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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.
Operator: Good morning, and thank you for attending Unifi's Second Quarter Fiscal 2026 Earnings Conference Call. During this call, management will be referencing a webcast presentation that can be found in the Investor Relations section of unifi.com. Please familiarize yourselves with Page 2 of the slide deck for cautionary statements and non-GAAP measures. Today's conference is being recorded [Operator Instructions]. Our speakers are listed on Page 3 of today's presentation and include Al Carey, Executive Chairman; Eddie Ingle, Chief Executive Officer; A.J. Eaker, Chief Financial Officer. I will now turn the call over to Al Carey. Please turn to Page 4 of the presentation. You may begin. Albert Carey: Thank you. Well, good morning, everyone, and thanks for joining our call this morning. I'm happy to report that we're beginning to see results in our business that are coming from a major effort that began one year ago, which is essentially resetting our cost base in North America business. The closing of the Madison facility and the reduction of costs across the board have created clear operating improvements that are going to allow us to make healthy profits on a much smaller sales level. Now a couple of highlights, and A.J. will go into more details on these later on. We're pleased to see improved profit margins improved free cash flow. We have dramatically improved our inventory turns and it's probably the best we've seen in recent history. We have 25% fewer people in North America, and our plant efficiencies have come way up from the summertime now that all the changes are behind us in our Yadkinville facility and also the closing of the Madison facility. A.J. will take you through the details of these business results in a moment. But we finally have actions behind us now after a year of hard work and some difficult decisions. So that was a necessary step one for us to build our profitable business back here at Unifi. Now step two is building a strong revenue growth, and it's clear from the results of Q1 and Q2, those revenue levels need to improve dramatically. But don't forget, Q1 and Q2 of this fiscal year were largely impacted by the tariff complexity that started in about April. We've seen improvements in orders from many customers in early January, and we're cautiously optimistic about the recent order trends that we're seeing into February. You may recall back in about April, May time frame last year, our revenues dropped precipitously. And that's when the reciprocal tariffs are placed in order that created turmoil in apparel and textile supply chains and most of the customers that we deal with place large orders before the tariffs went into place, understandably, but it led to record inventory levels and it slowed orders across the board in the industry for the entire balance of the calendar year, which was 7 full months. But here's what we're seeing in January, February. First of all, the holiday sales for apparel were what we would describe as solid plus 4%. I wouldn't say they were great. but they weren't bad and most of the retailers are satisfied with what they saw. Second, recently, we have seen customers come back in order to replace the inventories, especially those whose fiscal years ended on 12/31. Third, Central America demand has picked up, which is very important for us. It really does look like in the near future that this will be a good near-shoring opportunity for retailers and brands in North America. More on that later. And then finally, innovations. Our innovations of textile Takeback and on ThermaLoop are now gaining some traction. It's taken a long time to get there, but we're optimistic about what we're seeing and probably more to come in the summer. So in summary, we expect the sales to improve when you combine that with our lower cost base right now, it gives us quite a bit of optimism for what our profitability and our cash flow can be going forward. So to take a deeper look at all this, let me turn it over to Eddie Ingle, our CEO. Edmund Ingle: Thanks, Al. And as Al just noted, our results for the second quarter were in line with our expectations, actually with some of the metrics showing up better than expected. And while we are only a few weeks into the third quarter of our fiscal 2026, we are also starting to see some initial signs of an improved operating environment driven by increased customer engagement and many of them are beginning the post-holiday restocking. Importantly, the strategic initiatives that we have put into place to realign our cost structure and operations have put us in a much stronger position to take advantage of these positive trends as we move forward. I'm going to walk you through this in more detail in a few minutes. But first, we're going to change things up a little bit slightly this quarter. I'm going to turn the call over to A.J. now to walk us through the numbers for the quarter, and then I'm going to come back then to discuss our near-term strategic priorities and what lies ahead. With that, I'll turn it over to A.J. now to review our financial results. A.J? A.J. Eaker: Thank you, Eddie. I'll start off by discussing our consolidated financial highlights for the quarter on Slide 5. Net sales for the quarter were in line with our expectations, as Eddie said, but down 12.5% year-over-year, primarily driven by lower demand in the Asia segment and pricing pressure in the Brazil segment. Consolidated gross profit was $3.6 million and gross margin was 3% during the period compared to gross profit of $0.5 million and gross margin of 0.4% for the second quarter a year ago. SG&A was just $9.7 million during the quarter, a 25% improvement from the prior year period, and adjusted EBITDA was just a loss of $0.7 million which represents an improvement of $5.1 million compared to the year ago period. These favorable and improving results are the initial benefits of the hard work we have put into implementing our cost-saving initiatives which we anticipate will continue throughout the remainder of the fiscal year. On Slide 6. In the Americas, net sales were down 7.1% compared to the prior fiscal year due to a lower portion of fiber sales with which normally carry a higher selling price, along with the tariff uncertainty that Al mentioned. Gross profit in the Americas region increased by $6.1 million during the quarter, primarily due to the previously noted cost saving initiatives that included the consolidation of the yarn manufacturing operations in this region. While we were likely to continue to have some short-term challenges in the Americas, we do believe that the mid- and long-term outlook is improving giving the better customer engagement that we're seeing today. Slide 7 displays the Brazil segment, which saw net sales and gross profit decrease versus the prior year due to some pricing pressures associated with lower competitive prices and imports from Asia. That said, demand and growth opportunities continue to remain strong in Brazil, and we are anticipating that we will see an improved performance in the region during the second half of this fiscal year. On Slide 8, our Asia segment net sales and gross profit declined by 27% and 10%, respectively, primarily due to lower sales volumes and pricing dynamics in the region. Despite these headwinds, gross margin in the region improved, expanding by 260 basis points on a year-over-year basis, underscoring the effectiveness of our asset-light model and its flexibility. From a demand standpoint, we're beginning to see signs of improvement in that region with December outperforming both prior months, October and November. However, tariffs are continuing to create uncertainty and brands are still evaluating the most appropriate course of action for their businesses in Asia. As we've noted in the past, we continue to see immense opportunity in Asia once trade pressures begin to subside given that the majority of the world's polyester is still produced from China-based assets. Slide 9 outlines our balance sheet and capital structure. Our year-to-date free cash flow reached $13.3 million, reflecting a significant increase compared to the previous year's first half results. CapEx during the first half came in at just $3.1 million, around a 60% decline compared to the prior period as we prioritize our spending and cost savings. Our net debt was reduced to $75 million at the end of December, a stark improvement from recent levels and our working capital on a year-to-date basis came in at $149 million, which was 9% lower than levels seen during the prior fiscal period due to our leaner operations in the U.S. This significant improvement to our balance sheet and capital structure was directly attributable to our recent cost saving measures, footprint consolidation and reductions in working capital, which have helped us establish a more efficient manufacturing base in the U.S. We expect these efforts to minimize the drag on free cash flow through the remainder of fiscal '26. At the same time, as customers begin to rebuild their depleted inventory levels into calendar year 2026, we do anticipate a moderate increase in working capital spend to support disciplined inventory builds and accommodate higher sales activity. As a result, we expect the third quarter will exhibit lower operating cash flows compared to the second quarter to support these efforts. This concludes the financial review, and I will now pass the call back to Eddie. Edmund Ingle: Thank you, A.J. As you just heard from A.J., the hard work of our team is starting to pay off, and we're excited to see the solid start of a recovery in our core operating metrics. Today, I'd like to start with a broader perspective and talk to you through the cumulative results of two years of strategic initiatives and investments which we believe has positioned Unifi for long-term success. So let's turn to Slide 10 for an overview of our priorities for the second half of fiscal 2026. As we look ahead, our focus continues to remain on returning Unifi to long-term growth and profitability. In order to achieve this goal, we are concentrating our efforts on four key areas. First, we have dramatically improved our operating model through targeted cost decisions and manufacturing footprint consolidation. And we need to continue to better leverage the work we've done here. At the same time, we have and we'll continue to invest in ourselves to help strengthen and scale our leading brands. Next, we have a culture built around innovation and new product development. And we will continue to prioritize the customer adoption of our innovative solutions to support future growth. And finally, we must convert all this operational progress into a sustained financial momentum. The next few slides offer more details on each of these priorities. Let's start on Slide 11. As you can see from this slide, over the past three years, we've executed three strategic initiatives that have helped us better align our cost structures and operations. We began this process back in December of 2023, with the implementation of our profitability improvement plan, which streamlined our organization realigned leadership to enable a more efficient responsive go-to-market structure and initiated a sales transformation plan to improve operational efficiencies and gross margins. Then throughout calendar year 2025, we undertook a U.S. manufacturing transition, which entailed the sale of our Madison, North Carolina facility to a third-party buyer for the price of $45 million with the proceeds of the sale being used to pay down our debt. Additionally, this transition helps improve efficiency and utilization at our Yadkinville, North Carolina facility and created a more efficient operating footprint and with a higher productivity labor environment as we leverage the existing automation assets. And then most recently, during the end of calendar year 2025, we implemented an additional cost restructuring program, which reduced our head count and lowered labor hours, operating spend and CapEx. As a result of this program, we will see reduced operating spend and a $4 million in SG&A savings, all being reflected in fiscal year 2026. As A.J. just mentioned, we are already beginning to see the initial benefits of these initiatives. And we estimate that these efforts have reduced our annual revenue breakeven point by approximately $125 million to roughly $575 million today. Some of these initiatives were difficult to execute and I want to thank our teams in each of the business units for their help in turning ideas into actions and changing the underlying cost structure of our business. It's now up to us to further leverage this improved operating platform and drive long-term results. To do so would require top line growth. So on Slide 12, you'll see some of the continued efforts we are making to further scale our innovative brand. During the second quarter, we had several new co-branding placements of our latest product technologies and our REPREVE offering with key brand leaders. Save The Duck launched a collection highlighting ThermaLoop, showcasing our circular textile to textile insulation. Spanish brand, El Ganso, brought REPREVE into their stores with new signage and in-article branding about their usage of REPREVE. And on the U.S. front, co-branding efforts from winter wear outfitter Obermeyer, [ had a ] collaborative with Sealy and REI and furniture from Brentwood Home ran at a diverse showcase of REPREVE branding usage. Co-branding continues to play a key role in reinforcing REPREVE and our impact on global solutions for textile to textile recycling through our REPREVE Takeback and ThermaLoop brands. The interest in our recently launched products have integrated A.M.Y. Peppermint technologies have received very positive feedback. Conversations are growing around what we consider to be our circular textile to textile offerings, in particular, REPREVE Takeback and ThermaLoop. And we continue to leverage Instagram as a platform to collaborate with key brands and their usage of REPREVE and our technologies. Approach with Dario Mittmann highlighted the use of REPREVE on the runway at Sao Paulo Fashion Week. And we know this is not going to bring in a lot of sales but it does reinforce in our minds that designers are still thinking about sustainability and want to use it as a way to connect with the young influencers. And lastly, another company, Dovetail Workwear, a leading U.S. women's workwear company partner with our team to create a co-branded asset to announce the launch of their hot swap denim utilizing REPREVE and our Climate Control Technology, TruTemp365. Overall, we are pleased with how the continued efforts we are putting into promoting our innovative brands through partnerships, trade events and digital engagement are paying off. Now turning to Slide 13. You will see the output of the investments we have put into developing and launching our most important innovative products during fiscal '25 and '26. So far, the adoption of these new products has admittedly been slower than we anticipated due to the current environment, but we are ramping up efforts to increase customer adoption to help support future growth. We see great opportunities for these products globally, especially with some of our customers in Europe who are under increased legislative pressure to offer circular solutions by their governments and their consumers alike. Moving to Slide 14 for an overview of our outlook and how we anticipate sustaining our financial momentum. For the third quarter, we expect to realize the full benefits of our cost reduction initiatives and improved working capital efficiency. We are also anticipating that we will have greater clarity on the global trade environment, which should help support revenue improvement as we move through calendar year '26. Finally, we will remain focused on margin-accretive efforts with a continued emphasis on our REPREVE value-added products and the expansion of our Beyond Apparel initiatives. Regarding the second point around global trade, just last week, two countries in Central America, El Salvador and Guatemala just signed a reciprocal tariff deal with the U.S. government. This means that in the very near future, apparel made from regional yarns that are made in these two countries can once again receive [indiscernible] like duty-free treatments, where the final garments are shipped to the U.S. To wrap up, we recognize that there is still important work needed to sustain the recent successes as we move towards our long-term objectives. That said, we are encouraged by the progress we've made to date. We [ have won money ] into the second half of our fiscal 2026, and our focus remains on converting our operational improvements into sustained financial momentum and ultimately creating long-term value for our shareholders. With that, we would now like to open the line for questions. Thank you. Operator: [Operator Instructions] And our first question comes from the line of Anthony Lebiedzinski with Sidoti. Anthony Lebiedzinski: So by the way, it was a really good cash flow quarter, which is great to see. So I guess my first question, in terms of your comments about the pickup in demand that you've seen since the quarter end. Is that in all segments? Or is one segment particularly doing better than others? I just wanted to get more flavor, more color on what you're seeing thus far since the quarter ended? Edmund Ingle: Yes. Thanks, Anthony, for the question, for joining us today. We're seeing it -- really across the board. Brazil is coming out of the holiday season, so there's destocking