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Operator: Greetings, and welcome to the Aurora Cannabis Inc. Third Quarter 2026 Results Conference Call. [Operator Instructions] This conference call is being recorded today, Wednesday, February 4, 2026. I would now like to turn the conference over to your host, Kevin Niland, Director of Strategic Finance and Investor Relations. Please go ahead, sir. Kevin Niland: Hello, and thank you for joining us. With me is Miguel Martin, Executive Chairman and CEO; and Simona King, CFO. Earlier this morning, we filed our financials for the fiscal third quarter 2026 period ending December 31, 2025, and issued a news release containing these results. This news release, along with our financial statements and MD&A available on our IR website as well as via SEDAR+ and EDGAR. We have also posted our investor presentation to our IR website for reference purposes. Our discussion today serves as a reminder that certain matters could constitute forward-looking statements that are subject to risks and uncertainties relating to our future financial or business performance. Actual results could differ materially from those anticipated in those forward-looking statements. Risk factors that may affect actual results are detailed in our annual information form and other periodic filings and registration statements. These documents may similarly be accessed via SEDAR+ and EDGAR. Following our prepared remarks, we'll conduct a question-and-answer session with our covering analysts. With that, I'll turn the call over to Miguel. Please go ahead. Miguel Martin: Thanks, Kevin. Our quarterly performance reflects our strong competitive position in the rapidly expanding global medical cannabis market and continued commitment to profitable and sustainable growth. This success is supported by our proven commercial execution and purposeful investments in science, technology and talent. Additionally, our dedicated focus on improving patient access and strengthening physician engagement has contributed significantly to these results in fiscal Q3. Let's begin with a brief review of the quarter. First, net revenue increased 7%, driven by a record 12% growth in global medical cannabis revenue, including a 17% increase internationally. Notably, more than half of our total net revenue was generated outside of Canada. Second, adjusted gross margin rose 100 basis points to 62%, where we benefited from strong medical cannabis margins of 69%, which was the result of sustained growth in our higher-margin international markets. Third, profitability held strong with adjusted EBITDA of $18.5 million and adjusted net income of $7.2 million. And finally, we generated positive free cash flow of $15.5 million and maintained our strong balance sheet with over $150 million in cash and the absence of cannabis business-related debt. Unlike most peers, we have focused on medical cannabis as the most promising industry segment for nearly a decade. We have, therefore, deployed considerable resources and investments, providing us with the following competitive advantages. We are one of Canada's largest global medical cannabis companies. We are Canada's leading exporter of medical cannabis. And finally, we are a market leader in the 3 biggest nationally legal medical cannabis markets outside of Canada. Notably, about 90% of our annual manufacturing capacity is produced within Aurora's European and TGA GMP certified facilities and is subject to very stringent international standards. These standards are only increasing, significantly limiting with the number of market participants. There is a limited number of cannabis companies like Aurora that have regulatory certifications for their manufacturing facilities that permit shipments directly to European and Australian markets. Aurora manufactures most of its own products and distributes them compliantly and profitably. This advantage helps to ensure consistency of supply around the world, critical to both prescribers and patients and achieves lower manufacturing costs through higher yields, potency improvements and other operational efficiencies. As this industry evolves, maintaining our momentum in global medical cannabis requires an even greater commitment. This entails dedicating our full attention to solidifying and growing our leadership position. Following a strategic review, we have identified the following actions. First, we will begin exiting select markets within the lower Canadian consumer cannabis segment, enabling us to further prioritize allocating products and resources to our higher-margin global medical cannabis business. Since consumer cannabis carries higher sales and marketing expenses than Medical, this will benefit adjusted SG&A and consolidated adjusted gross margins in the coming quarters. While we expect some onetime costs that will impact cash flow in fiscal Q4, once the initiative is complete, we anticipate higher adjusted EBITDA contributions thereafter. Second, in relation to our plant propagation business, we are divesting our lower-margin plant propagation operations by selling our controlling stake in Bevo to its other principal shareholders. Combined, these actions will allow us to allocate capital more effectively, deliver enhanced profitability, streamline our operations and improve execution quality. On a related note, today, we filed a prospectus supplement establishing a new at-the-market equity program. The ATM provides us the flexibility to issue and sell up to USD 100 million of common shares from time to time at our discretion. The company intends to use proceeds raised under the ATM program, if any, for strategic and accretive purposes only, including for increased cultivation capacity and potential M&A. With that, let's now dive into our individual medical cannabis markets. Germany is the largest individual medical cannabis market in Europe and remains closely watched across the region due to its outsized influence on neighboring countries. More than half of EU member countries have already integrated medical cannabis into health care, including reimbursement, which leads towards greater international alignment on regulatory approaches. This provides an obvious advantage for compliant EU GMP-certified companies like Aurora. The German market is still growing and was the primary driver of our double-digit growth in international revenue. According to German regulatory data, imports reached 72 metric tons in 2024 and are estimated to have more than doubled in 2025. Our successful commercial execution and strong reputation among wholesalers, distributors and pharmacists have enabled us to continue to gain share in this rapidly growing market. We have consistently maintained a broad selection of core and premium products for the German market. However, more recently, we enhanced our offerings by introducing a new medical cannabis brand that prioritizes affordability and expands patient options without compromising quality standards. While increased competition in Germany has led to some price pressure, namely affecting the value segment as new players enter and grow, our core and premium products, which represent most of our sales volume have remained largely unaffected in terms of baseline pricing. The German government is considering modifications to the current telehealth framework related to cannabis descheduling, but it is still unclear how developments will unfold. We want to ensure that reasonable access to high-quality medical cannabis for the general public is maintained. But should changes be implemented within telehealth, we will adapt just as we did in Poland. We are currently doubling production at our manufacturing site in Germany, increasing scale will facilitate yield improvements and operational efficiencies, allowing this facility to mirror the performance of our Canadian sites based upon the same industry-leading genetics and product consistency. In addition to the planned operational improvements, our German site joins our Canadian facilities that were recently GMP certified for another 3 years. This consistent supply of GMP manufactured product is vital as we prepare for further growth in Germany and adjacent regulated markets. Australia remains our largest international medical cannabis market, where we currently hold the #2 share in what could become a $1 billion opportunity according to the Penington Institute. Notably, most sales in Australia, both for MedReleaf Australia, which we fully acquired 2 years ago and for the market overall are concentrated in value-priced products. This differs significantly from our other national medical cannabis markets where our portfolio is anchored in core and premium offerings with stronger margins. We are actively working to shift our Australian sales mix towards the same world-class core and premium products we offer globally and expand patient access, including through additional distribution agreements. The Australian market is particularly attractive and positively impacting patient outcomes as it offers one of the broadest product format ranges outside of North America, enabling us to fully leverage our diverse portfolio beyond flower and oils. While we are confident in our ability to successfully elevate the product mix, we are working through some anticipated near-term pressure on both sales and gross profit during the transition. In Poland, through continued collaboration and effective commercial execution, we gained market share and held the #1 position in calendar year 2025. We are widely regarded as a key partner in advancing medical cannabis in the country and are benefiting from increased annual import limits, including in fiscal Q3, which further supports our continued growth potential. The market has certainly evolved, but we have successfully navigated the shift in prescriptions from telehealth platforms to clinics while maintaining solid relationships with the regulatory authorities. In our view, we are well positioned to maintain this leadership position in Poland, thanks to our very skilled team engaging with all the key stakeholders and our broadening product portfolio of high-quality medical cannabis products. We recently expanded our product portfolio with the launch of a third proprietary cultivar in Poland, following market success in Canada, Germany and Australia. These new cultivars are grown and manufactured in our GMP-certified facilities using premium hang drying and curing techniques to ensure consistently high-quality standards. In the U.K., we primarily operate in the premium and super premium segments where there is less competition, but an influx of value products in the market resulted in lower year-over-year sales during fiscal Q3. Our strategy is focused on expanding our distribution and clinic relationships through new partnerships, a critical step to onboarding and connecting with patients. Turning to Canada. We remain a strong leader in medical cannabis. Net revenue grew year-over-year during fiscal Q3 to a new record, and we gained market share, a key point of differentiation for us in the competitive market. Our priorities are enhancing our online marketplace, product innovation and assortment and ensuring a high-quality patient experience, especially for our valued veteran patients. In summary, we are reallocating and directing our resources to focus primarily on the global medical cannabis market, where we excel and see runway for growth. This involves gradually scaling back our Canadian consumer cannabis operations and are selling our controlling interest in our Plant Propagation business. We believe this approach will improve our operational efficiency, unlock greater opportunities in both our existing markets and new countries and drive sustainable revenue growth and profitability. Let me now turn the call over to Simona for a detailed financial review of fiscal Q3, followed by an outlook discussion. Simona King: Thank you, Miguel. We are encouraged by our fiscal Q3 results as reflected in our revenue growth, strong adjusted EBITDA, positive adjusted net income and free cash flow. Time and again, we have demonstrated the soundness of a medical cannabis first strategy and our consistent ability to deliver results aligned with our long-term objectives. Let's review fiscal Q3 2026 compared to the prior year quarter and then discuss our outlook for the full year. First, net revenue of $94.2 million represented 7% growth, supported by record contributions from our global Medical Cannabis and Plant Propagation segments. Second, consolidated adjusted gross margin rose 100 basis points to 62%, while adjusted gross profit reached $55.6 million, a 6% increase. Global medical cannabis held its robust 69% adjusted gross margin. Third, adjusted EBITDA was strong at $18.5 million, combined with adjusted net income of $7.2 million. Fourth, we generated positive free cash flow of $15.5 million. And finally, we ended the quarter with $154 million in cash, cash equivalents and short-term investments and no cannabis business debt. In medical cannabis, net revenue rose 12% to $76.2 million, inclusive of 17% growth internationally. We benefited from increased distribution in Germany and new product offerings in Poland, which combined with continued strong contributions from Canadian Medical. Medical cannabis comprised 81% of net revenue compared to 77% in the prior year and approximately 95% of adjusted gross profit. Adjusted gross margin for medical cannabis held strong at 69%, driven by high-margin international markets that benefited from sustainable cost reductions, high selling prices and operational efficiencies, including sourcing for Europe from Canada. Consumer cannabis net revenue was $5.2 million, down 48% from $9.9 million. The year-over-year change was the expected result of the company's strategic shift to focus on portfolio optimization and the allocation of cannabis flower to the highest margin business segments. Adjusted gross margins for consumer cannabis was 28% compared to 26% due to sales of higher-margin products. VIVO's plant propagation net revenue increased to $11.3 million, up 27% from $8.9 million in the prior year. Adjusted gross margin for plant propagation revenue fell to 16% compared to 40%. The decrease was due to increased contract labor and utilities costs as well as inventory write-offs of $1.1 million in the current quarter related to surplus plants. Consolidated adjusted SG&A increased 14.5% to $35.8 million. The year-over-year change relates to higher professional fees as well as additional headcount and contract labor costs in Europe and Australia that are supporting these growing higher-margin markets. Adjusted EBITDA was $18.5 million compared to $19.4 million in the prior year, with the decrease primarily related to lower adjusted gross profit in the Plant Propagation segment and an increase in adjusted SG&A. Adjusted net income held relatively consistent at $7.2 million compared to $7.4 million in the prior year. Our balance sheet remains one of the strongest in the global cannabis industry, and our cannabis operations are completely debt-free. Free cash flow was $15.5 million compared to $27.4 million in the prior year quarter, reflecting a decrease in the working capital recovery of $9.2 million. Let me now provide some thoughts on what we expect for our fiscal year 2026 outlook, which ends on March 31. Annual global medical cannabis net revenue is expected to increase year-over-year to between $269 million and $281 million, driven primarily by 10% to 15% growth in the global Medical Cannabis segment. Plant propagation revenue is expected to perform in line with traditional seasonal trends as 65% to 75% of revenues are normally earned in the first half of a calendar year. Consolidated adjusted gross margins are expected to remain strong as we have benefited from favorable sales mix due to higher global medical cannabis revenue, along with operational efficiencies in our manufacturing sites. And finally, annual consolidated adjusted EBITDA is anticipated to increase year-over-year with an expected range of $52 million to $57 million, representing 5% to 10% annual growth. This expected growth is driven primarily by net revenue increases and industry-leading margins in the global Medical Cannabis business. Thank you for your time. I'll now turn the call back to Miguel. Miguel Martin: Thanks, Simona. Our primary objective is to grow our business by capitalizing on the rapidly evolving global medical cannabis opportunity, which is projected to surpass $9 billion, thereby maximizing shareholder returns. We've established a strong competitive position by first building deep regulatory and world-class genetic capabilities, supported by an extensive network of GMP manufacturing facilities and then demonstrating consistent commercial execution excellence. This approach has enabled us to be a market leader with both health care providers and patients. Through our focused commitment to global medical cannabis, we will reinforce our market-leading presence in Canada, Europe, Australia and New Zealand and expand into additional markets as opportunities arise. We look forward to providing updates on our progress and strategic direction as we advance. Operator, we are now ready to take questions. Operator: [Operator Instructions] Our first question comes from Kenric Tyghe with Canaccord Genuity. Kenric Tyghe: Congrats on the quarter. I just wanted to follow up on the select market exit in Canada. If we look at the number on the print, you're looking at roughly a $20 million in revenues business on a go forward. Could you sort of speak to what the run rate would look like on a select -- on the exit from those markets? And perhaps also whether there's a point in time whether you could or would essentially fully exit consumer cannabis in Canada. Miguel Martin: Thank you for the question. We continue to evaluate exactly what that looks like. I think what we can say though is that those decisions will be beneficial or accretive to our overall financial results. What we've seen is that the reallocation of our resources, particularly that finite high-quality flower into the international market will make a significant difference in our overall financials. And so it's a bit of an evolution for us. The other point, I guess, I'd make is this isn't anything new. You've seen us continue to prioritize global medical cannabis over the last couple of years and done it very sort of successfully as we've gone through. And so we'll continue to be a bit flexible. Now your point about would we ever get out completely? I think that's something we continue to evaluate. We've been in rec cannabis or consumer cannabis in Canada since day 1. And so we still have that touch point. But again, our focus is profitability and growth. And if that is a decision that looks like it's best suited to be exclusively on the medical cannabis side, it's something we would do. Kenric Tyghe: Great. And just a quick one with respect to Australia. This premiumization strategy or sort of moving up market in Australia. How disruptive is that shift to your presence in the market? And what are your expectations around time line when we can sort of get a better handle on how this will play out and the benefits for that Australian business and what that Australian business will look like once you've sort of high-graded your portfolio in the market. Miguel Martin: Yes. I don't think we -- well, thank you for the question. I don't think it's disruptive at all. I mean Australia really started out under a model they call a concession model and a value model for those patients. And as we talked about, it's quite a large and diverse market, and there is an expansion and an interest by both prescribing physicians and patients for a variety of products on the premium side. And as you well know, it's not just flower and oil. So we run globally a premium and core model. So it's not disruptive for us at all, and it's very accretive in terms of margins. And so we know there's a lot of value flower available in Australia, like other markets, whether it's Germany, Poland, the U.K. or Canada, our sweet spot is the genetics production and delivery of core and premium medical cannabis products. And so it sits right in the middle of all that. So I think it's consistent and not disruptive in any way. Operator: Our next question comes from Derek Lessard with TD Cowen. Derek Lessard: A couple of questions for me. Just maybe talk about the strategic decision to exit the Plant Propagation and sort of the timing around the expected close of the transaction? Miguel Martin: Sure. I mean I think, again, focus and execution on global medical cannabis is what we've proven we're best at and where the most profitability is. I think consistent with the announcement we made on the consumer business, when we look at our resources and we look at the best use of our time and energy and focus, it really is in that area. And the investment in plant propagation, while interesting for a period of time, continue to evolve in a way that wasn't that. And so we saw a great opportunity in divesting that majority share to the shareholders that already exist there. There are some economics that continue that allow us to participate in the success of that, including earn-outs and the facilities that we've ended in. But when you look at investment and ROI of our time and resources, clearly with high-growth markets such as Germany and Poland and U.K., it makes absolute sense for us to put all of our time and effort there. And I think if you look at the last quarter and you look at the last couple of years, when we focus on global medical cannabis, the results have always been positive. Derek Lessard: Absolutely. Makes sense, Miguel. And maybe just one for Simona. I appreciate the additional full guidance on the year. How should we think about the plant propagation contribution to EBITDA, I guess, for the full year and maybe for Q4? Simona King: Yes. And as we continue to finalize the closing conditions and implications to our financials, we will have a better sense of the pro forma in Q4. As a result of this divestiture, we will no longer be consolidating the financial results of the Bevo business, so -- and will be treated as discontinued operations. So that will be the treatment going forward. And so I would say, Derek, the focus really should be on thinking through the implications to the global medical cannabis business and continuing to model and think about Q4 and the future around the strength of that business. So it really is focusing on the global medical side. Derek Lessard: Okay. And maybe one last one, I'll sneak one in, switching gears back to Global Medical. Your potential -- sorry, you pointed to Poland as one of the contributors to growth, which is great to see. Just maybe talk about how you've been navigating the pressure there or if anything has changed since last quarter, I think when you guys pointed to additional pressure given the changes in the regs there related to restrictions around the online consultations. Miguel Martin: Yes. I mean I think it's a great question. So these regulatory frameworks are evolving, albeit with a pretty specific scientific underpinning. We saw the change in Poland, as you mentioned, and what it required really was to lean back on a strong system, product development, product registration, distribution and specifically having a way to be able to connect to patients through clinics. And we were very quickly able to do that, I think, really built on the background of the strength of the medications and the reputation that we had, having physicians and patients want to get those products. And so we navigated quickly. Obviously, our results reflect that. That's why we're encouraged by what's happening in Germany with what may land there that we'll be able to do a similar execution. So these regs continue to evolve. You have to be agile, but I think having tremendous relationships with them, we have a very strong GR organization, a very strong regulatory team. And so we are able to work with the regulators as things evolve, and we think that's a strength of ours. Derek Lessard: Yes. Great job, everybody. And congrats again on the quarter. Miguel Martin: Thank you so much, Derek. We appreciate it. Operator: Our next question comes from Bill Kirk with ROTH Capital Partners. William Kirk: A point of clarity first. I have year-to-date global medical cannabis at $211 million. The full year guide is $269 million to $281 million. Are those numbers comparable. Because even the high end would imply quarter-over-quarter deceleration in 4Q and the low end would imply a big deceleration. So I guess the clarity point, am I looking at those numbers comparably? Simona King: Yes. So let me jump in on that one. So the guidance that we provided is the full revenue for the company, which is inclusive of Bevo in there. And so with this announcement today around the divestiture of our stake in Bevo, that's what we will be working through is the pro forma impact of that in Q4. So again, it's continuing to focus on the -- as we think about the implications for Q4 with those results being removed and shown as discontinued operations, it's really focusing on the medical cannabis, global medical cannabis revenues and trending those out. So keeping in mind that, that full guidance was reflective of total revenue. William Kirk: Okay. Okay. Because the -- in the press release, it says annual global medical cannabis is expected to be behind $279 million to $281 million. And year to date global medical cannabis is $211 million, right? Simona King: Yes. Yes. Just to clarify, that is correct, global medical cannabis. And so yes, we expect a strong quarter in Q4. William Kirk: Wouldn't that be implied $58 million to $70 million in global medical cannabis, and I think you just did over $75 million. So I think I'm looking at something wrong because that would imply a big deceleration in 4Q global medical cannabis from 3Q, 2Q, 1Q. Simona King: Yes, we do expect the ranges that we've provided in the expectations in the press release to be in line where we're projecting the full year to come in at. William Kirk: Okay. And then the follow-up would be, why do you expect a deceleration in 4Q? Simona King: So at this point, we're really focusing on the full year guidance and the ranges that we provided, which we believe will be in line with where we're trending. Taking into account, there could be some headwinds in some of the markets. So again, highlighting that this is a record result for us on a full year basis. William Kirk: Okay. And then one last one for me. The adjusted gross margin in the wholesale business I think it was 35% in the quarter. It's been higher than the consumer cannabis segment for a while. Why would the wholesale gross margin be higher than the consumer segment gross margin? Miguel Martin: Well, for a couple of reasons. One is that, that consumer business, not only for us, but for others is tight. And when you look at fully loaded where you sort of end up in that market, you end up with those type of margins. I mean I think you've seen it in the industry, it's not just us. The wholesale business is pretty good. I mean it's obviously not as good as when you distribute and sell it yourself. And so I think it's just indicative of what it is. The other aspect on the wholesale business is those products that we sell are not readily available all over the world because of some of the regulatory requirements. So I think it's inherent to what you're seeing overall. And like I said, it's not just us on the consumer side. Operator: Our next question comes from Brenna Cunnington with ATB Capital Markets. Brenna Cunnington: Congrats on the results this quarter. Just looking at the ATM, so you mentioned the funds for this could go to M&A. And so we're just kind of wondering like are there any potential assets that you might be interested? Is it potentially like cultivation capacity expansion opportunities. Or any other top goals for the funds raised from this. Miguel Martin: Yes. And thanks for the question and the comment. The -- with over $150 million in cash and then you have this, it really allows us to be opportunistic. Clearly, as you've seen from our announcement, our focus and really what we excel at is around that global medical cannabis point, and there are many sort of aspects to it. Clearly, cultivation of GMP flower and products for the international market are always an area of interest for us. Beyond the M&A point, we've invested over $40 million internally in significant capacity and quality upgrades in our existing facilities, which has helped us receive that GMP certification for another 3 years at 3 of them. So cultivation, as you mentioned, always of interest to us. But there are other aspects to global medical cannabis that potential -- have the potential as well, whether that's on the distribution side or the clinic side or other aspects. So it's really to be opportunistic, and we intend to use that clearly not for operations, but for accretive aspects, including M&A. And so I would say it would be consistent with what we're focusing on, but the exact aspects of it and what it might be, we're not in a position to say yet, but we'll obviously update folks as that becomes more specific. Brenna Cunnington: Okay. Perfect. Fair enough. And then just looking at the exit from a lot of the consumer cannabis in Canada, what type of SG&A savings might we see from that? Miguel Martin: Yes. I mean we're continuing to value that. I mean I would say you'll see some of that reporting as you see the full year and then into Q4. We definitely think it's going to be a benefit though the other aspect beyond the SG&A savings is taking those inputs, as you heard from the previous question and put them into higher-margin markets. So the differential between the margins of, say, our consumer business and international markets is significant, and you've seen where the overall margin landed. So I think more to follow on what it is. You heard from Simona's comments about the benefits that we believe financially that will provide us, and we look forward to sharing that with you once those sort of work their way through. Brenna Cunnington: Perfect. And then if I could just sneak in one little last one. So on the international markets, just out of curiosity, are there any other international markets that you may be looking at? Miguel Martin: I mean we look at all of them as they come online. We're in 12 countries today. We've got a regulatory team and a product registration process that has allowed us to enter every market that's come online. Typically, we like to have markets that have a science sort of thorough regulatory profile, which we're starting to see in Europe. So the latest new markets that are bringing medical cannabis on places like Switzerland, Austria, France and some others, we are working to bring our products into those markets. But we're very excited about potential developments in other new countries such as, say, Ukraine and Turkey. And again, we've been very successful because of our stringent regulatory requirements and GMP products to be able to enter them as they come online. So we continue to see global growth. I know there's a lot of interest in the U.S., but we've seen the growth in medical cannabis regulations and overall systems throughout Europe and in parts of -- other parts of the world. And so we'll be there as they come online. And I think we've demonstrated that we can be successful not only launching but also sustaining our business in those markets. Operator: [Operator Instructions] Our next question comes from Pablo Zuanic with Zuanic & Associates. Pablo Zuanic: Miguel, I also want to discuss supply chain. But just first, one question on the U.S. In your opinion, if we get rescheduling as it's been announced, would that allow you to enter the U.S. market? Are we thinking we're going to have a federal legalization of medical cannabis. Will Aurora be able to participate given its expertise or the rescheduling doesn't necessarily mean federally legalizing medical cannabis. What's your opinion on that? Miguel Martin: It's early days, Pablo, first and foremost, what the Trump administration announced is very consistent with what we've said is important, medical cannabis first, a regulatory -- strong regulatory approach. And we think that lines up beautifully for a company like Aurora that operates in regulated markets all around the world. As it's been laid out, and we haven't seen any of the final details of what a Schedule I to Schedule III would look like, it does not allow a Canadian company traded on the NASDAQ to directly go into that market. It does expand research. It does start to open the door for some variety of different things, but we'll have to see what the details look like. But it is a step in the right direction. We're very encouraged by that. But again, it was a very strong medical message. That photoop in the White House with doctors and folks from the medical community really reinforces what we've always believed, which this will be a medical-first opportunity, which is why we think Aurora is so well positioned when we get there. Pablo Zuanic: Look, and regarding supply chain, it's a bit of a 2-part question in terms of understanding what you have right now and then how you're thinking about acquisitions. In terms of what you have right now, for example, you said in the call that most of the products that you sell are own products in your facilities. But does that mean 51%, 90%. If you can give some color in terms of how much you're buying from third parties, that would help. A reminder of what you have in terms of your current facilities and looking back, lessons from the Aurora Sky facility. So that part of question in terms of what you have now. In terms of buying cultivation capacity, are we talking about indoor versus greenhouse? Are we talking about small little craft growers? Are we talking about just Canadian or maybe other countries? Any color in that sense would help? Miguel Martin: Sure. So the majority -- I'm not going to give you a number, but it's closer to 100% than it is to 50% of the products that we sell internationally, we produce, distribute and sell ourselves. A really important dynamic for everybody to understand is the GMP flower dynamic. That standard is getting more challenging. It is difficult. And once you get that certification, which you need to have, say, for Germany, the fastest-growing market in Europe, you have it for 3 years. So we've got 3 of our largest facilities just received that certification, which is very exciting. And so GMP premium flower, those prices continue to be solid and in some cases, go up and is our focus. In terms of facilities and potential acquisition, we have the benefit of having one of the largest genetic facilities in the world, a facility called Aurora Coast off the West Coast of Canada. Those genetics that are created there that we use ourselves and also sell to others have been successful both in indoor, which is our primary method of current growing as well with greenhouses, which many of our customers use those genetics. So both work, and you can get GMP certification in both. We obviously have a long history in indoor, but that doesn't mean that we are bound to it. I will say Canada continues to be the best place to grow high-quality premium GMP flower in the world, and we're proud of that, and we continue to see great opportunities to ship it. So it's a big competitive advantage for us to be able to grow that much flower, be one of Canada's, or if not the largest, one of the largest exporters of GMP flower. And that's a core part of why we've been successful and will be successful going forward. Operator: We have reached the end of our question-and-answer session. There are no more further questions at this time. I would now like to turn the floor back over to Miguel Martin for closing comments. Miguel Martin: Thank you very much. We are very excited about this quarter and more importantly, very excited about the future of Aurora Cannabis, and we're thrilled to share some color with you here today. We'll continue to update you. We hope everyone is safe and well. All the best. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Jutta Mikkola: Hello, everyone, and welcome to Stora Enso's Q4 and Full Year Results Presentation. I'm Jutta Mikkola, Head of Investor Relations, and I'm delighted to be joined here today with our President and CEO, Hans Sohlstrom; and our CFO, Niclas Rosenlew. We're kicking off the webcast with our clear theme, sharpened strategic focus. It reflects the work we've done throughout 2025 and the momentum we are carrying into 2026. Today, we'll start with Hans, who will walk you through the key highlights and our strategic priorities. After that, Niclas will take you through our financial performance and we'll close with the main takeaways and what's ahead of us in 2026. Once we've covered everything, as usual, we'll open the floor for your questions. Thank you for joining us. Great to have you with us. Over to you, Hans. Hans Sohlstrom: Thank you, Jutta, and hello, everyone. Great to have you with us. 2025 was a pivotal year for Stora Enso, marked by decisive actions to sharpen our strategic focus and unlock long-term value for our shareholders. In Q4, we completed the strategic review of our Swedish forest assets, a major milestone and begun the separation to form 2 strong companies, a leading renewable materials company with a sharpened focus on packaging and Europe's largest listed pure-play forest company. We also launched a strategic review of our Central European sawmills and building solutions operations to further focus our portfolio. Despite a challenging environment during 2025, we delivered resilient results with a sales of EUR 9.3 billion and EBIT of EUR 528 million. We continued ramping up the Oulu consumer board line, a key part of our renewable packaging strategy throughout 2025. This weighted on our earnings by EUR 140 million in total during the year, but strengthens our long-term position and competitiveness. Excluding Oulu, the underlying profitability improved across all business areas with Biomaterials the exception due to lower pulp prices. Our net debt to adjusted EBITDA improved to 2.8x, supported by the divestment of approximately 175,000 hectares of Swedish forest land at a value of EUR 900 million and by our ongoing focus on cash flow and cost competitiveness. The Board of Directors will propose a dividend of EUR 0.25 per share at the Annual General Meeting on the 24th of March, 2026. Finally, we hosted a successful Capital Markets Day, where we introduced our new financial targets, strategic priorities and a clear road map for the coming years topics I'll return to shortly. But before that, let's review how we did with our sustainability progress. During 2025, we had strong progress on our sustainability targets. By the end of 2025, we have reduced Scope 1 and 2 emissions by 61% from 2019 base year, well surpassing our 2030 targets to reduce emissions by 50%. I'm also proud to say that Stora Enso once again has been included on CDP's Climate Change A list, highlighting our strong transparency and performance in climate actions. This recognition affirms our dedication to sustainable growth through emission reduction, renewable material innovation and advancing the circular bioeconomy. Additionally, in partnership with IUCN, the International Union for Conservation of Nature, we completed a pioneering project that offers the forest sector a science-based framework for achieving net-positive biodiversity impact. This collaboration helps forestry operations focus on the most effective actions to reduce species extinction risks while maintaining long-term economic value. But now let's look at the new financial targets and strategic priorities that we have set for the next years. Our strategic priorities as set forth in our Capital Market Day are clear. We want to lead in customer value creation, grow our business, expand our margins and generate strong cash flow over the cycle. We will achieve this through our continued actions in sourcing, operational efficiency, commercial excellence, working capital and fixed cost, all underpinned by a disciplined approach to capital allocation. Customer centricity is now at the forefront of our strategy. It drives us to push innovation, quality and sustainability across everything we do. With superior customer offering and the use of advanced technologies, we are raising the bar and setting new industry standards. So how will this show in our performance over the cycle? First, annual revenue growth of about 4% per annum. We have a strong track record of over 5% during the last decade for our renewable packaging business. We are well invested for the next wave and we will continue to lead in innovation, quality, sustainability and operational efficiency. Second, we are implementing our plan with speed and determination to reach about 10% EBIT margin. And importantly, this is fully in our own hands. We are putting profit and loss responsibility in place across 6 business areas and 23 P&L responsible business units, enabling determined execution of value creation actions and a strengthened focus on the core business. Third, we will distribute 50% of our net profit as dividends. Fourth, we will take our net debt per EBITDA to below 1x through disciplined capital allocation and a continued focus on cash flow. Finally, we introduced a new reporting structure. Our packaging businesses will be regrouped into Consumer Packaging and Integrated Packaging alongside Biomaterials and other as reporting segments. These new segments will be applied starting in Q1 2026. As just mentioned, one of our key strategic priorities is to expand margins through business focus, a strong performance culture and systematic value creation. The last 2 years show this is working. Despite headwinds from low consumer confidence and significantly higher wood costs, about EUR 900 million annual headwind compared to the year 2021, our sales have grown and our underlying profitability has improved. This progress comes from our own actions that have more than offset the market headwinds during these years and the work continues. In addition to the completed value creation programs, achieving about EUR 900 million profit impact during the years 2024 and 2025, we have identified additional EUR 500 million to EUR 700 million of profit improvement initiatives, all with clear owners and being worked on as we speak. At the same time, the Oulu ramp up continues and weighs profitability short-term. Once at full capacity, it will add around EUR 800 million in sales and support higher margins. With these levers, we are on a clear path towards reaching about 10% EBIT margin, excluding Swedish forests within 2 to 4 years regardless of market conditions. The message is clear. Margin expansion will come from our own focus, our performance culture and disciplined execution. We are taking determined actions to build a better company and our own future. Let's talk about our recent innovation highlights. We grew our portfolio of premium Packaging Materials with the launch of Ensovelvet, a new uncoated solid bleached sulfide board with velvet-like smoothness on both sides. It is developed for luxury applications such as cosmetics, perfumes and other premium consumer goods where touch and appearance are important. It also ensures excellent printability. Ensovelvet is, of course, recyclable, supporting the shift towards circular packaging solutions. The absence of coating also means fewer materials are needed in production, resulting in a reduced carbon footprint while maintaining the premium performance expected from premium Packaging Materials. Stora Enso's CLT solutions enabled the construction of the world's first large-scale timber data center in Falun, Sweden, and the site is now expanding with 2 new data centers. Using mass timber drastically cuts embedded carbon and accelerates construction time. The developer, Eco Data Center is aiming to be one of the world's most sustainable data centers. By using mass timber supplied by Stora Enso, the company has created a scalable blueprint for a new type of sustainable infrastructure. World Packaging Organization awarded Stora Enso in 3 categories: e-commerce, food and other for sustainable and innovative design. Niclas, let's take a look at the financials. Niclas Rosenlew: Thank you, Hans. So let's begin with group sales development and EBIT for 2025 as well as then for the fourth quarter. Group sales increased to EUR 9.3 billion in 2025. This was partially supported by structural changes, most notably the Junnikkala acquisition and the Oulu ramp-up. In Q4, sales declined and this was due to slightly lower board prices and significantly lower pulp prices. Adjusted EBIT for the full year decreased. However, if we exclude the old ramp-up, actually, the profitability improved across nearly all business areas. The exception was Biomaterials, where significantly lower pulp prices weighted on performance. And in Q4, the reasons for the EBIT decline are pretty much the same. Underlying businesses were developing quite nicely, considering the tough market and the old ramp-up was the main reason for the lower EBIT. In general, market headwinds such as lower pulp prices were offset by value creation actions. Looking at the EBIT development for the full year. The impact of our value creation actions is clearly visible. Even with the significant decline in pulp prices, our price and mix improved by more than EUR 100 million, while volumes remained stable. As Hans mentioned earlier, we continue to face a sizable headwind from fiber costs close to EUR 300 million this year. Despite these headwinds, our ongoing cost and value creation actions had a good positive effect. Other variable costs and fixed costs declined by more than EUR 200 million, supported by a leaner and more business-focused organizational structure. These actions have strengthened our ability to navigate market volatility and deliver a more resilient performance. The main drag on earnings for the year came from Oulu or the ramp-up of Oulu, which had a negative impact on EBIT of roughly EUR 140 million, again for the full year. While Oulu weighs on short-term profitability, we do remain confident in the long-term value and industry-leading quality this investment will bring once the line reaches its full potential in 2027. If we then move on to cash flow, despite the challenging market environment, we managed to safeguard profitability and improve cash generation. Cash flow after investing activities continued to be positive as expected following the gradual completion of the investment phase in Oulu. As we now become more disciplined with our capital allocation, combined with ending the heavy investment phase, we expect cash flow after investments continue to improve. So on that note, let's take a look at the net debt. Net debt decreased by almost EUR 800 million in the third quarter, driven by the Swedish forest asset divestment and remained stable in the fourth quarter. Our net debt to adjusted EBITDA ratio is now 2.8x. Operating working capital remained -- also remained stable at 7% of sales and we intend to maintain it at these lower levels and reduce it further whenever possible. So let's take a look at our segment performance. Starting with Packaging Materials. During the quarter, we conducted maintenance in some of our main sites. In addition, we continue to ramp up the new Oulu board machine. Despite this, profitability was preserved, thanks to good value creation activities and strong customer offers. Sales decreased driven by slightly lower consumer board prices and adverse currency effect from a weaker U.S. dollar. Adjusted EBIT improved slightly year-on-year despite a EUR 31 million negative from the ramp-up in Oulu. In Packaging Solutions, we delivered a positive result despite ongoing market challenges. Sales increased slightly, driven by higher sales prices from improved product mix and an increase in sales volumes. Adjusted EBIT increased year-on-year, supported by higher sales and the good momentum with value creation actions. So in summary, despite persistent overcapacity, actions to enhance product and customer mix, combined with continued cost efficiency improvements helped protect margins. Moving from Packaging to Biomaterials. In Biomaterials, the challenging market conditions continued. Demand for softwood and hardwood pulp was weaker in both Europe and China. Sales and adjusted EBIT decreased due to lower sales prices and volumes and adverse currency movements. However, intensified value creation actions such as cost reduction measures partly mitigated the negative effect. In Wood Products, market continued to be subdued with high raw material costs and low construction market activity. Sales increased mainly due to Junnikkala volumes and higher sales prices, both in classic sawn and building solutions products. Adjusted EBIT improved as the increase in raw material costs was more than offset by higher sales prices and value creation actions. Product curtailments were implemented to align with challenging market conditions. Finally, in Forest, sales were stable with no material differences in wood prices or volumes. EBIT decreased primarily due to the divestment of the 12% of Swedish Forest Holdings at the end of the third quarter. The fair value of the group's forest assets increased slightly to EUR 8.5 billion or EUR 10.75 per share. The results demonstrate strong operational performance within our forest assets and wood supply operations. So with that, I hand back to you, Hans, for concluding remarks. Hans Sohlstrom: Thank you, Niclas. As we enter 2026, we expect market conditions to remain subdued and volatile, shaped by ongoing macroeconomic and geopolitical uncertainty. Our priorities are clear. We will continue to execute our strategy, drive proactive, systematic and determined work across the whole group. We continue to improve profitability, cash flow and cost competitiveness through activities related to sourcing, operational efficiency, commercial excellence, working capital and fixed costs and maintain a disciplined approach to capital allocation. The demerger and listing of our Swedish forest assets will be a key focus as will the ongoing strategic review of our Central European sawmills and ramping up of our Oulu site. I want to thank all our employees, customers and partners for their dedication and resilience during this transformative year. Together, we are building a stronger, more focused and more sustainable Stora Enso. Thank you for listening and we are now ready to take your questions. Operator: [Operator Instructions] Our first question will come from Charlie Muir-Sands with BNP Paribas. Charlie Muir-Sands: I just had a couple of questions on the Packaging Materials segment on both pricing and on costs. Firstly, on the pricing side, I wonder if you could talk about the environment generally. We've seen obviously indexation reports suggesting that FBB prices are coming down a bit. One of your peers the other day also flagged pricing pressures in the liquid packaging board space, which is a grade that's obviously not price reported. So yes, firstly, on the pricing side. And then on the cost side, can you talk about what scale of tailwind you might envisage seeing from the fall in wood costs that we're starting to see in Finland and perhaps trickling over into Sweden? And when you would expect Oulu to no longer be a drag? Hans Sohlstrom: Yes. So first of all, when it comes to liquid packaging board, we have multiyear agreements, which basically meant that our prices have somewhat improved for this year compared to last year. When it comes to cartonboard, you are right that following statistics, there has been some slight decline in prices there. And then as you also know from public sources, there has been price increase announcements in containerboard, in testliner, also in Europe happening lately. Then on the cost side, I mean, yes, following also here public statistics, wood costs in Finland and Sweden, especially pulpwood, have come down throughout the latter part of last year. And -- but I don't want to take any stance on any predictions or forecasts here how the things will play out. Regarding Oulu, we have guided now for the first quarter still a negative EBIT impact between EUR 15 million and EUR 30 million on an EBIT level. And we remain confident there that we are continuing and progressing the ramp-up in order to be then fully ramped up for year 2027. Charlie Muir-Sands: But for Q2, do you anticipate Oulu still being a drag? Or should this be the last quarter? Hans Sohlstrom: Well, we don't give any further guidance there. I would say that the ramp-up is progressing. Quality is excellent. The feedback from customers is really good and quality properties, even if we had high expectations, having even exceeded our expectations in some cases. Charlie Muir-Sands: And finally, sorry, just I saw that you're guiding to much lower income from sale of emission certificates in the year ahead. Which segments would those headwinds year-on-year apply to? Hans Sohlstrom: It concerns mainly 3 of our business units. So it's Skutskar, which is pulp in Sweden, then it's Fors in Sweden, which is cartonboard and then it's also Enocell Uimaharju in Finland, which is pulp. So it's mainly the Biomaterials segment. Operator: Our next question comes from Lars Kjellberg with Stifel. Lars Kjellberg: I appreciate you don't want to forecast wood cost. But if you kind of -- where we are today in Finland in particular and the pressures we see in Sweden, if they were to stay where they are, when would you start to see a positive impact from that? I'm also hearing that wood costs in Poland has gone up. Can you provide any color on that, if that is indeed the case? I also want to question a bit about currency because, of course, both the Swedish krona and the euro are very strong. You had hedges, of course, right, but what sort of potential headwind would that be? And the final one, I'll just stick with consumer board, you have for a long time spoken to the pressures and imbalance in the market and soft demand. So the question is, as a big producer of consumer board, what sort of actions are you taking to rebalance the market and to get away from that pricing pressure? I appreciate closing assets is not your priority, but are you thinking about meaningful curtailment of capacity until demand resurfaces? Niclas Rosenlew: I'll take -- I'll take the first one. So the wood cost up or down, I mean, I guess the rule of thumb is 3 to 6 months. So first, it goes into the wood yard and then it goes into production. So 3 to 6 months depends, but that's kind of the kind of rule of thumb, which you could use. Hans Sohlstrom: And then your question on consumer board. So yes, we have also taken some curtail -- or curtailed our capacity to some extent. I would say the primary actions here in a situation of low operating rates and is to be the most cost-efficient, to work on your cost and efficiencies and be closer to your customers than ever before and produce the best possible quality of product and service. That's the way to manage in this kind of circumstances. You also had a question about the currency exchange rate, you want to comment... Niclas Rosenlew: Yes. Yes. I would say no -- nothing particular there. I mean, dollar has, as you know, been a headwind for us, the weaker dollar, given that quite a significant chunk of products, not least pulp is kind of dollar priced. And then on the Swedish krona, of course, we have quite significant operations in Sweden. So a kind of stronger Swedish krona means more costs also. But I would say just in general that the dollar is the kind of main swing factor here. Lars Kjellberg: Just a follow-up, I also asked you about Polish wood costs, if you have any color on that? And if you can share with us what sort of operating rates you're running at in consumer board in those? Niclas Rosenlew: Yes. So first of all, the Polish wood costs, we actually consume very little pulpwood in Poland because we are primarily using recycled fibers there to produce testliner. So it's not that relevant for us when it comes to log costs in Central Europe. They have been increasing, but so have also the price of timber and sawn goods. And what -- and you had some other question there, a follow-up question. Yes, operating rates. Well, we are not commenting further on the operating rates. Operator: Our next question comes from Pallav Mittal with Barclays. Pallav Mittal: So 3 questions. I'll take it one by one. So just following up on the first question around liquid packaging board. So your peer -- one of your peers has highlighted a difficult demand dynamic as well. And based on what we can see, one of your largest customers over the last few quarters has also highlighted a difficult volume backdrop. So just wanted to understand the demand dynamics. Clearly, your comments on pricing, we agree that it is a multiyear agreement and it is going up. But what are you seeing on the demand side of things? Hans Sohlstrom: Thanks to the multiyear agreements we have in liquid packaging board with our key customers, we see positive development both in terms of volumes and price. Pallav Mittal: Okay. And as you have now highlighted for the last few quarters that the market-related movements have been offset by your own actions. So if you could just help us understand, I mean, as we think about 2026, lower wood cost, et cetera. So if you were just to like give us some guidance in terms of those 2 buckets, do you still expect the market-related movements to be a significant headwind and then offset by some of your own actions, which you have said EUR 500 million to EUR 700 million for the next 3 years? Niclas Rosenlew: Yes. I think on the own actions, the teams are continuing the good work and certainly we'll continue during 2026 as well. What comes to wood cost, as Hans said, we just don't want to predict or comment on that. But on the own actions, we'll certainly continue to work on that and there's a good momentum. Pallav Mittal: And then lastly, just on the EU testliner pricing that the industry is trying to pass through. Any comments on how customers are reacting to it because now we are in the first week of Feb and it was expected to go live on the 1st of Feb? And do you think any of it will actually pass through given the cost environment and the demand backdrop? Hans Sohlstrom: Yes, I don't want to speculate here, but I think there has been broadly price increase announcements and there is a broad price increase attempt now in the industry and it's, of course, badly needed by the industry. Operator: Our next question comes from Linus Larsson from SEB. Linus Larsson: First off, a follow-up question on Packaging Materials. The price realization quarter-on-quarter in the fourth quarter was quite negative, minus 7% or so, from what we can see. Could you please just explain that mix effects, real price changes, FX, how that all adds up? And then also, please, if you could just clarify what you said previously on your multiyear liquid packaging board contract, what does that setup entail for 2026? Can you please just clarify, have you had renegotiations going into 2026 for a portion of that? And what's the nature of the agreements in place? Do they imply price hikes or price declines at the start of 2026? So just directionally, if you could just please clarify that? Niclas Rosenlew: So first, your latter question about liquid packaging board. So with most of our key customers, we have long-term multiyear agreements in place, implying improved pricing and volume for this year, but not for all. I mean, there are also customers where we have annual negotiations. But generally speaking, for the majority, there are multiyear agreements in place. And then when it comes to the Packaging Material quarter-on-quarter price development, so Q3 into Q4, so there was especially in the area of containerboard, some price reductions as we can see from public sources, [ resi ] and other sources as well as also in cartonboard. So that weighted on our average prices for Packaging Materials in Q4 compared to Q3. Linus Larsson: Got it. And then maybe a second question on forestry and the increase that we saw in forest book values in the fourth quarter. And you did write about it in the report, but if you could just expand a bit on that, what drove the increase? And also any updates, if there are any on the planned spinoff, please? Niclas Rosenlew: Yes. So the increase was primarily driven by the stronger Swedish krona. So FX was the prime driver. Also kind of the underlying asset, there was some increase, but the EUR 200 million or so increase we saw was mainly driven by FX. And then what comes to the spin, progress being made every day. Separation, a lot of activities there. So I would say on track and making good headwinds or good progress there. Operator: Your next question comes from Ioannis Masvoulas with Morgan Stanley. Ioannis Masvoulas: Excellent. Excellent. So a few follow-ups from my side. Just the first one, going back to liquid paperboard. Across your entire order book, if we think about '26 versus '25, is it fair to assume a low single-digit improvement in pricing? And related to this, do you think you're gaining market share in either Europe or Asia, as that will explain some of your comments on volume trends versus some of your peers? Hans Sohlstrom: Yes. So in liquid packaging board, we have some slightly increased pricing for the majority of our customers. And when it comes to market shares, I don't want to comment on those. Ioannis Masvoulas: Okay. And maybe one more on Oulu. So I appreciate you wouldn't like to provide full year guidance on potential ramp-up costs. But if we look at Q4, you account for about EUR 31 million impact. And for Q1, you're talking somewhere between EUR 15 million to EUR 30 million impact. So at the high end feels like there is no much improvement or a reduction in the ramp-up costs. Could you talk about some of the challenges there? And could you also clarify whether Oulu was EBITDA breakeven because that's something you mentioned in the past, but I didn't see that in today's release in terms of the Q4 run rate? Niclas Rosenlew: Yes. So first, Oulu was EBITDA breakeven in when running full during month of October. Then towards the end of Q4, we had some planned shutdowns and also some curtailments. But as we had guided before, we reached EBITDA breakeven in the month of October during, let's say, normal full run month. And when it comes to the first quarter, I mean, we are continuing the ramp-up as planned with excellent customer feedback and quality achievements. And of course, I mean, we need also to take into consideration that the cartonboard prices, as we know from public sources, are somewhat down. So with a certain impact also here. Plus then, of course, we have to consider also other things affecting then the weighting on the Oulu profitability during the first quarter. Operator: Our next question comes from Detlef Winckelmann at JPMorgan. Detlef Winckelmann: Just a quick one from me just on your pulp wood costs. Obviously, we've seen them come down quite drastically in the last, call it, couple of quarters. I'm hearing some conflicting views. I just want to hear your thoughts on whether this is a supply chain change or a demand-only driven price decrease. We're hearing from a handful of people, independent experts that maybe supply and wood being harvested is actually up. And at the same time, I'm hearing the exact opposite from someone else. So just would love some clarity there, if you can. Hans Sohlstrom: Well, yes, do you want to take it, Niclas? Niclas Rosenlew: Yes. I mean, sure, there's multiple factors, but to put it simply, the view is more demand. So demand has been lower. Some of the industry players, for instance, in Finland have been -- Finland have been curtailing production during the second -- latter part of the year. Operator: Our next question comes from Cole Hathorn with Jefferies. Cole Hathorn: Just like a follow-up on the wood cost side of things. You provide some helpful guidance for a 10% move in wood cost for the whole of Stora, which includes your sawn timber business as well as obviously your Latin American operations. Is there a guidance just so that we can think about the sensitivities for a 10% move just in the Nordic wood prices, just to understand the quantum? That's the first question. The second is thinking about the liquid packaging board of Beihai and given there's a number of capacity that's ramped up in China, just like any commentary that you can provide about profitability of your Beihai and China operations? Hans Sohlstrom: Yes. So first of all, our Beihai operation is doing very well. Also from a profitability perspective, it is one of the world's, if not even the world's most efficient board -- consumer board production line according to board machinery manufacturers statistics. So doing very well indeed. Excellent quality. I mean, we are competing in the high-end, highest quality liquid packaging board segment and consumer board segments in China, where we have a opportunity also to differentiate. And then when it comes to the wood costs, as you can see in our report, a 10% wood cost decrease would have a EUR 238 million impact on annual -- positive impact on annual EBIT. We haven't broken down that specifically for the Nordics, but the clear majority of this is the Nordics. So not all of it, but the clear majority. Cole Hathorn: And then maybe just as a follow-up, Niclas, your CapEx numbers come in nicely at EUR 550 million. It is lower year-on-year. It's the first time you're getting towards depreciation or below. I'd just like to think about how you're thinking about CapEx? And then, Hans, one for you on the EUR 500 million to EUR 700 million savings. Is there any color that you can give on what might be contributed in 2026? Because there are a number of moving parts this year. We do have lower prices. You've got potential positives from the Oulu drag being less negative. You've got the positives from potential wood costs, but the bucket that's missing is your own internal actions and efficiencies. Any quantum of that EUR 500 million to EUR 700 million that might be achieved in 2026 would be helpful. Niclas Rosenlew: Yes. So on the CapEx, we've done a fair amount of work on CapEx in latter part of last year and we discussed some of it in the CMD as well. And of course, one part of it is the, as we call it, the end of the heavy investment phase, which is primarily Oulu, but we've actually gone beyond that. I mean, we've looked a lot at where do we get returns, what type of investments are better, which ones are worse and so on and so on. A lot of categorization of our different assets, where do we invest, where do we not invest. So what you see now in the EUR 550 million guidance is kind of a summary, the outcome of this work. And it's -- in the end, it's all about discipline and returns. And I'm sure we'll learn more during this year and then we see how it moves beyond this year also. But the theme is clearly now let's be disciplined and let's ensure good returns on those investments we make. Hans Sohlstrom: And when it comes to the -- our own profit improvement actions, in the CMD, we explained that during 2024, we -- and then the 3 first quarters of 2025, we have achieved EUR 850 million of annual P&L impact and we are now at roughly EUR 900 million after the fourth quarter. And we also said that there is more to come. Currently, we have in the pipeline, EUR 500 million to EUR 700 million of projects and initiatives from a P&L impact standpoint. And as we said in the CMD, 2 to 4 years, 2 years if we also get some market tailwind. So in order to achieve about 10% EBIT margin level, so 2 years, if we get some market tailwind and 4 years if we have a continuous market headwind. So that's about the guidance I can give. Of course, the more you do these cost savings and streamlining, the harder it also gets. That's also good to remember. Niclas Rosenlew: Yes. And just to give you some additional color because it's a good team, nice team. So for instance, what we are looking at for the moment is fixed cost, how do we work efficiently within Stora Enso. And then also procurement is another area we are looking into as we speak. And there is potential. So it's quite positive and good. Operator: Our next question comes from Andres Castanos-Mollor with Berenberg. Andres Castanos-Mollor: It would be a follow-up on CapEx, please. How much of that EUR 550 million is allocated to forest? And how would our run rate of an ex-forest company look like for maintenance CapEx? Niclas Rosenlew: Now I'm actually looking at Jutta here across the table. How much of that is forest? I can't remember by heart actually. Jutta Mikkola: Right. It's not that much biological assets to some extent, but there also maturity would be actually Latin American CapEx. So it's not that much that goes into the forest. Hans Sohlstrom: So very, very little into the forest company as such. Operator: There are no further questions. I shall now hand back to Hans Sohlstrom; and CFO, Niclas Rosenlew, for closing remarks. Hans Sohlstrom: Thank you very much, all, for your -- for taking time and for your interest. As you can see, we are moving forward with speed and determination to improve our financial performance and to strengthen and build a better, more sustainable and more valuable Stora Enso. During last year, we have sharpened our strategic focus. We have defined our strategic priorities of leading in customer value, putting the customers in the center through innovation, sustainability and service and quality. We are looking to -- also to grow faster than the market, over 4% per annum. And we have a track record within renewable packaging of growing above 5% during the last 10 years and we are well invested to materialize this growth. We are expanding our margins to the well above 10% EBIT margins through our own actions regardless of market circumstances. And then last but not least, we are generating cash through disciplined capital allocation. Thank you very much for your interest. We are moving forward with speed and determination. Thank you. Bye-bye.
Operator: Good morning, and welcome to the Equifax Q4 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Trevor Burns, SVP of Investor Relations. Thank you. You may begin. Trevor Burns: Thanks and good morning. Welcome to today's conference call. I'm Trevor Burns. With me today are Mark Begor, Chief Executive Officer, and John Gamble, Chief Financial Officer. Today's call is being recorded, and an archive of the recording will be available later today in the IR Calendar section of the News and Events tab at our Investor Relations website. During the call, we will make reference to certain materials that can also be found in the presentation section of the News and Events tab at our IR website. These materials are labeled 4Q 2025 Earnings Conference Call. Also, we'll be making certain forward-looking statements including first quarter and full year 2026 guidance, to help you understand Equifax and its business environment. These statements involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from our expectations. Certain risk factors that may impact our business are set forth in our filings with the SEC, including our 2024 Form 10-Ks and subsequent filings. During this call, we'll be referring to certain non-GAAP financial measures, including adjusted EPS, adjusted EBITDA, adjusted EBITDA margins, and cash conversion, which are adjusted for certain items that affect the comparability of our underlying operational performance. All references to EPS, EBITDA margins, and cash conversion are references to non-GAAP measures. These non-GAAP measures are detailed in reconciliation tables which are included with our earnings release and can be found in the financial results section of the Financial Info tab at our IR website. Also in the fourth quarter, Equifax incurred a charge of $30 million related to a settlement associated with a resolution of inquiry disputes related claims. We expect costs associated with the settlement to be reimbursed by our errors and omissions insurers, with these insurance recoveries also included as one-time events when received. Moving forward, our non-mortgage results will be referred to as diversified markets. This terminology change does not affect any change in reporting structure. Also, for your modeling, additional 2026 guidance will be posted after the earnings call in the appendix to the earnings slide presentation. Now I'd like to turn it over to Mark. Mark Begor: Thanks, Trevor. Before I cover our results for the quarter, I want to spend a few minutes on our 2025 performance, a strong finish to the year, which gives us strong momentum for a strong 2026. Turning to slide four, Equifax delivered financial results well above both our February and October guidance with revenue of $6.075 billion, EPS of $7.65 a share, and free cash flow of $1.025 billion. Revenue was up 7% on a reported and organic constant currency basis at the low end, but within our long-term 7% to 10% organic revenue growth framework. Despite a continued weak U.S. mortgage market that was down 7% and the U.S. hiring market which was down 2%, the mortgage market had about a 100 basis point negative impact on Equifax 2025 revenue growth. EWS delivered 6% revenue growth with 51.5% EBITDA margins, but exited the year with strong fourth quarter 9% revenue growth. This accelerating performance was led by verification services, which successfully navigated difficult U.S. mortgage and hiring markets to deliver 8% growth for the year and over 10% in the fourth quarter, with fourth quarter growth driven by both strong low double-digit revenue growth in government, which was above our expectations, and an NPI vitality index of over 20%. The EWS team had another outstanding year adding over 20 million records to the Twin database. At the end of 2025, EWS had over 200 million active records, which were up 11%, and over 800 million total records, both big milestones for the business. USIS delivered 10% revenue growth and expanded margins 70 basis points to 35.2%. Diversified markets or non-mortgage revenue grew 5%, which is the highest USIS organic revenue growth performance since 2021 in our non-mortgage space. Mortgage revenue grew 22% and was up low double digits excluding the impact of FICO price increases as they gain share across both pre-qual and pre-approval solutions. International delivered constant dollar revenue growth of 6% and expanded EBITDA margins almost 100 basis points. The international team made strong progress towards cloud completion, which we expect to complete by the middle of this year. International also delivered 12% vitality last year, which drove good revenue performance despite weak Canadian and UK debt management end markets. Driving new product innovation is the core to our long-term growth strategy. In 2025, with 90% of our revenue in the new Equifax cloud, we pivoted from building to leveraging the cloud and accelerating our use of AI in new products. Equifax had another very strong year of NPI rollouts with a record 2025 Equifax vitality index of 15%, which was 500 basis points above our long-term 10% goal and equates to about $900 million of new product revenue during the year. USIS and EWS worked together to launch new products that deliver USIS credit files and leverage alternative data, including the twin indicator income and employment data in mortgage, card, and auto markets. With plans to launch similar products in the personal loan space early this year, these unique to Equifax products deliver credit, identity, and income and employment data in a single solution are gaining traction with mortgage and card lenders. In 2025, we launched 100% of our new models and scores powered by efx.ai. These new AI models and scores drive strong incremental lift versus traditional non-AI models and scores. And we're leveraging AI to help our customers identify clear and actionable insights. In 2025, Equifax secured a spot in the AI FinTech 100 list for our new patented explainable AI technology. We now have over 400 AI patents either secured or pending, and we added over 40 new AI patents last year. In U.S. mortgage, we made great progress working with mortgage lenders and resellers towards the adoption of VantageScore 4.0, with over 200 mortgage lenders testing or in production with Vantage given the significant cost savings opportunity. As we move through last year, we also leveraged our industry-leading cloud-native technology and efx.ai to drive operational efficiencies across Equifax through our new internal AI for Equifax initiative, which we expect to deliver cost savings, efficiencies, speed, and accuracy across Equifax in 2026 and beyond. And last, we delivered very strong free cash flow of $1.1 billion with very strong 120% free cash flow conversion. Flow was up $230 million from our February guidance. With our strong free cash flow, EWS acquired Vault Verify in the fourth quarter and also returned record amounts to shareholders. As we move into 2026, I'm energized about our commercial momentum and our strong exit from the fourth quarter, our new product innovation, our AI capabilities, and the benefits of the new Equifax cloud. Slide five provides detail on the strength of our free cash flow and free cash flow conversion. Our growth in revenue and EBITDA and declines in CapEx as we complete the cloud are driving accelerated free cash flow. We generated $1.13 billion of free cash flow last year with a cash conversion record of 120%, which is well above our long-term framework of 95%. This is about $170 million above the midpoint of our October free cash flow guidance. In 2025, Equifax repurchased over 4 million shares, returning $927 million to shareholders, including $500 million of purchases in the fourth quarter when our stock was weak and our free cash flow was strong. Further, we paid $233 million in dividends, resulting in total cash returned to shareholders last year of $1.2 billion. This was up 6x from 2024 and stronger than our plan for the year. In 2026, we expect to again generate significant strong free cash flow in excess of our 95% cash conversion long-term framework, which will allow us to continue to acquire bolt-on M&A and return cash to shareholders via dividends and share repurchases. Turning to slide six, Equifax fourth quarter reported revenue of $1.551 billion was up a strong 9% and $30 million above the midpoint and $15 million above the top end of our October guidance. This strong outperformance was most significant in Workforce Solutions, where we saw strength in mortgage as well as in government, which was above our expectations, and also in USIS, the strength was principally in mortgage. Both USIS and EWS saw the stronger mortgage markets that were better than our October framework. USIS mortgage hard credit inquiries were down about 1% but were better than our expectations of down high single digits. For the quarter, U.S. mortgage revenue represented about 20% of Equifax revenue. Diversified markets or non-mortgage constant dollar revenue growth grew over 6% in the quarter, slightly above our expectations and guidance. This was principally driven by broad-based strong execution in Workforce Solutions driven by stronger auto, card, and debt services revenue growth was up double digits, up low double digits, and talent, which was up high single digits. USIS diversified markets revenue was consistent with our expectations, while international was slightly weaker than expected, principally reflecting end market weakness in Canada and European debt management despite very good performance in Brazil and Australia. On an organic constant currency basis, revenue growth of 9% was over 200 basis points above the midpoint of our October framework, which gives us strong momentum as we move into 2026. Equifax delivered fourth quarter EBITDA of $508 million with an EBITDA margin of 32.8%, which was slightly below our October guidance. While EWS and USIS EBITDA margins were above expectations, international was at the top end of our October guidance range. Equifax overall margins were slightly lower than guidance due to higher incentive compensation, which impacts our corporate expenses. We expect incentive compensation to normalize to target levels in the first quarter as 2026 compensation targets are set at our plan for the new year. EPS at $2.09 a share was $0.06 above the midpoint of our October guidance, and we returned $561 million to shareholders in the fourth quarter, including purchasing 2.3 million shares or about 2% of shares outstanding for $500 million to take advantage of a weaker Equifax stock price. Our strong fourth quarter revenue performance and business unit margins give us positive momentum as we move into 2026. Turning to slide seven, Workforce Solutions revenue was up a strong 9% and better than our October guidance and our expectations. Verifier diversified markets revenue growth was up 11%, which is a very positive momentum as we enter 2026. Government had a strong quarter building off the third quarter performance with revenue up low double digits. Government revenue performed very well despite a tough comp with continued strong state-level penetration. And we had minimal impact on EWS revenue from the federal government shutdown in the quarter. Talent Solutions revenue was up high single digits in the quarter. In October, we discussed weaker hiring volumes that continued throughout the fourth quarter. Despite the weaker hiring macro, Talent Solutions continued to outperform their underlying markets driven by penetration pricing and higher hit rates from record additions and new products, including new solutions from the Total Verified Data Hub, which includes trended employment data as well as incarceration, education, and licensing data. Consumer lending continued to perform very well with revenue up very strong mid-double digits in the quarter from double-digit revenue growth in personal loans, auto, and card. EWS mortgage revenue was up about 10% in the quarter, delivering improved sequential trends from new products, record growth, and pricing. Employer services revenue was up two in the quarter despite continued weakness in our i9 and onboarding businesses from the weaker hiring market. In Workforce Solutions, EBITDA margins of 51.3% were driven by operating leverage from higher than expected revenue growth in the quarter. As mentioned earlier, Twin record additions continue to be strong again in the fourth quarter with 209 million active records up 11%. Our 120 million total current records were also up 9%, which represented 105 million unique SSNs. 105 million individuals with current records in Twin, we have a long runway for growth towards the 250 million income-producing Americans. In the fourth quarter, EWS signed agreements with five new partners bringing our total to 16 new agreements signed during 2025. Turning to slide eight, we continue to see momentum in our discussions in Washington and with state agencies to support their plans to implement the new TITAN OB3 social service eligibility requirements. Given our strong value proposition from Twin on the speed of social service delivery, caseworker productivity, and accuracy of income verifications, Equifax is uniquely positioned with our differentiated twin data assets and new solutions to help state agencies increase efficiency and strengthen program integrity, particularly with SNAP and CMS. Partnering with our customers, we're already bringing new innovative solutions to federal and state agencies supporting the government's goal of reducing the $160 billion of social services fraud, waste, and abuse. In the fourth quarter, we launched our new continuous evaluation solution for SNAP, which identifies changes in recipients' incomes above program levels enabling states to reduce SNAP error rates where nearly 80% of states today are above the 6% federal threshold. Given the strong value proposition, we've already contracted with a few states in the first quarter on our new continuous evaluation solution with many more actively in discussions to utilize this new product from Equifax. We expect this focus on programming integrity from OB3 will be a positive tailwind for our EWS government business in 2026 and 2027 and beyond. While OB3 related deals and revenue will likely be in the second half of the year and in 2027, the increased engagement represents positive opportunities in the near term to penetrate states not using Twin today for social service delivery. We're also continuing our positive engagement in DC with multiple federal agencies to support their efforts to strengthen social service program integrity. There are several new incremental opportunities that would drive positive future growth for EWS. This current environment is a unique opportunity for our government vertical with the big focus on improper social service payments. EWS has significant opportunities for medium and long-term revenue growth supporting government programs in the big $5 billion government TAM, for Equifax, which gives us confidence in our ability to deliver government revenue growth above the EWS long-term revenue growth framework of 13% to 15%. Said differently, we expect our government vertical to be our fastest-growing business across Equifax going forward. Turning to slide nine, USIS revenue was up a strong 12% in the quarter driven by strong mortgage outperformance. USIS diversified or non-mortgage revenue grew 5% in the quarter and was in line with our guidance. Within B2B diversified markets, we saw very strong high double-digit growth in auto from pricing and strong volumes in auto pre-products and low single-digit growth in FI. Given the stable lending environment, we have not seen changes in customer marketing or risk management behavior. USIS mortgage revenue was up a very strong 33% and better than our expectations. While hard mortgage credit inquiries were down 1% in the quarter, these volumes were better than our October guidance of down high single digits. FICO pricing, along with growth in mortgage preapproval products, with our new twin indicator drove mortgage revenue growth for USIS. In 2026, we expect to see share gains in USIS mortgage pre-qual, pre-approval, and hard credit inquiry products from the adoption of our new mortgage credit file with Twin Indicator and Twin Total Income products. Financial Marketing Services, B2B offline business was up low single digits in the quarter. USIS' consumer solutions business had another very good quarter, up high single digits from strong customer acquisition trends in our consumer direct channel as well as strong growth in partner revenue. Our USIS B2C business remains on offense entering into an expanded relationship with Gen Digital providing our differentiated data their engine by Gen marketplace. Later this year, we'll also leverage engine by Gen to power to provide MyEquifax consumers in the U.S. with access to expanded and personalized financial solutions. USIS EBITDA margins were 30.3% in the quarter and up over 100 basis points sequentially above the top end of our guidance range from stronger than expected revenue growth and operating leverage. Turning to slide 10. International revenue growth was up 5% in constant currency and below our expectations principally in Canada and our European debt recoveries management business. Latin America growth of 6% was led by high single-digit growth in Brazil and Argentina. Brazil continues to be a big success story for Equifax with strong above-market revenue growth from share gains. Canada, Europe, and APAC delivered 4% growth in the quarter. International EBITDA margins of 31.6% were slightly above our October framework. Turning to slide 11, proprietary data is the foundation of our highly differentiated products and analytical and decisioning capabilities through which our customers generate unique solutions to grow their businesses and mitigate risk. Only Equifax can access our unique and proprietary data sets. The application of advanced AI in traditionally IT-based analytical techniques allows us and our customers to develop solutions that are reliant on our only Equifax proprietary data. As AI advances, we are confident we are able to generate more effective analytical solutions based on our proprietary data at an accelerated pace as well as make these advanced analytical solutions available to more customers. Slide 11 provides more perspective on the percentage of Equifax global revenue that is based on data that's proprietary and not available or broadly accessible. In total, about 90% of Equifax revenue was generated through the direct sale or through derivative products generated from our proprietary only Equifax data. Within the U.S., almost 90% of our revenue is generated from our proprietary datasets such as the credit file, and with our twin income and employment data database which is our most unique and valuable data asset. Within USIS proprietary data assets include the consumer credit file, along with our alternative consumer credit assets like NC Plus, DataX, Teletrack, and IXI Wealth Data Exchanges. These USIS assets are proprietary to Equifax and only accessible by Equifax. Within our international businesses, proprietary data includes consumer and commercial credit as well as other proprietary data exchanges like our financial services Broad Exchange in Canada and our Australia Income Verification Exchange with data approaching 50% of the employment market. Over 90% of international revenue is generated from proprietary only Equifax data. The proprietary and unique nature of our data is a huge asset for Equifax in this new AI environment as only Equifax can utilize the data for customer solutions and new products using our advanced AI capabilities. Turning now to slide 12, AI is fundamentally changing how we operate from technology to data analytics, products operations, and across Equifax. Our $3 billion cloud investment provides the technology platform that enables us to leverage AI capabilities across every corner of Equifax. We're driving AI deep into the organization with almost 90% of our team leveraging Google Gemini AI in their day-to-day roles. AI is not just an add-on at Equifax, it's now part of our DNA in how we operate every day. Our cloud transformation is now delivering measurable returns across software development, operations, and business processes from lowering operational risk from fewer service disruptions that increase customers' trust and capacity for innovation and creating predictable repeatable deployments and reducing human error with 90% of our infrastructure as code. We are also getting more software output from the same engineering investment with about 1,900 Equifax software engineers using AI coding tools that have generated over a million lines of code using AI. As we scale adoption across our broader developer population, these gains compound translating to accelerated product delivery, faster response to market opportunities, and improved return and capacity inside of our R&D and technology spend. Our Angetic AI platform is accelerating and standardizing the development deployment, monitoring, and governance of AI agents across Equifax. This is a strategic differentiator for Equifax that reduces duplicative efforts and enables build-once deploy-everywhere leverage across Equifax. We're continuing to advance our state-of-the-art machine learning capabilities that allow our data scientists to rapidly build higher predictive models and deploy them quickly as well as develop capabilities to automate model deployment to make models available faster for our customers. Our advanced model engine also allows our data to build models using Equifax's portfolio of proprietary and patented AI algorithms. AI is also extending into Equifax's operations or back office. The first part of 2026, we're focusing on improving our customer and consumer call centers with AI-enabled and AI-assisted call processes. Our AI call center transformation demonstrates our ability to fundamentally reimagine our labor-intensive workflows, which is a template for broader workforce productivity gains across Equifax. Over the next three years, we expect to drive towards $75 million of annual cost savings from our E3 AI operations initiative. The number of new products launched using efx.ai is up 3x since 2023. We launched our new Ignite AI Advisor in the fourth quarter. This powerful platform includes new AI-driven conversational analytics for deeper customer insights and personalized recommendations that solve a real need for customers. Following the successful U.S. rollout, we are introducing our new Ignite AI Advisor in our global markets in 2026. All new models in 2025 were built using efx.ai. Our efx.ai models consistently delivered industry-leading performance, an outstanding nearly 30% lift over legacy models last year. This big level of performance improvement demonstrates that our AI strategy is not only scaling but providing the superior predictive value required to lead in the marketplace. In USIS, we recently launched the credit abuse risk model, an adverse actionable model that leverages AI to help lenders identify first-party fraud and credit abuse behaviors like loan stacking, particularly where traditional credit scores indicate low risk of the consumer. With this score, lenders can identify pockets of prime consumer applicants with delinquency rates as high as 29 times greater than the overall prime delinquency rate. Our new EFX cloud foundation is giving EFX an AI advantage in innovation, new products, technology development, operations, and really across every corner of Equifax. It's not a vision for the future of AI at Equifax, it's broadly in motion across our business. Turning to slide 13. Enabled by our proprietary data and our strong momentum with efx.ai, we continue to make outstanding progress driving innovation and new products delivering a record 17% new product vitality in the fourth quarter from broad-based double-digit performances across all of our businesses and a record 15% vitality for the entire year. We expect strong double-digit VI to continue in 2026 and be above our 10% long-term goal, leveraging our cloud capabilities to drive new product rollouts using proprietary data and efx.ai capabilities. Last year we launched new twin indicator solutions in mortgage, auto, and card delivering twin income and employment attributes at no cost to our no additional cost to our customers, which is a huge leveraging our cloud data fabric to create powerful new solutions for our customers. In U.S. mortgage, these solutions were introduced first, we've seen strong adoption with over 1,400 customers accessing these new only Equifax products. We've already seen strong momentum in U.S. mortgage from Twin Indicator, with major mortgage lenders, which will benefit from our new solution in 2026. In auto, we have about 100 customers piloting the new twin indicator solution and we expect accelerating adoption in auto as we move through the year. And in card, although earlier in the product launch, we expect to see customer wins in 2026. Slide 14 provides perspective on the impact on Equifax operating results from the increase in FICO mortgage pricing over the past few years. As a reminder, Equifax profitability is driven by the sale and the value of our unique data that we sell. The FICO mortgage credit scores pass through to our customers at cost and we earn no margin on the sale of the FICO score. In 2025, FICO mortgage represented only about 3% of our total revenue. In 2026, that number will increase to about 6% or double. This drives a substantial P&L impact on Equifax. Last year, Equifax revenue growth excluding the impact of the FICO mortgage was about 6%. And in 2026, our guidance implies revenue growth on the same basis excluding the FICO score pass through of about 7% which is within our long-term financial framework. As shown on the right-hand side of the slide, the increases in zero profit FICO mortgage score revenue which has no benefit to our EBITDA dollars reduces the reported growth in our EBITDA margin percent. 