expect our PI business, our euro business, our [ neuromod ] business and our CRM businesses to have stronger years in '26 than they did in '25. Not many questions on [ neuromod ], but that business we expect to be a high performer in '26, along with improvement in PI, euro and CRM. And then you have our other businesses, which are performing quite well as we get through this Axios issue. Our Endo business is strong. Our IO business has now scaled to over $1 billion, growing nicely in the double digits. Our coronary business grew 20% in the quarter. And now we're launching our seismic IVL and PI, and we just finished enrollment in our IVL platform for coronary. And importantly, we've also initiated our first clinical work with Vitalist and hypertension. So we have a number of investments that we're making for the long term. And it's really the whole of Boston Scientific and of our 8 divisions, 6 of them grew faster than market, which is pretty consistent. We grow faster than WAMGR. So we love our EP business. We love our WATCHMAN business. But it's the entire company that gives us confidence in the 10% to 11% guide for the full year. Operator: The next question comes from David Roman with Goldman Sachs. David Roman: I wanted to ask, Mike, if you could just expand a little bit more as you think about the diversification of growth drivers here on a go-forward basis. As you kind of reflect on 2025, you had some challenges in urology, you're raising some challenges here in endoscopy in the first half of the year. So what investments and processes are you putting in place to make sure that you're seeing consistency and performance in the non-EP and WATCHMAN businesses given those will represent a much more significant percentage of growth here on a go-forward basis? Michael Mahoney: Yes, we do that every day at the company. I highlighted on Neuromod a smaller business, but I think you'll see strong performance in 2026. We just added additional product in that category via acquisition. Urology was a tougher year this year. We had some supply chain issues. Axonics integration didn't go as well as we wanted to initially with commercial disruption but we feel comfortable with that. So also with new product launches come into urology, we expect urology to be at minimum back-to-market growth with our euro business. Neuromod quite a bit above growth and Endo is really a solid, high-performing company with second half launches that will be important for us once we get through that Axios issue. So a lot of confidence that MedSurg in general should have ideally we plan on a better year than '26 in '26 versus '25. In other businesses, ICTX is a very large business with us now. Our complex coronary business grew 23% -- I'm sorry, our complex coronary to be 31% in the quarter, 23% for the year. And our ICTX business despite the discontinuation of ACURATE grew 10% in the quarter. So that business is doing extremely well with agent, with our imaging portfolio. And we have the most product launches and biggest clinical studies in that business. So we continue to diversify and strengthen the ICTX business that's doing quite well. In our Interventional Oncology business, we have new product launches there. We've done a tuck-in M&A. So we continue to fuel all of our businesses. We don't invest at the same rate for all of them given the WATCHMAN and EP growth profile. But we -- it's classic Boston Scientific, doing organic R&D, tuck-in M&A to continue to grow above our weighted average market growth rate. Operator: The next question comes from Patrick Wood with Morgan Stanley. Patrick Wood: I'd love to hop off essentially from that topic. If I zoom out, there's been a ton of money spent building out people's vascular sales forces, obviously, the proposed transaction on your side, but some of your peers to in the last kind of 18 months. And I guess as I was reflecting on that and I was like how much is that going to help things like seismic in the IVL side and TCAR building out that force in a larger way? And then equally, are there things coming down the pipe over and above agent that we can't see on the vascular side that's causing a lot of money to be deployed in acquiring and building out sales forces there. Unknown Executive: I'm not sure I quite get the question. I would say on the commercial side, we have tremendous scale in our PI business commercially and within our individual cardiology business. We're combining the reporting structure of those business units together. So we're very much market leaders in that area. The announcement of Penumbra as we talked about, is really exciting for us. It gets us into new high-growth markets in PE and Neurovascular, just to name a few, with a highly scaled sales force. So in terms of commercial clinical capability, I think we're pretty unmatched in that area. And traditionally with the company, you've seen a lot of organic R&D like agent was and a lot of clinical work with new products being introduced, starting with IVL this year, and we'll continue to look at more tuck-in M&A there. So I think that whole we call that ICT area now, we're very bullish on and some of the biggest investments in the company are in that area. Operator: Next question comes from Danielle Antalffy with UBS. Danielle Antalffy: And Mike, sorry, this is another EP, WATCHMAN question. And maybe it's actually for Dr. Stein, though. I mean, I guess I'm curious, as you see competitors launch, I know you guys talked about like pretty significant efficiency gains with FARAPULSE and PFA devices overall. Those are probably slowing. We have WATCHMAN coming. I mean I asked this at the Analyst Day, but I'm just curious what's playing out in the real world as far as capacity at the EP lab because a lot of the docs we talk to sound like they have growing waitlist for their EP procedures and this could only just get exacerbated once CHAMPION comes assuming CHAMPION is positive. So I'm just curious what you could say to that and how much that is currently impacting overall market growth? Ken Stein: Yes, Danielle. I mean I think you nailed it, right? I mean we've now anniversaried -- I mean, we're 3 years into the launch of FARAPULSE in the U.S. I think the efficiency gains that people are largely now built into the system. And I think as Mike said, that's why what we're looking for, again, 15% growth in the EP market next year. Again, we are growing and believe it will continue to grow faster than that market. But the key -- again, I feel a little sort of almost silly to apologizing for 15% growth in what's one of the largest markets in med tech. But the keys to driving that forward will be, a, starting the build-out of ASCs in the United States to unlock some more capacity and reduce those waiting lists, continued just development and repurposing cath labs for the use for EP procedures in the hospital, continuing what we can do as a company to help further drive greater efficiency in procedures. So things that we can do with concomitant procedures, just growth of concomitant overall helps with that efficiency. We've talked about some of the other investments that we've made, the partnership