taking place but also there's stimulation in the economy by the government, so there seems to be positive momentum in the orders that we're seeing down there. China, the new year there is happening in mid-February. So there was a lot of activity in January in our Asia business in particular. And so that seems to be actually continuing more positively than expected because we're closing that new year period now. And then the U.S. and Central America, that's where it's shining because we are seeing the impact of the restocking of the inventories post everybody year-end -- their year-end trying to get their inventories down, but also the news around the reciprocal tariff agreement with Guatemala and El Salvador is positive for us. And so we're seeing more brands taking orders to the mills and the mills are placing orders with us. So it's really across the board. Anthony Lebiedzinski: So that's encouraging to hear certainly. So when we look at your business, I mean you've talked about Beyond Apparel for a bit. Can you give us an update? And I guess as we talked about this, maybe just kind of give us an update where you are like as far as apparel or as footwear, what percent of revenue is that at the moment? And kind of how should we think about the Beyond Apparel initiatives kind of going forward? Edmund Ingle: Yes. Beyond Apparel is really centered around carpet, packaging, military/tactical and auto. And I can say that last quarter, we had a very, very strong quarter in the packaging sector. Carpet actually grew slightly also and our military and tactical, while we didn't get orders, we still continuing to do a lot of sampling. So in the Q3, we won't see as much impact as we're we expect to see in fiscal Q4 as the orders start to come through. But definitely, as we -- we're still seeing very positive signals from the market around all of those initiatives so we're excited about that. And as a percentage of our business, apparel is still, of course, a large part of that. But we are moving towards making that a lower percentage, still very, very important, of course, but we do think that we're still on the right track with these Beyond Apparel initiatives here in the U.S. Albert Carey: This is Al. Watch military in the next couple of quarters. It looks like it's bigger than expected, and we're making a lot of progress with it. It just takes a long time to test for durability and colors. But when you get the business, it's usually a good long-term one and with high margins. Anthony Lebiedzinski: That's good to hear certainly. And can you also give us an update on the pricing dynamics in each of your segments that you talked about. I think you really highlighted Brazil as dealing with pricing pressures. But maybe if you could just go over the pricing dynamics that you have seen and expect to see here going forward in each of the three segments. Edmund Ingle: Yes. We talked about the dumping from Asia into Brazil, that has still continued although in the last few weeks as expected as oil has gone up as the Brazilian Real strengthened and as -- it appears that some of the really inefficient assets in Asia are being shut down. So it has created an environment where in Asia, the pricing has gone up and the sale is set by that raw material supply chain. So we are seeing some positive pricing momentum going into the Q3 in Brazil. Not huge, but enough to where we're feeling positive about that. In Asia, it's a very reactionary market, and so there is some slight uptick, like I said, in the Asian market. But in particular, I wanted to circle back to the U.S. because -- and Central America. We've done a lot of bottom sizing in that business. We've tried to exit business that were very challenging from a pricing point of view and we've done targeted price increases. We've also try to make sure that for the complicated mix that we have, we've got the right price points in each of those different product lines that we serve. So we are seeing the benefit of that from a revenue point of view. And as we -- as our volumes increase, it will become more transparent. But we're all seeing that be part of our margin improvement. The margin improvement has been helped by, of course, all these restructuring we've done and the spend, the cost takeouts, but the pricing has been a big part of that. Anthony Lebiedzinski: Okay. That's -- yes, certainly good to hear. So -- and obviously, as you guys have talked about, you've done a lot of work as far as the restructuring and manufacturing transitions and so on. So as we think about the $575 million revenue that's needed to breakeven. How do you guys think about the mix between the three segments? What do you guys need to get there? I mean if I look back historically, the Asia and Brazil segment, gross margins have done better than what we've seen last couple of years or so. So just broadly speaking, how do we think about the mix that -- between the three segments that's needed to get back to breakeven? A.J. Eaker: Yes. Good question, Anthony. Thanks for bringing the breakeven topic, certainly proud of the actions we've been able to get through the system and get to this point. When we look at how that's distributed across the segments you're looking at mid- to high 300s generally for the Americas and then the other two segments filling in the gap really from some of their historical run rates similar to those historical run rates. So that's how we would see the distribution that would get you to a high single-digit gross margin for the consolidated entity and therefore, breakeven on an operating income zero basis. Operator: Ladies and gentlemen, that concludes the question-and-answer session. Thank you all for joining in. You may now disconnect. Everyone, have a great day.
Operator: Ladies and gentlemen, thank you for your continued patience. Your meeting will begin shortly. Star zero and a member of our team will be happy to help you. Thanks again. Again, ladies and gentlemen, thank you for your continued patience. Your meeting will begin shortly a member of our team will be happy to help you. Good afternoon. Welcome to Ares Capital Corporation's Fourth Quarter and Year Ended December 31, 2025. John Stilmar: Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. On Wednesday, February 4, 2026. I will now turn the call over to Mr. John Stilmar, Partner of Ares Public Markets Investor Relations. Operator: Thank you, and good afternoon, everybody. Let me start with some important reminders. Comments made during the course of this conference call and webcast John Stilmar: well as the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, such as core earnings per share. Core EPS. The company believes that core EPS provide useful information to investors regarding the financial performance. Because it's one method the company uses to measure its financial condition and results of operation. A reconciliation of GAAP net income per share to the most directly comparable GAAP financial measure to core EPS be found in the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings filed this morning with the SEC on Form 8. Certain information discussed in this conference call as well as the accompanying slide presentation. Including credit ratings and information related to portfolio companies, was derived from or obtained from third-party sources. That have not been independently verified and, accordingly, the company makes no representation or warranty with respect to this information. The company's fourth quarter and year-end 2025 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the fourth quarter 2025 earnings presentation link on the homepage of the Investor Resources section. Ares Capital Corporation earnings release and Form 10-Ks are also available on the company's website. And now I'd like to turn it over to Kort Schnabel, Ares Capital Corporation's chief executive officer. Kort? Kort Schnabel: Thanks, John, and hello, everyone. Thank you for joining our earnings call. I'm joined today by Jim Miller, our President Jana Markowitz, our Chief Operating Officer Scott Lem, our Chief Financial Officer and other members of the management team who will be available during our Q and A session. Let me start by providing a few thoughts on ARCC's performance current market conditions and our outlook for the year ahead. 2025 was another good year for our company. We generated strong financial results supported by our stable credit quality and growing portfolio. Our core earnings per share of $0.50 for the fourth quarter and $2.01 for the full year fully covered our dividends. And drove an ROE in excess of 10% for both the fourth quarter and the full year. Reinforcing our long-term track record of generating NAV growth with attractive dividends, ended 2025 with modestly higher NAV per share and have now paid a consistent or growing level of regular quarterly dividends for over sixteen years. The drivers of these results are embedded in what we believe are our long-term competitive advantages, which include the experience of our team our long-standing market relationships, the scale of our capital base, and our rigorous credit standards. We remain confident that these enduring competitive advantages will continue to support compelling performance for the company in the future. Looking back on 2025, as uncertainty around macroeconomic policies from the early months of the year subsided, and pressure on private equity firms to return capital to investors mounted we saw a rebound in transaction activity during the second half of the year. This in turn led to a meaningful acceleration new investment commitments for us over the same period. Despite a relatively tepid M and A market, in the 2025, remained busy with the majority of our originations coming from incumbent borrowers as we sought to support the growth objectives of our portfolio companies. We believe that our ability to be a steady capital provider at scale through periods of economic and capital markets volatility is especially valuable to our portfolio companies. And continues to lead to further market share gains as our existing borrowers consolidate their lending relationships with us. Specifically, across our top 10 incumbent transactions during 2025, we more than doubled our share of the overall financing. These incumbent transactions can offer attractive opportunities to increase our exposure to some of our best performing portfolio companies. Therefore, our portfolio of more than 600 borrowers is yet another factor that we believe can drive future incumbent lending opportunities and in turn the long-term performance of our company. While we continue to see opportunities with incumbent borrowers into the 2025, the M and A and LBO markets also gained momentum. This accelerated transaction activity and new borrowers comprised the majority of our new lending activity in the 2025. Reflecting the breadth of our market reach and further expanding future incumbent opportunities, ARCC added more than 100 new borrowers to the portfolio during the year. A new record for the company. While the broader tailwinds of increasing market activity levels helped drive higher originations to new borrowers in the second half of the year, much of this growth also came from the continued expansion of our specialized industry verticals. The deep knowledge and specialized skill set we have developed in industries such as sports media and entertainment, specialty healthcare, energy, software, consumer, and financial services ultimately results in access to differentiated deal flow. Particularly in the non-sponsored channel. Building on the momentum we have in these verticals, our non-sponsored originations grew by more than 50% during 2025. Collectively, these factors supported a record year of gross originations at ARCC with $15.8 billion of new commitments in 2025. Importantly, we are maintaining our highly selective approach supported by a widening set of sourced opportunities. In 2025, our investment team reviewed nearly $1 trillion of potential investments, representing a 24% increase the number of opportunities we reviewed relative to the prior year. We also see the merits of origination scale in our ability to garner attractive terms and pricing. Against a competitive market backdrop, market spreads declined before stabilizing over the course of the year, we were able to drive a modest year over year increase in spreads. For our first lien commitments while also maintaining LTVs in the high 30% to low 40% range and upholding our stringent underwriting and documentation standards. The quality of our portfolio remains in excellent shape as our borrowers continue to demonstrate healthy overall performance. On average, our portfolio companies are growing faster than the economy and the comparable broadly syndicated loan market. In 2025, the weighted average organic EBITDA growth rate of our borrowers was more than three times that of GDP and more than double the growth rate of borrowers the broadly syndicated loan market. The continued growth and stability of our borrowers also contributed to improvement in portfolio fundamentals. For example, average portfolio leverage decreased approximately a quarter turn of EBITDA from the prior year, while our portfolio's average interest coverage ratio improved to 2.2 times driven primarily by lower market interest rates and earnings growth. Our credit quality showed stability throughout the year. As our non-accruals at cost ended 2025 in line with both the prior quarter and year-end 2024 levels and our weighted average portfolio grade remained consistent throughout the year at 3.1. We also generated pretax net realized gains on investments more than $100 million during 2025. These results extend our long track record of generating realized gains by successfully investing across the capital structure with the support of our industry-leading portfolio management team. During 2025, we realized over $470 million of gross gains from our equity co-investment portfolio and our successful portfolio management and restructuring efforts. The exits on our equity co-investments over the course of 2025 generated an average IRR in excess of 25% returning more than three times our initial investment on average. These results further support our track record of generating an average gross IRR on our equity co-investment portfolio that was more than double the S and P 500 total return over the last ten years. Collectively, these results underscore the strength of our team and the merit of our differentiated investing strategy. Even as our overall portfolio continues to perform well, we remain steadfast in our approach to risk management and diversification. With a 0.2% average position size at ARCC, we believe we are well positioned to minimize single name risk and thus lower portfolio risk overall. We believe this level of diversification stands apart from many others in the industry and in our view, contribute to further differentiation in performance between ARCC and industry averages. Against this backdrop of strong originations and stable credit performance, let me make some comments on our dividend outlook. We believe ARCC is in a good position to maintain its dividend despite market expectations for further declines in short-term interest rates. We generally set our dividend level based on our view of the earnings power of our company. While lower short-term rates present an earnings headwind, we believe there are multiple factors that can support our earnings and thus our current dividend level for the foreseeable future. First, we believe our dividend level was set in an achievable benchmark for today's interest rate and competitive environment. Second, our balance sheet leverage remains low below 1.1 times net debt to equity, leaving meaningful capacity relative to the upper end of our 1.25 times target range. Importantly, as we prudently grow the portfolio above one times, earnings will also benefit from the lower management fee rate on the marginal portfolio. Third, we see incremental growth opportunities from two of our most strategic investments, the senior direct lending program and IDL Asset Management. And as market activity increases, our ability to invest across the capital structure has historically provided us with higher returning opportunities. Fourth, we expect continued healthy credit performance considering the current economic outlook, the strength and stability of the current portfolio and the team's track record, over more than twenty years. Finally, which provides an additional cushion have more than two quarters of spillover income help support dividend stability in the event that our quarterly core earnings temporarily dip below the dividend. In closing, 2025 was a great year for ARCC. We believe our results for the fourth quarter and full year will continue to show differentiation in a market where there is already increasing dispersion in financial results. With this momentum, I believe we are well positioned for a successful 2026 and beyond. I will now turn the call over to Scott to take us through more details on our financial results and balance sheet. Scott Lem: Thanks, Kort. This morning, we reported GAAP net income per share of $0.41 for the 2025 compared to $0.57 in the prior quarter and $0.55 in the 2024. For the year, we reported GAAP net income per share of $1.86 compared to $2.44 for 2024. We also reported core earnings per share of $0.50 for the 2025, compared to $0.50 in the prior quarter and $0.55 for the same period a year ago. For the year, our core earnings per share of $2.01 compared to $2.33 for 2024. The decrease in core earnings year over year was driven in large part by the decline in base