2026 EBITDA margins are reduced by over 200 basis points by the FICO mortgage royalties we pass through to our customers with 2025 EBITDA margins also reduced by about by over 100 basis points. When we set our long-term financial framework in 2021, we did not anticipate that FICO would have these dramatic price increases benefiting Equifax revenue, but negatively impacting Equifax reported EBITDA margin rates. As we look at 2026 excluding these FICO mortgage impacts, our mortgage revenue growth at about 7% is inside our LTFF our EBITDA margins are expected to expand 75 basis points which is 25 basis points higher than our 50 basis point long-term financial framework for margin expansion. As we go forward we plan to share our performance excluding FICO mortgage royalties given the substantial impacts on our reported results. Turning to slide 15, our guidance assumes U.S. GDP growth consistent with our long-term financial framework of 2% to 3% and the U.S. mortgage market to be down low single digits in 2026 compared to last year. Internationally, we're expecting economic growth to be weaker than the U.S., particularly in Canada, the UK, and Brazil. And FX is a positive in 2026 versus last year benefiting revenue at about 50 basis points in EPS about $0.02 per share. Our 2026 guidance also assumes that all mortgage scores that are delivered will be FICO scores delivered by the three nationwide consumer reporting agencies, consistent with our mortgage scores volume to date in January. There is still uncertainty around when the FHFA will formally accept Vantage for agency mortgage originations. We felt this was a prudent guidance framework at this stage for 2026. We continue to see strong mortgage industry momentum to move to Vantage given the sizable cost savings to consumers and the mortgage industry. And we already have over 200 mortgage lenders in production or testing our free VantageScore that we deliver with a paid FICO Scored offering. Total Equifax revenue at the midpoint of guidance is expected to be up about 10.6% on a reported basis and 10% on a constant currency basis in 2026. As discussed previously, Equifax revenue at the midpoint ex FICO is expected to be up about 7%. Mortgage revenue is expected to be over 20% of our total revenue and diversified or non-market revenue up high single digits on a reported basis and constant dollar basis. FICO mortgage royalties in our guide are up over 2x from 2025 assuming no Vantage conversion or FICO direct score calculation by mortgage resellers. Excluding these FICO mortgage royalties from both 2026 and 2025 revenue as shown on Slide 15 you can see our revenue growth at the midpoint is about 7% in 2026 on a reported basis and constant currency basis and up almost 8% excluding the low single-digit decline in the mortgage market. Equifax mortgage revenue growth excluding FICO mortgage royalties is up mid-single digits. EWS mortgage will continue to outperform the underlying markets by high single-digit percent consistent with our long-term goals. And USIS mortgage excluding the impact of FICO scores will outperform the market by mid-single-digit percentages as we gain share from the introduction of the Twin Report Indicator, Twin Income Qualify, and our telco utility data in mortgage products. And again, this assumes no incremental revenue or margin from Vantage Score conversions in our 2026 guidance. Diversified markets or non-mortgage constant dollar revenue growth at the midpoint of 7% is up over 100 basis points versus 2025 driven by stronger growth in EWS and USIS. With weaker overall market conditions in international markets, we are expecting revenue growth rates in 2026 to be about consistent with 2025. John will provide more detail in a minute on our revenue growth at the BU level in his more detailed comments around our 2026 framework. EBITDA dollars are expected to grow by almost 10% at the midpoint of our 2026 guide to about $2.122 billion up from about 5.5% growth last year. And as a reminder, there is no profitability on the sale of FICO MortgageScore by Equifax, so EBITDA dollars are the same in both the with and without FICO mortgage score revenue views. And given there's no profit in the sale of FICO scores and mortgage, we are indifferent to TriMerge resellers calculating FICO scores under the new FICO direct model. EBITDA margins, however, are impacted meaningfully by the zero margin FICO score revenue in our reported results. Including the revenue from FICO mortgage score sales, reported EBITDA margins in 2026 would be down about 30 basis points at the midpoint. However, ex FICO, EBITDA margins grow substantially, up 75 basis points in 2026. The 75 basis point margin growth shows the leverage we are driving as we deliver high-margin data sales as well as cost savings from technology and AI operational initiatives. EPS in 2026 at the midpoint of $8.50 is up 11% versus last year and our free cash flow of over $1 billion will deliver free cash flow conversion of at least 100%, which is above our long-term framework. Turning to slide 16, the changes occurring in the U.S. mortgage market to provide lenders SCOR Choice Vantage or FICO in 2026 is very positive for consumers, the mortgage industry, and for Equifax. For lenders and consumers, VantageScore IV provides stronger score performance at least half the cost which is a winning combination for the mortgage industry and consumers. As a reminder, the consumer data from the credit file is the basis for mortgage approvals by lenders and the GSEs, not the scores. Equifax is a provider of not only credit data, but also unique telco and utility data with income and employment data and remains well positioned to continue to deliver value to mortgage industry participants. Interest in the mortgage industry to move to VantageScore is extremely high. We have over 200 lenders testing our free VantageScore with pre-qual and pre-approval products through mortgage hard pull products, with over 40 principally non-GSE lenders now in production with only the VantageScore. We are already providing Vantage historical data going back to '08, '09 to market participants both directly and through advanced analytical capabilities via our Ignite for Mortgage platform to aid our customers in the conversion to Vantage. And we're providing a free VantageScore with the purchase of any FICO score across all industry segments, mortgage, auto, card, personal loans, and insurance. In mortgage, we believe that when the FHFA Fannie and Freddie clarify the requirements for using VantageScore, and begin full acceptance for mortgage pre-review and underwriting, we'll see migrations to Vantage accelerate. The conversion of Vantage is a significant opportunity to drive margin expansion and EPS growth for Equifax. As a reminder, our 2026 guide assumes no conversion to VantageScore in the U.S. mortgage market. For perspective and provide data for your analysis, slide 16 includes our guidance for 2026 assuming no Vantage conversion and the impact of several Vantage conversion scenarios. For example, full conversion in mortgage to VantageScore from FICO scores in 2026 would reduce Equifax total revenue guidance of $6.7 billion at the midpoint by about $270 million, would increase Equifax EBITDA by about $160 million, and increase EBITDA margins by almost 380 basis points and increase our EPS by about a dollar a share. As we move through 2026 and there is more clarity on Vantage conversion timing, we'll update our guidance to reflect this shift and the opportunity for the mortgage industry, consumers, and of course Equifax. As a reminder, the incremental about $160 million in EBITDA impact in 2026 is with the U.S. mortgage market still operating well below 2015 to 2019 levels. And now I'd like to turn it over to John to provide more detail on our 2026 assumptions and guidance and also provide our first quarter framework. John Gamble: Thanks, Mark. Slide 17 provides the specifics on our 2026 full-year guidance that Mark discussed in detail. The slide includes additional detail on revenue growth rates and EBITDA margins excluding FICO MortgageScore royalty pass-through revenue and expected BU revenue and EBITDA margins. EWS in 2026 is expected to deliver revenue growth of high single digits and EBITDA margins at 51.2% to 51.7% about flat at the midpoint with 2025. Verification services revenue is expected to be up high single digits to low double digits. Mortgage revenue growth is expected to outperform the market by high single digits. Against a market that is down low single digits compared to 2025. Diversified markets verifier revenue is expected to be up about low double digits again consistent with 4Q 2025, government revenue growth, particularly in the second half, when new requirements begin to be implemented as well as in auto, card, and personal loans. Talent revenue is expected to continue to outperform an expected weak hiring market. Strong twin record growth, new products, and continued growth in both pricing and penetration particularly in government will continue to drive verification services. Employer services is expected to grow low single digits in 2026, again despite the expected weak hiring market. Employer services revenue is expected to decline in the quarter year to year. USIS revenue is expected to be up mid-teens percent and EBITDA margins are expected to be 32.4% to 32.9%. Excluding the increase in FICO mortgage score pricing in 2026, USIS revenue growth would be up mid-single digits at the bottom of our USIS long-term framework of 6% to 8%. And USIS EBITDA margins would be 39.6% to 40.1% up 100 basis points at the midpoint year to year, reflecting leverage on high-margin data sales and disciplined cost controls. USIS mortgage revenue excluding the benefit of mortgage price increase is expected to grow at mid-single-digit percent rates against a mortgage market that is expected to be down low single digits year to year. The growth principally from share gains as customers increasingly adopt our twin and NC plus based solutions as well as price increases. Including the impact of FICO mortgage score price increases, USIS mortgage revenue is expected to be up over 35%. Diversified markets revenue is expected to improve versus 2025 and grow mid-single digits year to year, benefiting from accelerating NPI, including twin indicator and total income-based products and share gains as they accelerate leveraging Ignite AI capabilities. International constant dollar revenue growth is expected to grow mid-single digits at a lower rate than 2025 with EBITDA margins at 28.6% to 29.1% up approaching 50 basis points at the midpoint. From 2025. Revenue growth is below the long-term financial framework for international and 2025 growth rates, principally from weaker economic growth in Canada and the U.K. Corporate expense in 2026 excluding D&A is expected to be up low single digits versus 2025. We believe that our guidance is centered at the midpoint of both our revenue and EPS guidance ranges. As Mark referenced earlier, we expect to deliver over $1 billion of free cash flow in 2026 and a cash flow conversion of at least 100%. With EBITDA increasing to about $2.12 billion at the midpoint, we are also generating over $400 million in debt capacity at our current debt leverage. This creates about $1.5 billion in capital available in 2026 for M&A and return of cash to shareholders. We continue to look for attractive bolt-on M&A to strengthen workforce solutions, our differentiated proprietary data assets as well as international platforms. And we have substantial capacity for share repurchases continuing the almost $1 billion we repurchased in 2025. Slide 18 provides the details of our 1Q 2026 guidance. In 1Q 2026, we expect total Equifax revenue to be between $1.597 billion and $1.627 billion up about 11.8% on a reported basis year to year at the midpoint. Constant dollar revenue growth at the midpoint is up about 10.6%. Diversified markets revenue is expected to be up mid-single digits on a constant currency basis and near the low end of our long-term financial framework and U.S. mortgage revenue to be up over 30%. EPS in 1Q 2026 is expected to be $1.63 to $1.73 per share, up about 10% versus 1Q '25 at the midpoint. Equifax 1Q '26 EBITDA dollars are expected to be $444 million to $459 million up about 7% at the midpoint. EBITDA margins are expected to be about 28% at the midpoint of our guidance. As a reminder, first-quarter EBITDA, EBITDA margins, and EPS are lower than the remaining quarters of the year in large part due to the structure of our employee long-term incentive and equity plans. Due to their structure, the disproportionately large percentage of the expense of these plans for the year impacts the first quarter. Excluding the impact of FICO mortgage scores, 1Q 2026 revenue would be up 7% to 9% nicely within our long-term financial framework and EBITDA margins in 1Q 2026 would be 29.9% to 30.3% about flat with 1Q 2025 on the same basis. Turning to slide 19, the left side of the slide provides USIS hard credit inquiry growth rates for 2015 through 2025. We have historically used our hard credit inquiry growth rates as a proxy for U.S. mortgage market growth as they have in general tracked together. For 2026, we will continue to provide you the USIS hard credit inquiry growth rate data each quarter. However, in 2026, we believe that USIS hard credit inquiries will likely significantly outperform U.S. mortgage market origination activity due both to significant Equifax wins that we believe will increase our relative share of hard credit inquiries and also the mortgage triggered lead legislation that goes into effect in March which we expect will result in an increase in the use of hard credit inquiries by lenders in shopping. And therefore a reduction in prequal and preapproval usage. We will continue to use the trends that we are seeing in hard credit inquiries which drive the bulk of USIS mortgage revenue as well as soft credit inquiries to forecast USIS mortgage revenue. The right-hand side of this slide shows the potential incremental mortgage revenue available should the market recover to average 2015 to 2019 levels. For this view, we have continued to use our historical USIS hard mortgage credit inquiries as a basis. We have also revised this slide to show Equifax mortgage revenue excluding FICO mortgage royalties and have updated the market recovery column to include the benefit of a full transition from FICO to VantageScore in mortgage. As you can see on this basis, with a full mortgage recovery and a full shift to VantageScore at 2020 pricing levels and EWS records, Equifax mortgage revenue which would include no FICO mortgage royalties could increase by $1.2 billion. At our very high variable margins, this would deliver incremental EBITDA of over $950 million and adjusted EPS of over $5.75 a share. For your perspective, you determine your view of the 2026 U.S. mortgage market based on a review of Equifax data on mortgage home purchase issuances since early 2022. We estimate that there are over 13 million mortgages with an interest rate over 5% including about 11 million with rates over 6% and almost 8 million with rates over 6.5%. This provides a perspective on the pool of mortgages potentially available to refinance as mortgage rates change. Now I'd like to turn it back over to Mark. Mark Begor: Thanks, John. Turning to Slide 20, as I mentioned earlier, our strong 2025 execution sets us up very well to deliver on our long-term framework in 2026. With constant dollar revenue growth of 7% ex FICO, which is inside our 7% to 10% long-term framework. Achieving our long-term revenue framework allows us to deliver EBITDA of $2 billion up high single digits with a margin rate up 75 basis points ex FICO which is well above our 50 basis point long-term framework. And deliver over $1 billion of free cash flow from cash conversion of at least 100% and 11% EPS growth. We are confident in our ability to deliver organic revenue growth in our 7% to 10% long-term target range, continue expanding EBITDA to maintain cash conversion above 95%, and to execute on bolt-on M&A. And in 2026, we expect to maintain a strong return of capital to shareholders. On the left side of the slide, you see our updated EFX 2028 strategic priorities, which are principally consistent with our prior framework. However, we've updated our EFX 2028 priorities to reflect our drive to accelerate our use of AI both internally and externally to drive efficiencies and cost savings for Equifax and bring new and improved products to market quicker that deliver greater lift and performance for our customers. Wrapping up on slide 21, Equifax executed very well last year against our EFX 2028 strategic priorities inside a challenging economic backdrop with a stronger second half and fourth quarter which gives us some momentum as we enter 2026. Our new cloud-native infrastructure is already providing competitive advantages of always-on stability, faster data transmission speeds, and industry-leading security for our customers, and importantly Equifax resources and technology product DNA are leveraging the new Equifax cloud for innovation, new products, and growth. We're using our new single data fabric efx.ai and Ignite our analytics platform to develop new credit solutions powered by clean indicators like verticals like mortgage, card, and auto that only Equifax can provide, which is leading to share gains and growth. We're also broadening our product sets in key verticals like government, talent solution, and identity and fraud. The Equifax team is fully focused on growth and innovation. Given our strong free cash generation, we are also delivering on our commitment to return substantial excess free cash flow to shareholders. As mentioned earlier, in 2025, we returned $1.2 billion to shareholders, which was well above our guidance for the year and in 2026, we expect to have $1.5 billion available to invest in bolt-on M&A like our 2025 Vault Verify acquisition and return substantial cash to shareholders through share repurchases and dividends. The new Equifax is investing in technology, efx.ai, and proprietary data assets to help our customers grow and deliver returns for our shareholders. I'm energized by our momentum as we enter the New Year, but even more energized about the future of the new Equifax. And with that, operator, let me open it up for questions. Operator: Thank you. We will now be conducting a question and answer session. Our first questions come from the line of Jeff Meuler with Baird. Please proceed with your questions. Jeff Meuler: Yes, thanks. Good morning. Mark, loud and clear, you've been front-footed on AI, both from a product and productivity perspective, and it sounds like you also have an AgenTeq AI platform in-house. Obviously, you have a massive data advantage, in employment and income today. I know it's still relatively early, on a GenTech AI, just how do you think about the applicability of AgenTek AI to the employment and income business given that a lot of the market is still manual I guess, both from an opportunity or a potential risk perspective? Mark Begor: Yeah. Thanks, Jeff. First off, the Equifax moat around data is very high. Whether it's our twin income unemployment data or our other credit data, our data is proprietary and over 90% of our revenue comes from proprietary data. What that means is no one else can access it. You know, when you think about credit data or in your question, income and employment data, the income and employment data comes from either payroll processors or individual companies, and that's also walled off. So the only way to access that is in a permissioned basis or in an aggregated basis like we have that's proprietary. So we think that there's a real moat around it from a data perspective. With regards to using AI in workforce solutions, we're doing a lot around our employer business where we, as you know, deliver regulated services to HR managers, things like i9, validations for new employees, unemployment claims management, work opportunity tax credit. We see big opportunities both in how we deliver those services from an AI perspective to the HR managers and their teams, but also how we actually complete the processes, you know, using AI in the paper processing to really drive productivity, speed, and accuracy. We're seeing a lot of opportunities there. And we talked you know, in my comments earlier, between AWS and USIS. This has really happened in the last six months us as we've been applying AI off of our new cloud platforms inside of Equifax. We're seeing big opportunities for productivity, speed, and accuracy in our operations by using AI call centers, paper processing, in workforce solutions as you referenced. To really drive efficiencies and productivity really quite substantially. And we talked about over the next couple three years in the neighborhood of $75 million of productivity from those efforts on internal operations. So we're quite energized around the use of AI. The investment we made in the cloud gives us a platform now across Equifax where we can really deploy it inside of Equifax. And back to the first point I made in obviously a topical point with what happened in the markets yesterday, you know, we have a lot of confidence around the moat that's around our data broadly. That really protects us from someone else using AI to try to disintermediate us. You know, we have the data, and as you know, you can't do AI without data. And when you have proprietary data, you've got the ability to really protect that and really deploy it in a very effective way. Jeff Meuler: Very helpful. And then overall margin, let's good to me normalized for FICO, but any additional perspective on the EWS margin outlook just any specific investments or headwinds things like the rev share on data partnerships or anything like that? Thank you. Mark Begor: Yeah. And we're pleased. I'm pleased, Jeff, that you are. I hope others are that we're gonna try to be transparent around the increasingly large impact that the FICO pass-through has on our reported results. And that's why going forward, we'll share with you what our particular margin rate impact is, which is quite substantial. And we're pleased with our guide of 75 basis points of margin expansion. I think that's a big number. You know, it's 50% above our long-term framework. It reflects the operating leverage in the business and, you know, some of the cost actions that we're taking, you know, driven by AI inside of Equifax. With regards to workforce solutions, you know, those EBITDA margins north of 50% are very attractive. You know, we think a lot about continuing to invest, and we are, in workforce solutions to maintain those margins because they're so accretive broadly to Equifax with our long-term framework, EWS growing faster than the rest of Equifax. And with those 50 plus percent EBITDA margins, you've got a lot of accretion you know, to our margin rate, and they generate a lot of EBITDA dollars. So we are continuing to invest there. We talked a little bit in our comments about some of the new products we're investing in, particularly in government. Like the continuous monitoring solution. Twin Indicator is a new solution that's a product between AWS and USIS. So, you know, investing in new products, investing new tech, investing in some of the AI capabilities inside of Equifax and workforce solutions on how they deliver solutions like in the employer business as part of the investments. And, you know, we continue to invest in acquisition of records and investing in our commercial team. So maybe a long-winded answer to say, we like our 50 plus percent EBITDA margins. Our goal is to maintain those, which we've been doing quite consistently, you know, while continuing to invest in the business to drive that kind of double-digit long-term framework revenue growth that is, as we all know, quite attractive at the 50 plus percent EBITDA margins. John Gamble: And as Mark covered, just in the total Equifax long-term plan. Right? Again, it's the hold those EWS very high margins and have them outgrow the rest of the company to add accretion, continue to drive USIS margins up, which you're seeing in our guide, continue to drive international margins up which you're seeing in our guide. And then also to get leverage corporate expenses that are outside the BUs, which again, I think you're seeing in what we guided for 2026. So I think 2026 is very consistent. With our long-term model and something you should expect to see from us consistently going forward. Jeff Meuler: Got it. Thank you. Operator: Thank you. Our next questions come from the line of Toni Kaplan with Morgan Stanley. Please proceed with your questions. Toni Kaplan: Thanks so much. And thanks for all the information around the FICO impacts and spelling out the different scenarios in the slides. I was hoping I know your guidance is assuming 100% FICO score sourced through the bureaus. Just maybe flush out sort of the hurdles that sort of get you like, get the lenders and resellers to being able to use Vantage. What are what's still remaining and what what's the timing on what those could be to get resolved? Mark Begor: Yes, that's a great question, Toni, and a tough one to answer. The timing element of it. As you know, the real hurdle that's left significant hurdle that's left is the FHFA as well as Fannie and Freddie you know, completing their work, you know, from a technology and, you know, planning process in order to allow for the adoption and the implementation of the Vantage core. That's really the big hurdle. Our intel is that it's you know, underway, meaning it's gonna be imminent. It's hard to handicap when that is. And we just thought it was prudent, you know, for given that that's uncertain when that's going to happen to put the guide out that we did. We also talked about there's a lot of energy in the marketplace with our customers, you know, number one, adopting our free Vantage Score for doing their own testing internally about VantageScore versus the FICO score, which is actually well known. You know, as you know, Vantage is widely adopted in non-mortgage space. So we've got good adoption there. We've got a couple of lenders that are non-agency, you know, a handful of lenders that have made the conversion because of the cost savings and performance and gone to full Vantage. They're smaller mortgage lenders for sure, but they're not the Fannie and Freddie know, conforming mortgages. So it's really a matter of when does that work complete, you know, by both agencies, you know, we're collaborating with them. You know, around that. And as it unfolds, we think there's energy in the marketplace to drive conversions once that gets green-lighted and you're available to submit a mortgage. You know, using Vantage. John Gamble: Also wanted to be clear in the presentation around in terms of the FICO direct model, which I know there's a lot of discussion around that. And, again, to us, we're indifferent in terms of operating profit. Right? Our level of operating profit generation is the same whether we sell the score or not. Because as Mark made clear that there is no margin pass through to us. So should that occur, doesn't affect our operating result our operating profit, yes, revenue would be lower. But it's, again, it's zero margin revenue. So we think we're in very good shape for that transition as it occurs or if it occurs. And then obviously we're in very good shape when Vantage transition occurs. Toni Kaplan: Great. And looking at government, I think there's a big opportunity there with OV3 and this year as well as next year. You just talk about the momentum that you're seeing there versus prior quarters? Like if the getting closer and closer to having to hit those error rate targets, is impacting the states' behavior? And is there a large season like, a large quarter for you for government? Like, is there seasonality that we should be aware of? And just anything in terms of momentum in that part of the business? Thanks. Mark Begor: Yes. It's a great question, Toni. It's one that we're quite energized about and we're putting a lot of effort into given this unique environment that really started a year ago when came in and there was a large focus or increased focus at the federal level and now at the state level. Around the improper payments. And OB3 that was passed in July is a big catalyst for that. And what it's resulted, I think we've been clear that a lot of the OB3 specific requirements you know, will have, we believe, revenue impact for us, meaning positive revenue in the second half of the year and into '27 when some of those requirements you know, have a start date in the, you know, in the states. But what the OB3 is driven and this focus on improper payments and some of the focus on error rates or the increased focus and penalties from the error rates above the federal thresholds is a very, very broad-based engagement with each of the states that we haven't seen really in the history that I've been here. Meaning, the states are focused on it. They know that they have challenges. If they don't, you know, take actions to drive some of the integrity in the programs, and we've just seen an uptick in commercial activity. And I think you've seen the business really have some sequential improvement in the third and again in the fourth quarter, which we're pleased with. They were above our expectations of what we characterize as kind of normal state penetration commercial activity that is probably, you know, driving you know, some increased commercial discussions or commercial engagement, you know, because of the focus on improper payments that's so strong. And because the states know that there's these new requirements coming later in the year and in 2027. So we're really pleased with the engagement at the state and federal level. And the federal level is a very, you know, obviously, a big, big opportunity for us with the IRS and some of the other agencies. Who aren't using our data today, which we think there's real opportunity. So we expect this business to be stronger in 2026 and 2025? As you know, '25 was impacted by some of the changes made in the Biden administration. Around cost sharing of data. Know, that was challenging for some of the states that air pocket that we had is behind really from a comp standpoint, which I think is positive. And then you just got some real commercial momentum. And the other thing we talked in our comments and with Jeff a minute ago is that know, AWS is investing increasingly in new products you know, to aid in broadly in the delivery of social services like continuous monitoring and things like that that we weren't doing before. So that's another catalyst for us as we move into 2026. Toni Kaplan: Great. Thank you. Operator: Thank you. Our next questions come from the line of Andrew Steinerman with JPMorgan. Please proceed with your questions. Andrew Steinerman: Hi, Mark. I wanted to think a little more about Slide 11 and proprietary data. When you look at your most sophisticated clients in terms of their use of AI, are these clients consuming more or less data from Equifax and why? Mark Begor: Yeah. It's first off, it's more. And we're the only place you can get scale data. At a proprietary basis in the set of datasets that we have. Think about our credit file's proprietary. TU and Experian also have one. They're proprietary. No one else has the scale of that data, and no one else can get to it. Obviously, a bank is gonna have or a financial institution their own internal data for their clients when they're trying to acquire new clients and they're also trying to understand what kind of debt does their consumer have in other financial institutions. You have to come to one of the three of us for that. Add to it the cell phone utility database that we have is only Equifax. DataX, Teletrack, only Equifax. The IXI dataset is proprietary at only Equifax. And then, of course, the Twin database you know, if you wanna get payroll data, you're gonna come to Equifax or you're gonna have to go to an individual on a consumer-consented basis companies don't share payroll data. Just broadly in a weighted scale. So that's another proprietary dataset. To your question know, around the data macro, there's no question that this is for years. There's been a macro of all of our customers wanting more data in order to broaden their decisioning. And as you point out, some of them are using their own AI and ingesting our proprietary data assets but we're increasingly using our AI deliver those solutions because we have the scale data assets. So you know, the moat around our data is very high. It can only be accessed by Equifax. Or by our customers, you know, when they're buying the data from us. You know, that's just it's got a it's got a very high mode around it and know, we think the combination of that motor around the data in our invest in investments in Equifax AI capabilities. We mentioned on the call, we've got 400 explainable AI patents We added 40 more in 2025. So we're expanding our capabilities to leverage our proprietary data assets with AI in order to deliver those higher performing scores models and products. And even smaller and mid-sized financial institutions we've delivered technology that lets them ingest our data easier. Right? So one score, right, integrates a substantial amount of our credit alternative data, which and it makes it easy for a midsized financial institution to access more information using our scores and to drive greater usage. And we're seeing that absolutely occur. And the AI advisor that Mark talked about now being launched is supposed to make that even easier because we'll be able to help them create new credit policies more rapidly using our agent to capabilities that will again help them ingest more data more quickly using AI Advisor as well as OneScore. Andrew Steinerman: Makes sense. Thank you. Operator: Thank you. Our next question has come from the line of Shlomo Rosenbaum with Stifel. Shlomo Rosenbaum: Hi, thank you very much for taking my questions. Mark, I just want to ask you a little bit more about the mortgage lenders that are testing or in production with VantageScore. Are you able to discuss what are the size of some of those mortgage lenders and FICO talked about their direct to lender, they're a you know, the top. It top five of the resellers. Where are you with the really heavy users of, like, you know, resellers and lenders in that? And then just in general, are you planning to spend a lot more money this year just marketing the Advantage score and helping your clients test it? Is that you know, an item that you're absorbing into your margins? Mark Begor: Yeah. So on the first half of the question, you know, there's clearly given the cost difference between FICO and Vantage, there's a lot of energy around know, the testing and utilization, you know, of Vantage. As we've said, you know, we've got, you know, a number of large as well as a large number of customers that are taking advantage of the free VantageScore delivery so they can, you know, work on their systems on how you how you would you know, bring in a second score and also looking at the performance of that VantageScore. And we mentioned that there are a number of smaller recognizably, but smaller lenders that have made the conversion, but they're not in the Fannie and Freddie space. But they've gone from FICO to Vantage. So there's no question that there's a, you know, real interest in it, and we think it just a matter of when do when does the FHFA know, authorize the ability, which they know, said they're going to do last July to bring the VantageScore in, and we think there'll be a and it'll obviously take time, but there's definitely a lot of enthusiasm there. With regards to, you know, marketing and costs, you know, we we're we're obviously you know, working with our customers to support them. I think, you know, part of the marketing effort was to offer the free VantageScore with every paid FICO score not only in mortgage but in the other spaces. So that's one that we're putting commercial effort behind as well as marketing effort. Of course any of our expenses associated with that which are I would characterize as not meaningful, but in our P and L and in our guide you shouldn't expect us to do, like, TV advertising or something, but you know, we're clearly incenting our commercial teams to work with our customers, you know, around this to use the VantageScore at half the price of the FICO score and really drive that conversion as soon as it becomes available and working hard to prepare our customers. We're also delivering you know, data on VantageScore performance, you know, going back to '08, '09 to our customers, so the risk teams can look at the performance which is very clear in the datasets that we have. So that's another element that we're doing to help support our customers as they evaluate the Vantage. As John pointed out, you know, from a you know, a guide perspective, we we put guidance in place assuming there's no conversion. We thought that was prudent because we don't know when it's gonna be greenlighted, you know, by the FHFA. And if there is conversion, it's only upside. To us. There's not any downside to it. And fundamental to that is that we sell the credit file that's used to calculate the FICO score. And we sell the credit file that's used to calculate the Vantage score. And of course, as we said a couple times in this call and it's well understood, when we sell FICO, you know, that $10 is a full pass through with no no margin on it. But we make full margin on the credit file that we sell because you can't calculate the FICO or VantageScore without our credit data. Shlomo Rosenbaum: Just a question if I can follow-up with John. Just on that selling the credit reports, it seems like from the guidance that you're taking the full hit of a pass through from the FICO score, not marking that up it doesn't look like there's much of a change in the cost of the credit reports to offset that. Am I understanding that correctly? John Gamble: So you're talking about we we indicated excluding the pass through of the FICO revenue, would be up mid-single digits. So you should compare that against the market that's down low single digits. So doing that math, that's high single digits ish, right, type of outperformance relative to the market. Which we think is relatively good. And relatively good relative to the other segments in which we operate. So that reflects certainly some price increase. It also reflects share gain that we're driving and we expect to see from Twin Indicator and the other only Equifax products that Mark would have already talked about. And there is also a little bit of headwind built in there related to what's going on with triggers, right. So as trigger legislation comes in our expectation is you'll see increase in hard pulls, but some reduction in soft pulls, and that could have a slight impact on our revenue. So we did the best we could to bake all those things in, but we think we think growing in that, you know, mid to high single digit range, x the FICO score is is a really nice outcome for our mortgage business. Mark Begor: Well, it's also our long-term framework. Yep. You know, our long-term framework is to grow organically seven to 10 and in USIS, six to eight know, in there. So, you know, we we have our mortgage business ex FICO kind of in that range, which we feel good about, and we and we think you should too. Shlomo Rosenbaum: Thank you. Operator: Thank you. Our next question has come from the line of Manav Patnaik with Barclays. Please proceed with your questions. Brendan Popson: Hey, this is Brendan on for Manav. I just want to follow-up on the some of the mortgage market commentary. Because obviously, in the last couple of years, kind of saw the opposite trend where there is a a lot of shift to prequal, and, and you guys have have you know, taken some share there as well. So it sounds like you're you think there'll be a reversal of that? So I guess just clarify, what's going on in the ground there. And then also the just to be clear, it sounds like you're saying the originations will be down low single digit. That's not the inquiries you the hard inquiries you actually think would would would be better than that. John Gamble: Sure. So on your last point, generally, we're talking about talking about hard inquiries and that's generally the way we guide. Now admittedly, we did indicate that we think we're gaining share there. So that we have to kind of net out the share gain when we're coming up with view of the market. But our down low single digits kinda reflects what we think inquiries would be doing absent the share gain that we're driving and absent some of the shift related to trigger legislation. And you know what's going on with trigger legislation I'm sure you're familiar with it. Right? We just we think we're gonna see some customers choose to purchase a hard pull earlier in the marketing cycle as opposed to purchasing soft pulls since those hard pulls now cannot be shared with other lenders, so that they so that they have an opportunity to market to the customer that's applying for the loan. So we think every customer is gonna do it. We still think there is we've seen growth continue. In soft inquiries and prequal and preapprovals. But we think this legislation is probably gonna result in some incremental adjustment where you might see a little more hard pull relative to soft pull for certain customers who choose to move to purchasing hard pulls earlier in mortgage cycle. Brendan Popson: Okay. And then on the twin indicator, I you're launching that kind of across the board obviously, it's already in market in some areas. But I guess, where should we think of the biggest incremental opportunity across your different know, product lines? Mark Begor: Well, certainly in mortgage. You know, mortgage is the largest FI vertical. It's one where income and employment is used in every origination. Along with credit. And we've talked many times that the way the market historically worked is, you know, you pull a credit file upfront, but you don't have any visibility of that applicant you know, is working or what their income employment characteristics are because that's typically done later in the process. And that's why we launched the Twin Indicator really last summer. We're seeing great traction with mortgage originators. We're offering it, I think, you know, for free. You know, with our credit file, not only in mortgage, but auto and card and and we'll do it in p loans this year also because it's really gonna differentiate, we believe, our credit file and drive some credit file share particularly in the mortgage space and that prequal application. Space that'll aid lenders in their kind of marketing funnel to really differentiate, you know, what kind of loan or will a will a consumer you know, close because they'll now have visibility, you know, around their employment, a range of income for them that they didn't have before. So we're seeing you know, some really good traction there and what it should result in and we're seeing some some beginning traction there is share gains. Know, when there's a one b poll, you know, in the mortgage prequal area, we want it to be an Equifax file because we're offering that differentiated data at no charge. Which we think will advantage us from a share perspective. And think about that same opportunity in auto, which would be kind of the next big vertical then we're also seeing some traction in card. You know, same same reasons, you know, historically, you know, card originations have always been done just on someone's credit profile. But you don't know if that credit profile supports someone with the capacity to repay or if they're employed. By adding the twin indicator, it just drives that decision higher as a card originator, you can approve more at a lower loss rate. And if we're doing it for free, which is our our business model, to drive share gains, you know, we're seeing some traction there too. So we're super energized around the twin indicator, which is a great example of you know, the kind of solutions we can bring because of the breadth of our proprietary and scale data. Brendan Popson: Alright. Thank you. Operator: Thank you. Our next question has come from the line of Faiza Alwy with Deutsche Bank. Please proceed with your questions. Faiza Alwy: Yes, thank you. I wanted to follow-up on the government vertical. So one is, it sounds like you're saying the business for diversified markets will be up low double digits. So one, I'm curious what you're embedding for the government vertical growth. And then I guess as you're having these conversations with various states and agencies, what are some of the factors that they're focused on? Sort of how important is, you know, pricing as a consideration, and if, you know, some of the funding issues that we saw with some of the states, you know, seem to have resolved. Mark Begor: Yeah. Government that, you know, as you know, has had a long track record of very strong growth through 2024. Kind of the five years prior, it had a CAGR of over 20%. So it's been penetrating into that large $5 billion TAM which is principally at the state level. And as you know, what we're delivering to states is, you know, speed of social service delivery because it's done instantly versus a manual verification of income eligibility. We're delivering productivity for the caseworkers at the state level, which is a very strong value prop. Then we also deliver integrity meaning it's very current. It's dated, it's from last week's paycheck, you know, so it's a very current dataset. And that growth penetration is really because of those three value props and that hasn't changed. It's south of around $700 million of run rate revenue, a little north of that in our government vertical versus the $5 billion TAM, our commercial teams focus is, you know, on those states and agencies. It's really agencies. That are still doing it fully manually. And when you think about a $5 billion TAM, in our business, you know, at, you know, less than 20% of that, there's a long runway for growth as we work with the states. To your question around, you know, what are why are why isn't it $3 billion business? You know, we think it will be over time. There are challenges around technology around process flow change. And as you point out, there can be challenges around budgets, you know, in states. We deliver a very, very high ROI. We deliver a big ROI on caseworker productivity, you know, meaning they can cover more individuals that are coming after social services. But we also deliver a huge ROI payback, you know, on the improper payments. And as you know, the federal government pays for social services, you know, with the states delivering it, and, you know, over the last year, they've really quantified the improper payments as being a massive number of $162 billion. So that's the incentive at the federal and state level. And what changed in the last, call it, twelve months is the passing of the OB3 bill that put more teeth into the requirements that the states have to deliver those social services. Meaning they have to use more verified data, they've got to do it more frequently, today, there's twelve-month redeterminations, it goes to six months. In 2027. All those actions are really putting teeth around addressing the $162 billion and it creates opportunity for Equifax and workforce solutions. So we were pleased to see the kind of above expectation revenue growth from call it, state penetration that's where it happened in the fourth quarter. Was some of that in the third quarter and we expect that to continue in 2026. And then you've got you know, kind of the macro of the OB3 requirements that go into place later this year and into 2027 and beyond. A lot of those conversations are happening now about how do I get prepared for that. Because of the incentives or penalties perhaps you wanna call it, that are embedded in OB3 for states that that don't take these actions they're now gonna have massive cost sharing or cost shifting from the federal government to the states where the states are going to be required to pay for a large portion of the social services if they don't get their error rates down. So that's been a real catalyst for an increase in conversations which gives us confidence in this vertical going forward. And as we've said a couple of times on this call, it's our expectation that this vertical government will be our fastest-growing business not only in workforce, but across Equifax going forward because of the uniqueness of our data set and our solutions and because of the ROI value we deliver to the agencies when they utilize our data. Faiza Alwy: Great. Thank you. And then just to follow-up on the on mortgage, and correct me if I'm wrong, I think you're guiding mortgage to low double digits ex FICO in the first quarter. And mid-single digit for the year 2026. So just curious like is that conservatism? Are you assuming higher rates? For the remainder of the year? Or what's behind that assumption? John Gamble: It's really it's really related to the the way the mortgage market and overall mortgage revenue moved in 2025, right? You saw improving levels as you moved through the year. So when you do year-over-year growth rates, they just look a little different than than than a flat level of performance relative to a consistent level of performance in each quarter. That's all that's happening. So the run rates that we're seeing today relative to where the first quarter was last year actually results in a little better mortgage performance in the first quarter as you move through the year if that run rate is maintained what you'll find is that you'll see the growth rates decline as we go through the year and that's what it reflects. Faiza Alwy: Understood. Makes sense. Thank you. Operator: Thank you. Our next question has come from the line of Ashish Sabadra with RBC Capital Markets. Please proceed with your questions. David Paige Papadogonas: Hi, good morning. This is David on for Ashish. Just following up on the government vertical I was wondering if you could talk about some of the pricing trends you've seen or expect to see in that vertical? I understand the three value prop that you're providing. Seems strong. There was a some a letter sent by some them senate senators regarding pricing. And then as a follow-up, was there any updates to the tried merge to buy merge? Mark Begor: Yes. On the first question, we have modest price increases at the government vertical. We don't price is not really a lever for us. We really think more about penetration. In the last year, we've gone to more subscription models in government in order to, you know, help a new state get used to using the service, you know, and and really help them in the adoption of our solution. So we don't think about price as being a big lever for us and it's not one that you know, is central, you know, where we have a multiple levers in workforce solutions. It's when you think about government penetration is such a huge one. We focus on delivering the right value in return for our customers. Product is a big one as we roll out new solutions. Last year we rolled out a consumer consented solution in government to go after some of the gig individuals who are going after social services that might have a w two job and be in our data set, but we don't have income. So we've got that in market now and we talked about our new monitoring solution that we're rolling out and we're seeing some real traction with that. So product is a big one. And of course, record additions are a big positive in this business and unique to Workforce Solutions. When we add new records and we added five more partners in the fourth quarter and 12 last year. In workforce solutions that really drives higher hit rates. So you've got a lot of levers for growth regards to your second question, of the buy merge, try merge, obviously, there's still some noise around that. Everyone we talk to understands whether it's the mortgage industry, know, our customers, you know, or, you know, on the hill or with the agency they understand the large differences between the three credit files from TU, Experian, and Equifax, and why a tri merge is so important. Now number one around access to credit, you for example, there's 10 million consumers in the U.S. roughly that are only on one credit file. If you don't pull all three, you might not be able to approve that consumer, you know, in a mortgage which is federally guaranteed. With the intent of expanding access to housing with the federally guaranteed support. So from an access to credit and getting a complete picture on the consumer, the tri merge is super important. And there's all kinds of studies that have supported that. And then from a safety and soundness, same thing, you know, if you went to pulling, you know, one or two of the credit files and instead of three, you may not pick up all the trade lines, and there could be trade lines that are either positive that help the consumer or negative that say there's a more risk with that consumer and that's why we think TriMerge is well embedded as an important tool for the underwriting of consumers mortgage. And frankly, the most sophisticated lenders in the United States outside of mortgage you know, pull TriMerge for cards, they pullMark Begor: it for auto, they pull it for personal loans for that same reason because they get a more complete picture on the consumer and it really drives their ability to approve more at lower losses, but also make sure that they're managing their loss profile from an underwriting standpoint. David Paige Papadogonas: Thanks so much. Operator: Thank you. Our next question has come from the line of Jason Haas with Wells Fargo. Please proceed with your questions. Jason Haas: Hey, good morning and thanks for taking my questions. I'm curious if you could talk about your philosophy and how you're thinking about pricing the credit file I guess, we know the price for this year, but for next year and going forward, can you talk about how you're thinking about that? And I guess, particularly for mortgage. Mark Begor: Yes, think it's the same in mortgage and non-mortgage. We do price increases every year in all of our products. And across whether it's workforce solutions or USIS or across our business. We generally do those on one one. We think about those as being reasonable and modest, you know, compared to, you know, to what FICO has done, it's obviously public you know, doubling their price that we don't do doubling a price and we have lots of relationships with our customers which is why, you know, I would characterize it we're balanced around price and will continue to be balanced going forward. Jason Haas: Got it. That makes sense. Very helpful. And then I wanted to focus in on talent, which I thought was a bright spot. Even despite the soft tire markets. Can you just reiterate what drove the strength there? Mean, how you expect that to trend going forward? Thanks. John Gamble: Yes. So our talent business is really heavily driven by not only our twin data, continues to perform well and we continue to increase penetration but we also have a broader set of products including in education around incarceration, right, that is that are also expanding. So I think the way we continue to outperform that market, which as you saw BLS was down low single digits. We grew obviously much stronger than that up mid to high single digits. So very good performance on our talent business is really driven by continued performance on the team of continuing to build penetration with our income-based products and then also expand consistently our education and other products including incarceration which also continue to grow. So nice very very nice performance by the team in a very tough market. Jason Haas: That's great. Thank you. Operator: Thank you. Our next question is come from the line of Kevin McVeigh with UBS. Please proceed with your questions. Kevin McVeigh: Great. And congratulations on the execution. It's obviously a lot of moving parts out there. I guess just a little bit higher level. I mean, seems like there's really no changes to the longer-term framework, right, despite a pretty meaningful shift from FICO. So is the offset you're able to lean into to the AI a little bit more to drive more rev? I mean, see it in the vitality index. Is that driving more revenue and expense management or other parts to the business you're helping offset that? And, you know, obviously, there'll be some shift as VantageCore starts to kind of season a little bit. But just any thoughts on the model overall just given you know, pretty dynamic shift in FICO? Mark Begor: Yeah. FICO is one that obviously is just a no margin pass through for us, you know, and it's very sizable now, which is why we to spike it out, and we will do going forward because it's such a big piece of our revenue. And, yeah, it's zero calories. You know, when we sell a FICO score, you know, we just pass that through. And, you know, we're gonna do that. You know, the performance of the business, we're pleased with. We're pleased with our revenue guide and you know, for 2026 with a mortgage market that's you know, down slightly again, you know, we had hoped that inflation would come under control and the rates would move down. Obviously, they've ticked back up, which has put some pressure on the mortgage market. But to have a 7% ex FICO guide, which is at the lower end of our long-term framework ex the mortgage market, you know, I think we're something closer to 8%. We feel good about that and when you look at the three businesses versus their long-term framework against the seven to ten, having EWS in that low double digits think is a big, big positive moving forward. As they return to their long-term growth rate. USIS performing well both mortgage and diversified markets are non-mortgage and then same with international. So, you know, what's driving that? I think it starts with our unique and differentiated data. And, you know, as you point out, you know, we've had a big focus obviously investing in our technology, but our technology is now enabling us to deliver more innovation and more new solutions. We think that's accretive and supports our growth rate. And the fact that we have our vitality index last year 50% above you know, our long-term framework of 10% is really good. Because that's momentum as we go into '26 those new products. And you look at some of the new products we're rolling out that a year ago we weren't talking about with you, we weren't doing because we were still finishing the cloud. You know, like the twin indicator. You know, that is a we think a really powerful solution. We're offering it at no charge to our customers to drive share gains for our USIS credit file. And as you know, the next credit file we sell is very high incremental margins. So we're pleased about that. With regards to the margin, ex FICO of 75 basis points, you should be pleased about that. We are that's 50% above our long-term framework of 50 basis points. That's really positive. It's going to drive double-digit EBITDA growth and EPS growth which is going to drive our free cash flow. We're really pleased about that and that's really driven by the pure operating leverage that we have with very high fixed cost structure. So our next product sale, our next credit file sale, or twin indicator sale or, you know, twin data sale is very high incremental margin. So that operating leverage is very high on revenue growth. And then as you point out, we're driving really in the last six months, the second half of last year, a big focus on using AI inside of Equifax drive productivity, speed, accuracy, customer service. But on the productivity side, we laid out that, you know, we've got a plan for 75 odd million of cost saves over the next couple three years from a lot of AI deployment inside of our back office. So I that's a real a real positive. So, you know, we're excited about the business and, know, really the performance in momentum coming out of last year. But then, our kind of outlook for 2026 we're pleased with. Kevin McVeigh: Very helpful. Thank you. Operator: Thank you. Our next questions come from the line of Kelsey Xu with Autonomous Research. Please proceed with questions. Kelsey Xu: Hi, good morning. Thanks for taking my question. Some of your peers have called out the improvement in the underlying post-consumer credit supply-demand dynamic. I was wondering if you can talk a little bit more about what you're seeing there in terms of just volume growth outlook for card, auto, and personal loans? Thanks a lot. Mark Begor: Yeah. The market is still quite solid. We talked about the mortgage market. We tend to talk about that from a market standpoint because it's so impactful and it's been a negative for quite some time because of the high interest rates. Going to the other verticals and they're solid. Some of the activity is kind of below still pre-COVID levels but there's still attractive. And then there's a question earlier around kind of the data macro, that's a positive for us as well as our ability to use AI to deliver higher performing products and solutions. Our customers from an origination standpoint are still originating. You know, there's no change. We don't see any, you know, kind of behavior around people thinking about slowdowns or recessions, but they're after more data. Which is a positive for us. They're after higher performing scores and models and we talked about some of the big lifts we're delivering now with our AI-generated scores and models and those become positive for us to penetrate in with our customers because we're delivering higher performing solutions. But your question on the markets, like our customers are strong, meaning financially, the banks and financial institutions. And broadly, the consumer is in good shape because they're still working and spending. So, you know, that's a positive for us. John Gamble: So we're seeing FI for us has been good. You look at online, we're seeing nice mid-single-digit type of performance. Auto really strong, which I know Mark talked about in his comments. Insurance was very strong. We're seeing double-digit type of movements there as well, so very, very strong. And for us really across these segments, fintech is performing extremely well. So that's an area of real growth for us where we're seeing very good performance that's helping us across each of those segments that I referenced. So overall, we think our performance in USIS, especially as you look at online, is very good. Kelsey Xu: Got it. So second question, understanding that you are EBITDA agnostic on the cycle direct program, but it does impact revenues. So just curious to hear what you're seeing in terms of TriMerge resellers adoption or pickups for the FICO direct program? And your guidance, I think, implies 0% penetration rate for this program. So just once again, more of your thoughts behind that assumption. Mark Begor: Yeah. I think we said in our comments, there's zero CRA reseller score calculation so far this year, meaning in January. We know there's dialogues going on between the CRA resellers and the CRA TriMerge resellers and FICO. I think FICO talked about that on their call maybe last week I believe they said that they didn't see this happening until maybe the second half, but meaning that that the resellers being prepared to do it, going through the approval process, etcetera. But, you know, really, we tried to say in our comments earlier that we're kind of agnostic whether we calculate the score or the TriMerge reseller calculates the score. Because if they calculate the score, we're gonna sell them the credit file. Know, at our full price. And then, presumably, they're gonna have to pay FICO $10 for the score. Whether they pay the $10 to FICO and calculate the score or we do it, we're kind of agnostic because you know, it has no margin impact to us. Meaning, we don't get any margin when we sell the FICO score. We get the margin when we sell the FICO credit, I'm sorry, the Equifax credit file. So, you know, how that'll unfold is tough to handicap. What the incentives are? Why a reseller would want to calculate the score? Is, you know, I think something they're trying to figure out, meaning, how are they gonna make incremental margin for investing in the score calculation. If they're paying a full price to FICO and a full price to Equifax, I think that's challenging. But we're agnostic, you know, and we're gonna be you know, collaborative, you know, with our customers, which are the the TriMerge resellers to help them in ways that make sense if they decide they want to do it because there's really no P and L impact to us, meaning, and we think about P and L as our EBITDA, our EPS, and our free cash flow, it's neutral to us whether we calculate the score or not. And, again, because of that uncertainty, we opted to have a guide that said there's gonna be no CRA score calculation in 2026, and, you know, there's gonna be no vintage conversion. You know, I don't think either of those are true, but it was the it kind of the best guide that we could put together, and we thought, you know, putting those scenarios in place for you helps you think about if there is a conversion, what it means to Equifax. And we'll be super transparent you know, every quarter on what activity we're seeing or not seeing, you know, on both of those fronts. You know, so we can share with you. And then you've got enough information so you can make your own assessments of, you know, how you think gonna unfold going forward. But, you know, between the FHFA and Fannie and Freddie's decisioning, and timetable being uncertain and the same with the CRA TriMerge resellers. We thought that was the right guidance to put in place for Equifax. Kelsey Xu: Super helpful. Thanks a lot. Operator: Thank you. Our next question is coming from the line of Scott Wurtzel with Wolfe Research. Please proceed with your questions. Scott Wurtzel: I just wanted to go back to the EWS margins. And just with sort of this assumption around new kind of government revenue from these benefits coming in, in the second half of the year. Should we assume that there could be like a ramp in EWS margins as we move throughout the year? Thanks. Mark Begor: Yeah. So I think John said it, and I said it in a different version. We like our 50 plus percent EBITDA margins in EWS. Our goal is to maintain them. In our long-term framework, because they're so accretive from a free cash generation as well as the overall Equifax margin rates, which are so powerful. And, you know, we're making investments to keep that top line at EWS, which is also accretive to Equifax. You know, going, whether it's around new products, know, new technology, we're investing in AI. I talked about some of our product delivery in the employer business. New products that we're rolling out. So we're going to keep that balance of investing in AWS to keep their top line double-digit top line growth over the long term going. While still balancing maintaining those 50% plus EBITDA margins. For overall Equifax, obviously if they're growing faster that's part of the accretion, it's in our 75 bps expansion this year. And then the operating leverage in the rest of Equifax helps drive that 75 basis points, which we're very pleased with that's well in excess of our 50 basis point framework over the long term. Scott Wurtzel: That's helpful. Then just a quick follow-up just on sort of your outlook on international and sort of your assumptions around the macro and key geographies. I know you called out some weaker economic growth prospects, I think, in Canada and The UK, but I know there's also been some macro volatility in Brazil as well. So just wondering if you can kind of give sort of high level, you know, macro assumptions in your key international geographies that's sort of underpinning guidance this year. Thanks. Mark Begor: Yeah. I think it's well recognized the Canadian and UK economic macro challenges. Just to contrast in The UK, we performed well in our CRA business, very strong performance even in a weak market. The debt management business where we do a lot of debt recovery analytics you know, was under pressure in The UK. Canada is clearly has got a challenge from the tariff conversations that's happened really over the last year. We expect to see that be pressure for that business, but we expect better performance in '26 and '25 out of Canada. Australia, fairly stable, and we've seen, you know, good performance in our business there. Latin America broadly, in good position. There are some Brazil economic conditions, but we've had very strong performance in Boa Vista our acquisition we made a couple years ago. Is where we're gaining share there. So we would expect that business to perform well again in 2026. So you know, international, we've got kind of framed out at the lower end of their long-term guidance of seven to nine. Principally for some of the underlying economic weaknesses in some of the markets. Operator: Thank you. Our next question has come from the line Craig Huber with Huber Research Partners. Please proceed with your questions. Craig Huber: Great. Thank you. My first question, you said several times today and in the past that you're agnostic if a FICO score was sold through Equifax or the resellers and so forth. Obviously, you're agnostic because you've raised the price of your credit file for mortgages and the associated fees to offset that, which is fair. I mean, it's must-have data if you wanna originate a mortgage out there and stuff I'm curious on two fronts there. What has the reaction been to the price increase to your credit file significant price increase there in the mortgage market? What's been the reaction out there? And is there any learnings there about that reaction there that you could potentially about raising prices more aggressively in other markets credit cards or maybe auto more importantly? That's my first question. Thank you. Mark Begor: Craig, your comments really accurate. Around what we've done with the credit file. And I think there's some misconceptions out there about what was marked up or what was not marked up. From our perspective, we've always been selling a credit file and a credit score know, for years. And that credit file you know, included the FICO score, you know, where we pass through the cost of the FICO score. So, you know, from our perspective, we haven't had a large increase in the credit file in 2026, and we haven't in the past. And we've shared that in prior investor meetings. You know, we passed through the FICO credit score, and you know, I would tell you that there's you know, a lot of, you know, consternation in the in the marketplace, meaning with mortgage originators around a FICO credit score going from 495 to $10. You know, that's just the reality. You know, that's not you know, we didn't we we we didn't take our credit file price up anywhere near, you know, in in a 100 miles away from that kind of a price increase. So that's really been the focus of the conversation. And, you know, what's the learning for us? You know, is we're gonna continue to have very modest increases on our credit file going forward, we would not do those kind of large price increases and we're we're we've not done them in the past. John Gamble: And as a reminder, we added a twin indicator we added NCTUE data to our credit file. Right, with that modest price increase. So we not only had a modest price increase, we also made the information we're delivering more rich. Right? So a better product with a modest modest price increase. Craig Huber: Sorry. Just to be clear on my end. So where did you exactly get the extra money to make up for the loss that you're no longer getting a margin on the FICO score that you were selling before? Mark Begor: We never we did again, is a narrative that was created by, know, really FICO. We never had a margin on the on the FICO score. And I think we've been very clear on that. We sell a credit file and that credit file cost is what we've been delivering to our customers and then we pass through a FICO score. Last year was four ninety five, and we passed that through. It was very clear to our customers and this year it's $10 and we're very clear to our customers on that period. Craig Huber: Okay. And my last question if I could, your vitality index of 15%, just talk real quick if you could about the AI enhanced products or new products that you're very excited about here. That's a big number. Mark Begor: There's a bunch. I had them in my prepared comments earlier. And a lot of around scores and models around risk underwriting, credit underwriting, we're seeing, you know, big 10, 15 kind of lift in performance, which is massive. So those higher performing scores using more data you know, from our differentiated datasets deliver higher performance for our customers. So we're seeing share gains. We call that, you know, one score is one of our products that pulls together all of our differentiated data that we rolled out last year, and we're seeing a a lot of take there. We're also seeing in identity and fraud really the same thing. By ingesting more identity and fraud data assets we're seeing higher, you know, hit rates or higher performance rates on our identity solutions or higher pass rates. So that's been a real positive. So scores and models really big deal. We talked about some of the additions we're making in our adding AI capabilities to our Ignite analytics platform to make that you know, more functional, more usable, you know, for large, but particularly medium and smaller lenders. So it's easier to use Angetic AI around those product solutions. It's really quite broad-based on, you know, the energy we have around AI. It as you point out, our 15% vitality last year or 17% in the fourth quarter, obviously, we ramped through the year. A lot of that is being driven by our differentiated data that's really proprietary to Equifax. And then second, our use of AI. And as I mentioned, you know, on the call, we continue to invest in our explainable AI capabilities with 40 more AI-related patents that we filed in 2025. I think that's a great kind of indicator of our investments to, you know, to drive our industry leadership around using AI to deliver our differentiated data to our customers. Craig Huber: Great. Thank you. Operator: Thank you. Our next questions come from the line of Zach Lasich with Feet Partners. Please proceed with your questions. Zach Lasich: Hi, thanks for the question. Despite no impact to EBITDA or EPS, there an assumption built into the revenue guidance on what percentage of mortgage volumes will move to the direct model for FICO? And any color on how the brokers have been thinking about the direct model and the option for the performance pricing would be greatly appreciated. Thanks. Mark Begor: Yeah, I think we said earlier in our comments and there was a question a couple of minutes ago on that one that our assumption in our guide is that there's no Vantage conversion and there's also no CRA reseller or tri merge originator so-called direct model using FICO's term score calculation. And we haven't seen any of that in the first so far in the first quarter, meaning in January. And our conversations, you know, with, you know, those, you know, kind of TriMerge resellers is know, there's no dates we can see, you know, call it in the first quarter, don't see any of that happening. And just as a reminder again, for probably the fourth or fifth time on this call, we're agnostic to that. Because there's no p and l impact to Equifax. Or benefit for the customer. You know, for the TriMerge resellers calculating the score know, we're gonna sell our credit file at the full price to them, and then they'll buy the FICO score presumably for $10 you know, from a FICO and then sell that once they start doing it. It's hard for me to see what the benefit is of reseller doing it, but, you know, that's why we put our guide together because there's no indications that that's, you know, has any certainty about when gonna happen. There's also some questions about what kind of approvals would have to be completed by the regulators. Around someone else calculating the score and that likely means time. But again, just to be crystal clear, we're agnostic. You know, if the TriMerge resellers and FICO decide they wanna calculate the score, we're cool. It has zero impact on Equifax p and l, meaning, and we think about P and L as our EBITDA, our EPS, and our free cash flow, it's neutral to us whether we calculate the score or not. It'll clearly impact our revenue because someone else will calculate the score but when, you know, the zero calorie revenue, we're agnostic to that. So, you know, we'll see how it unfolds, and we thought we gave the right guide of assuming none of that happens. I think that guide is likely wrong because there'll likely be some activity at some point. But it's impossible for us to handicap when that'll happen. But the Equifax bottom line you know, is not impacted by that change. Operator: Thank you. Our next question comes from the line of Arthur Truslow with Citi. Please proceed with your questions. Arthur Truslow: Hi there. Thank you very much for taking my question. So just sort of following on from that. Just wanted to clarify in simple terms. If what we're saying is that you are calculating the credit score for mortgages using the FICO algorithm, are you able to say whether the sort of contribution in dollars per mortgage inquiry is gonna be higher, lower, or the same in 2026 relative to 2025? Thank you. Mark Begor: It's higher. John Gamble: Yeah. There's no question. We'll make more margin dollars because we took up the price of our credit file, and John kinda gave a framework of what that increase looked like. So we'll have higher margin dollars. Our revenue obviously is impacted by the FICO score going from four ninety five to $10 because that's the pass through that we have, but our margin dollars on mortgage by selling the FICO credit score are clearly gonna go up. Now the margin rate is impacted just by the math, but the margin dollars are what you and I should care about. And, you know, we've given a framework for overall Equifax margin dollars being up low double digits broadly in the business and this is one of the elements that drives that. Arthur Truslow: Yeah. Just to reiterate, just if the score if there's a if the score is sold by the CRA, or if the score is sold by Equifax, our EBITDA, EPS, and cash flow are unchanged. Right? Doesn't matter. Right? Arthur Truslow: No. Thank you. And the second question I had just sort of following up from that. When you produced your long-term framework for USIS, did you assume that you were gonna benefit from an organic growth perspective from FICO very significantly raising prices every year. Of course not. Or not? Mark Begor: Of course not. No. This was done back in 2021. When we put that long-term frame in place, I think the FICO score was like $0.55 and we expected which they had for kind of the decade before that to them, they would do modest price increases. You know, which was in our long-term framework. You know, think about you know, kinda mid to high single digits, something like that was in our in our long-term framework. Obviously, changed dramatically and that's why we've you know, opted to spike out the FICO impact because it's so significant, you know, in our reported results. And give you better visibility around the underlying performance, which was always there. You could always look at our EBITDA dollar change. And, of course, we set as a framework a margin rate of 50 basis points per year, but that clearly did not assume that there'd be this kind of FICO price increase which is why going forward, we'll show it to you with and without. FICO. Again, you should and we're really pleased with the operating leverage of 75 basis points ex the FICO pass through. That's quite strong and one that we're really pleased with. Arthur Truslow: Brilliant. Thank you very much. Operator: Thank you. Our final question will come from the line of Simon Clinch with Rothschild Co. Redburn. Please proceed with your questions. Simon Clinch: Hi, thanks for fitting me in. Mark, I was wondering if you could help us think about quite an important question today, all the ruptures we've seen in the market. With the application of AI, to alternative datasets, beyond your own proprietary sets, is there any situation where the value extracted from that data reduces the relative value that you extract from your proprietary data sets. And thus, make some marketing more competitive in that front. That's definitely a question that know, I think a lot of people ask these days. Thanks. Mark Begor: Yeah. It's clearly we've been swept into a neighborhood we don't think we live in, you know, where AI could disrupt or disintermediate our business. I think the scaled data assets we have are unmatched. You know, there's no way to, you know, get to the kind of credit data we have or something that has the same predictive elements of our proprietary credit data. Our alternative data, the income and employment data we have, and the fact that it's not publicly accessible you know, by third parties through any kind of AI tool. You know, pick the dozens out there that are creating very sophisticated that can access public market data, they can't get to ours. So I think that's a big part of the Equifax moat around data. To your question, I think you were heading towards is you know, what other kinds of data that might be accessible from a public standpoint, you know, could replicate you know, what we do today, and we don't see any. You know? You can't get credit data in the public market. You can't go out to the web and, you know, really aggregate that kind of data. You can't get payroll data. You can't get, you know, income and employment data. It's just that those kind of datasets are proprietary to proprietary, the contributors that are giving us that data, you know, that data is a proprietary environment in their world. Think about the 20,000 financial institutions that contribute data to us you know, every month, you know, they've got a walled garden know, around their data. It's not accessible, you know, same with income and employment data, you know, the 4.8 or 9,000,000 companies delivering payroll data to us either directly or through a payroll processor or HR software company you know, that's a walled dataset that's not accessible from an AI tool in any way. So, you know, we think obviously what happened in the last twenty four hours in the broader industry around AI concerns of disintermediating businesses that principally, in my view, you know, rely on public market data. We're not in that neighborhood, but we've been swept into it. So we'll work to continue to communicate to our investors around the Equifax moat around our data, which we think is big and tall. And one that, you know, we think is gonna be long-term sustainable. And only Equifax can use the data for our customers when we authorize them to do it. In order to use that data in any way. Simon Clinch: Really useful. Thank you, Mark. And I think just as a follow on to that, I mean, as I'm thinking particularly long term here, but do you see the value of a credit score maintained in an environment where AI is producing a lot more value and insight from even your own proprietary data? I mean, is there a situation where VantageScore, the value of VantageScore to the market as a whole goes down while the value of your underlying data goes up. Mark Begor: Well, we think the underlying data is always the linchpin. You can't calculate a score without the data. And remember, like, Vantage only can calculate the score because we own Vantage along with TU and Experian. We use that Vantage algorithm on our data. So like a third-party AI algorithm can't calculate a score because it has no data. You know, the only way to do that is to have the access to the data and obviously, we control know, who uses our data and how it's delivered. So in my view, with all the data we have only gets more value. And as you know central to our strategy is to continue to add more data, either organically or through acquisitions and we've done acquisitions of, like, PayNet, DataX, Teletrac, You know, we've done a number of acquisitions to add more data into our proprietary dataset. And, you know, to me, I think what's fundamentally missing in the market today is that, you know, investors need to understand you can't use AI without data. And if you fundamentally believe that Equifax data, in our case, is proprietary, that's a pretty big mogul. Because the only ones who can use AI on our data is Equifax. Simon Clinch: That's great. It's really good to hear you say that. Thank you. Operator: Thank you. We have reached the end of our question and answer session. And with that, I'd like to turn the floor back over to Trevor Burns for some closing comments. Trevor Burns: Yes. Thanks, everybody, for your time today. Appreciate it. If you have any follow-up questions, can reach out to Molly and I. Otherwise, have a great day. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines at this time and enjoy the rest of your day.
Operator: In March, Greetings, and welcome to the Gladstone Investment Corporation Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Gladstone, Chief Executive Officer. Thank you, sir. You may begin. David Gladstone: Well, thank you, Latonya, and good morning to everybody. This is David Gladstone, Chairman of Gladstone Investment. And this is the earnings conference call for the third quarter ending 12/31/2025 for the 2026 fiscal year. And it is the March 31 year. We hope we get all of our shareholders on board and analysts in order to tell you about the future of the company. We are listed on NASDAQ under the trading symbol GAIN for the common stock, and then we have three preferred stocks: Gain N, Gain Z, and Gain I. Three different registered notes. Thank you all for calling in. We are always happy to provide updates to our shareholders and analysts and provide a view of the current business and the environment that we are in. Two goals of this call are to help you understand what happened to us during the last quarter and give you our current view of the future. And now we will hear from Catherine Gerkis, our Director of Investor Relations in ESG, to provide a brief disclosure regarding certain regulatory matters concerning this call. Catherine, go ahead. Catherine Gerkis: Good morning, everyone. Today's call may include forward-looking statements which are based on management's estimates, assumptions, and projections. There are no guarantees of future performance, and actual results may differ materially from those expressed or implied in these statements due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the Investors page of our website, gladstoneinvestment.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release for more detailed information. You can also sign up for our email notification service and find information on how to contact our Investor Relations department. We are also on X, at Gladstone Comps, as well as Facebook and LinkedIn. The keyword for both is The Gladstone Company. Now I will turn the call over to David Dullum, President of Gladstone Investment. David Dullum: Thanks, Catherine, and good morning to everybody. So I am pleased to report again that the '26, which as David Gladstone mentioned, ends on March 31, that we continue to build on the prior quarters, a very strong performance in this fiscal year. Driven by our continued growth in the portfolio and the results of our existing portfolio companies. So we ended the third quarter with an adjusted NII of $0.21 per share, total assets of about $1.2 billion, which is up about $92 million from the end of the prior quarter. Now this increase quarter over quarter in assets resulted from one new buyout investment during the current quarter along with fairly significant appreciation of our investment portfolio. So with the new buyout investment, we currently have 29 operating companies and a very healthy pipeline for new acquisitions. In this regard, to date, for fiscal 2026, we have invested $163 million, which is in four new portfolio companies, which compares to about $221 million that we invested for all of fiscal year 2025. These new investments are consistent, of course, with the buyout strategy where we grow the portfolio through the acquisition of operating companies at attractive valuations, and where we generally are the majority economic owner. We also make our acquisitions through a combination of equity and debt, and with the equity providing the potential upside through capital gains upon exit, and the debt securities, of course, generating the operating income, which supports our monthly distributions to shareholders. And that is a very important aspect of our portfolio. So this is one of the factors that in fact differentiates us from other traditional credit BDCs. The aspect that we provide both the debt and the equity when we make an acquisition. So from our operating income, we maintained our monthly distribution to shareholders of $0.08 per share, or $0.96 per share on an annual basis. Put this in perspective since inception in 2005, and through 12/31/2025, we have invested in 66 buyout portfolio companies for an aggregate of approximately $2.2 billion and exited 33 of these companies. This resulted in the total investments currently being valued at $1.2 billion while generating approximately $353 million in net realized gains and $45 million in other income on exit. So as we look forward, what we are finding is there is very good liquidity in the M&A market. This creates a very competitive environment for new acquisitions certainly at what we would consider reasonable valuations. Now while this is challenging, we do seem to be able to compete effectively, as I mentioned, the investments we have made in the fiscal year. So we are out there working hard, effectively competing for these acquisitions that do indeed fit our model. And again, this is where we are both the equity and the debt to complete the acquisition. And one of the things that we do in looking at the debt securities that we do, we need a meaningful what we call fixed charge coverage and income yield on our total investment. So that is indeed in excess of our cost of capital. As I mentioned earlier, we closed on four new investments during the first nine months of the fiscal year. We are continuing to be in varying stage diligence on some possible new opportunities, including accretive add-on acquisitions to existing portfolio companies. I would just like to elaborate on the add-on acquisitions that I mentioned. Given the way in which we manage our portfolio, it is not unusual for us to be constantly looking for acquisitions to add to existing portfolio companies and indeed are able to grow the value of our overall investments and portfolio by this add-on activity. So this activity all could lead to closing on new buyout investments during the balance of the fiscal year. And as it relates to the income that is generated for the portfolio, there is one word and question that seems to keep coming up. We hear about what we call spread compression and given that interest rates generally given SOFR coming down and so on, that these interest rates may be declining. I want to again emphasize that one differentiator for GAIN from other credit-oriented BDCs is that we put floors on our debt securities while we have a stated rate, which indeed is spread over SOFR. Now so while we may see a decline in yield, because SOFR has come down, granted that is coming down from a higher level, we still have the protection of the floors. And I think it is a very important point that we need to stress, and you will hear more about this from Taylor Ritchie, our CFO, in a little bit. So, again, the floor is usually set high enough, which establishes an effective yield on our total investments, which does help to mitigate this quote spread compression or the decline in SOFR over time. Taylor Ritchie: As to our existing portfolio, most of the companies have experienced very good results to date and this is reflected in a very significant increase in our net asset value. And though we continue to be cautious due to supply chain disruption, tariff, and the other issues going on in the economy, we feel very good about where we are with our portfolio companies. We are working with all of our companies in evaluating things such as supply chain alternatives, other cost efficiencies that we need to help navigate the current environment. So in summing up the quarter and looking forward to the rest of the fiscal year, our current portfolio is in good shape. We have a strong and liquid balance sheet. A good level of buyout activity with a prospect of continued good earnings and distributions over the next year. So with all of that, while we hope to navigate the challenges of this uncertain economic landscape. So I will turn it over to our CFO, Taylor Ritchie, and he can tell us a bit more detail. Taylor? Taylor Ritchie: Thank you, Dave, and good morning, everyone. Looking at our operating performance for the third quarter, we generated total investment income of $25.1 million, down slightly from $25.3 million in the prior quarter. The decrease was primarily driven by a decrease in dividend and success fee income, partially offset by additional interest income resulting from the continued growth of our debt investment portfolio. The weighted average principal balance of our interest-bearing investments was $699 million in the current quarter, representing an increase of $30 million compared to the prior quarter. After adjusting for the prior year's collection of past due interest income from investments that were previously on nonaccrual status, our portfolio's weighted average yield decreased modestly from 13.2% to 12.9%. This 24 basis point decrease is in line with the 32 basis point decrease in SOFR during the quarter and was mitigated by the interest rate floors included in each of our debt investments. Excluding non-accrual investments and revolving lines of credit, the weighted average interest rate floor for our debt portfolio was 12.1% as of December 31. We continue to underwrite our new debt investments with elevated interest rate floors in the 13% to 13.5% range to mitigate potential declines in SOFR. With over half of our debt portfolio currently at their interest rate floors, we believe our yield is well protected against future rate declines. Further, the overall interest rate floors will offset higher interest expense that will result from the future refinancing of our low-cost long-term debt that will be maturing in the coming quarters and years. Additionally, dividend and success fee income declined by $400,000 quarter over quarter. Dividend income from our equity investments is dependent on the portfolio company's ability to pay the distribution, while also having sufficient earnings and profits to support the characterization of the distribution as dividend income. Success fee income is derived from an interest rate associated with our debt investment that accrues off-balance sheet for both GAIN and the portfolio company and is not contractually due until a change of control event. However, similar to dividend income, a portfolio company may elect to prepay a portion of this accrual from time to time. Given that collection of both dividend income and success fee income is dependent on multiple factors, the timing of this income will be variable. Net expenses for the quarter were $31.6 million, up from $21 million in the prior quarter. The increase was primarily due to a $9.9 million increase in the accrual of capital gains-based incentive fees. Base management fee expense increased by $500,000 compared to the prior quarter as a result of new buyout investment activity and a significant increase in unrealized appreciation of our investments. Credits from the advisor, the level of which is correlated to the timing and volume of new originations, declined $400,000 quarter over quarter. Interest expense decreased $200,000 in the current quarter due to the timing of the issuance of our 6.875% notes and the reduction of our 8% notes. In new investment activity. This resulted in a net investment loss of $6.5 million compared to net investment income of $4.3 million in the prior quarter. Overall, portfolio company valuations in the aggregate increased $7.2 million. This unrealized appreciation was driven by both increased performance at some of our portfolio companies along with higher valuation multiples across the portfolio. The increase was partially offset by decreased performance of other portfolio companies. Adjusted net investment income, which represents net investment income or loss excluding any accrued or reversed capital gains-based incentive fees, was $8.2 million or $0.21 per share. Compared to $9.2 million or $0.24 per share in the prior quarter. We believe that adjusted net investment income remains an indicative metric of our ongoing and core performance as it removes the impact of capital gains-based incentive fees, which is an expense recorded under U.S. GAAP each quarter but is not yet contractually due. For the current quarter, we continue to have three portfolio companies on non-accrual status. We have been working closely with each of these three companies, working alongside their management team to support efforts to return to accrual status or pursuing exits where appropriate. Our non-accrual investments represent 3.8% of our total book portfolio at cost and 1.5% at fair value. Our NAV increased to $14.95 per share compared to $13.53 per share at the end of the prior quarter. The increase was primarily a result of $1.77 per share of net unrealized appreciation and $0.09 per share of net realized gains. These increases were partially offset by $0.24 per share of distributions to common shareholders, $0.016 per share of net investment loss, and $0.03 per share of realized losses associated with the redemption of our 8% note. Moving on to our balance sheet, our ability to maintain sufficient liquidity, financial flexibility, and managing a fluctuating interest rate environment is essential to supporting growing our portfolio. As part of our proactive balance sheet management, we redeemed the full $74.8 million outstanding balance of our 8% notes using proceeds from the recently issued $60 million 6.875% notes and borrowings under our line of credit. This redemption and new debt issuance reduced our interest burden for $75 million of debt capital by approximately 110 basis points. Further, we expanded our credit facility to include City National Bank with a $30 million commitment level. As a result of this expansion, we now have a total commitment level of $300 million under our facility. As of yesterday's release, we had approximately $171 million from our remaining share of During the quarter, we raised approximately $3.2 million in net proceeds through common stock, which began program issuances. While the price level of our common stock limited the number of days we were active on the ATM, we will look to sell under our ATM program in the future when prices are accretive to NAV. We believe that we are in a sufficiently strong liquidity position with our ability to access the debt capital markets and, when possible, the equity markets to support both the refinancing of upcoming debt maturities and our pipeline of new buyout opportunities. Overall, our leverage remains in a strong position with an asset coverage ratio as of 12/31/2025 of 201%, providing what we believe to be ample cushion to the required 130% coverage ratio. Focusing on our distribution to shareholders, we ended the prior fiscal year with $55.3 million or $1.5 per share in spillover. Sufficient to cover our current monthly distribution of $0.08 per share for an annual run rate of $0.96 per share, as well as the $0.54 per share supplemental distribution we paid in June. As of December 31, our estimated spillover was approximately $22.9 million or $0.58 per share. We ended the quarter with total distributable income of $108.7 million or $2.73 per share. Total distributable income primarily consists of the net unrealized appreciation of our investments as well as the GAAP adjusted balance of our spillover presented on our balance sheet. Including the $0.54 supplemental distribution in the current fiscal year, we paid an aggregate of $3.26 per share across 13 supplemental distributions over the last five fiscal years. In addition to the $4.68 per share of monthly distribution during this time. This track record reflects our ability to maintain a stable monthly dividend while also delivering incremental returns to shareholders, underscoring the strength and consistency of our focused equity-oriented investment strategies. Looking ahead, we expect supplemental distributions to remain an important component of our overall shareholder return strategy with the amount and timing of future payments driven by realized capital gains on our equity investments along with other capital allocation considerations. This covers my part of today's call. I will now hand it back over to you, David, to wrap us up. David Gladstone: Well, thank you. Very nice, Taylor, and nice by Dave Dullum and Catherine as well. And this will tidy over our shareholders until the next call, which will be at the March, the annual, as well as the third quarter. The call and Form 10-Q should bring everyone up to date. We have reported solid results for the quarter ending 12/31/2025, including new investment activity and a strong liquidity position. To grow the portfolio throughout the fiscal year. We believe Gladstone Investment is a very attractive investment for investors seeking continued monthly and some supplemental distribution from potential capital gains and other income. The team hopes to continue to show you a strong return on investment in our funds. Now let's stop for some questions from the analysts and other shareholders. Please come on, Mathewa. Thank you. Operator: We will now conduct a question and answer session. Once again, that's star one at this time. The first question comes from Mickey Schleien with Clear Street. Please proceed. Mickey Schleien: Yes. Good morning, everyone. Dave, a good portion of the appreciation in NAV quarter came from three investments, Shilling, Old World, and SFEG. Can you discuss the operational or valuation changes that drove that appreciation for each of those companies? David Dullum: Sure. Mickey. Nice to chat with you. Yeah. And actually, we had a pretty significant those three you mentioned were large numbers, but we have a number of other companies indeed also that had relatively speaking, pretty significant increase as well. But fundamentally, all the ones that were these large increases were fundamentally no multiple change, but pretty much all because of EBITDA increase. So, which is obviously the best situation. So, yeah, that was true of all three of those that you specifically mentioned. Mickey Schleien: The yeah. Sorry interesting. I do not know if it is pronounced Shilling or Shelling, but Shilling and Old World are obviously consumer-oriented companies, and we are reading, you know, so much about the k-shaped economy. So what sort of different about those two companies that is allowing them to grow their EBITDA even with the headwinds in the consumer sector? David Dullum: Yeah. I think the only answer I can give is the products that they make and sell obviously. Shilling is a very interesting business. And they have a very unique product, which makes up a reasonable portion of their overall revenue, something called needle. It is one of these things where you squeeze for a variety of reasons, and they have different types of that. And that product has had huge demand even with, as you point out, forget consumer demand generally, but the whole tariff increases that we have seen in their products, of course, a significant portion comes from the Far East. So even with that, they have literally been able to maintain a level of demand that just frankly has allowed the company to perform at an exceptionally high level. Overall Christmas, obviously, Christmas tree ornaments, you are familiar with those, I think. You have seen them, and, again, they are a well-run business. All of these companies are very well run. They have got great management teams on pretty much, frankly, all of our portfolio companies right now. And they have just been able to, I guess, really the consumer demand side of things, as you say. I do not have any further specific real insights to that other than, again, good management, quality products, and been able to manage through the tariff impacts. Mickey Schleien: That is really good to hear. Dave, you also recently invested in Rowan Energy. Can you walk us through how you underwrote that deal, particularly how you assess the cyclicality of the energy equipment, fracking, sand filtration sector and what assumptions you made about where Rowan stands in its business cycle? David Dullum: Mhmm. Best answer I can give you, Mickey, we can certainly chat about this offline if you need and, you know, bring some of the other folks involved that would more directly involved in those companies. But as you know, we have a couple of investments now that are in the energy-related sector. One company in particular, E3, which also had a very interesting and nice increase in valuation, and what we have there is a quality and experienced team running that particularly E3, and that frankly helps us to move off into and to be able to evaluate companies such as, you know, what you mentioned, Smart Chemical is another one. And so we have knowledge and experience within our portfolio to help properly evaluate that. So right now and through those lenses, we feel like where these guys are in their cycle that we still have upside and been able to manage it through valuations, frankly, that also are at a level that are not really, I will use the words carefully, but overpaying, so to speak. But, anyway, it is one that we can talk about in more detail if you really want to later on. Mickey Schleien: I appreciate that. Dave or maybe Taylor, if I look at the table in the press release regarding flow rates, I want to make sure I understand it. Is it correct to say that about half the portfolio has about 80 basis points of downside in average yields? Taylor Ritchie: Yes, but the way for us to get there, we would need significant decreases and so forth. So it would not just be 80 basis points would get to that level of 12.1% floor. We would need closer to 210 basis points to be able to bring SOFR down to a level where the other portfolio companies would then hit their floors. So there is some wiggle room. And as you could see, with the fact that the basis point decrease right below that table there, the 25, 50, 75, 100% or 100 basis point decreases and so forth. You can see as that decrease occurs, the decrease to the overall rate is not one for one. And that is because we start hitting the interest rate floors of more of the portfolio companies. Mickey Schleien: Okay. Yeah. I understand. And lastly, you know, given sort of typical portfolio companies that you are attracted to, is it reasonable to say that there is sort of limited risk from AI in the portfolio and how are you looking at that in terms of the pipeline? David Dullum: Yeah. The terminology, of course, is pretty broad. Right? AI. Yeah. I guess what I would say is that most of our companies are, to the extent that AI is important, they are actually using it to some degree. And I think you, in fact, if you recall coming out to our conference last year, we had a fair amount of stuff on that, and I think you heard some of that as well. So a number of our portfolio companies are utilizing various aspects of AI, which is enhancing, you know, their either their efficiency and whether it be designing some of the product you mentioned, Shilling. Again, they have actually, for a couple of years now, they have been using some aspect of AI in helping them to really design efficiently some of their products and so on. So I would say, yeah, we are more a beneficiary to some extent than necessarily, as you point out, where we have a tech company that might be directly in that space and there may be real competition for that, I would say we do not have that in our portfolio. So you are correct. Mickey Schleien: Yeah. That is good to hear. Those are all my questions. I appreciate your time this morning. Thank you. Operator: Thank you. Who is up next? The next question comes from Christopher Nolan with Ladenburg Thalmann. Please proceed. Christopher Nolan: Hi, thanks for taking my question. As a follow-up to the unrealized gains, were those mostly related to equity gains in the portfolio? Taylor Ritchie: Yes. So they were predominantly equity. We did have a handful of portfolio companies that experienced debt or debt fair value increases as the overall TV for that portfolio company was increasing. As a result of both multiple increases and EBITDA increases. But the bulk of it, yes, it is equity-driven. Christopher Nolan: And then in the comment section, you guys said, there is good liquidity in the M&A market. I have heard from other managements where credit is widely available to all these middle market companies, but equity is less so. Do you have a different take on that? And if equity is less prevalent, does that give you a competitive advantage? David Dullum: Yeah. So I guess, Chris, my response to that might be from my experience, our experience, I think maybe the folks that, let's say, we compete with are traditional BDCs, excuse me, traditional private equity guys, to the extent that they are able to access leverage at more attractive rates, I think that is where, you know, why if they can put less equity in and slightly higher leverage or lower rates, they are doing some of that. I think this gives us an advantage, though, as well because we are bringing, again, the equity and the debt, and we can moderate that so we get the leverage on our own equity. But I would say that it is competitive, frankly, with the M&A direct M&A shops because valuations, while we are seeing some elevation, frankly. On elevations, the fact that they can get, you know, leverage at lower rates, relatively speaking, makes them pretty competitive as well. So to your point, that might put in less equity, put in a bit more leverage, and be competitive with us even though we are doing the debt and the equity. So it gives us a slight advantage in that when we deal with the management team and we are trying to buy the business, we at least are speaking for the whole capital stack, and we have a bit more certainty there. Versus, say, a traditional firm that might have to go out and try to raise the debt, whereas we at least can speak for all of it. So it gives us a slight edge, but, yeah, it is a there is a fair amount of capital out there in both that I would say that certainly the debt market and clearly on the equity side. From our experience. Christopher Nolan: Great. And final question. Given the decline in base rate over the last year or so. Will that have any positive effect in the discount rate used in your evaluate in your fair value calculations for your portfolio companies going forward? Taylor Ritchie: Okay. Clarify that question again for me, Chris. Say it Sure. Christopher Nolan: Yes, the risk-free rates have gone down. Even the Fed cuts rates. And does that affect the discount rate used in your discount cash flow evaluations when you are fair value in an investment? Taylor Ritchie: Well, most of our investments are being fair value using a TEV valuation. So we are really looking at what EBITDA is times the multiple that we are setting for that portfolio company. So using a DCF model is not as prevalent for our overall valuation approach. But yes, you are correct. In theory, that would improve it, but that is not how we are really valuing the bulk of our investments. Catherine Gerkis: Right. Christopher Nolan: Great quarter. Very unusual in terms of the dynamics. You know, you guys have a super gap EPS profit and an NII EPS loss and a super jump in on that per share, but good show. Thank you. Operator: Thanks, Chris. Victoria, you have another question? The next question comes from Erik Zwick with Lucid Capital. Please proceed. Justin Marca: Thanks. Good morning. This is Justin on for Erik today. Just wondering if you could speak on the current state of underwriting conditions and specifically if you are seeing any pressure on terms or structure given the tighter spread environment? David Dullum: Yeah. I would for us, I would say, Justin, probably not. As I mentioned earlier, because of the availability of leverage lower leverage, so when we are competing for a deal, for us, we still try to stick with our formula. Typically, it is about 70% of our assets or the investment that we make is in debt, in the debt security, 30%, roughly is in the equity security. So when we combine those, we are driving for an effective yield on the total dollars. Relative to our essential cost of capital being very cognizant of, you know, the income aspect of it for dividend distribution, but, likewise, we look for, you know, on the upside, we always try to see a way to say two times cash on cash on the equity side of things. So our model really has not changed. What we have found, yes, indeed, there have been a couple of deals that we have been working on that we liked and we are, you know, we are bidding on, you will. And we were, you know, a couple of turns off on the multiple. But, you know, we stay pretty disciplined. And given what we are seeing out there, I do not see us having to change too dramatically our model. I mean, if we saw something we really like and we could say put a bit more debt on it and generate more income, so long as we were not sacrificing too significantly the equity side of things, we will do that. But, that is not necessary because of the markets just because the way we might look at the deal itself. If that helps. Justin Marca: Yeah. Thanks. And, Dave, in your prepared remarks, you described the pipeline as very healthy. Can you talk about how it is looking compared to maybe a year ago? And are there any specific sectors where you are seeing better deals than others? David Dullum: Yes. I would say compared to a year ago, probably similar. I do not certainly not lower. We are seeing them really across all sectors. We have seen recently a few areas. The consumer side of things, as actually Mickey was asking earlier, even though our experience of our portfolio and our consumer companies are doing really well, the consumer side of things are a little bit obviously slower, a great part because again, we talk about tariffs. And so when we look at a new deal, that is a consumer-driven, you have to really be very sensitive to the cost of product because of tariffs and so on, and that has some effect there certainly. It is business services. We are seeing reasonably good things in the business service area. Interestingly enough, on the manufacturing side, seeing things. I just kind of reflected in our portfolio kind of in the aerospace and defense area. Certainly aspects of what the government is doing, etcetera. So we have seen somewhat of a pickup in that area. So generally speaking, I would say pretty much across the board, everything is looking we are seeing about the same certainly as about a year ago. And if there is any one area that might be a little weaker in terms of looking forward, might be somewhat in the consumer area. Other questions? Okay, thanks. Justin Marca: Thank you, Justin. It was good to see sorry, I just got one more. Go ahead. Yes, sir. It was good to see that your nonaccrual was stable quarter over quarter. Just wondering if you could talk about your current outlook for quality and if there are any near-term opportunities to resolve any of the remaining names that are on non-accrual? David Dullum: Yeah. I would say this. The ones that are currently on nonaccrual in differing degrees, I feel better about them honestly today. If you had asked me that question perhaps a year ago. In part because we are taking some actions. Again, they are all generating actually positive EBITDA. There are some structural reasons why we do not have them back yet on accrual. But between some of the things that we are doing with them, we might even see if a potential exit, and certainly improvement to the point where we actually will be able to get them back on accrual. So I see it as a positive looking forward versus it being a negative. No, I agree. And where we stand with these three companies, there is no or it does not feel like we are in a next quarter it will change, but the outlook is much more positive. And every quarter, it looks more positive. So we are encouraged by where each of the three are trending. Justin Marca: Great. Thanks for the That is all for me today. Operator: Okay. Thanks, sir. Well, Troy, any other questions? There are no further questions at this time. I would like to turn it back to you, Mr. Gladstone, for closing comments. David Gladstone: Okay. Well, thank you. We appreciate all those questions. We hope there are at least double questions next time. We always like to answer your questions because that shows a light on all of the things we are doing. And you have to remember that these are not just portfolio companies. These are platforms, and we are getting people that are coming in and getting money from us because they are getting some of their money that they have made over the years back now. But they have equity and going forward. So it is a bite now and a bite later of income for people who are joining us. We are all oriented toward these platform companies. And thank you all for appreciating that. It is a different way of running our business, but one that works for us. So thank you all for calling, and next time, we will see you in April. Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