with Siemens for [ the ICE ]. But really, until all of those things play out, that's why we really don't see growth exceeding 20% in the market and why that 15% seems to us to be a much more realistic way to view it. but again, to close, but it is our intent to continue to grow faster than that market. Operator: The next question comes from Michael Polark with Wolfe Research. Michael Polark: I have a question on ICE. So the partnership with Siemens Healthineers for the 4D catheter versus your plans to launch a 2D product. Can you just help us understand, do these things work together? Does the partnership with Siemens, is that a reflection of a fresh view on how you plan to go to market with the 2D product? Help us understand how these are catalysts, how they coexist? I would appreciate any color. Unknown Executive: Yes. We'll give it to a little bit. It's a bit too early for that. We're excited about the Siemens collaboration. That's a product that's in development. It's not commercially available yet. So we -- in partnership with them, it's really going to be different segments. That will be very much a premium product and markets that can pay for a premium product, and we think it will be differentiated and further differentiate our WATCHMAN and FARAFLEX capability. 2D ICE would be a different price point. It's been an established market for a while. So our 2D ICE programs will really be just a nice portfolio addition to our overall portfolio within our EP portfolio bag. Operator: The next question comes from Matt Taylor with Jefferies. Matthew Taylor: I wanted to follow up on CHAMPION. You sound excited about that and should be, it's a big study. I was wondering if you could comment on the range of outcomes for that. Obviously, noninferiority trial, do you think there's any chance of showing superiority on any of the endpoints or the secondary endpoints? And I also wanted to ask, if you think a positive champion result could boost concomitant in the option indication? Ken Stein: Yes, Matt, first of all, just to clarify, the bleeding endpoint is powered as a superiority endpoint. We'll see what it shows when we when we report it out, but the goal there would be to show superiority on bleeding complications. I think it'd be -- you would have needed to power for superiority on stroke would have needed a trial that would probably have been an order of magnitude larger. And so that's part of -- and -- well, just backtrack a little bit. And I don't think we need to show superiority on stroke. Again, the goal here would be to show that WATCHMAN would be non-inferior, so as effective as the drugs but to be able to show superiority and bleeding. And again, that was what we demonstrated with option. And I think everyone's seen the impact that, that's had for the option population. In terms of the second part of the question, I think it's a perceptive question because there are a couple of things that would happen if CHAMPION does turn out to be positive, all right? And one is developing the new indication, but the other is strengthening the current indication. And so I do believe that a positive champion would give increased [indiscernible] to referring for the current indication, which includes the option indication. It will take time to build out the new indication, get better representation and guidelines and get a revision of the CMS national coverage decision. And again, that's part of -- when we look at the CHAMPION story, right, if it's positive, it's not just a step change in growth in WATCHMAN, but some of it sustains the growth in WATCHMAN over our long-range plan. Operator: The next question comes from Josh Jennings with TD Cowen. Joshua Jennings: Mike, it's only been a couple of months since the Investor Day. And I think just wanted to hear about your confidence level in hitting your LRP targets through '28, specifically the 10%-plus organic [indiscernible] throughout this call, I think your confidence level is clear that 2026 guidance is achievable. But any updates just on your confidence level through the LRP and the double-digit organic revenue growth target? Michael Mahoney: Yes, it hasn't changed. If we were doing our Investor Day today, we'd get the same numbers. 10% plus '26 to '28, 150 bps of margin improvement, strong double [indiscernible] growth even within that. And then we think Penumbra further enhances our WAMGR and further strengthens the company beyond that. So really no change in position here. Our whole key to our business is being in fast-growth markets, which we've demonstrated we anticipate in that time horizon, [indiscernible] gets closer to 9. Penumbra actually could slightly even improve that once that closes by a small margin, but slightly improve it. And excluding Penumbra, we're very comfortable with those LRP goals as we've stated. Operator: And I understand there's time for one last question, I have that from Chris Pasquale with Nephron Research. Christopher Pasquale: I think I heard you say that you think U.S. PFA penetration is already at 70% for [indiscernible] was a little higher than what we were thinking and suggest that we're already in the latter innings of that mix shift. I'd love your thoughts on what's left to penetrate with TSA, particularly as we think about other procedure categories like SBT or VT and what's going to be necessary from either a product or a data perspective in order to really move into those segments? Ken Stein: Yes. Thanks, Chris. Again, I think, first of all, right, the 70% penetrated [indiscernible], there's still 30% left to penetrate. And there's always just a tailwind of adoption of new technologies. I think as you look at arrhythmias other than atrial fibrillation, there is probably the 2 prime use cases where we would see a real advantage to moving to PFA would be for [indiscernible], the atypical atrial flutter type thing, although, frankly, we think that's going to be a diminishing part of the market going forward because usually, where that's seen, that's a redo AF ablation. And we just see redo numbers shrinking with the efficacy of FARAPULSE for de novo ablation. I think the other thing you hit on is [indiscernible]. We are already engaged in a couple of studies of using FARAPULSE technology for ablation in the ventricles and it's one of the areas where both FARAPOINT catheter and FARAFLEX catheter, which is in development now, and we're very pleased with the progress of that in its first human use studies. But that is one of the areas and I think those catheters and those form factors are going to shine. Lauren Tengler: Thank you for joining us today. We appreciate your interest in Boston Scientific. If we were unable to get to your question or if you have any follow-ups, please don't hesitate to reach out to the Investor Relations team. Before you disconnect, Drew will give you all of the pertinent details for the replay. Thank you, everyone. Operator: Please note, a recording will be available in one hour by dialing either 1 (877) 344-7529 or 1 (412) 317-0088 using replay code 7215110 until February 11, 2026, at 11:59 p.m. Eastern Time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.