rates. Importantly, in 2025, our core EPS remain in excess of our dividend in all four quarters, and we generated 10% core ROE for the year. Which was in line with our historical average since inception. Looking forward, as mentioned in previous it's important to consider the timing of contractual rate resets in our floating rate loan portfolio on our core earnings. Changes in base rates typically take about a quarter to be fully reflected in earnings. Therefore, assuming all else equal, the decline in base rates during the fourth quarter will create about $0.1 per share of earnings headwind for us in the 2026. As a reminder, there typically is seasonality in our business. As origination volumes generally tend to be slower in the first quarter than in the fourth quarter. Capital structuring service fees which are tied to origination volumes typically follow the seasonal pattern as well. Now turning to the balance sheet. Our total portfolio at fair value at the end of the fourth quarter was $29.5 billion which increased from $28.7 billion at the end of the third quarter and $26.7 billion a year ago. Our net asset value ended at $14.3 billion or $19.94 per share down 0.35% from a quarter ago and up 0.25% from a year ago. Shifting to our debt capital. We're proud of what we accomplished in the past year. By continuing to grow and strengthen our best in class balance sheet. In total, we added new gross debt commitments of $4.5 billion in 2025. A new record for the company. That progress was driven by consistent and leading execution across multiple funding channels, starting with our unsecured notes. We were active in the unsecured notes market during the year, issuing $2.4 billion of investment grade bonds marking our second most active issuance year since our inception. Notably, we remain the highest rated BDC by all three of the major rating agencies. Consistent with our long-term strategy of being a regular issuer and investment grade, notes market, we began 2026 by issuing $750 million of long five-year debt at an industry leading spread of 180 basis points over treasuries. Which we swapped to SOFR plus 172 basis points. We have also been a beneficiary of broader investor support as more than 75 new investors have participated in our bond offerings over the past twelve months through this transaction. We were also active with our diverse bank capital providers expanding our credit facilities by $1.4 billion over the course of 2025 while also reducing borrowing spreads by approximately 20 basis points on average. We are proud of the relationships we have with over 40 banks many of whom have been long-term and growing supporters of ARCC. And finally, we continue to benefit from Ares' long-standing reputation as a top-tier manager and one of the largest CLO issuers in the market. That positioning helped us execute our largest on-balance sheet CLO in our history. With $700 million of debt price in December at a blended cost of SOFR plus 147 basis points. Beyond the efficiency of this transaction, our execution further broadened our funding mix by accessing the strong demand for rated asset-backed financing secured by a significantly diverse high-quality portfolio of assets. Collectively, our floating rate financings help company capture the benefits of lower borrowing costs, should market rates decline further. Nearly 70% of ARCC's borrowing today are floating rate compared to approximately 50% at year-end 2024. Overall, our liquidity position remains strong. Totaling over $6 billion including available cash, on a pro forma basis for the post year-end activity that I just mentioned. In terms of our leverage, we ended the fourth quarter with a debt to equity ratio net of available cash of 1.08 times. Versus 1.02 times a quarter ago. Which still leaves us with meaningful headroom relative to the upper end of our target leverage ratio of 1.25 times. We continue to believe our significant amount of dry powder positions us well to actively support both our existing and new portfolio companies. Furthermore, we appreciate the continued support of all of our debt investors and lenders and we look forward to building on these partnerships in the year ahead. Finally, our first quarter 2026 dividend of $0.48 per share is payable on March 31 to stockholders of record on March 13. ARCC has been paying stable or increasing regular quarterly dividends for sixty-six consecutive quarters. In terms of our taxable income spillover, currently estimate that we will carry forward $988 million or $1.38 per share available for distribution to stockholders in 2026. I will now turn the call over to Jim to walk through our investment activities. Jim Miller: Thank you, Scott. I'll provide some additional details on our fourth quarter investment activity our portfolio performance and our positioning at year-end and then conclude with an update on our post quarter end activity and backlog. In the fourth quarter, our team originated over $5.8 billion of new investment commitments which is up more than 50% from the 2024. This brought our total new commitments for the year to $15.8 billion marking a new annual record for ARCC. About half of our new originations in the fourth quarter supported M and A driven transactions, such as LBOs and add-on acquisitions. Which builds on the momentum we saw last quarter and highlights our ability to benefit from the early signs of a more active and M and A driven market environment. Reflecting on our broad market coverage across the lower core and upper parts of the middle market, Our fourth quarter originations included companies with EBITDA ranging from under $20 million to over $800 million. Additionally, we made commitments to companies across 21 industries and 58 sub-industries. Demonstrating the benefit of our vertical focused origination team and identifying specialized opportunities. Which Kort touched upon earlier. We ended the year with a record $29.5 billion portfolio at fair value. A 3% increase from the prior quarter and 10% increase from the prior year. As of year-end 2025, our strong and growing portfolio remains well diversified across 603 different borrowers. The number of companies in our portfolio has also increased nearly 10% over the past year and 72% over the past five years. Further enhancing our diversification. The granularity of our portfolio can also be seen in our small position sizes. Each of our investments represents less than 0.2% of the overall portfolio on average. And our top 10 investments, excluding our investments in IAM and the STLP comprise approximately 11% of the overall portfolio. Which is less than half the average concentration of our relevant peers. The scale of capital available at Ares and ARCC supports our ability to execute our origination strategy invest across the middle market while also mitigating the impact of negative credit events in any one borrower on the credit performance of the company. The financial position of our portfolio companies remains strong. Our portfolios average interest coverage ratio of 2.2 times increased 10% quarter over quarter. And 15% year over year. The portfolio's average leverage level also showed strength. Declining about a quarter turn of debt to EBITDA from year-end 2024 and remaining stable with Q3 levels. Additionally, healthy enterprise values continue to underpin our loan positions. As loan to value ratios remain low, and stable at approximately 44%. Our portfolio companies continue to demonstrate growth their profitability. The weighted average EBITDA of our underlying portfolio companies demonstrated organic growth over the last twelve months expanding 9% year over year. This organic growth rate remains in line with our ten-year average and was more than double the EBITDA growth of the borrowers in the leveraged loan market of approximately 4%. When looking across the different segments of our portfolio, we continue to see healthy performance. We are observing positive EBITDA growth in excess of the broader economy across both senior and junior capital investments. As well in both large and small companies. We are also seeing outperformance through our industry selection as the top five largest industries in our portfolio including software, are experiencing faster EBITDA growth than the aggregate portfolio. The organic growth rate of our borrowers underscores what we believe is one of the many merits of not being a benchmark style investor. As we are able to be selective not only with the companies we are financing, but also with the industries we target more generally. Supported by these underlying portfolio trends, the credit performance of our portfolio remains strong. Our non-accruals at cost ended the quarter at 1.8%. In line with prior quarter and prior year levels. This level remains well below our 2.8% historical average since the global financial crisis. And the BDC historical average of 3.8% over the same timeframe. Our non-accrual rate at fair value also remained low at 1.2% of the portfolio and well below our historical levers. Our overall risk ratings remain stable throughout 2025. And the share of our portfolio companies in our lowest risk category Grades one and two, totaled 3.8% at fair value. Remaining 180 basis points below our five-year average. While our overall portfolio continues to perform well, we remain vigilant in monitoring our portfolio for underlying credit issues and seek to be proactive in addressing any issues as they arise. Shifting to 2026, we've had a strong start to the new year. Our total commitments through January 29, 2026 were nearly $1.4 billion an 11% increase as compared to commitments closed in January. Additionally, our backlog as of January 29, 2026 stood at $2.2 billion which is more than 17% greater than the reported backlog at January 28. As a reminder, our backlog contains investments that are subject to approvals and documentation and may not close, or we may sell a portion of these investments post closing. Furthermore, we are closely watching current market conditions to see if the choppiness in retail capital flows impacts the competitive landscape in our favor. In contrast to managers that have a have concentrated their fundraising in retail oriented products, We believe managers such as Ares, with both significant institutional and retail sources of capital possess a more stable base of committed dry powder. This allows Ares and in turn ARCC to be a consistent capital provider with the scale, in the market through changing periods. As we look to the future, we believe we are well positioned to capitalize on an expanding market opportunity supported by the collective expertise of our team and our differentiated approach. These advantages have underpinned both our leading investment performance and stock based returns. Since our inception in 2004, our stock based total returns have outperformed the KBW Bank Index BDC peer averages and the S and P 500 by approximately 40% or more. Most recently in 2025, ARCC generated more than 600 basis points of additional total return versus the BDC average as measured by the VanEck BDC ETF. As always, we appreciate you joining us today. And we look forward to speaking with you again next quarter. On behalf of the executive team, I'd like to thank our team for the hard work and dedication that led to another strong year for ARCC. With that operator, please open the line for questions. Operator: If you would like to withdraw your Please note, as a courtesy to those who may wish to ask a question, The Investor Relations team will be available to address any further questions at the conclusion of today's call. We'll take our first question from John Hecht with Jefferies. Your line is open. John Hecht: Good morning, guys. Thanks for taking my or I guess good afternoon. Thanks for taking my questions. You guys did mentioned the position you have in software. You also mentioned that software continues to grow faster than the pretty strong rates of growth elsewhere in the portfolio. But there's a big emerging fear in the market about the impact of AI on that type of business performance. I'm wondering, do you guys are you eyeing that emerging subject? And do you have any points to make on how you think it's positioned in that regard? Hey, John. For the question. Very glad that this is the first question of the day. Because obviously, there's a lot of noise going on out there. And I think we really want to make sure that we hit this hard and address anyone's questions and spend real time making sure that people understand our thesis in the space and how we built our portfolio. And our strategy going forward. So look, I think the first thing I want to say is we feel very good about our software book. And we don't feel any differently this quarter than we did last quarter despite all the noise in the market. The fundamental and the underpinnings of our portfolio and our underwriting haven't changed. And we did make a lot of comments last quarter in our prepared remarks on earnings call about AI and our software book. People could certainly refer back to that as well. But I think, you know, I'll spend a little bit time and sorry if it's a little long winded but I I wanna really make sure we frame up our strategy for people today. So the first thing to just sort of remind people is we started an in the software space about fifteen years ago or so. Here at Ares Capital. And from the beginning, the number one risk that we identified in the software space was technology risk, and obsolescence risk. And so we said to ourselves, if we're going down have a thesis in the space and build a book, really want to make sure is highly resistant that every single software company we put in the portfolio to technology risk. And obviously AI is probably the most disruptive technology risk that we could have imagined. And it absolutely is going to disrupt a lot of software companies, and I don't want to sugarcoat it. But we still believe strongly that we've constructed a portfolio that will remain highly resistant to this risk. So think maybe I'll just outline a few characteristics that we've always looked for in our software companies. And that we obviously continue to raise the bar on and look for even more in our new investments. So look, the first thing is that we primarily look to invest in foundational infrastructure software for complex businesses. Right? This is software that sits at the center the technology stack. And powers all core business systems. Right? It's the last type of software in our opinion, that a company would look to switch out because that all of your downstream systems that feed off this software might also be at risk. So we like this kind of software where the entire business and operations of the customers are dependent on the accurate functioning of this system. So that's that's kind of the most important point number one. We're also looking software companies that a lot of our software companies do this. We're looking for these companies that collect and own proprietary data. And they collect this data and build this data over many years of their customers and then they use the data as a core part of their value proposition when they deliver the software. Right? So we call this a data moat. And it's important to mention that AI is not a database. AI doesn't house data. It can't replicate proprietary data. So we really believe that these data enabled software companies will prove resistant. And these types of companies, you'll find a lot of these types of companies in our portfolio. We also are looking for software companies that serve regulated end markets like Where healthcare, financial services as a couple of examples. There's lots of these regulated end markets. the need for accuracy and auditing of information is really high. And the penalties for lack of compliance can be severe. Right. So John, you think about like Jeffrey's is not going to rip out its core infrastructure software and replace it with an AI based solution anytime soon in our opinion. We think it's gonna take a really long time for companies are in these types of industries to gain enough trust in any kind of new product if ever. So that's a really important point as well. Obviously, we always talk about diversification in our strategy in so many different ways and that applies to our software companies as well in terms of their customer base, right. So we're looking for software companies that have very diverse customer bases. So even if some customers do switch to maybe an AI generated software solution, Others will remain and they create sort of this long tail of cash flow. That will hopefully survive and we really do not see quick and binary outcomes that occur when you have this kind of diversified customer base. Right. And it's, it sort of leads into the next point to remind people about which is we are lenders. To these companies with maturity dates. We're sitting at the top of the capital structure We have all the assets as collateral, including intellectual property. Lots of ways that we can look to recover our principal if things do start to get disrupted. And this is just a very different place to be sitting in the capital structure. Than sitting down in the equity. Right? So if you look at some of the metrics on our software book, they're extremely healthy. The book itself is also highly diversified. With lots and lots and lots of different position sizes none of which is outsized in any way. These software companies are very large. Established businesses, right? The average EBITDA on our software book is $350 million that's above the average in our portfolio. You mentioned John in your question the growth rate of our software businesses remains