Linda Conrad: Welcome to Adient plc First Quarter 2026 Earnings Call. I'd like to inform all participants that today's call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Linda Conrad. Thank you. You may begin. Thank you, Denise. Good morning, everyone, and thank you for joining us. The press release and presentation slides for our call today have been posted to the section of our website at adient.com. This morning, I'm joined by Jerome Dorlack, Adient plc's President and Chief Executive Officer, and Mark Oswald, our Executive Vice President and Chief Financial Officer. On today's call, Jerome will provide an update on the business. Mark will then review our Q1 financial results and our outlook for the remainder of our year. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Jerome and Mark, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to Slide two of the presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. And with that, it's my pleasure to turn the call over to Jerome. Thanks, Linda. Jerome Dorlack: Good morning, everyone, and thank you for joining us to review our first quarter results. Today, we will focus on the quarter's solid performance and provide an update to our fiscal year 2026 outlook. We will also discuss new business awards and launches as well as share some insights on our expectations for the future beyond fiscal year 2026. Before we get into the results, I would like to take a moment to acknowledge the hard work and dedication of our more than 65,000 employees who work diligently every day to deliver on our commitments, especially in light of the significant challenges during the past quarter. The management team and I appreciate the team's collective efforts, which resulted in a solid start to fiscal year 2026. I would also like to thank our customers around the world who continue to recognize Adient plc as the world's preeminent CDN supplier. Thank you. Turning to slide four, which summarizes our first quarter results. The beginning of the year was filled with uncertainty. The Novella's fire, the Nexperia shortage, and JLR productions were all unknowns. But as the Adient plc team does time and time again, we managed through each of these events by leveraging a resilient operating model. Thankfully, the uncertainty of these events is nearly behind us, and we are focused on execution to meet the needs of our customers. For the most part, volumes are expected to recover within our fiscal year, and we expect to mitigate much of the overall impact of these events. Our revenue for the quarter was up 4% year over year, primarily driven by FX tailwinds from Europe. Excluding FX, revenue in China was up significantly as expected, delivering on our growth commitments and more than offsetting production headwinds from North America. We remain laser-focused on new business wins and ensuring we remain our customer's supplier of choice. We are supporting our customers' onshoring efforts in North America, both direct and indirect, and continue to view Adient plc as a net beneficiary of onshoring. While we have no new programs to announce at this time, we remain highly optimistic about the near-term potential for a large domestic OEM program. Our free cash flow generation and balance sheet remain strong, which allowed us to allocate capital in a disciplined manner. We returned an additional $25 million to shareholders through share repurchases this quarter, which Mark will detail further in his section. And we ended the quarter with $855 million in cash. Focusing beyond the operations and the quarterly financials, I would like to highlight that we have issued our 2025 sustainability report, which we will talk about in more detail in a few slides. Finally, as we look beyond the quarter to the full year, we are raising our guidance for revenue, adjusted EBITDA, and free cash flow, which Mark will outline in more detail during his section. Let's turn now to slide five. As fiscal year 2026 has become another year of transition for the industry, analysts and investors have been asking about fiscal year 2027 and beyond. So we wanted to provide our perspective on this year as well as some insights on where Adient plc is heading. We have said a key factor impacting this year's outlook is volume, which is very true. We are a volume-driven business. Production volumes are trending higher, particularly in North America, and overall industry volume indicators remain positive. With this production outlook and our resilient operating model, we are confident that we can deliver solid business performance. As a result, we are able to raise our guidance. But this year is about much more than just volume. It's about launching several key and complex new programs flawlessly. It's about continuing our drive for automation. It's about exceeding our customers' expectations with new and innovative products. It's about ensuring that our teams have the tools and the skills to evolve as AI takes hold. These are the things we are focusing on this year that go beyond our drive for operational excellence. Whether it's cross-functional or cross-regional, our teams are collectively working together to ensure Adient plc is equally focused on operational excellence and growth. As a result, this is what we expect for the 2027 fiscal year and beyond. We expect our investments in automation to ensure continued positive business performance as most projects have a payback under two years. We are capitalizing on approximately 400,000 units of near-term onshoring opportunities that will support our customers as they continue to reevaluate their manufacturing footprints. Our innovative products and processes, such as Sculpt to Trim, will help us win new business as they are expected to improve styling and also reduce costs by nearly double-digit percent. We have accelerated our growth with China domestic OEMs and will exit this year with 60% of our revenue in China from domestic OEMs. We expect this trend to continue. We expect our growth in cash flow generation to continue to reinforce our disciplined and balanced approach to capital allocation. It is for all these reasons that Adient plc is well-positioned for long-term shareholder value creation. In addition to outlining our expectations, I also want to provide some additional specific context around our growth opportunities. As we have discussed, onshoring in North America remains a clear focus, and we are actively working with all of our customers to support their onshoring activities. To date, we have won approximately 150,000 units of direct onshoring business and hope to be able to provide an update on another significant win in the near term. For clarity, when we talk about onshoring, onshoring for us means business that is produced outside of the borders of the U.S. and has moved within the borders of the U.S. In addition to direct onshoring opportunities, we've also won indirect opportunities resulting in an incremental 25,000 units. For 100,000 units of new and conquest business to The Americas. The collective impact of these wins and anticipated wins is an additional estimated revenue of $500 million, with $300 million impacting fiscal year 2027 and the full $500 million impacting fiscal year 2028. Looking beyond The Americas, the growth outlook for Asia is also solid. We expect China will continue to have double-digit growth through fiscal year 2028 in spite of relatively flat overall vehicle production. In addition, Asia, outside of China, is expected to grow above market in both fiscal year 2027 and 2028. Turning to Europe. Our teams continue to win new business in Europe. We expect these wins to offset the impact of our planned strategic program actions in the region and also expect these wins to be margin accretive. Now that we have outlined our future expectations, let's turn back to the near term and talk about the regions on the next slide on Page seven. For The Americas, as we have discussed, the team delivered positive business performance in the first quarter despite the production disruptions and expect their favorable business performance to continue. In addition, they are focused on executing key launches, including the Kia Telluride and the Rivian R2. Our manufacturing teams are also focused on expanding automation across plants wherever possible. Commercially, the team is laser-focused on growth and onshoring opportunities they will continue to aggressively pursue as we already mentioned. In Europe, the overall industry remains challenged by volumes, capacity, and the importing of vehicles from China. This will continue to stretch the industry and the European team. But they remain committed to delivering positive business performance for the remainder of the year just as they did this quarter. The European team is also focused on a complex launch with a German customer. The team continues to pursue and win new and conquest business, and restructuring activities remain on track as planned. Finally, in Asia, the team is aggressively pursuing innovation and is winning new business as customers recognize Adient plc as a supplier of choice. This would not happen without Adient plc's focus on operational excellence, which the team will continue to demonstrate as they launch new programs throughout the year. In China, the team continues to strengthen relationships with both China domestic OEMs and suppliers to drive top-line growth. As you can see, in each of our regions, Adient plc's resilient operating model is focused on driving value for all of our stakeholders. Turning to Page eight. We continue to win new and conquest business in all regions we operate in and have many successful ongoing launches to highlight. Starting in EMEA, as highlighted during our last earnings call, it appeared as if the region was showing signs of stabilization. We have seen customers move forward with some sourcing decisions, which is positive. We have recently won new metals business with Ford on a compact crossover SUV. We have other sourcing decisions pending. We expect to see some of these benefits on these programs coming online in late fiscal year 2027 and early 2028. We have also just successfully launched complete seat business on the Mercedes GLB for the region. With that said, we are also hearing some mixed signals from customers on near-term volume concerns, and so Europe remains a bit more of a wait and see at this point. In Asia, our momentum continues to build, highlighted by new conquest business with leading domestic OEMs. Key replacement business and the successful launch of the HypTech A800, which features a zero gravity passenger seat and showcases the region's ability to deliver innovation at scale. And finally, The Americas, we continue to strengthen our position with key replacement wins such as the Honda Pilot and MDX metals business, and we successfully launched the region's first long-distance JIT program with the Chevy Volt, which we commented on eighteen months ago as a conquest win. A clear demonstration of our operational capabilities and our ability to meet customers' evolving needs. Before we move on, I want to underscore why we continue to win new and conquest business across every region. These wins are not coincidental. They're a direct result of our team's excellence in operational execution and their track record of successful launches and innovation not only in product design but also in manufacturing. I'd like to recognize the entire Adient plc team and the relentless effort and focused execution across the globe in delivering for our customers day in and day out. Customers continue to recognize Adient plc as a reliable high-performing partner because we deliver. Our teams consistently meet and often exceed customers' expectations. That performance builds trust, which translates into new awards, expanded platforms, and increased share with both global and domestic OEMs. Our success in securing these programs is a reflection of the credibility our operations have earned over time, and it positions us exceptionally well as we look ahead to fiscal 2027 and beyond. These wins set the stage for innovations we're bringing to market that will further enhance our competitive position. For a closer look at one of these innovations, let's move to Slide nine. Adient plc is clearly focused on innovation, and within the last few weeks, we announced the introduction of ModuTech. It showcases Adient plc's forward-thinking approach to modular manufacturing. This advancement will benefit Adient plc, our customers, and the ultimate end user greatly. ModuTech is a modular seat design solution that greatly simplifies the seat build process. That opens the door for a higher level of automation across our plants. For our customers, ModuTech means enhanced seat comfort and craftsmanship, faster and more flexible launch execution, and a lower delivery cost. All while enabling long-distance JIT and a more resilient supply chain solution. These advantages directly support our OEM partners' onshoring priorities and their ability to compete and make vehicles more affordable for the end customer. ModuTech unlocks another level of modularity. The early benefits we are seeing from modularity are compelling, with upwards of 20% total value chain savings driven by significant labor and freight efficiencies. And nearly a 15% reduction in JIT floor space requirements. No other seat supplier is delivering a modular architecture at this scale. With this level of manufacturability improvement, Modularity strengthens our position as a supplier of choice and enhances our ability to win new business, especially as our customers look to optimize their footprint. Ultimately, both ModuTech and Modularity drive sustained margin expansion, capital efficiency, and enhanced free cash flow conversion. This is the prime example of how innovation in our product and process drives durable value. Not only by lowering our cost structure but by expanding our competitive advantage and our ability to drive sustainable shareholder value. Turning to Slide 10. Adient plc remains focused on driving sustainable growth into our business and reducing our impact on climate change. We strive for responsible use of natural resources by improving energy efficiency in our operation, reducing the carbon footprint of our finished products, and developing processes that protect our planet's natural resources. Adient plc is pursuing the use of sustainable materials and products by identifying materials and manufacturing methods that minimize our environmental impact and promote a circular approach to product development. Some of the highlights for fiscal year 2025 include: we have had a 42% reduction in Scope one and Scope two emissions since 2019. We are proud to share that 30% of our electricity is now attributable to renewable resources. Our total water withdrawal was reduced by 6% year over year, and 80% of our suppliers have been assessed with a sustainability rating. These accomplishments aren't just environmental milestones. They demonstrate the discipline and execution that underpin Adient plc's operating model. They show that our teams are embedding sustainability into the way we run our business, strengthening our cost structure through efficiency, reducing long-term risk, and increasing resilience across our global footprint. Just as importantly, they reinforce our position as a trusted supplier to the world's leading OEMs who are increasingly prioritizing responsible sourcing and measurable climate action. We view this as progress and as a competitive advantage, a value driver, and a key component of our long-term strategy. Let me leave you with a few takeaways before I hand it over to Mark. The company consistently delivers positive business performance through our focus on operational excellence, which allows us to meet or exceed our stakeholders' expectations and drive margin expansion. Our commitment to innovation and automation is reflected in our products, our processes, and our people. Cross-functionally and across regions, to deliver value-added solutions to our customers. While the company remains focused on operational excellence, we're also focused on delivering growth by being a supplier of choice with our customers. Adient plc is committed to being good stewards of capital on behalf of our shareholders through a disciplined approach to balanced capital allocation. Adient plc is well-positioned for growth and committed to delivering long-term shareholder value. And with that, I'll turn it over to Mark to take you through the financials and their outlook. Thanks, Jerome. Mark Oswald: Let's move to the financials on Slide 13. Adhering to our typical format, the page shows our reported results on the left side and our adjusted results on the right side. I will focus my commentary on the adjusted results, which exclude special items that we view as either one-time in nature or otherwise skew important trends in underlying performance. While the details of all adjustments for the quarter are listed in the appendix of the presentation for reference, I would like to specifically highlight one adjustment related to our tax expense. You may recall on our fourth quarter call when we gave our outlook for fiscal year 2026, we mentioned a one-time non-recurring tax settlement in a non-U.S. jurisdiction. That settlement was recorded this quarter and is the key driver of the GAAP net loss of $22 million. Moving to the right side, high level for the quarter. Sales of $3.6 billion were 4% better than the first quarter of fiscal year 2025, with adjusted EBITDA of $207 million. As Jerome mentioned earlier, there were some temporary customer production disruptions during the quarter, and despite these challenges, the team improved adjusted EBITDA by 10 basis points year over year to 5.7%. This improvement continues to demonstrate the resilience of the Adient plc operating model and the team's ability to efficiently and effectively manage external disruptions. Moving on, equity income was favorable year on year, primarily due to increased sales at our joint ventures. Adient plc reported adjusted net income of $28 million or $0.35 per share during the quarter. Let's move to the revenue and regional performance versus the market on Slide 14. I'll go through the next few slides relatively quickly as detail for the results are included on the slides, allowing adequate time for Q&A. Adient plc reported consolidated sales of approximately $3.6 billion in Q1, which was a $149 million increase compared to the same period last year, primarily driven by FX tailwinds and favorable volume and pricing in the quarter. Shifting focus to the regional performance on the right-hand side of the slide, In The Americas, Adient plc consolidated sales were generally in line with the broader market. In EMEA, sales trailed the market, reflecting customer mix and deliberate portfolio actions. Asia outperformed, driven by expected significant growth in China, as new programs with domestic OEMs ramped throughout the quarter. The remainder of Asia lagged the industry trends, particularly in Japan and India, where our customer presence is more limited. In Adient plc's unconsolidated revenue, year-over-year results declined approximately 3% adjusted for FX. Results were primarily affected by the joint venture portfolio rationalization action in The Americas that was finalized in late first quarter 2025. While both our EMEA and China unconsolidated businesses experienced growth year over year. Turning to Slide 15. Provided a bridge of adjusted EBITDA to show the performance of our segments between the periods. Adjusted EBITDA was up 6% at $207 million versus the same period last year. The primary drivers of the year-on-year comparison are detailed on the page. Business performance improved by $8 million year over year, despite the temporary inefficiencies experienced this quarter due to customer disruptions. As we've highlighted in the past, commercial recoveries tend to be a bit lumpy throughout the year, the favorable timing of some recoveries partially offset these inefficiencies as well as the planned increases in launch costs during the quarter. Equity income was favorable $8 million year over year, mainly due to higher sales and favorable business performance in our joint ventures. FX was a $6 million tailwind stemming from a combination of translational and transactional benefits. And finally, volume mix was an $11 million headwind during the quarter, driven by anticipated margin compression in China as well as unfavorable customer mix due to disruptions with key customers in The Americas. Overall, it was a solid start to the year, and the Adient plc team did well from an operational perspective, continuing to execute and manage what is within our control. As in past quarters, we've provided our detailed segment performance slides in the appendix of the presentation for your review. High level, both The Americas and EMEA continue to drive positive business performance. In Asia, business performance was impacted by the timing of certain growth investments, namely increased engineering spend and launch costs. Before we move to the cash and liquidity section, I'd like to point out that we have provided additional context in how our customer base is distributed across regions. In the appendix, the AdientEtic landslide provides a helpful view of our customer mix and revenue contribution based on our fiscal year 2025 consolidated revenue. As well as some of our top programs by region. Moving on, let me flip to our cash liquidity and capital structure on Slides sixteen and seventeen. Starting on Slide 16, For the first quarter, the company generated $15 million of free cash flow defined as operating cash less CapEx. This was higher than our internal expectations leading into the quarter. The team did a lot of good work to drive this number higher. We also benefited from an approximately $20 million timing impact from the previously mentioned non-U.S. jurisdictional tax settlement, which is now expected to be paid out in Q2. On the right side of the slide, we have highlighted the key drivers impacting the free cash flow during the quarter. These include timing and amount of net customer tooling payments, reduced restructuring spend year over year in Europe, and higher adjusted earnings compared to the same period last year. These benefits were offset by timing and level of VAT tax payments, timing and level of commercial settlement payments, as well as your typical period-to-period working capital movements. As we've mentioned in the past, our cash flow is typically more second-half weighted due to the seasonality of our business. We continue to expect solid cash generation for the full year. In fact, our expectations have increased to $125 million. I'll have more on our outlook in just a minute. As a reminder, as mentioned on our last earnings call, there are a few timing and non-recurring items placing temporary downward pressure on our free cash flow this year. Such as the one-time non-recurring tax settlement previously discussed. Beyond fiscal year 2026, we expect free cash flow to return to normalized levels and benefit from our increased sales earnings and a lower level of cash restructuring. Moving now to Slide 17 for our liquidity and capital structure. Total liquidity for the company was $1.7 billion at 12/31/2025, comprised of $855 million of cash on hand and $823 million of undrawn capacity under our revolving line of credit. During the quarter, the company returned a total of $25 million to its shareholders, repurchasing approximately 2.1 million shares, leaving approved authorization of $110 million. In addition, Adient plc continues to proactively manage our debt maturity and costs. In January, subsequent to the quarter end, we successfully replaced our term loan B and achieved a 25 basis point reduction, resulting in an annual savings of approximately $1.5 million. Focusing on our balance sheet, Adient plc's debt net debt position totaled approximately $2.4 billion and $1.5 billion respectively, at 12/31/2025. The company's net leverage at December 31 was 1.7x, comfortably within our target range of 1.5x to two times. Moving now to Slide 18, let's review our updated expectations for the remainder of the fiscal year. As we highlighted in our Q4 call, when we provided our full-year fiscal year 2026 guidance, we anticipated an improvement in the production volume environment would be a meaningful impact on our results. That said, with North America vehicle production now expected to be in the 15 million unit ballpark for fiscal year 2026, up from the 14.6 million at the time we gave the original guidance, we are raising our outlook for revenue, adjusted EBITDA, and free cash flow. For the full year, we now expect sales to be approximately $14.6 billion, up from our previous guidance of $14.4 billion. Adjusted EBITDA is now expected to land around $880 million, up from our previous guidance of $845 million, and free cash flow, as I indicated earlier, is now expected to be $125 million, up from $90 million in our previous guide. Keep in mind, this revised guidance reflects our current production schedules, FX rates, and assumes no significant changes to the current tariff policies. We continue to expect our overall earnings will be weighted towards the second half of the year. While we don't provide quarterly guidance, it's important to note that our second-quarter results are expected to be impacted by the seasonality of the Chinese New Year, as in past quarters. The lower level of production forecast for Q2 versus Q1 will translate into lower consolidated sales earnings and equity income for the region. Obviously, regaining momentum in Adient plc's Q3 and Q4 as production picks up. Given the puts and takes in production across the regions, we'd expect Q2 EBITDA to look very similar to the quarter just completed. For purposes of our analysis, we don't expect any meaningful changes to equity income, interest expense, or cash taxes from our previous guidance. And CapEx is expected to remain elevated this year due to customer launch schedules and increased investment in innovation and automation. To summarize, production schedules are normalizing, and that improved backdrop is showing up in our execution. We're carrying momentum into the balance of the year through disciplined cost and commercial management, and we expect solid free cash flow as the operating performance is expected to continue to flow through our bottom line. With that, we can now move to the question and answer portion of the call. Operator, can we please have our first question? Operator: The first question today comes from Colin Langan with Wells Fargo. Your line is open. Colin Langan: Great. Thanks for taking my questions. There's been some media headlines that there's possible disruption around the maybe it's a little worse for the F1, F Series recovery. Have you seen any impact in your schedule so far? Is there any way to kind of help frame maybe the risk to guidance if there is some hiccups in the recovery? Jerome Dorlack: So first of all, Colin, thanks very much for the question. I think as we handled in what would have been our Q4 call. We're not going to kind of front-run Ford. I think what we have guided to currently represents what we have on releases in our best information that we have today. You know when Ford says kind of F Series, we always have to remember there's going to be a split between F-150, which is the platform we have, and then Super Duty production that they have in Kentucky. And so we don't know if there is going to be a disruption, how that disruption will unfold. And then in terms of framing what the disruption will be, I think that's why we put into the appendix material kind of what the split is, what our key platforms are, and how those key platforms break out. I think if they're you know, once Ford comes on, I think they've said on the tenth, they'll give kind of their guidance and kind of updated figures. You know, if there is something meaningful, we can always circle back with you guys. But as of now, it's kind of best-known information. I think as we said, in my commentary in the prepared remarks, we kind of anticipate making up any of that production that we lost in Q1 kind of now throughout the back half of the year. What we've tried to reflect in the guide as best we can. Colin Langan: Got it. No, that's helpful. And maybe if you could just talk a bit on the onshoring opportunity that you flagged. I think it was a couple of quarters ago, you said it was $175 million, so we're to $500 million. And then also in your commentary today, I'm not sure if I heard it right, that there's a significant near-term win that you're hoping to update us on. So any color on maybe how quickly some of these wins could come? Because I feel like some might start trailing out into '29 and beyond, or are these gonna still be things that hit in '27 and '28? Jerome Dorlack: Yeah. So what I would say is, you know, so the 175 has grown to 500. That includes the conquest win that's in there as well. We picked up a conquest win, call that know, it's about a 100 to a 150 million. So between onshore and conquest now it's up to $500 million. And the big thing that's still left to get that I think we feel confident in is a domestic OE who is moving production from Mexico into the U.S. You know, we're in the quote process, kind of the final stages of that right now. I think we're hopeful that we'll hear something in the next couple of weeks on kind of the final decision. And that now makes up kind of the gap between know, we're at what I'd call 250 million of booked 250 to 300. That'll make up the gap between the 300 to the 500. So kind of if you wanna think of the bridge, last time we gave you an update we were at a 175. We're now kind of on the books for 300 and we've got another 200 of wood to chop. And we hope to know about that in the next I'd say, two weeks or so. Yep. And then, Colin, with regard to your question in terms of what rolls on, right, assuming that all comes in, we've indicated that about 300 million of that $500 million comes in 2027. And the other rest of it, the run rate full run rate comes in, in 2028. Yeah. Think that's a good point. I mean, we really don't see that some of it's already launching any of that really pushing out into '29. I mean, in this year with a lot of it now coming on in '28. So it is known booked revenue. We're spending capital now and launching up now to be able to roll it on in '27. Colin Langan: Just to quickly clarify the win that you're hoping to get from the domestic going from Mexico to the U.S. Is that in the 500 already? Or is that that would be incremental? Jerome Dorlack: Yes. So that would be in the 500. That would be the bridge from kind of 300 on the books going to 500. Colin Langan: Okay. Got it. Alright. Thanks for taking my questions. Thank you. Operator: Thank you. The next question is from Nathan Jones with Stifel. Your line is open. Andres (for Nathan Jones): Good morning, everyone. This is Andres on for Nathan Jones. Thanks for taking my question. Regarding Europe restructuring spend, can you please provide an update as to the progress you're making in restructuring the European business? Mark Oswald: Yes. So what we've indicated in the past and what we've guided to looking forward, right, if you look at the elevated spend last year call it, you know, around that 130 million-ish, most of that was in Europe. This year, '26, another, call it, $120-130 million in restructuring primarily Europe. We didn't indicate that that goes down in fiscal year 2027. Beyond that, we said it's very hard for us to give you a good line of sight because a lot of any type of restriction that goes out beyond '27 is really dependent on what our customers do with their programs. Right? So we're in active discussions with them just looking to see you know, end of production for certain programs, what new programs might be rolling into plants. So really, we'd love to be able to tell you what's happening in 2028 and 2029. There's gonna be restructuring. It's just a question of the magnitude of that. And, it's really relative to what our customer production plans are. Andres (for Nathan Jones): Awesome. Thank you. And then just one more, that's helpful. Asia adjusted EBITDA declined 7 million driven by increased engineering spending for new programs. Should this be expected to continue, sustain? Just trying to get a better idea as to the timing there. Mark Oswald: Yeah. I'd say that overall, APAC, right, if I look at business performance, that's gonna be positive. For full year '26. Clearly, there's gonna be quarters where you have increased launch and engineering costs. Again, those are gonna be offset as I go through the quarter with, you know, other ops other efficiencies that roll on. But we did indicate that net engineering and launch were going to be higher this year as we continue to grow out and spend for the growth. Andres (for Nathan Jones): Got you. Thank you. Appreciate it. Thanks for taking the questions. Thank you. Operator: The next question is from Emmanuel Rosner with Wolfe Research. Your line is open. Emmanuel Rosner: Great. Thank you very much. I was hoping to ask you about the commercial settlement. I think it's you mentioned it in a few slides as a factor in terms of at least timing and sometime magnitudes. Can you just help us understand if you know, the magnitude of it is beyond what's usual sort of like this year, if that's know, like, helping the Outlook or if you're just flagging it as essentially a cadence or calendarization impact. Mark Oswald: Yeah. Emmanuel, it's a good question, and thanks for the call and I'd say it's more of timing and cadence know, as you know, our business you know, is a transactional business. There's always certain commercial negotiations that are planned for the year. So we did have what I'd say a bucket of what I'd say planned commercial actions that the team had to go out there and get. Obviously, first quarter was benefited from, I'd say, the timing pull forward or certain of those commercial actions. Nothing that I would say is extraordinary versus what we were planning within the original '26 plan. Emmanuel Rosner: Okay. And then if we were trying to think about you know, fiscal twenty-six as sort of like a bridge sort of like in future years. Are there any sort of extra recoveries expected this year that we shouldn't be capitalizing, or is that sort of no more course of business? Mark Oswald: Say normal course of business. Emmanuel Rosner: Okay. Understood. Help me out with this because I don't wanna do anything more. I also wanted to ask you about the Asia business. Obviously, joint venture income, trending in the right direction. Can you just remind us when does Adient plc get, the cash from the, the joint venture? Mark Oswald: Yes. So it depends on the joint venture, right? So we have them cadenced throughout the course of the year. So in the first quarter, we'll get certain dividends in. If you look at our largest joint venture over Kuiper, right, that's typically back half weighted. Terms of when the dividends come in. Emmanuel Rosner: Understood. Thank you. Jerome Dorlack: Thank you for the questions, Emmanuel. Operator: Thank you. The next question comes from Joe Spak with UBS. Your line is open. Joe Spak: Hey, good morning, everyone. Wanted to just go back to the growth opportunities know, and I know you gave a lot of good color here, but it does seem like maybe the pie is also growing, right, versus sort of what you indicated prior? And, like, I just wanna get your sense of sort of you know, whether you think most of these reshoring decisions, least, on production, maybe not sort of the sourcing for that production is done more. Or if there if you're continuing to see customers look to or to move more here so that could maybe grow over time even if it doesn't come in necessarily in a 27 time frame. And then on the EMEA portion, you mentioned, you know, accretive balance in balance out and, you know, that that's long been part of the plan, but it's been delayed. And are you implying that you now see better line of sight to that really start to kick in in '27 where margins can start to move higher? Jerome Dorlack: So first, for the questions in both are really good questions. On the near shoring or maybe on shoring, I think, we see an acceleration in the discussion with our customers on onshoring opportunities. And what we've highlighted today are ones that we are actively in the quote process or awarded on. And that's what kind of totals to that 400 to $500 million including the conquest wins. That said to your point, we are seeing more activity with the particularly with the Japanese OEMs where we are very well positioned given our long-term partnerships with those customers for additional potential volume growth in the twenty-eight 'twenty-nine timeframe. Whether that be you know, some of their vehicles kind of two and three-row SUV type things. That they're looking to move back here. I do think there is that potential. A lot of it will come down to their capital allocation decisions and long-term where does USMCA set up next generation. So I think as they make their footprint decisions over the next possibly six to eight months that will then influence their loading of their vehicle assembly plants. What's key for us is given those relationships, given where our JIT facilities are, and given how well we service them, we are ideally suited to be able to capitalize on that growth. And so I do think we see a potential tailwind even beyond what we've talked to today. And there'll be more to come as they make their slotting decisions. So yes, I do think there is potential there. On your second question on EMEA, we are getting a greater line of sight on some of the roll-on roll-off. I think as we look into fiscal year twenty-seven and 'twenty-eight, we do see recovery. Mark and I have been talking to you about the recovery, you know, in the balance in balance out. So it's not anything that's going to be above and beyond, you know, what we've been speaking know, seeing in other call it, you know, 25, 50 basis points as we move out of 26 into 27 and just continue to slug through that region there. I just think it's getting the credibility in our customers' ability to launch the programs there. Certainly, the new business that we're bidding, new business that we're rolling on is coming on at accretive margins. It's just the timing associated with it. And what's really driving the timing is our customers launching programs over there is the different legislation around emissions you know when are they going to phase out the current products and are their current products competitive or not? And then what's happening, especially in the A and B segment, with respect to Chinese onshoring, are they competitive or aren't they? And they're really evaluating things that I have in the pipeline are they competitive? And if they're not they're going back to the drawing board, scrapping them, which is leading to delays in their product cycle which is leading to our delays and our ability to then launch some of these new projects. Hopefully, that answers your question. Joe Spak: Yeah. No. That it it it does. I I appreciate that. Maybe just as a second question, and sort of a quick follow-up to your recoveries comment. I just like, it it does seem like it helped the the results in the quarter from an earnings perspective. You just help me understand minus $37 million outflow you're showing in the cash from commercial negotiations. Like, is that just timing of when like, you're booking that versus the cash? Like, I I just any color on that be helpful. Mark Oswald: It really is, Joe. So, again, as I indicated, yes, it did benefit the quarter helped offset some of the operational inefficiencies. But again, it was pulled ahead either from a Q3 or a Q4 or Q2 timing right into Q1. So again, over the course of the year, it's no more than what we are expecting from a commercial. And again, whenever we have commercial recoveries, there's always a timing mismatch between what we're trying to recover versus when that expense or when that cost actually had. Tariffs is a perfect example, right? We'll have a tariff impact in our financial but yet we don't get the recovery for that for several quarters after that right. So it's normal course, but I'd say timing. Joe Spak: So that also helps the free cash flow cadence in the back half. What because that that's when you expect to get that. Okay. Thank you. Operator: Thank you. And as a reminder, if you would like to ask The next question comes from Andrew Percoco with Morgan Stanley. Your line is open. Andrew Percoco: Great. Thanks so much for taking the question this morning. I do just want to come back one more time to the Europe dynamics. It sounds like you're expecting some improvement in that market in 2027. But your prepared remarks, you talked about how one of the headwinds is essentially the China import volumes into that market, that doesn't seem like something that is maybe going to slow anytime soon. So I guess my question would be, you know, what are you doing to essentially either buffer yourself or manage margins if that continues? And I guess maybe a second part to that question would be, is there an opportunity to those customers? Obviously, you've seen some success with the domestic, China OEMs in China. But as they export more volumes to other markets, I'm just wondering if there's an opportunity to be a supplier of choice there, and that might help, you know, in terms of the margin improvement in that market. Thank you. Jerome Dorlack: Yeah. So I think there's two ways that we think about addressing that. So the first one is understanding where the Chinese exports are coming into Europe, what segments they're attacking there, and trying to insulate ourselves from the segment. So primarily as they're coming into Europe, they're heavy on the A and B segment. And so we've been very focused on going up segment. If you look at a lot of our conquest wins in the region, you know, they've been with say, 10, call it, you know, C segment luxury segment Porsche vehicles, the higher-end segment Volvo high segment type of platforms. And so business that's rolling on we talked with didn't give the platform name. We're in the middle of a complex launch. With the German OE at the moment that's on a very high-end segment type of vehicle. So it's going up segment on vehicles that are insulated at the moment from the Chinese where the Chinese are succeeding. Within Europe. So that's one way that we're going about it. Another way that we're going about it is as the Chinese are localizing within Europe we're able to win components business there. We're also able to bid on some of the JIP products and win some of the JIP content where possible. That's another avenue that we're able to actually attack and benefit from some of that. And then the last way that we see is where possible what vehicles are the Chinese exporting into China? From you know exporting into Europe from China and can we win share there. In some cases, because the large exporters would be with SAIC, And SAIC is historically one of our competitors' territory, Yingfeng. So that's not that's not territory that Adient plc plays in. But when it's a Neil, or when it is a you know I'll point to say Geely as you know as an example. And we've just recently signed a joint venture with one of Geely's largest seating suppliers that we're able to capitalize on. And that will give us access into that export market. And that's why we were very strategic in signing that joint venture to be able to gain access into the export market for vehicles that are exported into Europe. And so it really is kind of a three-layered approach into looking at it. You know? Insulate ourselves from the segments that are being attacked, Where we can't do that, can we gain components on vehicles that are being produced in there? And then looking at what vehicles are being exported can we gain content directly on the export vehicles? Andrew Percoco: Got it. Okay. That's super helpful context. And maybe just continuing on the onshoring debate and opportunity, I guess, I'm curious, and this may be a few years out, but I'm curious to what extent you're hearing or having conversations with the China domestic OEMs in terms of their aspirations to come to the U.S. or Canada market. Obviously, recently Canada making a deal with China on reducing tariffs on EVs. I'm just wondering if that's going to become a bigger opportunity for you guys going forward and if starting to have those preliminary conversations. Jerome Dorlack: Yeah. So maybe so the first thing I would say, and it's know, because you had said, you know, on the onshoring debate that mean, I just wanna be very very clear. I mean, there is no debate. Adient plc will be a net beneficiary from onshoring. I mean of all the seating suppliers we will be a net winner from onshoring. It's already being shown today we will be a net beneficiary, net winner from onshoring. I mean that's already shown and that trend will continue. Secondly to your question then, as it pertains to you know, the Chinese kind of coming to whether it be Canada or Mexico, I think Mexico is another potential depending on how USMCA plays out. And if the U.S. leverages Mexico into putting tariffs on. I mean we are working through our China because there's such strong ties in China. With some of those OEs that may explore a relationship with Canada or with So absolutely we're having those discussions you know with the BYDs of the world with the GLEs of the world on you know if they want to go to Canada or if they want to go to Mexico we could be there to service them. The question is what is their real appetite for doing so? But if they want to explore that we would absolutely be able to service them. The question is do they want to? And what are those long-term trade and industrialization ties look like? But absolutely, because of our strong strong relationships in China we are able and we do have those discussions. Andrew Percoco: Okay, great. Thank you so much. Jerome Dorlack: Yes. Thank you for the questions. Operator: Thank you. The next question comes from Dan Levy with Barclays. Your line is open. Dan Levy: Hi, great. Good morning. Thank you for taking the question. Wanted to first start with a question on your equity income and specifically the margin dynamics. This quarter was especially strong higher equity income despite lower revenue. And I think this is interesting in context of our understanding that some of the increased China business was supposed to roll on at lower margins. So maybe you could just talk through what occurred in the first quarter on the China equity income and how we might expect some of the margin dynamics to play out as you get some of this new China business? How margin dilutive is it? What's your confidence that the net profit will, in fact, be better? Mark Oswald: Yes. So maybe a couple of points there. Dan, and thanks for the question. We talk about the new business rolling on in China which would result in what I'd call manageable compression in our margins over there. That's really the consolidated business, right? So think of that, whether it's business with the Chinese locals that we're funneling through our consolidated sales, consolidated EBITDA, etcetera. In China. The equity income piece, that's really derived from our joint ventures right, like with Piper, certain of the other joint ventures that we have over in EMEA. Those sales, as I mentioned in my prepared comments, were actually higher this quarter. And so again, it drove my performance and my better operating performance at those joint ventures. Right? Piper being one of those joint ventures. So I think it's important to differentiate between each of those buckets, the consolidated piece as well as the unconsolidated piece. Dan Levy: Great. Understood. Thank you. And then second, wondering if you could just comment on one of your competitors who reported this morning pointed to a large conquest win for, complete seats on a US automaker's truck program. I know you gave some positive updates here on shoring, but maybe you could just talk about maybe some of the dynamics within sourcing or large trucks, which we know are a key program for you and also for you know, this competitor as well on some of the other platforms out there? Just if you could comment, on that development from them. Jerome Dorlack: Yeah. I mean, I think what you're getting at do we lose any large truck programs? And so there's we haven't lost any large truck programs. I think their win isn't reflective of any Adient plc losses. So I would anticipate that it is something that one of our competitors has lost. Which you guys know the market pretty well so you can where that loss would have come from. But I think stepping back more strategically and saying what does this mean for the market? First of all congratulations to Ray and Frank and Jason up there in Southfield. And I mean that. I think more strategically though what it means for the market is, and this is what I think both they've been saying and we've been saying is, this is a market that needs consolidation. You know, the competitor who had that business we have been actively conquesting their business. Know, we've conquested a large portion of their other business that sits in other portions of The U.S. So we've taken quite a few of their dots off the map. We've taken dots off of their map elsewhere. And I just think it's representative of a larger symptom of what needs to happen in seating which is consolidation. And so I think you know, for them I think it's I'll assume it's a good thing. And I think for seating, the more of this that can be forced through consolidation is generally what needs to occur in the space. But for Adient plc it's a it's no impact. It isn't anything that we had. It's none of our business. In terms of anything that we were an incumbent on. Dan Levy: Great. Thank you. That's helpful insight. Operator: And there are no further questions. Perfect. Thanks, Denise. Linda Conrad: And so, in closing, I want to thank everyone once again for your interest in Adient plc. If you do have any follow-up questions, please feel free to reach out to me. Also, would like to acknowledge that we will be in New York City next week. Participating at the Wolf Conference and hope to see many of you then. With that, operator, we can close out the call. Operator: Thank you. This does conclude today's call. We thank you for your participation. At this time, you may disconnect your lines.
Operator: Thank you for holding. Your conference will begin in two minutes. Thank you for your patience. Welcome to the Fourth Quarter and Full Year 2025 Phillips 66 Earnings Conference Call. My name is Michael, and I will be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I'll now turn the call over to Sean Maher, Vice President of Investor Relations and Chief Economist. Sean, you may begin. Today's call will include Sean Maher: Mark Lashier, Chairman and CEO, Kevin Mitchell, CFO, Don Baldridge, Midstream and Chemicals, Rich Harbison, Refining, and Brian Mandell, Marketing and Commercial. Today's presentation can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide two contains our safe harbor statement. We will be making forward-looking statements during today's call. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn the call over to Mark. Mark Lashier: Thank you, Sean. Welcome everyone to our fourth quarter earnings call. We delivered strong financial and operating results, reflecting our continued focus on world-class operations. Our disciplined approach to improving refining performance has delivered high utilization rates, record clean product yields, and enhanced flexibility. In midstream, we achieved another quarter of record NGL and fractionation volumes driven by our Coastal Bend and Dos Picos Two expansions. More importantly, our team remains focused on continuous improvement. We are lowering our cost structure and increasing reliability so that we can maximize profitability in any market environment. Moving to slide four, safe, reliable operations coupled with disciplined investment generate compelling shareholder returns. Safety is foundational. I'm pleased to report that 2025 was our best year ever for safety performance. I'm very proud of our employees for their commitment to safety. I would like to congratulate them on a job well done. In 2025, we optimized our portfolio through multiple strategic actions. We acquired the remaining 50% interest in the WRB joint venture, sold a 65% interest in the Germany and Austria retail marketing business, and idled the Los Angeles refinery. We also improved our competitive position in midstream with the acquisition of Coastal Bend and expansion of Dos Picos Two. The strong operating results are a reflection of a concerted multiyear plan and we're not done yet. In refining, we're targeting adjusted controllable cost per barrel to be approximately $5.50 on an annual basis by 2027. We've also streamlined our business to focus on the areas where we have a competitive advantage. As an example, our acquisition of the remaining 50% interest in WRB increased our exposure to Canadian heavy crude differentials by 40%. These differentials have widened by approximately $4 a barrel since the announcement of the acquisition. Phillips 66 assets are well-positioned to capture opportunities in markets across the value chain. Combining operating excellence, an integrated portfolio, and our disciplined capital allocation mindset, we will continue to deliver shareholder returns across commodity cycles. Last quarter, Rich discussed the progress and future of refining. This quarter, Don will share more about our plans in midstream. Don Baldridge: Thanks, Mark. In midstream, we've built an asset base that offers flexibility and reliability for our customers. We've increased adjusted EBITDA by 40% since 2022, and we've delivered approximately $1 billion of adjusted EBITDA in 2025. Our growth and our performance are a result of disciplined execution that has created a competitive wellhead-to-market value chain. Over the past four years, we have high-graded and simplified our portfolio. We bought in PSXP and DCP and we expanded the Sweeney Hub. Additionally, our recent Pinnacle and Coastal Bend acquisitions are performing above expectations, both operationally and financially, improving our acquisition multiple by about a half a turn. We intend to deliver increasing returns, improve customer service, and enhance reliability. Moving to slide six, the platform that we have developed has paved the way to growth opportunities that provide line of sight to a run-rate adjusted EBITDA of approximately $4.5 billion by year-end 2027. We anticipate adding a gas plant about every twelve to eighteen months due to our attractive footprint in the Permian Basin. For example, we commissioned the Dos Picos Two gas plant in 2025, and we announced the Iron Mesa gas plant, which is expected to be in service in early 2027. These plant volumes support our NGL growth. We completed the first phase of our Coastal Bend pipeline expansion and we are bringing online incremental capacity of 125,000 barrels a day in late 2026. In addition to these larger projects, we continue to identify low-capital, high-return organic growth opportunities across multiple basins. We are positioned to deliver mid-single-digit adjusted EBITDA growth, which will support our corporate capital allocation priorities. Our team continues to execute at a high level on a day-to-day basis. We have great momentum to deliver on our growth plans. Now, I'll turn the call over to Kevin. Kevin Mitchell: Thank you, Don. On slide seven, Midstream adjusted EBITDA covers two important priorities: a secure, competitive, and growing dividend of approximately $2 billion and sustaining capital of approximately $1 billion. This leaves the balance of cash flows available for accretive growth opportunities, share repurchases, and debt reduction. Further, at our targeted debt level of $17 billion, total debt would be approximately three times the adjusted EBITDA for Midstream and Marketing and Specialties, leaving Refining essentially debt-free. We remain committed to a conservative balance sheet and to returning greater than 50% of net operating cash flow to shareholders through dividends and share repurchases. On Slide eight, fourth quarter reported earnings were $2.9 billion or $7.17 per share. Adjusted earnings were $1 billion or $2.47 per share. Both reported and adjusted earnings include the final $239 million pretax impact of accelerated depreciation associated with idling the Los Angeles refinery. Capital spending for the quarter was $682 million, generating $2.8 billion of operating cash flow. We returned $756 million to shareholders, including $274 million of share repurchases. Net debt to capital was 38%. I will now cover the segment results on Slide nine. Total company adjusted earnings were flat for the quarter at $1 billion, with sequential improvements in refining, renewable fuels, and midstream, mostly offsetting decreases in chemicals, and marketing and specialties. Midstream results increased mainly due to higher volumes, partly offset by lower margins. In chemicals, results decreased mainly due to lower polyethylene margins driven by lower sales prices. Refining results benefited from the acquisition of WRB. Additionally, we saw higher realized margins in the Gulf Coast, partly offset by weaker Central Corridor crack spreads. Marketing and specialties results decreased primarily due to the sale of a 65% interest in the Germany and Austria retail marketing business and seasonally lower domestic margins, partly offset by higher UK margins and lower costs. Renewable fuels results improved primarily due to higher realized margins, including inventory impacts, partly offset by lower credits. Slide 10 shows cash flow for the fourth quarter. Cash from operations of $2.8 billion included a $780 million working capital benefit due to an inventory reduction, partly offset by the impact of falling prices on our net receivables and payables position. We received $1.5 billion from the sale of a 65% interest in the Germany and Austria retail marketing business. We repaid over $2 billion in debt and acquired the remaining 50% interest in WRB. We funded $682 million of capital spending and returned $756 million to shareholders through share repurchases and dividends. Our ending cash balance was $1.1 billion. Looking ahead to 2026 on Slide 11, in the first quarter, we expect the global O&P utilization rate to be in the mid-90s. We anticipate corporate and other costs to be between $400 million and $420 million. Beginning in 2026, costs associated with the idled Los Angeles refinery will be reported in corporate and other. In refining, we expect the worldwide crude utilization rate to be in the low 90s. Turnaround expense is expected to be between $170 million and $190 million. For the full year, we expect turnaround expenses to be between $550 million and $600 million. Utilization rates and turnaround expenses by region are provided in the appendix. We expect corporate and other costs to be between $1.5 billion and $1.6 billion. Depreciation and amortization is expected to be between $2.1 billion and $2.3 billion. Moving to Slide 12, Mark will now provide some final thoughts. We will then open the line for questions, after which Sean will wrap up the call. Mark Lashier: 2025 was a pivotal year for Phillips 66. Over the last four years, we've been laser-focused on improving performance and advancing our strategy. We reduced costs, simplified the company, and made tough decisions. We streamlined leadership, reduced headcount, outsourced work, and rationalized our refining footprint. In 2025, we began to see the benefits of the discipline. Solid, consistent results, which we're excited to build upon. We monetized more than $5 billion of assets and leaned into our integrated portfolio. We built a competitive wellhead-to-market position in midstream and we raised the bar in refining. Our teams responded, and we're driving toward world-class performance. And we're excited about what we'll do. Our assets work together. They complement one another. And our people maximize their value. We built a culture of ownership and accountability. We've challenged every employee to step up and aligned incentives so more of our people think and act like owners. Going forward, our priorities are clear: safe, reliable operations, continuous improvement, and disciplined capital allocation that returns cash to shareholders now while funding accretive returns that generate even more cash over time. This is a competitive business, and we have to earn investors' trust every day. We have momentum, and we're confident that we can rise to the challenge and deliver for our shareholders. Results matter, and in 2025, you've seen a positive inflection point in our results. And the best is yet to come. Operator: Thank you, Mark. We will now begin the question and answer session. We open the call for questions. As a courtesy for all participants, please limit yourself to one question and one follow-up. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press star then 2. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touch-tone phone. The first question comes from Steve Richardson with Evercore ISI. Your line is open. Please go ahead. Steve Richardson: Hi. Thank you. I was wondering if we could start on the Central Corridor, please. Can you talk about your outlook for Mid Continent products and opportunities you see on the feedstock side, particularly now that you have a quarter plus of WRB consolidated? Appreciate the comment in the prepared remarks about the 40% increase in exposure to Canadian heavies. But wondering if we could dig in there first, please. Brian Mandell: Hey, Steve. This is Brian. In PAD II, we have our maximum integration between our refining, midstream, and marketing assets. You probably know, we're one of the largest importers of Canadian crude, and from a crude perspective, PAD II is the first stop for this advantaged heavy Canadian crude. We also have crude optionality with various Cushing crude grades, advantage crudes directly from the wellhead in PAD II. And the widening heavy dips are a tailwind, a strong tailwind for the business. And as you heard in the intro, we've seen those dips widen by $4 since our purchase of WRB. Our sensitivities indicate that each dollar is worth $140 million in yearly earnings for the crude dip. Additionally, PAD II is expected to have the most robust demand profile for the next decade, with gasoline stable and with diesel and jet continuing to grow. We have really well-positioned assets in the market, and we have a strong supply of and other crudes and good product demand. So margins should be very supportive. Also, the ability of our commercial team to extract optionality from the assets and extract optionality from the integration of the assets provides additional value. And then finally, I'd say the Western pipeline will help raise demand for PAD II products to fill short in PAD V. Steve Richardson: That's great. Thanks, Brian. I was wondering if we could follow-up a little bit on costs. You've shown pretty good incremental progress on controllable refining costs this quarter, particularly relative to last year's fourth quarter. Can you talk about your 2026 priorities on the cost outlook? This is probably for Rich, but particularly as you have, you know, really improved utilization rate and clean product yield so significantly. Rich Harbison: Yeah. Thanks. This is Rich. You know, maybe I'll just start with a little bit of a recap of the fourth quarter, which is really setting the base for the 2026 performance, and it has some really good highlights here to show. We were $5.96 in the fourth quarter, which is clearly a nice improvement quarter over quarter, but directionally heading towards that $5.50 target that we're up. You know, regionally, we saw some volume on the denominator side change. So, of course, we have the Los Angeles refinery idling and then the WRB acquisition. So those have subtle impacts on the calculation. The primary headwinds we saw in the fourth quarter were really the natural gas pricing had increased. That was about a 13¢ a barrel headwind for us. But also, the Los Angeles refinery idling was also a big expense. We had a lot of expense there as we wound down that operation and put it in a safe position. And we had essentially no barrels throughput through that. So if we were to exclude that cost from our calculation for the fourth quarter, our actual fourth quarter performance was around $5.57 a barrel. So very strong performance by the organization even in the headwinds of this. So, you know, I'm very optimistic. We're on track for this $5.50 target. You know, going forward in '26, you know, the idling of the Los Angeles refinery will have a positive influence on an annualized basis of about 30¢ a barrel. So that's a positive tailwind for us. And also, probably as important is our organization and the continuous improvement effort our organization has really built into how we do our business day in and day out. And we're targeting another 15¢ a barrel reduction on that by year-end 2026. We've got over 300 initiatives that we're working on and a very solid track record of capturing value from this program. So all this is resulting in what I see as a very change in the business, honestly. You know, we've got these organizational changes and work processes that we've put in place. And we've got dedicated resources that are challenging the status quo of everything we do each and every day, trying to find a better way to do it. Driving inefficiencies out, eliminating waste. You know? Of course, the foundation with all this is reliability. You've got to be in the market to capture the market, and we're seeing continued progress on our reliability programs. And we have a very safe operation as well at an organization that is committed to safety. So we're making great progress. I'm very excited about it. I think the cost profile is heading in the right direction. And we're not done yet. Steve Richardson: Great. Thanks very much. Operator: We now turn to Neil Mehta with Goldman Sachs. Your line is open. Please go ahead. Neil Mehta: Just building on the operations and refining. You talked about operating costs. Can you spend a little time on turnaround specifically last year? I think you were able to beat your turnaround guide. In Q1, it looks like you know, you're gonna be running in the low nineties utilization, which is probably better than a lot of your peers. Just your perspective on how you're managing through the turnarounds and what you're looking to be best in class there. Rich Harbison: Hey, Neil. This is Rich, and thanks for the question. And I think I've given a few questions on this. Right? One thing I want to make clear is the 2025 guidance for turnarounds did not include WRB. The 2026 guidance includes 100% WRB. So there is a little bit of basis difference on these turnarounds. So you see a slight uptick in total turnaround cost, but full inclusion of the WRB assets in that. So when I think about 2026 and how that's going to move, you know, we see ourselves in a relatively low part of the cycle on the turnarounds. You know, the TAs are focused primarily in the Central Corridor with a smaller effort in the Gulf Coast area, and 2026 first quarter TAs, and that's highlighted in our enhanced information provided at the back end of the presentation here, which is giving you some insight into the quarterly or the geographic location of the turnarounds that we're providing. So we do see a fairly light turnaround cycle even though the dollars go up a little bit, it's really that inclusion of WRB into it that's reflecting it. And the other thing to think about, you know, we've often guided to 75¢ a barrel as the impact of our turnarounds. And there is a slight if you were to take WRB and look at it in isolation, but that's being offset by the idling of the Los Angeles refinery. So there's essentially no material change to that guidance on an annual basis either, Neil. Neil Mehta: Yeah. Thank you. And then, Kevin, follow-up for you. I think, Kevin, you talked about this eight-two-two-two framework. I thought that was a helpful way or moniker for thinking about the cash flow associated with the business. So I guess one of the questions as you guys are working down the debt towards the 30% net debt target, you're at 38% right now, is what's the capacity to buy back stock? And so if you could walk through that framework, that would be helpful. Kevin Mitchell: Yeah, Neil. I actually think it's pretty straightforward because we've laid out the debt target and also the 50% or greater of operating cash flow returned to shareholders through the dividend and share buybacks. So the dividend, which is secure, competitive, and growing, is right around $2 billion per year. The capital program, and we continue to be very disciplined around how we think about the capital program and the execution against that. The capital budget is $2.4 billion. So that's the second of the twos, so slightly over $2 billion. And then the balance is available for debt reduction and buybacks. And so when you think about an $8 billion operating cash flow, then that means there's just shy of $4 billion available for debt reduction and buybacks, and it would split approximately equally between the two, slightly weighted towards share buybacks if you think about that 50% calculation. And of course, you can change if the operating cash flow is it will be what it is, and it can flex up or down from that level, but the framework is there and in place. And so we think that we should be able to reduce debt by somewhere in the order of one and a half billion per year for the next two years, and that's excluding any additional flex we have with any asset dispositions that we have not baked into our plan. We have not communicated any targets around that, but we continue to work through the portfolio and options we have to monetize non-core, non-strategic assets that may be worth more to others than to us. Neil Mehta: Thanks, Kevin. Operator: We now turn to Doug Leggett with Wolfe Research. Mark, I'm sure you want to probably pass this off to one of the operations guys, but I'm afraid I want to ask you an obvious question about spreads, about Venezuela, about WCS, and so on. And I guess my question is quite simple. Are these what's the actual dynamic that's going on in the Gulf Coast from Phillips' perspective? Are you seeing physical barrels beyond the sequestered cargoes that were obviously taken to begin with, and are they competitive? And what I'm really trying to understand is is the market overreacting here? Because WCS normally widens in the wintertime, and we haven't really seen a ton of physical barrels show up yet. So we're trying to figure out what the market is pricing in here if it's, you know, everybody, you know, is competing for these barrels at the same time, including places like India and so on. Any color you could offer on your experience would be appreciated, and I've got a fully open operations list. Rich Harbison: Yeah, Doug. Hey. Thanks for the question. Yes. We're getting a lot of interest in the impact of Venezuelan crude, and certainly, we welcome the advent of more crude into the system. We've got the flexibility, as you know, to process Venezuelan crude. In fact, I think we've publicly stated we can process about 250,000 barrels a day. And if you look at that as a percentage of our total crude processing capacity, I think we're more heavily weighted, more opportunity there than our peers. So we're quite interested in being able to do that. And ultimately, we do think that there is an impact on WCS spreads. And there are cargoes of Venezuelan crude coming into the US even before Maduro was removed, there were cargoes coming in, and we participated in that from time to time when the economics dictated it. And as you know, we're gonna look at the economics. We're gonna run our models and if it makes sense to process it or not. But we've got the capacity there. We don't have to spend a dime to get there, and we're ready to go. I'll let Brian dig into the numbers a little more. Brian Mandell: Of course. I agree with everything Mark said. We were buying Venezuelan crude prior to Maduro. We're buying Venezuelan crude now, taking it to our refineries. But even if the Venezuelan crude doesn't come to our refineries, it's the global market. It's gonna impact heavy crude differentials. Even if on WCS, if you take a look at WCS, 2025 differentials versus this year's actuals and forward curve, $3.50 weaker in 2026 this year. So the market is a forward market. It's looking at barrels coming on, and it's processing and thinking about what the differential should be, not just for Venezuelan crude, but for all crudes. I would say, you know, we as Mark said, we look at relative crude values. So when we're thinking about crudes, whether we bring in Venezuelan crude or some other crude, we're thinking about the cost of the crude, the crude type, the value of the products the crude makes, transportation costs, the specific refinery that the crude is going to. And we have a lot of flexibility about what crudes we can run in all our refineries. We also have a strong commercial organization, and that allows us to redo the crude slate, you know, as the market dictates. So that's also a help. But you know, I would also one other final point that I haven't heard people talk about, which is the heavy naphtha. As more heavy naphtha is sent to the US Gulf Coast for blending crudes, it's likely to be a benefit to the gasoline margins, particularly when we're moving into gasoline season. Doug Leggett: No. I appreciate the answers, guys. Maybe just a clarification very quickly. I'm trying to understand if it's the physical market that's driven the widening or the expectation from the physical market. Or is this paper markets bidding out in the future? But the physical hasn't shown up yet? I'm trying to understand if it's already happening. If this is more speculative that's driving the gap that we've seen around what's normally a winter spread on WCS. Brian Mandell: I would say both. The barrels are coming into the market, both in the domestic market and foreign markets, and it's the expectation of continued barrels into the markets. Doug Leggett: Okay. My quick follow-up, Mark, just on your comments about the final utilization. Obviously, reliability was under the spotlight for quite a while. You guys have stepped up there, and I think Neil already observed on this question. My question is simply when we think about your run rate going forward, what would you have us think about the range of utilization? It obviously moved up. What should we think about as the go-forward sustainable utilization rate? Rich Harbison: Yeah. I'll let Rich tackle that. He's got some good metrics there. Okay. So utilization, obviously, we've been focused on enhancing our reliability in our programs that underlie that continued long utilization. So utilization is really two things in my mind. One is the equipment has to be available to run. And then the market needs to be there. So the market will be what it'll be. But when it comes to our ability to run, we're seeing some really good progress with these reliability programs. So much so we've actually even looked at our capacities as an organization and did some noodling on it, and we've concluded the fact that we've had some structural changes in four of our refineries. And you're gonna see us release some increased capacities and maybe even in the supplemental data on this presentation. But there's two primary reasons. One is demonstrated improved operating rates at two of the refineries, and projects that have been implemented at two other refineries. So at our Billings refinery, we're gonna move the capacity of that facility from historic 66,000 barrels a day stated capacity to 71,000 barrels a day. At the 217,000 barrels a day to 228,000 barrels a day. And on the project side, we've talked about both of these projects, and I think in 2025, they were both commissioned and have both their capability to meet the design parameters. So at the Bayway facility, we've talked about the VGO, the native VGO project. That has also unlocked some crude capacity for us. And we're gonna move the Bayway refinery up to 275 barrels a day capacity from 258 and then the Sweeney refinery from 277 to 265 related to the sour crude flex project, which we've talked a lot about over time. 25,000 barrels a day increase in capacity across the system, about a 2% increase. So when we think about utilization and then as a factor of capacity, you could see us using the equipment even at a higher level than what we have historically reported on. And I would just add to that, Doug. There's been a concerted effort around turnarounds. You've seen our turnarounds become more disciplined, and we're taking work out of the turnarounds. The work's still getting done, but we're finding creative ways to get it done outside of turnaround so it shortens that duration and the financial impact. And we've been using things like machine learning that we reduced the spend on turnarounds in our forecast, I believe, mid-year substantially, and I think we still beat that throughout the year because we're getting better and better at using those tools to better implement our turnarounds to manage the impact on utilization. So that's underlying some of that performance as well. Doug Leggett: Right. Mark, thanks so much for the answer. You're the reason we're having a panel on this exact topic at our conference in a few weeks. So thanks, guys. Ready for our answer. Rich Harbison: I appreciate that. Operator: We now turn to Lloyd Byrne with Jefferies. Your line is open. Please go ahead. Lloyd Byrne: Hey, afternoon, guys, Mark. Thank you for taking the questions. Maybe you guys could start with just an update on Western Gateway. And the open season and then any I know you guys are extending the destination to LA, but any hurdles, next steps, you know, where are you in permitting, all that stuff. Don Baldridge: Hey, Lloyd. This is Don Baldridge. I appreciate the question. Yeah. To unpack that a bit, you know, we had a first open season positive response. We received multiple shipper commitments, which, you know, really gives us a solid base of volume and some certainty there. And as you mentioned, what we're doing now in this second open season, it's really an extension as opposed to an expansion. Because what we've done is we've expanded the delivery points all the way into the California market, specifically the LA market, which is really the heart there, California demand. That plus being able to reach back into the Gulf Coast where we have made arrangements to be able to pull the product in from the Gulf Coast to the Explorer pipeline to reach the Western Gateway path. And as you know, we're a 22% owner of Explorer, so there's some benefit there. And so, you know, now prospective customers, they really have the ability to reach a very liquid demand center in the LA market, be able to reach back to supply origins both in the Mid Continent as well as the Gulf Coast. We think that is really a compelling offer. That's what this second open season is primarily focused on. And what I'd emphasize for you is that looks liquidity, that's really, I think, what's gonna help drive additional interest in this project. Like I said, we received commitments in the first open season. We're expected to get additional commitments for this path that would really be the Gulf Coast, Mid Continent to LA. The feedback's been positive. Yeah. I think the folks that we are actively engaged with along this project see the market developing a lot like we do where the West Coast begins to look a lot like the East Coast where you have it's supplied by a few refineries. Some imports that are waterborne, and then you have a pipeline which delivers really competitively priced, attractive, reliable American-produced fuel to that market. So that's what we think is really exciting about this. We're obviously actively working through the scoping and design phase and feel real confident in terms of the ability to execute. It's really right now, securing third-party supply commitments with the right contract terms and such to give us the right returns to be able to execute the project. Lloyd Byrne: That's great. And the support from the state's been pretty good. Don Baldridge: I mean, from my experience, this is one of the unique projects, and I've been in the pipeline business for most of my career. But to have the amount of support from regulatory folks, elected folks, both state and federal, this one is a first to have that type of just kind of unilateral support and understanding for this type of project, the design, the capacity, timing, all of it makes a lot of sense to most of the folks that we talk to. Lloyd Byrne: That's awesome. Thank you, Don. And a quick follow-up, I think, to maybe Steve's question. Clean product yields have been really strong. And just the sustainability of that, the catalyst optimization, and then whether the Central Corridor will help with respect to those yields going forward. Rich Harbison: Yeah. This is Rich. Thanks. So, you know, that's been a real focus for us. You know, we just talked a little bit about utilization and capacity, and that's really focused on the front end, the crude side of the business. The utilization and clean product yields component of that is a continued now focus for us. And we've taken time to evaluate every key unit that we have in our system. And we're using the discipline that we use for the crude unit utilization part of the business and applying that discipline now to all the downstream units that we have. And what you're seeing is the results of this effort starting to creep into the numbers here, and you'll see it in the clean product yield component of that. We had a record year this year annually for clean product yield, which is not an easy thing to achieve in a system as large as ours. But what it is is each organization is taking a detailed look at every one of these conversion units and making sure that we are converting to the highest product value that we can. So I feel it's structural. It's a structural change in our business, and I see it as very sustainable. And I also see it as we're gonna see continued progress on this as we move forward here. Part of it driven by the organization's performance, the other part driven by our smart small capital, high return investment opportunities. Lloyd Byrne: Great. Thank you, guys. Operator: We now turn to Manav Gupta with UBS. Your line is open. Please go ahead. Manav Gupta: Congrats on a lot of positive developments, including the debt pay down and cost reductions. My question here is when we look at the mid earnings, you can let me know if I'm wrong, but I think you've almost doubled them in the last two years. So how should we think about the midstream portfolio going away? We assume, like, the organic 5% or something like mid-single-digit organic growth in midstream and a possibility of good bolt-on deals if they come along, like, help us understand the growth path for midstream from here on. Mark Lashier: Yeah. Manav, this is Mark. You're absolutely right. You've seen that kind of growth in our earnings. There have been a number of things that historically have factored into that, certainly organic, but I think really the big upside has been the inorganic things that we acquired that opened up a larger organic playing field. So you've seen that with Dos Picos. You've seen that with Coastal Bend, and we'll continue to look for opportunities like that. But the current focus to get us to that four and a half is organic opportunities. And Don can walk you through what that looks like going forward. Don Baldridge: Yeah. Manav, I could just say, I think we are right where I expected us to be from a run-rate EBITDA, you know, right around that billion dollars. And maybe to kind of unpack how that looks over the next couple of years, I expect this to be about this billion-dollar run rate. We'll have some, you know, quarter-to-quarter variability a bit with commodity prices that are, you know, sensitive in our G&P business. So what the realized prices are, as well as, you know, just our contract and volume mix when that we factor in fee escalations and recontracting and spot rates and such. And the real step changes will be these organic growth projects that we have been talking about. And when those come online and fill up here in the latter part of '26 and into '27, those will be the big earning contributors. That's what really takes us to that 4.5 billion dollar run rate by the end of '27. And what I'd highlight for you, and I think you heard it a bit from Mark, is the momentum that we have within our midstream business. As you know, I came in from the DCP acquisition, and I could tell you we are a much different midstream business today than we were just a few years ago because of the platform that we built. Like Mark mentioned, some of these acquisitions, putting this platform together, we are a dramatically better midstream company. We have, you know, really great response from our customers. They see the breadth and the quality of the service and the reliability that we are executing on. So we're getting a lot more deal flow. We see that as what really gives me a lot of confidence in hitting our target at 4.5 billion by '27. Also, you're seeing the deal pipeline fill up for things past '27. Like a potential expansion of Corpus Christi's frac like the Western Gateway, and so those types of projects that are starting to come to fruition in our deal pipeline that gives me a lot of confidence that this is a sustainable growth rate of that mid-single-digit, not only to '27 but well beyond '27. Manav Gupta: Perfect. So my quick follow-up here is a little bit on the refining macro. And we started 2025 with a very bearish outlook and things improved and refiners massively outperformed S&P in 2025. Now you're starting '26 with a very similar sentiment that for some reason, people are overly bearish on refining. But the way the setup is looking, it's still looking pretty constructive to us. And year to date, refiners have again massively outperformed S&P, you have definitely outperformed S&P. I'm just trying to understand what's your refining macro outlook and do you believe that we could have another good year in 2026? As we did in 2025? Brian Mandell: Yeah. We couldn't agree with you more, Manav. We are very bullish. If you look toward the start of spring turnarounds, we believe the refining system will have trouble keeping up with demand. First, demand continues to keep growing in 2026. And if you look at global net refinery additions, they are less than global demand growth. We also see new refinery builds weighted to the very end of the year, and they'll probably slip into 2027. Second, we had very low unplanned turnarounds in 2025, and it'd be hard for unplanned outages for the US refining system to be much lower, particularly with, as you point out, that recent high utilization. So couple this with the widening of the heavy dips and the benefit of that to our system, and we are very constructive margins for the year. Manav Gupta: Thank you so much. Operator: We now turn to Theresa Chen with Barclays. Your line is open. Please go ahead. Theresa Chen: Hi. On the midstream front, how do you view the likelihood of increased ethane projection in the Permian following the start-up of multiple residue gas pipelines in 2026 and beyond? What implications could that have for your NGL volumes and margin realizations over time? And given your integrated strategy on translating this potential development to the chemical side, if Gulf Coast ethane availability tightens, could incremental upstream rejection ultimately affect the feedstock advantage for Gulf Coast crackers? Don Baldridge: Theresa, this is Don. I think our view on when you about the dynamics in the Permian with more gas pipelines coming on, our view is that the ethane will have to continue to get priced so that sufficient recoveries are there to feed the demand in the Gulf Coast. And so we don't see a material change in rejection or recovery in the Permian with the new gas pipelines coming on. Obviously, we, through our CPChem ownership, we've got some big demand coming on from an ethane standpoint as we turn on the Golden Triangle project in 2027 when it really starts commissioning and has that flow. And so I think we see this as continuing to balance out as gas prices rally, might see some ethane obviously price with that so it stays in recovery. But that's pretty much how I see it. Theresa Chen: Thank you. Operator: We now turn to Paul Cheng with Scotiabank. Your line is open. Please go ahead. Paul Cheng: Hey, guys. Good morning. I think this is the first one. Maybe it's for Mark. You guys have done a lot in improving your refining operation. So end of this point with your house is gradually, I think, getting into the shape that you want. Do you believe you could be a good consolidator in the refining industry? And do you have the desire to do it if there's a good refining asset that is available that you may be able to add to the system and be able to enhance? So what kind of criteria you may be looking at? Secondly, if we look at your heavy oil, I assume that in the first quarter, you're going to run more heavy oil given the discount. So, yes, the first quarter that you are already maxing out capability or that you actually think you still have excess capacity for the remaining of the year comparing to the first quarter level. And as you increase your heavy oil processing, with that in any shape or form impact, your life product yield, as well as your overall footprint level? Thank you. Mark Lashier: Paul, I'll add to your second question first and maybe invite others to pile on. But we are maxed out heavy. We are taking full advantage of what's out there. And of course, there is an impact on clean product yield. And so we recognize that, and then it's beneficial to the economic or we wouldn't be shifting that direction. On your first question, the improving refining operational performance, thank you for recognizing that. It's true. And I would say that what you're seeing, what you saw in '25 and we'll build on that momentum in '26, the precursors to that were set in motion almost four years ago. And we've been very diligent, and the results also reflect the momentum that we have because we're not just waking up today and thinking about what we can do tomorrow. These things have been building and building over the last four years, and so there's much more to come. Much more to do, much more to accomplish. And could M&A take a role in that? Certainly, we've shown that for the right value creation opportunity like we saw with WRB, we would add our refining capabilities. I think they're fairly rare and maybe could call them unicorns, but if there are the occasional unicorns that come up, we would certainly take a look at it if it added to our competitive advantage, particularly in the Mid Continent or Gulf Coast, we would certainly take a hard look at things. Paul Cheng: Thank you. Operator: Thanks, Paul. We now turn to Sam Margolin with Wells Fargo. Your line is open. Please go ahead. Sam Margolin: Hi. Thanks for taking the question. Maybe turning it back to midstream, you made a comment, you alluded to this post-2027 growth opportunity. And, you know, we have the 2027 EBITDA target out there, but it does seem just like underpinned by fundamental trends, GORs, and underlying production and efficiency trends, there is gonna be a tail to your midstream growth opportunity. And really, the question is how you are gonna frame that on the spending side. You know, you've got some organic projects that are starting up this year and next. Feels sort of like a peak spend, maybe there's some operating leverage and some infill in those new assets. Or there's an opportunity to accelerate spend. So just a question about how you know, the midstream gas opportunity extends past 2027 and what that means for your capital framework. Don Baldridge: Sure. You know, the way I think about that, we've built this platform that has this, you know, now, I think, an organic opportunity flywheel that continues to bring additional opportunities that are low capital, high return, being able to add incremental volumes to our system. And we'll continue to have some of these chunkier build-outs, and we've talked about a gas plant every year or so. I think we're on that pace, you know, additional fractionator. On that, we're on that kind of pace where we'll have those types of additions. But in the interim, just, you know, lower capital, higher return, both we kind of build out extensions of what we have from a platform. I think we'll continue to carry today. And so what I'd probably step back and just tell you is that that momentum and that platform that we see is just being able to generate those kinds of projects that will carry us beyond '27 and be able to continue on that mid-single digits. But I'd also say it's not just in our NGL business. We're seeing opportunities in and around our crude to clean value chain that we continue to stay focused on. And those are a lot of optimization projects around our pipes and terminals. So the breadth of which we can execute within the midstream space is pretty impressive and pretty exciting. Kevin Mitchell: Hey, Sam. It's Kevin. I also just that. The Western Gateway, if that's a project that moves ahead, that is not in any of our current projections. And so that just further adds to the potential for growth post-2027 if that goes ahead. Sam Margolin: Understood. Okay. Thank you. And then maybe just a follow-up on CPChem. It's an industry issue, not a CPChem or a PSX issue. But there is more capacity coming and, you know, maybe just your latest thoughts on CPChem both strategically after this slate of projects you have come online and then in the near term, you know, mitigating some of these commodity challenges? Mark Lashier: Certainly. I think that CPChem is focused on getting those big projects up and operating. They do see them being quite accretive even in this environment, and they need to get those online and generating value. But CPChem has shown that they're quite resilient during this downturn, generating our share of their EBITDA $845 million in 2025. And what needs to happen and is happening in the marketplace is pretty large-scale rationalization on the order of 20 million tons per year. And that would get the industry back to 85% utilization. Now I'd note that right now, the US base is running at 90%. And so the US is leveraging its cost advantages, its capabilities while Asia Pacific and Europe are running at about 65%. So they're on the bubble. They're on the ropes. And that's where we think the bulk of the rationalization needs to occur. We saw 5 million metric tons a year come off in '25. We expect another five to seven coming out of Southeast Asia in this year and next, and then an additional rationalization of naphtha crackers in Europe to tighten things up. And then the new builds that are out there beyond what we see at Golden Triangle and Roscoe Fon are primarily in China, and there's not a lot of clarity around those. When they will come up. There were, you know, stories of them being operational but not actually being run in '25. And so that's a little bit fuzzier, and typically, it takes longer for those assets to come on, and they will be they'll only be brought on when the Chinese think that they might be useful. And so that continues to push out. Sam Margolin: Thanks so much. Mark Lashier: You're welcome. Operator: We now turn to Matthew Blair with TPH. Your line is open. Please go ahead. Matthew Blair: Great. Thank you, and good morning. Maybe to stick on chems here. Could you talk a little bit more about the modeling considerations for your Gulf Coast cracker and PE plant that's scheduled to come online later this year? Do you think that Q3 is a good start-up target and if so, how long would that take to ramp? In terms of the sales split, would that be completely oriented to the export market, or do you think, like, a fifty-fifty domestic export split would be reasonable? And then finally, for the ethane supply, does that all come from PSX, or do you have any sort of contracts with third-party ethane providers? Thanks. Mark Lashier: Yeah. Thanks, Matt. Those assets should be commissioning and really starting up in the fourth quarter and then ramping up through at least the first half of '27. And given where we are today, it's gonna be largely export-oriented, and certainly initially, they'll always want to repatriate as much of that volume as they can. But starting up, it'll be primarily export-oriented. As far as the sourcing of ethane, the majority of it is coming from us, but they certainly have connectivity to ensure that they have the best possible situation and multiple sources of ethane. Matthew Blair: Sounds good. And then you've mentioned the LA shutdown impact on op costs in the fourth quarter. Would we found very helpful. Do you have a similar number, if there is one, on the LA shutdown impact for margin capture in the fourth quarter? And I guess the reason I asked is if I look at your margin capture in 2025 versus 2024, it looks like it came down about a percentage point, and some of your peers are talking about other margin capture increased year over year. And, of course, you know, these indicators aren't exactly apples to apples, but maybe you could just help us understand if there were any sort of unique headwinds to your margin capture in 2025. Thank you. Rich Harbison: This is Rich. Los Angeles refinery, when we step back and look at it, you know, when we're making the decision here to the fate of the asset and the operation. It was very clear to us on two things. One, the cost to produce was very high. And the materiality of the earnings was very low. If not negative, in a number of cases. So when I think about it, it is not material to the earnings side of the business, the shutdown. And the market capture on an overall system base if you think about it, it was a 135,000 barrel a day facility and a 2 million barrel a day operation. So it was not extraordinarily material either on the overall system. So I would say nonmaterial in market capture and nonmaterial on earnings. Matthew Blair: Got it. Thank you. Operator: We now turn to Jason Gabelman with TD Cohen. Your line is open. Please go ahead. Jason Gabelman: Yeah. Hey. All of my questions have been answered, but maybe if I could just touch on the midstream guidance because it sounded like the ramp-up from the new projects wouldn't really hit until the second half of this year. So wondering if you're seeing any headwinds in the first half from recontracting on the NGL pipes and if that's something that'll be a feature in future years. And then also, anything specifically in 4Q that resulted in a step-up in OpEx, which looked a bit high? Thanks. Don Baldridge: Hey, Jason. Yeah. In terms of the first half of this year, I think we're gonna see ourselves pretty close and pretty flat on that billion-dollar quarter run rate. I think that's pretty well set. You know, that factors in, like you mentioned, some contract renewals that factor in contract fee escalations are all in there. So I think that will stay fairly steady, and you'll see the uptick really when we start filling in some of these organic growth projects. And in terms of OpEx for the fourth quarter, that's really just sort of timing and seasonality. I think if you look at us over multiple quarters and years, you know, we spent a lot of time talking about extracting cost out of the refining business, and some of those successes have blended over into the midstream because the team there has also been able to grab some efficiencies through the scale that we've built and be able to leverage what we have at Phillips in total. And so we're seeing a really, I think, a healthy operating discipline there from a cost standpoint. But there's obviously some seasonality and some quarter-to-quarter timing, but really pleased with the performance from an operation standpoint. Jason Gabelman: Alright. I'll leave it there. Thanks. Operator: This concludes the question and answer session. I'll now turn the call back over to Sean Maher for closing comments. Sean Maher: Thank you all for your interest in Phillips 66. If you have any questions or feedback after today's call, please feel free to reach out to Kirk or myself.