really strong. The The software book, the LTM EBITDA growth in the software book is growing at a faster rate than the overall average EBITDA on our book. Even through the the recent quarter. The loan to values and this is maybe of the most important points below the values on our software book our software loan book is 37% on average. That's below the loan to values on our overall book there is just an enormous amount of equity cushion below these loans that sit in the first loss position beneath us. So there really would have to be a whole lot of value destruction that would occur before we as a lender lose a dollar. Right? So I I I again, sorry for being a long winded. I really wanna make sure we're getting clarity out on this topic. And maybe the last point I'll just say is we've got an incredible team of resources here at Ares. We've got a software vertical within our credit business that consists of a bunch of investment professionals that only do software credit investing. We've got an in house AI team at a company called Bootstrap Labs which we acquired a few years ago, which is a venture capital firm. It's been investing in AI for more than a decade And we use all of these resources to help us evaluate every new deal we do as well as during our quarterly evaluation process. To assess the risks and the marks that we're taking on all of these names. Don't think everybody does that. So that's something that's pretty unique to Ares and hopefully gives people confidence in the marks and the risk in the portfolio. So look, as we sit here today, we're obviously watching everything going on out there playing close attention want to sugarcoat it, but we really see minimal near term risk to our software portfolio and I'd say very manageable medium to longer term risk in the bond. That is very helpful, and I appreciate the color because I do think it's a an important topic. Follow-up question is you guys have an active pipeline strong growth year over year. You mentioned, I think, about half of them were buyout sponsor related stuff. Anything to the other half? And how that paints the picture for how you think market's firming up for the duration of 2026? Yes. I mean there's still a lot of add on activity on existing portfolio right? So that makes up usually the bulk of the remainder of the deal flow. Us just putting capital into support continued acquiring of added EBITDA. So those are good uses of capital. We have not seen a real big resurgence of dividend transactions. There have been a few obviously, private equity firms looking to return capital are going to test the market on dividends. But I wouldn't say that that's a huge driver of our deal flow right now. It's really the the add ons. Obviously, there are refinancings still going on. But most of the sort of refinancings in spread sort of reductions have worked their way through the system and spreads have been really stable now for better part of a year or so. That's not been a huge driver. There also have been some refinancings out of the broadly syndicated market. Where obviously the broadly syndicated market can be a little bit volatile at times or maybe a sponsor just wants values having certainty of capital in all environments that has come to us take out a deal that currently is in the broad syndicated market. So probably the preponderance of the other activity. Great. I really appreciate all the color. Thanks very much. Of course. Operator: We'll take our next question from Finian O'Shea with Wells Fargo. And actually, we'll move next to Doug Harter with UBS. Line is open. Douglas Harter: Thanks. I guess as you guys look at this current environment, clearly, Ares as a platform has a lot of advantages relative valuation gap versus your peers. How do you think about potentially playing offense and taking advantage of market weakness? In this type of environment? Yeah. Great question. We certainly get excited about those types of opportunities. Historically, there have been any kind of periods of dislocation, or volatility that's been a strength. For our industry in private credit and certainly for us at Ares, especially since our capital base is much more diversified than a lot of our peers. So the stability of our capital and the ability for us to sort of fill gaps in the market is a big advantage. So I think we'll see what unfolds from here. But to the extent that there are any pockets of changes in supply of capital, I think we stand to benefit. I mean, we just talked about software at length. I certainly might expect that the broadly syndicated market will have a hard time providing financing for some software businesses and if there's very high quality software companies that meet the standards I described earlier, I would venture a guess that the cost of capital for those companies probably has gone up a bit. And I think we might be excited to provide that type of financing to the very best of those companies. So we'll see again, we'll see what unfolds. Obviously, there's been some changes in the environment for some of the retail flows. And that could also create some changes in competitive behavior that we're watching closely, as Jim said in the his prepared remarks. And feel like we're in a great position capital wise to step in. Thank you. Operator: And now we'll move to Finian O'Shea with Wells Fargo. Your line is open. Finian O'Shea: Hey, everyone. Good morning. Thanks for keeping my place in line. So a follow-up on John's question on software. Just to push back on a couple of those points for the spirit of argument. The risk, I think, is presented pretty widely as still a few years out. You have a good a good feel of resistance in the book as you outlined but what sort of developments are you looking out for that would threaten even the more, say, foundational enterprise SaaS plays And do you see any progress toward those risks from AI in real time Or if not, why so confident that that will take a very long time? Thanks. Yeah. Yeah. Thanks, Fin. And I would love to offline sit down and debate it at length. I I think it's really hard, though, for for me to see a scenario where we would find any kind of real dramatic risk or change in our view toward those core kind of enterprise software businesses or those regulated industries just talked at length about all the reasons why think for us what we're focused on is the businesses that can be disrupted or I'm not going to say our portfolio is entirely clean. We have a very small amount of portfolio companies that could be disrupted. And that's where we're spending a lot of our time and focus and working with the financial sponsors and getting ahead of any kind of potential situation. It's not in those core enterprise software businesses. So I'm challenged right now to come up with you know, scenarios where would really see that get disrupted. Look, I think the areas that we do think can get disrupted and where we're trying to be really disciplined on new transactions are kind of more single function software apps that sit on the edge of the tech stack. Certainly any kind of software that creates or delivers content because AI is fantastic at creating content. So we'd be extremely careful about those, you know, data analysis or visual type companies. AI is exceptional at summarizing data and spitting out all different types of reports and synthesizing those. So know, the I think I just think those are the areas that are more at risk And again, very, very small exposure our portfolio for those. So sorry, not a great answer. Just can't come up with risks to those core enterprise businesses. Appreciate that. Hard to envision. Follow on the dividend, appreciate the color there. It feels like there'd be like a pretty good tailwind even though the structuring fees are lighter in today's environment. Has been the volume The deployment has obviously been fantastic. Does that sort of need to continue in your outlook or guidance or does that maybe moderate and something else offsets that impact? Yes. Yeah. I mean, there's so many variables and things that change all at once. Right? So it's hard to sort of look at one variable or one driver and just say if that changes, what happens? One thing I do want to say on the foot structuring fee point is the fees were actually consistent during the quarter. We had a actually quarter. Another quarter where we had some transactions that we fronted for and sold. Right after closing. And so that dilutes the fee percentage, the sort of stated fee percentage, but actually the fee percentage on a constant basis, if you just look at the dollars that we're holding in the book was constant. Quarter over quarter. So just want to hit that one. But look, I think if if the spread environment stays where it is now, which is obviously tight. And we see, you know, rates potentially continue to fall a little bit like the curve shows. Then we're gonna wanna have a lot of volume like we did this quarter in order to produce results. And I don't see any reason why that wouldn't be the case. That we'd see that kind of volume. kinda stays where it is. If the spread environment and the economic environment If volume falls off, I would think there would be other things that are happening in conjunction with that. Which maybe is less supply of capital our space. Therefore, maybe spreads widen, maybe fees widen, Certainly what we saw in 2022 and 2023 coming off a super high volume here in 2021 and everything was getting tight. Spreads widened 150 basis points, volume fell off, but we obviously had a fantastic period of performance. At Ares Capital through 2022, 2023 despite the lower volume. So I just think it's really hard to pick one variable. So hopefully that helps answer the the question. Yes, helpful. Thanks a lot. Operator: We'll take our next question from Casey Alexander with Compass Point. Your line is open. Casey Alexander: Hi, good morning, Court, and thank you for taking my questions. I do want to expand on that. I mean, you did give a little bit of color on broadly syndicated market and what that could cause to happen with spreads in software But I'm curious in that we've had some at least psychological market dislocation going on since before you guys reported your third quarter results. As a result of the Diamond comments and whatever and this has continued to be you know, picked up a lot from the media, on the minds of investors left and right, And so I'm curious why haven't we or are we about to see a widening of spreads in general Normally, in a period of of dislocation, such as this, we usually see that happen fairly quickly. And in this event, it hasn't happened. And and I would add, you know, I think inflows into the non traded market are slowing down. So I'm just curious on some comments as to why we haven't seen spreads widen or if you think they're about to. Yeah. Great question, Casey. Probably two points I'd make on the events you mentioned. So when we saw some of that volatility a quarter or two ago and First Brands and Tricolor and there was concerns about credit quality and potential blowups the BSL market wind out for a pretty short period of time. And it actually did recover pretty quickly and the fourth quarter became active again for the BSL market and spread kind of tied back in that side of the market. So I just it was too short lived is what I would say. To drive real impact on the private market and then know, I'm sure there's a lag our market. We often see the broadly syndicated market will move up and down. And our market takes a little bit of time to react to that, which is by the way, one of our value propositions in our market is we don't gyrate as much and our capital is more stable for our borrowers. And we take our time to make sure that any spread movement in the syndicated market is going to be more sustained. So I think that's just what we saw for the first event you mentioned last year. We were thinking there would be a maybe a more sustained period, but it just didn't really prove out. On the non traded flows, absolutely something we're watching really closely. Again, what I would say on that one is that pretty new. So it's really in the last month or two max that we've seen those flows change. It's not like they are on a net basis, moving wildly negative. They're really on the whole just kind of moving. You're seeing redemptions but you're still seeing inflows So they're kind of the money is not flying into those funds like it was before, but it's still remaining pretty stable in terms of the funds that are there. I do think if it stays like that, It will impact competitive behavior for our peers that are more concentrated to that channel. And at Ares Capital and at Ares Management I should say, we've been purposeful about not becoming too concentrated into that channel so that we can take advantage of maybe those kinds of changes in competitive behavior. So yeah, if it stays like that, I expect it to change things and that could absolutely be a catalyst for spread widening. But it's just too soon and we're really anecdotally not Hopefully that helps. we haven't seen enough volume come through the system. It's January seasonally the slowest month of the year, but we're watching it closely. Yes, it does. Thank you. My follow-up is, it's been a while since the stock has traded below NAV. And certainly recent market turmoil is been a catalyst for that. I'm sure investors would love to hear, our view has always been that if you're willing to take capital from the market when you're trading at a premium DNAV, you should be willing to give capital back to the when you trade at a discount. You guys do have $1 billion share repurchase program. I think investors would like to hear your willingness to deploy the share repurchase program depending upon how volatile the markets get. Yeah. Good question. I I guess the only thing I'd say on that Casey, is just we have heard we have purchased shares back in the past. So it's not something that we're not unwilling to do. And it's always on the table. And something that we're looking at and discussing with our board based on where the stock is trading. So other than that, I'd probably don't wanna speak too much or give much, you know, any kind of forward looking statements about what we might or might not do on that front. Other than to say that we have done it and we're always open to it. Okay, thank you. Operator: We'll take our next question from Arren Cyganovich with Truist. Your line is open. Arren Cyganovich: Thank you. This will probably show my lack of knowledge in the tech sector, but going to give it a shot anyways. You mentioned that average EBITDA for the soft port portfolio companies is over $350 million and they've been growing. When I look at public software companies that have been facing a lot of pressure, EBITDA is not really a metric that they use in terms of valuation because I guess, they're in a higher growth phase. I was wondering if you could just describe some of the differentiation between the software that you own versus you know, what we might be looking at in the in the public markets? Yeah. I don't know that it's all that different. I just think you're it's a difference between equity and debt. Thesis, right, when we're thinking about the investments strategy. So we, as lenders, are looking at the underlying cash flow of these businesses. We're our loan and get us paid our money back. So, you know, we're we're very focused on EBITDA. The equity markets and publicly traded companies are focused on forward growth to justify their valuations. And there have been you know, extremely high expectations of future growth. And I think as you start to see some of that growth temper, that is driving a lot of the fall off in values in the public market. And that's why those public companies are always pointing to revenue metrics and growth metrics, because I just think those investors are more focused on that. But I don't think they're necessarily different types of companies. We have seen obviously in the lending space over the last five or six years the development of recurring revenue loans where there are lenders that will lend against the revenue and the forward growth, not necessarily the EBITDA or the forward achievement of EBITDA. We have been very conservative on that. And I didn't even really mention that as part of the overall, you know, the intro I did on the software topic. But another data point to even point out around our strategy which is we've been much more conservative around recurring revenue lending than I think a lot of our peers. And it's less than it's like less than 2%, one to 2% of our book right now. Is recurring revenue loans and that's also extremely diversified. We've had a strategy of building that book with a bunch of very small positions. That we can watch that space develop and see how it would perform By the way, it's actually performed quite well. And those loans have actually converted into EBITDA loans. So it's actually been a good space. But we've been very conservative on that. So hopefully that helps answer the question. It does. I still need to do some some reading on on the sector since I'm not my area of expertise. As a follow-up, we've been waiting for the M and A markets to really open back up and the IPO markets to kind of open back up to free up some of the investments that the private equity have been holding on for longer periods. You feel like the software pressure is going to weigh on that timeline for 2026 in you know, maybe what other areas outside of you know, in this kind of story, other sectors, do you see within your pipeline that might be able to take up some of that slack? Yeah. I mean, I I think it it it obviously might impact in the software space. Right? So and especially for the your prior question around valuations in the public market and when you're private equity firm looking to buy a software company, you're obviously gonna rethink value. And a lot of it private equity firms that own the existing companies pay pretty high prices So I certainly do expect there could be a bit of a widening of the gap on bid ask spreads on new buyouts in the software space. That being said, still think there's going to be really attractive add on opportunities for existing portfolio companies. To potentially take advantage of lower valuations. I think that'll be a good opportunity for us to deploy into the space And certainly take private opportunities on in the software space given lower valuations will probably tick up if I had to venture a guess. So there's some offsetting factors I think within that industry. I mean, in terms of the rest of the economy, again, fundamentals feel strong, growth rates are good. And I don't necessarily see that spilling over into other areas of the economy. I think the ingredients are in place. Given the sort of long in the tooth nature of the whole periods on a lot of private equity funds that just continues to extend. And given the apparent confidence in the overall economy for on the part of buyers to step up and buy new companies. So I think we still feel optimistic on the rest of the year. Great. Thank you. Appreciate it. Operator: We'll move next to Brian McKenna with Citizens. Your line is open. Brian McKenna: Okay, great. Thanks for squeezing me in here. So maybe one more on the theme of software. I think all the focus recently is clearly been around the negatives from AI, and and no one has really talking about maybe the potential upside for your portfolio companies from AI and leveraging AI, specifically those companies away from software. So I'm curious, when you look across your portfolio today, there any way to think about what percent of your portfolio companies could actually see more talents from AI than headwinds over time And then is there actually a scenario where your portfolio collectively is experiencing more net benefits longer term? Yes. Thanks so much for asking, Brian. I you know, we're lenders, so we're always focused on downside risks. But 100% there is upside. And I think that is being that is missing from the discourse here in the public, which is it sort of almost feels like people think big software companies are sitting their heads in the sand asleep at the switch while AI is creating competitive threats and they're not doing anything. It couldn't be further from the truth. We we have great dialogue with our software companies. They are all working on augmenting their products with know, using AI solutions or just using AI to create additional software modules and tools to add on to their core infrastructure software. And that's actually going to help some of these core infrastructure software businesses create new products to on and upsell faster than they might otherwise have been able to do. And they already have that leg into the customer via the core enterprise. So I 100% think it's going to be a boon to some of our companies. Obviously as lenders you know, help us get our money back. Maybe faster, but is not a ton of upside as a lender. But back to our equity co investment strategy, which we talked a lot about in the prepared remarks. So certainly could be really helpful on those equity co investments that we have made selectively into some of those software companies. And then just one more for me. Just taking a step back and looking at the industry, it's clearly getting larger and larger, more competitive. And there's really a long list of firms that can write large checks. In the market. So I think having intellectual capital and really a full suite of value added capabilities are becoming that much more important. So you guys clearly have this you noted, you know, some of the strong expertise that exists across your your deal teams and just the platform more broadly. But when you look at some of the differentiated deals you're winning in the market today, how much of these how much of those are a function of kind of these, full suite of capabilities, if you will, and really the capabilities away from just being a provider of capital and just trying to think through that a little bit more? Yeah. It's all about those capabilities. And and not just about being a provider of capital. So you know, it's a combination of so many different things. I think first and are the amount of people and the talent that we have on our origination and investment team We do believe we still have the largest investment team in the direct lending industry and means we have a lot of people out there calling on companies trying to source opportunities. And that deal flow takes longer to germinate and result in an actual transaction We could be out talking to, you know, CEO or management team or a board of a of a non-sponsored company for years building a relationship and there might not be any transaction to do and then all of a sudden they want to do something and they pick up the phone and call us. Because we've been building that relationship. So this is something that not happen overnight, takes a really long time to build those and lead to this kind of deal flow. And, you know, so it starts with the team, starts with those touch points, but then it also combines with the fact that that team is out there offering a huge amount of flexibility of products. Right? We're not out just saying we can be your senior lender, your bank. We're saying we can be your junior capital provider, We can you equity co investments. We can start as a mezzanine lender and then down the line if you want a senior lender, we can become that lender. So we're we're really trying to explain to these companies that we can be their capital provider for the next ten to twenty years, not just the next three to five years. And I think that really resonates. So it's all those things combined. It's not really just one thing. And I do think we're ahead of our of our peers in that respect. Operator: We'll take our next question from Robert Dodd with Raymond James. Your line is open. Robert Dodd: Hi, guys. A quick one from me maybe. Obviously feel very comfortable with the underwriting process you're doing on software and you got a well thought out thesis there. You seem also optimistic that maybe spreads will widen that market if BSL market becomes less inclined to finance new software? LBOs, etcetera. I mean, so looking at that, would that make software even more attractive to you from a risk return perspective? And would you be looking to potentially increase your allocation to software over the next you know, call it twelve to twenty four months? Yeah. Good question, Robert. Look, we will have to see what unfolds, I think is what I would say. I don't it can go in so many directions in terms of yeah, how how widespread gets. Right? What types companies are looking to raise capital? So there's just so many different things that can go into that, but I don't know that I wanna necessarily speculate. We we are big on diversification. As we said, over and over in so many different ways, And software is our largest industry category. We're very comfortable with it. But at the same time, we like diversification. So maybe I'll just leave it at that and we'll see what the market gives us. Operator: We'll move next to Kenneth Lee with RBC Capital Markets. Your line is open. Kenneth Lee: Hey, good afternoon and thanks for taking my question. Just one on the broader industry. The recent OCC FDIC changes to the leverage loan guidance for for banks. You expect to see any kind of potential for meaningful change in over the competitive landscape over time based on the change of guidance there? Thanks. Yeah. Ken, definitely something we're watching closely. I you know, I I don't think so. The reality is the leveraged lending guidance that was put in place a while ago hasn't really been enforced. And so I think the relaxing of that guidance is not necessarily gonna change behavior. I think the the larger driver of you know, regulatory behavior on banks is the the regulatory capital requirements and the capital capital charges. That banks see if they make a loan into our market. And that's still remains punitive and is not changing. So I just don't think the leverage lending guidance change is gonna make sense. Got you. Very helpful there. And just one quick for me. On some of the recent deals you've been seeing or some of the new investments in terms of the terms and documentation that you're seeing there, any changes more recently and more specifically, have you been seeing any loose loosening of example, like EBITDA add backs or any other terms there? Thanks. Not really, no. If anything, would say there's probably a heightened focus on documentation terms just given some of the headlines around LME transactions in the broadly syndicated market. And the looser documentation that exists in that market. There's been a little bit more a spotlight that's been put on that. And so I think it's actually been a good thing for our space. It's woken up more of our peers to the importance of focusing on documentation. We've made that a priority here for years now. And it's a critical part of our committee process. We will walk away from transactions based on documentation terms. Not really seeing a big change to that, if anything, getting better. Got you. Very helpful there. Thanks again. Operator: We'll take our next question from Paul Johnson with KBW. Your line is open. Paul Johnson: Yes, good afternoon. Thanks for taking my questions. I know you have been fairly conservative with the ARR structures in the past, as you said. But is there any sense of like the number or the percent of your software book that is below profitability today? Below profitability, you mean negative EBITDA? Yeah. Correct. I don't have the numbers in front of me, but I I can't imagine that there would be another software company in our portfolio outside of those ARR loans. That would be negative EBITDA. And in fact, I would also venture a guess that many of those ARR loans have positive EBITDA as well. For two reasons. Number one, when we do a new ARR loan, a lot of cases, they still have positive EBITDA, but it's not necessarily enough EBITDA to maybe justify the amount of debt. You look at it on a revenue basis, and they're growing 50% a year and it's going to be a lot of EBITDA in a year or two. But it's not like everyone is negative EBITDA. Some of those are actually EBITDA at the outset. But then secondly, others ARR loans in our portfolio have been in there for a number of years and have achieved the growth, that they were expecting. And so now they are positive EBITDA. So, I mean, very, very, very small almost de minimis amount, I would say, of our software book. Has negative EBITDA. Got it. That's very helpful. And then last, I would just ask, on the PIK portfolio, which has been a good portfolio for you guys historically, I'm just curious though within the debt side of some of the pick assets, is there a tilt toward software within that portfolio? Or has that generally been just as diversified as the broader portfolio? Yeah. It's it's around the same. We did take a look at that, and the I'll say two things. Number one, the percentage of the software book had a slightly higher percentage of PIC in it. But the pick in that software book is I wanna say, 99% maybe even 100%. Structured at the upfront at the outset of the investment, not amendment pick. Right? And that's an important thing on the overall pick book that we talk about all the time and try to disclose, which on a consistent basis, which again this quarter on our overall pick book, it's roughly 90% of the pick interest and dividends was structured at the outset of the investment. And purposely done Only 10% is amended PIC. And then so again, in the software book, it's almost a 100% is structured. So again, back to the point that we're just not seeing weakness in the software book at all. We don't have the need to provide any amended PIC there. Got it. Appreciate it. That's all for me. Thank you very much. Operator: We'll move next to Derek Hewitt with Bank of America. Your line is open. Derek Hewitt: Good afternoon, Court. So how large are you willing to grow both the SDLP and Ivy Hill over the next year or so kind of given the more favorable economics versus the core portfolio? And then are there assets on the balance sheet today that could potentially be sold down to those entities? Yes. Thanks, So, I'd say, if you look historically, we've had an investment in Ivy Hill go as high as 11% and I think STLP as high as 7%. So those are probably good you know, guardrails for now. So we truly value those two assets quite a bit and agree with they're very strategic to us and you're right, are pretty high yielding particularly in a low yield environment. So I could certainly see you saw us grow this quarter. So, I think there's a it's really in our playbook to continue focusing on those two investments over the course of this year. And yes, we did see in the fourth quarter, did sell assets in Ivy Hill. And so that is certainly there's certainly more assets on the balance sheet we could move to look to move down to IVL over time. Yeah. And I don't think we wanna I there's not really a, a stated cap or a target that we manage business toward? Again, I think we wanna see the market develops, what kind of transaction activity there is, where spreads go, all of those factors. Work into it. The only real cap would be the 30% non-qualifying asset cap. So that would be the sort of governor on the top end. Okay. Great. Thank you. Operator: This concludes our question and answer session. I'd like to turn the conference back over to Kort Schnabel for any closing remarks. Kort Schnabel: Great. Well, you all for joining us today. And for your continued support and engagement. And we look forward to reconnecting with you on our next quarterly call. So till then, stay well, everyone, and have a great day. Operator: Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of the call will be available approximately one hour after the end of the call through March 4, 2026 at 5PM Eastern. To domestic callers by dialing toll free +1 808394018. And to international callers by dialing +1 (402) 220-2985. An archived replay will also be available on a webcast link located on the homepage of the Investor section of Ares Capital's website. Goodbye.
Operator: Ladies and gentlemen, welcome to the Lundbeck Financial Statement for the Full Year 2025 Conference Call. I'm Lorenzo, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Charl van Zyl, President and CEO. Please go ahead. Charl van Zyl: So good morning, everyone. Welcome to our full year 2025 earnings call. Of course, it's my pleasure to really present to you our outstanding results. It's been again another record year for Lundbeck in 2025, and it's really underpinned by very strong fundamentals, very much underpinned by our focused innovator strategic path. You'll hear me say a lot about the results very much in the sense of it's not by chance, but by clear intent that we are delivering these outstanding results. If we can go to the next slide, please. So of course, our discussions today are containing forward-looking statements, which, of course, are subject to change. So, let's go to the next slide, please. And here, I would like to take a moment just to pause and reflect on the last 2 years of our focused innovative strategy. And there's so much to say about this transformation that Lundbeck has gone through. But I have to say, I'm really proud of the progress that we have made. Again, it is not by chance, but by clear strategic intent that we see these very strong results. If you recall, our focused innovator strategy is very much about growth, innovation and funding. And when I speak about growth, you would have seen over '24, '25 that we've had double-digit growth across our strategic portfolio, which allows us in a way to extend our growth also into 2026. Secondly, when you think about innovation, we made the acquisition of Longboard that bolstered our late-stage pipeline, but we have truly seen a transformation of this pipeline over the last 2 years with the position we're in now with 5 to 6 mid- to late-stage assets that are really the growth engine of the future of Lundbeck. And it's a pipeline that is characterized by first-in-class or best-in-class molecules. And the third foundation of our strategy is really the funding, the largest capital reallocation that the company has undertaken, and it has allowed us to fund the growth and the pipeline and keep us in a flexible financial position to continue that journey into 2026. If we go to the next slide, I'd like to focus a little bit more on 2025. And truly, it was an outstanding and a record year for Lundbeck. Again, our intent was to focus on investing in our strategic brands, but also in our pipeline. And on the growth level, we have seen that continuation of the double-digit growth on the strategic brands being at 19% in 2025, underpinned by a stellar growth in Vyepti of 59% and also stellar growth for Rexulti at 23%. As you recall, we also made very clear moves in 2025 around sharpening our commercial model to focus on 12 key markets and allowing us to work with partners across 27 markets, again, allowing us to focus our efforts on where we can play to win and grow very strongly as we go also into 2026. When you think about the pipeline, keep thinking about the fact that we're building strong diversification of this