Operator: Hello, my name is Nikki, and I will be your conference operator this morning. At this time, I would like to welcome everyone to Veralto Corporation's Fourth Quarter 2025 Conference Call. [Operator Instructions] I will now turn the call over to Ryan Taylor, Vice President of Investor Relations. Mr. Taylor, you may begin your conference. Ryan Taylor: Good morning, everyone. Thanks for joining us on the call. With me today are Jennifer Honeycutt, our President and Chief Executive Officer; and Sameer Ralhan, our Senior Vice President and Chief Financial Officer. Today's call is simultaneously being webcast. A replay of the webcast will be available on the Investors section of our website later today under the heading Events and Presentations. A replay of this call will be available until February 18. Yesterday, we issued our fourth quarter and full year 2025 earnings news release, earnings presentation and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. In addition, we also issued our 2026 first quarter and full year guidance. These materials are available in the Investors section of our website, veralto.com, under the heading Quarterly Earnings. Reconciliations of all non-GAAP measures are also provided in the appendix of the webcast slides. Unless otherwise noted, all references to variances are on a year-over-year basis. During the call, we will make forward-looking statements within the meaning of the Federal Securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results may differ materially from our forward-looking statements. These forward-looking statements speak only as of the date that they are being made, ,and we do not assume any obligation to update any forward-looking statements, except as required by law. With that, I'll turn the call over to Jennifer. Jennifer Honeycutt: Thank you, Ryan, and thank you all for joining our call today. Our team finished 2025 with a strong fourth quarter, capping off an outstanding year for Veralto. I want to recognize our 17,000 associates worldwide for their rigorous VES driven execution that helps us serve customers improve operating efficiency and meet our financial commitments in 2025. Our success last year was underpinned by exceptional contributions and tireless efforts by our procurement, supply chain and factory operations teams. During the year, we replicated and regionalized more than a dozen production lines into existing locations to drive flexibility across our footprint and improve our ability to serve customers more efficiently. These moves in combination with targeted supply chain and strategic pricing actions enabled us to successfully navigate last year's dynamic macro environment while providing strong support to our customers. In 2025, we delivered mid-single-digit core sales growth, double-digit adjusted earnings per share growth and over $1 billion of free cash flow. As we closed out 2025, we established a $750 million share repurchase program and announced an 18% increase in our dividend. And at the outset of 2026, we completed the acquisition of In-Situ, expanding our world-class Water Analytics portfolio into fast-growing environmental water and hydrology markets. Going forward, we remain excited about numerous opportunities to create value for shareholders through strategic growth and disciplined capital allocation. Entering 2026, we are confident that the enduring need to safeguard the global supply of clean water and safe food will continue to underpin steady demand for our products and services across our key industrial, municipal and consumer packaged goods end markets. Combined with our durable business model and a rigorous deployment of VES, we expect to deliver yet another year of core sales growth and continued margin expansion with mid- to high single-digit adjusted earnings per share growth. Now turning to our 2025 full year financial results in detail. Total sales grew 6% year-over-year to $5.5 billion, an all-time high. We delivered 4.7% core sales growth with both segments growing near the company average. Incremental margins were within our long-term framework at about 30% despite headwinds from tariffs and growth investments in TraceGains. Adjusted operating profit margin expanded by 20 basis points year-over-year. And adjusted earnings per share was $3.90, up 10% year-over-year, marking our second consecutive year of double-digit EPS growth. And we generated over $1 billion of free cash flow, further strengthening our financial position. Overall, I'm very pleased with the gross margin expansion and robust free cash flow we delivered in 2025. Looking at core sales growth by geography and end market for the full year, growth throughout the enterprise was broad-based across key verticals and regions, as our commercial teams executed well leveraging our VES growth tools and strategic investments. In North America and Western Europe, which comprise about 70% of our total revenue, core sales grew 5.3% and 3.8%, respectively, in 2025. And core sales into high-growth markets grew 5.1% year-over-year. Taking a closer look, in North America, core sales growth exceeded 5% in both segments. In Water Quality, we continue to capitalize on broad-based demand for our chemical water treatment solutions, which delivered mid-single-digit core sales growth during 2025. From an industrial end market perspective, we saw the highest growth in chemical processing, power generation, mining and data centers. Our growth in these verticals was a function of solid demand, strong commercial execution and strategic new customer wins. North American sales of UV water treatment grew just under 10% last year, driven largely in support of our municipal customers' water reuse efforts. Both our water treatment and analytics businesses continued to benefit from increased industrial activity in North America. In PQI, core sales in North America grew 5.8% year-over-year in 2025 with mid-single-digit growth across both packaging and color, and marking and coding. In marking and coding, core sales of consumables and equipment both grew mid-single digits year-over-year, with equipment sales growth from both our inkjet and laser product lines. This reflects a combination of steady end market demand, differentiated new product launches and strategic market penetration across an ever-increasing number of substrates. In Western Europe, core sales grew 3.8% year-over-year, with Water Quality up 4% and PQI up 3.6%. Core sales growth in Water Quality was led by our water analytics team in Europe and reflects traction from our growth initiatives as well as improvements made to our commercial architecture in 2024. These changes contributed to rigorous lead generation, funnel management and VES catalyzed commercial execution. Notably, Water Quality's growth in Western Europe last year was across both municipal and industrial customers. And in PQI, core sales growth in Western Europe was across both marking and coding, and packaging and color. Growth in marking and coding was led by consumables and continuous inkjet printers. And in packaging and color, our core growth in Europe was highlighted by strategic growth within mid-tier consumer packaged goods customers. In high-growth markets, core sales increased 5.1% year-over-year in 2025, led by Latin America, India and the Middle East. In China, full year core sales grew modestly over the prior year, led by PQI. Overall, we delivered solid growth across all key regions while continuing to invest in our businesses for future value creation. Since the inception of Veralto, our core sales growth has accelerated approximately 200 basis points, and our adjusted operating margins have expanded by an average of 50 basis points per year. Over this 2-year period, we have grown adjusted EPS by approximately 11% annually, with free cash flow conversion above 100%. This financial performance highlights our durable growth and capital-light business model fortified by the Veralto Enterprise system. The acceleration in our core growth rate reflects strong commercial execution and traction from strategic initiatives, including targeted geographic growth, enhanced service offerings and new product innovation. From a geographic perspective, we invested in people and resources to capitalize on secular growth drivers in Latin America, India and the Middle East. Secular drivers in these markets, such as a growing middle class, increased scarcity of freshwater, rapid urbanization and expanding industrialization create a strong need for our products and services across both segments to test and treat water, and ensure packaged foods are safe to consume. We see the investment in these markets across both the public and private sectors. In 2025, Latin America, India and the Middle East were our 3 fastest-growing regions. And as it relates to enhancing our service offerings, we focused on expanding support across our global installed base, increasing the attachment rate of service contracts on new equipment sales, and expanding our consulting services to new project design, particularly with respect to water treatment systems for data centers. This focus drove strong service growth across both segments in 2025. As it relates to innovation, our increased investment in R&D, combined with a focus on new product opportunities that have the highest growth and most attractive returns have reinvigorated our innovation flywheel. Combined with our extensive direct-to-customer business model, these efforts have accelerated our development of fit-for-purpose solutions to enhance product quality, resolve critical pain points, and drive greater efficiency throughout customer operations. Over the past 12 to 18 months, we have begun to see the fruits of our R&D efforts across Veralto with several new product launches. A few notable new products that contributed to growth in 2025 include a new ammonia analyzer launched in water quality that simplifies operations, improves efficiency and reduces maintenance for customers. This product is used at various stages of the water cycle to monitor ammonia levels, maintain water quality and protect the health of aquatic environment. Additionally, we continue to expand the number of parameters customers can test using our most advanced and easiest-to-use testing technology, our single-use Chemkeys, which grew double digits year-over-year in 2025. In our PQI segment, our new UV laser marking and coding system met strong customer demand in 205. This new technology is helping customers transition to more sustainable, flexible film packaging solutions. And in our packaging and color software offering, we launched a new AI-enabled solution to help streamline and error-proof packaging print during the design phase. This helps brands accelerate go-to-market and reduce costly reprints and product recalls. Looking at 2026, we believe that the durability of the secular drivers across our key end markets will continue to underpin steady demand for our products and services. About 80% of our sales are tied to water, food and essential goods, and about 60% of our revenue is recurring. Of our recurring revenue, the majority is comprised of consumables that are critical to the daily operations of our customers where the cost of failure is high. In addition, our large global installed base of instrumentation and equipment drives a reoccurring need for replacement and upgrades each year, further fortifying our sales durability. Given these attributes and continued focus on our strategic growth initiatives, we guided to another year of steady core sales growth in 2026, and our third consecutive year of adjusted operating margin expansion with adjusted EPS growth in the mid- to high single digits. In conjunction with reigniting our innovation engine, we are improving the quality of our portfolio with a focus on accelerating our core sales growth rate and creating long-term value. At the outset of 2025, we divested AVT, a slower growth instrumentation product line within PQI. Meanwhile, our acquisition of TraceGains grew sales by more than 20% in our first full year of ownership. The combination of Esko and TraceGains is helping our CPG customers accelerate time to market for new products and connect digital workflows to drive efficiency. In our Water Quality segment, we acquired AQUAFIDES in the second quarter of last year. AQUAFIDES complements our Trojan UV business by providing low-flow UV water treatment solutions through an expanded footprint in Europe. And just a few weeks ago, we completed the acquisition of In-Situ, expanding our world-class water analytics portfolio in the fast-growing environmental water and hydrology markets. Based in Colorado, In-Situ is a global leader in water measurement and monitoring, offering easy-to-use sensors, sondes and data management solutions. Its differentiated technologies strengthen our position across the environmental water ecosystem and complements our OTT HydroMet portfolio. Over the past 3 years, In-Situ has averaged roughly 8% core sales growth. And in 2025, In-Situ delivered approximately $80 million in sales, with gross margins around 50%, and EBITDA margins in the mid-teens. The addition of In-Situ expands our presence in fast-growing environmental water and hydrology markets, and enhances our ability to help address freshwater challenges related to increasing water scarcity, severe weather events and water contamination. Greater visibility to the quantity and the quality of surface and groundwater enables municipalities, government agencies and industries to mitigate economic risk and ensure public safety. These customers are increasingly faced with a variety of issues, including not enough water, too much water, water in the wrong places, and changing water composition, which requires different treatment solutions. The combination of In-Situ and OTT products, along with support from our broader water analytics capabilities creates a significant opportunity to help customers efficiently monitor and analyze the quantity and quality of their freshwater sources. We now have a premier environmental water analytics portfolio with significant opportunities to accelerate growth through complementary channels, improve efficiency across our global footprint, and deliver greater value for customers and shareholders. This addition to our portfolio is squarely aligned to our purpose of safeguarding the world's most vital resources, and we are excited to publicly welcome the In-Situ team to Veralto. Going forward, we remain excited about numerous opportunities to create value for shareholders through strategic growth and disciplined capital allocation. Our pipeline of acquisition opportunities remains strong for both Water Quality and PQI. That concludes my opening remarks. And at this time, I'll turn the call over to Sameer to provide details on our fourth quarter results and 2026 guidance. Sameer Ralhan: Thanks, Jennifer, and good morning, everyone. I'll begin with our consolidated results for the fourth quarter. Total sales grew 3.8% on a year-over-year basis to nearly $1.4 billion. Currency was a 250 basis point tailwind year-over-year, and divestitures, net of acquisitions, reduced sales by 30 basis points, primarily reflecting the AVT divestiture. Core sales grew 1.6%. Our core sales growth was primarily driven by price, which increased 2.3% year-over-year. Volumes were down modestly, a function of 3 fewer shipping days in the fourth quarter of 2025 versus the prior year. This impact was approximately 260 basis points. Underlying demand remains steady in both the segments. Recurring revenue grew mid-single digits year-over-year and comprised 59% of our total sales. Gross profit increased 3.4% year-over-year to $828 million. Gross profit margin was 59.3%. Adjusted operating profit increased 7% year-over-year, and adjusted operating profit margin improved by 80 basis points to 24.6%. The increase in Q4 profitability was across both our segments, driven by strong operating execution. Looking at EPS for Q4, adjusted earnings per share grew 9% year-over-year to $1.04 per share. In the fourth quarter, we generated free cash flow of $291 million, or 115% conversion of GAAP net income. I'll cover the segment results now, starting with Water Quality. Our Water Quality segment delivered $846 million in total sales, up 4.3% on a year-over-year basis. Currency was a 240 basis points tailwind. The acquisition of AQUAFIDES contributed 50 basis points of growth. Core sales grew 1.4% year-over-year, led by price, which increased 1.8%. Volumes decreased modestly due to 3 fewer shipping days. Underlying demand for our water analytics and water treatment solutions remained steady year-over-year. Adjusted operating profit increased 5.8% year-over-year to $219 million, and adjusted operating profit margin was 25.9%, up 40 basis points year-over-year. Looking at the full year, our Water Quality team delivered core sales growth of 4.7%, driven largely by volume. Core sales growth was equally driven by recurring revenue and instrumentation. Adjusted operating profit grew 9.4%, or $74 million, to $858 million. This resulted in 80 basis points of margin improvement. Overall, our Water Quality team executed well in 2025 and delivered outstanding financial performance, setting all-time highs in annual sales and adjusted operating profit. Moving to the next page. Total sales in our PQI segment grew 3% year-over-year to $550 million in the fourth quarter. Currency was a 280 basis points tailwind. Net divestitures reduced sales by 1.6% year-over-year. This was primarily due to the AVT divestiture, partially offset by a couple of small technology acquisitions. Core sales grew 1.8%, with price up 3%. Volume was down 1.2%, primarily due to the 3 fewer shipping days, which had an impact of approximately 260 basis points to volumes on a year-over-year basis. Underlying demand for our PQI products and services remained steady. PQI's adjusted operating profit was $146 million in the fourth quarter, up $13 million over the prior year period, resulting in adjusted operating profit margin of 26.5%. This represents a 160 basis point improvement over the prior year period. For the full year, PQI delivered 4.8% core sales growth, an adjusted operating profit margin of 26.5%. The full year margin reflects investments in TraceGains to drive continued strong double-digit growth as well as investments made to diversify our regional production. Overall, it was a very strong year for our PQI team that delivered all-time highs with nearly $2.2 billion in sales and adjusted operating profit of $578 million. Turning now to our balance sheet and cash flow. In Q4, we generated $311 million of cash from operations. We invested $20 million in capital expenditures. Free cash flow was $291 million in the quarter, or 115% conversion of GAAP net income. At the end of the fourth quarter, gross debt was $2.7 billion and cash on hand was $2 billion. Net debt was $642 million, resulting in net leverage of 0.5x. As Jennifer shared, early in the first quarter of 2026, we completed the acquisition of In-Situ. The deal was funded with cash on hand. The cash outflow in Q1 for this acquisition was $427 million, net of cash acquired. Even after this acquisition, we continue to have flexibility in how we deploy capital. To that point, in the fourth quarter, our Board of Directors approved an 18% increase in our quarterly dividend and authorized a $750 million share repurchase program. We have an attractive pipeline of opportunities in both Water Quality and PQI. We will remain disciplined in our approach as we continue to deploy capital to create long-term shareholder value. Over the long term, our bias remains to create long-term shareholder value through M&A. Turning now to our guidance for 2026, beginning with our expectations for the full year. We are targeting core sales growth in the low to mid-single-digit range on a year-over-year basis. Total sales growth, including the impact of completed acquisitions and FX, is projected in the mid- to high single-digit range. We are modeling a currency tailwind of 100 to 150 basis points. This assumes that FX rates as of December 31 prevail throughout the year. Acquisitions net of divestitures are expected to contribute 150 basis points of growth, primarily from the In-Situ acquisition. Moving to adjusted operating profit margin. We're targeting approximately 25 basis points of year-over-year improvement in 2026. This assumes 50 basis points of margin expansion in our core business, offset by about 25 basis points of dilution from the In-Situ acquisition. Our adjusted EPS guidance for the full year 2026 is in the range of $4.10 per share to $4.20 per share, or mid- to high single-digit growth over the prior year. We are targeting free cash flow conversion of approximately 100% of GAAP net income. This assumes CapEx in the range of 1% to 1.5% of sales, and a modest working capital investment to support our growth. Looking now at Q1, on a year-over-year basis, we are targeting core sales growth in the range of flat to up low single digits, and total sales growth, including the impact of completed acquisitions and FX in the range of mid- to high single digits. Currency translation is expected to be a year-over-year tailwind of approximately 3.5%. And acquisitions net of divestitures are expected to drive about 50 basis points of sales growth. As a reminder, our core sales growth in Q1 2025 was 7.8%, setting up a tough comparison for this year. Our Q1 2026 guidance implies a 2-year stack of about 4% to 5% core sales growth. We are targeting adjusted operating profit margin of approximately 24.5%, and adjusted EPS in the range of $0.97 per share to $1.01 per share. Additional details on the modeling assumptions supporting our full year and Q1 guidance are in the appendix of our earnings presentation. That concludes my prepared remarks. At this point, I'll turn the call back over to Jennifer. Jennifer Honeycutt: Thanks, Sameer. In summary, we capped off an outstanding 2025 with a strong fourth quarter. Given the essential need for our technology solutions, durable business model and strong secular growth drivers across our end markets, we expect another year of steady core sales growth in 2026. And we will continue to leverage the power of the Veralto Enterprise System to drive continuous improvement in support of our customers. Our financial position remains strong, and we will continue to evaluate strategic opportunities within our disciplined capital allocation framework. We are proud of the progress we've made on our journey as a young public company, and we are excited about the opportunities in front of us as we continue to build Veralto, and help customers solve some of the world's biggest challenges in delivering clean water, safe food and trusted essential goods. That concludes our prepared remarks. And at this time, we are happy to take your questions. Operator: [Operator Instructions] We will take our first question from Deane Dray with RBC Capital Markets. Deane Dray: Since we're at the start of the year, I think it's a good place to get synced with the water sector macro. Just what's your expectations on muni CapEx? And just related, any differences in demand trends from your municipal customers versus the industrial -- broadly industrial, commercial power, electrical, semiconductor and so forth? So just start us there, if you could, please. Jennifer Honeycutt: Yes. Thanks for the question, Deane. What we see in the water quality markets is really steady demand. And I would say that we see that both across muni and industrial markets. Relative to your CapEx question, we are relatively insulated from fluctuations in CapEx funding cycles. As you know, 60% of our business is recurring revenue. We sit in the high end of the value chain where we are integral to the operation of the customer's process. They can choose not to use us, but the cost of failure, or the risk of failure to them is going to be high. So highly sticky business needed to continue to deliver clean water. And so we feel good about our position there. Relative to the demand between muni and industrial, we see pretty good opportunities on both sides. Every year, we always see some fluctuations in which industrials are up or down. Currently, we're seeing strong read-through here in the industrial markets that really support data centers. So data centers themselves, precursors, which would include semiconductor, mining and power as well. So strong growth, as we had mentioned in our prepared remarks relative to those industrials. And then on the muni side, government funding continues to flow. So feel good about demand in both cases, and I think we're well set up here in 2026. Deane Dray: That's really helpful. And then just a quick follow-up. It's come up in a number of calls across the sector regarding DRAM. Given across both of your businesses and the level of automation, are you seeing any pinches in supply or pricing? And could you size that for us, if you could? Sameer Ralhan: Yes, Deane, this is Sameer. I'll take that one. No, our exposure actually in dollar terms is very small to the DRAM side. So as we kind of look at it and size it, we don't expect it to be material at this point. Operator: Our next question comes from Andy Kaplowitz with Citigroup. Andrew Kaplowitz: So maybe this one is for Sameer. Your guidance of 50 basis points of margin expansion ex In-Situ, which is, I think, right in your incremental margin algorithm. But maybe you could give us some more color into the puts and takes you're seeing? Because I think you'll be lapping tariff-related headwinds. I think you said in the past like by Q2. But Deane asked a question on inflation. It's out there in different areas and there are investments that you're making In-Situ. Is that kind of front-end loaded? Any more color would be helpful. Sameer Ralhan: Yes, Andy. As you kind of look at the core business, we are guiding towards 50 basis points of margin expansion. A big chunk of that is actually pricing is driving it. And as you mentioned, some of the headwinds from the tariff-related friction that we had in 2025, those things will start rolling off. We're going to start seeing the impact of that in the second half of 2026 as we kind of look at it and model then. That's really offset by some of the investments that we continue to drive. You heard from Jennifer a little bit earlier about the investments we're making the services as we're trying to expand that part of the business. And also just on the sales side as we continue to increase feet on the ground as we kind of think about the sales side. So it's really the algorithm for the core business is steady as for the long-term value-creation algorithm. So there's no changes over there. We feel pretty confident on that side. In-Situ, a really great acquisition for us as we kind of get through some of the initial costs, especially in the first half of the year to integrate and some of the costs tied to the realization of the synergies. Those are the kind of really things that are driving the upfront impact. And on a net year basis, that's going to be 25 basis points. So those are some of the puts and takes as you kind of think about the margin expansion. Andrew Kaplowitz: Got it. That's helpful. And Jennifer, you mentioned data centers are strong. I know in the past, you said it's still a relatively small part of Veralto. But we've seen a wave of data center orders here over the last couple of quarters for a lot of industrial companies. Could we see the data center wave be sort of meaningful for you guys in growth in '26? Or is it still too small? Maybe you could elaborate on sort of your TAM, and, sort of, what's going on there for you guys? Jennifer Honeycutt: Yes, Andy, we don't size our markets publicly. And I would say that our sales into data centers are still relatively small. We wouldn't expect to see a meaningful contribution this year, although the aggregation of power generation, cooling towers, mining, semiconductor, right, it does start to add up if you kind of include all of the ancillary vertical markets that go with it. But data center specifically, again, small base of business, growing double digits, but not going to be a meaningful contributor to core growth this year. Operator: We will move next with William Grippin with Barclays. William Grippin: My first question here just was hoping to drill down into PQI a little bit and perhaps specifically, what you're seeing in that business as it pertains to this kind of high-protein boom that we're seeing. Could that really start to be a volume driver within PQI? And just any color there would be helpful. Jennifer Honeycutt: Yes. Thanks for the question. Our CPG market tend to be holding up really well. They're stable. We're not seeing any changes in demand patterns, good linearity across the 4 quarters. And within that, we've got solid demand across some of our new product innovations. UV laser, we've seen some good interest there. Relative to changes in terms of food products and package size and so on. Look, any time changes get made to what is being produced, it's generally a nice pickup for us, right? So the secular drivers around the proliferation of brands, the proliferation of SKUs, changes in package size, even regulatory influences, right, those are all positive drivers for our business there. So we absolutely feel good about changes to packaged foods to support changes in dietary requirements and so on. So I think on the coding and marking side, that's a volume game for us. So the more packages, the more coding and marking equipment and consumables that gets sold into that space. So as far as protein-intensive consumer packaged goods goes, I think we're well positioned to capitalize on that. William Grippin: Got it. I appreciate that. And then just one specifically on geographic performance in 4Q. If we're doing the math right, it looks like Western Europe may have actually been down year-on-year in terms of core growth. Do you have any color or commentary on the drivers there? Sameer Ralhan: Yes. If you kind of look at the Western Europe, really, Will, that's driven by the impact of the 3 days if you start looking on a year-over-year basis. If you recall, we saw pretty solid growth in the Q1 across the regions, especially in the Western Europe as well because we had 3 excess shipping days. That's really kind of driving the year-over-year comp as you can look at the Western Europe. There's nothing otherwise on that. So on a full year basis, we feel pretty good if you kind of look at the growth in the Western Europe, really great execution by the team on the Water Quality and the PQI side. Jennifer Honeycutt: Yes. Our recurring revenue business is really what drives that, right? So 60% of the business being recurring revenue is going to have a pretty big impact when you've got days fluctuation. We see that in the first quarter and the fourth quarter last year. Operator: Our next question comes from John McNulty with BMO Capital Markets. John McNulty: Maybe just digging into the guide a little bit. You're looking for mid- to high single-digit EPS growth. And yet your growth overall on the top line is kind of in line with what you've seen over the last couple of years when you put up double-digit EPS growth. So I guess, is there anything that gives you some pause either in the end markets or on the cost side that has you forecasting EPS growth that's a little bit more modest than what you've seen over the last couple of years? Sameer Ralhan: Yes, John, thanks for that question. Look, as we kind of look at the guide overall, maybe just, John, start from the top for the P&L, for the core growth perspective, we expect to be in the low to mid-single digit as we kind of came out of the year. I think it just makes sense for us to be prudent. At -- there's still some moving parts from the macro perspective. But underlying demands are pretty good and pretty, pretty solid. So we feel pretty confident on the demand side. But as you kind of move further down, we'll have the margin expansion of roughly 25 basis points, including the impact of the In-Situ acquisition, that really boils down to EPS growth in the mid- to high single digits. There's nothing material, John, anything on the cost side. So we'll have the top line growth and margin expansion, that's ultimately coming down. It's really -- the only other impact I would say on the EPS side is from the In-Situ perspective. It's going to be accretive to the earnings -- operating earnings from $0.02 per share. But there is a $0.04 dilution from the lack of interest income because of the cash being used. So that's kind of baked into the EPS as well. So that helps you do your math. John McNulty: Got it. Fair enough. And then just a question on the data center opportunity and the market. I think recently, it became more clear that there is an opportunity for warmer water cooling as opposed to refrigerated water cooling. Can you help us to think about if that changes the game for Veralto at all in terms of how they target and maybe benefit from the data center growth as we look forward? Jennifer Honeycutt: This is a great question, John. Liquid cooling tends to increase the need for Veralto solutions because it's really a smaller volume of water focused on high-purity fluids. And these need to be monitored along with ensuring sort of continuous chemical control and monitoring. So it doesn't really matter in terms of what the temperature of that water is. And even though in these cases where it's a closed-loop system, liquid cooling using less water, it's more valuable. You can think of it as more valuable water, right? So there's precision dosing to prevent corrosion and biofouling. That supports our ChemTreat business. You've got continuous monitoring of ultra-low range organics such as TOC. That benefits our Hach business. And then you've got high-purity disinfection needs there, which benefits our Trojan business. So we do get this question from time to time, and it's really not a function of the temperature of the water. It's the fact that water is used at all. And the lower the volume of water you use, the higher the need to have precision control over that water to make sure that, that process is running well and not creating problems and other kinds of quality risks for the data centers themselves. So that's the way to think about it. Operator: We will move next with Jacob Levinson with Melius Research. Jacob Levinson: You folks have done a couple of interesting bolt-on deals in the last 2 years. And I know you've got a new buyback authorization and the balance sheet is in a pretty nice spot here. But maybe you can just speak to your confidence in, maybe, getting some more deals across the goal line in '26. And any color around just the activity levels that are happening behind the scenes here. Jennifer Honeycutt: Yes. Thanks for the question, Jake. We feel good about the level of activity we've got right now in our M&A pursuits. We've got full funnels, both on Water Quality and PQI, and continue to work on a number of different opportunities, which we do believe are actionable. That said, we've got -- we're going to hold true to our discipline here in terms of making sure that we like the market, that we've got a top-tier asset, and that we can get it at the right valuation. We don't always -- there's a lot about that, that we don't control and timing tends to be a little bit episodic. But we are excited about what we have in the funnel. I do believe that we will be continuing on our M&A journey this year. And relative to share buybacks, that just gives us another lever here in terms of the way to return value to shareholders should we see a period here where we're going to be a little bit lighter in M&A. But I would say even with that program in place, it takes nothing away from our ability to transact on our aspirations here relative to M&A. Jacob Levinson: Okay. That makes sense. And just another one quickly on In-Situ. It seems like a pretty interesting asset. I'm just trying to get a sense of what the integration plan might look like. I'd have to imagine it's maybe a bit subscale and a lot of these private assets tend to need some help operationally or maybe just need to be larger. So maybe you can speak to where the low-hanging fruit is or the biggest opportunities that you see. Jennifer Honeycutt: Yes, great question. We're really excited about the In-Situ acquisition and certainly have plans to realize synergies on both the top line and the bottom line. I would say right out of the gate, we're most excited about the top line synergies, to be honest. We've got a good opportunity to accelerate growth. And as a reminder, In-Situ has grown 8% over the last 3-or-so years. We believe we can get that to low double digits here with the combination of the OTT portfolio. The thing that's so attractive about this is that they are complementary product portfolios. So In-Situ is strong in water quality. So that would be the analytics measurements and environmental water. And OTT is strong in water quantity, which would be level and flow. And together, the product portfolio really snaps together like LEGO pieces. So the combined product portfolio is going to give us strength going for complementary channels, right? In-Situ is predominantly a North American company, and so we've got the opportunity to leverage OTT channels outside the U.S., including Europe, Latin America and Asia. And then certainly, to your point, Jake, they're going to benefit from the VES tools, whether that's those being deployed on the factory floor for improved operating efficiency or those deployed for our commercial efforts and helping them really grow faster. We're going to also look to the cost synergy side of things. We will move in parallel with our top line synergy activity here, and these would fall into things that you typically expect. So VES on the factory floor, improving operating efficiency, we're going to have opportunities to leverage global supply chain and our procurement teams through purchase price variance and in-sourcing activities, and then just globalizing or optimizing the global resources. So a number of things there. The teams will be busy and running at breakneck pace, but I think we're really excited about the possibilities here. Operator: We will move next with Ryan Connors with Northcoast Research. Ryan Connors: I wanted to talk a little bit about the water segment. It seems like the growth has been there generally. Obviously, you've got some great secular themes behind that, but it does seem like the growth has been more price driven and that the volume growth has been a little more tepid. So can you just unpack for us what's it going to take in your mind to kind of unlock the volume growth in water given that you do have such compelling big picture themes behind it? Sameer Ralhan: Ryan, this is Sameer. Yes, as you kind of look at the water side, you're absolutely right. We feel really excited about the opportunity that's in front of us. The steady demand drivers, both in the muni and the industrial side continue. Overall, if you're going to unpack between industrial and the muni side, the muni side, actually, we've been doing really well. You noted some of those things on the pricing side, but the underlying volumes have been pretty good as well. Industrial side, I would say it's -- when you start looking at things like the data center ecosystem, as Jennifer said earlier, I mean, those kind of industries, be it semiconductor on the power, all the ancillary systems around the data centers, they are kind of helping us drive the volume as well. As you kind of look at our filings, you'll see a little bit of commentary around the chemical treatment side, which is the ChemTreat and the UV side. Those businesses are growing sort of solidly in the mid-single to mid-single-digit-plus kind of a range. And the muni business is a little slower grower, but it's a steady rock solid, as you know, given the stickiness of that business in the market. So overall, as you're going to start look long term, Ryan, we're in a really, really solid place. Now 2025, just with a 3-day dynamic that moved between Q1 and Q4 has made the numbers look a little bit odd. But otherwise, if you look on a full year basis, we're doing really well. Full year basis, volume -- Water Quality was up more than 3%. Ryan Connors: Yes. Okay. And then switching gears over to PQI. Also some great big picture themes there, especially with the combination now of Esko and TraceGains. But can you talk about how exactly you monetize that demand? Is it more subscriber licenses and existing accounts? Is it adding new accounts? Is it higher pricing for existing users? Just curious if you can give us some more color on better understanding how you actually convert that demand into revenue and earnings? Jennifer Honeycutt: Yes. So our Esko and TraceGains businesses together are growing really well in the software space, as you mentioned, on the back of some secular growth drivers relative to digitized workflows across food and beverage and things to that effect. These are SaaS-based businesses, right? So we've got recurring revenue in terms of the mechanics behind how revenue is recognized there. I would say one of the things that was so attractive about TraceGains is that they had a leading position in mid-market brands. Esko largely has the enterprise brands. And so the cross-pollination of the 2 allows the TraceGains channel to bring Esko into mid-market, and the Esko channel to bring TraceGains into enterprise accounts. So there is a fair number of new accounts, new business that we see there, and it's the fastest-growing sector is mid-market. But we also see product expansion happening. So Webcenter Go is kind of the backbone of Esko. We've now integrated the TraceGains AI offering into that backbone through a product called [ ComplAi ] that allows for automated AI verification of copied print in packaged goods. And as we mentioned in the prepared remarks, helps reduce errors -- transcription errors, costly product recalls and so on. So it's both menu expansion and its new customers. Operator: We will move next with Nathan Jones with Stifel. Nathan Jones: I guess I'll start with a fairly basic question out of the guidance. The low to mid-single digit is a pretty wide range. Can you talk about what would get you to the low end of that range, what would get you to the high end of that range? And then the 50 basis points core margin expansion, would that change if you were at the low end or at the high end, but can you do 50 basis points on low single-digit growth and maybe you get a little bit better than that if you get to mid-single-digit growth? Just any color you could give us on the width of that range. Sameer Ralhan: Yes. Nathan, thanks for that question. As you kind of look at the top line from a core growth perspective, low single-digit to mid-single-digit range, really, as we kind of come out of the year, the demand underlying patterns are pretty good, frankly, Q1 out of the gate, the order patterns are looking pretty good as well. So we feel pretty good about the business. But there's still things on the macro side, you always have to keep an eye on and it's just the beginning of the year. So we just wanted to have a guide that's a little prudent and a little judicious at this time. Overall, we feel pretty good about the business. As it kind of pertains to its impact on the margin side, you're absolutely right. Given the fall-through and the leverage you would expect on the system as we kind of move up, that should help us. But we do have flexibility to modulate some of the cost side as well, right, depending on whether we are trending on the low side or the high side. So I think it's good at this point to model in 20 basis points on the core side, but more to come as we kind of give the Q1 guide. Nathan Jones: And I guess my follow-up question on supply chain moves and some of the regionalization of footprint, Jennifer, that you talked about in your opening comments. Maybe a little bit more color around what's been done there? I know some of that was kind of a tariff avoidance kind of things, so might be okay regardless of tariffs. Is there incremental profitability that drops through from that, that contributes to the margin expansion and that maybe offset some price that maybe you don't take? Or just how you're thinking about your ability to keep that improvement in cost? Jennifer Honeycutt: Yes. I mean, principally, we initiated regionalization of our manufacturing lines and sort of regionalize our supply chain to certainly deal with the tariff environment that we are facing last year. As a reminder, these are all no-regret moves because we're effectively a light assembly house, right? There's no big capital monuments to replicate or move. And so it's fairly straightforward to kit up these lines and move them within a 6- to 9-month kind of time frame. And so far as what kinds of moves happened, our Videojet business had a fairly large China manufacturing footprint. We've diversified that footprint into the U.K., into Europe. We derisked our Trojan business in Canada by adding footprint into an existing -- or expanding footprint in an existing location here in the U.S. We've had some Hach product lines that have been diversified as well. So all told, they were close to a dozen line moves there to really get a setup for any kind of trade environment that we would be facing going forward that would be more restrictive given sort of the geopolitical dynamics. The things that we're working through now here are to make sure that we're not encountering any absorption issues, right? We got to make sure that those new line moves are up and running to full capacity and that we're operating efficiently there. So there's a little bit more work to do there. But again, these are no-regret moves. And to the extent that trade relationships continue to change, we just had one yesterday between the U.S. and India with -- that became favorable for us, right? So we're going to continue to be flexible and nimble and agile in how we approach the geopolitical tariff trade environment. And I think VES does a great job of serving us well here. Operator: We will take our last question from Brad Hewitt with Wolfe Research. Bradley Hewitt: Just curious in terms of what you're assuming for the price contribution to growth in 2026, both consolidated and by segment? And how much of that is carryover versus incremental pricing? Sameer Ralhan: Yes. Thanks, Brad, for that. Yes, if you're going to look at the pricing that we have modeled into the guidance in 2026, historical range is 100 to 200 basis points. You should expect us to be towards the high end of the range this year. Part of it is carryover, as you said, from the pricing actions that we initiated, but we are implementing price increases on top of that as well, just as part of regular cadence. So that will put us closer to 200 range -- basis points range. Bradley Hewitt: Okay. Great. And then as we think about organic growth phasing throughout the year, is it fair to assume organic growth accelerates each quarter through the year and then Q4 given the easy comp you're kind of comfortably in the mid-single digit zone? Sameer Ralhan: Absolutely, Brad, as you're going to think about this thing. Interesting thing is that you're going to look at the sequential sort of buildup of the revenue throughout the quarter, it's pretty much in line with the historical averages, right? 24% of the total revenue in Q1 that if you look at overall, just because of the 3-day impact, the comps will be a little bit of a headwind in the first half of the year, but they become favorable in the second half from that 3-day math. But otherwise, underlying demand patterns, there's no changes. Ryan Taylor: This is Ryan Taylor. We appreciate everybody joining the call today. We appreciate you sticking with us a little bit past the bottom of the hour here. As usual, I'll be around for follow-up questions over the next days and weeks. Should you have any, just reach out to me. And thanks again for joining our fourth quarter call. Operator: This brings us to the end of Veralto's Corporation's Fourth Quarter 2025 Conference Call. We appreciate your time and participation. You may now disconnect.
Operator: Good morning, and welcome to the KKR Real Estate Finance Trust Inc. Fourth Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jack Switala, please go ahead. Jack Switala: Great. Thanks, operator, and welcome to the KKR Real Estate Finance Trust Earnings Call for the Fourth Quarter of 2025. As the operator mentioned, this is Jack Switala. This morning, I'm joined on the call by our CEO, Matt Salem; our President and COO, Patrick Mattson; and our CFO, Kendra Decious. I'd like to remind everyone that we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in our earnings release and in the supplementary presentation, both of which are available on the Investor Relations portion of our website. This call will also contain certain forward-looking statements, which do not guarantee future events or performance. Please refer to our most recently filed 10-K for cautionary factors related to these statements. Before I turn the call over to Matt, I'll quickly go through our results. For the fourth quarter of 2025, we reported a GAAP net loss of negative $32 million or negative $0.49 per share. Book value as of December 31 is $13.04. We reported distributable earnings of $14 million or $0.22 per share, and we paid a $0.25 cash dividend with respect to the fourth quarter. With that, I'd now like to turn the call over to Matt. Matthew Salem: Thanks, Jack. Good morning, everyone, and thank you for joining us today. Before reviewing our company results in more detail, I would like to highlight several key achievements for KREF in 2025. First, we made significant progress strengthening our liquidity position throughout 2025. In March, we closed a 7-year, $550 million Term Loan B, which we later upsized and repriced in September, increasing the outstanding balance to $650 million and reducing the coupon to SOFR+ 250 basis points. During the year, we also upsized our corporate revolver to $700 million, up from $610 million. Second, we closed on our first loan in Europe for KREF. We have been strategically building our real estate credit platform in the region over the last several years. This transaction along with subsequent European investments in the fourth quarter represents an important milestone in that effort and positions us to capitalize on relative value across the U.S. and Europe. These transactions also serve as a foundation for continued geographic diversification. During 2025, we continue to experience healthy repayment activity, which totaled $1.5 billion, consistent with 2024 levels. We offset this with $1.1 billion of new originations and today, we are operating at the high end of our leverage ratio and targeted portfolio size. More than 75% of our new originations during the year were concentrated in multifamily and industrial loans, sectors where we continue to see resilient fundamentals and attractive risk-adjusted returns. Multifamily remains our largest property type exposure. And given our significant exposure to Class A product, we continue to observe strong underlying performance across the portfolio. We remain focused on maintaining and selectively growing the portfolio within on-theme asset classes and top tier MSAs. Looking ahead, 2026 will be a year of transition for the company. Through execution of our business plans, we have positioned much of our REO portfolio for liquidity this year. Additionally, we are going to implement an aggressive resolution strategy for a significant portion of our watch list assets and select office assets. The overall goal is to compress the discount of our stock price to book value and more quickly unlock approximately $0.13 per share embedded in our REO assets. However, this strategy will also put additional pressure on earnings until we're able to fully execute the plan. As it relates to this approach, we will need to be balanced on a few assets. To that end, I want to touch briefly on our Mountain View asset. The market continues to improve meaningfully, and we remain engaged with tenants. If we were able to sign a lease in the near term, we believe the optimal strategy will be a monetization post 2026, given a number of factors, including anticipated CapEx and tenant improvement work. Finally, I want to comment on our dividend. The dividend is something the Board is actively evaluating as part of a broader capital allocation discussion, particularly as we work through a transitional year for the portfolio. Our priority is to make disciplined decisions that balance near-term earnings visibility and long-term shareholder value. With that, I'll turn it over to Patrick. W. Mattson: Thanks, Matt. Good morning, everyone. Looking at risk ratings. During the quarter, we downgraded the Cambridge Life Science and San Diego multifamily loans to risk rating 5. As a result of these developments, we recorded total incremental CECL provisions of $44 million during the quarter. Subsequent to quarter end, we entered into new modification discussions on our Boston Life Science loan, which is currently risk rated 3. And while the loan continues to make contractual monthly interest payments, we anticipate a ratings downgrade and CECL increase in the first quarter. New originations in the fourth quarter totaled $424 million, which surpassed repayments of $380 million. In 2026, we expect full year repayments of over $1.5 billion, exceeding repayment activity in each of the last 2 years. We'll continue to originate new loans while maintaining our target leverage range alongside other capital allocation strategies. Turning to financing and liquidity. We ended the year with near record levels of liquidity totaling over $880 million, including $85 million of cash on hand, another $74 million loan repayments held by the servicer as well as $700 million of undrawn capacity on the corporate revolver. Total financing capacity was $8.2 billion, including $3.5 billion of undrawn capacity. Leveraging our internal KKR Capital Markets team, we added to our non-mark-to-market capacity during the quarter and 74% of our financing remains non-mark-to-market. We remain well positioned with no final facility maturities until 2027 and the corporate debt due until 2030. The weighted average risk rating on the portfolio is 3.2. Our debt-to-equity ratio is 2.2x, and total leverage ratio is 3.9x, consistent with our target range. Finally, during the quarter, we repurchased over $9 million of common stock at a weighted average share price of $8.24 for the full year 2025, we repurchased $43 million of common stock at a weighted average share price of $9.35, which resulted in approximately $0.32 of accretion to book value per share over the course of the year. As of the end of the fourth quarter, we have approximately $47 million remaining under our current share buyback authorization plan. Our strong liquidity position provides meaningful flexibility in managing the portfolio, allowing us to thoughtfully allocate capital across a range of opportunities, including share repurchases and new originations. Overall, we remain well capitalized and focused on repositioning the loan portfolio for improved earnings. With that, we're happy to take your questions. Operator: [Operator Instructions] The first question comes from Tom Catherwood with BTIG. William Catherwood: Matt, you talked in your prepared remarks about accelerating resolutions on watch list and REO assets. If KREF executes on this plan, and the stock doesn't materially pull to par if there's just a structural discount for monoline commercial mortgage REITs. Are you willing to take an approach similar to what ARI announced last week and look to revamp your business totally? Matthew Salem: Tom, I appreciate you joining us, and thank you for the question. I guess a couple of things there before I have addressed the ARI transaction. I think, first of all, we made a lot of progress on the REO, which is kind of why we're at this point today. We feel like we're in a good position on much of that portfolio to be able to liquidate that over the course of this year. And then obviously, start to think about our Mountain View asset, getting a lease done there and being able to execute that business plan more fully post 2026. So I think we've made the right decisions in terms of just being patient, taking good real estate back, and now we're at the point where we either advance the business plan, liquidity has returned and we can get, obviously, some monetization activity there. The question you're asking, I think, is a good question, and it's kind of why I think we're putting a second phase of this plan in effect, which is let's just not deal with only the REO where we've had progress. Let's also deal with some of the watch list and maybe some other of our select office assets so that when we are through this portfolio strategy, we could show up with a relatively new origination portfolio. A lot of the REO has been cleaned out, and we don't have some of the exposures that the market is I think, focused on right now. So that's really the goal here. And my expectation is if we show up with a clean portfolio, a newer portfolio that the market will price it, I think the market is efficient and will recognize the steps that we've taken and the new portfolio that we've been able to create at that moment. But we'll have to evaluate that. Obviously, when we get to that moment in time, and there's a good amount of distance between now and then. So that's how I would say that. I have optimism that won't occur, that we will get recognized for the portfolio, we're going to create here. As it relates specifically to the ARI transaction, listen, I think it's an interesting transaction for sure. It definitely shows how the private markets value some of these portfolios compared to what the public markets do. But I don't want to draw any direct correlation to KREF. I think we've got our business plan. We've got our strategy, and we're really focused on implementing that. William Catherwood: Appreciate those thoughts, Matt. And maybe sticking with this kind of overhaul of the portfolio. When we get to the end of '26, what does success look like? I mean you mentioned Mountain View likely carrying on into '27. Is it all the REOs as of right now is resolved? Is it the watch list is fully resolved? Is it office has been reduced by 50%, some number out there. Like what does success look like internally? What are those targets by the end of '26. Matthew Salem: Yes. And I appreciate the question. I would say a couple of things. One, I think in our next call, I think we'll be able to really walk everyone through and articulate what the end goal is here. Certainly, when we're looking at it today, if you think about our watch list, which we highlight, I think, on Page 12 of our supplemental, I think the goal is to get through and monetize or liquidate the vast majority of that watch list. The reason I don't say all is because I think some of those life science assets, one, we're in the process of modifying and so we should get to a basis where we're comfortable moving forward on those or two, we just have to evaluate the liquidity in that particular sector. But certainly, when we think about the office on our watch list, we have one multideal on there, the multideal on there, like the goal is to move through those and then I think to your point, on office, I think we're going to have to start making a distinction on office because we are making new office loans that we think are really high quality, but there's certainly some of our legacy deals that we wouldn't put in that same that same bucket. And so I think the goal would be to, at the end of this year, be able to articulate, hey, we think from an office portfolio perspective, we've kind of liquidated everything that we see a problem on. We'll be able to identify any future issues that we may see. So create a lot of clarity there. On the REO, I don't expect much to change there as it relates to what we've talked about on the last couple of earnings calls. When you think about the buckets that we've put our REO in, which is I think listed on Page 25 of our supplemental if you want to follow along. We have a number of assets -- excuse me, Page 15. We have a number of assets that we put in the short-term bucket. The goal for those would be to liquidate over the course of this over the course of this year, either partially or fully. Obviously, some of these are selling units or selling lots. So I'm not sure we'll get through 100%, but we'll at least be making good headway there. Those assets are the West Hollywood, luxury condo, Portland, Oregon redevelopment, the Raleigh, North Carolina multifamily and the Philadelphia office. So those are all the short term, and we'll be able to give progress updates over the course of the year on those. Medium term, I'd put more in the Mountain View asset, which we've talked about, right, get a lease done on that. Again, that market is extremely healthy right now, and we are engaged with tenants in the market there. And then I put in this last category, the longer term, more of the life science, right? So we've got the Seattle asset, and we'll likely go to a title on our Boston loan that's on the watch list right now in the life science sector. So a little bit of background there, but same buckets, like vast majority coming out this year, and then if we can execute on Mountain View in the intermediate term, and we've largely cleaned it up with the exception of a couple of these life science deals, which we'll see, right? We were pretty patient on some of our office, and that's worked out very well, I'd say, just the market has come back. It's healthy. What we have in the portfolio from an REO perspective in life science is extremely high quality. So to the extent that market comes back, I understand it's under pressure today. But forever is a long time, and if those markets come back, certainly, we could benefit from that as well. Operator: The next question comes from Rick Shane with JPMorgan. Richard Shane: When we sort of run back at the envelope, we're looking at over $800 million of loans that are of assets that are either REO or on nonaccrual. We then -- there's the development in terms of migration, adding the new loan to the watch list this quarter. Is that going to be in nonaccrual as well? And are we could be in a situation where let's call it, 20% of the portfolio is under earning in 2026 or as a negative carry. W. Mattson: Rick, it's Patrick. I'll take that question. I think in terms of like specific numbers, I don't have sort of that bucket. I will say this, on things like the asset that we indicated will likely downgrade. That asset is paying its contractual interest. We expect in the near term that you will continue to pay contractual interest and so from an earnings standpoint, we're not seeing any degradation from that. What's driving it in the near term are some of the REO assets we talked about, and we'll give more color in terms of the timing of the resolution in the subsequent quarter, when we can get some of that back and when we can actually convert that into earnings assets. So clearly, we're being dragged down by some of those assets, but we do think there's a near-term opportunity to pull that forward. On some of these other assets that are on the watch list, and we can sort of -- you can kind of go through each of these, but in general, we're seeing contractual payments being made here. So it's certainly impacting us, we certainly think there's a lot of upside, as we've indicated before. We think there's around $0.13 from getting these REO assets back and converted into performing loan assets. But that's kind of what I would say on that. Richard Shane: Okay. And again, I assume, look you guys talked about dividend policy, and I heard what I would describe as sort of rational financial analysis as opposed to focused on market sentiment and just maintain a dividend for the sake of that, I'm assuming that, that is an indication that as we go through the year, you guys are going to be looking at all of this. And we should be thinking about our dividend very much in the empirical way as opposed to sort of some sort of gauge sentiment. Matthew Salem: Rick, it's Matt. I think that's a fair articulation of how we're thinking about it now, which as we kind of look through the course of the year, like I said, and we try to rebalance this portfolio, trying to understand the near-term impact of earnings there. Richard Shane: Matt, I think fair was a good adjective, but clear or straightforward probably wasn't a good adjective to describe my commentary, but thank you for answering the question. Operator: The next question comes from Jade Rahmani with KBW. Jade Rahmani: To touch on Tom's question and maybe the underlying issue is that the bid for assets or loans that KREF is originating seems to be stronger in the private credit market than the required yield that mortgage REIT investors require. So there could be an arbitrage there. As a result, perhaps management should pivot its focus to value creation as the top priority, which could include loan sales, share repurchase, unlocking potential gains in the portfolio if there are some such as Mountain View REO. And perhaps that would buy time to reposition the company rather than go with the strategy you've been undertaking which might still result in KREF trading at this very sharp discount to book value. Otherwise, accelerated dispositions could materialize the book value that the market ultimately is projecting, which clearly requires significant losses on the Life Science, in particular, but perhaps elsewhere in the portfolio. So just wanted to get your thoughts on that potential pivot and if you see that as something management might undertake. Matthew Salem: Thank you, Jade. Yes, it's Matt. Let me unpack that a little bit. I guess when I heard you go through the list of things that we could accomplish or strategies we could follow. I think we are doing most of those. Certainly, when we think about and I mentioned like watch list, select office assets, repositioning the portfolio, I think we would -- part of that will be loan sales, 100%. I think when we think about gains on the REO, unlocking those gains, completely agree. We should try to accelerate those as much as possible, which we're doing, and I think which our plan will incorporate. A lot of it comes back to -- when is the optimal time to sell, and we don't want to give money away, the market has certain expectations, when it buys an asset, when I think about something like Mountain View, well, even if we sign a lease, there are certain things that we'll have to do to get that tenant in and occupying et cetera, for the lease to go effective. So there are certain moments where we're going to create more value and liquidity that we have to be mindful of. And so we'll do that. The last piece, share repurchase, we've been repurchasing shares. So I think that certainly has been part of our strategy as well So I do think that we're evaluating everything possible. I think the last -- the last point that you might ask as a follow-up question, well, what about performing loans? Why not go and sell those? And certainly, we could add that and continue to evaluate a performing loan sale. But right now, I'd say we're focused on really getting the portfolio in a place where the public markets can trade us in the right way because all these portfolios, whether it's ours or some of our peers, we all have some legacy assets. And that's not to say that they're all going to become watch list or they all become losses, but perhaps they're just higher loan to value, right, than where we started, of course, values are down a lot in the real estate space. So maybe that's what the market is telling us. And as we reposition the portfolio and as the percent of newer loans on adjusted basis comes into that portfolio, then these stocks can compress. So I'm not convinced that this is again forever, like these stocks are always going to trade like this. We've just gone through probably one of the most challenging real estate environments, certainly in my career. And as we get through this, I expect the market will be rational and reprice these portfolios. Jade Rahmani: The eye of the storm seems to be life science. When you listen to Alexandria's earnings call, it's clear and they are best in class at this. They expect a very long timeline to turn around this sector, 5 years plus. And AI is also going to re havoc on this sector. So you talk about putting in place modifications to get basis to a point of comfort, the weighted average basis today is $830 a foot. Do you have in mind the range or some benchmark that you could provide, which we should think would be a reasonable basis to take this outsized risk beyond the investor horizon that people are contemplating? Matthew Salem: Yes. I think a couple of things on the life science sector. We understand and certainly follow it closely. We understand it could be a very long, a long road here. At the same time, I remember when we foreclosed on Mountain View, everybody in the market, including the most sophisticated brokers told us it was going to be 5 years before we could get anything done there. I'll take the under on that by a few years, and I'll take the over on the value creation that we make there. So things change. And as it relates to technology and AI and particularly as it applies to life science, I'm not convinced that's a negative for the life science sector. I think it could be actually quite a positive in terms of the development and need for development of new drugs and need for new lab space. So kind of we'll see how that plays to the system. I think we're eyes wide open, though, we need to get to a lower basis, and you've seen us doing that. I think we apply the same thing to our life science as we do to all the other modifications that we're doing, which is unless the sponsor is willing to make a significant capital commitment to delever us to a point where we feel comfortable, then usually, we'll either go to REO and sell it. But in the case of our -- some of the challenges that we're dealing with now and some of these downgrades recently, we do expect our sponsors to commit significant capital to pay us down. And in return, we'll likely have to do some type of hope note around that. But I don't want to talk specifics as we're in the middle of some of these negotiations right now. But in general, we've been bringing our basis down in a pretty significant way, again, not just through hope notes, but also through principal paydowns and borrowers coming out of pocket and recommitting to the assets. Operator: The next question comes from Gabe Poggi with Raymond James. Gabriel Poggi: I want to kind of piggyback on what's been asked already, but kind of go a different angle and how do you guys comment through the KKR lens as it pertains to just broad demand for one commercial real estate credit and then commercial real estate in general. Matt, to your point you just made, right, timing is in the eye of the beholder and can change in 5 years to a shorter term. But just what's the bigger KKR machine seeing as it pertains to global demand for domestic real estate, both on the credit side and the equity side. I think it will help us kind of get an angle as to the true value here or value creation probability if we take a little bit longer-term tact. Matthew Salem: Thanks, Gabe. I appreciate the question. So right, let's put our KKR hat on for a minute here. I would say that we are seeing increased allocation to both real estate credit as well as real estate equity. I think the sentiment has clearly shifted from a relative value perspective. A lot of institutional allocators of capital, I think we're looking at their overall portfolio and thinking about where those values have gone over the course of the last 5 years and seeing that real estate has been relatively stagnant. And so you're starting to see a shift back into that sector. Now I would say it's still predominantly in the opportunistic and value-add parts of the market within equity. So you haven't fully seen, so that core money come back in or that core plus money, although I could see early signs of it, but I'd say most of it is in that opportunistic value-add sector. So people are allocating velocity is starting to come back a little bit in the market. I think we've all seen that some sales starting to go through. When we think about our pipeline still predominantly refinance on the lending side, but it's -- there's more acquisitions that we're seeing, which means lots of capital is increasing funds returning capital, and that money typically gets recycled back in the fund. So that reset, I believe, is beginning to happen. On the real estate credit side, same comment true. We are seeing increased allocations to real estate credit. I think we've been in a little bit more favored piece of the market than equity for a while now as just allocations to private credit overall have been increasing over the course of the last handful of years. Now I think there is a very tangible relative value discussion happening around not just real estate credit, but asset-backed as well and particularly infrastructure also from a sense that how do people may be fully allocated to corporate credit, maybe corporate credit has other potential challenges in those portfolios. So how do I diversify away from that, but still be in a credit exposure, still get -- take advantage of the yield and the safety that credit offers in today's market. So we've seen certainly a pivot into real estate credit. The private funds are raising not just us, but other -- our peers as well, I think are raising a significant amount of capital in this space and my expectation is that will continue going forward here. Operator: [Operator Instructions] The next question comes from Chris Muller with Citizens. Christopher Muller: So we have a couple more rate cuts behind us now in futures are suggesting another 2 cuts this year. I guess the question is, have those cuts increased interest in your guys' REO assets at all? And I guess what I'm really trying to get at is, have those cuts narrowed the gap between buyers and sellers? Matthew Salem: Thanks, Chris. It's Matt. I do think that these rate cuts are helping liquidity in the market. I don't know if it specifically translates to the liquidity we're seeing, but it's certainly part of it. But I think overall, the sentiment for real estate right now is pretty positive. There hasn't really been a lack of buyers in the market. I think there's a lack of sellers personally. Sellers at a price, right, sellers at an opportunistic price, which is why we're seeing a lot of our activity more in the refinance part of the market than the acquisition part. Because you have owners of real estate that own a really good property. That property likely is performing fine from an occupancy and cash flow perspective outside of like small pockets where you have some oversupply, you may have a sponsor that owns it at a higher basis than they'd like given just value decline since rate hikes in 2021. And so we're seeing our sponsors really play that forward refinance by time where supply really drops off and they can raise rents and grow their equity value back. So that's the overall market. So as we think about selling our assets, particularly on our REO, I do expect there to be liquidity and unrelated to maybe the rate cuts, we're seeing more liquidity in the office sector, right? Some of those assets that we've taken back or on the watch list like didn't historically have a lot of liquidity, just given the uncertainty market there has found some stable ground, and you're starting to see real liquidity in that sector. Again, I'm not sure it's directly related to rate cuts. I think it's more about just time and seeing where leasing is shaking out and finding some stability in the overall occupancy and leasing market. Christopher Muller: Got it. That's very helpful. And that's a good segue into my next question on office. And you touched on this a little bit, Matt. But we haven't really seen many new office loans in recent years. So can you guys just talk about your view on that sector? And what makes an office loan attractive these days? Matthew Salem: Sure. I'd say our borrower is still high. Jade asked the AI question. Like certainly, we think there's potential volatility ahead as it relates to technology in real estate. So we need to continue to be mindful of that. The opportunity, I think, is on -- if you can lend on newer, high-quality assets, and especially for someone like KREF on stabilized cash flows like leased or mostly leased assets with long-term leases in place, that's really where we're seeing an attractive opportunity today. So you're not really taking a lot of leasing risk or reposition risk, you're going to have this stable cash flow in place, you're in a good market. You can see a lot of leasing demand and velocity within that market, and you're in one of the top buildings within that market. I think that's really where we're focused. And there's a substantial amount of data, I think, that can prove not only is there liquidity for in the capital markets for owning real estate like that, but there's also a lot of leasing demand as well. So it's kind of an interesting opportunity for us where we don't have to take a lot of repositioning risk. We can just lend on really high-quality real estate that's already leased. Christopher Muller: Got it. Very helpful. And if I could just squeeze one more quick one in. Should we expect originations to mostly be in line with repayments as you execute this more aggressive resolution strategy? Or could we see some net portfolio growth in the coming quarters? Matthew Salem: Yes. I would think about it as -- really need to look at it through 2 lens. One is repayments and recycling that capital, I think is the right to answer your question, yes, we'll how to recycle that capital into new loans. The second piece is just making sure we're staying within our targeted leverage ratio, right? Those are the 2 things that we're balancing. Christopher Muller: Got it. So REO sales may be the missing piece of that puzzle there? Matthew Salem: Yes. And as we liquidate REO, we'll be able to increase portfolio size. It would be the other piece of that as well, you're right. Operator: And we have a follow-up from Jade Rahmani with KBW. Jade Rahmani: On Mountain View, could you quantify how much dollars you expect to put in? And do you see a potential gain there? Matthew Salem: Jade, it's Matt. I don't think, we don't have a lease yet. I don't think we'd want to comment on potential CapEx, TI, et cetera, until we have a lease. At that point in time, when we have the final numbers, we can certainly go through that. The answer to your second part is everything we're seeing today, I'll comment again, we don't have a lease done. But everything we're seeing today would suggest that I think we've got significant value in that asset above where we're carrying it today. Jade Rahmani: Okay. That's good to know. And then office, there's a couple of 2021 and early 2022 vintage risk-free loans. I'm not sure if that's what you're referring to in your office comments, including Washington, D.C., Plano and Dallas. So just if you could comment on that. Matthew Salem: Yes. And I think we can take everybody through this again in more detail next quarter. I guess a couple of things. One, not all of our -- we're not worried about kind of like all of our office 3 rated loans, to be clear. Like you called out some of the Dallas assets, like I'd expect those assets are perfectly fine, and we have DC assets that are totally fine. So I expect to get -- we're going to get a fair amount of repayments in our office portfolio this year from that seasoned piece from the 2021 or earlier. So I wouldn't look at it as though we're looking at each particular asset. I think most of them are going to get repaid. To the extent we're not going to get repaid, we may just choose to note sale those or recut a deal with the borrower, et cetera, to make sure that we can get on a call and have that portfolio -- that piece of the portfolio reduced. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jack Switala for any closing remarks. Jack Switala: Well, great. Thanks, operator, and thanks, everyone, for joining us this morning. You can reach out to me or the team here with any questions. Take care. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to The Hanover Insurance Group's Fourth Quarter Earnings Conference Call. My name is Nick, and I'll be your operator for today's call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva. Please go ahead. Oksana Lukasheva: Thank you, operator. Good morning, and thank you for joining us for our quarterly conference call. We will begin today's call with prepared remarks from Jack Roche, our President and Chief Executive Officer; and Jeff Farber, our Chief Financial Officer. Available to answer your questions after our prepared remarks are Dick Lavey, Chief Operating Officer and President of Agency Markets; and Bryan Salvatore, President of Specialty Lines. Before I turn the call over to Jack, let me note that our earnings press release, financial supplement and a complete slide presentation for today's call are available in the Investors section of our website at hanover.com. After the presentation, we will answer questions in the Q&A session. Our prepared remarks and responses to your questions today other than statements of historical fact, include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements can relate to, among other things, our outlook and 2026 guidance for level of profitability and premium growth, economic conditions and related effects, including economic and social inflation, tariffs as well as other risks and uncertainties such as severe weather and catastrophes that could impact the company's performance and/or cause actual results to differ materially from those anticipated. We caution you with respect to reliance on forward-looking statements and in this respect, refer you to the forward-looking statements section in our press release, the presentation deck and our filings with the SEC. Today's discussion will also reference certain non-GAAP financial measures such as operating income and accident year loss and combined ratios, excluding catastrophes, among others. A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release, the slide presentation or the financial supplement, which are posted on our website. With those comments, I will turn the call over to Jack. John "Jack" C. Roche: Thank you, Oksana. Good morning, everyone, and thank you for joining us today. Our outstanding fourth quarter results capped a record year for The Hanover, a year marked by disciplined execution and strong engagement across the enterprise. Our performance in the quarter and in the full year is a testament to our agility and operational excellence and also to the power of a strategy built to provide resilience, adaptability and long-term value creation. We delivered excellent margins while growing with intention. In markets where competition intensified, we remain disciplined, prioritizing profitability and quality risk selection. At the same time, we leaned into segments with attractive margins and favorable risk profiles. This balanced targeted approach enabled us to successfully navigate complex markets with confidence and clarity. In addition, we continue to invest in a strategy that sets our company apart from our competitors, building out our product and service capabilities, enhancing our technology, strengthening our agency partnerships and attracting and developing top talent. These investments have sharpened our competitive edge and have positioned us to capitalize on opportunities in any market environment, driving sustainable growth and profitability. From a financial perspective, we achieved one of the best fourth quarters in our 30-year history as a public company with record quarterly operating earnings per share. For the full year, we delivered an all-time high operating return on equity of 20%, along with a new record for annual operating earnings per share. While we benefited from favorable weather in the fourth quarter and the year, we also generated strong underlying profit. The improvements in our underlying performance are the result of disciplined portfolio management and underwriting, building on the margin work we've been driving for the last few years as well as the skilled and thoughtful management of our investment portfolio. Now let's look at our operating performance by segment, beginning with Personal Lines. Our Personal Lines team continued to deliver outstanding profitability during the year, a direct result of the decisive actions we've taken and the strong execution across our business. We've materially elevated the resiliency and performance of our portfolio through pricing, changes in terms and conditions and targeted deconcentration actions in the Midwest. These actions are driving stronger and more sustainable profitability while positioning us to deliver continued growth, balanced risk exposure and sustainable long-term returns. Personal Lines net written premium growth increased to 4.4% in the quarter with full year growth of 3.7%, primarily driven by pricing. Retention remained relatively stable, highlighting strong customer loyalty, the differentiated value of our bundled product offering and the support of our agency partners. And while rate is normalizing from historically high levels, we are very confident in our ability to sustain strong margins. Our Personal Lines team continued to advance our diversification strategy, focusing our growth in 11 key states where we have identified compelling profitable expansion opportunities. Overall premiums in these states grew approximately 8% in the fourth quarter compared to 3% in all other states with new business seeing strong momentum in these diversification states. The momentum we have established across the business, coupled with our targeted actions, has also reduced the relative weight of Midwest business in our portfolio, reducing its share of our total premiums by approximately 4 points since the beginning of 2023. While competition in monoline auto markets seems to be intensifying, differentiated offerings like bundled accounts and our prestige product creates significant opportunities to advance our market penetration and leverage our distribution strategy. As we look ahead, our Personal Lines business is well positioned to continue to deliver steady, high-quality performance and growth, backed by solid margins, our effective whole account strategy, disciplined execution and our geographic reach. Moving now to Core Commercial. This business continued to deliver solid profitability for the quarter and the year supported by active portfolio management and disciplined pricing. While the market environment has become more competitive in select sectors, we have responded with greater precision and discernment, directing our efforts towards opportunities that meet our return thresholds. Our Small Commercial franchise continued to deliver a strong performance on both top and bottom lines, with net written premiums increased by nearly 5% in the quarter and for the full year. Renewal metrics remain favorable in the business as well with strong retention and double-digit price increases. New business was very healthy with double-digit growth, a clear reflection of our market leadership and the strong commitment from our best agents as we pursue more targeted offense. Small Commercial has meaningful barriers to entry, and our competitive advantage is well established, anchored in an efficient service model, strong brand recognition with agents and a robust product offering that blends point-of-sale capabilities with traditional underwriting expertise in the higher end of Small Commercial. During the year, we expanded our distribution capability through strategic and thoughtful new agency appointments and increased engagement with more account managers throughout our existing agency relationships. Our Workers' Compensation Advantage product is now live in 17 states with a national rollout targeted by the end of 2026, making it even easier for our agent partners to place new business and to transition books of business to us as markets consolidate. Moving on to middle market. Despite experiencing some softening property market conditions, underlying growth accelerated sequentially to 2.6% in the fourth quarter. Our proven strategy in middle market centers on managing the business at a granular level with focus on sectors where we can truly differentiate ourselves. Middle market rate and retention reflected crisp execution in the quarter with rates and terms aligned to the underlying environment and the desirability of the risk. Renewal pricing decelerated modestly in the fourth quarter, driven primarily by property lines. Even with such pricing moderation, earned pricing continues to meet loss trends. We continue to exercise discipline in this market, walking away from underpriced new business as rate and risk selection remain critical to our success. As we adjust to more dynamic market conditions, we have several levers to accelerate profitable growth in middle market. We are doubling down on high-margin expertise-driven segments such as technology, human services and manufacturing. We are deploying our enhanced underwriting work bench, which includes additional automation and pricing tools for underwriters to strengthen decision quality and improve productivity. And we are transitioning to an enhanced field underwriting model to ensure that we deploy strong expertise while adjusting to evolving agency operating models. Overall, our Core Commercial business is positioned to deliver top line improvement in 2026, led by continued growth momentum in Small Commercial in a market that remains overall rational and stable. Turning to Specialty. This segment continues to deliver consistent and strong profitability through expertise-based underwriting, targeted risk selection and disciplined execution. We are taking targeted rate actions and deploying margin selectively to retain and grow our high-quality book of business while staying close to loss cost trends. Granular policy design and improved terms and conditions continue to also help offset moderating rate trends. Premium growth in Specialty moderated to approximately 4% in the fourth quarter adjusted for reinstatement premium, reflecting heightened competitive pressure across property lines, which impacted our Hanover Specialty Industrial Property and to a lesser degree, our Marine business. Importantly, market conditions remain very constructive across most other specialty segments with nice resiliency in the smaller account space, which represents the vast majority of our book of business. Excess and surplus lines continued to deliver strong double-digit growth, and we enter 2026 with a very strong and experienced team in this segment. Our new AI-powered submission triage is delivering nicely. Our risk appetite is expanding in targeted areas, and we are well positioned to benefit from tightening capacity in parts of the market where we have deep expertise and strong appetite. Management liability growth accelerated in the fourth quarter due in large measure to pricing stabilization, strong growth in our Financial Institution segment and an updated admitted asset manager product launched in the fourth quarter. More broadly, across professional and executive lines, our enhanced operating model is improving quoting speed, responsiveness and agent engagement, supporting profitable growth as market conditions evolve. Surety delivered robust double-digit growth in the quarter as we benefited from the growth in some commercial surety niches and from added tech capability to write E&S bond products. We are also driving meaningful efficiency gains through technology upgrades and process refinements that are speeding decision-making and enhancing underwriting quality decisions. And at the same time, we've strengthened risk selection and pricing segmentation, which are important contributors to the margin durability we are seeing across Specialty. Overall, Specialty remains a powerful lever for growth and ROE expansion, supported by our team's deep expertise, disciplined underwriting and differentiated earnings across market environments. As we close the books on 2025, ending the year with outstanding results and a solid foundation, we begin 2026 poised to build on that strength and to accelerate our progress. Our portfolio is stronger, our execution is sharper, and we have the operating leverage and discipline needed to continue to deliver attractive returns as we accelerate top line growth. We've built businesses that are resilient, adaptable and positioned to win in any market through underwriting excellence and operational discipline. In closing, I want to thank and recognize our employees for their dedication, our agent partners for their collaboration and our customers and our investors for their trust in us. With that, I'll turn the call over to Jeff. Jeffrey Farber: Thank you, Jack, and good morning, everyone. We are very pleased with our exceptional performance and strong execution in both the fourth quarter and for the full year, headlined by several records as our momentum continues to build across every major area of the business. We wrapped up the year on a high note with an excellent fourth quarter combined ratio of 89% as well as operating return on equity of 23.1%, one of our best results ever. Our full year combined ratio was a strong 91.6%, improving over 3 points year-over-year. Excluding catastrophes, our combined ratio in 2025 was 87.1%, decisively outperforming our original guidance for the year and 1.3 points better when compared to 2024. Catastrophe losses for the year of 4.5 points came in well below our original guidance, helped by generally benign weather and our property management actions, which continue to contribute positively to our CAT and ex-CAT results. Our expense ratio of 31.1% for the year improved 20 basis points from 2024, but was above our original expectations, driven primarily by higher variable agency and employee compensation, reflecting better-than-expected underwriting results and a much lower level of CATs. Additionally, we continue to make investments across the business to support future profitable growth. We remain committed to managing expenses carefully. Quarterly prior year reserve development ex-CAT, was favorable across each segment in both the fourth quarter and the full year. In Specialty, favorable prior year reserve development was 5.3 points for the quarter, with widespread favorability across multiple coverages. In Personal Lines, prior year reserve development was slightly favorable in the quarter. Homeowners' coverage continues to be favorable, while we made a minor increase to auto bodily injury in response to higher severity. We also updated our current year assumptions accordingly. And in Core Commercial, fourth quarter prior year reserve development was 0.3 points favorable, with very minor adjustments by line. As it relates to commercial and personal auto liability, we expect pricing to continue to increase in 2026. In line with our traditional reserving approach, we are being thoughtful and prudent in setting our loss picks in both prior and current accident years to ensure that our balance sheet remains strong. Turning to our underlying underwriting performance. We posted outstanding results and outpaced our expectations in both the quarter and the year. Our consolidated underlying loss ratio improved 1.1 points to 57.1% in the year with impressive improvement in Personal Lines, Specialty results that continue to exceed our expectations and strong underwriting margins in Core Commercial. Now I'll discuss results by segment. Starting with Personal Lines. This business posted an outstanding current accident year ex-CAT combined ratio of 85.3% for the year and 85.4% for the quarter, improving 3.8 points and 0.6 points from the prior year periods, respectively. The improvement in the year was driven by the benefit of earned pricing in both personal auto and homeowners as well as reduced frequency. Our personal auto ex-CAT current accident year loss ratio was 69.5% for the year, an improvement of 2.2 points compared to the prior year. The result for the fourth quarter of 75.7% was higher year-over-year but approximated our expectations. Turning to homeowners. We delivered exceptional ex-CAT current accident year loss ratio improvement, down 6.4 points to 45.8% for the year and down 4.6 points to 36.6% in the fourth quarter. Earned pricing continues to be a benefit as well as favorable weather. We also continue to partially attribute lower claim frequency to deductible changes leading to fewer small claims, not only in CAT, but also in ex-CAT results. Personal Lines growth accelerated to 4.4% in the fourth quarter with the full year at 3.7%. PIF was relatively stable in the quarter, shrinking 0.6 points sequentially, which is an improvement from the third quarter of 2025. We expect PIF growth in 2026. We achieved Personal Lines renewal price of 9.2% in the quarter with auto pricing up 6.9% and home pricing up 12.3%. While price increases were lower sequentially, they remain above our long-term loss trend. Umbrella pricing remains strong, holding around 20%. We are pleased with our current Personal Lines rate levels in light of the strong overall profitability we've achieved. Now turning to our Core Commercial segment. We posted a current accident year ex-CAT combined ratio of 91.6% for the fourth quarter, improving 2.4 points from the prior year quarter and achieved 92.6% for the 2025 year. The fourth quarter ex-CAT current accident year loss ratio improved 1.5 points from the prior year quarter to 57.4% as core property continued to perform well and large loss activity remained within expectations. The full year result of 59.1% was slightly higher compared to 2024, primarily driven by prudently increased loss selections in commercial auto liability and in workers' compensation, partially offset by lower losses in commercial multiple peril. Core Commercial net written premiums grew 3.6% in the year and 2.5% in the quarter, led by Small Commercial on the back of double-digit new business growth and healthy retention. Core Commercial segment growth was impacted by middle market reinstatement premiums, which were receipts in the fourth quarter of 2024 and payments in 2025. Excluding the reinstatement premium impact, the Core Commercial segment delivered fourth quarter growth of 4.1%, inclusive of 2.6% growth in middle market. We're very satisfied with what we're seeing in this segment of the market and have confidence in our ability to continue capturing profitable growth opportunities. Overall retention in Core continues to be solid at 85.3%, up nearly 1 point from Q3, while price increases, including exposure changes, moderated only slightly to 9.4%. Price levels remained elevated compared to historical averages and overall rate continues to be above loss trend. Moving on to Specialty. The business continues to perform extremely well, posting a current accident year combined ratio ex-CAT of 87.4% for the year and 89.5% for the quarter. The current accident year loss ratio ex-CAT of 50.1% for the year and 51.4% for the quarter were both within our long-term expectation of low 50s for this business. Fourth quarter loss experience was largely in line with expectations, while the year saw favorability driven by large property losses, which can fluctuate period to period. Liability continued to remain within expectations. We are very pleased with the consistent execution and profitability in our Specialty book and remain confident in our positioning to further capture attractive growth opportunities in our markets. Turning to reinsurance. We successfully completed our multiline casualty reinsurance renewal on January 1. The program was placed in a similar manner to last year, including the same $2.5 million per risk retention at rate levels slightly below our expectations. As a reminder, our property per risk and catastrophe reinsurance treaties will renew on July 1. Moving on to a discussion of our investment portfolio. Net investment income increased an impressive 24.9% in the fourth quarter and 22% for the year to $454.4 million. This performance reflects growth in our asset base from strong earnings, the benefit of higher reinvestment yields, improving partnership income and the success of our portfolio repositioning efforts. As we mentioned last quarter, fourth quarter NII also included a benefit of approximately $4 million from the investment of funds from our $500 million debt issuance in August 2025. This benefit is offset by higher interest expense on our debt. The debt level was temporarily elevated following our issuance but will normalize in the first quarter. We repaid approximately $62 million of senior notes that matured in October of 2025 and also called $375 million of senior notes at par, which were retired in January, originally set to mature in April. Our investment portfolio continues to be a key pillar of our diversified earnings stream. It is conservatively positioned, broadly diversified across sectors and is not overexposed to any single asset class or industry sector. Our limited exposure to variable rate instruments also continues to provide stability in our investment income and reduces reinvestment risk as short-term rates decline. Our fixed maturity portfolio continues to carry a weighted average rating of A+ with 95% of holdings investment grade. Portfolio duration, excluding cash, remained relatively stable at approximately 4.3 years, consistent with our long-term asset liability alignment approach. Moving on to our equity and capital position. Our book value increased approximately 27% in 2025, ending the year at $100.90, driven by strong earnings in the year and an improved unrealized loss position on invested assets. Excluding unrealized, book value increased approximately 15% for the year to $104.21. In December, we raised our quarterly dividend by 5.6% to $0.95 per share, marking the 21st consecutive year we have increased our dividend, underscoring the durability of our enterprise, our commitment to delivering shareholder value and the confidence we have in the company's future. We also continue to be active in share buybacks, repurchasing approximately 307,000 shares totaling $55 million in the fourth quarter and approximately 754,000 shares totaling $130 million during 2025. Additionally, we repurchased approximately $44 million worth of shares through January 30. We remain dedicated to responsible capital management and prioritizing shareholder value. Turning to our annual guidance for 2026. We expect overall consolidated net written premium growth to accelerate in 2026 to mid-single-digit growth. We expect net investment income growth in the mid- to upper single digits compared to 2025. Our expense ratio for 2026 is expected to be 30.3%. However, we want to let you know we will not be giving specific expense ratio guidance in future years. We will continue to be disciplined financial managers, but we believe the combined ratio overall should really be the focus that we guide to. The combined ratio, excluding catastrophes, should be in the range of 88% to 89%, an improvement from our 2025 guidance. Our CAT load for the year is 6.5%, consistent with our guidance for 2025. Although CAT losses for 2025 came in below our expectations, and we continue to observe benefits from our deductible and terms and conditions changes, we believe holding our CAT load consistent for now is prudent given the volatility of this income statement line and evolving weather patterns. Our CAT load for the first quarter is 6.1%. To wrap up, we are beginning 2026 in a position of strength and are extremely well positioned to deliver on our goals. Our broad and resilient portfolio, diversified earnings stream and talented team are the foundation that will allow us to sustain this performance in 2026 and beyond. The combination of underwriting performance and the strong investment portfolio puts the Hanover in a terrific place. With that, we are ready to open the line for questions. Operator? Operator: [Operator Instructions] And the first question today will come from Michael Phillips with Oppenheimer. Michael Phillips: Congrats on a nice year and quarter. Jeff, in your opening comments, you talked about adjusting the current year for auto BI severity. I assume you're referring to personal auto there given what we see in the quarter. So I guess -- and you also, of course, mentioned the Core Commercial accident loss ratio up a bit given the activity you took earlier in the year. We didn't see that activity for Core Commercial this quarter. I don't think we did. And I guess, does that mean that the pressure you felt from those casualty lines and Core Commercial, you felt less of a need to do so and maybe things are kind of easing there? Jeffrey Farber: So your first question, yes, it was PL auto liability that we were raising picks in the fourth quarter. With respect to Core Commercial auto, yes, we didn't see a whole heck of a lot this particular quarter. It's been a relatively quiet quarter there. But we've been mentioning it all year long, and we've been increasing our IBNR reserves for auto largely for -- solely really for 2023 and '24 and '25. Years before that are quite mature. And I think we leave 2025 with the strongest balance sheet that we've ever had. Michael Phillips: Okay. Jeff, appreciate that. Maybe more of a higher-level question, maybe for Jack -- or Jack. As we kind of get into a phase for the overall industry where pricing starts to come off a little bit and maybe more so as the year progresses, Jeff -- or Jack, can you talk about any changes that you might make to how you approach your agency partners, I guess, specifically, do you talk to them more from management teams? Do they hear from you more? Do they hear from you less? Does your message, what you say to them, change as we get into a softer environment? John "Jack" C. Roche: Mike, this is Jack. Thanks for the question. I'll say a few words here, and I'm sure Dick can chime in also. I think the dialogue that we're having with the top agents in the country is accelerating for a number of reasons. They're obviously becoming more strategic and operationally focused, and they're increasingly trying to work with carriers that can help them with their evolving operating model. So there's a lot of dialogue going on across our franchise. And as you know, our partner strategy really lends itself to this type of dialogue, including some great analytical tools that help agents as they're trying to become more efficient and more effective. So from a pricing standpoint, I wouldn't say that, that alone is changing our dialogue at the top of the house. What becomes really important is that our field teams and our underwriters are very proactive about which accounts are coming up when and how we want to approach those things. So we're being respectful of the client relationships that they have, but also at the same time, not acquiescing to an overall market condition. Each account needs to be looked at one account at a time. So Dick, do you want to supplement that? Richard Lavey: I like the way you came at this question, Mike, is are we doing anything differently? Or do we have to lean in more differently? And I'd say, yes, we adjust kind of our activity and specifically our talk track with our agents, more time spent on helping them understand their economics and their behaviors in this kind of marketplace, watching the trends, kind of the leading indicators, really focused on the benefits of keeping accounts stitched together, right, in a bundled way because when you separate those out and you have perhaps 2 shopping opportunities, that creates issues for them in the future with potential risk to retention. So we spent a lot of time talking about that, how to -- the benefits of not only [ bundled ] accounts, but then in our case, we have a common effective date, which is really powerful because both of those policies renew on the same date. So we try to put data in front of them for their own book and for the industry. And our team, you've heard me say this before, it's a super power of ours that we bring data and we help agents understand their own situation. So that's probably what I'd add to Jack's response. Operator: The next question will come from Mike Zaremski with BMO. Michael Zaremski: Maybe on Personal Lines specifically, if you can kind of just tease out directionally what the non-CAT property benefit was in home? I think there was a benefit for the year, just so we kind of can better understand the run rate. You guys have obviously done an excellent job improving margins there. And just maybe higher level overall Personal Lines, kind of like I see the comment in your deck about expecting policy count to grow a bit. But I guess what's kind of the North Star in the current competitive environment? Would it be kind of very low single-digit PIF growth? Or any comment there would be helpful. Jeffrey Farber: Thanks, Mike. It's Jeff. I'll start on the loss ratio. A lot of moving pieces with respect to home. First off, we're getting price above loss trend, which is really earning in and being very powerful for us. But you also have issues like the benefit of the deductibles and even some consumer behavior. Clearly, favorable weather in 2025 and even particularly in the fourth quarter is having a healthy benefit. So it's -- I'm reluctant to spike that out, even though we've tried to estimate it because it's just -- it's too raw. I don't have enough confidence in it. But I think it would be wise to assume that the 47.5% that we did for the year will need to come up a little bit because of that particular benefit. Richard Lavey: All right. And I'll take the question on the North Star Personal Lines. So thanks for that. We've really been maniacally focused on our North Star in Personal Lines, which is to be the best market in the IA channel for preferred accounts. So I do think of our future as like strengthening that strength, growing thoughtfully while achieving our diversification objectives, not only across states, but even within states where we have a lot of market share, pushing ourselves continuously upstream into that prestige account space, the $750 million to $3 million space. And then as you've seen, importantly, continue to invest in that account solution. So classic cars, schedule items and things like that. So we are -- we continue to be focused on that. I like a mid-single-digit growth objective kind of into the future. I think that's a good place to be. And as prices come down to more rational levels, that's always been our objective. Michael Zaremski: Okay. Sounds good. My follow-up, Jeff, a lot of commentary helpful on the reinstatement premiums. Can you just remind us what drove the reinstatement premiums? Is that CAT or casualty? Jeffrey Farber: Sure. So again, with reinstatement premium, we had some incoming reinstatement premium on reserve takedown in 2024 quarter and some outgoing on an increased reserve for reinsurance. It was not CAT. It was generally property -- large property loss exposure in the property per risk program. Michael Zaremski: Okay. Great. And I guess lastly, just thinking higher level about lawsuit inflation in the United States and cognizant of the comments you made on personal auto. But it looks like you guys have been adding some conservatism to your loss picks throughout the year in commercial. I guess we'll see some data -- the stat data in a month or so. But any changes in your view of what you're seeing or maybe the industry trend-wise in terms of lawsuit inflation? Is it stabilizing at high levels, still maybe increasing, decreasing? John "Jack" C. Roche: Yes. Thanks, Mike. This is Jack. I think overall, what we're witnessing now is that the liability severity trends are presenting themselves in a pretty mature way. Will the severity levels continue to go up over time? Possible. But I think maturing might be a good word right now because there's not too many severe injuries that don't include a lawyer and lawyer representation. And the courts are obviously in full gear. So I think there is a little bit of a leveling out in terms of the environment itself. And I think the way we've tried to deal with it, as you referenced, is make sure that we have the right claim strategies and we're going at each individual claim in an appropriate way, but also to continue to be very prudent with our reserving. I think we have done our best to add to IBNR levels to look at the individual trends by subline and make sure that we're not one of the companies that gets behind. And so I have a high level of confidence, as does Jeff, in our reserve position, but also our claim strategies in this litigious environment. Operator: The next question will come from Paul Newsome with Piper Sandler. Jon Paul Newsome: I was hoping you could give us maybe a little bit more elaboration on the competitive environment in middle market commercial, which seems to be heating up. And I think there are investor fears that what we've seen in the large account pushes back down to the middle market. What's your perspective today on that? John "Jack" C. Roche: Yes. Thanks, Paul. This is Jack. I'll get us started here. I would say that there's no doubt that on the larger property schedules, and in certain sectors, there has been some heightened competition. But I would tell you, at the same time, there are particular areas, and I would spike out something like the human services sector where they have some real challenges in terms of market access, particularly in the professional liability and the sexual abuse and molestation lines and getting excess limits. So there's parts of the middle market sector, particularly on the liability side that are definitely on the front end of a firming market. And if I had a crystal ball, I would probably say that, that will continue that at some point in time, the property market will level off and the liability pricing will steal the headlines. But in the meantime, being a good account player primarily playing on the low- to mid-sized accounts and staying out of the upper middle market is serving us extremely well. And I think we're poised eventually to be even more assertive as the market starts to firm, hopefully sometime this year. Jon Paul Newsome: And then maybe a different question. Longer term, I think catastrophe management has been an effort. The 6.5% looks a lot like -- for next year looks a lot like it has been in the past, maybe more of a stable number. Are you thinking about trying to move your property exposure to have less CAT in the future? Or is this kind of the right level sort of broadly thought way? John "Jack" C. Roche: Well, I think our objective is to really focus on earnings volatility. And so I go there because the more we can address any micro concentrations and then look at the pricing and terms and conditions across the portfolio, then I don't think there's a magic number that we're shooting for. I think all of that adds up to us over time trying to drive the CAT load of the organization down, but the environment will dictate some of that. And as you've seen, the severe convective storms have driven some CAT loads up in some of our competitors. So we're trying to be very thoughtful about making continued meaningful progress in our CAT management -- in our property aggregate management, but to be -- not be -- to be still relatively conservative in terms of how we model that out and choose our CAT loads. Jeffrey Farber: Yes, Paul, severe convective storm is the area that has given us some issue over the last several years with that volatility. And we've done a tremendous amount of work on thinning out the aggregations, putting in place the deductibles for the terms and conditions and making it -- so those matters are less severe, getting lots of rate and then also, particularly in the commercial space, putting in place new technology that is having a tremendously beneficial impact on limiting those CATs where people have devices that will let them know if there's either excessive cold temperatures or some water issues with pipes, and that's a real benefit for us. Operator: The next question comes from Rowland Mayor with RBC Capital Markets. Rowland Mayor: I wanted to quickly get ahead of no longer getting expense ratio guide in 2027. Is the long-term goal there still to show year-over-year improvement? And I guess on top of that, the tech investments, are those neutral to the expense ratio right now as efficiency gains come in? Or is that still adding some pressure? John "Jack" C. Roche: This is Jack. Listen, I think what you should know is that we intend to be very disciplined from an expense standpoint and that we believe we have expense leverage as we grow the organization. And so I'll let Jeff speak to kind of our rationale of going forward on guidance. But I think you should expect us to scale each of our businesses. But obviously, the mix, our expense quotient is different across each of those businesses. And I would say from an investment standpoint in technology and data and analytics, the philosophy of the firm is that we are spending more, but we tend to do that by reducing some expenses in other areas as opposed to trying to drag that out of earnings. And I think we -- the team has been very disciplined in that regard to find savings to fund the additional investments that are required for our future. Jeffrey Farber: Yes. I don't think that you should interpret our moving away from guidance as in any way, lacking financial expense management discipline. To the contrary, we're still every bit as disciplined as we always have. But a year like we've had this year where the loss ratio is or the overall combined ratio is much lower than we had guided to with or without CAT, it causes us to have an expense ratio elevation and just didn't really want to be slavish toward reporting against it or being held to it. Having said all that, there's an awful lot going on with expenses. We have expense needs and demands to make investments in technology and data and analytics in AI, in a variety of different places, and we're making those investments in a way that we'll spend a little bit of money before we'll get the benefits of that, which will come. But we're funding that. And so we have a very active process of looking at our expenses across the organization and creating the capacity that's needed to be able to make those investments. Rowland Mayor: That's super helpful. And I wanted to quickly then ask on the repurchase volumes, and they've been steadily walking up the past few quarters and even the January number looked -- I think it was the biggest probably month you've had in a very long time. Can you walk through the approach there and just how we should be thinking about your ability to buy back stock and maybe capital needed for growth needs? Jeffrey Farber: Yes. We bought back, as you said, $100 million of stock in the last 4 months, which is a healthy dose with growth being a little bit lower in the last 12 months and the earnings and profits being super strong, we're building a lot of capital, as you can imagine. It ends up being a high-class problem. And we've always been good stewards of capital. We've got choices. Growth is always at the top of the list, continuing buybacks, of course, dividends. We can consider things about reinsurance, perhaps even small inorganic or renewal rights deal. But we'll be balanced, Rowland, as to how we use capital. And I suspect the stock buyback will continue to play a meaningful role. Operator: The next question will come from Meyer Shields with KBW. Meyer Shields: Two quick questions on the line, if I can. First, at least in the third quarter of this year, we're seeing most Personal Lines coverages claim frequency decline. I'm wondering whether that broad picture matches what you're seeing in your preferred market? Richard Lavey: Yes, definitely. We're seeing the frequency on the property coverages in the auto and the homeowner side of things. And certainly, some of that's related to customer behavior, we believe. Some of it's related to the terms and conditions that we put in place, certainly on the home side and the weather, ex CAT weather. And then, of course, as you know, on the auto side, the safety technology that is being implemented in the cars as they roll off the conveyor belt and more and more of those on the streets and highways is definitely having an impact on the number of accidents and frequency down. Meyer Shields: Okay. Perfect. That's very helpful. When we look forward to the growth in the new states, I'm assuming that's the 11 states that Jack called out, you're going to continue to pursue growth there. Should we anticipate some level of new business penalty just or higher initial loss ratio, however you want to frame it from the fact that there's going to be hopefully an uptick in new business? John "Jack" C. Roche: This is Jack. I'll say a couple of words in that these are existing states that we believe are reaching a level of maturity and benefiting from the hard market that we came out that accelerated growth can come through at a very accretive level. So I would not think about it in a traditional way with new business penalty. Frankly, we've been through an era where new business pricing was matching renewal pricing for some time. So we're not still at a traditional gap of new to renewal pricing. So Dick, I don't know... Richard Lavey: No, we've never been at a more adequate price level in our -- as we look across all of our states in the business. So we feel good about it. John "Jack" C. Roche: And needless to say, as we diversify from a capital allocation perspective and just an overall performance, we think it will help us because we have had to adjust CAT loads and we've had to think about weather differently. And so spreading that risk better, particularly on the homeowner side is having an additional positive impact. Operator: The next question will come from Mike Zaremski with BMO. Michael Zaremski: Great. Just a quick follow-up. Does the -- is the winter storm recently in 1Q, is that big enough to -- we should talk about it? And is it -- if so, is it in the guide for '26? Jeffrey Farber: So burn represented most of our January CATs this winter storm burn. And based on what we're seeing, there's no reason to modify our first quarter CAT estimate of 6.1%, Mike. Operator: And the next question will come from Daniel Lee with Morgan Stanley. Daniel Lee: My first question is on the Specialty segment. I was just kind of curious to hear just some more details on like competitive dynamics. I know you guys mentioned just competitive pressure across the Property Lines. But -- and yes, maybe with management liability and pricing stabilization across for professional and executive lines, how are you guys thinking about the competitive dynamics going forward for that subsegment? Bryan Salvatore: Yes. Thank you, Daniel. I'll take that. It's Bryan Salvatore. And yes, to your point, we do see increased competition across the property lines, and we are reacting to that. We're really fortunate to have a very diversified portfolio. And the things that you mentioned, for example, management liability, really pleased with the progress we saw in the fourth quarter, right? Yes, the market has stabilized. But that along with the investments we've made in operating model efficiency, improving turnaround, we saw double-digit growth in the fourth quarter for management liability, and we see that continuing. And we also saw improvement in professional liability from the investments we've made there. So that diversified portfolio for us gives us a lot of confidence in our ability to appropriately grow in 2026 even in this environment. Daniel Lee: Yes. So I guess my follow-up is, I'm also kind of curious on just the overall E&S demand that you guys are seeing out there. Is there still more robust submission flows that are coming in for E&S? Or do you guys kind of see that subsiding as a little bit of the [indiscernible] markets start to open up? Just curious. Bryan Salvatore: So I'll react to that too. Sorry, I'll react to that, too. We have not seen any abatement in the activity in our E&S book. It grew double digits throughout the year. It grew double digits in the fourth quarter. The submission volume is quite high. And we do have a couple of benefits. One is where we're positioned, which is middle to smaller E&S, and so the competition there isn't as severe as you might see in some other places. Also, we have a real nice mix now of retail play E&S business and wholesale space. So we have different avenues, different access to opportunities. And so we continue to see that business growing for us in a nice, healthy way. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Oksana Lukasheva for any closing remarks. Oksana Lukasheva: Thank you, everyone, for dialing in today. We're looking forward to talking to you next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Brandywine Realty Trust Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to turn our host for today's program, Jerry Sweeney, President and CEO. Please go ahead, sir. Jerry Sweeney: Jonathan, thank you very much. Good morning, everyone. Thank you for participating in our Fourth Quarter 2025 Earnings Call. On today's call with me are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, our Senior Vice President and Chief Accounting Officer; and Tom Wirth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain information discussed on the call today may constitute forward-looking statements within the meaning of the federal securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurances that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports that we file with the SEC. During our prepared comments today, Tom and I will briefly review fourth quarter results and frame out the key assumptions behind our '26 guidance. After that, Dan, George, Tom and I are available to answer any questions. So to start moving forward from an operating portfolio management and liquidity standpoint, 2025 produced results very much in line with our business plan. We posted strong operating metrics, reinforcing the continued flight to quality among our tenant base and our strong market positioning. Our wholly-owned core portfolio is 88.3% occupied and 90.4% leased. Forward leasing commencing after year-end increased 26% to 229,000 square feet with most taking occupancy in the next 2 quarters. We generated near $27.3 million of spec revenue, very much in line with our business plan. And we also exceeded our tenant retention target, which ended up at 64% compared to our original business plan range of 59% to 61%. Leasing activity for the year approximated 1.6 million square feet. During the quarter, we executed 415,000 square feet of leases, including 157,000 in our wholly-owned portfolio and 257,000 square feet in our joint venture portfolio. Our capital ratio for the year was 9.5%, slightly better than our '25 business plan midpoint. This was the lowest capital ratio range we had in 5 years, primarily due to continued good capital control, our purchasing power and a high percentage of renewals. On an annual basis, our GAAP mark-to-market was 4.2%, exceeding our business plan expectations. And on a cash basis, we were in line with our business plan. New leasing mark-to-market was very strong at 13% and 4% on a GAAP and cash basis, respectively. And then we also had some very encouraging news on the tour volume standpoint. So fourth quarter tour volume exceeded third quarter by 13%. Tours in the fourth quarter '25 exceeded fourth quarter '24 by 87%. And for the quarter on a wholly-owned basis, 45% of all new leasing was a result of flight to quality. Our annual tour volume in 2025 outpaced '24 by 20% on the fiscal number of tours, but more importantly, 45% on a square footage basis. We experienced increased tour levels in all of our core markets, particularly CBD, Philadelphia and Radnor at 49% and 45%, respectively, on a square foot basis, a great sign of an ever-improving market. We also continue to experience good conversion rate from these tours, which is really the most important step. For 2025, 56% of all tours converted to a proposal, and from proposal, 38% converted to an executed lease. So very much in line with our historical averages, in fact, slightly above in some cases. A few additional comments regarding our various market dynamics. In Philadelphia, which is our largest submarket, it encompasses both CBD and University City, we're now 95% occupied and 97% leased with only 6% of our space rolling through 2028. So a very solid operating portfolio. Our Commerce Square joint venture property is now 90% leased, bringing our combined Philadelphia holdings, both wholly-owned and joint ventured to 95%. As I noted, overall activity levels remain strong. Interesting data points. Over the last 5 years, Brandywine has captured 30% market share of all new leasing activities signed in Market West and University City, substantially outperforming our 15% market share. This trend accelerated during 2025 for the full year. 54% of all new leasing signed in these markets was at a Brandywine property. More importantly though, since 2021, our net effective rents in these submarkets have increased almost 20% or an annual net effective rent increase of 5.4%. This net effect of rent growth was achieved through sustained controlling capital costs and continued rent growth. In the Pennsylvania suburbs, overall we're 89.4% leased and our Radnor submarket is 91% leased. We continue to see solid levels of pipeline prospects for the existing vacancies. Austin, at 74% occupancies, creating a 400 basis point drop in overall company leasing levels. But tour volume there was up over 100% year-over-year and the other side of that market being on a slow path to recovery. Our operating portfolio leasing pipeline remains solid at 1.5 million square feet, which also includes about 140,000 square feet in advanced stages of negotiations. Relative to liquidity, we're in solid shape with no outstanding balance on a $600 million unsecured line of credit and $32 million of cash on hand at the end of the quarter. We also have no unsecured bonds maturing until November of 2027. And as noted previously, we plan to maintain minimal balances on our line of credit as our business plan is designed to return us to investment-grade metrics. As we'll discuss our '26 plan, we'll reduce overall levels of leverage. But as an interesting point, over 50% of our outstanding bonds has coupons north of 8%, providing very good refinancing opportunities over the next several years, assuming the market remains constructive. As an illustrative point, if we refinance those bonds over 8% to market rate today, our interest rate costs would decrease approximately $0.10 per share. As we look at the year-end results, our FFO for the quarter and year were both in line with consensus. And then notably, during the fourth quarter, we took our first steps towards recapitalizing our development joint ventures. In December, we redeemed our preferred partners' equity interest in both joint ventures at Schuylkill Yards. Our 3025 JFK property, what a high-quality asset onto our balance sheet with a major tenant already taken occupancy in early January. The 3025 commercial component will be added to our core portfolio in the first quarter at 92% leased. Our buyout on 3151, which aggregate about $65.7 million, was mostly funded with a $50 million C-PACE loan, which effectively replaced our higher-priced partners' equity with a lower priced loan with prepayment flexibility. As we've noted before, the capitalization phase in this building ended at the end of 2025. Our pipeline in this project stands at approximately 1 million square feet, broken down to 60% office and 40% life science. Discussions with many prospects remain active and several key proposals are outstanding. Both of these buyouts temporarily increased our year-end leverage in anticipation of the 35 construction loan refinancing and our asset sales program. Notably, the fourth quarter buyout on 3025 occurred in advance of our lead tenant taking occupancy. Pro forma for that revenue stream, which did commence this month, our net debt to EBITDA would improve by 0.4x and are fixed charge by 0.2x. As a result of these buyouts at Schuylkill Yards, our remaining joint venture development projects are One Uptown and Solaris in Austin. At Uptown ATX -- at One Uptown, we are now 55% leased, up from 40% last call, but we do have an additional 20,000 square feet or 8% of leases after execution, which would bring us to 63%. The pipeline remains strong with tenant sizes ranging from 5,000 to 60,000 square feet. Solaris, as we noted, is 98% occupied and 99% leased, we are seeing significantly improved economics on lease renewals. In fact, our renewal since November 1, it's all achieved, on average, a 12.7% effective rent growth. Looking at One Uptown. With the outstanding lease being executed and at 63%, we have 3 floors available. The 12th floor is subject to an extension right by our lead tenant, where we'll receive notice in July. Also, since we had great success on the seventh floor, which is 100% leased, the 10th floor is under construction for spec suites, which leaves the 11th floor at 43,000 square feet the primary target for the larger tenant bases right now. Looking at the investment market. We continue to see a strong improvement in that market, both in terms of velocity and pricing. For example, in a project recently marketed, over 90 CAs were signed. We had 20-plus tours and a strong bid response from the buying pool. Buying pools we're seeing consists of high net worth family offices, operators with private capital and the reemergence of institutional quality buyers. And as we noted previously for 2025, we did exceed our sales target. Turning to '26. Our 2026 business plan can really be summarized as a return to earnings growth, a continuation of solid operating results, continued crisp focus on stabilizing One Uptown and 3151, an accelerated sales program to both pay down debt and further refine our portfolio with corresponding balance sheet improvements. From an operating perspective, our 2026 business plan is very straightforward, highlighted by solid core portfolio performance and strong leasing activity. We are providing '26 FFO guidance with a range of $0.51 to $0.59 per share for a midpoint of $0.55. And at that midpoint, our '25 FFO represents a 5.8% growth rate over -- I'm sorry, '26 FFO represents a 5.8% increase over '25 FFO. The primary drivers of this are highlighted in the FFO reconciliation, which is found on Page 1 of our SIP, which Tom will review in more detail. Notably, our midpoint does not factor in the benefit of any of the Austin development recap. Improvements as we looked at the year, G&A expense will be lower due to lower compensation costs and related cost control measures, improving operations in our development joint ventures and the buyout of our partners at 3025 and 3151, wholly-owned GAAP NOI will increase primarily from the consolidation of 3025, and we do not expect any early retirement of -- extinguished cost of debt. Reductions include higher interest expense, primarily due to the consolidation of the 3025 construction loan and lower capitalized interest due to the end of the capitalization period at 3151. Obviously, with the joint ventures at Schuylkill Yards disappearing, we'll have lower third-party management and development fees. But Tom will review those items and several factors in more detail. From an operating standpoint, the core portfolio will add 3025 in the first quarter and 250 Radnor in the second quarter. Spec revenue, we've targeted between $17 million to $18 million. While down from '25 levels, spec revenue from new lease transactions is up 39% from '25 levels. We are currently almost $13 million or 75% done at the midpoint with healthy pipelines across the board. We do project that our year-end occupancy will improve 120 basis points from 2025 levels. Based on this, we do project positive net absorption for the first time in several years as another evidence of an improving market. GAAP mark-to-market will range between 5% and 7% led by an 8% to 10% mark-to-market in CBD in the Pennsylvania suburbs. Cash mark-to-market will be between a negative 2% to 0% again, led by a positive mark-to-market in the CBD and PA suburbs. Leasing capital will be slightly above our '25 levels at a target range of 12% to 13%. Again, that's primarily due to a higher composition of new lease transactions. Same-store growth will range between a negative 1% and a positive 1% on a GAAP basis and 0% to 2% on a cash basis. From a capital markets perspective, we plan to repay the 3025 construction loan with lower priced debt. We expect about a 200 basis point savings there. We're also evaluating as part of that a secured financing on that residential component and then add in the office portion to our unencumbered asset pool. Our business plan projects between $280 million to $300 million of sales activity. We anticipate average -- cap rates averaging around 8%. We anticipate closing a majority of these sales during the first half of the year. We currently have approximately $100 million with buyers selected and advancing towards agreement of sales and have a number of other properties in the market across all of our submarkets. The vast majority of sale proceeds will be used to reduce debt and continue to improve liquidity and all of our credit metrics. And while that primary focus is lowering leverage as a top priority, given that our stock remains significantly undervalued, we anticipate based upon the velocity of the sales program we have underway to repurchase our shares while continuing to lower leverage. We do have availability under our existing share purchase program. Our sale target also includes executing several delayed land sales, which we anticipate will generate gains, but are not included in our '26 guidance. Our business plan does contemplate that both One Uptown and Solaris will be recapitalized during the second half of '26. We could do sooner than that, but right now, the plan is based on the second half of '26. Those recaps could range from a complete sale or a pari-passu joint venture, where Brandywine remains a minority stake and recovers significant capital to both lower debt attribution and improve overall liquidity. We do project the year-end core net debt to EBITDA to be between 8 to 8.4x. And we anticipate our CAD ratio will be between 90% to 70% with the improvement occurring during the second half of the year after we fully burn off the remaining tenant improvement costs related to leases done between 2020 and 2023. So with that, Tom will review our financial results for the fourth quarter and provide more detailed '26 outlook. Thomas E. Wirth: Thank you, Jerry, and good morning. Our fourth quarter net loss was $36.9 million or $0.21 per share. Our fourth quarter FFO totaled $14.6 million or $0.08 per diluted share and in line with consensus estimates. Both quarterly results were impacted by a onetime charge for the early extinguishment of a CMBS loan, totaling $12.2 million or roughly $0.07 per share. Some general observations from the fourth quarter. Property level NOI was $70 million or $1 million below our forecast, primarily due to increased operating costs across the portfolio. FFO contribution from our unconsolidated joint ventures totaled $0.6 million or $1.4 million better than our projection. The improvement was primarily due to the improved operations at Commerce Square, ATX Office and Solaris. G&A expense was below our reforecast by $0.6 million, primarily due to lower compensation expense. Net interest expense was $0.7 million higher, primarily due to the inclusion of 3025 JFK's loan, partially offset by higher-than-anticipated capitalized interest. And our other forecasted quarterly results were generally in line. Looking at our debt metrics. Fourth quarter debt service and interest rate coverage ratios were 1.8, both below the third quarter levels. Our third quarter annualized combined and core net debt to EBITDA were 8.8 and 8.4, respectively. Both metrics were also above our business plan ranges. These metrics were negatively impacted by our fourth quarter preferred equity partner buyouts totaling $136 million, which retired higher priced capital, but was funded by lower priced debt. As we highlighted, we anticipate 2026 sales to reduce -- and reducing our ownership in Uptown ATX will offset these increases. Of note, our consolidation of 3025 JFK occurred before the first quarter stabilization for contractual leases, which increased our combined net debt by 0.4x and our fixed charge by 0.2, otherwise placing both metrics within the stated targets. We continue to maintain a solid liquidity position with $32 million of cash on hand and no outstanding balance on our unsecured line of credit as of the end of the year. Looking at 2026 guidance. Regarding guidance, at the midpoint, our net loss is projected to be $0.62 per share. Our 2026 FFO at the midpoint will be $0.55 per diluted share, representing a 5.8% increase compared to last year. Operating metrics. Overall portfolio operations are expected to remain very stable with property-level GAAP NOI totaling $292 million, representing a $30 million net increase compared to 2025. This increase is comprised of the following: 3025 JFK will generate an incremental $17 million as stabilized wholly-owned asset; 2025 asset sales plus the full impact for that as well as the fourth quarter move-outs I mentioned last quarter will total $7 million NOI decrease. Same-store results will be essentially flat. Our fourth quarter contribution from the unconsolidated joint ventures will improve from an $11 million loss in 2025 to a $1 million contribution of income in 2026. This improvement is comprised of the 3025 JFK, which is now consolidated, and in 2025 had a loss of $11 million, which is now eliminated. ATX developments with continued lease-up at One Uptown and reduced rent concessions at Solaris, we expect a $9 million improvement as compared to 2025. 3151 partially offsetting these improvements was a onetime item for $7.5 million or $0.04 a share that we took as a tax credit gain in the first quarter of '25 that will not repeat. G&A will be $36 million to $37 million, which is $5.5 million below our full year 2025 results. This reduction is primarily due to a decrease in compensation expense, including incentive compensation. Total interest expense, including $5.5 million of deferred financing costs and $2 million of capitalized interest, will approximate $170 million, and at the midpoint, $30 million increase compared to 2025. The increase is primarily due to the capitalized interest, which will increase $10 million, primarily related to 3151 becoming operational on January 1, 2026. 3025 JFK, the consolidation of that property will increase interest expense by roughly $8 million once refinanced. 3025 bond issuances, which happened in June, also a bond issuance in October and the related CMBS loan repayment will have an $8 million increase in 2026. And the C-PACE loan which we put on 3151 will increase interest expense by about $4 million. Termination and other income will be between $9 million and $11 million compared to $6.6 million in '25. The increase is primarily related to improved income from our increase in retail tenants that were put in place during 2025 and some in '26. Net management and development fees are anticipated between $6 million and $7 million, a $4 million decrease, mostly due to lower development fees in 2026 as our development joint ventures stabilize. Sales activity. We are anticipating $290 million of wholly-owned sales activity, which weighs towards the first half of the year. As Jerry touched on, our sales activity will be used to reduce debt and continue our path back to investment grade. Depending on the volume and timing of these sales, we expect that we will use the shares to lower debt, which may include a buyback of outstanding bonds. Looking at financing activity. The 3025 JFK has a $178 million consolidated construction loan, which matures in July 2026. We plan to refinance that loan by late first quarter or early second quarter. We are considering a low rate secured loan on the residential portion of the property totaling approximately $100 million and using those proceeds as well as the line of credit to fully unencumber the office portion of the property. For the credit facility, our unsecured line of credit matures in June 2026, and we anticipate an extension of that facility ahead of the maturity date. Recapitalization of our joint ventures at ATX. As our joint ventures continue to lease up and improve cash flow, we anticipate recapitalizing projects on a pari-passu common equity joint venture basis during the second half of 2026 with our ownership level decreasing to a minority stake. The recapitalization of both projects will generate cash that will be used to further reduce our wholly-owned leverage. Due to the timing and changing in ownership structure being later in 2026, we've not included the benefit of any of these transactions in our FFO guidance. We anticipate no property acquisitions. Our share count will be roughly 180 million shares. While we feel incredibly positive about executing on our land sales program this year, we have not included any land gains or losses in our results. Focusing on the first quarter, property level NOI will be approximately $70 million and will be fairly consistent with the fourth quarter. While we will have the full quarter impact of $2 million incrementally at 3025 JFK, this will be partially offset by seasonality throughout the balance of the portfolio. FFO contribution from our joint ventures will total a positive $0.5 million for the first quarter. Our G&A expense for the first quarter will total $12 million. That sequential increase is consistent with prior years and is primarily due to the timing of our deferred compensation expense recognition. Total interest expense will approximate $42 million, which includes about $1 million of capitalized interest. Termination and other fees will total $2.5 million, and net third-party fees will approximate $1.5 million. Turning to our capital plan. As outlined above, our 2026 capital plan has more activity than 2025 and will approximate $475 million. Our CAD payout ratio will range between 70% and 90%, and we expect incremental improvement as the year progresses -- as the year continues. Looking at our larger uses. We will refinance the 3025 JFK construction loan, which totals $178 million. We will use $125 million for buyback activity on the bond side and debt reduction. Development and spend will total $50 million, including 3151 Market, 165 King of Prussia and 3025 JFK. We have $57 million of common dividends, $33 million of revenue maintaining capital and $25 million of revenue creating capital, $10 million of equity contributions to fund tenant leases at One Uptown. The sources for these uses will be $110 million of cash flow after interest payments, speculative sales activity totaling $290 million at the midpoint and $90 million of loan proceeds from potentially financing the residential portion of 3025. Based on the capital plan above, we anticipate having approximately $52 million of cash on hand at the end of the year and full availability on the line of credit. We anticipate net debt to EBITDA to range between 8.4 and 8.8 and our fixed charge ratio between 1.8 and 2.0. Implicit in these ratios is the extension of our asset sales program and the recapitalization of the ATX developments. These ratios do continue to be elevated as increased revenue comes online with the development projects, particularly 3151, which is now a wholly-owned investment which continues to generate operating losses. As these developments stabilize, our leverage will decrease, will further accelerate improvement on these metrics. And we anticipate the leverage levels will improve as the year progresses. I will now turn the call back over to Jerry. Jerry Sweeney: Great. Tom, thank you very much. So as I look ahead, the operating platform enables us to capitalize on improving real estate market conditions. Earnings growth from our development pipeline has begun to translate into earnings growth in '26, and we expect further improvement in '27. We have a very achievable sales program laid out that will drive a number of factors in the organization. So the groundwork has really been laid, and we'll continue to build on the momentum from an operating, from a capital standpoint to drive long-term value. With that, Jonathan, we are delighted to open up the floor for questions. We do ask, as we always, in the interest of time, to limit yourself to one question and a follow-up. Jonathan? Operator: And our first question for today comes from the line of Seth Bergey from Citi. Seth Bergey: I think you mentioned in your opening remarks that just where your current -- your average cost of bond, that is kind of north of 6% and 50% is kind of north of 8%. And were you to refinance those kind of today, you could save $0.10 on interest expense. I guess kind of what is a hurdle where you kind of want to look to pull forward some of those refinancings? Jerry Sweeney: So I think the first course of action we have right now is to execute on the sales program and generate additional liquidity and continue to improve the credit metrics, which we think will continue to reduce our overall cost of debt capital. And we don't really have in our business plan for '26 any kind of pull forwarding of those bonds at this point. But look, capital market conditions are ever evolving. We think that the execution of the sale program, continued improvement on the lease-up of the development projects will generate some additional NOI and liquidity. And we'll be evaluating the bond buyback program, the debt reduction program all as part of the sales program acceleration. Seth Bergey: Great. And then just as a follow-up. With the kind of $125 million earmarked for debt or share repurchase, how are you thinking about how much of that you would want to do with share buybacks versus debt repurchase? Jerry Sweeney: Yes. Look, we didn't mention anything about $125 million share buyback. I think our major focus is sales proceeds will be used first to reduce leverage, period. That's top priority. As we accelerate that program and get more clarity on maybe even some additional sales, we think we have an opportunity to be opportunistic in buying back, we think, our significantly undervalued shares. But want to be very clear. Our primary objective of the asset sale program is to continue on that path back to investment-grade metrics. As Tom touched on, we temporarily increased some of those leverage metrics by doing the buyouts of our Schuylkill Yards joint ventures. Clearly, with the major tenant and the income stream coming off 3025, that brings some of those down fairly dramatically immediately. But we do want to stay on a very crisp path to continue to improve our overall balance sheet metrics. And stock buyback optionality comes into play as we achieve our other objectives. So hopefully, that is clear. Operator: And our next question comes from the line of Anthony Paolone from JPMorgan. Anthony Paolone: Jerry, just following up on the dispositions and thinking about capital markets activity, when we look at your stock price and where it is, and you just mentioned you think it's pretty undervalued. Like as you think about what to sell, is there a part of the portfolio that you think is just being undervalued or just not being appreciated in the market? And are you trying to crystallize value at that? Or are you going into the market just selling what can be sold right now? I understand debt paydown is the priority, but just trying to understand where you're trying to go with the portfolio and what to sell. Jerry Sweeney: Tony, great question. Yes. Look, we think the entire portfolio is being undervalued. So I think across the board universally, from a public market standpoint, we think that we're significantly undervalued primarily do, I think, the perceived headwinds on stabilizing the remaining 2 development projects. But as we're looking at the sales program going forward, we took a hard look what we forecast some of the growth rates to be on some of our assets, given changing submarket dynamics. We took a look at what we thought the net present value to us was on holding certain assets and then kind of developed the framework for what assets do we think could, number one, be marketable in today's climate. And again, we're targeting an average cap rate around 8%. Where we have lease-up risk and some assets we think will be protracted and will be expensive so we can obviate some future capital spend. And then just the general portfolio realignment. As we talked before, our major focus in the Pennsylvania suburbs is to get down to 1 or 2 core submarkets. Our focus in Austin is to really shift our attention primarily to the tremendous opportunity we have at Uptown ATX. And then as we mentioned publicly, one of our programs is to rationally exit the D.C. marketplace. So when we looked at the overall sale program, Tony, it was a company-wide look and kind of looking through a number of quantifiable metrics to identify which properties we thought would generate real value for us today without sacrificing growth rates going forward. Anthony Paolone: Okay. Got it. And then just my follow-up is on the life science side. You all have the incubator space and I think part of that, that effort was to kind of see what was coming down the pipe as tenants grow. I guess, is there anything to glean from what you're seeing in that part of the portfolio as to whether there's been any improvement in terms of life science funding for these smaller companies or the start-ups that, overtime, could become bigger tenants in the portfolio? Or just anything you're seeing there that might be helpful as a forward look? Jerry Sweeney: Yes. And George and I can tag team this. I mean, on the life science front, we're seeing a number of green shoots. But honestly, I think the entire life science market needs to see those green shoots grow into trees. So we are seeing activity. There has been a good performance of a number of the privately held life science companies that are in Philadelphia regions, particularly cell and gene therapy. We're seeing a high velocity of activity at our incubator space and the graduate labs and has signed up a couple of key tenants with a good healthy pipeline. But George, maybe you could add some color to that as well. George D. Johnstone: Yes. I think as Jerry mentioned, I mean, the incubator, the 1, 2, 10-bench kind of companies, we have seen them expand. And that, quite honestly, is what helped generate the graduate lab spaces, which are 93% occupied at this point. So we've got all of that. We have 1 4,000-square foot lab left to lease up on the 8th floor. But again, we've seen a little bit of expansion outside of the incubator, and we're really just kind of waiting for the next kind of expansion of graduate lab tenants to then move into a full-fledged lab space. Operator: And our next question comes from the line of Steve Sakwa from Evercore ISI. Steve Sakwa: I guess, Jerry, as it relates to the outright sales as well as the recaps of the JVs, maybe my recollection was wrong here, but I thought there was maybe a view that you would try and do some of those JV recaps and bring those assets to market kind of earlier in '26, or at least one of them. But now it sounds like those are kind of pushed to the back half of the year. I'm just trying to sort of understand a little bit the thinking of maybe flip-flopping those. And is it just a question of getting things like Solaris more stabilized before you can bring kind of an apartment asset to market today to maximize value on that sort of transaction? Jerry Sweeney: Yes. Steve, look, I think our business plan contemplated those recaps occur in the second half of the year. The business plan also, as Tom mentioned, doesn't really include any earnings impact of those plans for the year. That being said, we're actively in the market, continually evaluating with a variety of investors what the right timing is to recap there. Solaris has done very well. As I mentioned, it's essentially 99% leased. I think to accelerate the leasing of that property, you may recall from our previous calls, we did embark on a fairly strong concession package given the oversupply in that market. We were successful, at one point, absorbing almost 40 units a month. Right now, we're heavy into the early stage of renewals. So all the renewals that we have done in the third quarter -- I'm sorry, beginning in the third quarter and fourth quarter of last year, enrolling thus far this year, we're getting almost a 13% increase in effect of rent. That's a huge impact on the NOI. So we're monitoring that to decide the best time to recap that. So that's moving along on a very nice track, and we feel very confident that, that will be happening, call it, a midyear convention. It could occur sooner than that. On One Uptown, right now, it was closing on 63% leasing. The pipeline remains pretty strong, particularly on the small tenant side. That's why we're building out one of the floors as another spec suite floor. We're certainly anticipating making more leasing progress there. And again, we're dovetailing those leasing efforts, Steve, with our conversations with recap partners as well. So it's not like -- it's not as sequential. It's kind of a concurrent review that we're going through. So I hope that answers the question, but we would love to get those done sooner rather than later. But I think in the interest of being conservative, we didn't really factor in any of that impact into our earnings outlook for the year. Steve Sakwa: Okay. Great. And maybe just to go back. Again, I'm just trying to make sure I had the facts right. I think you said there was like 1 million square feet of pipeline, or maybe it was 1.5 million. Could you just maybe provide a little more color on the overall pipeline just kind of broadly by market? And where are you seeing kind of the most demand in either by product type or whether it's life science, office and in which submarkets? Jerry Sweeney: Yes. And again, George and I will tag team. Look, I think from -- where we're clearly seeing the strongest trend lines at this point are really in CBD Philadelphia and University City. I think as I noted in the prepared comments, we've really been able to drive effective rents there. I think that's really a function of -- I think demand levels are returning to pre-COVID levels. For example, in '25, we saw the highest level of new deal volume in the past 5 years. So certainly, things seem to be accelerating. Certainly, the inventory is shrinking. So there's been a number of properties that are either in some level of financial strain or in the process of being evaluated for residential conversion. So we do expect that somewhere between 10% and 15% of the inventory here in the CBD will be converted to residential. State had passed a 20-year tax abatement for office to residential conversions. The city is evaluating that as well. So we think that will spur some additional inventory decreases. We've actually been pretty pleased with the pickup in activity in Radnor, Pennsylvania and King of Prussia. We've seen some very good activity there as well. And in terms of the -- and George, let me just cover the development. And on the development side, 3151, look, that pipeline remains very robust. We actually have proposals outstanding to a number of tenants. It's about 60% office, 40% life science. Look, we understand that we're trying to get all those transactions across the finish line as quickly as possible. We know the project is being very well received. We're not really receiving any pushback on the proposed economics. So we remain encouraged by the level of tour activity coming through that building. And then finally, at One Uptown, really, with the size of the tenants there, we have between 5,000 and 50,000 square feet, we feel as though we're in very good shape to meet all our leasing objectives there. But George, in terms of overall operating portfolio. George D. Johnstone: Yes. I think the operating portfolio, the pipeline remains fairly consistent. We're at 1.5 million square feet today. Last quarter, we were at 1.7 million, and then we executed about 200,000 square feet of that 1.7 million. So every time we seem to execute a lease, we're generating more, as Jerry mentioned, in the pickup in overall tours. So I think these spaces all show well, getting plenty of activity. We're seeing good levels of conversion. And it really comes down to converting this very robust pipeline at 3151. And then at One Uptown, really, with 3 floors to lease, one of them kind of with an expansion right encumbrance, we've got a pipeline that's almost 3x the available amount of square feet we have. Operator: And our next question comes from the line of Upal Rana from KeyBanc Capital Markets. Upal Rana: Jerry, do you have an update on the IBM move-out in Austin? one of the footnotes in your '26 business plan states that you plan on redeveloping one existing ATX building. So just want to get some details on that. Jerry Sweeney: Yes. Great question. Yes. Certainly, as been previously disclosed, IBM will be rolling out of their space at our Uptown development starting at the end of the first quarter of next year. In addition, as we've mentioned before, we did receive a significant modification to our Uptown approvals last year that gave us the ability to do much more increased density throughout the 66-acre park. So as part of that and looking at the market demand drops, and certainly that Northwest market remains fairly cyclical in the domain area, we are looking at -- again, this is a function of how the sales program goes and a few other functions. But our '26 business plan does contemplate us commencing redevelopment of one of the existing buildings. That building is currently vacant, consists of about 157,000 square feet. We anticipate the renovation cost would be somewhere in the $30 million to $40 million range, and we can complete that within a 3- to 4-quarter period. We have done a marketing launch on that. And we've been very, very pleased with the results. We have about 600,000 square feet of potential prospects there. Pricing levels would be about 20% to 15% below the rents required at One Uptown, and we're targeting everything to a cash yield north of 8%. So all the planning for that, Upal, is underway. We're waiting for the other elements of our capital plan to really come together. But we'll continue the marketing process for, first, that first building, then following that could be 2 other buildings that would probably go through the same program around the same cost and economic metrics as the first building. Upal Rana: Okay. Great. That was helpful. And then on the dispositions. You went through a few of the assets in the markets that you want to dispose some assets in. I thought of those that you've identified, are there other properties that could come up for sale that could occur this year or could be up for consideration in '27? I'm just trying to understand if the $300 million for this year is sort of it, and after that you'd feel comfortable with the core portfolio going forward. Jerry Sweeney: No. Look, a great question. I think the target for this year is the $280 million to $300 million. But we have a number of other properties, including some land holdings that we're queuing up for sale as investment market conditions continue to improve. So certainly, with the market being what it is, we've taken a hard look at where we really do expect to be able to generate outsized growth from each of our different assets, and as I alluded to earlier, where we really think that we're going to be treading economic water in some of these properties because of changes in submarket conditions or, frankly, changes in tenant appetites in terms of what they classify as A versus B or B+. We're certainly taking a hard look at that. So we would expect to have a level of dispositions program for 2027 as well and have that dovetail with the developments fully stabilizing. Operator: And our next question comes from the line of Dylan Burzinski from Green Street. Dylan Burzinski: Just sort of going back to, Jerry, your comments around wanting to use the initial capital from dispositions to delever and then anything after that going to share buybacks. Can you kind of just talk about sort of the internal conversations that you guys have and then thinking about the right level of leverage to operate at before going into share buybacks and trying to take advantage of what you guys view as a very opportunistic share price? Jerry Sweeney: I'm sorry. Dylan, you cut after the last part. I apologize. Could you repeat? Dylan Burzinski: Yes. Just trying to get a sense for how you guys internally think about the deleveraging process and balancing that with share buybacks. Just is there a certain leverage target in mind longer term that you guys actually want to get to before you really start to take the share buyback in the year? Jerry Sweeney: Yes. Look, I think as we look at our strategic direction, certainly we want to get a leverage metric to be fully back on the investment-grade ladder, which is typically evidenced by fixed charge coverage well north of 2 and net debt-to-EBITDA somewhere in the low to mid-7s. So I think we do view that, as we've talked about it, being a multiple year plan. And that can certainly be accomplished by asset sales, as we've laid out, certainly increasing NOI. So we do have a number of of, I think, good programs underway to increase absorption throughout our existing portfolio as well as these development projects coming online and being recapitalized. When we look at it strategically, those development projects coming online can bring on about $27 million of incremental NOI. That's a significant amount per share. So we look at all that from a matrix standpoint. The bias right now is to delever, but we're also very cognizant of the undervaluation of our public securities. And that's one of the reasons why we continue to look at are there other ways for us to accelerate land sales, other building sales to actually generate more than ample liquidity, maintain on the positive absorption, positive earnings growth track and be in the market to be able to buy back shares. Dylan Burzinski: That's helpful, Jerry. And then I guess just on the development projects outside of Austin, so the ones in University City, Philadelphia. I mean, are those potential disposition candidates as you stabilize those? Or are these sort of off the disposition candidate list for the time being? Jerry Sweeney: No, they're not off the sale list at all. In fact, certainly, one of the things we keep in the top of our mind is on 3025. We have an extremely well-performing residential project there. Our initial thinking is we're going to be evaluating a refinancing of that so we can significantly reduce the carrying cost of that debt. But certainly, a joint venture on that residential component is not entirely off the table. And then I think on 3151, as that project gets more visibility on lease-up, certainly talking to other capital partners about that would be on the radar screen as well. That will all be dovetailed with how we're doing with other elements of our business plan. Because as we do look at these developments, I mean, they're top of market, incredibly high quality, extremely well located with significant growth driving characteristics for us. So our preference is to hold on to the really high-quality stuff we have in our portfolio and to generate additional sales proceeds, look at other things that, as I mentioned on one of the previous questions, may not be as robust in their forward growth projections, if that's helpful. Operator: And our next question comes from the line of Michael Lewis from Truist Securities. Michael Lewis: So you talked about what you want to sell. I wanted to ask a question a little bit more pointed about the use of the proceeds, right? So the 8.5% bonds maturing in '28, is that really what we're talking about? It looks like those are trading at like a 5.6% yield, right? So if I just summarize it, what kind of cap rate do you expect when you sell the assets? And then can I assume that proceeds will be used to pay 8.5% bonds at 5.6% or 5.7%? Jerry Sweeney: Well, I think it's a two-part question. Tom will pick up the second part. I think when we're looking, Michael, at the -- when we look at the sales program, we are looking at an average cap rate of about 8% based upon the visibility we have from the marketplace today. That obviously will range from lower single digits to higher single digits based upon the asset and the submarket location. So we feel very good about both the timing expectations we have and the value proposition we think we can generate from those sales. But Tom, maybe share some thoughts on the application of those proceeds. Thomas E. Wirth: Yes, Michael, when we look at the application of the proceeds, a, timing of when those sales occur. But as you know, we still have some development dollars left to spend. So we will always be trying to keep the line as close to 0 as possible. But also as we see those sales come in, in the line is near 0, one of the areas we are targeting is maybe buying in some of our bonds separately. And the 28s are a good example at a 106 or even inside of that, we can buy back some of those bonds on the open market. If we got a lot of sales done, we could also make it sort of a formal tender. But we're definitely thinking about some of the higher priced bonds, taking them out early. It does help with near-term impact to fixed charge. So we will be focusing on the higher priced ones. But knowing that we have maturities coming up, focusing more on the near term 28s as opposed to something further out. Michael Lewis: Okay. That makes sense. And then my second question, you talked about all the things you're kind of exploring, right? So the stock price is below $3. I think consensus NAV is $8. So some of those things could be share buybacks if you get the leverage down. Has the Board talked at all or thought about any kind of a recap? Or is there M&A interest out there? Because this is a quite large, obviously, kind of persistent discount to NAV. Is there anything else kind of under consideration or that has come across your desk? Jerry Sweeney: Yes. Look, I mean, the Board and management always have open door to any type of strategic solution. I think as we evaluate where we are today and where we want to go, we do believe that one of the drivers of the discount in our public market pricing is the leasing up of these development projects and the related impact of -- on our balance sheet metrics. But I think when we take a harder look at the overall strategic direction, the operating portfolio remains in excellent shape. We're growing occupancy with positive absorption, with good capital control. In several of our markets, we're getting the highest net effective rents we've ever gotten. We are absorbing more than our market share. Bought 3025, a great asset onto our balance sheet. Tour volume, all those things are resonating that there's a very good pathway to NOI growth. So I think the foundational points of the operating portfolio are in very, very strong shapes. We do believe we have an opportunity to both improve the overall quality of the portfolio, simplify our holdings and delever by bringing on this $290 million, the midpoint of sales, and that's across all of our different markets. And I think when we take a look at the challenges we have underway, I mean, certainly there's Austin, as I mentioned, has been a 400 basis point hit to our occupancy. Certainly that portfolio has underperformed our expectations. We sold the number of assets down there. As I mentioned to a previous question, our focus really is gearing in sharply on the value we can create at our Uptown ATX development. But we also recognize that there's an overhang right now on our 2 remaining developments, primarily One Uptown, which as I mentioned, is 65%. And then 3151. We have a great pipeline there, but we need to show the Street that we can execute and get leasing done there. We did take at a higher price cost of capital, albeit through loan proceeds. But we do have $0.5 billion of assets on the balance sheet that aren't generating a lot of return right now. And we think as that leases up, we'll be in great shape. All that being said, the Board and management review our strategic direction every quarter. We remain in very close touch. We have a lot of discussions underway with these recap partners, asset sale programs. So I think we never lose sight of the fact that tactics have to be part of a strategic direction. We think we have all the key ingredients here to get back to investment-grade metrics, stabilize these development projects, all while we're recycling assets to generate additional liquidity, but also maintaining good operating portfolio performance. Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jerry Sweeney for any further remarks. Jerry Sweeney: Great. Well, thank you all for participating in our call today. Look, prior to signing off, some time ago, we did announce that George Johnstone has elected to retire. So this will be -- he'll be retiring shortly. This will be his last earnings call. So while we have several internal celebrations plans for his remarkable career, I did just want to mention on the call, on behalf of the Board of the employees, George, thank you for your many years of outstanding service and your many, many contributions. You will be missed. But we have very best wishes for the next step of your life's journey. So with that, Jonathan, we can sign off. Operator: Certainly. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. George D. Johnstone: Thank you, Jerry.
Operator: Good morning, and welcome to the Zurn Elkay Water Solutions Corporation Fourth Quarter 2025 Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer; and David Pauli, Chief Financial Officer for Zurn Elkay Water Solutions. A replay of the conference call will be made available as a webcast on the company's Investor Relations website. As a reminder, this call contains certain forward-looking statements, which are subject to the safe harbor language outlined in Zurn Elkay's press release issued yesterday afternoon and in the company's filings with the SEC. In addition, some comparisons will refer to non-GAAP measures. The company's earnings release and SEC filings contain additional information about these non-GAAP measures, why they are used and why the company believes they are helpful to investors and contain reconciliations to the corresponding GAAP confirmation. Consistent with prior quarters, the company will speak to certain non-GAAP metrics as they feel they provide a better understanding of the company's operating results. These measures are not a substitute for GAAP. Zurn Elkay encourages you to review the GAAP information in its earnings release and SEC filings. With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn Elkay Water Solutions. Todd Adams: Thanks, Rebecca, and good morning, everyone. I'll start on Page 3. We wrapped up calendar year 2025 with a pretty decent fourth quarter as sales grew 10% organically over the prior year Q4 and EBITDA grew 14% to $104 million, with margins expanding 100 basis points to 25.6%. In the quarter, we generated $83 million of free cash flow, bringing the full year to $317 million, which was up 17% over 2024. Over the course of the year, we repurchased about 3% of our outstanding shares for $160 million and paid $64 million in dividends. All this while leverage declined to 0.4x. Taken as a whole, we accomplished a lot over the course of 2025. The most important of which are the additional sustainable competitive advantages we've built in our business that will help us grow faster and be more profitable in the future, and I'll touch on those in just a bit. Along the way, 2025 afforded us the opportunity to live test the supply chain optimization plan that we have been deploying and talking about for several years and for the most part, it's worked flawlessly. We quickly celebrated 2025 here, our attention has turned to the next 3 years and even more specifically delivering another record year in 2026. For us, leveraging the Zurn Elkay Business System and everything we do, and how we operate, keeps us relentlessly focused on getting just a little bit better every day. To that end, one of the core pillars of ZEBS is our strategic planning and strategy deployment process. We wrapped up our annual 3-year strategic planning process in Q4 and are now actively deploying year 1 of that plan. It's a process we've used and done annually for about the last 18 years or so, and we think we've made continual improvements in that process. But this process isn't a desk exercise. It's a full contact sport where we evaluate every aspect of our business from our markets, competition and our industry to products, customers, channels and adjacency as well as larger, more disruptive ideas. We ask what's changed, what did we get wrong last year and what are our risks? And importantly, where can we further exploit the competitive advantages we've built? This defines and aligns our organization around what our priorities are going to be over the next coming 1, 2 or 3 years. The resources and investments required as well as the tools, processes and capabilities we need to leverage or develop to get there. While we're not going to be super specific this morning about the exact things we're up to, at least at this juncture, I can say this. We see more new organic growth opportunities, largely in adjacencies and underserved verticals than I can remember. We have a plan to attack these opportunities. And assuming we execute, which we have a reasonable track record of doing, I'm confident this only enhances our organic growth trajectory over the coming 2 to 3 years. I also believe that in time, our approach in attacking these adjacencies and verticals will have an incrementally positive impact on our M&A cultivations. Before I turn it over to Dave, I'll touch just briefly on our initial outlook and framework for 2026. The approach we're taking to our outlook this year is exactly the same approach we've taken in the past. We start with a range of outcomes that are reasonable, not back half weighted and in line with our demonstrated performance. We then go about retiring risks quarter-by-quarter while we work on our strategic breakthroughs. We gave everyone our view on the market last quarter, and that hasn't changed. We also have some carryover price from last year. And most importantly, we're executing well. All things equal, we're off to a really good start in January, but still 11 months to go in 2026. So now I'll hand it over to Dave to take you through some more color on the quarter. David Pauli: Thanks, Todd. Good morning, everyone. Please turn to Slide #4. Our fourth quarter sales totaled $407 million, which represents 10% core and reported growth year-over-year. Continuing what we saw throughout 2025 and in line with our expectations going into the quarter, core sales growth in our nonresidential end markets outpaced the softness we experienced within residential and pockets of the commercial segment within nonresidential. In the fourth quarter, we continued to deliver positive price/cost position with respect to tariffs and saw the benefit of roughly 5 points of price in the quarter from our previously announced tariff-related pricing actions. Overall, we continue to have solid execution on our growth initiatives, and they helped to drive our sales performance above the outlook we provided 90 days ago. Turning to profitability. Our fourth quarter adjusted EBITDA was $104 million, and our adjusted EBITDA margin expanded 100 basis points year-over-year to 25.6% in the quarter. The strong margin and year-over-year expansion was driven by the benefits of our productivity initiatives, leveraging our Zurn Elkay Business System and continuous improvement activities across the organization that Todd will touch on in a few slides. For the fourth quarter, profit performance continued on a trend we saw all year of strong year-over-year margin expansion. 2025, our sales and adjusted EBITDA have increased $129 million and $52 million, respectively, which represents a 40% drop-through on the year-over-year volume increase. Our full year adjusted EBITDA margin improved 120 basis points year-over-year as core sales grew by 8% in 2025. Please turn to Slide 5, and I'll touch on some balance sheet and leverage highlights. With respect to our net debt leverage, we ended the year with leverage at 0.4x, the lowest leverage we've had as a public company. We continue to repurchase shares in the quarter, we deployed $25 million to repurchases. That puts our 2025 full year repurchases at $160 million with an average repurchase price of $36.74. Free cash flow finished strong at $83 million in the quarter, bringing our full year total to $317 million or a 17% improvement year-over-year. We continue to cultivate and evaluate our funnel of M&A opportunities and our combination of management team capability, low leverage and cash flow generation all support our ability to execute on the right M&A opportunity. At the same time, we're actively working on entering organic adjacencies through investment in internal development. I'll turn the call back to Todd. Todd Adams: Thanks, Dave. I'm back on Page 6 here, where I want to briefly highlight a few of the things you'll see in our 2025 sustainability report that we'll be issuing later this month. So last year alone, our drinking water products provided 2.4 billion gallons of cleaner, safer filter water while preventing 20 billion single-use plastic bottles from entering waterways. We launched Pro Filtration, our latest evolution of our trusted Bottle Filling Station line, advancing both water quality and sustainability for customers worldwide. Pro Filtration features included top-mount filter access for faster 30-second filter changes and reduced downtime, new 10,000 gallon filtration capacity for longer filter life -- filter life gauges, UVC LED lights. We also introduced a filter that expanded filtration beyond PFOA and PFOS to capture the full family of PFAS or forever chemicals. Filters are now certified to reduce microplastics, lead, total PFAS and much more. And we expanded our filtration portfolio with Liv EZ bringing commercial-grade water filtration into residences, commercial and hospital applications, helping people enjoy the same high-quality water trusted in schools, airports, hospitals and stadiums. We're especially excited to share that we have recently partnered with TerraCycle to launch a recycling program for used water filters. Customers can now return filters through TerraCycle's Zero Waste Boxes where plastic casings are repurposed into durable industrial materials and carbon media is responsibly managed. Activated carbon filters like ours retain more than 99.5% of PFAS, ensuring contaminants remain securely contained during disposal. And it's not just advancements in drinking water. The sustainability benefits of our products permeate into our other product categories. Our World Dryer hand dryers eliminated the need for 3.5 billion paper towels in 2025. We launched the SANITIZE + DRY sanitizing dryer, a breakthrough hygienic, sustainable hand dryer. Its cold plasma technology neutralizes 99.99% of common bacteria and viruses, including SARS, COVID, E. coli, Norovirus, Influenza A and the common cold, all without chemicals. It's not why we do it, but our work continues to earn recognition. Zurnlkay again maintained top-tier ratings from Sustainalytics, MSCI and S&P Global. And we were named to 6 leading sustainability lists, including Newsweek, TIME, Barron's and USA Today. Proud of our efforts to expand access to clean water. Our Fountains for Youth program continued delivering filtered bottle filling stations to under-resourced schools, helping ensure students have reliable access to clean, safe drinking water. And in total, we reached 1.9 million in philanthropic giving in 2025. All in, another really solid year of walking the talk with respect to sustainability and watch for the report in the coming weeks. So the last one for me is on Slide 7. And last quarter, I shared our 1-page slide on ZEBS that depicted how we think about and manage our business, leverage our operating philosophy and ultimately, how we measure ourselves. In the middle of all of it, we highlighted that the glue to this was the Zurn Elkay Business System, our common language, which is rooted in a deep culture of continuous improvement. We found that continuous improvement can connect and engage everyone, in every location, function and role around the simple idea of making things 1% better every day. And the best part of it is it compounds every day and to improve quality, better customer satisfaction, more engaged associates, lower cost, career development, the list goes on and on. We have an internal portal creatively named #CI, where we ask our associates to communicate and share in real time some of the things they're doing or have done to get better. This creates a way to celebrate successes, share ideas and radiate these across the company regardless of position or location. Back in 2024, our team of roughly 2,500 managed to log 3,741 #CI submissions. In 2025, that same group of roughly 2,500 people submitted 5,568, an increase of almost 49%. And if I was a betting man, which for the record, I'm not, I take the over on what our team will do in 2026. And now I'll turn it back to Dave for the outlook. David Pauli: Thanks, Todd. I'm on Slide 8 with our 2026 guidance framework. As Todd mentioned earlier, our approach to the guidance is the same as we've taken in the past, provide a framework that we have confidence in our ability to deliver taking into account the fact that we are 1 month into the year and a range of outcomes are possible. With respect to the full year and based on the assumptions I'll touch on shortly, we expect core sales to be up plus mid-single digits, incremental adjusted EBITDA margins of approximately 35% on the increased sales and generate approximately $335 million of free cash flow in 2026. On the upper left-hand side of the slide are a few assumptions embedded in our outlook. From an end market perspective, our outlook assumes our markets in total look a lot like what we just saw in 2025. Institutional and waterworks end markets continue to grow at low single digits. Commercial end markets to be flattish and a continued tougher residential end market. The result of these individual end market expectations combines to an overall assumption that the market is generally flat to slightly positive. In terms of price, we will have higher price impact in H1 as by the second half, we cycle against quarters that already have the tariff-related price realized. One of the uncertainties that will impact 2026 that we are actively monitoring is the evolving tariff environment. Our guidance assumes that the tariff countries and their respective rates remain consistent throughout the year and are consistent with today's levels. As a business, we navigated through the 2025 tariffs very well and continue to action our strategy to exit direct material purchases from China. We are on track and with some products ahead of schedule to our goal of having only a few points of COGS spend coming out of China by the end of 2026. As we did in 2025, we again remain confident in our ability to execute to positive dollar price/cost impact from tariffs in 2026. For the first quarter of 2026, we are projecting core sales growth to increase 7% to 8% over the prior year with incremental adjusted EBITDA margins of approximately 35% on the year-over-year growth. At 35% incremental margins, the EBITDA margin for Q1 will be approximately 25.5% to 26%. It's roughly 60 basis points of margin expansion over the prior year at the midpoint of the range. In Slide 8, we've included our first quarter and full year outlook assumptions for interest expense, noncash stock compensation expense, depreciation and amortization, adjusted tax rate and diluted shares outstanding. We'll now open the call up for questions. Operator: [Operator Instructions] And at this time, your first question comes from the line of Bryan Blair with Oppenheimer. Bryan Blair: Very solid close to the year. Todd Adams: Thanks Bryan. Bryan Blair: I guess starting with your core sales outlook, maybe speak to what your team is seeing to kick off 2026? And then how we should think about the build to mid-single digits in terms of market outgrowth and price carryover or perhaps incremental price being baked in. Todd Adams: Yes. I mean I would sort of decouple those 2 for a moment and say, if you look at what we're saying for Q1, we're looking at 7% to 8%. I think we're off to a really good start. I think as I also mentioned in my intro comments, there's 11 months to go. And so I don't know that there's a discrete framework that marches you from 7% to 8% to mid-single digits other than there's probably a little bit more price in the first half than second. But all things equal, I think we endeavor to beat what we're saying for the year. And we're off to a really good start, Bryan, I think is the only way to characterize it. Bryan Blair: Understood. That makes sense. And as a follow-up, your balance sheet is in a pretty fantastic position. You're obviously generating a lot of cash flow. Maybe touch on the deal environment now. It's been a while since your team has executed a transaction. I know that's not based on inactivity behind the scenes. Just curious how your funnel has developed, how we should think about actionability this year, whether there's, I guess, any excitement on that front. Todd Adams: Yes. I mean, as we talked about, we went through our strategic planning process. I think we've been even more exhaustive in how we've looked at adjacencies. And so there's a fresh sort of view on the funnel and some of the cultivations that are happening that have been in the works for a while, continue to progress. We have not seen anything transact that we feel like we've missed. And so I'm optimistic that the combination of continuing to do the cultivation work, I would say, maybe a new fresh look at adjacencies and what that can do both organically, inorganically, but I think will be incrementally helpful. And as you point out, we've got tons of flexibility over the course of the year to repurchase shares, look at the dividend again and ideally get something done from an M&A perspective that fits -- meets our criteria and we can do a lot with. So I think we're optimistic, but I'm not going to predict or project either. Operator: Your next question comes from the line of Nathan Jones with Stifel. Adam Farley: This is Adam Farley on for Nathan. Following up on that last M&A question. Could you provide any more color or detail on maybe some of the adjacencies or verticals that you've identified through that your planning cycle? Todd Adams: Adam, you're a little bit muffled. I can't quite hear what you're saying. Adam Farley: Yes. So following up on that last M&A question, could you provide any more detail or color on maybe the new adjacencies or verticals that you've identified in your 3-year planning cycle? Todd Adams: Yes. I guess, I will give you a little color. I mean I think it looks and feels a lot like things we do today. So it's North American-based. It's in and around water, professional-grade plumbing. It could have flavors of leveraging certain lead products into different verticals. And I'll take you back to what we did in fire protection 5, 7 years ago, where we identified we had some niche products and then we built out a portfolio around that and then grew our fire protection business into something that's substantial. And so it's got a lot of that flavor where we start with maybe a larger application where we have some products that are involved and then what else can we add to that bundle, either organically or inorganically to all of a sudden be a formidable supplier into that vertical or into a discrete market adjacency. So I think you'll see some of these things roll out over the course of the year. And when we do that, I think it will become obvious as to why it makes sense for us to get into these and the kind of incumbency that we have right next door that we can leverage that kind of expertise, that go-to-market, that supply chain into these adjacencies and be a formidable competitor right away. Adam Farley: P Okay. That's helpful. And then looking at the 2026 guide, given some of the more recent increases in metal prices and continued general inflation, I mean, do you think you need to or maybe already have been out to the market with additional price increases? Todd Adams: Yes. I mean it's certainly something we're watching. We're not oblivious to it. But in the same breadth, I think when you look at what we're doing with our supply chain, our costs are coming down month by month as we continue to move and leverage the new supply chain base that we've created. That being said, yes, we've seen and watched metals. And I think it's one of those things where we'll be as judicious and smart about any incremental price as we can for our customers and the industry itself. But it is something we're watching. But for the time being, we feel like we're relatively well positioned. Operator: Your next question comes from the line of Michael Halloran with Baird. Michael Pesendorfer: This is Pez on for Mike. I wanted to ask about the drinking water business. I know in October, the Lead and Copper Rule came out from the EPA, and I know that they did some presentation and educational awareness in November and some tweaks to that plan in December. I'm wondering, is that -- do you view that as an accelerant to the drinking water within the institutional, specifically school market? Or do you see that more as helping sustain the healthy trajectory of attachment and acceptance that you've been seeing since the merger? David Pauli: Pez, I think we view it as helping to sustain. I think things like what the EPA came out with only help to continue to raise the awareness around drinking water and some of the drinking water quality issues that we have here in the U.S. So whether it's lead, whether it's lead and copper rules, whether it's PFAS, microplastics, I think any of the legislation or pending things that you see around that is only helpful for us. I think it continues the trajectory that we saw and don't see it as an accelerant to what's already out there, but it doesn't hurt the overall drinking water story. Todd Adams: Yes, Pez, I mean, the way to think about it is there's -- it's a relatively new category bottle filling. And there's 6 million of these drinking fountains installed. And so to the degree people are more aware and it's going to help with that. And it's got such a long tail on it. I'm not sure that we actually need the acceleration. I think it's just a steady drumbeat of better products, more awareness, funding at the right times. And then once that installed base continues to grow, the filtration opportunity compounds from there. And so I agree with Dave's comments that I don't know that it accelerates it as much as it just -- it's another down payment on converting this massive installed base out there. Michael Pesendorfer: Understood. That makes a lot of sense, particularly given the traction that you've already been seeing. Maybe switching gears a little bit. When we take a look at the incremental margin guidance, obviously, execution has been exceptional. The 42% pull-through last year, the supply chain optimization, it feels like that 35% is probably a prudent approach to 2026. And I know that you said that you're taking a similar approach to guidance as you have in the past, trying to remain prudent in mitigating potential risk through the year. As we move forward, do you see an opportunity for that baseline incremental margin to move higher over time, just given some of the work that you've done on supply chain optimization, the new product innovation and just the mix of overall business evolution? David Pauli: We do. I think we're trying to continue -- as we've talked about maybe in the remarks, invest back into the business in organic growth. And so I think when you think about our business today, our fastest-growing categories and products are above the fleet average. So I think there's a mix weighting that's going to naturally raise the overall incremental margin over time, along with putting some resources and investment back in to grow more. So we feel like 35% is a baseline that we're very comfortable with. And all things equal, if we execute like I think we will over the next 2 to 3 years, I think that, yes, the number can move higher for sure. Operator: Your next question comes from the line of James Ko with Jefferies. Jae Hyun Ko: So I wanted to ask about kind of just the construction industry kind of overall. I mean, you obviously track many different indicators, but data continues to kind of suggest elevated planning pipeline, but the conversion remains weak given kind of declining billing. So what are some tangible signs that you're watching that would suggest inflection point in project conversion here? David Pauli: Yes. I think when we look at it, James, if you go back and some of the information that we shared on our last earnings call, we look at a number of different indices. We specifically highlighted some of the Dodge square foot data. But I think when you look at the guidance that we gave -- the guidance that we gave for 2026 is essentially what we're seeing today. So we're seeing an institutional market that continues to grow, a weaker commercial market. And then a residential market that at the start of 2025, I think we called flat, but ended up being a little bit tougher of an end market. And so when you look through what we're seeing in terms of our incoming order rates, what we're seeing in terms of project starts through our reps across the country, we have a pretty good insight into the level of construction activity that's happening and are comfortable with the guidance that we gave in 2026, looking a lot like what we just saw in 2025. Jae Hyun Ko: And I wanted to touch on the drinking water business here again. Can you kind of update us on how filter attachment rate is kind of progressing with the Pro Filtration? And it seems like gallons of filter water kind of increased like mid-single digit in 2025. So how should we think about that in terms of filter sales? David Pauli: Yes. I think we've seen good early adoption of Pro Filtration. So that's the product that Todd talked about, the different feature set and that launched this summer. I think when you look at that product, the features and benefits that Todd walked through were a direct ask of the consumer and the maintenance folks that interact with that product every day. And so one of the nice things about that product is as we sell it, the attachment rate becomes very high. So we've done some things with a proprietary head that only our filters work in. And also to make the unit work properly, you have to continue to change the filter on a regular interval. And so I think Pro Filtration is only going to help us in that effort to get the attachment rate as high as possible. And then just from a filtered gallons perspective, yes, there's some nice growth in terms of actual filtered gallons. And so that stat of us is really how much -- we know how many filters we've sold. We know the gallons of the associated filter. And what you're seeing is the result of that. And so that's the work that our team is doing every day in terms of getting the latest Pro Filtration speced in and then making sure that we pull through the related filtration along with it. Todd Adams: I think it's not a -- we're not going to measure attachment rate every 30 or 90 days. I think with the recent launch of Pro Filtration and the very, very high attachment rate associated with that as that becomes a bigger portion of our overall shipments and as that grows into the installed base, there's without question, it's going to pull the overall attachment rate up. And so I think it's a good question. I think it's something that we're measuring and -- but I don't know that it's a 30- or 90-day sort of thing. Let's get Pro Filtration units into the field over the course of the year. We know the attachment rate on it is exceptionally high. And as that happens over 1, 2 and 3 years and that compounds, I think we see a really good path for filtration. Operator: Your next question comes from the line of Jeff Hammond with KeyBanc. Jeffrey Hammond: Can you give us price in the fourth quarter and what's embedded in 1Q? And then just on your announced pricing for this year, is that kind of in line with back to normal course? Or does it contemplate a higher annual price increase because of tariffs -- newer tariffs or some of this copper inflation? Todd Adams: Yes. I think any price increases that we've put in place this year, Jeff, are sort of back to normal course. And then in terms of what's in Q4 and what's in the guide, I think Dave will. David Pauli: Yes, Jeff. Yes, so Q4 was about 5 points of price. And I think the way to think about price in 2026 is I'll just walk you through what we experienced in 2025 and 2026 looks like the inverse. So Q1 was light price. Q2 1 point or 2 of price. And then in the back half of 2025, we had 4 to 5 points. And so as it rolls into 2026, it's almost the exact opposite. You've got 4 to 5 points of price in the beginning and then starts to lap some of the price increases that we put to the back half of the year. Jeffrey Hammond: And then as you look at kind of these adjacencies and new products, I remember back with Elkay, you were maybe considering entering that market and then you bought Elkay. Like do you see -- and I think, Todd, you mentioned kind of these organic opportunities lead to inorganic opportunities. Maybe just talk about how you see those going together as you look at some of these adjacencies. Todd Adams: Yes. It's a good question, Jeff, and it's really grounded in the way we look at our strategic plan. And so as we're going through our work and looking at competitors and markets and doing the mechs and evaluating who's there and what would it take to compete and all those things, it launches sort of a dual path, right, of what do we want to prioritize and do internally that may lead to cultivation and ultimately an M&A opportunity. And we sort of value those 2 things for a while. And then when there's a decision to go one path or the other, we make it and we live with it. And so that's the process that we've used really for a long period of time. And I think as we've, I would say, expanded our view on what could our served market look like, that only creates, I would say, more optionality for M&A that perhaps maybe we weren't cultivating before. But we can do it organically as well. So it's a little bit of the same path that led us to Elkay, Jeff, as you point out. And so I think we're excited about it. I think it's -- if we can think about our markets being $1 billion or $1.5 billion or $2 billion bigger, that's a big opportunity for us. And when you think about can we grow, 1% is $17 million, 2% is $34 million. So that's a great opportunity for us over the coming years to enhance our underlying organic growth rate, either organically or through an M&A transaction or some sort of transaction that makes a ton of sense because we've already vetted the category. We know the business, we've cultivated it. And so we're excited about it and optimistic that good things will happen as a result. Operator: Your last and final question comes from the line of Brett Linzey with Mizuho. Brett Linzey: Just a follow-up on the adjacent market strategy. So I understand you don't want to expand too much on the product categories. But maybe just a finer point on the expense or the product development spending you think is required this year as you ramp up and get set for any type of commercialization there. Todd Adams: Yes. I mean, there was clearly some throughout 2025, there will be more in 2026. It's measured in the millions of dollars for sure. But it's all sort of embedded in sort of that [ $35 million ] for the year, maybe better. But yes, it's going to be one of those things where we're not going to specifically call it out, but just know that it's millions of dollars in '25 and it will be millions of dollars in '26 as well. Brett Linzey: Got it. And then just a follow-up on data center. So currently not a big market for Zurn. We're seeing orders accelerate as we exit '25. Is this a growing focus for the company internally? And I guess, what is your right to play and win in that vertical, whether it's drainage or filtration and other addressable opportunities? Any color would be great. Todd Adams: Yes. It's funny because we have, I would say, the commensurate amount of content in a data center as we do in anything else. So when you think about a commercial building that requires lots of water, plumbing, drainage to either heat or cool or provide fire protection, we do participate. And I know some people have questioned whether or not we're in it at all? We absolutely are. It's absolutely growing quickly for us. Do I ever see it being a wedge in our pie? Perhaps not. But nonetheless, it's clearly a growth category for us. We have a great suite of products that we compete with others that are in the space. We don't have the heating or the cooling, but we've got everything else that touches water. And so I think we're doing quite well there. And it certainly is helping us as we exit '25 and grow into '26. Operator: I will now turn the call back over to David Pauli for closing remarks. David Pauli: Thanks, everyone, for joining us today. We appreciate your interest in Zurn Elkay Water Solutions, and we look forward to providing our next update when we announce our March quarter results in late April. Have a good day, everyone. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Fredrik Dalborg: Good morning, everyone, and welcome to the AddLife Fourth Quarter Presentation. This morning, we will take you through the highlights of the quarter and then, of course, open up for a Q&A session. After that Q&A, we do encourage you to stay on because we have recorded a wonderful video of one of our companies, this time, Biolin, a manufacturer of advanced research instruments. So now let's go. I'm very pleased to note that the AddLife companies were able to wrap up 2025 in a good way. We saw continued profit improvement. We saw strong profit and strong cash flow. On the EBITA margin account, we saw that Labtech were able to protect the very high level at 14.1%, EBITA margin, same as we had in the strong fourth quarter of last year. And on the Medtech side, it improved to 12% compared to 11.6% in the corresponding quarter of last year. Overall, we saw healthy customer demand in our markets. But of course, currency effects impacted our sales growth, but the currency adjusted sales increased by 2% in the quarter. We are working diligently with profit improvement initiatives, and this is one of the core parts of our business model. We have seen for many quarters now a continuous improvement, and we do expect that to continue in the future as well. In the U.K., we have had a long-standing dialogue with a key partner in the area of endoscopy. They have chosen to go direct, and we have supported them in that, handing over the team and the resources related to that business, and we have received a consideration of SEK 158 million in the quarter. So this, in combination with the strong cash flow that we saw has helped us to achieve a net debt-to-EBITDA of 2.2. So this -- with this, we achieved our goal of remaining at 3 or below, and we have actually far exceeded the ambition as well. So very pleased with that. So now I hand over to Christina, who will take us through the details of the quarterly financials. Welcome, Christina. Christina Rubenhag: Thank you, Fredrik. We had a stable growth in the quarter after a very strong fourth quarter last year. Organic and acquired revenue growth was 2%, while adjusted EBITA growth was 5%. In the quarter, we had negative effect from currencies. And looking at revenue, it was minus 5%, and the EBITA was impacted with minus 7%. We have 2 financial targets within AddLife. One is to improve profit with 15% year-over-year. On the long term, this is supposed to come approx half from acquired and half from organic growth. Looking at 2025, organic growth was 10% and acquired growth contributed with additional 2%. Then we had FX impacts in the quarter. So total EBITA growth for 2025 was 8%. So including currencies, sales growth was minus 3% in the quarter with organic and acquired growth of 1%, respectively. We had stronger gross margin. This is due to price management, also increased prices in new tenders and the product mix where we are moving towards more advanced high-margin products. We had higher OpEx in the quarter as well, driven by growth investments and also some specific projects. The adjusted EBITA margin was up to 12.4% in the quarter compared to 12.3% last year. Also, lower interest costs continue to have a positive impact on the profit and loss. And then adding divested operations, profit before tax increased with 129%. EBITA margin is clearly in a positive trend. Looking back to 2023, we were at 10.5%, increasing to 11.3% and now we end 2025 on 12.1%. Looking at the fourth quarter, Labtech margin remained at a high level of 14.1%, same as last year, while Medtech increased to 12% from 11.6%. Full year EBITA margin has also increased for both business areas. They are approximately at the same level now. Labtech, 12.5% and Medtech is on 12.4%. An increasing EBITA margin has been a focus area throughout the last 3 years, and that remains a top priority moving into 2026. Operating cash flow is normally high in the fourth quarter, and this year was not an exception. We delivered almost SEK 900 million in the quarter and for the full year, it was SEK 1.4 billion. Also cash conversion remains high at 111%. Excluding sales of operation, it was at a high 98%. And to be above 100%, that is a little bit too high. So going forward, probably in the range of 95% is more realistic. And of course, focus on working capital efficiency remains a priority also in 2026. Working capital contributed with SEK 426 million in the quarter. And here, we had lower inventory. We had strong collection of accounts receivables and also account payable was higher. Looking at inventory towards sales, we were at 16% throughout 2025, slightly better compared to '24 that was 17%. Acquisitions in the quarter relate to Pharmacold and Opitek. Net debt was reduced with almost SEK 800 million in the quarter. With majority of the loans in euros, here, we had a positive impact from currencies. But the main reason for the net debt to be reduced in the quarter was due to repayment of loans and increase of cash. When we talk about net debt, we include in addition to bank loans and deducting cash, lease liabilities, contingent consideration, pension liabilities and provisions. Net debt in 2025 decreased with almost SEK 900 million. And at the end of the year, leverage were at 2.2, which is clearly below the target of 3 or below that we set up for ourselves. Net debt towards adjusted EBITA was 2.5. The second financial target for AddLife is to have a profit over working cap of above 45%. 2025 ended at 62% compared to 51% last year. And debt has been reduced via self-generated cash flow. And entering into 2026, we now have a balance sheet that supports both organic and acquired growth. And with that, I hand over to Fredrik again. Fredrik Dalborg: Well, thank you, Christina, for that thorough review, and now we will get into the business areas summaries. So starting with Labtech. As you may remember, Q4 of 2024 was a very strong quarter for Labtech. And this quarter, we saw currency adjusted revenues declined a little bit by 3%. We're really pleased to note that the EBITA margin were maintained in spite of that slight drop in revenue. So we are still at 14.1%, same as the corresponding quarter last year. So that's very healthy. We saw a little bit less instrument sales in this quarter compared to last year. And in that last year quarter, we had a very high level of instruments being delivered linked to various tenders that we won. In the market in general, there has been some hesitation with academic market sales. We saw that this quarter also, but slightly better, I would say. We also saw a little bit of caution in the pharma industry segment. In the third quarter of this year, we were really pleased to note a very healthy development in Central and Eastern Europe, and we saw that continue into Q4. So that helped a lot, wrapping up the quarter for Labtech in a very healthy way. Moving on to Medtech then. We saw growth, excluding currency effects at 4% and acquired growth was 1%. EBITA margin improved to 12% from 11.6% in the corresponding quarter. Capital sales in the U.K. have been weak for some time now, as many of you have noted. We were really pleased to see that, that actually improved in the fourth quarter. So that's great news. As I mentioned earlier, we have an agreement with a supplier to hand over the endoscopy business in U.K. and receive the consideration for that. Elective surgery in general in the European market tended to be relatively flat. The patients list weren't really shrinking. And on top of that, we also had strikes in U.K. as well as in Spain during the month of December. So number of surgical procedures was relatively low. But anyways, a good growth in the Medtech business and also helped by a healthy development in Homecare, which we think will continue going forward. We talk a lot about improving margins, and that is indeed a key activity for us, actually what we have chosen to prioritize the highest. So what are we actually doing? We are working on margin improvement initiatives in the eye surgery business, we are strengthening the margins in Homecare. We are working with specific initiatives in the companies where we see further improvement potential. And then on a more general level, we are always driving gradual and continuous performance improvement programs across all companies. This is a key piece of our business model. We are also pruning our product portfolio, removing products that are less profitable and adding new and advanced high-margin products. We are also increasing the share of own products. And of course, the acquisitions we make are focused on higher-margin segments and are expected to contribute to this positive development in terms of margin. And we do these activities, we drive them, of course, starting with our fantastic companies within the group. They are all led by strong and empowered leadership teams, and they have a very nice entrepreneurial spirit that we like to see. So they are very strong in this continuous work to improve margins. They are also supported by a group of experienced business unit leaders. We are also leveraging the activities we have within AddLife Academy and a strong group of business controllers. And on top of that, the companies together with the business unit leaders work on an acquisition agenda improving margins over time. So with this, we have a lot of activities ongoing. We have seen a lot of good results, and we do expect those results to continue. I also want to highlight our unmatched European coverage. This is something that we have been working on for quite some time, creating a pan-European footprint. So of course, our origins in the Nordics are strong, but we are very strong in Western Europe, Central and Eastern Europe as well as Southern Europe. This is important for us because it gives access to a very large market. It gives us more supplier opportunities. We are also able to choose from a broader range of acquisition targets, which is quite powerful because we can be selective and really choose the acquisition targets that are attractive in many ways, including healthy multiples. So -- and I also want to move forward to acquisitions now. Again, acquisitions are again becoming a very important growth driver for us. And in the month of December, we were very pleased to welcome 2 new companies to the AddLife family, starting with Pharmacold, which is a specialized in highly customized refrigeration technologies as well as services for the pharma industry and for the health care sectors. Together with Holm & Halby's customer base and regulatory know-how, we see great potential for these highly customized products and to grow that business even further. So a very nice and healthy acquisition here, relatively small, but with great potential. Another acquisition that we concluded in the month of December is a Danish manufacturer specializing in patient positioning products that address both staff ergonomics as well as the patient safety. We have worked with this company for many years. We know the products well, and they are really well renowned in the market. This business will become part of Mediplast and very much in line with the strategy that we have to increase the share of our own products. So a nice addition to the business and very much in line with the strategies that we have laid out. So very happy to also welcome Opitek to the AddLife family. So to summarize the quarter, we are very pleased to note that the margin improvements, they do continue in the fourth quarter as well as for the full year, of course. And we are working diligently on these efforts, and we do expect further potential to improve the margins going forward. Of course, currency effect impacted revenues, but organic and acquired growth were positive compared with a strong Q4 in 2024. We're very pleased with the fact that net debt-to-EBITDA is now at 2.2. So this means that our ambition to reduce it below 3 has been achieved and exceeded. With this, we have strengthened the balance sheet, and this enables us to really pick up the pace with acquisitions again, which we did already in December, and we expect a lot of activity going forward. So I can really say that we look forward with confidence and enthusiasm to a strong 2026. Thank you very much. And with that, we open up for Q&A. Fredrik Dalborg: All right. So thank you for listening into the presentation. And now we are ready for questions. And I think we see a few of you having raised the hands already. So [ Philip ] maybe you can start and don't forget to unmute. Unknown Analyst: I hope you can hear me now. Fredrik Dalborg: Yes. Christina Rubenhag: I can. Unknown Analyst: Starting on the U.K. market recovery, positive to hear that you're seeing some early signs there. Could you elaborate a bit on the momentum you're seeing entering '26 and what you're seeing throughout the coming year here? Fredrik Dalborg: Yes, of course. Thank you. Good question. So as you may remember, we have seen for really the whole year a bit of a hesitation in primarily capital spending and capital investments in the U.K. market. And we're pleased to note that in the fourth quarter, that actually started to improve again. So that's a healthy. Sign. Looking at the general trend in the U.K. market, there was a little bit of a, I would say, subdued surgical procedures because of flu and also strikes and whatnot. But capital really did pick up. So we're pleased to note that. So that's a good sign also for the future. We can also note that as we have stated before, the NHS has become more and more clear in their vision for the future, where after the election immediately was relatively big. It's become more and more focused and clear what they are planning to do and in January, we have seen further statements talking about robotic surgery, talking about AI, talking about gene sequencing, things that we, as a group, are quite engaged in. So I think these are all positive signs. I hope that's an answer to your question, [ Philip ]. Unknown Analyst: Yes, of course. Good. And while we're on the notion of U.K. and also perhaps Spain, the strikes in December, early December, is it possible to quantify that impact or give any indication of how large that impact was? Fredrik Dalborg: A little bit tricky, but I think we should look at it as a few days of lost surgical procedures. So a few days of lost sales in U.K. as well as in Spain. Unknown Analyst: Sure. Makes sense. And then perhaps finally for me, and then I'll get back into the queue. You talked about an improvement in home care market, which is positive, of course. How sort of -- what's your visibility on it? And how sustainable is it? Is it throughout the year? Or is it a few months or... Fredrik Dalborg: Well, I think we're starting to see signs of improvement, but we still have work to do. I mean it's still an area where we think there is further growth and margin improvement potential. So there are a few things that are going on here. We have a few initiatives that have been worked on with -- in terms of product launches and so on that are now starting to show signs of really picking up the pace. So that's exciting that a lot of that is on the technology side. On top of that, we have also seen in multiple countries, a healthy trend in terms of construction. So some new care homes and so on that are being built or being planned to be built. So I think the outlook is in general in that market is improving. And our internal initiatives are also starting to show signs of results. So more work to do, but some positive direction there, I think we can see. All right. Thank you for good questions. So I think we have Ulrik here. Ulrik Trattner: Yes, hopefully, you can hear me, all right. Fredrik Dalborg: Yes, we can. Yes. Ulrik Trattner: A few questions on my end. You commented on a slightly softer Labtech market, especially in Denmark and a bit of caution from the pharma companies. Is that something that you see broad-based and something you potentially could elaborate a little bit about? Fredrik Dalborg: Well, not super broad-based. I think it's quite primarily a Denmark thing where we see a little bit of hesitation just very recently. We're not super worried about it. I think there is a healthy underlying market and growth there. So I think in 2026, that should pick up again is our expectation. So nothing dramatic there. But looking at our numbers, Denmark came down a little bit on the sales side, partly currency, but also a little bit of a slower activity. But again, we do think it's temporary. Ulrik Trattner: And just general on the market conditions because I remember like 1 year ago, we did see a trend shift in tender activity. You entered into a few higher-margin tenders, and that looks to have continued throughout '25. So can you just give us sort of the state of the sort of tender market where we're at versus what we entered into '25? Fredrik Dalborg: I think we're -- we have seen the impact of these tenders. There were quite a few in fairly short period of time that we were successful in winning and those instruments were installed -- a lot of it were installed back in Q4 in 2024. So that was a bit of a peak on the instrument sales there. Of course, we have been benefiting from those sales related to the instruments that were installed. So the consumable sales have been supporting us throughout the year and will continue to do so going forward. Tender activity in general, I think it's normal, I would say, activity ongoing for sure, but sometimes there's a little bit more sometimes there's a little bit less quarter-to-quarter. But then overall, no trend shift really, I would say. I hope that's answer your question. Ulrik Trattner: Yes, yes, absolutely. That's perfect. And you sound optimistic about continuous margin improvements. And you guys have spoken before that there is improvements to be done in Homecare. And you've done a lot of tail cutting on the Medtech side generally throughout '25. Have you seen the full effects of the tail cutting? And are you done on that end where you feel -- obviously, there's some natural tail cutting going on, I guess, in your business, but majority of it is done in '25. And second question would be then the follow-up if you have enjoyed sort of the full effects on the margin side from those cutting out lower-margin products? Fredrik Dalborg: There were a few bigger measures taken during the year, you're correct. So we've seen that playing out nicely. So -- but the evolution of the product portfolio, it continues. And so there, I'm sure that we will be looking at portfolios and taking out less interesting products. For sure, we are adding a lot of new things. So I think the -- over all of 2025, we've increased our activity in terms of business development, finding new suppliers. And that has generated a number of new products being brought into the portfolio. Some of them have started to sell, but sometimes it takes time, especially if it's a novel technology and these activities and increased resource, both in the larger companies, but also using our network to support the smaller companies evolution of the portfolio. So I think more to come in terms of continuous addition of advanced products for sure. Ulrik Trattner: Great. And last question on my end before getting back into the queue. Can you say anything about the margin profile of the divested endoscopy business, if it was on par with rest of Medtech or roughly where they were at? Fredrik Dalborg: Yes. It was a healthy margin business for sure compared to the Healthcare 21 other product line. So good margin business. All right. Thanks, Ulrik. So now we move forward, so we have Albin here, right? Are you ready for us? Albin, are you ready for us? Daniel Albin: All right. I think I will stay on the margin side here. We've never seen such high gross margin in Q4. And of course, you're working with it, focusing on it. But is this just like the new focus? Or is it some timing effects as well? And how should we think about the gross margin heading into '26? Fredrik Dalborg: Yes. I think. Do you want to comment on that, Christina? Or is it something... Christina Rubenhag: There's no one-offs into it. No, it's more the result, I think, of the continuous work that has been done during the last 3 years. Fredrik Dalborg: So nothing dramatic disturbing the comparison, I would say. I think it's -- like Christina said, something we have prioritized and something that we're working on and something that every company is contributing to. Daniel Albin: All right. That's good to hear. And then on the M&A pipeline, you're now down at 2.2x net debt-to-EBITDA impressively. So can you give us an update on the pipeline? And how do you find the competition and pricing in the market currently? Fredrik Dalborg: Yes. No, I think we're very pleased that we have reached a really good level on the net debt-to-EBITDA. So we can put these concerns about balance sheet behind us. That's nice. We have been expecting this and preparing for it, right? So we have over the last almost 2 years, been gradually gearing up the activity and resource that are focusing on acquisitions. So the business unit leaders are driving their respective agendas for what type of acquisitions they want to make, and they are supported by a strong team of transaction specialists here in -- at the head office. So this pipeline looks healthy. We have a number of discussions ongoing, and we have a pretty clear plan of what we expect to do in the coming quarters. So I think we are optimistic about it. And then, of course, we are picky. We do stick to our criteria. We are picky about valuation and so on. And since we have a quite long list of attractive targets and we can search all over Europe, as we mentioned earlier, we will be picky when it comes to quality of company and the valuation as well. But I think it looks good. So we're excited about it. Daniel Albin: That's clear. And then looking at net sales per country, I just noticed that rest of the world is now down at SEK 2 million. Maybe I missed something here, but what does that stem from? And is that part of the plan? Fredrik Dalborg: Rest of the world, I think that's primarily China, Australia, U.S. to some extent, yes. So it's coming down a little bit. Well, I think we're clearly seeing some of our companies that are selling into the U.S. market, primarily research, certainly feel a change in behavior there. But it's -- on a group level, it doesn't really move the needle. But for those companies, it's obvious. And now let's move forward to Jakob. Let's see. I think he's still on mute, right? Jakob Lembke: Can you hear me? Fredrik Dalborg: Yes, we can hear you. Jakob Lembke: My first question is on the Medtech EBITA margin. Just to understand -- or looking at the U.K. on the sales, it seems that the U.K. actually grew in the quarter but you still say that the profitability is down from the U.K. [indiscernible]. Fredrik Dalborg: Well, I think if we look at the U.K. for the whole year, it's been negative, unfortunately, in the first 3 quarters. But now it improved significantly in the fourth quarter. So we're pleased about that. And it was driven to a large extent by more capital sales. So that's exciting. So the question there on the profitability, I think that we received a question earlier that asked about business that we're discontinuing and whether that was a high or low-margin business, I would say it's a good margin business in line with what we normally see in the U.K. market. So that's how we would look at it. Is that -- was that the question you asked? Jakob Lembke: Yes, not really. I mean, if I recall correctly, you had quite good sales to the U.K. a year ago. And now you were able to grow that earnings contribution from the U.K. in this quarter as well despite the sort of negative impact from flus and worse operating days and so on. Fredrik Dalborg: Yes. I think the conclusion is that a number of surgical procedures hasn't really grown. It's been a little bit challenged by flu and strikes and whatnot. But it's been holding up, so to speak. And then on top of that, we've seen a marked pickup when it comes to capital. So that's good. I mean it's been a bit of a challenge, a decline over the past few quarters, but now it's changed direction. So that's a positive. Jakob Lembke: Okay. Then just if we look forward, last year, I think Q1 was clearly the strongest quarter in terms of EBITA margin for Medtech. Is that still what we should expect in 2026? I know there's a sort of U.K. budget effect in Q1. Fredrik Dalborg: Yes. I think we don't want to really make any projections or forecasts or outlooks for coming quarters. But normally, we do see Q1, the final year of the fiscal year for NHS is normally strong. Of course, the discontinued business, there might be in previous years, some sales related to that, that will not happen in Q1. But other sales will. So that's to keep in mind. But apart from that, I don't want to give any real outlook for the coming quarters. But of course, we -- in general, we are -- we think many parts of our business is really picking up the pace, and there's a lot of stability in other parts. So I think overall, we're very optimistic about the future. Jakob Lembke: And just a short follow-up. The divested business, is that more capital or consumables? Fredrik Dalborg: Mix. Capital and consumables and service. Jakob Lembke: Okay. And then just a final question, sort of a follow-on on the M&A pipeline. If you can talk a bit about sort of what type of companies you have in the pipeline and also the size, if -- it's more smaller companies or larger ones? Fredrik Dalborg: Well, yes, I think we have a good mix in the pipeline. We're actively in active dialogues with a few and then analyzing a number of others and so on. So it looks pretty healthy. We are sticking to our criteria, which means that the company should be below EUR 50 million in turnover and the sweet spot is probably lower than that, say, EUR 10 million to EUR 30 million, somewhere in that neighborhood, EUR 10 million to EUR 30 million of turnover. And they should also be in areas that we understand and then we have a good knowledge base to assess the companies. We love the entrepreneurial ones, of course, prefer to buy companies from entrepreneurial owners. So we're sticking to the plan here. And of course, what we can look at the previous acquisitions, I think Edge and BonsaiLab are excellent examples of acquisitions we like to see. The ones we made in December are also great additions, but they are a little bit on the small side. So a little bit -- little bigger than that, but certainly not the very big ones of 2021 and 2022. Christina Rubenhag: And of course, an EBITA margin contributing to the growth as well. Fredrik Dalborg: Yes. Of course. So I hope that gives some clarity, but hopefully, we will be able to communicate more about that in the not-too-distant future. And now we have Mattias. I think, he's on mute. Mattias Häggblom: I had only a few left. So -- but I'm going to try and push you a bit more on the M&A side. So you state in the report you will be fully able to execute your growth plan for both organic and acquisition-driven growth. So is it possible to give us maybe a number or range in terms of your aspiration for '26, if not at least compare with the contribution from M&A in 2025, which added 1%, so which is obviously below -- it's a more towards the right direction. But should we think about a 5% to 7% contribution? Or what -- obviously, dependent on deals and signatures, but your aspiration would be interesting to hear. Fredrik Dalborg: Yes. Something like that, Mattias. I mean, traditionally, we have said that to achieve our 15% profit growth target, roughly half of that should come from organic and half of it from acquisitions. And in the past, we're kind of proud that we have almost achieved that 15% through organic activity. The organic activity will continue, no doubt. But in 2026 and beyond, we should get back to that more of that mix of roughly 50-50 over time. So that means a few more acquisitions. So we have 3 in 2025, right? So it's going to have to be a few more than that. Mattias Häggblom: That's helpful. And then with regards to the divestment and the SEK 140 million in revenues, obviously, you spoke about Q1, so obviously, no more shipments there. But then in the report, you talked about an ability to gradually replace it over time, but perhaps not already in '26. So talk about that process in terms of gradually replacing. Fredrik Dalborg: Yes. So I think that's a great point. That's something -- first of all, I would like to say having a setup like this where we hand over a business to a supplier is fairly normal, right? This is something that happens all the time in the life of a distributor. What sets this apart a little bit is we really got handsome payout for all the work we've done to build that business. So that's a positive in many ways. And then, of course, this is something we know happens from time to time. So we work in a continuous way to add new products to the portfolio. And we like to add more products and to broaden the portfolio as well as evolving it towards even more advanced products. So this has been ongoing for a while. We don't expect and actually don't want just one quick replacement of the same size. We would rather have a few more products added to it. And of course, that's not starting now. That's been ongoing for a long time now. So the gradual addition of products has started to happen and will continue during the year. I think, will there be a big chunk of the business immediately replacing it of the same size coming in Q1? No, but it's been ongoing for quite some time. So I would say a gradual replacement of that business is already ongoing. Mattias Häggblom: That's helpful. And final question for me. You spoke about products that were discontinued due to shaping the portfolio towards more higher-margin products. I didn't catch if Christina perhaps quantify what portion of sales that were discontinued during the year to help us understand the bridge from 2024 base to where you ended 2025. Christina Rubenhag: We haven't really quantified that. But then if we look at the mix of everything that then it's approx 1% [ reduction ] yes. Fredrik Dalborg: Gustav, yes. Gustav Berneblad: It's Gustav here from Nordea. Just to come back to Medtech here and our favorite topic of AddVision. In terms of that margin, can we get some sort of ballpark indication of how that is progressing here? Is still within the range of mid-single digits? Or what's your view there? Fredrik Dalborg: Yes, mid-single digits. It is improving over last year, not dramatically, but it is improving. It's better than last year Q4. So that's, that's nice. We have actually taken quite a few measures within that group in this quarter as well, the things that we have seen that needs to be addressed and have been addressed in the quarter. So that gives us further confidence in the direction of the British and German business. In other parts of the business, I think as you know that we have, what I would say, achieved a good level of stability and a nice trajectory. So that's great. So now with these measures, we hope that the same thing will apply for all the parts of the business. So mid-single digits still improving, but of course, lots of more upside, I would say, in that business before we are happy with it as it stands. Gustav Berneblad: No, that's perfect. Then do you expect effect already here in 2026 from these measures you have taken here recently or... Fredrik Dalborg: Yes. Christina Rubenhag: Yes. Fredrik Dalborg: Yes. We're aligned there. Gustav Berneblad: And then in terms of Labtech, just as one final question here. Given that you saw, I mean, lower instrument sales in Q4 and of course, I mean, compared to Q4 last year was a strong quarter, we know that. But in terms of the Labtech margin, I mean, did you see a net positive mix effect on the margin coming from gene sequencing? Or how would you describe it? I mean, we saw organic growth down 3%. So just to get a better understanding there. Fredrik Dalborg: Yes. I think it's a good point. I mean we didn't have the same level of instruments as the somewhat unusual Q4 of last year. So we're actually quite happy with the fact that we remained at 14.1%. That's a very healthy margin. So I think you're correct. There is a healthy underlying trend in that business. Some of the businesses are gradually improving, great customer relationships and strong supplier relationships and also doing an excellent job in adding new products. Others still have some work to do in -- primarily those on the research side, where we had seen a little bit less stability in demand, but I think we have a quite impressive product portfolio, and we see good evolution in those areas. We have made some changes also there in the past few months. So I think we're confident that we are on the right track there as well. So I think it's a healthy business, but there is also room for improvement. Gustav Berneblad: Okay. So it sounds more like it's structural rather than a temporary mix -- positive mix effect in Q4 then? Fredrik Dalborg: Yes. I would say there's a structural improvement underneath, so to speak. Okay. So now let's see. Do we have any more questions? None seem to be raising their hand. But thanks, everyone, for listening in, and thanks for great questions. And you're all free to e-mail or call afterwards if you want to follow-up on specific topics. So with that, we wrap up. But I do encourage you to stay on to see the video about Biolin. Biolin is a very exciting company, developing and manufacturing really advanced products for the research field. So please take a look at that if you have a few more minutes to spare. Thank you very much, and take care.