pipeline, building a strong position in neurospecialty and also in neuro-rare. When you think about neurospecialty, of course, Vyepti, a growth engine in the U.S. and in Europe, but also soon to become a growth engine with the filings that we've done in China, Japan and Korea to truly make this a global launch for Lundbeck. You will also, in the first quarter, receive results on our anti-PACAP proceed trial that will further enhance our position in the space of severe preventative migraine. When we think about neuro-rare, we think clearly about bexicaserin, of course, the Longboard acquisition that is very much in this Phase III and in execution of the clinical program and so is Amlenetug in its fast enrollment also in MSA. Both of these really high unmet need areas where we can see the opportunity very strongly in the Phase III results. Then we will talk a bit more today about further elements of the pipeline in the mid-stage, our anti-ACTH in congenital adrenal hyperplasia as well as Cushing's disease, and you'll hear more about that from the pipeline discussion later today. Fundamentally, the funding that you see is a continuation of the first 2 years of our focused innovative strategy, where we will continue to be disciplined around our capital reallocation in this range of $1.3 billion to $1.5 billion that we are freeing up to create that flexibility for us to invest in growth and also in innovation. And therefore, we are guiding today very much in a position of strength from '24 to '25 going into '26, with revenue growth of 5% to 8% and adjusted EBITDA between 4% to 12% with that spread also taking into account the strategy of investing in the pipeline as we see the triggers unfold in 2026. So with that, let me just introduce the other speakers for today on our agenda, and you'll hear a business update from the team as well as a portfolio update and, of course, the financial results in more detail. So with that, it's my pleasure to, first of all, start with a business update and hand over to Tom Gibbs, our Head of the U.S. Thank you, Tom. Thomas Gibbs: Great. Thank you, Charl. As Charl just mentioned, we are pleased with our commercial performance for 2025, which is headlined by a strong growth of Vyepti and accelerated growth of Rexulti. Please turn to the next slide, and I'll first review the performance details for Vyepti. Vyepti delivered strong and sustained growth for the full year 2025, and we expect this to continue in 2026. This performance has been powered by continued strong growth in the U.S. and supported by robust adoption of Vyepti in prioritized ex U.S. markets, including Canada, Italy, France, Spain and Germany. Vyepti global net revenue for 2025 was DKK 4.476 billion, and this represents 59% growth over the same period last year. Net revenue for Vyepti in the U.S. was DKK 3.908 billion, growing 58% over prior year. In the U.S., our focus has been to make purposeful investments in our patient-centric model supporting Vyepti through our disciplined capital allocation program that Joerg will speak to later. We will continue to make incremental investments in 2026 to elevate the impact of our execution informed by our advanced analytics capability, and this includes a sales force expansion as well as optimize direct-to-consumer advertising. We expect to sustain market-leading demand growth by driving depth and breadth of prescribing and continued positive momentum in new patient starts supported by high written-to-infusion conversion ratio and best-in-class patient persistency. In Europe and international operations, significant work is being done preparing for the launch of Vyepti in Asia. And if approved, we see this region as a significant opportunity to drive further growth for Vyepti. Next slide, please. Now moving on to Rexulti. Rexulti continues to perform well and deliver consistent growth propelled by continued strong progress within the AADAD segment in the U.S. Reported revenue was DKK 5.745 billion, increasing 23% for the full year 2025 versus prior year. Importantly, revenue growth in the U.S. was driven by strong underlying TRx demand, delivering 24.2% growth in 2025 compared to 2024. Rexulti AADAD volume is becoming increasingly important to overall Rexulti brand growth, and we expect this to continue through 2026 and beyond. AADAD monthly TRx volume has increased 725% versus pre-indication baseline and the AADAD contribution to overall Rexulti demand has grown to 24.4%. Importantly, the 65-plus segment now contributes 34.8% or more than 1 out of every 3 Rexulti TRx claims based upon the most recently available claims data. The team in the U.S. is continuing to focus on the levers to drive continued growth for Rexulti, informed by our margin return on investment analysis. As you may recall, we reallocated a portion of our DTC advertising for AADAD to expand our sales footprint, and this is mainly in the primary care segment. The first wave of the expansion of our multi-specialty sales force team was deployed during 3Q 2025, and we're encouraged by the early results. The second wave is ongoing, and we expect to be fully deployed during first quarter 2026. Overall, we're pleased with the momentum of Rexulti demand exiting 2025 despite an increasingly competitive market and evolving policy landscape. TRx demand in fourth quarter 2025 grew 24.2% versus fourth quarter 2024. Precision execution across the marketing mix, including our expanded sales team in primary care is expected to reinforce the long-term growth for Rexulti and help address increased competition. Michala, over to you. Michala Fischer-Hansen: Thank you, Tom. Let's turn our head to the Abilify franchise performance, where 2025 was another year of solid growth momentum for the franchise, growing at 10% versus last year overall, now at DKK 3.776 billion. If we look at the U.S. first, the Abilify franchise delivered a 9% growth compared to the year before, and that was also resulting in a gain of 1.1 percentage point market share. Importantly, as the U.S. is transitioning from franchise maximization to conversion maximization, ASIMTUFII continues to be a key growth driver with an encouraging 22% NBRx weekly conversion rate. If we turn to Europe and International operations, the franchise delivered 10% growth versus last year. This was driven by continued launches of Abilify 960 milligram, which is now launched in a total of 27 markets across Europe and international operations. We continue to see strong conversion rates across our key markets with several markets surpassing 20%. Across the markets, we also continue to see encouraging conversion rates from other oral atypicals and LAIs that are outside of our Abilify Maintena franchise. Looking ahead, conversion maximization remains a critical strategic focus. And with regards to generic competition for Abilify 1M in Europe and international operations, we expect to see generics in the market in Q2 of 2026. Next slide, please. If we turn to the 2026 outlook, as Charl said, we are pleased to see that despite the pressures from generics that we expect, the strong performance of our strategic brands reinforces our confidence in updating our 2026 growth outlook, where we're pleased to guide a 5% to 8% revenue growth in constant exchange rates. Let me unpack that for you. In 2026, we expect to see headwinds from increased generic pressures on Abilify Maintena and Brintellix, the reprioritized resources with the Takeda agreement in the U.S. as well as emerging competition on Rexulti. This is outweighed by a continued strong performance of Vyepti, Abilify, Asimtufii and Rexulti. 2026 will also reflect in-year commercial adjustments that impact on our reported revenue and growth. As mentioned by Charl, in December 2025, we implemented a sharpened commercial model where we introduced 27 partner-driven markets. These partners will receive a commission fee of 25% to 30% of our revenue, which will reduce our net revenue compared to 2025. In addition, as part of the transition to the partner model, the partners are building up inventory in the market, which is expected to amount to approximately DKK 500 million positive revenue impact in '26, which will be a onetime effect for this year. When adjusting for the partner model impacts, we're encouraged that our underlying performance is expected to be at 6% to 9% underlying growth, reflecting strong fundamentals as a result of the strategic decisions we have taken in 2024 and 2025. Specifically for our guidance for '26, as stated, we're pleased to guide a 5% to 8% constant exchange rate revenue growth for 2026, which is driven by our continued strong brand execution and our accelerated capital reallocation towards high-value opportunities globally. Joerg will come back to this in his section. With this, I conclude the performance section and hand over to my esteem colleagues, Maria and Johan for a portfolio update. Johan Luthman: Thank you, Michala and Tom. It's great to see the continued very strong commercial performance throughout the full year '25. Maria and I will take you through the portfolio update. Overall, during '23 and '24, we paved the way for the pipeline to go through critical value inflection points in 2025 with positive data emerging from several early-stage projects. Thus, this means, as you heard from Charl, that we can with confidence say that we will have 5 to 6 mid- to late-stage assets in the pipeline by end of 2026 for 6 to 8 indications. So, from an R&D perspective, 2025 has been a solid year of execution and progression. We have continued to advance our research pipeline with innovative assets with highly innovative and strong programs entering into development. I'd like to highlight that we initiated a strategic partnership with Contera, marking Lundbeck's first entry into oligonucleotide-based medicines. As I mentioned, maturing the Phase I portfolio has triggered several programs to progress towards Phase II starts during 2026. At the same time, we have executed well on our late-stage development programs as well as continue with critical brand support, primarily for Vyepti. In early-stage development, we have made extensive use of focused Phase Ib exploratory proof-of-concept studies, allowing us to generate patient data and progress programs with strong biological and clinical validation. As you have seen in the last 2 quarters, this has led to data supporting progression of our D1/D2 agonist 996 in Parkinson's disease and our CD40 blocker 515 in thyroid eye disease to Phase II initiation. Next is our anti-ACTH mAb909, now with the INA name Asedebart. Maria and I will return to Asedebart in a few minutes. For late-stage programs, 2025 marked the year executing on our 2 Phase III programs, Bexicaserin and Amlenetug with progressing recruitment and continued health authority interactions. In Q4, Bexicaserin was granted breakthrough designation in China for DEE, and Amlenetug received Fast Track designation with the FDA as well as orphan drug designation in Japan. Also, during 2025, we completed enrollment in the PROCEED Phase IIb trial. Finally, turning to our strategic brands Vyepti, we have now completed the Asia filings based on the Sun programs in 2025 with submissions in China and Japan in Q4, completing the global rollout of the program. On Vyepti, we also continue to generate strong data on efficacy and effectiveness in severe migraines. Overall, this reflects a year of discipline and generally very successful pipeline progression. Next slide, please. Our pipeline progression is underpinned by strong scientific momentum. During 2025, Lundbeck maintained broad engagement across the scientific and medical community with many medical conference attendance and with 114 scientific presentations and several high-impact publications in peer-reviewed journals. This level of activity is not just about visibility. It enables continuous external dialogue and validation of our science with clinical and academic experts. Importantly, this momentum continues in 2026 with strong presence planned at several medical conferences. Let me showcase some of those. For ADPD here in Copenhagen, we'll present Phase I data for our D1/D2 agonist 996 with further data being presented at the MDS meeting. Also, at AD/PD, we'll present the design of the innovative approach in the Amlenetug pivotal program. For AAN, we have 4 programs presenting data, Vyepti, including new data from the INFUSE real-world evidence study in prior anti-CGRP treatment failures. Bexicaserin data from its Phase II PACIFIC trial and Amlenetug expert input in what would constitute a clinical meaningful effect. Finally, for 202, our Anti-PACAP mAb will present data from 2 Phase I trials. However, much more importantly, for 222, we will present the PROCEED IIb headline results at the American Headache Society Meeting as well later in June at the European Academy of Neurology. Since Lundbeck in recent period has obtained very encouraging data in neuroendocrinology for the CD40 blocker 515 and Asedebart, we will showcase our emerging presence in this space at the ENDO conference in June. As promised, we will now turn over to speaking more about Asedebart. So Maria? Maria Alfaiate: Thank you. And as Johan just outlined and Charles mentioned in his opening remarks, our pipeline is progressing with increasing clarity, focus and value inflection, and Asedebart is a strong illustration of that strategy in action. Asedebart represents one of our most differentiated first-in-class programs moving forward with a clear scientific rationale and a well-defined development path. Asedebart is an anti-ACTH monoclonal antibody designed to address the root cause of cortisol and androgen excess. This mechanism directly differentiates it from existing therapies that focus on downstream hormone control rather than disease modification. We are advancing Asedebart in 2 rare endocrine indications, ACTH-driven Cushing's syndrome and congenital adrenal hyperplasia. Together, these indications represent more than 80,000 patients globally, currently underserved and share a common prescriber base, enabling efficient development, regulatory alignment and future commercial leverage. Importantly, we have already secured orphan drug designation in CAH in both the U.S. and EU, reinforcing the regulatory attractiveness of the program. From an unmet need perspective, the rationale is clear. In ACS, patients lack targeted disease-modifying options and are often exposed to complex polypharmacy with significant safety limitations. In CAH, currently approved treatments provide suboptimal disease control and rely on chronic glucocorticoid exposure with well-known long-term risks. Asedebart's differentiated profile positions it to create value across different stakeholders. For patients, it offers the potential for improved tolerability in ACS and superior efficacy in CAH. For payers and reimbursement authorities, meaningful differentiation on key outcomes supports reduced total cost of care. For health care professionals, it enables a simpler, more predictable approach to long-term disease management for Lundbeck, solidifying our ambition in neuro-rare diseases, supporting long-term pipeline and value growth. In summary, consistent with the pipeline progression Johan described, Asedebart perfectly exemplifies how we are advancing focused, high-impact assets with clear differentiation, regulatory momentum and significant upside potential. And for a more detailed look into one of these indications, I will hand back to Johan. Johan Luthman: Yes. Thank you, Maria. Next slide, please. Yes. So, with that unclear medical need defined by Maria, let me show an example of the strong data we obtained for Asedebart, in this case, for congenital adrenal hyperplasia. In CAH, chronic ACTH elevation drives adrenal overstimulation, leading to excess production of androgens and the precursors. Current treatments primarily rely on glucocortoids, cortisol replacement, which suppresses ACTH indirectly. But as you heard from Maria often with the cost of long-term overexposure and associated complications. By directly targeting ACTH, Asedebart is designed to intervene upstream in the disease pathway, reducing adrenal overstimulation and downstream hormone excess at its source. This provides a clear strong biological rationale. 17-hydroxyprogesterone, 17-OHP is a precursor in the production of cortisol. When cortisol production is hindered by CAH, the body produces excess of 17-OHP in the adrenal glands and donuts and thus elevated 17-OHP is a diagnostic biomarker for the indication. In an ongoing multisite open-label multiple dose trial in patients, we could demonstrate effective engagement of the ACTH pathway. As you can see, following effusion Asedebart, at 24 hours, there is a 90% to 98% reduction of 17-OHP from baseline. We also looked at androstenedione or A4, a key marker used to monitor treatment efficacy and disease control. Like 17-OHP, we see a reduction in A4 following Asedebart infusion ranging from 65% to 90% compared to baseline. These pharmacodynamic effects provide a strong reason to believe in the potential of Asedebart to address core disease drivers in CAH. From a safety perspective, Asedebart was well tolerated with no serious or severe adverse events reported. With this data set, we can now conclude the Phase Ib part of the ongoing Phase I/II study and move into the Phase II part of the study. Next slide, please. Finally, let me place this in the broader pipeline context. In addition to CAH, we also have data for Asedebart in a similar Phase I/II open-label study in Cushing's disease. Cushing's a condition caused by ACTH secreting pituitary adenomas, leading to excess cortisol production by the adrenal glands. We have now very encouraging Phase Ib data to be presented at ENDO, supporting progressing Asedebart to Phase II for this indication. Together with our CD40 blocker 515 and Thyroid Eye Disease and our D1/D2 agonist 996 in Parkinson's disease, we have 3 assets across 4 indications progressing towards larger Phase II trials. As mentioned already, 222 headline results from PROCEED Phase IIb is near-term catalyst. And if positive, the program holds potential to expand our migraine efforts into franchise with the addition of a novel mechanism of action product. In conclusion, while progressing our current Phase III programs, we are progressing several additional first-in-class and sometimes first-in-indication programs supported by clinically validated biology, building a solid mid- to late-stage pipeline. With this, I'd like to hand over to Joerg. Joerg Hornstein: Thank you, Johan and Maria. And please allow me a few opening remarks before we turn to our key figures. Over the past 2 years, we have executed within a very clear financial framework, prioritizing growth behind our strategic brands, accelerating innovation and funding this through disciplined capital reallocation. This focus is clearly reflected in our results. From a growth perspective, we delivered strong double-digit revenue growth in '24 and '25, exceeding expectations and underpinned by exceptional performance from Vyepti and Rexulti. This has translated into a strong gross profit growth, providing operational leverage, allowing us to both expand margins and step up investments where it matters most. This is why we enter 2026 with confidence and a clear strategic intent. We have strong commercial momentum, a sharpened operating model and a significantly strengthened mid- to late-stage pipeline with several key milestones ahead, including PACAP. From a financial standpoint, this supports both our growth outlook and the guidance ranges we have provided. With that, I will now turn to the financial performance for '25 and our guidance for 2026. Next slide, please. Revenue reached DKK 24.6 billion, growing 13% at constant exchange rates, driven by strong momentum across our strategic brands grew 19% predominantly reflecting accelerated growth in Rexulti and Vyepti. The adjusted gross margin was 87.5%, impacted by a reservation fee related to a manufacturing contract for Amlenetug. Sales and distribution costs decreased slightly by minus 2% to DKK 7.7 billion, reflecting the execution of the focused innovator strategy alongside disciplined resource allocation and capital reallocation. Administrative expenses reached DKK 1.5 billion, corresponding to a slight increase of 4% at constant exchange rates, in line with expectations. R&D costs increased by 10%, reaching DKK 4.9 billion, mainly driven by the continued progression of our Phase III programs for Bexicaserin and Amlenetug and a maturing mid-stage pipeline. The increase was partially offset by the Marly impairment loss recognized in '24. Other operating expenses reached DKK 969 million, primarily reflecting an impairment loss of a nonstrategic production site in Italy of around DKK 600 million and commercial restructuring costs of around DKK 400 million related to the transition of 27 markets to a partnership-led model. Adjusted EBITDA grew 24% at constant exchange rates, mainly driven by the strong performance of our strategic brands. Adjusted EBITDA margin expanded to 32% up 3.2 percentage points, reflecting our strong performance in '25, continued disciplined capital reallocation, more than offsetting the R&D cost increase from the acquisition of Longboard Pharmaceuticals and the shift to a more mid- and late-stage R&D pipeline. Next slide, please. EBIT rose 59% to DKK 5.3 billion, driven by higher gross profit and lower sales and distribution costs. This performance was partially offset by higher R&D costs and other operating expenses associated with our commercial restructuring and an impairment loss of a nonstrategic production site, as earlier mentioned. Net financials reached an expense of DKK 788 million, mainly due to higher interest costs related to the new debt obtained in connection with the acquisition of Longboard and unfavorable currency effects, especially from the U.S. dollars. Our effective tax rate was 28.9% compared to 15.5% in '24. '24 was positively impacted by the reversal of a provision related to the U.K. tax audit that was closed with no adjustments. The increase in '25 in the effective tax rate to 28.9% is driven by 2 nonrecurring items in Q4. The primary driver was a nondeductible impairment related to the planned divestment of our manufacturing site in Italy, combined with the finalized outcome of a U.S. advanced pricing agreement adjustment that had a larger tax impact than previously expected. Looking ahead, we are guiding an effective tax rate of 20% to 23% for '26, reflecting the absence of these one-off items and a more stable tax position following the APA finalization. Net profit increased by 2% to DKK 3.2 billion and adjusted net profit increased by 5%, reaching DKK 5.2 billion, again, reflecting strong performance and capital reallocation, partially offset by higher financial expenses and income expenses. In line with our dividend policy, it is proposed to pay out a dividend of DKK 1.15 per share per share, which is an increase of 21% compared to '24. The proposed dividend corresponds to approximately 36% of Lundbeck's net profit and 30% of net profit adjusted for the impairment loss for our manufacturing site in Italy. Next slide, please. Cash flow from operating activities was in line with EBIT performance, reaching DKK 5.5 billion, reflecting strong EBIT growth and a significant working capital improvement. Keep in mind that the change in working capital in '24 was highly impacted by around DKK 2.8 billion of acquisition-related transaction and settlement costs. Cash flow from investing activities was an outflow of DKK 611 million, reflecting the purchase of intangible assets and property, plant and equipment, whereas '24, again, was highly impacted by the acquisition of Longboard. Cash flow from financing activities was an outflow of DKK 6 billion, mainly driven by the repayment of the loan facility used for the acquisition of Longboard, partially offset by a EUR 500 million bond issued in Q2 to refinance the loan facility. Next slide, please. An essential part of Lundbeck's focused innovator strategy is our capital reallocation program through which we have taken a number of deliberate decisions to support funding for growth and innovation. During '25, we increased our level of ambition and continue to operate with a high degree of discipline, maintaining our target of freeing up approximately DKK 1.3 billion to DKK 1.5 billion by 2027, as communicated last year. Importantly, we have been able to absorb the Longboard costs while still expanding margins in 2025. The capital reallocation program is built around several strategic pillars, spanning both value creation and efficiency initiatives. These have been successfully executed across '24 and '25, providing strong financial flexibility and a solid foundation as we enter 2026. One key pillar we acted on in the fourth quarter is our production model optimization. As part of this, we have initiated a planned divestment of a noncore production site, which will further reduce complexity and streamline our manufacturing footprint. In summary, we have more than delivered on the commitments we made 2 years ago during our Capital Markets event and remain firmly on track to achieve our midterm targets. Next slide, please. Let me now turn the focus on the outlook for 2026, where we expect to deliver another year of profitable growth, building on the strong momentum we achieved in '25. For 2026, we are guiding a revenue growth of 5% to 8% at constant exchange rates. This guidance is underpinned by continued strong underlying growth across our core portfolio, particularly our key brands, which remain the primary drivers of value creation. As explained by Michala, there are a couple of onetime effects impacting our '26 revenue. While the sales from the new partner markets are reduced by the partner commission fee, this decline is partially offset by a onetime inventory impact of approximately DKK 500 million in Q1 2026. This impact is specific to '26 and relates to inventory buildup within the partner channel and is not expected to be a recurring driver of revenue growth. Excluding these onetime effects and restating '25 on a comparable basis, our underlying revenue growth would be in the range of 6% to 9%. Turning to profitability. We're guiding adjusted EBITDA growth of 4% to 12% at constant exchange rates in 2026. This range is driven by strong gross profit growth, reflecting again, continued momentum in Vyepti and Rexulti. At the same time, we are increasing investments in R&D to support long-term growth. With several critical clinical trial initiations and readouts plans during '26, especially PACAP, our guidance, therefore, assumes a wider adjusted EBITDA margin range. The wider range still points towards margins within our midterm guidance. And with that, I would like to hand over back to Charl. Charl van Zyl: Thank you, Joerg, and thank you to the entire executive leadership team for these outstanding results. I will make a few closing remarks on the next slide, please. So, you've seen clearly from us the 2-year window of where we've put some of the fundamentals in place that allow us to now extend our growth very clearly into 2026 with very clear priorities. We are extending our growth, as we said, with clear focus on our strategic assets. But fundamentally, you've also seen a transformation in the pipeline that allows us to really bring those 5 to 6 mid- to late-stage assets further into their cycle of development, allowing us to continue our strategic path of developing them for the long-term success of Lundbeck. So, we enter into 2026 really from a position of strength with a very clear strategic path. And as I said, these results are not by chance, but really by clear strategic intent and choices we've made that allow us now to enter '26 in this very strong position. So, we want to open it now for your questions, and I'll hand it back to the operator. Operator: [Operator Instructions] The first question comes from Charles Pitman-King from Barclays. Charles Pitman: Two from me, please. A first question just on Rexulti growth dynamics. I was just wondering if you could provide a little bit more detail on how you're thinking about the potential impact of the IRA listing Rexulti from '28 ahead of the '29 LOE. And coupled with that, just I know it's super early, but if you're able to comment at all on the initial impact from J&J's CAPLYTA on Rexulti's growth trajectory. I'm just wondering kind of can MDD and schizophrenia keep growing into that '28 kind of erosion timeline now? And then just secondly, on M&A. Back in November, Lund pursued a potential acquisition of Avadel. So just wondering if you could provide some thoughts more on the potential commercial opportunity within the narcolepsy space that you saw what the rationale behind your approach was for that asset? And just thinking about kind of the future BD and the rise of M&A activity at the end of last year, how you're kind of viewing the market today and what therapeutic areas you're most interested in pursuing? Charl van Zyl: Thank you, Charles. And I just -- I will -- before I hand to Tom to speak more about Rexulti, just one word to say on Rexulti is that what you've seen and what we're guiding is very much as expected and also planned in our strategic outlook for the brand. But I think Tom can talk more to that. And then I will come back and speak about M&A. But Tom? Thomas Gibbs: So, thanks for the question, Charles. Just first off on the IRA, based upon the established role of Rexulti as a treatment option for many Medicare patients with MDD, schizophrenia and AADAD, Rexulti did meet the criteria for selection of the IRA price setting in 2028. And I think it's important to note that this was aligned with our expectations. I think it's also important to note that since approval in 2015, Rexulti has treated over 1 million patients across all these indications. Lundbeck and Otsuka are committed to ensuring as many patients as possible have access to Rexulti and will formally enter into the CMS process. Because the negotiation process is just the beginning, it is too early to really comment about our expectations related to the impact of the IRA. But what I will say is that, we believe Rexulti is and remains a key growth driver for Lundbeck and our focus remains on driving growth of this brand. And I think this is evident, as you said, in the fourth quarter. Overall TRx demand growth, and this is in the fourth quarter of 2025. So, it's really important as we think about the exit momentum was 24.2% versus the same period last year. That's 16.6% growth in MDD and 63.8% growth in AADAD. So overall demand in fourth quarter 2025 is similar to what we saw throughout the year. As it relates to CAPLYTA, I think it's also important to note that there's so much unmet need when we think about mental illness, additional products is welcome for patients. And again, it's very early to look at the impact of CAPLYTA, but I think CAPLYTA from their perspective is probably doing a pretty good job. But I think it's important for us to understand where their source of business is coming from. If you look at their source of business for MDD, 26% are coming from anxiolytic, 25% from SSRIs and SNRIs, 12% for mood stabilizers and 10% from generic atypicals. If we look at Rexulti specifically, it's 1.5%. So even within the context of a new competitor, as you can see, Rexulti is still growing strongly within MDD, but most importantly, across the overall franchise. Charl van Zyl: Charles, to talk about M&A, again, I think the example you raised of Avadel is a normal process that we go through in bolstering our innovation. We keep looking externally. in our M&A BD strategy in this notion of a string of pearls like we've spoken before, where we look at opportunities that can either strengthen our positions we have. So, we often look at them through the lens of the neuro-rare space or neurospecialty where we can have synergies with our existing pipeline or our sales organization to build sufficient scale. In the case of the space of sleep disorder, I mean, this is, of course, one of the spaces that we keep looking at. We also have some early programs that we will speak more about later in the year that would be in this space of sleep disorder, but it's not the only space that we are looking at. So, thank you for your question. Operator: The next question comes from the line of Xian Deng from UBS. Xian Deng: Also 2, please, from my side. First one, maybe just to follow up on Charles' previous question regarding M&A. So just wondering, you also have this year moving 4 of your programs into Phase II. But in the meantime, you also made the bid for Avadel last November, but then in the end, didn't increase a bit further, so you didn't have the deal in the end. So just wondering if you could maybe help us to reconcile your strategy in terms of R&D, considering both internal and external opportunities, please? So, is that kind of -- do you mainly look at external for the late stage while developing prioritizing internal for early stage? Or any color on that, that would be great. So that's the first question. The second one is on Rexulti, please. So, understanding the underlying trends on TRx, everything looks great. But still this quarter, you have a 9% miss versus consensus. So just wondering, is there any stocking patterns that we should be aware of? If yes, I wonder if you could quantify that, please. Charl van Zyl: Good. So let me start with the M&A topic. So, first of all, I think to just emphasize further what I mentioned, it is an ongoing process of how we build a sustainable pipeline. So, we look at this through the phases of Phase I, II and III and of course, how do we create more optionality long term. So, we have a full pipeline, which is a great thing. We are investing in that pipeline. But we will not be agnostic to looking at other innovations that are coming from outside. If they are more interesting, have more potential than what we have, we will make some of those choices and trade-offs in the pipeline. So, from that perspective, yes, we really look across the range, and we feel that it's very much part of how we will build the long-term sustainability of Lundbeck by looking both at the external environment that supplements exactly what we are doing also internally to build a compelling pipeline. Good. Then the second question, we go to Tom. Thomas Gibbs: Thanks for the question, Xian, and I'm glad we can clarify this for you. I said overall, as we talked about, TRx demand growth exiting the year was 24.2%, and we saw strong growth across both of our key indications. I think some of the mechanics to help close the gap between what was reported for revenue and the underlying demand, I think, are twofold. One is there's one less shipping day this year. And I think it's important to note that we only ship to the 3 big wholesalers on Mondays and Tuesdays. So basically, one, when you have 1 day missing, in 1 day, we'll ship 1/3 of the orders for the day and then 2 for the week. And then the second day, we'll ship 2/3 of the orders for the week. So, I think that's a dynamic that's worth noting. And then secondly, as we look at inventories, we exited the year for inventories at the low end of our normal range. And I think it's those 2 dynamics that will help bridge the gap