Operator: Hello, everyone. Welcome to Silicon Motion Technology Corporation's Q4 2025 Earnings Conference Call. [Operator Instructions] I must advise you that today's call is being recorded. This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial conditions and business prospects. Although such statements are based on our own informations and informations from other sources we believe to be reliable, you should not place undue reliance on them. These statements involve risks and uncertainties and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons. Potential risks and uncertainties include but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressures on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers and changes in political, economic, legal and social conditions in Taiwan. For additional discussions on these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligations to update any forward-looking statements, which apply only as of the date of this conference call. With that, I would now like to hand the call over to your first speaker today, Mr. Tom Sepenzis, Senior Director of IR and Strategy. Thank you. Please go ahead. Thomas Andrew Sepenzis: Good morning, everyone and welcome to Silicon Motion's Fourth Quarter 2025 Financial Results Conference Call and Webcast. Joining me today is Wallace Kou, our President and CEO; and Jason Tsai, our CFO. Wallace will first provide a review of our key business developments and then Jason will discuss our fourth quarter results and outlook. Following our prepared remarks, we will conclude with a Q&A session. Before we begin, I would like to remind you of our safe harbor policy, which was read at the start of this call. For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the U.S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the close of market yesterday. This webcast will be available for replay in the Investor Relations section of our website for a limited time. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have, therefore, chosen to provide this information to enable you to perform comparisons of our operating results in a manner consistent with how we analyze our own operating results. The reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call. With that, I will turn the call over to Wallace. Chia-Chang Kou: Thank you, Tom. Hello, everyone and thank you for joining the call today. I'm pleased to report that we delivered another excellent performance in the fourth quarter, exceeding our revenue and near the high end of operating margin guidance and positioning us for a record-breaking year in 2026. We benefit from strong demand across all our markets and through the introduction of compelling new controller and solutions. We increased market share in existing and new markets and expect the momentum to continue throughout 2026. We remain focused on delivering long-term growth, while investing heavily in next-generation products, increasing our engineering resources to support new product end markets and further positioning Silicon Motion for long-term market share expansion. While 2026 memory and storage industry dynamics are challenging given the supply tightness of NAND and DRAM and rapidly increasing prices of these components, we believe our resilient operation strategy and our unmatched NAND maker relationship will allow us to deliver strong growth across our business. Given our current backlog and sales plan, we believe that first quarter '26 revenue will be the lowest of 2026 and expect sequential growth throughout the remainder of the year. As we continue to introduce the [indiscernible] compelling new eMMC and UFS controller, PCIe client SSD controller, MonTitan enterprise SSD controllers, enterprise bodes solution and our expansion in Ferri automotive portfolio, we expect to deliver broad-based growth and to deliver the highest annual revenue in the history of the company in 2026 as we capitalize on multiple new products and execute on our continuing diversification strategy. I would like to start by addressing the current market environment. The rapid adoption and growth of AI has introduced significant demand across all memory and storage technology, including HBM, DRAM, NAND flash and even hard drives. The new and growing demand has led more recently to supply constraints, tight market condition and increasing pricing pressure across multiple markets, including AI and enterprise storage, boot drive drives, PC, smartphone and most other markets that use NAND flash. AI CSPs has attempt to lock up all the DRAM and NAND supply through 2026, which has made it increasingly difficult for other market player to get product and is driving significant intra-quarter price increases. Given the growing supply constraint in DRAM and NAND, industry analysts are beginning to take a more cautious approach regarding smartphone, automotive and PC unit growth in 2026. Silicon Motion, however, remain extremely well positioned in the consumer market despite the tight condition given our long-standing partnership with all the major flash vendors, our expanding market share within our existing market and the introduction of the new higher ASP products. We are leveraging our strong relationship with flash makers, OEMs and module maker to help secure NAND supply for our smartphone and PC OEM customers and ensure steady access to NAND even in the tight times. We are delivering greater value add to both our NAND maker partners and OEM customers, driving stronger partnership that will lead to sustainable long-term growth. As a result, despite the expected market headwind, based on our existing backlog, we expect growth in all our major product lines in 2026, including automotive, mobile, PC, enterprise SSD and boot drive storage solution given our strong and growing market position and leading product portfolios. I would now like to discuss our highlights in eMMC and UFS. Growing AI demand in focusing a more disciplined CapEx approach by memory and storage market to prioritize resources across multiple technology products and market. Increasingly, we are seeing additional opportunity for Silicon Motion to supply controller as NAND makers shift their internal resources to focus on DRAM, HBM and customized memory technology for high-performance AI requirements. The mobile market is a prime example of this trend as NAND makers are actively exiting mobile in favor of DRAM HBM, which has led our mobile business to outperform in 2025 as our eMMC, UFS business grew 25% for the full year, far outperforming the smartphone embedded market. Module maker are seeing great assets to access by using local NAND supply, coupled with our controller, just as many of other NAND flash maker have looked in to exit the mobile market in favor of the enterprise. We will continue to benefit given that we are the only meaningful merchant controller maker for the eMMC and UFS. While the overall smartphone market is expected to decline this year due to higher DRAM and NAND component cost, we expect the continuing shift from NAND flash maker to module maker to continue in 2026 and further benefit our eMMC, UFS controller business. Leveraging our strong relationship with local NAND makers and helping to align supply with handset OEMs and module maker will lead to continuing outperformance for our business. In addition, the market for eMMC are vast and growing with over 900 million units shipped annually. We are shipping eMMC into automotive, industrial, commercial, IoT, smart device, streaming device and many other markets. As flash makers has all but exited for eMMC market, the competition has diminished significantly and we are experiencing strong revenue contribution from this segment. Given our current backlog and customer outlook for 2026, we expect to significantly outpace the market and deliver another strong year of growth of our eMMC and UFS business despite the difficult market environment. I will now discuss our client SSD business. 2025 marked a turning point of our client SSD business, given the success of our new PCIe 5 controllers. We introduced our 8-channel PCIe 5 controller at the end of 2024 with 4 flash maker partners and nearly all module maker makers, setting us a clear path to grow our client PC market share from 30% today to 40% over the next few years. We expect our new DRAM-less 4-channel PCIe 5 controller that we introduced last quarter to ramp significantly throughout 2026, targeting the mainstream market and driving higher adoption of PCIe 5 given that it is DRAM-less, making it easier for our customers to create SSD despite DRAM shortage. We have secured design wins with 4 NAND flash makers, including the 2 from South Korea for TLC and QLC SSD and nearly all the module maker for this controller. And we expect to benefit from higher ASP and profitability as this new controller enters the mix. Until the memory and storage makers increase their big production capacity to alleviate the current shortage, the PC market will likely experience some difficulty driven by both shortage and demand destruction from higher prices. Silicon Motion, however, remain in excellent position to grow its PC business in the near to long term, given market share gains, ASP increases and growing decision by the NAND flash maker to walk away from the consumer business in favor of AI. And we expect continued growth from our client SSD business in 2026. I will now provide an update on our enterprise business. The opportunity of Silicon Motion in data centers and AI infrastructure expanding daily. Current expectation are for data center and AI infrastructure investment to exceed $1 trillion by 2030 and the [indiscernible] of NAND technology expanding rapidly to help store and process large volume of data quickly. The need for increased speed and lower latency has driven greater adoption of SSD in the data center. And the industry is increasingly looking to adopt NAND solution in one storage, compute storage and eventually near GPU storage as well. Interest in our growing portfolio of MonTitan controller is increasing as they are ideally suited to address the evolving requirement of AI workload for both compute and storage. In the December quarter, we began end user qualification of TLC-based high-performance compute SSD using MonTitan with multiple customers. This qualification will progress throughout the first half of calendar 2026 and will begin to ramp commercially in the second half of the year. High-capacity QLC-based storage SSD represents the largest addressable market for MonTitan and we remain on track with multiple customers to begin qualification this year. Our MonTitan QLC one storage solution offers significant advantage over HDD for AI inferences, including speed and power. Additionally, demand for QLC storage solution has accelerated in recent months given the current supply shortage of HDD. Over the next few years, we expect the QLC SSD will become a compelling alternative to HDD as they offer unmatched economies of scale, which will lead to lower prices over time, in addition to the inherent speed and power advantage. During 2026, we plan to tapeout our first 4-nanometer chip, a PCIe 6 version of MonTitan that is targeting hyperscalers, NAND flash maker, storage system provider, CSPs and other Tier 1 customers. We have been developing the chip in association with multiple partner customer and expect this new controller to drive additional success for MonTitan beginning in the 2027, '28 time frame. I'm pleased to announce that we have already secured design wins with multiple Tier 1 customer for this new controller, which is expected to ramp significantly in 2028. We remain confident that MonTitan will ramp to represent at least 5% to 10% of revenue, exiting 2026 and should experience further success in 2027 and beyond as our entry into enterprise market scale meaningfully in the near to midterm. And finally, I would like to discuss our enterprise-grade full drive storage business, which is rapidly evolving into a significant new era of growth for our company. We are allocating -- we are collaborating with multiple customers to develop an enterprise boot dive solution that can work across multiple platforms. In the fourth quarter, we started volume shipment to the leading AI GPU maker for their current DPU product. We are currently working with this customer to qualify the next-generation version of their DPU as well as their -- for several NVLink and Ethernet switches of their new GPU/CPU platform that are expected to launch in the second half of 2026. This next-generation DPU and switch product require higher capacities with much higher ASP and unit volume, creating a significant new growth opportunity for Silicon Motion. We are also working with other potential customer, including a leader -- leading search engine company to develop enterprise-grade boot storage drive based on our leading controllers. With the enterprise boot drive, our complete SSD product, this business will face greater exposure to our NAND scarcity and the high price environment, placing greater emphasis on sourcing NAND to supply our customer. While this has become more difficult given the supply constraint and recent price increases, we remain confident that our relationship with the NAND flash maker developed over the past 20 years will help us succeed with these significant new opportunities. For our Ferri storage solution, we are seeing strong demand from our automotive and industrial customers, especially in the tight NAND environment, our customer are relying more on us for steady and consistent supply to ensure smooth supply chain dynamics. We will continue to play a more strategic role and partner to our Ferri customer but we will also look to balance revenue growth with margin stability to drive profitability growth. In conclusion, the fourth quarter of 2025 delivered a significant growth for our business and accelerated our boot drive storage business. In 2026, beginning in the first quarter, we expect to continue to reap the reward of our investment in MonTitan, our 6-nanometer client SSD controller and our new portfolio of eMMC and UFS products that are experiencing rapid growth and the ramp of automotive business to about 10% of total business by the end of this year. We have never been better positioned as a company given our expanding product portfolio and scaling in a large new market, including the AI and enterprise storage market. I'm increasingly confident that we will deliver strong, broad-based, sustainable sequential growth throughout 2026 and beyond as we scale multiple existing and new opportunity. Now let me turn the call to Jason to go over our financial performance and outlook. Jason Tsai: Thank you, Wallace and good morning to everyone joining us today. I will discuss additional details of our fourth quarter results and then provide our outlook. Please note that my comments today will focus primarily on our non-GAAP results unless otherwise specifically noted. A reconciliation of our GAAP to non-GAAP data is included in the earnings release issued yesterday. In the December quarter, sales increased 15% sequentially and over 45% year-on-year to $278.5 million, coming in well above the high end of our guided range and surpassing our $1 billion target run rate set at the start of the year as we experienced continued strength in mobile demand and strong growth in our PCIe 5 client SSD business. Gross margins was at the higher end of our guidance range and increased again in the quarter to 49.2% as we capitalized on new product introductions and benefited from mix shift towards client PC products. Operating expenses increased sequentially to $83.2 million, given increased investments in our emerging AI and enterprise SSD and boot drive storage businesses. Operating margin increased sequentially to 19.3%, within our guided range, driven by the higher-than-expected revenue and gross margin during the December quarter. Our earnings per ADS was $1.26. Total stock compensation, which we exclude from non-GAAP results, was $15.8 million in the fourth quarter. We had $277.1 million in cash, cash equivalents and restricted cash at the end of the fourth quarter compared to $272.4 million at the end of the third quarter of 2025. Cash increased in the fourth quarter from improved operational performance, offset by a combination of dividend payments of $16.7 million and an increase in inventories to support expected strong business ramp. Our team is executing well despite the difficult NAND and DRAM pricing environment. During the fourth quarter of '25, we continue to invest in new advanced [ geometry ] products for our existing markets and for our emerging enterprise markets, including MonTitan SSD and enterprise boot drive solutions. These investments will be ongoing in 2026 as we support new growing interests for our new enterprise portfolio. For the first quarter of 2026, we now expect revenue to grow 5% to 10% to $292 million to $306 million, up sequentially and counter to typical seasonality. We expect continued strength across nearly all our product segments with a particular emphasis on mobile where we expect significant outperformance due to continued market share gains. Gross margins are expected to be slightly lower sequentially to -- at 46% to 47% in the March quarter, given the product mix. But we expect overall margins to recover back to our target range of 48% to 50% throughout the year, as the mix of newer products increases, including our PCIe 5 controllers and our enterprise SSD solutions. Operating margin is expected to be in the range of 16% to 18%. Our effective tax rate is expected to be 19%. Stock-based compensation and dispute-related expenses is expected to be in the range of $10.8 million to $11.8 million. We're well positioned for growth this year and expect 2026 to be a record revenue year for Silicon Motion with sequential revenue growth each quarter. We anticipate additional tapeout and development costs, especially from our upcoming 4-nanometer tapeout in the second quarter, will drive higher operating expenses in the second and third quarters of the year. Our focus has always been growing profitably and 2026 is no exception. We anticipate full year 2026 operating margins to improve as compared to 2025 despite our higher investments this year. While the current supply shortages and resulting component increases are creating headwinds, our pipeline for growth in 2026 and beyond remains stronger than it has ever been in the history of our company. We remain focused on our market and product diversification strategy, which has already begun to deliver results. We have successfully entered the enterprise market with our boot drive storage solutions and are currently in the end customer qualifications with our MonTitan enterprise SSD products, which are expected to scale in the second half of 2026. Our leading position in the merchant controller market and unmatched NAND maker partnerships will drive higher share in eMMC and UFS, client SSDs, enterprise, automotive, boot drives, storage, high-performance and high-capacity enterprise and data center storage markets. And I look forward to sharing our progress in greater detail when we report again in 3 months. This concludes our prepared remarks. I'd like to open the questions -- open it up to questions now. Operator? Operator: [Operator Instructions] First question comes from the line of Mehdi Hosseini from SIG (sic) [ SFG ]. Mehdi Hosseini: Two for me. How should I think about the mix of eMMC, UFS revenue, especially in the back half of the year exiting this year? And I'm asking that because I'm under impression that there is a diversification by end market. It used to be a smartphone driven and now there is auto and I want to better understand how that diversification is going to play out towards the end of this year? And I have a follow-up. Chia-Chang Kou: Our UFS controller majority is smartphone. eMMC controller majority is in IoT devices, smart device, streaming device and set-top box and nonautomotive. So the combination, I think the -- around probably 40% controller -- or probably roughly is similar, 50% for smartphone, 50% for nonsmartphone area. Mehdi Hosseini: Okay. And then on the BlueField, how will revenue contribution play out? I think your commentary implied that there could be some revenue contribution later this year. And how would it impact your gross margin? I'm under impression that for BlueField, the COGS is going to change. You actually have to go procure NAND. And if you could just comment on it and let me know is the wrong assumption, that is corrected, how procuring NAND would actually impact the overall gross margin? Chia-Chang Kou: Yes. BlueField -- our boot drive is a solution for BlueField and also several other switches platform. We need to procure the NAND and NAND price at the market price. So we have to work out with the customer, we can pass through the cost increase to the end customer. So it is challenging but ongoing process quarter-by-quarter. It definitely will impact some of our gross margin but we manage the margin pass-through. So I think because even the customers, they have at least 2 to 3 supplier, so they're based on the price and based on the supply and depends the percentage. We believe BlueField-3 is for -- primarily for this year [indiscernible] and the NVLink and the Ethernet switches is for the second half and really more volume in 2027. Operator: Next question comes from the line of Neil Young of Needham & Co. Neil Young: My first question is, I wanted to understand how you're segmenting revenue from the boot drive opportunity. And same question for MonTitan. Are they both in SSD solutions? Or is it just the boot drive, are you placing that in SSD solutions? And then at what point -- I think you sort of just answered this but just for clarification, what point do you anticipate revenue from the next-gen boot drive and those other switch opportunities that you talked about, with the leading GPU maker? When do you expect revenue for those to begin to ramp? Jason Tsai: Yes. So you're right. For the boot drives, that's going to be part of our SSD solutions that we talk about each quarter. Enterprise controllers, MonTitan is part of our controller business. We will give you guys more color as it's appropriate. Chia-Chang Kou: I think we -- when we talk about 5% to 10% for our company revenue, does not include the boot drive solution. So currently, that's only kind of MonTitan controller. But boot drive solution is part of our enterprise business. The -- we cannot comment regarding what percent about the boot drive. I think this year it's relatively still small but I think next year will be much bigger. But #1 is, we're trying to secure the NAND supply. Currently, we have 2 NAND supplier. One is secure but the other is not. So we're working with our NAND partner continually to support the major project. Jason Tsai: We expect the next-generation DPU revenue to begin for us sometime in the back half of the year. Neil Young: Okay. That's helpful. And then the second question. I just wanted to ask about the smartphone strength in 1Q. Maybe if you could just provide a little more detail sort of what's driving that? I think it's predominantly market share gains but if there's anything, different customer behavior or anything that you guys are seeing, that would be great. Chia-Chang Kou: So first of all, as you know, probably 2 NAND makers walked away from the mobile storage. And we see -- but they're also still selling the wafer to module maker. And I think we benefit from majority module maker using silicon motion controller. They not only use NAND maker from U.S. and Japan but also use local NAND maker in China. That's why we continue to gain market share. And we see -- we gained market share from [indiscernible] and we expect to start to ramp the high end by end of 2026. Jason Tsai: Anything else, Neil? Next question. Operator: The next questions comes from Craig Ellis from B. Riley Securities. Craig Ellis: Congratulations on the great execution, guys. I wanted to start out by going back to the comments on sequential growth through the year and just better understand some of the product level gives and takes as we go through the year. I think from what I've heard, it sounds like we'll see some real strength starting the year from eMMC and UFS and the color on MonTitan transition from sampling to revenue ramp-up would suggest more of a back half of the year orientation towards SSD solutions. And I think that would lead SSD controllers plugging along. Along with that, if we have sequential growth in the 3% to 5% range, we exit the year annualizing at a $1.3 billion to $1.4 billion run rate. Is that the right level of growth we should be thinking about? Or are you thinking about growth higher than that? Jason Tsai: Yes. So you're -- I think you're right on some of these things. I think certainly strength in the first half of the year is coming primarily from eMMC and UFS. We'll see client SSD controllers ramp throughout the year but first quarter should be seasonally weaker. And then we'll see the MonTitan products begin to scale in the back half of the year. We do anticipate quarter-on-quarter sequential growth this year. We are not providing full year guidance specifically beyond just sequential growth and we expect this year to be a record year. Chia-Chang Kou: So let me add some comment. I think we have very strong backlog and we have a very strong momentum from all product line. But because some of the products like automotive, Ferri and the boot drive, we required to procure the NAND. So the case by case, some business, we probably just bypass, some business we become strategic, we're going to take. So even potentially, we have a much higher growth rate but we might skip some of the business if the margin didn't meet our company target. So that's why we balance and the thing. But just from the backlog in the business, we decide to engage, we have a sequential growth quarter-by-quarter. Craig Ellis: That's helpful. And then the follow-up question is really a longer-term question. for you, Wallace. You and I have known each other a long time. I've seen you transition the business previously from a USB and memory card business to one that's more oriented to smartphones and PCs. And it seems like you're doing it again, transitioning the business to include a very significant enterprise quotient. The question, do you see a point in the 2027, 2028 time period for that enterprise quotient is actually bigger than the consumer business? Would love to get your views on that and how you see the longer-term arc of the company playing out. Chia-Chang Kou: I think enterprise segment definitely is a target one to grow. But when we can -- the enterprise portion exceed the consumer portion, we cannot really reveal to you. We target -- try to accelerate the momentum. But I think the boot drive is a really pretty strong business for us. We also have a multiple customers, not just one of the GPU customer. And in addition, automotive storage also very strategic. And we believe if we can procure NAND stably, we can grow even much faster. So we have a multiple weapon to grow but enterprise is stronger portion and we do have a -- some new product coming in the next 2 years. So we're excited -- we're very exciting about the opportunity to grow but just be patient with us and hopefully can grow much faster even 2027. Operator: Our next question comes from Suji Desilva of ROTH Capital. Sujeeva De Silva: Congratulations on the progress here. Maybe stepping back on calendar year '26, you talked about it being a growth year. You talked about 5 segments, auto, mobile, PC, enterprise, boot drive. Maybe you can talk about which ones would have the highest percent or dollar contribution to the growth in '26, given some of the moving parts around NAND supply and so forth? Chia-Chang Kou: Percentage, I think the enterprise controller definitely grow much faster. Boot drive also is new to us. It growth percentage is much bigger. But from dollar-wise, I think the mobile controller, eMMC, UFS is a bigger one and it will exceed probably about 35%, 40% of our total company revenue. So I think these are all strong momentum to grow but we also see a more balanced growth continually moving to 2027. Sujeeva De Silva: Okay. All right. And then specifically on the notebook SSD controllers, can you just talk about the puts and takes of how the year-over-year would trend given there's obviously NAND tightness and PC demand impact because of the cost of the inputs going up versus your share or your mix shift to premium, how that would all net together into a year-over-year trend for notebook SSD controller? Chia-Chang Kou: So this is a very good question. I think the -- as you know very well, DRAM and the NAND supply is really very tied to PC OEM customers. So some can -- are able to secure the supply, some don't. So it gave a tremendous opportunity to Silicon Motion because the NAND maker, they move all the resource allocation to CSP. So the [indiscernible] is not enough for all the PC maker to meet their demand. So the -- because we have a 4 NAND maker using PCIe 5, 8-channel controller, 4 NAND maker also use a 4-channel [indiscernible] controller that balance about their internal allocation to fulfill the demand for NAND maker. In addition, because there's a shortage from NAND supply to PC OEM, module makers start to take -- takes the opportunity. So because we have majority module maker design win, that's why we fills the other gap. So even the total unit shipment for 2026 PC OEM will decline but I think for 5% to 10%. But we still have a pretty strong confident to grow continually in 2026. Jason Tsai: And also, Suji, keep in mind, it's a combination of higher share, higher ASP products as we transition to PCIe 5, even with the 4-channel PCIe 5 controller, it's still a much higher ASP than a comparable PCIe 4. So we're going to get the benefit of both higher share and higher ASPs this year in spite of any sort of macro issues around PC unit volumes. Operator: Our next question comes from Gokul Hariharan from JPMorgan. Gokul Hariharan: So just wanted to understand, again, on the client SSD controller. What is the conversations you're having on the -- from the PC OEMs, given many of them are already sounding a little bit more skeptical about overall demand? Is there any indication that the spec migration is slowing down because of the cost inflation from PCIe Gen4 to PCIe Gen5 because the general commentary in the industry seems to be about some degree of despecing of certain specs. Just wanted to understand if you can give some indication of what is the baseline like PC market expectations that you have? And then how are you building on top of that, both for market share and units and ASP to kind of get to growth in the client SSD business? Yes. That's my first question. Chia-Chang Kou: Yes. I think, Gokul, you got a very good question. It's -- we cannot comment for each individual PC OEM. But overall, I think the 2026 PC unit shipment will decline 5% to 10% and each OEM perform differently. Now regarding the sharp NAND price and DRAM price increase, so PC OEM outpaced the price increase quickly. So I think from value line and many would despec the storage product. So [indiscernible] gigabyte go down to 120 gigabyte. But for high end, they need to increase the price. So from despec portion, I think they will lose the demand and interest from value line customer. So that is a fact. So I think the impact for each of PC OEMs are different. And we see this is a current challenging situation for all the PC OEMs. And we work with the -- our module makers and work with the NAND maker because we also depend on their internal allocation for the NAND quarter-by-quarter. So it is very challenging. But because we have a much better position, so we have a much stronger opportunity to grow continually in 2026. Gokul Hariharan: Got it. And any comments about like the PCIe Gen5 penetration? I think last year, I remember it was like 5% to 8%, or 5% to 6%. Are we expecting that this goes to like high teens, 20% by end of this year? Chia-Chang Kou: Yes. So PCIe Gen5 is supposed to ramp much stronger in 2026 but for 8-channel high end because of DRAM shortage, that's why 8-channel increase will slow down dramatically in 2026. However, the PCIe 5 4-channel DRAM-less because no DRAM has much more to build the SSD to ship. So we see the much stronger demand for DRAM-less PCIe 5 controller, especially from the second half to ramp more meaningfully. Gokul Hariharan: Okay. Understood. Second question on the boot drive storage. Could you help us understand how big this business could be because you've got the biggest GPU customer and it looks like for the next platform, this is going to be mandatory. And I think you just mentioned you're also getting the biggest ASIC program out there as well. So you're kind of locking up probably 80% or 90% of the market share of the market already from the addressable market. How sizable is boot drive storage business going to be? And are you still going to stick with the NAND bundle kind of model here? Or is it going to be eventually like NAND pass-through at higher margin? Chia-Chang Kou: Yes. First of all, let me talk about the TAM. I think, first of all, the DPU, the boot drive business, it depend on the several factor, right, including the success of the DPU. But so far, we see the volume is very meaningful in 2026. And the -- all the leading CPU and GPU maker, they use a multiple supplier, 2 or 3 supplier. So we are not the sole supplier for the DPU program. We see this year revenue relatively around $50 million but I think next year will be much higher. So it all depends the NAND procurement from us. So it's a case by case because we have multiple programs, not just one GPU customer. We have a multiple customer and also some will ramp up from Q4, the new program. So it depends how success we secure the NAND, also whether we can pass through the incremental cost to the customer with a meaningful margin. So this is all the negotiations. So it's -- some is dynamic. And we just make a reasonable meaningful forecast for this year. And -- but it is a very strategic business for us for long term. So we work closely and build a partnership with our GPU partner. Hopefully, this will become a much larger business in '27 and '28. Operator: [Operator Instructions] Our question is from Craig Ellis from B. Riley. Craig Ellis: Wallace, I wanted to just talk about something and ask about something that we've started to see much more broadly with NAND flash and DRAM OEMs of late and see if it's got applicability to Silicon Motion. And the topic is long-term supply agreements, LTAs or LTSAs. Is that something that would make sense for SIMO? If so, where would that be? Would it not make sense for SIMO? Just talk about the gives and takes with any move in that direction. Chia-Chang Kou: We currently we did not have the LTA agreement but I think based on partnership and relationship, see, because in the past, we never want to build a much bigger revenue from storage solution. And for automotive, because automotive sector, they are the lowest priority for NAND and DRAM maker. That's why many, many major Tier 1 supplier come to Silicon Motion, ask for help. That's why we will case by case to make a decision whether we can support them. If the -- we are able to pass through the incremental cost to the automotive supply chain and we will do the business. If the other hand, for boot drive, it's more strategic business. So some -- in certain case, we might have to sacrifice the margin lower than our corporate average margin because more strategic. So balancing, I think in the long term, because we cannot use a multiple NAND selection, it's take a time and the customer does not want to change the NAND solution either. So we just have to work out the -- with our NAND partner to get a stable supply. The challenging thing is much more severe than anybody can imagine because CSP really demand much more than the current supply can support. And that's why even leading smartphone maker have a tough time to procure their NAND and LPDDR5 supply. So this is the fact. And it's just not one NAND maker cannot supply us because just they really have tough time to do allocation and so many big Tier 1 customer ask for help and ask for supply. So this is a challenging situation right now. Craig Ellis: That's really helpful. The follow-up somewhat relates to the way you concluded that. And it's an inquiry on some of the inside baseball, not asking for customer names. But if we go back to January 5 or 6 when NVIDIA said that, okay, look, the bottleneck in inference is all around the DPU. It's all around the storage. We've got to find a way to drive a 5x increase in inference processing time. We're going to do it with much more NAND-intensive architectures. The question is, what have you seen from existing and new enterprise customers following that? Have you seen that catalyze new levels of engagement? And what does it mean for how you think about R&D and just how you're looking at opportunities going forward? Chia-Chang Kou: Because in -- AI inferencing is growing much faster than anybody can anticipate. So there's so many new technology, so many new storage technology around, right, for KV cache, how you can improve the latency, how you really -- and capacity also increased dramatically because so many new content, new data need a storage device to keep it. So this is a huge momentum and need the NAND maker to increase capacity. But because there's a limitation for land, for clean room, for equipment build, it all take your time and it need a tremendous CapEx. So a lot of the several NAND, DRAM maker, their preference is definitely DDR and HBM, right? So the left over -- the CapEx for the NAND is limited. But then we see the demand is very strong and so many variable technology and it's just much more and they all need MonTitan to fill the role. And hopefully, I think our customer and ourself can secure the NAND and we can pay our duty to fulfill obligation to be part of the AI game. Operator: I would like to invite once again Mr. Matt Bryson from Wedbush to ask question. Matthew Bryson: Awesome. Sorry about that. Great quarter. One question, one follow-up for me. So you have the large fabs seemingly shifting allocation away from handsets and PCs to support that cloud demand. And that, at least to me, seems like it creates significant room for share gains for SIMO over a multiyear period, particularly in the Chinese handset market. But we also know that China tends to prefer Chinese production when it's a viable alternative. At the same time, it also seems like the Chinese controller vendors have really struggled to compete technically. So would you mind just talking a little bit about competitive dynamics, whether anything is changing in that market and some of the structural dynamics that might make it hard for the domestic Chinese players to compete? Chia-Chang Kou: I think the Chinese controller maker, they will have tough time to secure TSMC advanced technology node. So I think the -- to beyond 12 nanometers, like 7 nanometer, 6 nanometer, 5 nanometer, it's -- they have to be applied and to be approved by TSMC or Samsung in order to fabricate their advanced technology node product. For mature technology for 22 nanometer, 28 nanometer, China local fab can fabricate but that is really legacy product. So I think that is tough in part and we believe we need to mention the technology, how good they are or whatever. But that is a manufacturing point of view. We see due to the NAND supply shortage, I think create another dilemma. So that will probably give even tough time for China local supplier. But to say that, I think both YMTC and CXMT, they also try to increase capacity as much as they can but just take time. Jason Tsai: Another thing, Matt, is that our controllers manage everybody's NAND, right? And so working with a lot of the module makers, especially in China, that does qualify a lot of local production there because we're using -- the module makers are building a lot of these solutions for the Chinese handset OEMs as well. Chia-Chang Kou: Using our controller not only can sell in China locally, can sell to internationally. Matthew Bryson: Makes sense. And so just one more quick question. With regards to the lower gross margins in Q1 on mix, Jason, can you just talk to whether that's lower margins on controllers or whether it's -- you're shipping more modules and so the NAND weighs on the gross margins? Jason Tsai: Yes. As we've talked about before, eMMC and UFS, our mobile controllers tends to be a little bit below corporate average. So as that business is a little bit stronger here in the first quarter, that's going to have some pressure on our gross margins in the near term. But as we have MonTitan and more PC client SSD products ramping in the back half of the year, we do expect to see improvements in our gross margins as we go into the back half of the year. Operator: At this time, there are no further questions on the line. I'd like to hand the call back to the management for closing. Chia-Chang Kou: Thanks everyone, for joining us today and for your continuing interest in Silicon Motion. We will be attending several investor conferences over the next few months. The schedule of this event will be posted in the Investor Relations section of our corporate website and we look forward to speaking with you at this event. Thank you, everyone, for joining today. Operator: That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the Brookfield Asset Management Fourth Quarter 2025 Earnings Call. [Operator Instructions] 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'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, and 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 the 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. [Operator Instructions] And with that, I'll turn the call over to Bruce. Thank you, Jason, and welcome, everyone. James Flatt: 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, and 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 though 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. I will continue as Chair of the Board as well as CEO of Brookfield Corporation. We began this process 4 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 strategy, 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 David 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 Neoen, a leading global developer with long-term contracted clean power assets, and we acquired National Grid's U.S. renewables platform, expanding our footprint in North America. In private equity, we invested in Chemelex, a global industrial technology business with mission-critical products. Our infrastructure business acquired Hotwire Communications, a leading U.S. 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 Hospitals, 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, and 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 2 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 fundraises 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 fundraises 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, [indiscernible], 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 3 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 or 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 25 years because it works across market cycles. However, today's environment plays directly to our strength as a long-term owner and operator of mission-critical, essential assets and businesses. Private equity was the first fund we launched more than 25 -- 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, Pinegrove, 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 supercore infrastructure fund and our private wealth infrastructure vehicle continue 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 the 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 their 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 12 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 both strong inflows and disciplined capital deployment across the platform, even as we continue to return capital at an accelerated pace to clients through realizations and distributions. 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 our 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 prime's opportunistic strategy at $2.2 billion, exceeding our target, a very successful outcome for our first-time fund. Within our credit business, we raised $23 billion of capital, which represented a record quarter. Driving our credit fundraising was real asset and asset-backed finance strategies as well as our insurance channel. This includes nearly $9 billion of capital raised from Brookfield Wealth Solutions. We also raised $5.6 billion from our long-term private funds, $1.4 billion of which was for our fourth vintage of our infrastructure mezzanine credit strategy, $4 billion for our perpetual credit funds and $3.2 billion for our liquid credit strategies. 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 contributing more than 1/3 of our fee-related revenues. As an example, the introduction of our transition platform 5 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 60 strategies compared to only 4 in market just 10 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 and 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 earnings 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 and 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 5-year notes at a coupon of 4.65% and $400 million of 10-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, and 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 our 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 $0.50025 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: [Operator Instructions] Our first question comes from Cherilyn Radbourne with TD Cowen. Cherilyn Radbourne: So clearly, manager consolidation is continuing, and the recent emphasis seems to have been on private credit and also secondaries. 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 David Teskey: We've made a few complementary 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. 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: Connor, congrats. Obviously, I think well deserved on many fronts. Question for you guys around the growth for 2026. So it sounds 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? Do that include Oaktree and Obviously, those are going to be additive to that FRE? So 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. Connor David 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 5-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 3 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 outsized growth in both PE and infrastructure where in each of those platforms, we'll 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, this 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. Operator: Our next question comes from Michael Brown with UBS. Michael Brown: So a lot of anxiety surfaced in the market yesterday around AI-driven disruption, including within the alternative space. Based on our analysis, your exposure screen's 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, I'd love to hear your high-level views on how AI-related disruption could flow through the private asset ecosystem. And if there are major losses, how do you think LP allocations to private assets could react? Connor David Teskey: So there's really 2 punchlines 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 announcement's not yesterday, but the increasing tailwinds over the last several months only provide further support for those initiatives. Obviously, this question is topical given the significant market move yesterday. But given our firm-wide focus on AI, this is a trend we've been tracking for a while. And as a result, the punchline is our exposure across the organization is very minimal. As a reminder, our portfolio is almost entirely focused on long-term contracted real assets where we don't take any technology risk or build on spec. Maybe to get into some of the specifics you asked about, within our private equity portfolio, we have less than 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 benefits 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: Connor, also echoing the congrats on the CEO appointment. I 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 just related to that, could you give us a high-level sense of the duration over which the $130 billion-ish of uncalled commitments could get called? Hadley Peer Marshall: Yes, sure. So this is Hadley. 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. For some time, we've benefited from the cash on hand from the spinout, 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 will 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 obviously in a big growth area and wanting to support that growth. When we look at our other area of liquidity, that's the uncalled capital at $130-ish 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 our BSREP, 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, which 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. Operator: Our next question comes from Craig Siegenthaler with Bank of America. Craig Siegenthaler: 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. So my question is on artificial intelligence. So Brookfield has really built a leading business servicing the AI industry. So 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 going to squeeze in, if you can address this one, too. And on the leases, they're, I think, almost all 15-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 3, but they're all kind of related. Connor David 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 3 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 offtake 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 2 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, et cetera. 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, I'm just seeing here. The second part of your question, these are very strong long-term offtakes, 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 offtaker 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: Maybe just sticking with AI and data centers. I 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 you're expanding your capacity there given bottlenecks? Connor David Teskey: There is no question. The bottleneck to AI growth today is not capital. It is not demand. It is electricity supply. And unlocking that electricity supply and the slogan, bringing your own power, is a key differentiator. And while 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 going to 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 capture this significant demand and essentially not be restricted by the growth of the grid that is not going to keep up with the opportunity set we see in front of us. Operator: Our next question comes from Dean Wilkinson with CIBC. Dean Wilkinson: Congrats, Connor and Bruce. Just want to circle back on credit overall. I mean there's been concerns around private credit, I guess, going back to September of last year. 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. Connor David 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. Operator: Our next question comes from Dan Fannon with Jefferies. Daniel Fannon: Just wanted to follow up on just the outlook for wealth flows. You've obviously had very good momentum exiting 2025. Can you talk about your product road map as you look into 2026 and beyond as well as just the continued momentum? Connor David Teskey: So 2025, our growth in the wealth channel was a little bit north of 40%, 4-0 percent. 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 our product offering, most notably on the credit side. Operator: Our next question comes from Crispin Love with Piper Sandler. Crispin Love: 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. 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 onetime 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 going to 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 will 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 improve because of that operating leverage that's built in across all of our platforms. 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: 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 3 initiatives for '26 on that front, including brand awareness. I'm just thinking from a cultural perspective, Brookfield's culture has been very consistent, very strong, excellent institutional culture to make Brookfield where it is today. How do you balance 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 David 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 going to 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: Congrats as well, Connor. On the private wealth market as that continues to evolve and access for private markets and 401(k)s expands, how should we be thinking about the potential impact on BAM's fee-bearing capital and FRE? And what do you need to have happen for that to become material? Connor David Teskey: So when we think about the large opportunity in the future for the individual investor, we think about that in 3 parts: the retail and high net worth channel, the insurance policy and annuity holder and the 401(k) and retiree 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 these 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 strategies. 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 assets 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: Our next question comes from Kenneth Worthington with JPMorgan. Kenneth Worthington: Connor, congratulations. My question is for Hadley. There was a more meaningful increase in the long-term fund and co-investment revenue in both the 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 $44 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 Pinegrove, 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 some 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 wind. And so that's something that you're seeing flow through there. Operator: Our next question comes from Sohrab Movahedi with BMO Capital Markets. Sohrab Movahedi: Congrats to Connor as well. Hadley, can you just give us a sense of how you arrived at the 15% div bump and whether or not you expect to be below 100% payout ratio next year? Hadley Peer Marshall: Yes. 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 the 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.
Operator: Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to Corteva Agriscience 4Q 2025 Earnings. [Operator Instructions] I would now like to turn the call over to Kim Booth, VP, Investor Relations. Please go ahead. Kimberly Booth: Good morning, and welcome to Corteva's Fourth Quarter 2025 Earnings Conference Call. Our prepared remarks today will be led by Chuck Magro, Chief Executive Officer; and David Johnson, Executive Vice President and Chief Financial Officer. Additionally, Judd O'Connor, Executive Vice President, Seed Business Unit; and Robert King, Executive Vice President, Crop Protection business unit, will join the Q&A session. We have prepared presentation slides to supplement our remarks during this call, which are posted on the Investor Relations section of the Corteva website and through the link to our webcast. During this call, we will make forward-looking statements, which are our expectations about the future. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Our actual results could materially differ from these statements due to these risks and uncertainties, including, but not limited to, those discussed on this call and in the Risk Factors section of our reports filed with the SEC. We do not undertake any duty to update any forward-looking statements. Please note in today's presentation, we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in our earnings press releases and related schedules along with our supplemental financial summary slide deck available on our Investor Relations website. It's now my pleasure to turn the call over to Chuck. Charles Magro: Thanks, Kim. Good morning, everyone, and thanks for joining us. I hope your year is off to a great start. Before we get into our results, I'd like to provide a quick update on our separation and what you can expect this year. It is still early in our overall planning, but we remain on track for a second half separation, most likely sometime in the fourth quarter. Now for some details. Over the past several months, a subset of our Board has been very busy with a global CEO search for new Corteva. We are making good progress and expect to make an announcement on that in the first half. At or around the same time, we intend to launch the official name and brand identity of SpinCo, which is very exciting for me at least and will really bring this transition to life. As we progress into the latter part of the first half, we'll be announcing the core executive leadership teams for both companies, we'll be working with the credit agencies on our capital structure submissions, and we will likely have filed the initial and first amendment of our Form 10 with the SEC. The second half is where we'll essentially be getting the separation to the finish line. We expect to go effective on the Form 10, announce our Board appointments and receive the final approval on the capital structures of the 2 companies. We'll also be completing the separation of our IT systems. And last but not least, we currently expect to hold our Investor Day events in mid-September. As for net dissynergies, we are still estimating roughly $100 million, $50 million of which is built into this year's guide. We'll keep you informed on our progress on a timely basis over the coming months. So now let's move to our financial performance. Let me start by saying by all accounts, 2025 was a strong year for Corteva. Our results for the fourth quarter were in line with our expectations. With the exception of outperformance on our controllables and even stronger cash flow generation than we anticipated. We grew the top line low single digits while improving operating EBITDA, low double digits, leading to over 200 basis points of margin expansion, pushing us over the 22% mark for the first time as a public company. This is a testament to growing demand of our technology, exceptional performance of our dedicated commercial teams and combined with disciplined execution on operational efficiency in both businesses. Our Seed business performed well again this year with organic growth in every region as well as share gains in both corn and soybeans. Seed delivered about $340 million of net cost improvements as well as $90 million in royalty improvement, reflecting our growing position in North America corn and progress in soybean licensing in Brazil. As noted last quarter, we're expecting to cross double-digit trade penetration for Conkesta this year in Brazil, the largest soybean market on the planet with over 300 basis points of margin expansion this year alone and our out-licensing business just catching its stride, I have to say it's fun to imagine what things might look like in another few years with our growth platforms, including gene editing in hybrid wheat really starting to take off. Our Crop Protection business is also performing well delivering top and bottom line growth as well as margin expansion this year and what I'd still describe as less than ideal market conditions. As we updated you last quarter, this business already has an incredible $9 billion pipeline of differentiated technologies. But in order to remain ahead of the curve, we are in the process of ongoing asset and sourcing optimization. For the full year, our CP business generated over $300 million of productivity and cost benefits, which improves our resilience as we make our way towards what we still expect to be improving market conditions in 2026. From an industry perspective, the overall ag fundamentals remain mixed. We're still seeing record demand for food and fuel and major crop inventories are within normal ranges despite large crops in Brazil and North America. Farmers continue to prioritize top Tier C technologies while managing tighter margins. Given the high corn area in the U.S. last year, it's logical to assume we'll see a few million acres shift back to soybeans in 2026, all of which is factored into our guide. In the Crop Protection market, most notable is that we are expecting modest growth in 2026, something we haven't seen in a while. Although we continue to experience competitive pricing dynamics in some major markets, including Latin America and Asia Pacific, underlying farmer demand in terms of applications remains consistent with historical levels. So what does all this mean for 2026? We are reiterating our preliminary operating EBITDA midpoint of $4.1 billion, which is 7% growth versus the prior year. Included in that estimate is momentum in our Seed Licensing business, growth in Crop Protection volumes driven by new products and biologicals and productivity benefits in both businesses. It's still quite early in the year with winter still firmly in place but we feel good about how 2026 is shaping up. Now before I turn the call over to David, I'd like to address some new developments since we last spoke in November. We recently reached a comprehensive resolution with Bayer related to our seed freedom to operate. Not only does this agreement allow SpinCo to remain focused on its forward trajectory and value creation opportunities, including continued investment in innovation, it also provides business certainty from ongoing litigation. We are pleased to have reached an agreement, which solidifies the use of existing technology rights in our own corn, canola and cotton product portfolios, including our own germplasm. As a result of this resolution and the progress we've been making across the broader out-licensing spectrum, we now expect to achieve royalty neutrality in 2026, which is 2 years ahead of our most recent expectations. In North America, this agreement will accelerate the introduction of existing Corteva proprietary triple-stack corn technologies for licensing. We now expect to be licensing as early as 2027, an acceleration of 5 years. This resolution also facilitates the introduction of our third gen aboveground trait platform in North America corn, which will be available for branded sales and licensing by the end of the decade. This is an acceleration of 2 years. Finally, this resolution includes a new licensing arrangement, which allows us to expand our addressable market by entering the cotton licensing market in the U.S., a space in which we do not currently participate. Leveraging our strong 2025 free cash flow, we committed to a payment of $610 million, which was largely completed last month. However, over the course of the next 10 years, we believe this agreement will generate about $1 billion of aggregate earnings upside for Corteva across our corn, cotton and canola portfolios through both out-licensing and branded sales. In summary, we consider this resolution to be a win for our long-term strategic objectives. But more importantly, this is a win for farmers and for agriculture at large as this resolution strengthens competition and offers farmers more choices when making purchasing decisions. Getting back to 2026, let me wrap up by saying what I say to our employees. We are one team until we're not. Based on our latest time line, we'll spend more time together than apart in 2026, and we're going to stay focused on controlling the controllables. Our intended separation is about sharpening focus, accelerating innovation and unlocking value that has been earned through performance, and we are committed to delivering results like this past year throughout this transition period. With that, I'll turn the call over to David. David Johnson: Thanks, Chuck, and welcome, everyone, to the call. Let's start on Slide 7, which provides the financial results for the fourth quarter, second half and full year. While it's more meaningful to look at our business in halves, I'll briefly touch on the quarter. Sales and operating EBITDA for the quarter were down versus prior year, largely due to lower volume in Seed and Crop Protection, coupled with higher compensation expense. While it's worth knowing that the fourth quarter of 2024 was a record quarter for Corteva and this year was the second highest fourth quarter on record for us as a public company. Organic sales for the quarter were down 4% compared to prior year. Crop Protection saw volume and price declines of 2% and 1%, respectively. Price declines were largely due to competitive pricing dynamics in Latin America and in line with expectations. Volume declines in Crop Protection were primarily driven by a seasonal shift and timing for North America to first half 2026 along with timing of fungicide demand in Latin America. Seed had pricing gains of 3% versus prior year, evidencing our price for value strategy with volumes declined 8%, largely due to timing shift of safrinha sales into the third quarter of 2025 and the shift of North America deliveries into the first half of 2026 as a result of freight optimization and weather across the Midwest. Looking back at the second half, sales were up 4%, and operating EBITDA was up 16% driven by better price and mix in Seed, continued execution on controlling the controllables and volume gains in both segments. Organic sales were up 2% compared to prior year. Crop Protection saw volume growth of 1%, offset by price declines of 2%, largely driven by competitive pricing in Latin America. Seed had price, mix and volume gains of 3% and 2%, respectively, versus prior year. Focusing on the full year. Organic sales were up 4% over last year with growth in both Seed and Crop Protection. A continuation of our price for value strategy along with increased corn acres in North America and Latin America drove Seed price/mix and volume gains of 3% and 2%. Crop Protection price was down 2% for the year as expected, driven by competitive market dynamics, mostly in Brazil. Crop Protection volume was up 5%, but gains in nearly every region. Notably, new products have strong demand and biologicals delivered double-digit volume gains compared to prior year. Operating EBITDA was up 14% over prior year. Operating EBITDA margins of over 22% was up about 215 basis points, driven by organic sales growth coupled with significant benefits from lower input cost and productivity. Moving on to Slide 8 for a summary of the year. Operating EBITDA was up more than [ $470 ] million to $3.85 billion. Price and mix volume gains and cost benefits more than offset currency headwinds. Seed continues to make progress on its path to royalty neutrality with about $90 million in reduced net royalty expense. This improvement was driven by increased out-licensing income in North American corn and lower royalty expense in soybeans. We finished the year with a net royalty expense position of around $120 million. Seed and Crop Protection combined to deliver over $650 million in net cost improvement, including lower seed commodity costs, raw material deflation and continued productivity actions. SG&A for the year was up compared to prior year driven by higher commissions and compensation expense. The increased investment in R&D aligns with our target just over 8% of sales for the full year. As expected, currency was $217 million headwind on EBITDA, driven by the Brazil real, Canadian dollar and Turkish lira. Both Seed and Crop Protection finished the year with impressive EBITDA growth and meaningful margin expansion over prior year. Together, this translated to over 22% operating EBITDA margin. In addition, free cash flow has improved by about $1.2 billion from prior year to $2.9 billion. This is driven by our increased EBITDA, lower cash taxes and working capital discipline. With that, let's go to Slide 9 in transition to the updated outlook for 2026 and the key metrics we are tracking. Our updated 2026 guidance reflects the continued momentum from our 2025 performance and continued confidence in delivering on productivity and cost benefits. 2026 operating EBITDA is expected to be in the range of $4 billion and $4.2 billion or approximately 7% improvement over prior year at the midpoint. This would post at the low end of the 2027 EBITDA framework we outlined in our last Investor Day. Meaningful margin expansion is expected to be driven by organic sales growth, together with benefits from improved net royalty expense and productivity actions. Operating EPS is expected to be in the range of $3.45 to $3.70 per share, an increase of 7% at the midpoint, which reflects higher earnings growth and lower average share count, partially offset by higher net interest expense. Free cash flow in 2026 will be impacted by separation items and the Bayer agreement. Absent these, we would be in line with our long-term target we communicated at our 2024 Investor Day. We remain committed to returning cash to shareholders as we progress through the separation. We announced the first quarter dividend last week, and we are targeting about $500 million of share repurchases in the first half of 2026. Turning to Slide 10. in the 2026 operating EBITDA bridge, growing from approximately $3.8 billion in 2025 to $4.1 billion at the midpoint. Total company pricing is expected to be slightly up with pricing gains in Seed partially offset by declines in Crop Protection. While we expect the Crop Protection market to grow, we expect prices to be down low single digits for the year. We are expecting volumes to be relatively flat in Seed as North America share gains are expected to be offset by the corn to soy planted area shift, and have a full year under our Brazil soybean shift to licensing. Crop Protection volume is expected to be up mid-single digits, driven by demand for new products and biologicals, which are expected to outperform the rest of the portfolio. We expect approximately $120 million improvement in net royalty expense driven by the continued ramp-up of Conkesta E3 soybeans and PowerCore Enlist corn licensing. We expect to deliver around $200 million of productivity savings in 2026, partially offset by approximately $80 million in tariffs. SG&A and R&D as a percentage of sales are expected to be relatively flat with 2025 levels. Keep in mind, this includes approximately $50 million of net dissynergies. We are expecting a currency tailwind versus 2025. This is largely driven by the Brazilian real, euro and Canadian dollar. The appreciating foreign currencies are expected to translate to a low single-digit tailwind on net sales and approximately $75 million tailwind on operating EBITDA. Together, this translates to approximately 7% operating EBITDA growth at the midpoint and about 50 basis points of margin expansion. Regarding the timing of sales and earnings in 2026, we are expecting about 60% of sales and roughly 85% of EBITDA to be delivered in the first half of the year. With that, let's go to Slide 11 and summarize the key takeaways for the year. 2025 was a record year for Corteva with strong organic growth across both Crop Protection and Seed. Performance was driven by volume, favorable mix and continued adoption of our differentiated technologies. In Crop Protection, demand for our novel modes of action and biologicals remain strong, while Seed benefited from our price for value strategy and solid execution across key markets. Importantly, this growth reflects underlying demand and execution. We also delivered record free cash flow in 2025 driven primarily by higher earnings and working capital improvements. Tighter operational discipline and greater year-end cash collections improved cash conversion. As a result, we returned approximately $1.5 billion to shareholders in fiscal 2025 through a combination of dividends and share repurchases. Our capital allocation priorities remain unchanged, investing in the business, maintaining a strong balance sheet for Corteva and the future independent companies, and returning excess cash to shareholders in a disciplined manner. Looking ahead, our 2026 guidance reflects growth in sales, operating EBITDA and margins. We expect continued demand from our differentiated technology, supported by our innovation pipeline and ongoing productivity and cost actions. With that, let me turn it back to Kim. Kimberly Booth: Thanks, David. Now let's move on to your questions. I would like to remind you that our cautions on forward-looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions. Operator: [Operator Instructions] Your first question comes from the line of Chris Parkinson with Wolfe Research. Christopher Parkinson: Chuck, could you just kind of help us break down Slide 27 a little bit more with the Bayer litigation. It seems like there are 2 or 3 key buckets of what this accelerates as it leads into the chart that you published across triples, insect resistance and cotton. I'd love to hear if it actually affects the acceleration of E3 or Conkesta in terms of the next-gen stuff. So I'd love to hear the breakdown of that. And then also in that chart, do you assume any gene editing assumptions? Or is that purely a corollary of what was announced yesterday evening? Charles Magro: So let me start, and then I'm going to have Judd unpack some of the finer details. So first, we're very pleased with the agreement. And I personally view this as being extremely strategic in terms of what our overall licensing ambitions can be. And so this is a comprehensive agreement. We've been working with Bayer for quite some time. These things are very scientifically based. They're very -- there's a lot of legal precedent here for us to work through. But I'd say what the agreement does is it provides 2 broad things. The first is we now have freedom to operate and an increased access to the licensing market, which is extremely important to us. You know our ambition when it comes to our licensing business, and it's really centered around the expectation to accelerate our corn licensing business to as early as 2027, which is years ahead of our original plans. We're also going to enter the cotton licensing market, another big opportunity for Corteva. But I'd say more importantly, this is great for farmers and for agriculture in general because it's going to give our farmer customers simply just more choice. So now we're going to have a strong licensing portfolio for soybeans, for corn and for cotton. And if you look at it financially, the big picture, it really does set us on a path, as we said today, to deliver about $1 billion in licensing income in the next decade. The second thing that this does, this agreement does is it resolves all the outstanding litigation with Bayer. And I think that's very helpful from a clarity and risk management perspective. So that's what this agreement is intended to do. Like I said, I'm very pleased with the agreement. Judd, do you want to just talk about some of the finer details? Judd O’Connor: Yes. Thanks, Chuck, and thanks, Chris, for the question. And I think Chuck captured it all extremely well. And we're still needing to bring product through the R&D pipeline, but maybe let me touch on it. One, we've got freedom to operate in canola in specific markets around the world where that's very important to us. Number two, we're going to be able to bring, as you see here, triple-stack options into the market 5 years earlier than what our previous plan was with complete freedom to operate and the ability to line up and provide additional volumes with our licensees that we've got tremendous amount of demand building with licensees today. Number three, we get to bring our next proprietary third-gen above-ground product 2 years forward into the marketplace. We also provided Bayer license for Enlist cotton. They provided us an opportunity to license their HT4, and this provides us an opportunity to license in cotton, which we had no freedom to do previously. So comprehensively it creates a tremendous amount of opportunity for us to continue to accelerate our ambitions in this space. We've got our germplasm funnel that has continued to widen, so that we've got the -- or the germplasm that we need to be able to provide these traits. And it just puts us in a really great spot. It's a great investment for all of our constituents, whether that be farmers or whether it be investors, whether that be our licensees if we work closely with them going forward. And we're excited to be able to put the certainty and freedom to operate in the hands of our R&D team so they can start streamlining the lines that they're bringing forward as well. So thanks. Operator: Your next question comes from the line of Vincent Andrews with Morgan Stanley. Vincent Andrews: Some more clarification on the Bayer agreement. Firstly, it sounds like there is some existing licensing expense that was going through the income statement that with the payment of the $610 million, you will no longer expend. So number one, is that true? And can you tell us how much it is? And whether you had contemplated that back in October when you gave the original guidance? And then secondarily, you referenced HT4 having a license on that from Bayer. Can you clarify whether in future years, if you do elect to use that, whether you'll have to pay any per acre royalties today or in the future for that? Or is that all encompassed in the $610 million and you kind of have an all you can eat on that? David Johnson: Okay, Vincent, this is David. I'll handle the first part of that question. Perhaps Judd can follow up with the end. So in our current guide, we have $120 million of net royalty benefit in '26. A portion of that is the fact that there were some Bayer royalties that we will not be paying now in '26 and '27, so that's what accelerated us to a net neutral position in '26, which is 2 years ahead. The rest of the benefit of the entire overall agreement is really later past 2027 when it adds over $100 million a year. And that gets more into the freedom to operate and more on the offensive on the licensing income piece. Operator: Your next question comes from the line of Joel Jackson. Judd O’Connor: So maybe I'd jump in here. Joel, thanks for just a little bit of time to answer Vincent's -- the second piece of Vincent's questions on access to HT4. Does that come royalty-free? No, it doesn't come royalty free. I mean we would have a royalty that's associated with that as they would with the license that we would provide reciprocally with them. So -- but it puts us in a really good position with certainty as terms of path forward and making sure that we can continue to bring our products in the marketplace. So, thanks. Joel Jackson: I'll ask my question now. So I just want to follow up on that a bit, too. I went back to your Investor Day deck from late 2024. And if I compare your -- how you're showing you're going from a net outflow payer of royalties to becoming positive, and I look at that chart versus the chart you presented last night in your deck, it looks the same through 2030, and now you show a 2035 where it's $1 billion. I'm just trying to reconcile that with statements that you're pulling forward things to this decade, from after next decade, you're pointing 2 years forward, 5 years forward. But it looks the same through 2030 and more incremental 2031, 2032, 2033, 2034, 2035. Can you reconcile that, please? Charles Magro: Joel, look, I'd have to look at the details that you're going back to the Investor Day, but it should not be the same. The acceleration that this agreement gives us is pretty powerful. When we were thinking about our original royalty journey, we were really talking about soybeans and then corn starting in late next decade. And now we're talking about corn starting now, basically in 2027, and then the introduction of cotton now. So when you put all that together, I think that what you're going to see is that we've really put our licensing business in a much higher gear than what we could have done absence of clarity around this comprehensive agreement. So we'll have to go back and we'll look at the numbers. But the acceleration from a freedom to operate is real, and it's pulling our corn in many cases, many years ahead, and it's also opening up the door on cotton. I think the other thing is this does not contemplate wheat. So if you start thinking about that, and we've said that our hybrid wheat opportunity combined with our branded business and our licensing opportunity, it would be $1 billion of revenue. So when you start thinking about this strategically as Corteva and then soon to be SpinCo, this provides a huge amount of value creation for our shareholders. The licensing opportunities continue to grow. And as Judd mentioned, even today, we have more demand than we have supply. So this was a matter of clearing up the access to the freedom to operate. And now that we have that, we can set our R&D and our commercial teams to meet the growing demand that we have for soybeans for cotton, for corn and soon-to-be wheat. Operator: Your next question comes from the line of Kevin McCarthy with Vertical Research. Kevin McCarthy: Maybe a 2-part question on the subject of gene editing. As we follow the regulatory developments in Europe, it seems as though there is a developing regulatory framework whereby Europe could open its market to gene-edited seeds. So the first part would be, do you expect that to happen in 2026? And what might it mean for Corteva over the medium to long term? Then secondly, I think one of your gene-edited products is multi-disease resistant corn. I was wondering if you could just provide an update on that product for the U.S. market and when we might expect commercialization of MDR? Charles Magro: Kevin, sure. So look, we're -- if you step back and you look at the global regulatory framework, we're seeing very good progress on support for gene editing around the world. In fact, most of the major producing countries now have policies firmly in place. To your question with the EU, in December, there was an agreement with the EU framework. It still needs to be formally adopted by parliament and the council, and we are expecting that, hopefully, soon, I'd say, by the first half of this year. And we are very supportive of what we've seen so far. We think it's science-based. We think that it's going to be quite practical and it's going to allow us to bring much better crop technology to European farmers and really help, I think the EU from an overall food security and self-sufficiency perspective. And the regulatory framework that is being proposed, I think we'll have some areas where it will actually be a simplified process, which will allow us to get, I think, products to market a lot more quickly. Now we still need China approval. It's probably one of the last remaining significant import markets that we need approval. And we're very hopeful that we'll get that soon. If you think about gene editing, and you know you've heard me talk about this before, there's probably no more important technology right now that we can bring to market to help farmers. And if you start thinking about how thin farmers' margins are right now, this technology can go a lot way to helping farmers improve their profitability. Now to your second question around our products. So that's right. We have a gene-edited fungal disease-resistant corn hybrid, we call it a disease super locus. And I've seen the test plots, it continues to look fantastic in our test fields. And we will be able to bring that to the market most likely within a year or 2 after receiving our overall regulatory approvals and we're pretty excited about that. We'll first bring it to the U.S. market, but then we'll quickly move that technology around the world. Operator: Your next question comes from the line of David Begleiter with Deutsche Bank. David Begleiter: Chuck, can you discuss your U.S. order book for the upcoming year? And how the pressure on farmers is manifesting itself into this year's buying activities? Charles Magro: Sure. Well, why don't we start with Seed, and then Robert can talk about CP. Go ahead, Judd. Judd O’Connor: Yes. Thanks for the question. Our order books are very strong at this point in time. Our prepay that we've collected is on par with prior year. And our cash credit mix is very, very similar, plus or minus 1 point or 2. So we feel really good about the position we're in. I guess, translation may be what's your guess on corn acres. I'd say it's February. There's still snow on the ground and that corn versus soy mix, it's going to shift a little bit. There'd be a little bit of weight towards some more soy acres in space of corn. It's all very well manageable and within the guide that we've provided. But feel really good about the start to the year, both with our direct Pioneer as well as our Brevant retail brands. Robert King: David, it's Robert for Crop Protection, very similar story, very strong order books across the Northern Hemisphere. Europe is in full swing, and North America is moving. As we look into January, we're having a strong movement now. Keep in mind, both of these markets this last year grew a few temps, and that momentum continues as we're moving forward here. So thank you. Operator: Your next question comes from the line of Joshua Spector with UBS. Joshua Spector: I wanted to ask on free cash flow. Obviously, really strong performance last year. I mean how are you thinking about the conversion into 2026? Is there something one-off last year that gives back? Or is this something that you guys build on top of? David Johnson: Thank you, Josh, for the question. And we obviously had a very strong end of the year with free cash flow. Some of that was, as Judd had mentioned, we did have favorable cash credit mix at the end of the year. So that was certainly a benefit. It's something that we don't count on every year. So that's probably one element year-over-year, which should be a little bit of a tailwind into '25 and the headwind into '26. When you look at the really -- the major portion of why we were favorable is our working capital management. And where we ended this particular year was down probably 300 to 400 basis points lower than typical in our net working capital as a percentage of sales. So I would say the teams did a really good job. That's also reflected in the fact that in Seed, we had very strong sales and what have you. So our inventories are lower than typical. So I would say going into '26, absent any type of onetime items, and I'll go into those in a little bit more detail, we would be in the range that we articulated during our Investor Day. So free cash flow, about 45% to 50%. And you might ask if that have definitely a few points lower than '25, I would say most of that is because of working capital gain back to normal. So call it another 200 or 300 basis points as a percentage of sales. But this year, when we actually show the number, we will have a few unusual items. We will have the Bayer agreement, which will be an offset to the free cash flow number. As we get later in the year, we will be looking at separation type items. So we will be going into onetime separation cost and we'll likely also want some flexibility because we're committed to have 2 strong investment-grade balance sheet for the separated companies. So we want flexibility to make sure that we're handling that appropriately and that both companies are set up for success in the future. Operator: Your next question comes from the line of Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: A 2-part question. First, your overall revenues in the fourth quarter were roughly flat year-over-year, down a tiny bit, but your SG&A and R&D really jumped. SG&A went from $735 million to $860 million, up about $125 million. R&D was up $50 million. What happened? Why are those numbers so unusually high? And then secondly, can you give us an idea of where you stand with Conkesta soybeans in Brazil? Where is your share? Or what are your revenues? What share do you expect for next year? What kind of revenues do you expect? Charles Magro: Okay. Yes. So I'll handle the first part of the question, and I'm assuming Judd will handle the second part of your question. So on SG&A, R&D, as you can see throughout the year, we have increased our R&D. As a percentage of sales, in total we're up about 8%. And certainly, that's not really much timing on sales or fourth quarter. So you've seen that build throughout the year. On SG&A, as we mentioned in the opening comments, we do have some additional compensation expense, variable compensation expenses sort of items that hit in Q4, also hit in other quarters, but it was probably a little bit more impactful in Q4, especially against the small revenue number. And Judd? Judd O’Connor: Yes. And Jeff, as far as E3 Conkesta, [ CE3 ] in Latin America, and particularly in Brazil, we're going to finish the year after just getting started in this space and going through our multipliers and licensing model, somewhere in mid-single digits in 2025. We expect to double or more than double that going into 2026. We will be completely out of our vertically branded business and be 100% focused on licensing through multipliers, and we believe we're going to be in the mid-teens plus for 2026. So a lot of momentum. We've advanced a number of new genetic platforms and feel really good about how that transition is going. Operator: Your next question comes from the line of Aleksey Yefremov with KeyBanc Capital Markets. Aleksey Yefremov: Could you just call on your CP business, what share of your business will be off patent versus patent and new products in '26, given that there is quite a bit of difference between growth in these 2 categories. Robert King: Aleksey, this is Robert. We will remain about flat to what we've been in the past. Keep in mind, we're about 2/3 differentiated on our overall portfolio now, getting good growth out of our new products and biologicals. But we don't have any major shifts coming off patent, like in the industry, there are some big molecules coming off, but we don't play in those markets. So we should be stable, much like you've seen this past year from a portfolio standpoint. I would keep in mind that there's a few things coming to play, though, that are going to help us out a little bit more. And we're waiting on registration, but we hope to have [ Visa ] launch latter part of this year, which will augment that differentiated portfolio. And remember, this is a fungicide that attacks Asian soybean rust, and we're expecting big things out of that molecule as we move forward. Thank you for the question. Operator: Your next question comes from the line of Duffy Fischer with Goldman Sachs. Patrick Fischer: With '25 in the rearview mirror, can you just go by your major crops on Seed in major geographies where you saw either market share gains or if there were any market share losses? And then just I wanted to clarify, on the deal with Bayer, they don't get access to your Enlist in soybeans, is that correct? Judd O’Connor: Yes. Thank you, Duffy. So maybe just walk around the world a bit. From a North America perspective, we were able to continue to pick up share in corn and in soy. As we go into Latin America, we picked up mid-single-digit share in summer. We picked up mid-single-digit share plus in safrinha, tremendous amount of momentum and share in that Brazilian market as well. And as you look at other markets around the world, we had some nice recovery in India in the rainy corn season market, and we saw some nice share gains in sunflower and corn in EMEA. So we had positive impacts in almost all regions around the world. Now in terms of the Bayer agreement, E3 on soy was not part of those discussions at this point in time. Obviously, we have a number of places that we worked with Bayer across, but that was another part of it. So thanks for that question. Operator: Your next question comes from the line of Kristen Owen with Oppenheimer. Kristen Owen: I wanted to ask about the 2026 EBITDA guide. You're in line with the $4.1 billion that you gave us earlier last year. But it seems like maybe some moving pieces around with the pull forward of net royalties, maybe the push in volume from 4Q into 1Q. So can you help us sort of frame what the upside case and downside case look like in this bridge? And I do actually have a follow-up on Brazil Conkesta, if I could ask quickly. Just with the economics, how we should see that show up, that doubling in market share, how we see that show up in the EBITDA bridge as well. Charles Magro: Okay, Kristen. So we'll have Judd answer that. David will take the guide question, but let me just give you my perspective, and I guess my philosophy. We're sitting here in February. It's appropriate, I think, given that outside and in the corn belt, we have a lot of snow. The ground is still frozen, and we are literally weeks, if not a bit more than that, away from putting a crop in the ground. So we are usually, at this point, looking at the market conditions and needing to see what happens from a crop perspective, but it is generally our philosophy not to do too much with a guide in February. Now we can talk about the ups and downs. So go ahead, David. David Johnson: Yes. Maybe it would be helpful to just kind of reiterate what we have in the guide and then we can go from there. So when we look at the $4.1 billion, it is up 7% from the midpoint. The other interesting thing is that is the beginning or the low end of our 2027 range, which would be a year early. So I think all are very positive. I think the other couple of takeaways. One, we are going to show growth in both Seed and CP, very much like we were able to do in 2025. And 2/3 of the EBITDA increase year-over-year will accrue to the Seed business and about 1/3 of CP, again, very similar to what we've seen. So when I think about the bridge and the different elements of the bridge, right now, we have the price impact would be more or less similar to 2025. So low single-digit seed increases. We have increased royalty income. That will be partially offset by the low single-digit CP declines. So not much of a major difference from 2025. We already talked a little bit about net royalties, but that will be a positive. We expect somewhere in the range of $120 million versus the $90 million in 2025. The volume impact in 2026, right now, we have it in as fairly flat for Seed. Again, that's mainly due to the acreage differences between corn and soy in the U.S. that shift. And then CP more or less is forecasted to have a similar benefit in '26 as we continue to see growth in new products and biologicals. Probably the major difference between our bridge in '26 versus '25 would be on the cost improvements. And we still have $200 million built in for cost improvements in '26, then '25, we benefit pretty significantly. About half of our $665 million was really a commodity impact that we do not have included in 2026. We think that's going to be flat in 2026. So that's a major difference there. And we also have an $80 million kind of headwind in our -- in tariffs. So those are the major elements. And then when you go to other, if you look at other between the 2, they're about the same. So when I think about it, price is fairly balanced, royalty is definitely a positive story. The volume is probably the one that you could argue one way or the other at whether or not we're being conservative or not, but it's very early in the season to be able to make that termination. And we'll keep an eye on being able to offset tariffs and include additional cost improvements. One other element we did include, and we put this in the notes is we have $50 million of dissynergies in our number in 2026, which obviously, we would not have had in '25. Charles Magro: Conkesta? Judd O’Connor: Yes. And maybe just a follow-up on the Conkesta question. So for 2026, overall earnings for Seed in Brazil are up significantly. The Conkesta transition and the additional share is certainly a big part of it. That also is part of that $120 million that's in the plan that David just mentioned as well. Operator: Your next question comes from Laurence Alexander with Jefferies. Chengxi Jiang: This is Carol Jiang on for Laurence Alexander. Actually, my question has been asked already. But just a follow-up on the tariff estimation. You estimate $8 million impact from incremental global tariff in 2026. Does this figure also account for the potential secondary effects such as increased dumping of generic product in non-tariff market like Brazil? Judd O’Connor: Yes. I think -- I believe the question is does this include secondary impacts like impacts from Brazil? Is that the question? Chengxi Jiang: Yes, just the $80 million figure. Robert King: Yes, the estimate that we've got on the Crop Protection primarily is where the tariffs all are -- is encompassing everything we've got for the entire business. So it includes all companies, including -- all countries including Brazil. Charles Magro: If it's helpful, almost all of it is CP and almost all of it is China, actives coming in to the United States. Robert King: That's the biggest part. Charles Magro: That is, by far, the biggest part of the tariff impact. Robert King: Correct. Operator: Your next question comes from the line of Arun Viswanathan with RBC. Arun Viswanathan: Most of my questions have been answered as well, but I guess I'll just ask on the $200 million productivity benefits. You guys have obviously been very successful the last few years, bringing up your margins and executing on that productivity. Is that kind of -- maybe you could break that out between Seed and CP if that's relevant. And then is that kind of an ongoing -- how do we think about the ongoing productivity opportunity? Where are you kind of in that journey? I know there's been a lot of discussion about that in the past, but maybe you can just kind of give us some updated thoughts? Judd O’Connor: Yes, sure. No problem. So yes, the $200 million is split somewhat equally between the 2 different businesses. And the way I look at that is it is a running rate. There's opportunities every year in seed, in production and how we go and grow the seed with our farmers, how efficient we can be there. In Crop Protection, typically, your normal productivity year-over-year improvement. I would say beyond that, though, there is further elements in crop when they look at footprint and different optimization opportunities in the future. Charles Magro: I think the one thing to call out is when we gave our financial framework for 2027, we said it would be about $700 million of net productivity and cost improvement, and we had almost that last year. So obviously, with David's communication today around another couple of hundred million on a gross basis. So call it -- he did outline some of the other headwinds we have. So if you call that $100 million net, and that's only in 2026, and then if you play the framework forward into 2027, we're going to far and exceed the original $700 million that we put into our financial framework. We probably overachieved a little bit in '25, but I think '26 and the pipeline that we've got for cost and productivity is still very healthy across the company, and it is more or less split between Seed and CP. Operator: Your next question comes from the line of Patrick Cunningham with Citi. Patrick Cunningham: As we look at the Latin American CP market for 2026, does the current channel inventory position support a return to more normalized purchasing patterns? Or should we anticipate continued volatility in some of the order timing? And have you seen any further impact or improvement of credit and liquidity concerns for farmers in the region? Robert King: Patrick, this is Robert. I'll take that one. As far as LatAm goes, we're expecting the year as we move into this year, crops are in the ground now. And looking at 2026, we're going to continue to see pricing pressures in LatAm. We expect volume growth to take place there, much like this year, more lands going in and the pest and resistance pressures continue to build. So we expect growth to continue to happen there. Pricing pressures, like I said, will continue. And that just has to do with there is more than enough supply in the market nowadays. And so that will eventually tighten back up and from a channel standpoint, the channels are about normal right now for this time of year, We need to let the year play out for the rest of the season to see where we land there. From a farmer standpoint, to touch on that just a little bit. Farmers in Latin America are stressed, very high interest rates, commodity price is a little bit suppressed, but they're still making money by and large. Cash flow is tight for them. And we've been working through a lot of those things with them. Keep in mind, you will have seen that our barter program this year between crop and seed will be near $1 billion in total for revenue there. And so we're doing things to help mitigate risk and to help manage that with farmers. And we think we're in a pretty good position as we head in '26 to have another good year there in a market that is challenged. Operator: Your next question comes from the line of Matthew DeYoe with Bank of America. Matthew DeYoe: You talked openly about kind of the initial days of the announced spin that Seed would be looking to expand beyond corn and soy. And I know you have the hybrid wheat coming out next year, which is obviously exciting. And you're talking a little bit about cotton on the back of the Bayer agreement. But what -- how do you prioritize the new markets? Are there anything beyond that? Are you looking at fruits and veggies more broadly? Do you need acquisitions to get to where you think you want to be in 5, 10 years in the Seed business from a portfolio perspective? Charles Magro: Yes, Matt, let me give you a teaser, but I want you to join us in September when we do our Investor Day for both companies just prior to our separation. So I won't tell you the whole story. But look, I think from a Seed perspective, we have a lot of opportunity in our core businesses. And Judd just articulated a little bit here on this call. So we think there's room to grow in corn and soybeans. And with the agreement now that we have in place, the seed licensing business, I think, is going to be just a great growth platform for us going forward. I think then we've talked about cotton. So that's another new market for us, and we've already covered gene editing. I think gene editing, the capability, if we can provide differentiated technology from our innovation in gene editing, we will consider what I would consider to be tangential or adjacent crops, but we won't go there unless we believe we can provide something that is unique and special to the market. And right now, as we said, our short-term focus is Seed licensing in cotton and corn and in soybeans and then entering the hybrid wheat market. We're going to do that conventionally, but also with gene-edited hybrid wheat. And that market is the largest row crop market on the planet, 20% of our calories are still consumed there as humanity. And we've got lots of new technology coming in with our proprietary traits as well. So I think we've got a lot to keep our plates full right now. But with the advent of gene editing and as we get more comfortable with the acceptance of the science around the world, which certainly looks to me like that's what's happening, it should open up other markets for us in the future. Operator: Your next question comes from the line of Mike Sison with Wells Fargo. Michael Sison: Just a quick follow-up on Crop Protection. It looks like you expect the markets to rebound in '26 versus '25. Anything in particular that gives you confidence there? The double-digit volume growth you have for the year seems to be more biologics and strong demand for new products. And then just a quick follow-up on Brazil pricing pressure in Crop Protection. Is it stabilized, getting worse, getting better? Just curious on that. Robert King: Michael, this is Robert again. Let's talk about CP markets for 2026. We expect to see modest growth in the overall CP market around the world this year. It will be volume will continue to grow. There's going to be some pricing pressures against that. But by and large, we're seeing positive signs around the world. And earlier question this morning about how things looking in Northern Hemisphere on the order books, and like I said, they're strong. So the year started really well from that standpoint. Specific to Brazil, when you think about pricing there and when do they stabilize, et cetera, a couple of things happening in Brazil. When you look at the overall market, there is ample supply of product coming in. And so that is a lot of more generics, in formulated generics, but nevertheless, a lot of supply. But when you think about the differentiated products, we're still seeing a need for that technology and farmers are demanding that. And keep in mind, for us, again, 2/3 differentiated around the world. For us, those products command about a 10% to 15% higher margin than the rest of the portfolio. So yes, we think there continues to be some pricing pressures there from some of the big molecules. But we have a good portfolio to combat that, and we think we're in a pretty good place from a business standpoint as we head into 2026. Operator: Your next question comes from the line of Edlain Rodriguez with Mizuho. Edlain Rodriguez: A quick one. This is a follow-up to the CP question. Like the competitive pricing pressure we're seeing in Brazil and in some parts of Asia, can we ever see that happening in North America or Europe again, like how well protected all these markets from the generics? Charles Magro: Yes, Edlain, look, let me take a stab at that one. I think, look, the businesses, the markets are just fundamentally different. They're structurally built differently the way the farmers buy their channel partners, the infrastructure that's in each of the countries or the regions are different. And we -- no market is immune to having generics, right? Generics have been part of the global CP market as long as I've been around and will always be, and they're in all the markets. I think that what's unique is what's happening in Brazil right now. And look, Brazil is going to grow and there's more area going into production, as we've already said. But I think what we're seeing is that the channel is being a bit more responsible. It looks to us like the channel is functioning still relatively normally. There's a lot of product currently going to ground. But it is a well-supplied market because of the way that they allow their imports. Now what we haven't talked about, I think, specific to Brazil is a lot of this product is coming from China. And it looks to us like China may be taking early steps to control some of their exports. They just repealed their export VAT. So that's going to drive up the cost to export outside -- from China into Brazil that we think is constructive for the market overall. We're starting to see M&A actually from some of the generics in China. I think that will be constructive overall. So I think that when you start thinking about this, we are comfortable that 2026, and I'm going to talk about globally, 2026, we should see some slow growth, which is a lot better than we've seen in the last 3 years. And 2025 was better than '24, right? It was a flat market driven by volume. But as Robert said, our planning assumption today is some headwinds when it comes to pricing in Brazil. But the rest of the markets, I think, are going to be quite healthy. Operator: I will turn the call back over to Kim Booth, VP, Investor Relations, for closing remarks. Kimberly Booth: Great. Well, thanks for joining and for your interest in Corteva. And we hope you have a safe and wonderful day. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Greetings, and welcome to the Reservoir Media's Third Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jackie Marcus, Investor Relations. Thank you. You may begin. Jacqueline Marcus: Thank you, operator. Good morning, everyone, and thank you for participating in today's earnings conference call. Reservoir Media issued a press release with results for its third quarter of fiscal year 2026 ended December 31, 2025, earlier this morning. If you did not receive a copy of our earnings press release, you may access it from the Investor Relations section of our website at investors.reservoir-media.com. With me on today's call are Golnar Khosrowshahi, Founder and Chief Executive Officer; and Jim Heindlmeyer, Chief Financial Officer. As a reminder, this call is being simultaneously webcast and will be recorded and archived on the Investor Relations section of our website. Before I turn the call over to Golnar and Jim, I'd like to note that today's discussion will contain forward-looking statements that reflect the current views of Reservoir Media about our business, financial performance and future events, and as such, involve certain risks and uncertainties. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that our expectations, beliefs and projections will result or be achieved. Please refer to our earnings press release and our filings with the Securities and Exchange Commission for more information on the specific risk, uncertainties and other factors that could cause our actual results to differ materially from our expectations, beliefs and projections described in today's discussion. Any forward-looking statements that we make on this call or in our earnings press release are as of today, and we undertake no obligation to update these statements as a result of new information or future events, except to the extent required by applicable law. In addition to financial results presented in accordance with generally accepted accounting principles, we plan to present during this call certain financial measures that do not conform to U.S. GAAP, if we believe they are useful to investors or if we believe they will help investors to better understand our performance or business trends. Reconciliations of these non-GAAP financial measures to the nearest comparable GAAP measures are included in our earnings press release. I would now like to turn the call over to Golnar. Golnar Khosrowshahi: Thank you, Jackie. Good morning, everyone, and thank you for joining us today. We continue to execute our strategy in the third fiscal quarter with a sustained focus on deepening relationships with our top-tier talent through new ventures, investing in the next generation of hitmakers and expanding our presence in emerging markets. Organic growth was up 5% year-over-year, underscoring the strength and demand for our catalog. Music Publishing revenue grew another 12%, while Recorded Music revenue for the quarter was up 8% compared to the year ago period. Both Music Publishing and Recorded Music's revenue growth were driven by acquisitions, an increase in Digital revenue and continued growth of music streaming services. Before reviewing our operational highlights, I want to congratulate the nominees and winners of music's highest honor, the Grammys, held on Sunday in Los Angeles. Our roster contributed to 10 wins across multiple genres. Khris Riddick-Tynes' collaboration Folded by Kehlani won Best R&B Song and Best R&B Performance. Sarah Jarosz and her group, I'm With Her, took home Best Folk Album for Wild and Clear and Blue and Best American Roots Song for Ancient Light. Jony Mitchell received the Best Historical Album Grammy, and Miles Davis' Miles '55, The Prestige Recordings, won Best Album Notes. Our songwriters, Michael League, Steph Jones, Robert Augusta, Mike Chapman, Simon Pilton and John Marco also contributed to wins for Best Alternative Jazz Album, Best Contemporary Country Album, Best Dance Electronic Album and Best Tropical Latin Album. Congratulations to all on a memorable night and an extraordinary year in music. Turning to the quarter's highlights. Reservoir's portfolio is distinguished by its diversification, spanning iconic catalogs and genre-defining artists alongside new and emerging creators across global markets. This quarter reflected that balance. We announced the acquisition of the publishing and recorded music rights of yacht rock icon, Bertie Higgins, adding evergreen hits, including Key Largo to our portfolio. As noted last quarter, Reservoir acquired the Miles Davis catalog in September. This January marks the official launch of his centennial year, and we are working closely with the estate and partners to honor his legacy through a global celebration with key integrated moments all year long, including the feature of Miles Davis' Blue In Green as well as his artwork in a recent ad campaign for Lexus. The debut of celebratory centennial logos, numerous planned releases across the various label partners, a co-branded Miles Davis centennial cigar from premium cigar and accessories company, Ferio Tego, a deal between the states official global merchandising and brand licensing partner, Periscope, and premium men's retailer, John Varvatos, a centennial edition of Miles, The Autobiography, several live performances and festival appearances and more. This quarter was also marked by new partnerships with 2 music icons, R&B legend Gladys Knight, and HipHop icon, TI. The agreement with Gladys Knight includes rights to her income streams across both publishing and master recording catalogs. The deal with TI will see Reservoir work with the acclaimed rap superstar across his entire publishing back catalog and future works as well as select recorded music interests, including master recordings, artist royalties and neighboring rights. These agreements mark our team's proven ability to structure and execute unique flexible deals with legendary talent and further build our portfolio of evergreen hits that are accretive to the portfolio as a whole. Alongside partnerships with established and legacy talent, investing in the next generation of hitmakers remains central to our growth strategy. We welcomed critically acclaimed band, Say She She, with a global publishing deal covering past and future works. This female-led band is redefining discodelic soul and recently kicked off a North American tour. We also added Allison Veltz Cruz, an in-demand songwriter, in the popular country pop space, with #1 hits and credits for artists, including Matt Stell, Tenille Arts, Jason Aldean, Luke Combs and Lady A. Also joining the roster this quarter is Britten Newbill, whose pop and R&B song writing and producing credits include hits by Cap Burns, Olivia Dean, Daya, Meghan Trainor and more. We also continue to invest in high-growth emerging markets. We extended our publishing agreement with multi-platinum Indian hip-hop artists, Divine, now overseen through Reservoir's recently launched subsidiary, PopIndia. Originally signed in 2020, this partnership, including our joint venture with Divine's umbrella company, Gully Gang Entertainment, has helped cultivate new talent across India's hip-hop ecosystem, and we are excited to continue supporting the genre's global growth. Additionally, we entered into a joint venture with Dan's Hall publisher, Abood Music, and Jamaican Star Cordel Skatta Burrell. Skatta's hit record Coolie Dance Rhythm exemplifies how enduring works can reach new audiences through inventive sampling. With uses in global hits by Pitbull, Lil John, Whitney Houston, Fatman Scoop, Nina Sky, 2025 Grammy-nominated gold selling global hit After Hours by Kehlani and more, Coolie Dance reinforces the long-term value of culturally significant music. Through the joint venture, Reservoir and Abood Music will acquire catalogs and sign and develop Jamaican creators, aimed at further advancing the new generation of Jamaica's music scene. Our emerging market strategy remains highly impactful with favorable acquisition multiples and streaming growth rates that continue to outpace both the U.S. and Europe. Our performance this quarter is taking place against the backdrop of sustained growth in the global music economy. As reported by music economist Will Page in December, the global value of music copyright reached an all-time high of $47.2 billion for the year prior. Streaming services continue to follow a relatively regular cadence of price increases, which serve as additional tailwinds for general industry growth. We believe our focus on premium assets, long-term creator partnerships and emerging markets positions us well to drive growth and maximize value creation for our songwriters, our artists and shareholders over time. I will now turn the call over to Jim to discuss our fiscal third quarter financial performance. Jim? Jim Heindlmeyer: Thank you, Golnar, and good morning, everyone. Our third quarter results demonstrated another quarter of financial strength, stemming from our ability to acquire quality catalogs and maintain substantial operating leverage. Our confidence to raise our fiscal 2026 guidance as we head into our fourth fiscal quarter is supported by our impressive roster of talent, and we are excited to continue to build upon a successful first 3 quarters of fiscal 2026. Revenue for the third fiscal quarter was $45.6 million, a 5% year-over-year improvement on an organic basis and an 8% increase when including acquisitions. At a segment level, we posted a 12% increase in Music Publishing revenue and an 8% increase in Recorded Music revenue, both of which were largely driven by an increase in Digital revenue due to the acquisition of additional music catalogs and continued growth at music streaming services. Total cost increased 8% compared to the prior year's quarter due to a 3% increase in administration expenses, a 7% increase in cost of revenue and a 16% increase in amortization and depreciation expenses. This led to an expansion of operating margins given our 8% revenue growth. Turning to operating performance for the third fiscal quarter. OIBDA was $18.1 million, an increase of 11% year-over-year, and adjusted EBITDA was also up 11% year-over-year to $19.2 million. Both OIBDA and adjusted EBITDA benefited from revenue growth, but was slightly offset by an increase in administrative expenses. Interest expense was $6.6 million for the quarter, an increase of $800,000 from the prior year due to an increase in borrowings to support our M&A strategy, which was partially offset by a decrease in interest rates. Net income for the third fiscal quarter was approximately $2.2 million compared to net income of $5.3 million in the third fiscal quarter of the prior year. The decrease in net income was primarily driven by a loss on fair value of swaps compared to a gain in the prior year period as well as increased interest expense and the change in other income. This was all partially offset by an increase in operating income and a decrease in income tax expense. Earnings per share for the quarter were $0.03 compared to $0.08 in the year ago quarter. Our weighted average diluted outstanding share count during the quarter was 66 million. Diving into our segment review for the quarter, Music Publishing revenue increased 12% year-over-year to $30.1 million. This was mainly due to an increase in performance revenue, driven by the strong results from hit songs, and an increase in Digital revenue due to the acquisition of additional catalogs and continued growth of music streaming services. In our Recorded Music segment, revenue increased by 8% year-over-year to $12.9 million. Recorded Music revenue benefited from Digital revenue growth, driven by continued music streaming growth and the acquisition of catalogs and an increase in neighboring rights revenue. This growth was partially offset by a decrease in Synchronization revenue due to the timing of licenses. Now let's turn to our balance sheet. As of December 31, 2025, cash flows from operating activities increased by $5.1 million year-over-year to $38.2 million, owing to an increase in OIBDA and cash provided by working capital. We had total liquidity of $114.8 million, consisting of $20.6 million of cash on hand and $94.2 million available under our revolver. We ended the quarter with total debt of $452.3 million, which was net of $3.6 million of deferred financing costs, and thus, we maintained $431.7 million of net debt. That compares to net debt of $366.7 million as of March 31, 2025. With respect to our guidance range, we are increasing our full year revenue guidance range of $167 million to $170 million to now reflect $170 million to $173 million, which, at the midpoint, implies growth of 8% versus fiscal 2025. Similarly, we're raising our adjusted EBITDA guidance range of $70 million to $72 million to now be $71.5 million to $73.5 million, which signals growth of more than 10% over the prior year at the midpoint of the range. Looking at the fourth fiscal quarter of the year, we believe we are well positioned to achieve our increased full fiscal year guidance ranges. Remaining true to our proven capital deployment strategy continues to position Reservoir to provide long-term value as a partner of choice for worldwide talent, which, combined with our ability to grow the top line without an excess of additional cost, should allow us to continue our track record of growth in the coming quarter and fiscal year 2027. With that, I'll now pass the call back to Golnar. Golnar Khosrowshahi: Thank you, Jim. As you've heard today, we continue to make progress toward our top line goals while maintaining discipline across costs and the balance sheet. Reservoir remains a trusted partner for songwriters and artists around the globe with a commitment to our creators and value enhancement. Our pipeline is strong and diversified with landmark transactions at attractive returns. We look forward to closing out the fiscal year in the coming weeks. With that, we will now open the line for questions. Operator: [Operator Instructions] Our first question comes from Griffin Boss with B. Riley Securities. Griffin Boss: So first off, given the step-up in debt, I would say it appears to be another robust quarter for catalog acquisition, and you mentioned several of the deals that occurred. Is there anything you can say about how the fourth quarter is shaping up for deal activity? Do you expect it to stay at what has been an elevated clip the past 2 quarters? Golnar Khosrowshahi: Yes, we do. We are on track with continued M&A for this quarter. And obviously, things are subject to timing and timing shifts, but we anticipate to be continuing at the same clip. Griffin Boss: Okay. Great. And Golnar, you did mention in your prepared remarks favorable acquisition multiples. So I guess the question is, is it safe to say that you're not seeing any material change generally to the weighted average multiples that you've paid historically? Golnar Khosrowshahi: That's correct, we are not. Griffin Boss: Okay. Okay. Great. And then just last one for me, and I'll pass it off. I'm just curious if there's anything that you'd like to say or comment on regarding the activist investors amended 13D filing last night. I think you've been engaged with that specific shareholder for quite a while now, so just curious if there's anything that you wanted to share about the nature of those discussions. Golnar Khosrowshahi: No, I don't have anything to add. I don't have any information to share. We're very much focused on continuing to grow the business and delivering value for all of our constituents. Operator: [Operator Instructions] Our next question comes from Richard Baldry with ROTH Capital. Richard Baldry: Fourth quarter implied revenues looks like down a little bit sequentially seasonally. And that is what happened last year, but I feel like third quarter had an unusually high other income line. And in prior years, fourth quarter has typically been seasonally pretty strong. Are there any call-outs on unusual onetime events this time around? Or do you think just typical conservatism? Jim Heindlmeyer: Rich, last year, we did call out royalty recoveries related to an audit that we completed. There were actually 2 audits we completed last year, 1 in Q3, 1 in Q4. So those certainly impacted the numbers last year. There's nothing unusual that we are expecting in Q4 this year, but we'll have that dynamic with respect to the comps year-over-year. Richard Baldry: Okay. And the G&A number had -- last quarter had been up pretty meaningfully year-over-year. This quarter, it's almost flat year-over-year. How do we think about the trending on that, and how to look at it on a go-forward basis? Jim Heindlmeyer: Well, I think some of those ups and downs in G&A is driven by the small other segment that we have related to our management business, where, as that revenue goes up or down, the commissions that we pay to the actual managers is impacted, and that sits in our G&A line. So that's driving some of those ups and downs that you see. But I think that what you're looking at for this quarter is -- and certainly, when you look at it on a segment level, it's really where we expect to be. We have normal inflationary pressures on our G&A. But other than that, there's nothing that stands out there. Richard Baldry: And then last one would be, if you look at the ROIs on deals and the pricing, is there a meaningful difference between international versus domestic? Will that sort of skew where you're looking for deals in the future? How do we think about those sort of growth trends? Golnar Khosrowshahi: It's not a secret that we can acquire at more favorable multiples in the emerging markets or at least in some of the emerging markets. I wouldn't necessarily put Latin in that same category, given that, that pricing is pretty mature and on par with Western markets. So from that point, I would say that given the expansion and the growth that is occurring and projected to continue in those emerging markets, we're looking at some equally more favorable returns on those investments as well. Richard Baldry: Got it. And then maybe last one from a very macro level, when you think about price increase at streamers and royalty rates agreements at the highest level, are there any tailwinds, headwinds we should be thinking about as we look out to '27? Golnar Khosrowshahi: I think there's a bit of both. I think we have uncertainty around CRB, and that process is underway. Obviously, that's not a process that is new to us, and we've gone through that before. We have tailwinds in so far as subscription number increases, tailwinds in so far as just the emerging markets expansion, people coming online, price increases across streaming platforms. So I would say there's a bit of both, but we continue to be -- we continue to believe that, on a net basis, there are -- we are looking at tailwinds and continued growth in music. Operator: We have reached the end of our question-and-answer session as there are no further questions at this time. I would now like to turn the floor back over to management for closing comments. Golnar Khosrowshahi: Thank you, operator. We appreciate your support and interest in Reservoir, and we look forward to sharing our full fiscal year results with you later this spring. Thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning. Welcome to Voya Financial's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the call over to Mei Ni Chu, Head of Investor Relations. Please go ahead. Mei Ni Chu: Good morning, and thank you for joining us this morning for Voya Financial's Fourth Quarter 2025 Earnings Conference Call. As a reminder, materials for today's call are available on our website at investors.voya.com. We will begin with prepared remarks by Heather Lavallee, our Chief Executive Officer; and Mike Katz, our Chief Financial Officer. Following their remarks, we will take your questions. I'm also joined on this call by the heads of our businesses, specifically Jay Kaduson, CEO of Workplace Solutions; and Matt Toms, CEO of Investment Management. Turning to our earnings presentation materials that are available on our website. On Slide 2, some of the comments during today's discussion may contain forward-looking statements and refer to certain non-GAAP financial measures within the meaning of federal securities law. GAAP reconciliations are available in our press release and financial supplement found on our Investor Relations website. And now I will turn the call over to Heather. Heather Lavallee: Thank you, Mei Ni. Good morning, and thank you for joining us today. Let's turn to Slide 4. In 2025, Voya delivered strong financial and commercial results that exceeded our targets and accelerated our growth strategy. We delivered over $1 billion of pretax adjusted operating earnings for the full year and significantly grew earnings across all segments. We generated $775 million of excess cash, well above our target. And in 2025, combined Retirement and Investment Management assets surpassed $1 trillion. This achievement illustrates our scale and reinforces the value of our integrated business model. These financial results reflect our outperformance against the priorities we set at the start of the year, accelerating commercial momentum in Retirement and Investment Management, successfully integrating OneAmerica and improving margins in Employee Benefits. Voya's financial performance and strategic progress show the strength of our franchise and our team's consistent focus on execution. Before Mike walks through the quarterly and full year numbers, I'd like to touch on a few key highlights from 2025. In Retirement, we delivered exceptional results across our business. Defined contribution net flows surpassed $28 billion, the highest in Voya's history, and our participant base is fast approaching 10 million accounts, demonstrating our expanding reach. The OneAmerica integration significantly exceeded our financial targets while expanding the capabilities we offer clients and broadening our reach with advisers. We also continued to expand wealth management as a high-margin growth engine. The business generated over $200 million in net revenues in 2025, contributing to our exceptional financial results in Retirement and helping us serve our customers to and through retirement. Across Retirement, our strong margins reflect our scale, our focus on driving profitable growth and our disciplined expense management as we invest in key growth initiatives. In Investment Management, we delivered strong results, reflecting the scale and breadth of our platform and the momentum we're seeing across the business. We delivered a record $1 billion in annual net revenue and 4.8% organic growth, well above our long-term target. Our platform is well positioned in the areas where the industry is growing, including private assets, insurance asset management and the continued expansion of our intermediary platform with actively managed ETFs. We're an established leader in the third-party insurance channel built on our expertise in managing Voya's general account. This channel continues to build momentum heading into 2026 and is a clear competitive advantage. Our record net flows in 2025 drove AUM to $360 billion, highlighting both the competitiveness of our offering and the trust our clients place in our investment capabilities. In Employee Benefits, we made meaningful progress in improving margins and expect further improvement this year. In Stop Loss, we have increased our rates, enhanced risk selection and been disciplined with reserving. Our actions position us well for 2026. Across the enterprise, our results this year reflect the competitive strength of our franchise and the progress we're making against our strategic priorities. Our strong performance drove significant cash generation and positions us well to further increase excess capital in 2026. Together, our growth in excess capital and strong balance sheet gives us flexibility to deploy capital to the most value-accretive opportunities. With that, I'll turn it over to Mike to walk through the financials in more detail. Mike? Michael Katz: Thank you, Heather. 2025 marked a strong year of execution. We generated over $1 billion of pretax adjusted operating earnings, $168 million higher than a year ago. And we increased earnings per share 22% to $8.85. This included EPS of $1.94 in the quarter, which was up 39% from last year. These results were driven by management action throughout the year as we delivered above-plan financial results across all our strategic priorities. We continued our commercial momentum in both Retirement and Investment Management. We significantly exceeded our financial targets integrating OneAmerica, and we achieved substantial margin increases in Employee Benefits. This led to approximately $775 million of excess capital generation in 2025, including approximately $175 million in the fourth quarter. And looking forward, we expect further excess capital improvement in 2026. Turning to Retirement. 2025 was an exceptional year, marked by record commercial results, robust earnings growth and higher value accretion from OneAmerica. We generated nearly $1 billion of adjusted operating earnings in Retirement stand-alone, 17% higher than 2024. This included $255 million of earnings in the fourth quarter. Earnings growth was primarily driven by higher fee-based revenues, which now exceed $1.4 billion. Commercial momentum and our integration of OneAmerica are driving a 21% increase in fee-based revenues year-over-year. Importantly, we finished the year with an adjusted operating margin of 40% as we both drove efficiency across the business while investing in key priorities that accelerate our strategy. We generated a record $28 billion of organic defined contribution net inflows in 2025, and we added $60 billion of assets from OneAmerica. Together, this supported a 30% increase in total defined contribution assets to approximately $730 billion at year-end. We now have a base of approximately 10 million participant accounts for us to serve both to and through retirement. Looking ahead to '26, we anticipate meaningful defined contribution net inflows underpinned by plans expected to fund in the back half of the year. And our scale and leadership position in Retirement provide a strong foundation for durable fee-based revenue growth, increasing cash generation over the long term. Turning to Investment Management. 2025 was a year of record commercial results and revenue. Net revenues exceeded $1 billion in 2025. Both institutional and retail revenues grew year-over-year, contributing to overall adjusted operating earnings of $226 million. This included another year of exceptional investment results as we realized $35 million of performance fees in the fourth quarter. We generated flows of approximately $15 billion, well exceeding our long-term organic growth target of 2%, further scaling our franchise. Flows for the year were broad-based across channels and strategies. In institutional, insurance channel demand for investment-grade credit, commercial mortgage and private credit strategies remain strong. And in retail, international demand for income and growth remained robust, while fixed income and specialty equity strategies drove positive flows in the U.S. intermediary channel. We enter 2026 with significant momentum and are on track to deliver another year of organic growth. Turning to Employee Benefits. Adjusted operating earnings were $152 million in the full year, significantly improved from $40 million in the prior year. A key driver of this improvement included Stop Loss, which I will discuss in a moment. In Group Life, full year loss ratios were at the low end of our target range of 77% to 80%. This included favorable loss ratios in the fourth quarter, driven by better-than-expected frequency and severity of claims. In Voluntary, our full year loss ratios were approximately 50%, consistent with our plan to drive enhanced value for our customers. Turning to Stop Loss. In 2025, we delivered meaningful improvement supported by higher rates, tighter risk selection and disciplined reserving. Full year reported loss ratios improved by 10 percentage points from 94% to 84%. This reflects in part a reserve increase of $37 million in the fourth quarter. Claims experience on the '25 book is developing modestly better than the prior year. However, ensuring we have a well-supported reserve level heading into first quarter is essential. And as a reminder, claims experience for January cohorts will move from approximately 65% to 90% credible on a paid basis through the first quarter. Looking forward, we continue to embed recent experience into our pricing and risk selection. For the January 2026 business, we achieved an average net effective rate increase of 24%, above the 21% increase secured last year. Different than a year ago, we were able to maintain in-force premiums. And we have more opportunities to select our risks with RFP volumes rising, driven by employers seeking greater certainty in their medical spend. Collectively, these actions, reserving, pricing and risk selection have materially strengthened our positioning and support further margin expansion in 2026. Turning to Slide 11. We generated approximately $775 million of excess capital in the full year, including approximately $175 million in the fourth quarter. This meaningfully exceeded our $700 million target in 2025. Exceptional earnings drove a more than 200 basis point expansion in our adjusted return on equity, which now stands at 18.6%. We have been disciplined with our capital in 2025, including our acquisition of OneAmerica, which is generating earnings and returns well above our original targets. More broadly, our strong balance sheet, healthy excess capital and highly cash-generative businesses provide us significant flexibility to deploy capital in the most value-accretive way. In the near term, the best use of that capital is for share repurchases. We will repurchase $150 million of shares in the first quarter and expect to do the same in the second quarter, subject to macro conditions. Longer term, we will continue to be strategic, opportunistic and disciplined with our deployment of capital as we accelerate our strategy. We head into 2026 with clarity on our priorities and great momentum. We exceeded our financial targets in 2025 and expect to do the same in 2026. I'll now turn it back to Heather to share those priorities. Heather Lavallee: Thanks, Mike. Turning to Slide 12. I want to thank the entire team here at Voya. Collectively, we delivered for our customers and positioned Voya for another strong year in 2026. Our priorities for 2026 are clear and compelling: growing excess cash generation, maintaining balance sheet strength and capital flexibility, driving continued commercial momentum in Retirement and Investment Management, and further improving margins in Employee Benefits. These priorities and our continued focus on execution, accelerate our growth strategy and create meaningful value for our customers and shareholders. We are helping our customers build financial confidence and clearing a path for better outcomes today and in the years ahead. With that, I'll turn it over to the operator so we can take your questions. Operator: [Operator Instructions] Our first question is from Bob Huang with Morgan Stanley. Jian Huang: My first question is on Stop Loss, especially regarding the reserve that you've added. Can you maybe give a little bit more details behind the reserve actions? Is it more of a -- you have the reserves mainly just to pad the reserves to be conservative? Or is it more you're actually seeing some losses developing that would cause you to take the actions you've taken? Michael Katz: Bob, yes, first, just let me start by saying and reiterating what I shared in the prepared remarks. When we talk about the January '25 business relative to the January '24 business, it's running modestly better than where we were at this point last year. That includes when we set the reserves coming out of December and frankly, where we stand right now. And then to your question, second, we did increase reserves in the quarter. The importance of the claims experience in the first quarter can't be understated. As I mentioned, we moved from 2/3 complete to 90% complete in the first quarter. And the range of outcomes today is different than what I would say historically for Stop Loss. You hear us talk about 77% to 80%, a 3-point range. But with this health care backdrop, that range is wider, probably double the normal range. And so when we look at the reserving, we think about being on the higher end of that best estimate range. Now when we look forward and we think about the margin expansion that we expect in 2026, we certainly see that coming from not only the perspective of where we price the Jan '26 business, 24% increase we got on that business. And frankly, from a risk selection perspective, we've gotten more opportunities. RFPs are up. And as I just mentioned, we are seeing employers look for this type of coverage as they're really trying to get certainty with their medical spend. I think the big step back here right now is that when we look at Stop Loss, it did not take us off course for an incredible year in 2025. And the actions we've taken across pricing, risk selection and how we reserve for this heading into 2026 positions us to say the same. Jian Huang: Got it. Really appreciate that. So it sounds like your path hasn't changed. So maybe a follow-up on that specifically is the 24% rate increase for the January 2026 cohort. As we go forward, obviously, that's a big rate increase. Do you feel that rate increase is enough or sufficient going forward as we think about just the broader Stop Loss environment where you feel like maybe going into the next few years, there should be more pricing. Just curious, any comments or dynamics on pricing. Michael Katz: Yes, we do. We do, Bob. We feel -- when we think about where trend is, we talked a lot about the fact that we expected higher trend in '25 and '26, and so we went out to get that rate. Certainly, it was easier for Jan '26 than it was for Jan '25 as we were ahead of many in going after that rate. But when we look at this relative to that kind of high single-digit, maybe 10% first dollar trend, you lever that up around, we think, in that 20% range. And so the other piece I'd mention, too, is that demand we're seeing from employers that are looking for certainty of spend. We feel like as we move forward on the progress of margin improvement at the cohort level that we're going to have even more opportunity in 2026, because when you look at the demand, it's up, supply is at best, limited to down. Heather Lavallee: Yes. And Bob, it's Heather. Maybe one thing I would add, just to kind of do the broader step back on stop losses. We've always talked about this being a 2-year journey. And as Mike talked about the $100 million improvement in earnings in '25 is a significant step in the right direction. We aren't declaring victory. As Mike talked about, we're reserving for a wide range of outcomes, but we believe we only have upside from here, which is why we have reiterated our capital deployment plans for the first half of '26. Operator: Our next question is from Tom Gallagher with Evercore ISI. Thomas Gallagher: A couple of Stop Loss follow-ups. Mike, when you said your actions support further margin expansion in '26, are you -- is your baseline the 84% that you did for the full year? Or is it the 91% accident year loss ratio for the Jan '25 cohort like what should we -- when you say improvement from which number, the 84% or the 91%? Michael Katz: I think it's both, Tom. Like when you think about the 84%, I mean, certainly, that's the reported levels of loss ratios for the full year. And as Heather just mentioned, we took the EB business from $40 million to $152 million. That included progress with Stop Loss, but also from the 91% perspective. And I think Bob was getting at this just a moment ago, when you think about reserve levels, and frankly, we -- fourth quarter is super critical when we make that assessment of where do we think the range of outcomes are. As I just mentioned, it's not a 3-point type of wideness in the range. We think it's frankly closer to double that. And we want to be in a position here where we're at the higher end of that best estimate range. Now we certainly need to see where things play out in the first quarter, and frankly, some of the second quarter before we decide where this is ultimately going to land or where we see where this ultimately is going to land. But the one thing I would just kind of encourage folks to think about here is don't conflate where we're reserved at with where this ultimately lands. Heather Lavallee: And Tom, I would just add to it, if you really compare where we were a year ago with our reserve levels, about this time last year, we were close to 95%. And while we're not fully complete, on the '25 book of business, you see it coming in closer to that 90%, 91% range, which is quite an improvement. And so we do think it's prudent given the backdrop to do the reserve adjustments that Mike mentioned. But as you saw last year, things only went in a one-way direction which was a positive direction. And so we see -- we like the progress we made, and we see further upside from here an improvement to build on what we delivered. Thomas Gallagher: I appreciate that color from both of you. My follow-up is just if you look at the, I guess, the loss pick of 91%, it implies loss cost trend was up 20%-ish. Is that the right level that you think is happening across the board for Stop Loss? on a trend basis? Or was there something about your risk selection? Did you get selected against? Do you think your loss experience was worse. I just want to get a sense for like what did you see in the quarter? Was it material worsening? Or is this more conservatism? I just want to get a sense for what do you think actually happened in maybe why -- I think people look at the 91% and they get scared because you went from 87% and 91% and think you don't have your arms around the situation. So maybe just to the extent that you can tell us how confident you are that you have your arms around the situation and you're not seeing adverse selection. Michael Katz: So from a risk selection perspective, it's about a well thought never one. I think when we talked about the Jan '24 business that was risk selection, not where we wanted to be, in any way, shape or form. We made improvements when we think about where we were at Jan '25, and we expect to make even further improvements on risk selection. So it's never perfect. Tom, I think to your question around the trend, as I mentioned earlier, like we think it's in that, call it, 20% high teens level. And so it was more difficult to get rate in the Jan 2025 than it was for the Jan 2026 for the reasons that we were talking about around demand. So when we -- when you just kind of roll that all together, your -- the heart of your question, like do we feel like we have our arms around this? Absolutely, we do. Operator: Our next question is from Mike Ward with UBS. Michael Ward: I was curious about maybe just utilizing the Stop Loss experience. And in terms of leverage in order to sort of cross-sell other products with specific employers, you know what I mean? Like how is that going? Is that becoming material? Is that contributing to your confidence in '26 for the Retirement side? Heather Lavallee: Yes. Mike, it's Heather. I'll let Jay add. But I think what's important to think about is that we're often selling Employee Benefit products to the same brokers and consultants, both the Stop Loss and the Voluntary. And it goes to the point of we see high demand for the products that we're offering. But maybe the last bit I mentioned before I toss it over to Jay is our teams have continued to be highly disciplined on margin over growth. So we're not leading into anything to drive unnecessary growth just given the backdrop. But Jay? Jay Kaduson: Yes. As we think through this heading into '26, as Mike referenced, the supply at best level, we think is actually down, but the demand is significantly up, and we're hearing that from our brokers and intermediaries. And so what it does is it does cause this kind of capacity conversation of there is only so much capacity in the marketplace for coverage. And getting a more fulsome book as we think through the areas of Employee Benefits and where we have and are in similar segments in Retirement, we definitely are changing that conversation. It's happening in front of us. We're engaged in those conversations now. We expect those conversations to continue. We are also seeing more and more from a bundling perspective. So as we get into different questions on different parts of the book, we're seeing a greater opportunity to bundle given what we've done in some of the product lines. And so I think we'll come back to you as this conversation progresses, but it's definitely a leverage point and a conversation point we're having actively with our partners. Michael Ward: And then just for Heather and Mike, you both sounded confident on the idea of expanding your excess cash flow generation in '26. Wondering if you could unpack that a little bit more. Michael Katz: Yes. Look, it really boils down to what we've been talking about in 2025 and what we're signaling around 2026 from a priority perspective, Heather finished with this, really, there's really three elements. I think the first element is the commercial momentum that we've had in both Retirement and Investment Management, record years. Earnings have been fantastic. And then what we just talked about from an Employee Benefit perspective, we made good progress in 2025, but we're not satisfied, and we see even more margin expansion in 2026. That's going to be a contributor as well. And then if you're looking at it from a per share perspective to Heather's point, just a moment ago, we see share repurchases as a key element of the value proposition. And frankly, when you look at our return on equity at close to 19%, we're more than happy to buy shares at these valuations. Heather Lavallee: Yes. And Mike, maybe to build and certainly makes sense while there's a lot of questions on Stop Loss. But if you think about the broader and, frankly, larger portion of our business, we've had an absolutely amazing year in '25. If I think about record revenue and Investment Management, record flows driven by a diversified breadth of solutions with strong investment performance. We've talked about and you heard Mike mention on the call, an absolute record year in Retirement that is setting us up well for continued growth at margins that frankly have been above our long-term target. We're making progress on the build-out of wealth management, which further diversifies that business. And then the OneAmerica, where we've added additional capabilities for our clients. We brought in additional distribution partners but we've also demonstrated really good deployment of capital into an acquisition that generated over 30% unlevered return. So to your question, Mike, yes, we feel confident in our ability to continue to grow cash generation in '26 and are committed to returning that back to shareholders. Operator: Our next question is from Suneet Kamath with Jefferies. Suneet Kamath: I wanted to go back to Stop Loss. Mike, as you were talking about the '25 block, I think you said it was modestly better than '24. And I had sort of expected it to be significantly better just given the pricing actions that you took. So I guess the question is, is this 2-step process that you talked about sort of extending to maybe it's going to take you another year to kind of get there in terms of the loss ratio? Michael Katz: Yes. Look, I think it's a stay tuned, Suneet. We're pricing this business, and we did it in the fall. We'll do it in 2026 to get our target margins. And as we've been talking about, we made a lot of progress in 2025. We're not all the way there. Our expectation is to continue to make progress in 2026, the exact amount of that, I think we'll have a better sense as we get to more in the middle, late part of 2026. But we'll update you along the way. Like Tom was asking earlier, do we have our arms around this, we do, and we're taking action across the three dimensions. And those three dimensions are the pricing, the risk selection and the reserving. And so we think we've taken the appropriate steps in the fourth quarter to make sure that we're in a good position in 2026 to continue that excess capital generation growth that Heather just talked about a moment ago. Suneet Kamath: Okay. And then I guess when you go from 1/3 to 2/3 then to 90% of the experience, is there something in the latter part of how that experience earns in that gives you more information? Or is this just as you saw what happened in the fourth quarter, that's what caused you to take the reserve build? Michael Katz: Yes. It's just timing, Suneet, right? Like fourth quarter is really critical. First quarter is really critical. That's not new news. We've been trying to get that across for the reasons you just called out. And so even though the claims are happening in 2025, we may not be aware of them until 2026. There's just a lag between event and when it's reported. And so with that health care backdrop, I think it's just super prudent to be on the higher end of best estimate ranges for reserves. So that's what we did. Operator: Our next question is from John Barnidge with Piper Sandler. John Barnidge: My first question is on Stop Loss. And Mike, you had some comments about range of outcomes is different today than historically and a lot wider. Is it one of these things with the Stop Loss business with the fourth quarter there just probably is going to be more seasonality going forward in this business, in this backdrop, setting aside the rate need? Michael Katz: Look, I think -- when we look at '24, we look at '25, we're in kind of a once-in-a-generation type of situation as it relates to the health care backdrop. Where this lands as we get deeper into 2026. And is this going to be something that's happening every fourth quarter? Yes, I wouldn't want to signal that. What I would want to signal is that the analysis, the work that we do and what we're putting on our book and the analysis and the work that we're doing in assessing what the right amount of reserves are, that's going to continue. Does the range stay at a similar level in December of 2026 that it is December 2025. We would hope not, but if it is, that's the way we're going to assess it. And all the actions we've taken heading into this year, again, gives us a confidence level that we're going to continue to expand margins in EB, and it's not just a Stop Loss story. It's frankly across the board in that particular business line. John Barnidge: And my follow-up question, can you talk about the strategic rationale of Stop Loss in the context of what it brings in synergies to the growth opportunity in Investment Management and Retirement? Heather Lavallee: Yes, John, it's Heather. Happy to do that. And I think if you look broadly at Employee Benefits and Stop Loss, this isn't a very important product in our overall portfolio. If you think about within the workplace business, stop losses in incredibly high demand for employer clients to help them control really more volatile medical expenses when they choose to self-insure. As you heard Jay mention, there is much greater demand and lower supply. And so we think we're in well positioned, specifically demonstrated by the 24% rate increase we achieved on the book, while maintaining the block size. But it also goes broadly. You think about the supplemental benefits we have is those are really critical for families and employees to cover out-of-pocket expenses when they're in a high deductible plan. It goes to the capabilities Jay talked about in terms of the lead management build-out is that our workplace benefits are designed to help people protect against unforeseen events. And then you think about the complementary nature across Retirement, wealth management and asset management, those are all really around accumulation returns and planning. And so I see them as the opposite side of the same coin is that we've got the right capabilities to serve clients at the workplace. We've got the right capabilities to bring to institutional clients. And it goes back to our vision really helping clients to achieve and secure financial future. So it really is a great strategic asset for us. Operator: Our next question is from Jimmy Bhullar with JPMorgan. Jamminder Bhullar: So I just had a question on the Stop Loss as well. And clearly, the results have improved over the past year as you've implemented price hikes. But it's hard to imagine that you're not seeing something that would have warranted you increasing the pace at which you're building reserves versus 3 to 6 months ago. Like I just don't think you would just willingly raise the reserves just for the hell of it to be conservative. So -- and you haven't answered anything on any of the questions on what it is that you've seen now versus maybe 3 months ago, 6 months ago that have caused you to raise reserves as much as you have. Like I realize you will eventually fix this, but you're just not answering the question on what's happened in the business in the last few months. Michael Katz: Yes. Jimmy, I think again -- and maybe just to give you a little bit of color on the types of that we're seeing, if that's what you're looking for. And it's not a different theme. Like we're seeing the same themes with respect to higher frequency related to cancer, particularly at younger ages. We're seeing the higher severity from a cell and gene therapy perspective. And again, like think about where we are in the development. I think that's the key here, right? We moved from really not developed until we get to the third quarter. But even in the third quarter, we're only about 1/3 developed. And we moved to 2/3 developed in the fourth quarter. That's when we're making the real assessment on the range of outcomes. And then in the first quarter, we're getting a sense of where this lands. And so as I mentioned earlier, when Tom was asking, like, don't conflate where this is landing from where we're reserving at right now. The range of outcomes are wider, and so the prudent thing to do is to be on the higher end of that best estimate range. So the ultimate improvements are going to play out as we move through the course of 2026, but we feel good about where we are, and we feel good about the progress we're making. Jamminder Bhullar: But the range of outcomes, okay, that is wider, but you're choosing to be conservative based on something you're seeing in the market, right, or in the loss environment. Because you could have chosen to be conservative throughout the last several quarters as well. Like I heard all the other questions. That's the reason I asked or I heard all the other answers that you provided. Heather Lavallee: Jimmy, let me add on. I think Mike's been really clear in why we did what we did. But if you take a bigger step back and you think about what's going on in the U.S. health care market, right? We are seeing more cancer claims. We are seeing higher cost of pharmaceutical drugs. That gives a wider range of outcomes. So if we have historically given you a target range of 77% to 80% of a loss ratio, when you think about it, that's a really narrow margin, right? Think about -- if you think about a hurricane trajectory, several days out, you've got a much wider cone. And as you get closer you see a lot -- you have a lot more certainty. And that's really how Stop Loss develops. It is 1/3 complete through the first 9 months of the year. The completion doubles in the next quarter. And so for where we are and given the claims that we see coming in, as Mike hit on that we see '25 coming in favorable to the '24 book. But it really is that range of uncertain outcomes given the broader healthcare backdrop that we just think it is prudent to take the reserves up, and we see opportunities to more surprise to the good versus surprise to the bad. Operator: Our next question is from Wes Carmichael with Wells Fargo. Wesley Carmichael: Maybe first question off a Stop Loss. But in the Retirement business, could you maybe talk about the outlook for full service in 2026 in terms of organic growth? And also, are there any shock lapses that you expect to still come from OneAmerica? Or are we largely through that? Jay Kaduson: Sure. If you think a little bit about where we are heading into '26, we are building off of '25 strong organic DC net flows. If you think about the $28 billion we generated. We also had $60 billion in assets from OneAmerica. Our growing participant base is approximately $10 million, and we've done that in high 90s retention rates. So we do expect that the flows in to continue to be strong. And much of this, we expect to be back half weighted. We do have visibility into some of the plans that are funding in '26. An important data point that we use is around planned RFP activity. And we saw that activity continuing to grow at a healthy and consistent pace heading into '26. We're really pleased with the strong commercial momentum in Retirement, and we'll continue to come back. Again, that's on the heels, if you think about where we finished in '25, Heather referenced this, earnings growth of 17% and above target margins of approximately 40%. So really heading into the year with a lot of strength. Wesley Carmichael: Got it. That's helpful. And maybe just a follow-up on capital deployment. Mike, I hear you loud and clear on buybacks being a near-term use of capital. But could you maybe talk about a little bit further out? Are there more potential roll-up opportunities in the Retirement space? And maybe how many opportunities are out there that are similar to OneAmerica that you might be thinking of? Heather Lavallee: Yes, Wes, it's Heather. I'll take your question. So if you think about it, the industry -- retirement industry continues to be in secular consolidation. And we're viewed as a natural buyer. I think we demonstrated that very clearly with OneAmerica that we can do this quite successfully and deliver for our clients. So we're actively assessing opportunities. We think that the -- there is a number of opportunities that we can pursue. But having said that, we do have a high bar for M&A right now, given what Mike talked about as we see the most value accretion deployment of excess capital is into share buybacks. Maybe the final comment I'd make Wes is, to go back to something Mike mentioned on the third quarter call, is that if we were to pursue a retirement roll-up, it does not take us off track to be able to return capital to shareholders. We understand that, that delivering and returning capital on a consistent basis is important to our shareholders. So if you think about the cash payment of OneAmerica, not a large size. So we think there's something that we can do both. Operator: Our next question is from Alex Scott with Barclays. Taylor Scott: I do have one Stop Loss question, and I promise I'll ask about something different. So when I think about the 91% policy year and I think about the 24% and the fact you took 21% and it didn't get better last year, it does feel like to believe that you can get better off the 84% calendar year, I need to be able to believe that what you're saying on the conservatism and reserves is real. And it's obviously a tough thing to believe just because like we've had this negative momentum broadly in the albeit you did have favorable development of last year, so I get it. But I wanted to see if you could give us some metrics, right? Like usually, we could assess this using -- in property and casualty, something like a paid [ out ] ultimate. So if you could tell us how much in actual cash claims you've paid out so far this year on the '25 policy year versus last year versus maybe the historical average or IBNR as a percentage of reserves, something to help us like have some kind of quantitative evidence that what you're saying is real around this conservatism? Michael Katz: Yes. Again, Alex, I mean that's something we can think about for future calls to put out there. I think, again, as we've been talking about the first quarter is going to be able to put that in a more clear light because I think folks will take information on paid claims and try to compare that to 2024. And it's hard to do that. And why it's hard to do that is, number one, it's a smaller block. Second, we've improved the loss ratio experience and then even claim settlements, which we're doing faster today than we did a year ago can conflate how to think about those things. So we don't want to confuse the matter from that perspective. But again, like we -- when we've been talking about this, we -- the uncertainty around claims in the fourth quarter was high and coming into 2025. It's high coming into 2026. We're happy with how the '24 block is developing, that's developed favorable relative to where things were reserved for coming into 2025. we cannot guarantee that's going to happen in 2026, but that's exactly how we're positioning ourselves. Taylor Scott: Okay. All right. Understood. And then second question I wanted to ask about artificial intelligence. And maybe both the good and the bad, right? Like what are the opportunities you see broadly? But then also from a risk standpoint, are there any parts of your business that could get disintermediated. And I think the stocks kind of moved yesterday on the idea that maybe there's software concerns and investment portfolios broadly. So I'd be open to any kind of color you could provide on that as well. Heather Lavallee: Thanks, Alex, for the question. It's Heather. I'll start, and then I'll ask Matt to add some comments on just how do we see it in the broader investment arena. So first, as you think about AI, the opportunities, as you'd imagine, it's something we're leaning into. Our focus is on leveraging AI to be able to improve client experience to help us to drive efficiencies and to support scale and growth. We are deploying it right now across a number of areas within our claims organization, within our contact center, certainly within technology as we think about how it allows us to speed up some of the software, the programming that we're doing. So it's something that we are leaning into. It's not new. We've been leveraging some bit of AI for a number of years. We're also paying attention to how it could disintermediate us. I do think that given the businesses that we are in, we -- people need insurance, they need retirement planning. We see it as something that is a little bit less of a disintermediator, but we're paying attention to ways that it could disrupt us. But right now, we see a lot more opportunities than headwinds on AI. And a critical one goes back to something we've done for years, which is expense efficiency, being able to maintain and grow our margins, and we see AI as an important lever. But Matt? Matthew Toms: Yes, Alex, an important question for the broader investor universe here. You're 100% right. I think it's important to think about where there's risk and where there's volatility. And I'll start with an insurance sense about our general account and how we view this really not an issue within the core GA bond portfolio. A broad technology makes up for us a little over 1%. I think you'll see some stats a bit higher across our peers. But again, I think you're going to be generally in the single digits there. We're a little over 1%. And software is about 0.5% if you look at that directly. And in the investment-grade space, you're going to run in names like Alphabet, Microsoft, Salesforce and beyond. So you've got diversified business models that can actually do quite well with AI, if done correctly. So within a core GA sense, I don't view it as an issue within the private portfolio, less than 1% of our portfolio is in tech. And within high yield, we're not really exposed to below investment grade in a meaningful way as a balance sheet, and that's where you see more industry risk. We don't have anything notable there, nearly 0 in high-yield tech. Over time, we view technology to be a much better investment from an equity standpoint than a debt standpoint. You can have very disparate outcomes. That plays itself better in an equity sense. Across the equity portfolio, you really have to get into our alternative portfolio for Voya. That's about 3% of our balance sheet within PE, you'll tend to see 25%-ish, 20%, 25%, we're lower than the 25% number in software related. So it's still meaningful. But you get, again, down to a number that's less than 1% of the GA. And I think that's where you have both upside and downside. But in the debt markets, we prefer to lean away from tech and feel very well supported. But if you're going to look for volatility, look for those more the venture more the recent vintage PE, we don't feel meaningfully exposed there as far as even that alternative portion of our portfolio. Operator: Our next question is from Joel Hurwitz with Dowling & Partners. Joel Hurwitz: So just one on Stop Loss, Mike. I guess I'm just still trying to understand why you can't provide us with the paid claims experience, right? That's something that you guys provided as last year in the fourth quarter in your slide deck. And at the end of the day, I think we're all just trying to understand what does it actually mean that the book is performing modestly better year-over-year. Michael Katz: Yes. Look, I think that's again something we can think about taking forward, Joel. Like when I -- and I mentioned this just a moment ago from a reserving perspective and why we need to be cautious with this. The amount of reserves that we have up this year versus last year is meaningfully less. And part of that is because we've got a smaller block. A part of that's because of just timing of when reserves released versus incurred from the '24 to '25 block and then just the settlement part of it on paid claims. And so when we do the assessment of what we think the appropriate reserve level is, yes, we look at paid claims. We're looking at reported claims. There's more dimension to that than just, hey, how are paid claims developing. But we certainly can provide more color as we move down the road and particularly in the first quarter, I think would be an appropriate time to do that because you're going to have the right comparison year-over-year. But we'd just be reiterating the same messages that we shared earlier with respect to how we think about reserve levels. Joel Hurwitz: Okay. And then shifting, can you just provide some outlook on how the take-up of your new leave offering and short-term disability has gone, and how we should think about that from a revenue and earnings standpoint in '26? Heather Lavallee: Sure, Jay will start and Mike can address the revenue question. Jay Kaduson: Great. If you think about the leave investment, we did successfully launch the integrated leave and disability claims solution in January. We do expect that the offering is going to continue to contribute revenue throughout '26. While it's early, we are encouraged by the initial feedback from our clients and our intermediaries, and they are providing that feedback real time. The market demand for this is really strong. We did see that over 50% of the Group Life, disability and sub health RFPs for 1/1/26 were bundled with leave. It's a really positive sign given the in-source and the commitment we've made to the space. But we are consistently hearing right now from our clients and brokers that leave administration is the most important capability they're looking for from carriers today. So specifically, they focus on the claims experience for their employees. We'll report back progress throughout the year, but we're really happy with the 1/1 launch. Michael Katz: Yes. The only thing I would add, and I want to come back to the question from Joel just for a moment. But when we look at -- just as you're looking at in-force premium growth, I think we just would encourage you to look at the growth from '23 to' 24 to '25. So growth has been more modest year-over-year. But when you look at 2-year growth across Voluntary, Group Life, very, very good. We had a fantastic year in 2024. And just on paid claims too, I know that's come up a couple of times here at the end. Like we're not sharing a number. We're saying it's modestly better when you look at Jan '25 or Jan '24, you should be thinking low single digits better on a paid claim basis from where we were a year ago to today. More to come. We don't want people running with that number yet because we need to see how things play out for the balance of the year. But that -- just to size it a bit, that's kind of what I would have in your mind. Operator: Our next question comes from Kenneth Lee with RBC Capital Markets. Kenneth Lee: One on Investment Management. You saw nearly 5% organic growth in 2025. What were your expectations are for organic growth this year? And in particular, any specific products or offerings you see as driving most of that growth. Matthew Toms: Ken, yes. So as you referenced, very pleased with the overall momentum in 2025, the $14.6 billion net growth, really best in a market that still has headwinds. So very happy with that. The theme going into 2026 is, say, twofold. A, longer term, we continue to think about that 2-plus percent organic growth rate assumption. We entered '26 with momentum that has allowed us to grow above that. And we do expect the first quarter to be positive with good breadth across the domestic market. So that's good as we really come into the year on our front foot. That's driven by strong investment outcomes. If you think about the 1, 3, 5, 7, 10 years, we deliver for our clients, and we get rewarded by our clients with net cash flows. And that's still the basis. And I think the performance fees at the end of the year were a testament to that as well. As far as where we're seeing products and channels, not a big change, insurance with fixed income, public and private still a stall work for us, very strong competitive position. We think more broadly in the U.S. institutional space. In DC, our target date offerings and partnership and coordination with our Retirement business is a good forward look, new products coming there. and fixed income continues to resonate there. And then internationally, income and growth in thematic equities, again, driving that. So really, it's a continuation of a story of breadth while we're looking to continue to grow upon our strength. So we enter first quarter feeling quite good. Kenneth Lee: Great. Very helpful there. And just one quick follow-up, if I may. Just on the Voluntary benefits side, what's the outlook here for this year? Is still around 50% benefit ratios there? Michael Katz: Yes. Maybe I'll hit it from a loss ratio perspective margin. And then maybe, Jay, if you want to hit it from just a premium perspective. So we've talked about 50% throughout the course of 2025. We have been building up reserves to get in front of the fourth quarter when we see a lot of seasonality for that product line that worked exactly according to plan. So we saw the 50% come through. The outlook, we say modest increase with respect to loss ratios. That's totally part of the plan of us providing more customer value with these products. These are important complements to high deductible health care plans. But from a net margin perspective and Heather was alluding to this before, I think it's true not just within EB, but across the board. I mean we are constantly finding areas where we're looking for efficiencies to offset either investments for growth or protect margins where we want to deliver more customer value. And so I think when you look at the Voluntary line, I would think of slightly higher loss ratios, but net margins intact. Jay Kaduson: Ken, I'll address a little bit how we see the voluntary market heading into '26 and maybe a quick step back on EB. We do expect growth in '26. 1/1/26 sales showed that commercial momentum. Just as a reminder, we are a top 3 provider of Voluntary. We've got about 10% market share. I did reference the newly in-sourced integrated leave and disability claims solution that is going to be kind of contributing to some of the growth and retention of our Voluntary products. That did show itself in 1/1/26, as I referenced, that 50% RFP with bundle. With that said, our top priorities right now across all of EB really does remain focused on this margin expansion. We're doing it through pricing execution where it is driving stronger persistency in our customer base. That's important. And as Mike referenced, we're creating more efficiencies in the business through investments in claims automation and AI, which is starting to show itself into the efficiency line. And so really happy with where we are in the EB business. As it relates to Voluntary, 1/1/26 was a positive step. Operator: Our next question is from Wilma Burdis with Raymond James. Wilma Jackson Burdis: What's the best way for us to -- or could you give us some insight into how you're thinking about the loss pick for the January 2026 Stop Loss business? Maybe if you could just pull together the pieces on the 24% rate increases, 20% medical trend and any benefits from risk selection. Michael Katz: Yes. Not a ton to add here, Wilma, on just how to think about trend that part of it. We've talked about that being an approximately 20% high teens is where we see trend. And so the other part of it is risk selection where we continue to make improvements, particularly versus where we were with the Jan '24 block. Jan '26 will come back to that in the first quarter. I think it's the same story here where we're going to look at the experience that comes in Q1. We talked about getting improvements. So we'll be in a better place than we were for Jan '25, but where we ultimately set that, we'll make that judgment in April. Heather Lavallee: Yes. And Wilma, the only thing I'd add to Mike's point is just something he said earlier is, as we're pricing this business, we are pricing it to be back within our target loss ratio range. So I just think that's an important element. And as Mike mentioned, we'll give you more details on the first quarter call. Wilma Jackson Burdis: Okay. And cash generation exceeded Voya's target for '25, could you drill a little bit more into the factors were reserve releases on '24 Stop Loss business. Is that something that would have supported the figure? Or how should we think about that? Michael Katz: Yes. I mean certainly had an effect on the cash generation in 2025. I think net, if you think about what we did in the fourth quarter with the prior period reserve releases in Q1, Q2 were net favorable with respect to just Stop Loss, EB in totality was better. I talked about expenses. So it certainly played a role. And we -- the base case is that it plays a role in 2026 as well. Heather Lavallee: Yes. And I would add, Wilma, is, again, you think about the cash generation of our Retirement business, the largest business is successful integration of OneAmerica above our targets. That was also a significant contributor to cash generation in addition to what we delivered for in Investment Management. So really, it is a portfolio story and something that we are confident we're carrying into '26. Operator: Thank you. We have reached the end of our question-and-answer session. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Thank you for standing by. My name is [ Jay ], and I will be your conference operator today. At this time, I would like to welcome everyone to the Chubb Limited Fourth Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Susan Spivak, Senior Vice President, Investor Relations. You may begin. Susan Spivak Bernstein: Thank you, and welcome to our December 31, 2025 Fourth Quarter and Year-end Earnings Conference Call. Our report today will contain forward-looking statements, including statements relating to company performance, pricing and business mix, growth opportunities and economic and market conditions, which are subject to risks and uncertainties, and actual results may differ materially. See our recent SEC filings, earnings release and financial supplement, which are all available on our website at investors.chubb.com for more information on factors that could affect these matters. We will also refer today to non-GAAP financial measures, reconciliations of which to the most direct comparable GAAP measures and related details are provided in our earnings press release and financial supplement. Now I'd like to introduce our speakers. First, we have Evan Greenberg, Chairman and Chief Executive Officer; followed by Peter Enns, our Chief Financial Officer. Then we'll take your questions. Also with us today to assist with your questions are several members of our management team. And now it's my pleasure to turn the call over to Evan. Evan G. Greenberg: Good morning. We had an outstanding quarter, which contributed to another record year, demonstrating both the resilience on the broadly diversified nature of our company. We delivered excellent full year results with strong contributions from virtually all of our businesses. We achieved record earnings for both the quarter and the year. For the quarter, very strong double-digit increases in underwriting and life income along with record investment income, led to core operating income of nearly $3 billion or $7.52 per share up about 22% and 25%, respectively. Total company net premiums grew almost 9% with P&C up 7.7% and life up about 17%. In fact, our company's published growth this quarter was faster than the average for the full year. In the quarter, our underwriting performance was simply outstanding. P&C underwriting income was $2.2 billion, up 40% with a record low combined ratio of 81.2%. Our published underwriting results were supported, of course, by low cats and prior period reserve development, but importantly, very strong current accident year performance from our businesses across the board, including from our agriculture division, where we are the #1 crop insurer in America. Agriculture's outstanding results benefited the quarter's underlying current accident year combined ratio of 80.4% which was nearly 2 points better than prior year and a record low. Importantly, however, excluding agriculture, the global P&C current accident year combined ratio, reflecting the strength of our businesses from around the globe was 80.9% almost a full point better than prior year and again, a record result. And we had an outstanding quarter on the investment side of our business. We generated record adjustment net investment income of $1.8 billion, up 7.3%. Our fixed income portfolio yield is 5.1% and our current new money rate averages slightly above that. Our invested asset now stands at $169 billion, up from $151 billion a year ago. The more important time frame to me to discuss though is the full year, and what a year we had. We printed record operating income just shy of $10 billion or $24.79 per share, up about 9% and 11%, respectively, over prior. For perspective, over the past 3 and 5 years, core operating income has grown 55% and over 200%. All 3 major sources of income for our company produced record results last year. P&C underwriting income of $6.5 billion was up 11.6% with a record low combined ratio for the year of 85.7%. Adjusted net investment income rose 9% to almost $7 billion, and life insurance income of $1.2 billion was up over 13%. Our record underwriting results and earnings were achieved in spite of full year cat losses that were, in fact, higher than prior year, substantially driven by the California wildfires in the first quarter. Though U.S. and worldwide hurricane and typhoon seasons were unusually light this year. Annual industry cat losses still approached $129 billion. By its nature, cat exposure is volatile. Frequency and severity of losses are alive and well. Fire, flood, cyclonic and earthquake are all perils that contributed to industry cat losses. For the year, we grew total company premiums over 6.5%, with P&C up about 5.5% and life up over 15%. Per share tangible book value, our most important measure of wealth creation grew 25.7% last year. Peter is going to have more to say about financial items. Again, our results for both the quarter and the year, top and bottom line, put a point on the broad-based, diversified nature of the company, by geography, by product, by commercial and consumer customer segment and distribution channel, it speaks to how well we are positioned both relatively and in absolute terms. Turning to growth pricing in the rate environment. P&C premium revenue again grew over 7.5% in the quarter, with consumer up almost 12% and commercial up over 6%. Our international P&C and U.S. agriculture business had a particularly strong growth quarter, with premiums up nearly 11% and over 45%, respectively. But we also had strong growth from our U.S. personal lines business and our commercial U.S. middle market and E&S businesses. In terms of the commercial P&C underwriting environment in the fourth quarter, as I said in the last few quarters, the market globally is in transition and growing incrementally more competitive quarter-by-quarter, particularly large account property admitted in E&S and upper middle market. Casualty pricing, overall, large account, E&S and middle market continues to firm in the areas that require rate. And in those that don't, price increases have slowed. Financial lines remained soft with some signs of firming in discrete classes. Let me give you some more color on the fourth quarter by division, and I'm going to begin with our international P&C business. Premiums in overseas general were up 10.8% or over 8% in constant dollar, a very good result. Premiums in our global retail, which operates in 53 countries and which is 90% of our overseas general division were up 12.5%. With consumer premiums, both A&H and personal lines up 18.7%. And commercial lines, up almost 7.5%. Latin America grew 14.7% with consumer up almost 18% and commercial up 10.5%. Asia grew 13%, with consumer up 25% and commercial flat and Europe grew over 7%. In our international retail commercial business, P&C rates were down 3.6% and financial lines rates were down almost 9%. Loss costs remained steady. Premiums in our London wholesale business, which is 10% of our international P&C were down about 1%. Given more competitive London open market conditions basically across the board, property, marine, aviation and professional lines. Turning to North America. Total P&C premiums were up over 6.5%. Agriculture, again, was up over 45%, predominantly due to the profit sharing formula with the government. Excluding agriculture, premiums were up 4.7% including more than 6% in personal lines and 4.3% in commercial, which is made up of middle market, small E&S and large account divisions. Breaking U.S. commercial growth down further, premiums in middle market and small commercial grew over 6%, with P&C up 7.5% and financial lines up 1.5%. New business for middle market and small was strong, up more than 17% versus prior year. Premiums in major accounts and specialty grew 3%. With major or large account business, up 0.5% in Westchester, our E&S company, up over 7.5%. Major account and for that matter, Westchester growth, was impacted by property, obviously. And in major, we wrote fewer one-off LPT transactions than we did prior year. Commercial pricing for property and casualty, excluding fin lines and comp was up 4.3%, with rates up 2.5% and exposure change of 1.8%. Property pricing was down 1.5% with rates down 4.6%, partially offset by exposure of 3.3%. Going a step further, property pricing was down over 13.5% in large account business and E&S and it was up 3.7% in middle market and small commercial. Casualty pricing in North America was up 8.5%, with rates up 7.6% and exposure up 0.8%. Financial lines pricing was down 1.5%, and comp middle market pricing was down just under 1%. Large account risk management pricing was up 6.5%. In North America commercial, again, there was no change to our selected loss cost trends. Premiums in North America, high net worth personal lines grew over 6%, and homeowners pricing was up over 8.5%. In our international life insurance business, which is fundamentally Asia, premiums were up almost 18% in constant dollar. And in North America, premiums in Chubb worksite benefits business were up over 16.5%. Our Life division produced $322 million of pretax income in the quarter, up just shy of 20%. So in summary, we had a great quarter and a great year, which again speaks to the broadly diversified and global nature of our company. We have many sources of opportunity on both the liability and asset side of the balance sheet. At the same time, we are continuing to invest to improve our competitive profile. While early, we're off to a good start in '26, and we're confident in our ability to generate for the year strong growth in operating earnings and double-digit growth in EPS and tangible book value through the 3 sources of income, P&C underwriting, investment income and life though cats and FX aside. I'll turn the call over to Peter, and then we're going to come back and take your questions. Peter Enns: Good morning. As you heard from Evan, we concluded the year with an outstanding quarter that produce full year earnings records and all-time highs on our balance sheet, including cash and invested assets exceeding $171 billion and book value of nearly $74 billion. Our exceptional results were supported by $4.2 billion of adjusted operating cash flows in the quarter and $13.9 billion for the year. We returned $1.5 billion of capital to shareholders which contributed to a total of $4.9 billion for the year or about half of our core operating income, including $3.4 billion in share repurchases at an average price of $282.57 per share and $1.5 billion in dividends. Book and tangible book value per share, excluding AOCI, grew 3.4% and 4.8%, respectively, for the quarter and 11% and 15.5%, respectively, for the year. Our core operating return on tangible equity and core operating ROE in the quarter were 23.5% and 15.9%. Pretax catastrophe losses were $365 million for the quarter, principally from weather-related events split 55% U.S. and 45% international and $2.9 billion for the year versus $2.4 billion in the prior year. Pretax prior period development in the quarter in our active companies was favorable $430 million, split 64% short tail lines and 36% long tail lines. Our corporate runoff portfolio had adverse development of $162 million primarily related to our asbestos review, which is completed each fourth quarter. Our paid-to-incurred ratio for the quarter and year was 105% and 91%, respectively Excluding cats, PPD and agriculture, our paid-to-incurred ratio for the quarter and year was 94% and 88%. Turning to investments. Our A-rated portfolio increased about $2.7 billion from the prior quarter and $18.1 billion from the prior year. The increase for the quarter and full year reflects strong operating cash flow and positive marks to market while the year also includes favorable FX, partially offset by shareholder distributions. Adjusted net investment income of $1.81 billion was at the top end of our previously guided range, primarily due to strong growth in the invested asset base. For the year, adjusted net investment income grew 9% to $6.9 billion, which included approximately $6 billion or 9% growth from our public fixed income portfolio and $940 million or 8.5% growth from our private investments. We expect adjusted net investment income in the first quarter of 2026 to be between $1.81 billion to $1.84 billion. Our core operating effective tax rate was 18.7% for the quarter and 19.4% for the year, which was slightly below our previously guided range. We expect our annual core operating effective tax rate for 2026 to be in the range of 19.5% to 20%. I'll now turn the call back over to Susan. Susan Spivak Bernstein: Thank you, Peter. At this point, we're happy to take your questions. Operator, please queue up the questions. Operator: [Operator Instructions] Your first question comes from the line of Brian Meredith of UBS. Brian Meredith: Evan, first question, just looking at the U.S. commercial lines, North American commercial lines business. Your underlying margins have been incredibly consistent and excellent results over the last several years. I'm just wondering, given the current pricing environment, do you think you can sustain those here in 2026? Evan G. Greenberg: Brian. I don't give forward guidance, as you know. And on one hand, you have clearly, lines of business where price is not keeping pace with loss cost. And the math naturally works in one direction. On the other hand, we have a very broad business and mix of business changes, mitigate on the other side. I'm very comfortable with the combined ratios we are publishing, and I do not prognosticate the future, but I do have confidence and underwriting income for this company, growth in underwriting income contributing to that growth in EPS. Brian Meredith: And then maybe -- that's terrific. And then maybe pivot over to the personal lines business. Once again, terrific combined ratios, there's been some press and some regulators talking about excess profit laws and implementing them. I'm just curious your thoughts on that and potential implications for Chubb and this profitability in that business? Evan G. Greenberg: Yes. Look, if you measure our personal lines business in the United States over any reasonable period of time, 3, 5, 10 years, it classically runs in the high 80s to up into the low 90s combined ratios, given -- and it bounces around given the nature of catastrophe losses, in particular. I'm very mindful and more than mindful sympathetic about the issue of affordability in the United States and -- but I would be careful when politicians think about that issue of affordability pointing to insurance as a culprit. We intermediate money. We don't print money. For job loss costs in homeowners are rising around 7.5% to 8% at the moment. Liability on one hand is a strong contributor to that. And we know liability costs in the U.S. overall rising inflation for the liability is roughly 9% -- 7% to 9% and that's multiples of CPI. That's a problem with litigation. That's not an insurance company problem. Secondly, and I think more important to homeowners, a large part of pricing is catastrophes. And those are measured over an extended period. As you know, you could have a 2-year period where you have huge outsized cats, and you lose money in that state. On the other hand, you could have a quiet period. And it looks like you made money. You measure it over an extended period. And for homeowners, admitted homeowners in particular, prices are filed and they get approved based upon technical actuarial. So I would be careful of politicizing the affordability question as you point to homeowners insurance or it's going to create ultimately an availability problem and that will exacerbate affordability. Operator: Your next question comes from the line of Bob Huang of Morgan Stanley. Jian Huang: I'm a sucker for overseas business so I'd like to ask a question on that. Clearly, the growth in Latin America and in Asia are very strong. And In Latin America, Mexico has been consistently called out as very much a favorable environment. Maybe can you give us a little bit of color outside of Mexico in Latin America in terms of -- what is the opportunity there? And what is the growth momentum there? Evan G. Greenberg: Yes. It's more in our consumer than in our commercial businesses. We have -- as I'm sure you know, Banco de Chile, largest bank in Chile is our long-term partner for distribution of consumer-based insurances as an example. Nubank is our partner in Brazil for digitally distributed insurance, consumer insurance. In Ecuador, we are partners with Banco Guayaquil, one of the biggest banks in Ecuador for distribution of the consumer insurances, you get the picture. And in Argentina, we have actually a very good business growing in both consumer and commercial. While commercial is good in Mexico and Brazil, to a degree in Chile and Colombia, it's the consumer businesses with multiple distributions, A&H specialty personal lines and automobile on both a direct-to-consumer through bank and other distribution digitally based direct-to-consumer and broker and agent driven our Mexico business predominantly is agent-driven growth. Though we are the exclusive insurance partner long term of Banamex and with the sale of Banamex right now from -- by Citigroup to a local Mexican management, I expect that's going to be another growth opportunity. So it's very broad-based. It's across a variety of countries, and we've been at it for years. Jian Huang: Really appreciate that. It sounds like a lot of opportunities without us worrying about pricing. Maybe the second point, staying on overseas, Asia business, clearly, another area of excitement but can you maybe give us a little bit of the competitive dynamics there, right? You made an acquisition there this year. Just curious about how we should think about an area where everyone is excited about it. And clearly, everyone wants a piece of that pie, so to speak. Evan G. Greenberg: Yes. First, I want to just -- so we stay grounded in reality. When you think about Asia, when you think about Latin America, Asia dwarfs Latin America in its size and scale and the opportunity. Both regions though are developing market and mature market regions. And they have that signature about them. So a certain volatility to economic and political growth. It's many, many countries in Asia, small micro markets and large markets. But there is a certain volatility in any period, one period to another that can occur. The trend line for both regions is up and Asia in particular. Growth this quarter in Asia, as you saw, came fundamentally from consumer lines, commercial lines was flat. That's mostly the large account business, Australia, Singapore base, Hong Kong a little bit where the environment more competitive. Our growth is in small and middle market commercial and in consumer lines, both agency and digitally and direct-to-consumer-oriented. Market by market, it is very hard to compete in that business for anybody to just come in and want a piece of that pie. It's a lot of countries every culture is different. They're economically different. They're small markets, many of them like Southeast Asia, but they add up in aggregate to be a big region, it's hard work, and you have to establish yourself, not with 1 office and 2 or 3 underwriters, you've got to have broad capability distributed through the country to be able to mine the opportunity of small and mid-market commercial and consumer. So it's years of hard yards to build local franchises in those operations. And then on top of it, the ability to bring your technology and bring your data and your insights to bear from what you have and the scale around the globe to help your competitive profile in those markets, that is another dimension. And that's what we're hard at work at and it shows results and I'm bullish on the long-term opportunity. Any one period of time notwithstanding. Operator: Your next question comes from the line of David Motemaden of Evercore ISI. David Motemaden: Evan, maybe just a follow-up on just on the overseas general insurance business and the consumer lines growth there has been robust, and it looks like that's continued over the last 3 quarters. Sounds like you feel good about the opportunity and sustaining that. I guess -- could you help us think through how that manifests through margins? Because it feels like that's margin accretive, at least over the last few quarters. But I know there are some moving pieces there with the consumer business, higher expense ratio, lower loss ratios. I'm hoping you can help me think through that. Evan G. Greenberg: Yes. I can't help you too much that you're left to your own -- we each have our hell and you're left with that one. We don't break out the margin by business. We don't break out overseas general consumer versus commercial margins. What I'm going to help you with is simply this. Our A&H -- it breaks down between A&H and auto and homeowners and specialty personal lines. Each has their own signature. And by the way, depending on the distribution channel, whether I'm doing it digitally or in a bank direct response, telemarketing, we're doing it through agency brokerage they have their own signature of acquisition costs and loss ratio. They're reasonably steady businesses. Auto not as steady, obviously, as A&H is. Our A&H is a large business that is -- that a lot of the risk is on the direct marketing side, and we have built capability over many years. We're the #1 -- when we say we're the #1 direct marketer in Asia, that's predominantly A&H business over non-life and life. It produces a reasonably steady and decent underwriting margin. Beyond that, I'm confident in our mix of business overall between large accounts, middle and small and our consumer businesses internationally that our margins are, how do I want to say it, they are -- they are not predictable because it's the risk business but they are decent, as you see, and we feel confident in them. David Motemaden: Got it. I appreciate that. And then maybe just... Evan G. Greenberg: I know you wanted more, but we just don't break it down that way. David Motemaden: I had to try. But I guess just maybe a bigger picture question. The December presentation showed about 150 basis points of combined ratio improvement from the digital transformation over the next 3 to 4 years? And I'm not asking for formal guidance here. But could you just share how you're thinking about the key drivers and execution priorities to deliver on that improvement even as the competition in some of the markets you operate in intensifies? Evan G. Greenberg: Yes. Most of it is on the expense side. It is in both OpEx and in cost of claims. It is -- there is some that is but it is more -- much more minority that is projected in loss ratio, but we're fact-based people. And so as we see no more that we can measure mathematically, we gain more confidence in that portion in the insight. And it is business by business, division by division. It's predominantly North America, U.K., Europe, and our larger markets of Asia and in Latin America. It is covering right now we're focused, in particular, on 9 or 10 very discrete projects that all the businesses are lined up on the business leaders, our technical team, around technology, data, AI, analytics and our operations. And we work it with those who are fully dedicated along with the disciplines and the business leaders to transformation and bringing it all together in how we transform a business in the 9 discrete projects across a variety of geographies. Here you go, and it will continue to evolve. Operator: Your next question comes from the line of Greg Peters of Raymond James. Charles Peters: Good morning. So I'm going to have 2 follow-up questions. One to the overseas operations. I guess I'm going to ask a question around foreign exchange and I realize this is probably going to spill over into geopolitical considerations as it relates to the growth of your operations. But I'm looking -- I've been watching the last several weeks, the yen go down relative to the U.S. dollar. And I understand you're matching your assets and liabilities in the same currency. But running a global enterprise, I'm just curious how you look at foreign exchange volatility as it relates to what you're managing the enterprise risk? Evan G. Greenberg: Yes. We do not hedge revenue or income. The only time we really hedge is remittances -- around remittances when they're large. Our assets and liabilities are matched in currency so they move together. Foreign exchange, if the U.S. dollar weakens relatively, that's a tailwind to us in terms of growth, and it obviously helps income in any business generating income. And then if the dollar strengthens, which has been its longer-term trend over a long period, we pay that price. And you can see it because we're transparent about it of what are we in constant dollar in terms of growth versus published. And so Greg, that is what it is. Right now, the prognostication is more towards the dollar at the moment, the dollar weakening as you look forward. But you know what, that sentiment bounces around and changes based upon financial conditions, economic and as you said, geopolitical. Charles Peters: Okay. And then I wanted to follow up on... Evan G. Greenberg: And by the way, that's why that is why I say that when we talk about any projection about Chubb future income or EPS growth, I do say cats and FX aside. We're in the risk business. It's not like we can control anything, but we have better control over most things and can forecast -- I can't forecast cats. I can't forecast FX, and I don't have control over them. And it doesn't speak to the intrinsic strength of the business. Charles Peters: Got it. I think you said in your -- the quote was macro conditions notwithstanding, when you talked about your outlook for growth. Evan G. Greenberg: I said it broadly. Charles Peters: Correct. Can I go back to the other comments around Agentic AI and digital infrastructure. And I guess I want to come at it from a different angle. The large brokers are talking about the build-out of this infrastructure as being a big opportunity. I think Marsh used 2,000 to 3,000 data centers being built over the next couple of years. And so I guess I wanted to approach it from a couple of different angles. How do you see that evolving and Chubb's participation in that? And I guess there's also an investment opportunity, too, that Chubb might be looking at. So I'm just looking for how you're looking at the different touch points of this emerging trend and how it's going to impact your organization? Evan G. Greenberg: Yes. On the insurance side, we're all over it. We've been writing data centers, and we -- globally, this is a global opportunity. And we're -- our capabilities are extremely broad. We're in a rare group when it comes to capability. Builder's risk, operations in terms of property. And we write the primary property. We do the engineering. We have large capacity we put at it. And others take shares behind us generally. We can do that on a global basis. Marine and all of the related exposures around that, surety, liability, professional lines when it comes to design of data centers. We are one of the few that writes insurance around the broad variety of exposures globally that those who are constructing data centers confront. We have recently, obviously, with all of the investment that is going into this and by the way, on the utility and energy side, we are a major writer and no one is building a major data center without the energy and utility dimension of this, and we can seamlessly transition to that in coverage as well. With all the investment that is going in our -- inside our organization, we have doubled down on how we are structured to bring all of the coverages, the services and engineering, the teams together to approach this globally were an important factor when Aon and Marsh and other major brokers are engaged in the creation and putting together in placement of data centers. The one thing I would say about this right now, there's a lot of projects announced, how much of this actually gets built and over what period of time remains a question. There are headwinds. There's headwinds around availability and affordability of energy to power data centers. And that is a rising and growing problem. How fast does that get addressed? And for each data center, it's a different answer depending on where they're located. There's more pushback on where data centers will be built. There is the question of labor. And is labor available for the construction of data center, supply and the supply chains and the cost of supply are questions that hang out there. So there's a lot announced. We're all focused on it. But I'd be careful not to be overly breathless about this. On the question on the invested asset side, some of -- this is a great technology that we are creating for economic and mankind purposes in so many great ways. There is trillions of dollars being poured in. I have no doubt that some of it is going to produce good returns. Some is going to produce more anemic returns and some may not prove to be money good both on the technology development side and on the infrastructure to support the technology, i.e., data centers, et cetera. As an investor, we are thoughtful and very cautious around this. I think there'll be a second act down the road that may be a very interesting investment opportunity, and I'll leave it at that. Operator: Your next question comes from the line of Ryan Tunis of Cantor Fitzgerald. Ryan Tunis: So Evan, I guess just a follow-up on that question from Greg. GDP growth has been -- I'm just trying to think about how economic growth maps to growth if you're looking for insurance growth opportunities. And obviously, a lot of the GDP growth we've seen has sort of come from this AI infrastructure build-out. As someone looking for growth opportunities in P&C, are you agnostic as to where the growth comes from? Or is -- would you actually prefer the GDP growth to be coming from more traditional means such as growth in employment. Evan G. Greenberg: Ryan, when GDP growth, if it's overly concentrated, it is more vulnerable. It is more -- it is potentially more volatile. Broader-based growth by definition, is more stable. And it creates more broad-based prosperity. That impacts both commercial and consumer. So just as a businessman, as a citizen, I would say that to you. When it comes to Chubb growing, if we can earn an adequate risk-adjusted return on the growth, I'll take it wherever it's coming from. That's why we're -- we're pursuing opportunities in multiple directions. Ryan Tunis: Got you. And then just a follow-up, not looking for guidance, but the acquisition and expense ratio in North America commercial. It's kind of an upticking, I think, because of mix in middle market. Is that a trend that we should continue to see? Or do you feel like these levels are sort of steady state? Evan G. Greenberg: Be careful with it. In the quarter, a part of it is because -- and an important part is because we wrote less one-off transactions this year in the fourth quarter, LPT business, which type business loss portfolio transfer, which has a very low acquisition ratio to it. Classically a little higher loss ratio. And that impacts it, and that bounces around quarter-to-quarter. You also have in North America commercial. Yes, middle and small growing faster than major. So that mix shift impacts it on one hand, but the relative size of each varies a little bit quarter-to-quarter. So you got a -- it's not just a straight line that way. But that trend in that direction, yes, is clear. And then E&S has been growing faster than major. And that is, by its nature, it's wholesale business as a higher acquisition ratio. Operator: Your next question comes from the line of Matthew Heimermann of Citi Research. Matthew Heimermann: First question would be, you had this comment with respect to more favorable January 1 conditions relative to expectations. I just -- I was curious what you meant by that, whether that was from a growth standpoint, from a pricing standpoint, geopolitical factors, just like to better understand what you meant. Evan G. Greenberg: Yes. It wasn't geopolitical. January 1, and don't overread it. January 1 is an important date for certain businesses, particularly large account business. It's a very important date in Europe and the U.K. very large percentage of the business, particularly it's large account oriented is on the continent and in the U.K. January 1. And so between the U.S. and Europe and the U.K. in particular, the large account business, it did better than we, it had a relatively good start because it did better than we had imagined ourselves. That's all. So it said it was a statement of confidence for that business that we're off to a good start. Matthew Heimermann: I appreciate it. I guess, with respect to -- one, I appreciate that you actually gave some targets on the investments you're making on the digital side. So thank you for that. I would be curious, though, when you think about the pace at which you're moving on that, how constrained are you at all, if at all, by other stakeholders' constituents, whether they be distributors, customers or service or technology providers? Evan G. Greenberg: Yes. And by the way, when we did this just that I want everyone understand, when I came out in December at the investor dinner to talk about this and to put this up, it's because I'm talking more long term and about intrinsic value creation and competitive profile of the company. This is not going to become something that -- and it's a long term, and I put it out there on multiple years. So it's not something that is going to start working its way into worksheets or I'm going to start giving quarterly updates of this or this or this. It's missing the whole point. And from time to time, I will give updates that provide a broader insight when someone is thinking about investing in job who is long-term investing. And to answer your question, the only place where a distribution partner constrains our ability to implement or to grow is really in our digital business with digital partners, where how fast given all of their priorities for growing their basic business. Will they pay attention in connectivity, data, analytics, et cetera, and make available for us to be able to do what we do well and that is interest and distribute through their pipeline to customers. It's the only place of significance that comes to mind. Operator: Your next question comes from the line of Tracy Benguigui of Wolfe Research. Tracy Benguigui: On asset allocation, you're targeting to raise private from 12% of your investments to 15% over the medium term. I recognize that Schedule BA type of assets, at least for the private equity piece, consumes a lot of risk-based capital. Are you expecting to make that up with diversification credit like as you grow your life business, should I think about those 2 pieces moving together? Evan G. Greenberg: No. Go ahead, Peter. That's a worksheet question. I think we ought to take off-line, but I'm going to let Peter... Peter Enns: Not specific to life. There is an allocation of PE that goes into life and in particular, the Asian markets. But it's relatively modest to the overall footprint and what we intend to grow. Evan G. Greenberg: They're not -- we did not look at them together in diversification. And by the way, we're very mindful both on a statutory and an S&P basis, how much capital each class of alternative draws and we have made statements about how it will be and is accretive to our ROE now and will be as we go forward. Tracy Benguigui: Okay. I love seeing actual quantified metrics with respect to your AI digital agenda. So my question is actually more on the cultural side. I kind of think of insurance tends to be a tribal culture. What is the reception from your underwriting and claims folks with respect to reinventing how they do business like the transformation piece? Evan G. Greenberg: Yes. It's very interesting, Tracy. The comment tribal. I think of every business in any industry, every company that is a good company and is well run. A hallmark of it is its culture. And culture is norms of behavior that all hold in common that they consider important and that forms culture. And when I look at Chubb part of our culture is an ability and a willingness to adapt, change to be earnest -- it's a meritocracy where you're rewarded for what you achieve. We're a highly disciplined organization. The things we intend to do are measurable. It's an organization and behavior that is about accountability. And that we take individual accountability. It's not about some committee. And when I add all that together, and it's a respectful culture. We respect each other. It's not management respecting employees. We're all employees. We're all colleagues and so when we have plans, and they are understood and explained, and we work through them. The vast majority in this organization work hard towards achieving it with an open mind, and we support each other. It is for many employees, the transformation and we didn't invent this. The digital transformation society is going through and how it's going to impact businesses in economic, Chubb has a great opportunity to be a leader and to be highly relevant, but all of us have to adapt. All of us have to learn skills. All of us have to be flexible. And the majority, I have so much confidence in my colleagues. The vast majority around the globe will put themselves into this. And that is a large part of what gives me confidence. Operator: Your next question comes from the line of Andrew Kligerman of TD Cowen. Andrew Kligerman: Evan, your commentary around financial lines and workers' comp pricing trends didn't sound that compelling. So it was interesting to me that financial lines net written premium was up 5.4%, workers' comp was up 3.6%, an acceleration from the prior quarters. So I'm wondering what you might be seeing there? Do you think this trend can continue where Chubb is growing in those lines? Evan G. Greenberg: Well, first of all, it bounces around quarter-to-quarter. But I'm going to turn it over to John Keogh to answer that question. John Keogh: Andrew, why don't we talk about the financial lines number. This one that I observed, I think you understand is, one, that's a global number. So we're offering financial lines in a number of markets around the globe, some of which are growing, some of which are shrinking. Financial lines also includes everything from public D&O to D&O for private companies, not for profits. It includes all sorts of professional lines. for different trade groups and industries. It's employment practices, it's fiduciary coverages, it's fidelity coverages, it's cyber coverages. So in that number, you're seeing, I think, speaks to the diversity of our business and financial lines and the areas there where we were purposely growing that business because we think we're getting paid adequately for that particular product in that particular market. And there are other places, unfortunately, where we're shrinking where a product in a particular market around the globe does not meeting our requirement. So that number is an aggregation of the diversity of those businesses. To your question in terms of trend, the one thing we did see in the fourth quarter in the financial lines is some green shoots in terms of some areas that do need rate. And I'd call out, particularly in North America, we saw for the first time in many quarters, a slight rate increase on our public D&O book. We saw in transaction liability, pricing terms and conditions, a lot more rational in the fourth quarter than we've seen in the last couple of years. And then employment practices in the U.S., we're pushing rate across the board because it needs it in that book of business. Evan G. Greenberg: In workers' comp, it was predominantly in middle market and small commercial that had a very good quarter. I'm comfortable because we don't write -- we're not a broad-based writer of all industries, all classes and comp. We've been and our signature for many years is we're selective within the industries and the states within which we write. This quarter was, in particular, a strong quarter. I don't believe it's such a trend, it was a bit opportunistic, but it was very good. Andrew Kligerman: Got it. And then just shifting over to another outstanding prior period development favorable $268 million. Curious about the casualty piece, commercial auto excess liability. How did that develop? And maybe a little color on accident years, if you could. Evan G. Greenberg: Yes. We're not going to -- we don't break down that way, as you know. And the prior period reserve development in long-tail lines came from the portfolios that we studied in the quarter. Every quarter, we study a different cohort of portfolios for annual deep dive review. We look provisionally every quarter in all portfolios, but we, in particular, react to those and especially long tail business, where it's part of a quarterly review. And so long tail in the cohorts we reviewed this quarter, they produced a favorable outcome. That's as far as I'm going to go. Operator: And that's all the time we have for our Q&A session. I will now turn the conference back over to Susan Spivak for closing remarks. Susan Spivak Bernstein: Thank you, everyone, for joining us today. If you have any follow-up questions, we will be around to take your call. Enjoy the day, and thank you again. Operator: This concludes today's conference call. You may now disconnect.
Jim Friedland: Thank you for standing by for the Alphabet Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker today, Jim Friedland, Head of Investor Relations. Please go ahead. Jim Friedland: Thank you. Good afternoon, everyone, and welcome to Alphabet Fourth Quarter 2025 Earnings Conference Call. Sundar Pichai: Thanks, Jim. Hi, everyone. Thanks for joining us. It was a tremendous quarter for Alphabet. The launch of Gemini 3 was a major milestone, and we have great momentum. Alphabet annual revenues exceeded $400 billion for the first time. This quarter, Search continued to accelerate with revenues growing 17%, YouTube's annual revenues surpassed $60 billion across ads and subscriptions. Cloud significantly accelerated with revenues growing 48% now on an annual run rate of over $70 billion. Backlog grew by 55% quarter over quarter to $240 billion representing a wide breadth of customers driven by demand for AI products. We have over 325 million paid subscriptions across consumer services, strong adoption for Google One and YouTube Premium. In addition, we have sold more than 8 million paid seats of Gemini Enterprise, we launched just four months ago. And our Gemini app now has over 750 million monthly active users. We are also seeing significantly higher engagement per user especially since the launch of Gemini 3 in December. Overall, we are seeing our AI investments and infrastructure drive revenue and growth across the board to meet customer demand and cap on the growing opportunities ahead of us, our 2026 CapEx investments are anticipated to be in the range of $175 to $185 billion. Today, I'll provide an update on our AI progress and then share highlights from Search, Cloud, YouTube, and Waymo. First, AI progress across the full stack. Our unrivaled infrastructure serves as the bedrock of our AI stack. We have the industry's widest variety of compute options. That includes GPUs from our partner NVIDIA, who announced at CES that we'll be among the first to offer their latest Vera Rubin GPU platform. Plus our own TPUs that we have been developing for a decade. In December, we announced our intent to acquire Intersect which provides data center and energy infrastructure solutions. As we scale, we are getting dramatically more efficient. We were able to lower Gemini serving unit costs by 78% over 2025 through model optimizations, efficiency, and utilization improvements. Next, world-class AI research including models and tooling. We offer the most extensive model portfolio in the world, and lead across text, vision, and image to video LM Arena leaderboards. Gemini 3 Pro drives the state of the art in reasoning and multimodal understanding. It has seen the fastest adoption of any model in our history. Since launch, Gemini 3 Pro has consistently processed three times as many daily tokens on average as 2.5 Pro. Our latest model powers Google Anti Gravity, our new development platform where agents can autonomously plan and execute complex software tasks. It already has more than 1.5 million weekly users after launching just over two months ago. Our first-party models like Gemini now process over 10 billion tokens per minute via direct API used by our customers, up from 7 billion last quarter. Third, bringing AI to our products and platforms. We are shipping innovation at scale to bring helpful AI features to people everywhere. In January alone, we have launched personal intelligence in AI mode in search and the Gemini app. Introduced new features to Gmail and updated Vio. Reimagine Chrome as an AI-first agentic browser through features like Chrome Autobrowse. Announced Project Genie, which lets users create and explore interact worlds generated in real-time using Genie 3, our general-purpose world model. And we laid the groundwork for shopping in the AI era by introducing a new open standard for agentic commerce. The Universal Commerce Protocol built alongside many retail industry leaders. Finally, from Android to Pixel, we are getting our best AI capabilities into People's hands. At CES, a range of partners, including Samsung, showcased how they are bringing Gemini to more devices from XR to the living room and beyond. And to confirm the rumors, we'll be introducing our Pixel 10a to our best-ever rated Pixel 10 series very soon. Turning now key highlights from the quarter, starting with Search. Search saw more usage in Q4 than ever before, as AI continues to drive an expansionary moment. We have executed with incredible speed, We shipped over 250 product launches, within AI mode and AI overviews just last quarter. We have integrated Gemini 3 directly into AI mode and search. Now Search can better understand your query, dive deeper on the web, and generate interactive UI experiences. And last week, we upgraded AI overviews to Gemini 3 giving users a best-in-class AI response at the top of the search results page. We have also made the search experience more cohesive ensuring the transition from an AI overview to a conversation in AI mode is completely seamless. These new experiences are proving to be more helpful and are driving greater usage. A few highlights. First, once people start using these new experiences, they use them more. In The US, we saw daily AI mode queries per user double since launch and AI overviews continue to perform very well. Second, people are engaging in longer, more complex sessions. Queries in AI mode are three times longer than traditional searches. We are also seeing sessions become more conversational, with a significant portion of queries in AI mode, now leading to a follow-up question. Third, people are searching in new ways beyond text. Nearly one in six AI mode queries are now non-text using voice or images. And Circle to Search is now available on over 580 million Android devices. Next, Google Cloud. Our growth in revenue, operating margin, and backlog highlights the strength of our entire portfolio. One, we are winning more new customers faster. We exited the year with double the new customer velocity compared to Q1. Two, we are also signing larger customer commitments. The number of deals in 2025 over $1 billion surpassed the previous three years combined. And three, we continue to deepen our relationships with existing customers who are outpacing their initial commitments by over 30%. Nearly 75% of Google Cloud customers have used our vertically optimized AI, from chips to models to AI platforms and enterprise AI agents, offer superior performance quality, security, and cost efficiency. These AI customers use 1.8 times as many products as those who do not enabling us to diversify our product portfolio. Deepen customer relationships and accelerate revenue growth. Our product line has multiple monetization levers spanning infrastructure, platform, and high-margin AI-powered products and services with 14 product lines each exceeding $1 billion in annual revenue. We offer leading infrastructure for AI training, and inference to our cloud customers. With the industry's widest variety of compute options, from our own seventh-generation Ironwood TPU to the latest NVIDIA GPUs. Our ten-year track record in building our own accelerators with expertise in chips, systems, networking, and software translates to leading power and performance efficiency for large-scale inference and training. Our Cloud AI accelerators serve the leading frontier AI labs. Capital markets firms like Citadel Securities, enterprises like Mercedes Benz, and governments for high-performance computing applications. We also offer our leading generative AI models including Gemini, Imagine, Vio, Chirp, and Liria to cloud customers. December alone, nearly 350 customers each process more than 100 billion tokens. In Q4, revenue from products built on our generative AI models grew nearly 400% year over year. Significantly accelerating from the prior quarter. Today, more than 120,000 enterprises use Gemini, including AI unicorns like Lovable and Open Evidence. And global enterprises like Airbus and Honeywell. 95% of the top 20 and over 80% of the top 100 SaaS companies use Gemini, including sales and Shopify. Gemini is becoming the AI engine for the world's most successful software companies. Leading enterprises are also driving strong demand for our enterprise AI agents. We have sold more than 8 million paid seats of Gemini Enterprise our enterprise AI platform, to more than 2,800 companies including BNY and Virgin Voyages. To streamline knowledge management and automate processes. Gemini Enterprise managed over 5 billion customer interactions in Q4, growing 65% year over year. For customers, including Wendy's, Kroger, and Woolworths Group. Our integration of Gemini and Google Works is driving wins with global brands like Schwartz Group and public sector organizations like the U. S. Department of Transportation. We are also seeing momentum with independent software vendors. Revenue from AI solutions built by our partners increased nearly 300% year over year, and commitments from our top 15 software partners grew more than 16x year over year. Before moving on, I'm pleased that we are collaborating with Apple as their preferred cloud provider and to develop the next generation of Apple Foundation models based on Gemini technology. Up next, YouTube. I want to highlight four points. First, streaming. In the living room, YouTube continues to be the number one streamer in The US. For nearly three years, according to Nielsen. From the NFL to Coachella, YouTube is where people watch today's biggest popular culture moments unfold. Second, subscriptions. We continue to see strong subscription revenue growth across YouTube. Particularly YouTube Music Premium. We'll soon launch new YouTube TV plans bringing more choice and flexibility to subscribers. With over 10 genre-specific packages. The NFL has seen strong NFL Sunday Ticket subscriber growth with YouTube. With the highest paid subscriber number ever in the history of the product. Third, podcast. To illustrate YouTube's popularity, in October 2025, viewers watched over 700 million hours of podcasts on living room devices, up 75% from just a year prior. And fourth, AI is transforming the YouTube experience for both creators and viewers. On average, every day in December, over 1 million channels used our new AI creation tools to supercharge their creativity. During that same month, more than 20 million viewers used our new tool powered by Gemini to learn more about the content they watched. And finally, Waymo, This week, Waymo raised its largest investment round to date and is well positioned to continue its momentum with safety at the core. In December, we surpassed 20 million fully autonomous trips and are now providing more than 400,000 rides every week. Waymo continues to expand its service territory. Its sixth market, Miami, launched two weeks ago and Waymo will soon expand its service to multiple cities across The U. S. And in The UK and Japan. The team has made incredible progress on important capabilities, including opening up public service to airports and freeways. In closing, 2025 was a fantastic year for the company a big thanks to our employees and partners worldwide. We are really well positioned going into 2026. Now, over to Philip. Thanks, Sundar, and hello, everyone. I'll cover performance for Google services for the quarter, then structure the rest of my remarks around the great progress we're delivering across search, YouTube, and partnerships. Google services revenues were $96 billion for the quarter, up 14% year on year, primarily driven by accelerated growth in search. Adding some further color to our results. The 17% increase in search and other was led by broad strength across all major verticals. With retail particularly strong. On YouTube, the 9% growth in advertising revenues was driven by direct response. Network advertising revenues were down 2% year on year this quarter. Starting with Search and Other revenues, which delivered over $63 billion in revenue for the quarter. Sundar mentioned the expansionary moment for Search. The same is true for ads. We're investing in AI to drive significant improvements across all areas of marketing. We're expanding the entire playing field that advertisers can compete on. AI gives businesses the ability to reach more customers in more places than ever before. Gemini uniquely positions us to bring the transformational benefits of AI to ads in three critical areas for our customers. Ads quality, advertiser tools, and new AI user experiences. First, ads quality. We've been deploying Gemini models to improve query understanding at a rate of almost a launch per month for the last two years. These improvements drive better query matching, ranking, and quality making search ads even more effective. With Gemini across our ads quality stack, we evaluate relevance with greater accuracy than with previous generations of models. This has significantly improved our ability to systematically deliver more helpful high-quality ads contributing to a meaningful reduction in irrelevant ads served. Gemini's understanding of intent has increased our ability to deliver ads on longer, more complex searches that were previously challenging to monetize. Gemini models also have a significant impact on query understanding in non-English languages, expanding opportunities for businesses to scale globally. Second, we're building more agentic actions into our advertiser tools. Business can now leverage Gemini in conversational experiences within ads and analytics Advisor to identify and run recommended such as generating new campaigns. Advertisers use Gemini as a real-time partner to assemble creatives. In Q4 alone, they use Gemini to create nearly 70 million creative assets via text customization in AI Max and PMax. For instance, Aritzia, Canada's premier fashion house, used AI Max to find new high-value customers that traditional strategies miss, delivering an 80% incremental uplift in conversion value for Q4. L'Oreal, one of the first alpha testers, used AI Max 2025 across 800 unique campaigns in 23 countries and 30 brands. AI Max enabled the L'Oreal Group to maximize its presence across the full consumer journey, fuel its consumer growth, and increase revenue for DTC brands like Nick's by 23%. Third area is how we monetize new AI user experiences in search. We have significantly increased our focus on AI mode and are in the early stages experimenting with AI mode monetization, like testing ads below the AI response, with more underway. For example, we announced direct offers in new Google Ads pilot which will allow advertisers to show exclusive offers for shoppers who are ready to buy directly in AI mode. This new type sponsored content uses AI to match the right offer provided by the retailer to the right user. As Sundar mentioned, we are building the era of agenda commerce and working with partners to introduce the universal commerce protocol in our consumer products and across the web. We've received tremendous feedback from the industry. Soon, people can use a new checkout experience to buy directly in AI mode in Gemini from select merchants. Turning now to YouTube, which remains the number one streamer in The US for nearly three years according to Nielsen. YouTube creators are providing an unmatched breadth of content. Our investment in AI innovation across creativity, viewing experience, and monetization continues to pay off. We're seeing strong traction in our subscription business, our innovating to meet consumers where they are. We added a new sports tier for YouTube TV at a lower price point. YouTube Premium Lite is proving to be a popular choice. And we continue to deliver strong year on year growth across YouTube subscriptions particularly YouTube Music and Premium. Looking at monetization across YouTube, momentum continues in Shorts and the living room. Shorts now averages over 200 billion daily views. And as we've shared before, in a number of countries, Shorts earns more revenue per watch hour than traditional in-stream on YouTube, including The US. The retail vertical continues to grow fueled by smaller advertisers increasingly adopting demand gen. Likewise, direct response continues to benefit from the momentum we're seeing with small and medium-sized advertisers. Viewers trust product and brand recommendations from YouTube creators, and we're focused on making YouTube a premier shopping destination. Innovations like shoppable ad formats are improving advertiser return on investment. During Cyber five, advertisers piloted shoppable mass eads, a new interactive ad format where viewers browse products and send links to their phones for an easy shopping experience. On brands, our creator partnership hub makes it easier for brands to find creators and develop campaigns. This holiday season, brands like JCPenney, Old Navy, and Target work with creators for their holiday campaigns. Mattel partnered with eight top YouTube creators to reach families during the peak holiday shopping season in a campaign that helped drive a 25% increase in search volume for UNO. As always, I wrap with the progress we're seeing across partnerships. Where customers tap into the strength and breadth of Google's products to accelerate their transformation. I would start by joining Sundar and saying hope pleased I am that we are collaborating with Apple as their preferred cloud provider and to develop the next generation of Apple foundation models based on Gemini technology. We partnered with Reliance Jio to provide over 500 million consumers with an eighteen-month free trial of our Gemini suite of products and two terabyte of cloud storage. Reliance Enterprise customers will also get access to Google Cloud Gemini Enterprise and TPUs, bringing the best of Google AI to every employee and workflow. The Home Depot is applying Google AI across the board from cloud tools to AI-powered ads and YouTube creator partnerships that connect with the next generation of Duos. Their investments in PMax and YouTube creator partnerships have resulted in double-digit increase in ad clicks and visits. In closing, I'd like to thank Googlers everywhere for their contributions to our success and, as always, to our customers and partners for their continued trust. Anat, over to you. Anat Ashkenazi: Thank you, Philip. My comments will focus on year-over-year comparisons for the fourth quarter unless they state otherwise. I will start with results at the Alphabet level and will then cover segment results. I'll end with some commentary on our outlook for the first quarter and full year 2026. 2025 was a strong year of innovation and execution for Alphabet. These efforts, combined with our investments in AI, drove meaningful results across the business. For the full year 2025, Alphabet consolidated revenues were $403 billion up 15% on a reported and constant currency basis. Moving to Q4 performance, we delivered strong growth in the fourth quarter. Consolidated revenues reached $113.8 billion up 818%, or 17% in constant currency and was driven by an acceleration in Search and Cloud revenues. Turning to costs and expenses. We reported $2.1 billion stock-based compensation charge due to increase in Waymo's valuation related to the investment round that was announced on Monday. The vast majority of the charge was reflected in R and D expenses. Total cost of revenue was $45.8 billion up 13%. Tech was $16.6 billion up 12%. Other cost of revenues was $29.2 billion up 13% with the increase primarily driven by depreciation associated with the deployment of our technical infrastructure content acquisition costs largely for YouTube and other technical infrastructure operations costs. Total operating expenses were up 29% to $32.1 billion R and D expense increased by 42% driven by compensation and depreciation. The increase in compensation was due to the Waymo charge and investment in AI talent. Sales and marketing expenses were up 12% primarily driven by marketing investments to support the Gemini app and search. And G and A expenses increased 21% primarily due to a shift in timing of our charitable contributions. Operating income increased 16% to $35.9 billion and operating margin was 31.6%. Both operating income and operating margin were negatively by the $2.1 billion Waymo charge in the quarter. Other income and expenses was $3.2 billion primarily due to unrealized gains in our non-marketable equity securities portfolio. Net income increased 30% to $34.5 billion and earnings per share increased 31% to $2.82. We generated record operating cash flow of $52.4 billion in the fourth quarter and $160.5 billion for the full year. This translated into $24.6 billion of free cash flow in the fourth quarter and $73.3 billion for the full year. We ended the quarter with $120.8 billion in cash and marketable securities and $46.5 billion in long-term debt. Turning to segment results. Google services revenues increased 14% to $95.9 billion reflecting strong growth in search and subscriptions. Google Search and other advertising revenues increased by 17% to $63.1 billion representing another strong quarter with continued growth across all major verticals with the largest contribution from retail. YouTube advertising revenues increased 9% to $11.4 billion driven by direct response advertising. Results were negatively affected from the lapping of the strong spend on U. S. Election in the 2024 that we've mentioned on previous earnings calls. Network advertising revenues of $7.8 billion were down 2%. Subscription, platforms, and devices revenues increased 17% this quarter to $13.6 billion due to strong growth in YouTube subscriptions, particularly YouTube Music and Premium and growth in Google One benefited from increased demand for AI plans. Google services operating income increased 22% to $40.1 billion and operating margin was 41.9%. The Google Cloud segment delivered outstanding results in the fourth quarter as the business continued to benefit from strong demand for enterprise AI products. Cloud revenue accelerated meaningfully and were up 48% to $17.7 billion. Revenues were driven by strong performance in GCP which continued to grow at a rate that was much higher than cloud's overall revenue growth rate. As Sundar noted, we're driving performance through strong growth in the win rate of new customers, signing larger customer commitments, and increasing spend with existing customers. GCP's performance was driven by accelerating growth in enterprise AI products which are generating billions in quarterly revenues. We had strong growth in both enterprise AI infrastructure driven by deployment of TPUs and GPUs and enterprise AI solutions which benefited from demand for industry-leading models. Including Gemini 3. Core GCP was also a meaningful contributor to growth due to strong demand for infrastructure and other services, such as cybersecurity and data analytics. We also had double-digit growth in Workspace, driven by an increase in average revenue per seats and the number of seats. Cloud operating income was $5.3 billion more than doubling year over year. And operating margin increased from 17.5% in the fourth quarter of last year to 30.1%. Google Cloud's backlog increased 55% sequentially and more than doubled year over year, reaching $240 billion at the end of the fourth quarter. The increase in backlog was driven by strong demand for our cloud products led by our enterprise AI offerings, from multiple customers. In Other Bets revenues were $370 million and operating loss was $3.6 billion reflecting the $2.1 billion Waymo charge I mentioned earlier. We allocate resources in Other Bets to businesses like Waymo where we see meaningful opportunities to create value. Alphabet funded a significant portion of the $16 billion investment round that Waymo announced on Monday, which will allow the business to accelerate its global expansion. CapEx was $27.9 billion for the fourth quarter, and $91.4 billion for the full year. In line with our expectation. The vast majority of our CapEx was invested in technical infrastructure approximately 60% of that investment in servers, and 40% in data centers and networking equipment. In Q4, we returned capital to shareholders through $5.5 billion share repurchase, and $2.5 billion of dividend payments. Turning to our outlook, I would like to provide some commentary on factors that will impact our business performance in the first quarter and full year 2026. First, in terms of revenues, we're pleased with the overall momentum of the business. At current spot rates, we would expect to see an FX tailwind to our consolidated revenues in Q1. However, the volatility in exchange rates could affect the impact of FX on Q1 revenues. In Google services, we expect growth to be driven by ongoing in the user experience as well as improved ROI for advertisers. Keeping in mind the normal seasonal pattern for advertising revenue. In Google Cloud, we're seeing significant demand for our products and services. Which we expect to continue to drive strong growth despite the tight supply environment we're operating in. Moving to investments. The investments we have been making in AI are already translating into strong performance across the business as you've seen in our financial results. Our successful execution coupled with strong performance reinforces our conviction to make the investments required to further capitalize on the AI opportunity. For the full year 2026, we expect CapEx to be in the range of $175 billion to $185 billion with investments ramping over the course of the year. We're investing in AI compute capacity to support frontier model development by Google DeepMind, ongoing efforts to improve the user experience and drive higher advertiser ROI in Google services significant cloud customer demand, as well as strategic investments in Other Bets. Keep in mind that the availability of supply, pricing of components, and timing of cash payments can cause some variability in the reported CapEx number. In terms of expenses, as we've discussed on previous calls, the significant increase in our investments in technical infrastructure will continue to put pressure on the P and L in the form of higher depreciation expense and related data centers operations costs such as energy. In 2025, depreciation increased by nearly billion dollars or 38% from $15.3 billion in 2024 to $21.1 billion in 2025. Given the increase in our CapEx investments in recent years, we expect the growth rate in 2026 depreciation to accelerate in Q1 and meaningfully increase for the full year. We're also planning to continue hiring in key investment areas such as AI and cloud. In 2025, our teams delivered amazing innovation, executing with a high level of discipline and velocity. These efforts provide great experiences for consumers and outstanding performance for creators, partners, and enterprise customers, driving strong revenue growth. I want to take this opportunity to thank our employees for their contribution to this impressive performance. Now Sundar, Philip and I will take your questions. Jim Friedland: Thank you. As a reminder, to ask a question, you will need to press And your first question comes from Brian Nowak with Morgan Stanley. Your line is now open. Brian Nowak: Thanks for taking my questions. I have two, one on AgenTeq. One on YouTube. The first one on AgenTek, Sundar, I'd be curious to hear about you look back at 2025, do you think you made the most progress on new types of agentic commerce products? And then looking into '26, you most optimistic to sort of have even more progress in utility for users and your advertisers? And the second one is on YouTube. You know, we've seen a lot of the new content creation models like Genie, etcetera. Walk us through sort of the the alphabet long term vision for how Genie and some of these content creation tools be integrated into YouTube over time? Sundar Pichai: Great. Thanks, Brian. First, maybe I'll take the agentic part first. I definitely think '25 was more about laying the foundation getting the models to start being more robust in agentic use cases. And obviously, coding is an area where progress was was the most felt in areas like commerce, think we spent the year working with the ecosystem to develop the underlying protocol that's going to be needed for this agentic world. So I think the launch of, universal Commerce protocol at NRF in January with a bunch of partners, founding partners, I think has been super well received. So I'm excited now that we've laid the foundation of interoperability on which agent e commerce can work. And now we are integrating those experiences into Gemini AI mode and so on. So I think think this is the year where you will see consumers actually being able to use all of this, and I'm excited that about the opportunity ahead. On YouTube, look, super excited by Jeannie and blown away by spent a lot of time creating these incredible worlds. I think it's going to have a wide level of applicability. I think an area where we shine in general is multimodality and representing the real world. And I think Genie is a further step in that direction in terms of building world models. All the innovation we are doing be it our Imagine Veo, Liria, Genie, all that work we bring in into our products and to our cloud customers. And YouTube is going to be a natural place for creators. We are going to keep incorporating these tools already creators are responding by adopting these, but we do want to put creators at the center of the experience and that's very, very important to us. And so it's for us making sure YouTube is a voice for creator expression is the foundation by which we will approach this. Brian Nowak: Great. Thanks, Sundar. Jim Friedland: Your next question comes from Eric Sheridan with Goldman Sachs. Your line is now open. Eric Sheridan: Thanks so much for taking the question. Two, if I could. Over the last couple of earnings calls, we've talked a lot about imbalances between demand and capacity for AI. Both internally and externally. With the step function change in app capital dollars you're projecting now in twenty six, Can you talk about the pathway to closing the gaps for the need for compute both internally and externally, and how to think about some of the outputs of closing that gap? As the year progresses. And again, the second part would be against that level of spend that you're now projecting for '26. How do you think about continuing to find operating efficiencies inside the business to fund those investment growth investments as well. Thank you. Sundar Pichai: Thanks, Eric. You are right. And we've been supply constrained even as we've been ramping up our capacity. Obviously, CapEx spend this year is an eye towards the future. And you have to keep in mind some of the time time horizons are increasing in the supply chain, etcetera. So we are constantly planning for the long term and working towards that. And obviously, how we close the gap this year is a function of what we have done in the prior years. And so there is that time delay to keep in mind. I expect the demand we are seeing across the board across our services, what we need to invest for future work for Google DeepMind, as well as for cloud, I think, is exceptionally strong. And so I do to go through the year in a supply constrained way. And maybe Anat can touch on the second part. Anat Ashkenazi: Sure. Thanks, Eric, for the question. Now I've mentioned on one of the previous earnings call our approach to how we look at efficiency and productivity. And we don't view this as an episodic one time project or but rather how we run the business on a regular basis and always seek additional opportunities to drive efficiency across the business And certainly, with the demand we're seeing, whether it's from external customers or across the organization, the more capital we can free up within the organization to invest the better we can turn this flywheel of making investments to drive future growth. And we're doing this across the organization. Whether it's within our technical infrastructure, certainly when we invest at these amounts, we look at how we can ensure that we are the most efficient with every dollars that goes towards our technical infrastructure, There are scientific innovations that are with our part of that process. Technical innovation, as you know and we've mentioned before, we primarily focus on construction of our own data centers. We do partner with some external parties on lease on occasion, but most of our data center, we can start ourselves, and we ensure that we do it in the most efficient way in a way that matches our workloads and our needs. We look at coding productivity that Sundar mentioned in the past, about 50% of our codes are written by agents, coding agents. Which are then reviewed by our own engineers. But certainly, it helps our engineers do more, move faster, with the current footprint. We look at how we run the business across the organization. So using AI within the business to to drive daily operations. It can be all the way from the engineering team to small teams within our back office, even with my finance team, for example, we deployed agents within our treasury organization. We're deploying agents within how we run how we pay and reconcile invoice So there are opportunities across the business that we evaluate evaluate on a regular basis to ensure we can free up more of that capacity to invest in our future. Jim Friedland: Your next question comes from Doug Anmuth with JPMorgan. Your line is now open. Doug Anmuth: Thanks for taking questions. I have two. Over the last couple of years, we've seen considerable large language model leapfrogging in many that to continue. What are the ways that Google can build and maintain its Gemini position around data and distribution and product integration And then how should we think about the potential for TPUs to move outside of Google Cloud and into external data centers and develop as an incremental revenue stream. Thank you. Sundar Pichai: Doug, look, I think you know, the the LLM frontier, you know, I mean, it's been an exciting trajectory, and I think 2026 will continue to show that progress. We're obviously improving these models across many paradigms, right? On pre-training, post-training, test time compute, so on. And we are bringing multimodal models into the picture. Are bringing agentic capabilities. The coding area is showing a lot of progress. And obviously, integrating all of this together and offering a great customer experience for our our products as well as through our APIs to our Cloud customers, to me, feels like there's a lot of headroom ahead. And as you've seen, our trajectory over the past two years in terms of how we've been making progress, I think we are in a very, very relentless innovation cadence, and I think we are confident about maintaining that momentum as we go through 'twenty six. In terms of TPUs, I would think about it as it's reflected in our overall part of what makes Google Cloud an attractive choice is the wide choice of accelerators we bring to bear here, and we meet customers in terms of what their needs are and the choice as well as other things we bring as part of Google Cloud, the end to end efficiencies in our data centers, all of that comes to bear. And that's what you see in the momentum in Google Cloud. And given the overall investment we are making, we expect to be able to drive momentum there. So that's how I would think about it. Doug Anmuth: Thank you, Sundar. Jim Friedland: Your next question comes from Mark Mahaney with Evercore. Your line is now open. Mark Mahaney: Thanks. Two questions. One, could you just comment a little bit on the YouTube ad revenue, that 9% year over year growth? It sounded like Direct Response was good and it sounded from search that retail came in relatively strong. It's little surprising that didn't kinda come through in the YouTube ads revenue growth. And then, Sundar, can I ask you to try to get ahead of a debate in the market, which is kind of maybe at a deep seek moment again? You talked earlier about Jim and I being the AI engine for the most for some of the most successful software SaaS companies out there in the world, and it just seems there's a market belief that these software companies are kinda losing seat power losing pricing power, it looks like it'd be a really terrible customer base. I can't imagine that that's actually gonna happen. But could you just talk about it? You're at the front forefront of AI and the impact that that's happening on software companies. Why wouldn't that be, or why would it be undermining the economics of your large software SaaS company base? Thanks. Philip Schindler: So, Mark, so first of all, thank you for the question. For the full year 2025, our YouTube's annual revenue surpassed $60 billion across ads and subscription. In In Q4, YouTube ads was driven indeed by strong growth in Dive Response. On the brand side, as Anat shared, the largest factor negatively impacting the year over year growth rate was lapping the strong spend on U. S. Elections. We also saw a slight impact in other brand related verticals. But taking a step back, I think it's important to think about YouTube ads and subs holistically. Because when a user shifts from being an ad supported user to a YouTube Music and Premium customer, it has a slightly negative impact on YouTube ads revenues, but a positive impact on our business. And we had strong revenue growth in YouTube subscriptions this quarter, particularly in the YouTube Music and premium category. Maybe the interesting part is what we're actually excited about, our roadmap and brand, the opportunity on connected TVs, more innovative ad formats, For example, the shoppable mastheads I spoke about earlier. That we piloted during Cyber five. We're working really, really hard to further connect brands and creators, scaling sponsorships, enabling enabling advertisers to showcase their products, their services during high visibility spotlight moments. We continue to expand the functionality of the creator partnership hub, making it a lot easier for brands to actually find creators and develop campaigns. We're heavily focusing on brand deals, on measurement efforts. So there's a lot of interesting work in the pipeline. And on top of that, we're actually see opportunity also for upside with performance There's a lot of momentum with demand gen adoption. Across small and medium advertisers. We're also excited about the opportunity for continued ads innovation and direct response, like, for example, shoppable formats, including in the living room. Which is then helping drive strength in retail, the continued momentum in shorts, and so on. So overall, we're we're quite excited. Yeah. Sundar Pichai: Great. And and, Mark, on on in terms of Gemini adoption and how what this moment means for etcetera. Look, at least from my my vantage point, you know, I definitely, see We have very, very good SaaS customers who are leaders in their respective categories. And what I see the successful companies doing is they are definitely incorporating Gemini deeply in critical workflows be it on improving their product experience and driving growth or using it drive efficiency within their organizations. And I think I think it is an enabling tool, just like it has been an enabling tool for us across our products and services, be it Search, YouTube, etcetera. I think the companies who are seizing the moment think, have the same opportunity ahead. And at least we are excited about the partnerships we have there and the momentum if I look at it in terms of their tokens usage, etcetera, the growth has been very robust. In Q4. Mark Mahaney: Thank you. Jim Friedland: Your next question comes from Mark Shmulik with AllianceBernstein. Your line is now open. Mark Shmulik: Yes. Thanks for taking the questions. Two, if I may. The first for Anat is, can you talk a little bit more the relationship between investment levels and how you kind of expect core performance to to trend? Is there, like, an operating income or a free cash flow objective that you solve towards, or or how do you think about greenlighting resources and projects? And then the second question for all of you, you know, a year ago, we probably could have guessed the answer to this question. Given where we are today, for each of you, what keeps you up at night here as you think about the Google story, and what's next? Thanks. Anat Ashkenazi: Thanks, Mark. Let me start with a question on the investment framework. And it's an important one and as you can imagine, an important one for us as well. We have a highly rigorous framework that we use internally, where we look at all the needs for investment, whether it's from own organization or from external customers, and have an estimate of what that investment could potentially yield, obviously not just near term but long term as well. So we take that into consideration when we make the following decisions. The first one is the total investment that we make across the company. This was, for example, in 2025, the $91 billion we invested in CapEx and our estimate for CapEx investment this year. So what's the total envelope that wanna invest to ensure that we can drive both near term and long term growth for the company? And then the second way we use that framework is to just allocate these funds across the organization, determine where we should make these investments. And throughout the year, as you can imagine, we always look to understand where things are moving, whether it's a external dynamics or internal dynamics. And I've mentioned some of the supply chain pressures we're seeing externally. So we look at this with a highly rigorous framework. To make sure that we're making the right decision. It was exciting to see the fact that we're already monetizing. And you saw it in the results that we've just issued this quarter, the investments that we've made in AI. It's already delivering results across the business. I know in cloud, it's very obvious external, but you've heard the comments on the success we're seeing in search, the comments from Sundar and from Philip, and then the frontier model development that really serves as the foundation for the organization. We then also look at just the cash flow, cash flow generation, the health of our financials and the balance sheet, that's important as well. So we take that into consideration when we make the decision about the overall level of investment. We wanna make sure we do it in a fiscally responsible way and that we invest appropriately, but we do it in a way that maintains a very healthy financial position for the organization. Sundar Pichai: And yeah, maybe I can answer on what keeps us up at night. Look. I think overall, we've been on this AI first trajectory for over a decade now, and it's it's it's what we've been methodically thinking our way through. It's the reason why we've been working on TPUs for over a decade, as an example. But I think specifically at this moment, maybe the top question is definitely around capacity, all constraints be it power, land, supply chain constraints, How do you ramp up to meet this extraordinary demand for this moment? Get our investments right for the long term, and do it all in a way that we are driving efficiencies and doing it in a world class way. So that's where I think we are meeting the moment well and it's definitely an area where I'm spending a lot of time on. Jim Friedland: Your next question comes from Michael Nathanson with MoffettNathanson. Your line is now open. Michael Nathanson: Thanks. I have one for Sundar and one for Anat. Sundar, you mentioned universal commerce protocol a bunch of times. I wonder if you could spend some time talking about the rationale for developing it. The opportunity that you see it solves for, what it means for the prop discovery funnel for consumers and for not any color you can provide on a CapEx guide between longer duration assets like buildings, and infrastructure and shorter cycle assets like technical equipment, that'd be helpful. Thanks. Sundar Pichai: Thanks, Michael. Obviously, people people go through a lot of commercial journeys across many of our surfaces, search, YouTube, Gemini app, and so on. So I think there's as well as we support through cloud and ads, our entire retail partners as well. And the opportunity to improve the experience, I think, can be a huge foundational uplift here. But it's important to be approaching it, keeping in mind that our users, as well as merchants here and figuring out that value part of what's been good in designing the Universal Commerce protocol is it makes it much easier for users to complete transactions but at the same time, it allows merchants to help showcase range of their offerings, if they want to make promotions, etcetera. So all of that is built into the protocol. And I think you have to get that value prop for the ecosystem right to make the experience better. And so it's foundational. More importantly, we are now implementing the protocols and are Gemini models are making progress in those agentic capabilities. I think so I'm excited about a future where as people are going through discovery, searching, finding new things, if they're interested in acting upon it, all of that is seamless. And so it overall creates an expansionary moment. Anat Ashkenazi: And the question with regards to the CapEx and the kind of what makes up the total that we've announced for this year and last year. Approximately 60% of our investment in 2025 and it's going to be fairly similar in 2026, went towards machines, so the servers. Then 40% is what you referred to as long duration assets, which is our data centers and networking equipment. And I think you're probably referring to the depreciation delta between them, those long term duration assets depreciate over the building could be forty years or longer. Other components may be may less than that. Another important component is how we allocate the CapEx. And we've commented in the past about the allocation of our ML compute across the business. And for 2026, just over half of our ML compute is expected to go towards the cloud business. Michael Nathanson: Thank you so much. Jim Friedland: Your next question comes from Ross Sandler with Barclays. Your line is now open. Ross Sandler: Great. Just a question on the native Gemini $750,000,000 So we added 100,000,000 MAUs in the fourth quarter. Could you just talk high level about usage and retention of native Gemini? And is this $7.50 the right way to measure your progress against companies like Chachi BT or is there another cohort of users that aren't in that $7.50 that maybe we should also consider Thanks a lot. Sundar Pichai: Ross, I think, you know, we definitely saw I would say, extraordinary period of growth in Q4 for Gemini App. It's not just the growth in monthly active users, but there is definitely there was a sharp increase in engagement per user on the app. All the metrics be it active usage, the intensity of usage, retention, all showed distinct progress across iOS web, Android, etcetera, and geographically, globally. Definitely all the product experience improvements, the work we did with Nano Banana, the progress with the Gemini models all translated into strong momentum. And that momentum is continuing. So we are excited about that, and we'll continue to invest. Obviously, there are many people who are getting a deeply AI native experience in the context of AI mode in Search as well, And and, you know, we are definitely seeing strong growth and progress. And the introduction of Gemini three in AI mode was a very positive driver as well. And obviously, we'll continue to evolve these experiences, and I'm excited about the opportunities there. Ross Sandler: Thank you. Jim Friedland: Your next question comes from Ken Gawrelski with Wells Fargo. Your line is now open. Ken Gawrelski: Thank you very much. Two, if I may, both on search. First, could you walk us through how you are evolving your views on the monetization of AI search activity, given the more conversational nature and longer periods of engagement per session, Consumer utility increasingly, is increasingly driven by the on platform results, not specifically the link outs and referrals. In that construct, how do you think about increasing the revenue opportunity to match the consumer utility? And is this increasingly where premium subscriptions play? And then question two, and it's related. As you think about partnerships such as the new Apple partnership on Siri. How do you think about the right way to align for success with those partners Previously, as disclosed in the DOJ documents, etcetera, It was a revenue share relationship, but now if you think about the utility that you're driving through AI search and through, you know, and through Gemini on those platforms, it may be less related to the actual search search revenue. Could you just talk a little bit about how you align with partners for success there? Thank you. Philip Schindler: First of it may be worthwhile to say that the acceleration we saw in the search was not due to a single driver, but was really the result of many different parts of our business showing strength and working well together. And maybe I quickly add the vertical perspective, retail finance, health drove actually the greatest contribution to search More specifically to your question, the ongoing innovation is Revenue, though nearly every major vertical actually accelerated in Q4. as you know, core to what we do and the enhancements to the user and the advertiser experience really continue to drive our performance. And we make hundreds of these changes every quarter We see AR overviews and AR mode continue to drive greater search usage and growth in overall queries, including important and commercial queries. Gemini based improvements in search ads help us better match queries and craft creatives for advertisers. I talked about the understanding of intent and how this has significantly expanded our ability to deliver ads on longer and more complex searches. That were frankly previously difficult to monetize. AI Max, for example, is already used by hundreds of of advertisers and continues to unlock billions of net new queries in that sense. We see strength with SMB advertisers expanding their budgets and the adopting automation tools leading to better ROI. On the creative side. We're using Gemini to generate millions of creative assets via text customization in AI Max and P Max. And so on. So we're we're very pleased with what we're seeing here. Jim Friedland: And our last question comes from Justin Post with Bank of America. Your line is now open. Justin Post: Great. Just want to follow-up on the Gemini app. Obviously, great growth there. Are you seeing any cannibalization of search as far as that activity as people start using that app more? And then second, on monetization, where are you on that? And and with AgenTic and other ads coming, could that be incremental to your growth over the next few years? Thank you. Sundar Pichai: Right now, overall, look, I I think we are giving people choice People are obviously using Search, experiencing AI overviews and AI more part of it, and Gemini app as well. And the combination of all of that, I think, creates an expansionary moment. I think it's expanding the type of queries people do with Google overall. And and so overall, you know, some of it all is what we see as a growth opportunity. And we haven't seen any evidence of cannibalization there. And maybe Philip can comment on the monetization. Yeah. Think Philip Schindler: Sundar previously commented on AgenTig and how we think about it. And look, in general, as with all of our products, we really focus first and foremost on creating a great user experience. And we have excited about where we are with the ads and AI overviews and early experiments in AI mode, including innovations like direct offer and our road map for the future. In terms of the Gemini app, today, we are focused on a free tier and subscriptions and seeing great growth, as Sundar discussed. But ads have always been part of scaling products to reach billions of people, and if done well, ads can be really valuable and helpful commercial information and the right moment, we'll share any plans. But as we've said, we're not rushing anything here. Jim Friedland: Thank you. Operator: And that concludes our question and answer session for today. I'd like to turn the conference back over to Jim Friedland for any further remarks. Jim Friedland: Thanks everyone for joining us today. Look forward to speaking with you again on our first quarter 2026 call. Thank you, and have a good evening. Operator: Thank you, everyone, This concludes today's conference call. Thank you for participating. You may now disconnect.
Casey Katten: Thank you for joining us today to discuss e.l.f. Beauty's Third Quarter Fiscal 2026 Results. I'm Casey Katten, Vice President of Corporate Development and Investor Relations. With me today are Tarang Amin, Chairman and Chief Executive Officer, and Mandy Fields, Senior Vice President and Chief Financial Officer. We encourage you to tune into our webcast presentation for the best viewing experience, which you can access on our website at investor.elfbeauty.com. Since many of our remarks today contain forward-looking statements, please refer to our earnings release and reports filed with the SEC where you will find factors that could cause actual results to differ materially from these forward-looking statements. In addition, the company's presentation today includes information presented on a non-GAAP basis. Our earnings release contains reconciliations of the differences between the non-GAAP presentation and the most directly comparable GAAP measure. With that, let me turn the webcast over to Tarang. Tarang Amin: Thank you, Casey, and good afternoon, everyone. Today, we will discuss our third quarter results and our raised outlook for fiscal 2026. I am proud of our incredible e.l.f. Beauty team for another quarter of consistent category-leading growth. In Q3, we grew net sales 38% and adjusted EBITDA 79%. Q3 marked our twenty-eighth consecutive quarter of net sales growth, putting e.l.f. Beauty in a rarefied group of high-growth companies. We are one of only six public consumer companies out of 546 that has grown for twenty-eight straight quarters and averaged at least 20% sales growth per quarter. We're excited by the consumer engagement we're seeing across the beauty category, and especially the momentum of our brands. On a consumption basis, our namesake e.l.f. Cosmetics brand grew 8% in the U.S. this quarter, two times the category. We increased our market share by 130 basis points, the largest share gain among over 700 cosmetics brands tracked by Nielsen. Nutarium, our clinically effective biocompatible skincare brand, which we acquired two years ago, continues to drive strong growth. Rhode, the high-growth beauty brand founded by Hailey Bieber, which was acquired in August, delivered an outstanding quarter achieving the number one brand ranking in Sephora North America and executing another record-breaking launch with Sephora in the UK. The strength of our brands is evident when viewed in the context of the overall beauty market. While beauty has comparatively low barriers of entry, very few brands have been able to scale. Of the nearly 1,800 cosmetics and skincare brands tracked by Nielsen, only 14 have surpassed $200 million in annual retail sales. We have four of these 14 brands. The combination of our value proposition, powerhouse innovation, and disruptive marketing engine continue to fuel our results and our outperformance relative to the category. Let me take a moment to discuss a few of the milestones we achieved in Q3. Starting with our value proposition. We believe in democratizing access to the best of beauty. Each of our brands offers accessible price points relative to the competitive set. For context, the average price for e.l.f. Cosmetics is $7.50 today, as compared to approximately $9.50 for legacy mass cosmetics brands and nearly $30 for prestige brands. 75% of e.l.f. Brand product portfolio sits at a phenomenal value of $10 or less. While there are other brands with low price points, our real advantage is our ability to also deliver exceptional quality. Our quality scores have gone up every year over the past ten years. Consumers love e.l.f. for delivering an incredible price point and quality that is often better than prestige. Looking to innovation. We have a unique community-led approach to innovation across our brands, focused on democratizing access to the best of beauty through our premium quality products at extraordinary prices. Our namesake e.l.f. Brand held four of the top 10 new products in all of mass cosmetics in 2025, on top of holding six of the top 10 new products in 2024. The consistency of our winning innovation is supporting our share gains across segments. We've more than doubled e.l.f. Cosmetics' market share over the last five years, and see significant opportunity ahead. As compared to the 22% share we have in face makeup, we have a 13% share in lip and a 9% share in eye. We have significant white space in these large segments and believe we have the innovation engine to conquest them. Spring 2026 is an exciting time for innovation. Building on the success of e.l.f. Glow Reviver Lip Oil in 2024, and Melting Lip Balm in 2025, we recently launched our Glow Reviver Slipstick at a $10 price point compared to a prestige item at $48. We're pleased with the initial reaction we're seeing from our community, with Slipstick already achieving the number one new lipstick on both Amazon and TikTok shop, where it debuted. We're also excited about e.l.f. Soft Glam Satin Concealer, our first concealer innovation in the last five years, at an incredible $5 price point compared to the prestige item at $32. We're answering our community's call for value. You can expect to see our spring innovation rolling out with our global retail partners over the coming weeks. We are leaning into our disruptive marketing engine to fuel brand awareness across our portfolio and deepen the connection we have with our community. We are also reaching new audiences through our unique brand-on-brand with like-minded disruptors. Two years ago, e.l.f. Cosmetics partnered with Liquid Death, one of the fastest-growing beverage brands, for a limited edition Corpse Paint collection that sold out in forty-five minutes. Our community was thirsty for more, so we reunited with Liquid Death to launch a sequel. The response from our community to this limited edition Lipenbaums was phenomenal. Our Lip Crip Vault sold out in nineteen minutes. Our campaign drove over 4 billion earned impressions, and our date with death stunt generated over 10 million views. We also saw over 25 million attempts at completing the Liquid Death Obstacle course in our ElfUp Roblox experience, with an average play time of over seventeen minutes per session. In another first-of-its-kind collaboration, e.l.f. recently joined forces with H&M to reimagine three e.l.f. Beauty icons. The collaboration marks a number of firsts: e.l.f.'s first global collaboration dropping in 27 countries, e.l.f.'s first fragrance launch, a category our community has been asking for, as well as H&M's first partnership with another beauty brand. The collection launches for a limited time only starting January 29 with a robust activation plan including outreach to H&M's 150 million loyalty members globally. The excitement on our marketing calendar doesn't just stop there. Make sure you tune in to Peacock this Sunday, where e.l.f. will be debuting a commercial at the big game. While the big game serves as our ignition point, we plan to run our commercial for an additional eight weeks across a variety of platforms with a total estimated campaign reach of nearly 300 million. The strength of our category-leading results and productivity continues to earn our brand space with our global retailers. The e.l.f. Brand remains the most productive cosmetics brand on a dollar per linear foot basis with our largest retail customers globally. We are looking forward to the expansion we have planned for e.l.f. in spring 2026, expanding our space within Ulta Beauty in the U.S., and launching with Diem in Germany. We're leaning the strength of our retail relationship to enhance the global distribution footprint for our brands. In September, Rhode launched in retail for the first time with Sephora, the world's leading global beauty retailer, achieving the biggest launch in Sephora North America history, two and a half times bigger than any other brand. In November, Rhode achieved another record-breaking launch as it expanded with Sephora in the UK. This was the largest launch in Sephora UK history, outperforming the previous record holder by five times. In terms of what's next, we are excited to launch Rhode in Australia and New Zealand with Mecca this month to further its global reach. We are seeing significant pent-up global appetite for Rhode. International drives approximately 20% of Rhode's DTC sales, while 74% of the brand's social followers are from outside the U.S. Turning to Notorium. When we acquired the brand two years ago, it was only available on Target, Amazon, SpaceNK, and its own website. Since then, we've launched Notorium with Ulta Beauty in the U.S., Shoppers Drug Mart in Canada, Boots in the UK, and Sephora in Australia and New Zealand. We're pleased by the strong growth in share gains we're seeing across retailers. We will be expanding Notorium's retail presence to Walmart for the first time this spring, where the brand will be launching in a subset of U.S. stores. With this launch, we are continuing to further Notorium's unwavering commitment to deliver the science of consistent skincare to everyone everywhere, every day. Looking across our brand portfolio, we're in the early days of our international opportunity we see. For context, international drives approximately 20% of our net sales, as compared to legacy peers having over 70% of their sales outside the U.S. In summary, we're excited by the broad-based momentum we are seeing across our brand portfolio and remain confident in our ability to continue to gain share and deliver best-in-class growth in beauty. I'll now turn the call over to Mandy to talk more about our third quarter results and our raised outlook for fiscal 2026. Mandy Fields: Thank you, Tarang. Net sales grew 38% year over year, on top of 31% growth in Q3 of last year. The acquisition of Rhode contributed $128 million or approximately 36 percentage points to our Q3 net sales growth. This better-than-expected performance was supported by strong retail sell-throughs in Sephora North America, a record-breaking launch in Sephora UK, and a strong holiday period on roadskin.com. Looking to our organic sales trends, excluding Rhode, our Q3 net sales were up approximately 2% year over year. This was lower than anticipated given some softer trends we've seen in the UK and Germany, our largest international markets. As we've talked before, we're seeing weaker consumption in the UK, and we're cycling our largest international launch to date with Rossmann Germany. Outside of those markets, international consumption remains strong. Looking to our geographic regions, our net sales in the U.S. grew 36% year over year while in Q3, international net sales grew 44%. Pricing and product mix added approximately 38 points to net sales growth, while unit volumes were relatively flat year over year. Q3 gross margin of 71% was down approximately 30 basis points compared to prior year and up 200 basis points sequentially versus Q2, in line with our expectations. The year-over-year decrease was largely driven by tariffs partially offset by pricing and mix. On an adjusted basis, SG&A as a percentage of sales was 51% in Q3 as compared to 54% in Q3 last year. While we continue to make ongoing investments in our team and infrastructure, this was offset by leverage in our marketing spend on a year-over-year basis and a timing shift of some of our SG&A expenses into the fourth quarter. Marketing and digital investment for the quarter was 21% of net sales, as compared to 27% in Q3 last year. Q3 adjusted EBITDA was $123 million, up 79% versus last year. Adjusted net income was $74 million or $1.24 per diluted share compared to $43 million or $0.74 per diluted share a year ago. Moving to the balance sheet and cash flow, our balance sheet remains strong, and we believe positions us well to execute our long-term growth plans. We ended the quarter with $197 million in cash on hand compared to a cash balance of $74 million a year ago. During the quarter, we repurchased approximately $50 million of our outstanding common stock given the disconnect we see between e.l.f. Beauty's market valuation and the strength of our business fundamentals. At quarter end, approximately $400 million remained available for repurchase under our previously authorized repurchase program. Our liquidity position remains strong, with less than 2x net debt to adjusted EBITDA even after our acquisition of Rhode. We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting strategic extensions. Now let's turn to our updated outlook for fiscal 2026. We are raising our fiscal '26 outlook on the top and bottom lines primarily driven by Rhode's outperformance. For the full year, we now expect net sales growth of approximately 22% to 23% year over year, up from 18% to 20% previously. We expect Rhode to contribute approximately $260 million to $265 million in net sales to fiscal 2026, versus our expectation for $200 million previously. On an annualized basis, our outlook assumes Rhode will achieve net sales growth of approximately 70% year over year. Looking to the second half, our guidance implies 31% to 33% net sales growth. On an organic basis, excluding Rhode, we expect net sales to be up approximately 2%. Let me walk through the building blocks of our organic sales outlook. We are assuming approximately 6% global consumption growth similar to what we saw in Q3, partially offset by a four percentage point headwind from pipeline, as we cycle significant retail expansion we had in the second half of the year, including the launch of e.l.f. in about eleven thousand Dollar General stores and a 50% space expansion for e.l.f. in Target. This dynamic is driving shipments below consumption in the second half of our fiscal year. Our consumption remains strong, and we believe consumption and market share gains are the best indicators of the underlying health of our business. Over a longer period, shipments tend to even out with consumption. The great news is consumers continue to choose our brands, driving our consistent outperformance relative to category trends. Turning to adjusted EBITDA, for the full year, we now expect $323 million to $326 million in adjusted EBITDA, as compared to our expectation for $302 million to $306 million previously, largely due to the outperformance we saw in Q3 partly offset by a timing shift of expenses into Q4. Our outlook implies adjusted EBITDA growing 9% to 10% year over year and adjusted EBITDA margins of approximately 20%, which we believe is quite strong considering the level of tariffs we faced this year. Looking to the second half, our outlook implies adjusted EBITDA margins of approximately 19%, down approximately 300 basis points versus last year. There are two key factors. First, marketing. We expect marketing spend to be about 27% of net sales in the second half, up about 200 basis points relative to the 25% of net sales we spent in the second half of last year, including a new commercial debuting at the big game that Tarang mentioned. We have a number of marketing campaigns planned in Q4, an activity we did not participate in last year. Second, within non-marketing SG&A, we have planned investments in two key areas. First, space expansion. The strength of our brands continues to earn us additional space and distribution, which comes with incremental costs related to fixturing and merchandising. Our second investment area is in our team. We continue to build our team to support the significant white space we see across categories, brands, and geographies. In summary, Q3 marked another quarter of industry-leading growth. Our business fundamentals remain strong, and we continue to make progress unlocking the full potential we see for our portfolio of disruptive brands. With that, operator, you may open the call to questions. Operator: In Press touch tone telephone, withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then one. Join the question queue. Our first question today comes from Olivia Tong from Raymond James. Please go ahead with your question. Olivia Tong: Great. Thanks. So first question is just a better understanding about your approach to spending as well as guidance. Great quarter for December, but looks like you're expecting EBITDA margins in the low double-digit range for Q4. So obviously, there's a super lag. You talked about some of the other spending plans. But I would assume that Rhode and FX also provide tailwinds on margins. So just if you could unpack that first. Then second is just around your ability to expand Rhode at a faster pace. There's great momentum there. So, you know, you talked about Australia upcoming, but there's obviously a lot of world out there, and you already have exposure in Western Europe. So just thinking about the path forward for Rhode from here. Thank you. Mandy Fields: Hi, Olivia. I'll take the first question. We'll let Tarang take the second one. So on EBITDA margin, you really have to look at the second half in total. And so when you look at the second half, we're actually outlooking around a 19% adjusted EBITDA margin, and that's up from around 17% previous. And so we talked about seeing some costs shift from Q3 into Q4. That was inclusive of marketing, where we had some cost shift and where we've added additional spend. As we've talked about and you've seen, the marketing in action with the collaborations that we've done, just at the start of 2026 calendar year. And with the Super Bowl activation or the big game activation that we have coming this weekend. And so those are some of the areas in addition to team and infrastructure that we've talked about making those investments in. But overall, second half, outlook on adjusted EBITDA is better than previously expected. Tarang Amin: Hi, Olivia. This is Tarang. I'll take the second question on expanding Rhode at a faster pace. What I tell you is less about expanding Rhode at a faster pace, but continuing the excellence of launches that we've had. Rhode growth has been phenomenal, outweighing anyone's expectations. If you look at it, it's really the quality of execution that we've had. Sephora North America, the biggest launch ever, number one position there. Look at Sephora UK, five times bigger than the next biggest launch. We're tremendously excited. I think next week, we launch with Mecca in Australia and New Zealand. And so it's more about making sure we're being disciplined in the rollout. Now the great news, as you heard in the prepared remarks, is there's tremendous pent-up demand for Rhode. Only 20% of our DTC sales are outside the U.S. Yet 74% of our social followers are outside the U.S. So we have very high aspirations in terms of the globalization of Rhode over time, but we want to make sure we're doing it with the same level of quality and care. We've done so far in both North America and the UK and soon to be Australia and New Zealand. Olivia Tong: Great, thanks. And then in terms of the core e.l.f. Brand, can you talk about some of the things that you're planning to do in order to drive incremental growth there? Clearly, you've got some strong laps that you have to go against, but you talked about some of the additional shelf space. What about international launches further than the ones that you've already announced? Tarang Amin: Well, Olivia, I guess the first thing I'd tell you is we're using the same strategy driven twenty-eight consecutive quarters and not only net sales growth but market share gains. I sometimes feel that people don't fully appreciate just how phenomenal the market share gains have been and as consistent. We've gone back as far as we can look. We've not seen another cosmetics brand grow share for twenty-eight consecutive quarters and even in Q3. Building a 130 basis of market share is pretty phenomenal. So I'd say our core proposition, our value proposition, powerhouse innovation, and disruptive marketing engine. Many examples that you heard on this call will continue to fuel the brand. And in terms of continued growth on e.l.f., one of the real strengths that we have is every one of our major retailers their most productive brand on a dollar per linear foot basis. And that naturally leads to more space and more support. You're seeing that right now with the rollout that we have at Ulta Beauty in terms of more space. I'm particularly excited about the rollout coming up pretty soon with DM in Germany. It will bring, building on the phenomenal launch we had last year with Rossmann in Germany as well as with Amazon, it really will bring e.l.f. to the majority of German consumers. I'd say that's probably the last thing I'd say is our ability not only to seed the brand in different countries, but then really build out our presence in those countries like we did in Canada, UK, soon to be Germany. Really, I think there's a ton of potential both in the U.S. as well as internationally. Operator: Our next question comes from Dara Mohsenian from Morgan Stanley. Please go ahead with your question. Dara Mohsenian: Hey, guys. Tarang, I was hoping you could give us a bit of a state of the union on the e.l.f. cosmetic business in the U.S. just heading into the spring. You're obviously coming off a very large price increase. Maybe looking backwards, how do you think that's been received at the consumer level? Should we expect to see volume pick back up going forward as some of the sticker shock wears off? And then you have the huge spring innovation pipeline a couple years back, not quite as strong last year. You mentioned some exciting products today coming up. Just any perspective on the overall innovation pipeline for the spring this year relative to last year and any additional thoughts around the U.S. in terms of category growth here or other important dynamics? And then maybe just second, you spoke about international for Rhode, but can you just give us an update on innovation and portfolio plans around Rhode in the U.S. in fiscal 2027? Are there any plans to move into additional products, subcategories? And just as you think about the brand longer term, how do you look to extend the durability and sustain the momentum that you've seen this year? Thanks. Tarang Amin: Sure. Hi, Dara. So I'd say, first of all, on the state of the e.l.f. Brand in the U.S., it's never been healthier. Our consumption is the category. We continue to build share, as I talked earlier. And one of the things that I was really pleased by was the execution on our price increase. We took a 15% price increase and we saw single-digit unit declines, which is actually quite good in your seeing that in the dollars that you're as we go forward. Usually, spring is a time that many of our competitors usually take price increases. We're different than a lot of our competitors at historically we've grown through unit volumes, whereas a lot of our competitors have grown through price increases in AUR. So we do believe our value proposition will continue to get better as time goes on given that we've already taken our pricing and we live with pricing and the consumers have accepted that. Second, as I think about innovation, you're right. 2024 was the biggest year we ever had in innovation. 2025 was the second biggest year of innovation we had. So it was not as big as 2024, but it still was a good innovation year. So we do have that consistency we mentioned earlier 1,800 cosmetics and skincare brands. Yet we held in 2025 four of the top 10 positions from an innovation standpoint on top of six of the top 10 positions the year before. So really have proven strength in innovation and our ability to do so. I'm particularly excited about the innovation we have this spring. You know, we mentioned our slip stick at $10 versus a prestige item at 48. I look at our soft glam satin concealer at a jaw-dropping price of $5 versus a prestige item at 32. And we have a number of other innovation items that I feel really good about. Now we won't get a full read on those. Well, it's promising early days in terms of our own site and places we've launched them. Really over the next few weeks is when we'll get a much better sense on the spring innovation and how it compares to 2025 as we go forward. We also have very strong innovation plans across our brand. So you mentioned Rhode. Rhode, if you look right now, we just launched a face mask as well as a lip mask. There's major activation taking place in Montana right now on that. And what we see is just really great consumer acceptance on Rhode innovation because it is so curated and thoughtful. The one of everything really good works for Rhode. Notorium also has a very strong plan as does e.l.f. skin and well people. So innovation is definitely one of the key drivers of our business, and I feel great about that. Last, you asked about the category. I've long been bullish about the beauty category, particularly cosmetics and skincare. We're seeing some of the healthiest category growth rates we've seen in quite some time. So in this last quarter, the color cosmetics category is up 4%. The skincare category is up 8%. You know, I'm glad that e.l.f. was more than double both of those category growth rates, but that's always great to have a tailwind when it comes from a category standpoint. So not only is the category healthy, but we're particularly well positioned with our value proposition, innovation, and marketing within the category. Operator: Our next question comes from Andrea Teixeira from JPMorgan. Please go ahead with your question. Andrea Teixeira: Thank you, operator. Good afternoon, everyone. I just want to kind of like dig into Tarang what you just said in terms of innovation. But also from a perspective of cat or subcategories, I know you have, like, 50 to 60% in market share for primers. You basically created some of these items, right, in a way or basically brought these items to, from Prestige into a more affordable price point. I was wondering now your like, the two other very big subcategories, lip and mascaras, you have been pushing, particularly lip, as we think about the consumer being more stretched maybe she wants to make sure that she has more basic items like lipsticks and mascaras. I was wondering I haven't seen any you know, pardon if I missed anything major in So I was hoping to see if you have against the spring and thinking about innovation across where the low hanging fruit I'm assuming, are still there. Right? I mean, if you can kind of give us a perspective of how, both your innovation team and your retailers are pulling and asking you to bring affordable items within their aisle. Or electronic aisle, I should say. Tarang Amin: So hi, Andrea. So I'll answer that. I'd say first of all, we feel really great about our innovation plans as I just talked. And our strategy is really twofold. Number one is really building strength in those segments that we have very large share positions in. We now have 21 segments where we have the number one or two position, and those become really great competitive moats. Be my guest competing against us in primers or any of the other categories. We have very strong share positions. And we continue to innovate on those. The second is conquesting categories where we're undershared. So if I just look relatively within the category, in face we have a 22% share, clear leadership in face. In lip, we went from almost nowhere to a 13% share and a really strong position in lip. We continue to innovate in lip, building on the success we have with Glow Reviver, a couple years ago. With our slip stick. I mean, it's basically lipstick on a stick. Which is a phenomenal form. And then in eye, we now have, I mean, literally it was nowhere to 9% share in eye, and we continue to have innovation across all three of those segments and you'll continue to see more. I think some of our mascara innovation that's coming out is slated closer to the fall time frame that you'll see. So and we've been pretty consistent. We've been chipping away at kinda mass mascara share as well as overall eye share and lip share for a while. So I feel good about the innovation strategy, both leveraging the strengths that we have, continue to feed that, including our growing franchises and extending those franchises in other segments. Well as what we have on innovation pipeline, both in the spring as well as upcoming in the fall. And as I look at next spring. So you'll continue to see, that work. And then the last area, even though you're not aware, is, the progress we're making in skincare. We now have three of the fastest growing brands in skincare. I feel really good about the innovation we have on e.l.f. Skin. The round of innovation we have on Notorium and Rhode, as I just mentioned. We really have really stepped up our ability in skincare and also the momentum we're seeing there. Mandy Fields: And just to add to that, Andrea, I'll just add on that from because you asked about our value and bringing that to our retailers. No, 75% of our portfolio still sits at $10 or less overall. So we are very much focused on bringing that value to our consumers, and Tarang highlighted our soft glam satin concealer, which we're launching at a five-dollar price point, which is really incredible. And a very competitive price point in the category. And so that's always gonna continue to be our focus. How do we bring that value to life for our consumers? Operator: Last question comes from Peter Grom from UBS. Please go ahead with your question. Peter Grom: Great. Thank you and good afternoon, everybody. Can I just ask on the split of the $128 million of Rhode, just U.S. versus international? And I just asked this in the context of it would imply that for the base business in the U.S., it would be pretty challenged if the ED20 rule kind of apply. So just maybe help us understand that. And then just on the 6% consumption that you expect in the back half of the year, maybe could you outline specifically, is that what you expect for 4Q? And can you break that down U.S. versus international? Thanks. Mandy Fields: Hi, Peter. So for Rhode overall, the look. Very pleased with Rhode's performance, $128 million contribution to the quarter. We haven't broken that out across international and U.S., but the 20% is relatively close. Right? We talked about Rhode having 20% of their business outside of the U.S. We also talked on the call about seeing softness in some of our key markets on the organic business in the UK. As we've seen a highly promotional environment that has remained the case throughout the holiday. And then also in Germany where we're cycling the launch of Rossmann in Germany. And so when we think about our overall consumption that we're implying, the 6% is what we see for the second half of the year. And that is gonna be offset by that four-point headwind from the pipeline. As we talked on the call. So that's kind of how we get to our net sales outlook. For the second half overall. Operator: Our next question comes from Sydney Wagner from Jefferies. Sydney Wagner: Hi. Thanks for taking our question. Can you help contextualize where you see the largest buckets of share gain opportunity going forward for core e.l.f.? Just curious how you think about the level of contribution maybe from mass tiers, prestige players, or even adjacent non-color beauty categories? And then if you look across international markets, what are the near and long-term KPIs you're watching most closely to assess brand health and positioning? Along with innovation traction for Core Elf. Thank you. Tarang Amin: Hi, Sydney. So on your first question, on the share gains, let me back up a little bit and kind of provide. If you think nationally, we're about a 13% share. At Target, our longest-standing national retail customer, we're over 20% of their category. So we see major share gains including a target going forward. And it is that combination of leveraging where we have strengths. I don't think anyone thought we'd have a 20% share in face at some point, but we're not done there with the innovation we have. And we certainly have major opportunity in both lip and mascara and the innovation to help conquest those. The last piece, you know, I brought it up before, but skincare is a major growth factor for us, and we have three brands really to pursue. Our aspirations, in skincare. And then in terms of the key KPIs for international, I think they're very similar to the KPIs we use in the U.S. We really take a look from a consumer what's the penetration, what's our ranking amongst the key and most desirable consumer sets, so the strength we have in the U.S. amongst Gen Z, Gen Alpha, Millennial, we track that, and we're very pleased with what we're seeing. In the markets we enter. Second thing we look at is productivity. What is the productivity in terms of the sales per linear foot that we deliver in? And as I mentioned earlier, we're not only the most productive brand here in the U.S., but we are with our major U.S. major international retailers, Boots and Superdrug being the two biggest Shoppers Drug Mart, Walmart Canada. And so we look at that. Then I'd say the third are the sub-metrics by each of our core functional areas, and what I'll tell you in summary is we're really pleased overall with our international market. Mandy talked about, hey. Look. We're currently facing some challenges in the UK given the promotional environment, but we continue to see very strong build in terms of awareness, overall brand equity ratings. Heard that some of our competitors are gonna be taking pricing in the UK, so that should help aid the value proposition we have in the UK. And in Germany, the real strategy I talked about earlier is really building our presence in the countries that we've already seeded. So being able to have DM, Amazon, and Rossmann, Germany allows us to put our full marketing model on in that country once you have real presence. So I'm particularly excited about what we can do in Germany, the largest market in Europe. And we will continue to seed other markets. But all the consumer metrics we're seeing right now are healthy, relative to the time that we've entered. Each of these, each of these countries and each of these retailers. So really encouraged by what we can continue to do and not only on e.l.f., but as I mentioned before, across the portfolio, e.l.f. Skin, Notorium, and Rhode. All have major potential, and we're pleased with the results we're seeing behind them. Operator: Our next question comes from Anna Lizzul from Bank of America. Please go ahead with your question. Anna Lizzul: Hi, good afternoon. Thanks so much for the question. I wanted to follow-up on your marketing spend plans in the second half. Just curious what drove the decision this year to go back to a Super Bowl ad after not having one last year. Then if we look at fiscal Q4, of course, acknowledging that you have that Super Bowl ad and some distribution gains, this should be significantly higher marking in fiscal Q3. Wanted to better understand an allocation of what's driving that between these factors. I know you talked about your EBITDA margin in the second half overall now expected to be around 19%. Which is better than your expectation for the prior quarter. So I wanted to better understand what changed. You did mention that cost shift from fiscal Q3 into fiscal Q4, but it does look like it's overall lower in the second half than you originally expected, if you could elaborate on that. Thank you. Mandy Fields: Hi, Anna. Sorry about that. We have a little technical difficulty over here. So marketing spend in the second half, yes, we overall for the year, let me take a step back. Targeting 24 to 26% for our marketing spend. So that remains unchanged. How the quarters have come together, we did have some timing shifts. You saw the number of campaigns that we've already had as we started Q4. And so that is what's driving some of that marketing spend. Heavier in Q4, but really overall for the second half, largely the same. On the Super Bowl or the big game, as we have to call it, you know, we did participate in in a way last year. It just wasn't through an ad. And this year, we're gonna do it through streaming on Peacock. We'll also be on Univision. And so, again, it's not that big, broad national ad. And then we're also gonna continue to run that for an additional eight weeks as we go through. So we'll continue to get some additional hits and eyeballs from that activation as well. And so feeling really good about the marketing spend. And then on the SG&A or on the adjusted EBITDA for the second half, like I said, from an adjusted EBITDA margin standpoint, we are seeing that better than we previously outlooked. And, really, that's why I'm looking at things on a second half basis because we did have some timing shifts on the quarter. Operator: Our next question comes from Bonnie Herzog from Goldman Sachs. Please go ahead with your question. Bonnie Herzog: Alright. Thank you. Hi, everyone. Actually, I had a question on your full-year guidance. You raised your net sales guidance at the midpoint by $46 million but you now expect Rhode sales will be about $60 million to $65 million higher, which does suggest e.l.f. Brand growth will now be lower. So could you talk to that and maybe what's changed? I guess, is this outlook conservative? Or is there something you're seeing, I don't know, with some of the innovation you've rolled out so far, which maybe gives you a little pause? Mandy Fields: Hi, Bonnie. So I'll take that. So overall, we did raise our guidance, so we're very pleased to be in a position to raise our guidance up to 22% to 23% on the full year. What's implied in that on the e.l.f. brand or on an organic basis, is around 2% for the second half, and I'll take you back to the math that we talked about on the call. We're seeing about a 6% global consumption rate right now. And so we're using that, and we're saying four points come off from a net sales standpoint given the pipeline that we have to cycle in the base. So what changed to your question, is that global consumption rate. We were seeing that consumption rate closer to 8% when we came out with our guidance in November and have since seen that come to around 6%. So I would say that would be the key change as we look at the organic business overall. Tarang Amin: And, of course, if that gets better, there's some upside. And so we're just using kind of what we're currently seeing right now, but we feel good about the fundamentals. Mandy Fields: That's right. As Tarang mentioned, for spring resets, are still taking place. Some haven't even started yet. And so that will allow us to get a real read on how spring innovation is performing. And so that could be a potential opportunity as we look forward. Operator: Our next question comes from Filippo Folorni from Citi. Please go ahead with your question. Filippo Folorni: So for Q3, can you help us bridge the gap in terms of the organic performance in the U.S.? Relative to the strong double-digit consumption growth that we see in track channel data. I thought that pipeline cycling was more Q2 to Q4. So maybe there a bigger impact in Q3, than previously expected? That drove that gap? And then looking forward, into Q4, can you give us a sense of what you expect in terms of U.S. consumption within that 6% global consumption? We expect U.S. to be above that? Given some of the international weakness, that you mentioned? And when do you think we should see more consumption data some of the benefits from the innovation and the shelf space gains that you mentioned earlier in the call. Thank you so much. Mandy Fields: Hi, Filippo. So for Q3, we talked about we're looking at things in the second half in aggregate. Which I think is a better way to look at things because in Q3, we did have some timing of shipment shift over into Q4, and so that's why I keep anchoring back to the second half. Originally, we had expected Q4 to be a negative quarter for us, but now we're outlooking that to be flat to up 2% would be implied by our guidance. So that's a good thing, but that does imply some shipments shifted from Q3 into Q4. And in addition, as I just spoke about, to Bonnie's question on the global consumption rate, we're seeing that at around 6% versus 8% previously. We haven't broken out what to expect from a U.S. versus international. In fact, we really wanna anchor back to the total level on some of these numbers because there are so many ins and outs with you looking at U.S. and at Rhode versus organic. We really wanna anchor back to what we're seeing overall as a total company, which is very strong momentum. We just reported 38% net sales growth quarter, and our outlook looking for the second half, 31 to 33% net sales growth, which is quite strong in this backdrop. Mandy Fields: And just to finish up with those questions on consumption and innovation, and when do you start to see those things marry up? Or see any benefit from those. And the spring innovation, like we were saying, resets are starting now. Some haven't started yet. So I think by the time you get to the March, you should start to see some of that out in consumption data as we go through. Operator: Our next question comes from Anna Andreeva from Piper Sandler. Please go ahead with your question. Anna Andreeva: Great. Thank you so much for taking our questions. We have a couple. You guys talked about softness in the UK for e.l.f. Organic. Can you talk about did that get worse this quarter? I think that's your biggest international market. So could you talk about some of the initiatives there to return back to growth? And then just to follow-up on the Rhode, congrats, I mean, really great results and understanding some of the investments is pretty necessary and the pipeline of innovation there is different than at core. But can you talk about where are you in the investment cycle at Rhode? Should we think that's something that's continuing into 2027? Until you've kind of lapped owning the business in the back half? Thank you. Tarang Amin: So hi, Anna. This is Tarang. So starting with softness in the UK, we have seen the UK have a higher promotional environment than has been normal. And so that certainly has impacted us. In terms of our strategy, I think it's threefold. One is reinforce our value proposition. As I mentioned earlier, a number of our competitors have announced they typically take pricing in the spring. So we'll see how that pricing plays out in terms of how that helps our overall value proposition. Second, we have a new leader for EMEA, a very experienced GM, and the focus really is building out depth in our existing markets. And so there's, you know, it's been quite a while since we've done awareness advertising in the UK, some other levers within our overall marketing engine that will apply. And, certainly, innovation always plays every single geography rep. So just as we see promising signs in our spring innovation in 2025, we believe that will play out in our international markets, including the UK. So there'll be, I'd say, the three things. You know, greater focus on the market, new leadership, and then, being able to really leverage both our innovation and marketing. We are confident of our position in the UK longer term. If I look at over the last, as I mentioned earlier, the last five-year CAGR for international, at 55%. 60% of that was driven by the UK and Canada. So we still have much further to go. In the UK, and in Canada where we continue to have momentum. Then on your second question in terms of Rhode, I would say where we are in the investment pipeline. First of all, the team has done a phenomenal job, being able to keep up with the tremendous demand that we're seeing for Rhode. Right? We're continuing to work with Sephora to make sure that in stocks are right. I mean, the brand is just so outsold anything anyone's expecting that the team has done really a herculean job really keeping up from a supply standpoint, making the right investment. And so we have good capacity to be able to continue to do that. It's more forecasting thing relative to the demand we saw, and we'll get better there. In terms of other investments we're making, you know, we mentioned when we acquired the brand, one of the early investments we made is field seal sales support. For Sephora and really making sure that that launch went off without a hitch, and that was one. Over time, we talked also during the time of acquisition. We would wanna invest more in marketing and the team. We continue to build out the team. Particularly given our global aspirations for the brand. And so I feel good in terms of where we are on the cadence of both the rollout as well as the investments we're making in some respects, it's very much pay as you go. I mean, the Rhode margins are pretty phenomenal, and we'll continue to invest in it. As we mentioned during acquisition. I don't know, Mandy, if you have anything else to add there. Mandy Fields: That's good. Operator: Our next question comes from Susan Anderson from Canaccord Genuity. Please go ahead with your question. Susan Anderson: Hi, good evening. Thanks for taking my questions here. I guess maybe can you give us an update just on tariffs when you'll start to cycle the impact there? And then just curious, have you been able to fully mitigate the tariff impact with the price increase and then other efforts? And then also, maybe if you could talk about I think on the last call, you talked about holding back some inventory to some retailers that haven't changed their pricing. I guess I assume that's been resolved, and you're shipping to them now. But I guess I was curious if there was any catch in the quarter there as well. Mandy Fields: Hi, Susan. So on the tariff front, it's been pretty quiet since the November 10 change in tariffs. So the tariff rate is now at 45%. As you know, it has been as high as 170% earlier in the fiscal year. And so we really haven't had any changes since that point in time. And if it remains at 45%, that becomes a little bit of a tailwind for us as we get into fiscal 2027 given that we were paying those higher rates as we started the year. And so that's the latest on the tariff front. On a shipment standpoint, yes, and pricing, that was fully resolved. That was fully resolved as we exited the second quarter, and so no further updates on that front. Operator: Our next question comes from Steve Powers from Deutsche Bank. Please go ahead with your question. Steve Powers: Hey, thanks so much. Good evening. Mandy, one of the areas you mentioned as a driver of higher SG&A spending in the fourth quarter is spending on that incremental space expansion. I just wanted to dig in there a little bit juxtaposed against the four-point top line shipment headwinds you framed for the back half and in the fourth quarter. I guess, as you step up that spending, on expanded space, is the implication that that's in that's you know, that four-point headwind is net of that. Incremental space expansion is the implication, alternatively, that you're gonna spend on organic space expansion, but you won't realize any revenue gains on that until we get into fiscal 2027 beyond the fourth quarter. Or are what you're saying as you're spending more on space expansion behind Rhode? Would be, you know, inorganic. You know, where is that spending and when is the return on that spending likely to manifest on the top line, I guess, is my ultimate question. Thank you. Mandy Fields: Yes. So maybe let me start with the four-point headwind. That is a net number. So that is net of any new space expansion, net four is the overall impact. The what we're not what we're cycling plus any new that we have. And so when we talk about space spend on space expansion, it really comes in in two varieties. One is on incremental space that we're currently getting. So that would include Rhode and like, the space expansion that we talked about with Ulta and different things that we noted on the call. And then there's also just refreshed spending that happens on space that you have on an existing visual merchandising, fixturing, display costs that happen with the spring resets. And so all of that is gonna kinda fall into that space spend that we're covering with that comment. Tarang Amin: And I'd add, historically, the payout has been really good. If you think of, you know, we're look. The target example of we started at four feet. We're now at 20 feet at target. Number one position with over 20% of their category. Those incremental expenses over the years from a retailer standpoint have paid out really well. I can point the same across each of our customers. Having said that, we do believe there's an opportunity to be more efficient. With some of that spend. I think particularly given how much expansion we've had a lot of times when you're kind of trying to meet an expansion goal and kind of sprinting towards it, that spend could be higher than, I think, what we could we could optimize in the U.S., particularly internationally. I think some of the international space expansion has come at a higher cost. And as we look at it, we believe that's somewhere we can get a little bit more efficient. As we go forward, regardless of kind of the overall brand. Operator: And with that, we'll be concluding today's question and answer session. I'd like to turn the floor over to Tarang Amin for any closing remarks. Tarang Amin: Well, thank you for joining us today. As I said, I'm really proud of the incredible team we have at e.l.f. Delivering another quarter of consistent category-leading growth. We look forward to seeing some of you at the CAGNY conference in a few weeks and speaking with you in May. When we'll discuss our fourth quarter and full-year results. Thank you, and be well. Operator: With that, ladies and gentlemen, we'll be concluding today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.