for you. Xian Deng: So just wondering, the last part, you mentioned the inventory low end of normal range. This is relating to the wholesalers, right, not your inventory? Thomas Gibbs: Yes. It's the wholesalers. We're just quoting the days on hand for wholesalers. Operator: The next question comes from the line of Kirsty Ross-Stewart from BNP Paribas. Kirsty Ross-Stewart: Kirsty Ross-Stewart from BNP. Two questions from me. So, on the broad R&D expense range, I understand that PACAP progression is kind of a key swing factor. So, can you talk to your thoughts on kind of probability of success here, especially in light of the positive HOPE data that we've already seen? And outside of that progression decision, are there any other kind of moving parts that we need to be aware of? You mentioned the Phase II starts, but I think we already knew that they were moving to Phase II. So, can we assume that those are incorporated into the bottom end of the guidance? And if there's anything else just contributing to that broad range? And then a second question on Asedebart, the anti-ACTH. Interested on your perspectives on the Phase II data that we saw from Kinetics in CAH in January this year, which showed kind of good reduction of ACTH production and how you see this asset from a competitive perspective and how your antibody approach is differentiated versus the kinetics molecule at Amlenetug. Charl van Zyl: First, just a very quick question before I hand to Johan on the views on PACAP. I mean, overall, from an R&D perspective, yes, it is one of the important investment triggers. But of course, you know that we also have Bexicaserin and Amlenetug in Phase III. So these are also sizable investments that we are making to complete these studies. And so, from that perspective, we have sort of a healthy pipeline to fund, which is reflected also then in the range of R&D spend that we see. But I think, Johan, do you want to make comments on your views of what you think you can say at this point on PACAP and then maybe on your thoughts on kinetics. Johan Luthman: I mean obviously, you'd like to know some PRS, how we view this, but we'll get the data soon and we take a look at it. There are, of course, prior information. And if you believe in prior, there is, of course, the HOPE trial. And then recently in June, I believe, last year, Lilly presented data from their very early terminated program in 38 patients that showed also an effect. So, there is, of course, overall, encouraging data in the field. And now we just need to expand this with a much wider dose finding range. And we'll see what the data will get. So, you can draw your own conclusions based on that basically. For kinetics, yes, we were happy to see that data. It's a good validation that the pathway is really to be addressed and you can see effects. I'd like to remind you that Kinetics working with the ACTH receptor blocker, MC melanocorticin receptor 2 blocker. So, it's at the adrenal gland stage. So, it's further down in the biology, which means that you don't cover all the different aspects of the overproduction in the system. So here, we have the ability with this mechanism to have a broader symptomatic effect across different adrenal hormones that are hyperactive in this condition. So great data, but we believe it can have even broader effect with this molecule. Charl van Zyl: Then going forward, I think what we again guided for was the range of DKK 5.5 billion to DKK 5.9 billion for '26, and that principally encompasses Bexicaserin and Amlenetug and also the advancement of anti-PACAP and anti-ACTH. I think on the rest of investments, that's always dependent on, you can say, milestone outcomes. Operator: The next question comes from the line of Tobias Berg Nissen from Danske Bank. Tobias Nissen: I have a question on Vyepti here. It's been a very solid '25 with accelerating growth here over the last 3 quarters. I'm just wondering if you can quantify some of the growth drivers here for '26. You have lifted the persistency ratio quite significantly over the last few years. Are you hitting the ceiling here? And also, if you can give some insight into like the dosing mix and what you expect here in exit '26 and also perhaps on expected approval and first-time sales timing here for the APAC region, both Japan, China, South Korea. Charl van Zyl: Thank you, Tobias. So let me ask Tom to comment more on the growth drivers for the U.S. But just to emphasize that this is, of course, a key asset of investment for us, both in U.S. and in Europe. And then we have filed in Asia and so expect to see more of the sales impact on Vyepti in Asia more in '27. But I think, Tom, you want to just talk quickly about how you see your insights on '25, how it carries forward to '26? Thomas Gibbs: Yes. So, thanks for the question. And as you stated, we're pleased with the progress that we're making on Vyepti. As we think about the key drivers for growth, it all starts with new patient starts. That's where our focus is and new patient starts by being able to drive Vyepti further up the treatment paradigm to be used earlier in treatment. And then within that context, also to make sure that we're maximizing the written-to-infusion ratio as part of our patient-centric model. As it relates to the 100 milligrams versus 300 milligrams, for the most part, we saw that allocation between 100 and 300 milligrams pretty stable over the course of 2025. We expect that to continue. But we will also say that the majority of patients are on 300 milligrams because we -- the observation from clinicians is that you see improved efficacy for the -- at the 300 milligrams for most patients. Operator: The next question comes from the line of Alyssa Larios from Leerink. Alyssa Larios: This is Alyssa on for Marc Goodman. I was wondering if you can give us a little bit more color on how the partnership model is expected to impact total revenue for Vyepti and Rexulti. And also related to the onetime inventory build, should we think about the impact of being more front-loaded in the year? Or will there be some inventory stocking spread across the quarters as some of the international partners kind of come online? Charl van Zyl: Alyssa, could I just clarify your last question? We didn't quite get a clear line there. Alyssa Larios: Yes. So related to the onetime inventory build, is that going to primarily be seen in Q1? Or will there be some stocking across the quarters as well? Charl van Zyl: Very clear. Michala, do you want to comment on your thoughts on how that's going? Michala Fischer-Hansen: Yes. So, first of all, with the partnership model, as you know, we have, of course, the provision we need to or the commission we pay the partners, as I explained. And then we have the one-off effect of inventory, which we expect to be a Q1, and it relates specifically to partners needing to build up safety stock in the market. So, it's, you can say, a technicality, so to speak, of them taking over the distribution of our assets or our products in these markets. In terms of our expectations, I think you asked about our expectations for Rexulti and Vyepti in the partnership markets, and we don't guide specifically at brand level. But generally, of course, our expectation is that the partners will be able to continue to deliver with the momentum we've seen when we have the business in our own hands. So, we expect to see that, that will continue. Operator: The next question comes from the line of Alexander Moore from Bank of America. Alexander Moore: Two from me. One on Abilify Maintena. Slide 8 shows conversion to 2 monthly continuing to increase in Europe and IO. I just wondered if you could give any color on what your conversion rate assumptions are factored into the full year guidance? And then secondly, just one on pipeline. Slide 36 highlights potential benefit of limit -- little to no monitoring requirements for Bexicaserin. I wondered if you could just give any color on what monitoring is currently included in the Phase III DEEp SEA and DEEp OCEAN trials. Charl van Zyl: Thank you, Alexander. So Abilify conversion ratio, do you want to start, Michala, with that? Michala Fischer-Hansen: Yes. So generally, as I stated for EIO or European International, we see an average of 19%. And of course, what you have to bear in mind is that we're launching at different times. So not all markets have launched at the same time. And that, of course, also impacts the conversion rate as it progresses. But when we look to '26, we expect this to continue. And as I also mentioned, we expect to see generics in Q2, where we previously expected to see them earlier. So of course, that also gives us a chance to convert more patients. So, we continue to focus on that. Charl van Zyl: Tom, on your views on the U.S.? Thomas Gibbs: Yes. Well, I think if we look back over the course of the last 2 years with Abilify Asimtufii, our focus has really been on franchise maximization, and we've been able to grow our market share over the past year for the franchise 1.1 share points to 24.9%. I think as we look into 2026, our focus is really going to be moved from maximizing conversions. And we have seen some good momentum in NBRxs. With the latest week, we saw a 22% conversion ratio. And our expectation is -- and ambition continues to be to exceed the conversion rates of the other benchmarks in the LAI marketplace. Charl van Zyl: I think the question from Alexander, Johan, is on Bexicaserin Phase III, what are we -- what are the endpoints? What are we monitoring? Johan Luthman: Yes. First of all, it's a trial in what we call DEE, which is the broad indication here across all developmental enphalopathies. -- we have 2 trials, as you know, DEEp SEA and DEEp OCEAN. What we're monitoring is, of course, how we are progressing with the trials. In terms of progressing with the global rollout, we are doing well. We have now activated all sites across the world. But remember, we started the trial during early 2025, and it's been a gradual rollout of the trial. What in monitoring in terms of blinded data in the trial, we're very careful with that. We have some monitoring of data acquisition, and we know that we get the right kind of populations in at the front door that we have a good balance between various parts of the spectrum, and we're doing well on that. There are little differences in enrollment between the 2 trials in Dravet syndrome is more challenged, but that is a stand-alone trial, and the balance is good across the whole system. In terms of medical monitoring, we have good views on what's going on so far with the patients and no concerns there, what we've seen so far. And as you know, we are out of the box having to have a cardiovascular monitoring with this mechanism. So that is the big benefit for trial sight. But how much I can say, and we're looking forward to try to wrap up the randomization during the year. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Charl van Zyl for any closing remarks. Charl van Zyl: Yes. So, thank you again for joining today. And again, I want to reiterate very strong position we are in from the last 2 years of focused innovative strategy. And we are, of course, very confident as we enter into '26 with another strong year of performance ahead of us. So, thank you again for joining today.
Operator: Ladies and gentlemen, welcome to the Lundbeck Financial Statement for the Full Year 2025 Conference Call. I'm Lorenzo, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Charl van Zyl, President and CEO. Please go ahead. Charl van Zyl: So good morning, everyone. Welcome to our full year 2025 earnings call. Of course, it's my pleasure to really present to you our outstanding results. It's been again another record year for Lundbeck in 2025, and it's really underpinned by very strong fundamentals, very much underpinned by our focused innovator strategic path. You'll hear me say a lot about the results very much in the sense of it's not by chance, but by clear intent that we are delivering these outstanding results. If we can go to the next slide, please. So of course, our discussions today are containing forward-looking statements, which, of course, are subject to change. So, let's go to the next slide, please. And here, I would like to take a moment just to pause and reflect on the last 2 years of our focused innovative strategy. And there's so much to say about this transformation that Lundbeck has gone through. But I have to say, I'm really proud of the progress that we have made. Again, it is not by chance, but by clear strategic intent that we see these very strong results. If you recall, our focused innovator strategy is very much about growth, innovation and funding. And when I speak about growth, you would have seen over '24, '25 that we've had double-digit growth across our strategic portfolio, which allows us in a way to extend our growth also into 2026. Secondly, when you think about innovation, we made the acquisition of Longboard that bolstered our late-stage pipeline, but we have truly seen a transformation of this pipeline over the last 2 years with the position we're in now with 5 to 6 mid- to late-stage assets that are really the growth engine of the future of Lundbeck. And it's a pipeline that is characterized by first-in-class or best-in-class molecules. And the third foundation of our strategy is really the funding, the largest capital reallocation that the company has undertaken, and it has allowed us to fund the growth and the pipeline and keep us in a flexible financial position to continue that journey into 2026. If we go to the next slide, I'd like to focus a little bit more on 2025. And truly, it was an outstanding and a record year for Lundbeck. Again, our intent was to focus on investing in our strategic brands, but also in our pipeline. And on the growth level, we have seen that continuation of the double-digit growth on the strategic brands being at 19% in 2025, underpinned by a stellar growth in Vyepti of 59% and also stellar growth for Rexulti at 23%. As you recall, we also made very clear moves in 2025 around sharpening our commercial model to focus on 12 key markets and allowing us to work with partners across 27 markets, again, allowing us to focus our efforts on where we can play to win and grow very strongly as we go also into 2026. When you think about the pipeline, keep thinking about the fact that we're building strong diversification of this pipeline, building a strong position in neurospecialty and also in neuro-rare. When you think about neurospecialty, of course, Vyepti, a growth engine in the U.S. and in Europe, but also soon to become a growth engine with the filings that we've done in China, Japan and Korea to truly make this a global launch for Lundbeck. You will also, in the first quarter, receive results on our anti-PACAP proceed trial that will further enhance our position in the space of severe preventative migraine. When we think about neuro-rare, we think clearly about bexicaserin, of course, the Longboard acquisition that is very much in this Phase III and in execution of the clinical program and so is Amlenetug in its fast enrollment also in MSA. Both of these really high unmet need areas where we can see the opportunity very strongly in the Phase III results. Then we will talk a bit more today about further elements of the pipeline in the mid-stage, our anti-ACTH in congenital adrenal hyperplasia as well as Cushing's disease, and you'll hear more about that from the pipeline discussion later today. Fundamentally, the funding that you see is a continuation of the first 2 years of our focused innovative strategy, where we will continue to be disciplined around our capital reallocation in this range of $1.3 billion to $1.5 billion that we are freeing up to create that flexibility for us to invest in growth and also in innovation. And therefore, we are guiding today very much in a position of strength from '24 to '25 going into '26, with revenue growth of 5% to 8% and adjusted EBITDA between 4% to 12% with that spread also taking into account the strategy of investing in the pipeline as we see the triggers unfold in 2026. So with that, let me just introduce the other speakers for today on our agenda, and you'll hear a business update from the team as well as a portfolio update and, of course, the financial results in more detail. So with that, it's my pleasure to, first of all, start with a business update and hand over to Tom Gibbs, our Head of the U.S. Thank you, Tom. Thomas Gibbs: Great. Thank you, Charl. As Charl just mentioned, we are pleased with our commercial performance for 2025, which is headlined by a strong growth of Vyepti and accelerated growth of Rexulti. Please turn to the next slide, and I'll first review the performance details for Vyepti. Vyepti delivered strong and sustained growth for the full year 2025, and we expect this to continue in 2026. This performance has been powered by continued strong growth in the U.S. and supported by robust adoption of Vyepti in prioritized ex U.S. markets, including Canada, Italy, France, Spain and Germany. Vyepti global net revenue for 2025 was DKK 4.476 billion, and this represents 59% growth over the same period last year. Net revenue for Vyepti in the U.S. was DKK 3.908 billion, growing 58% over prior year. In the U.S., our focus has been to make purposeful investments in our patient-centric model supporting Vyepti through our disciplined capital allocation program that Joerg will speak to later. We will continue to make incremental investments in 2026 to elevate the impact of our execution informed by our advanced analytics capability, and this includes a sales force expansion as well as optimize direct-to-consumer advertising. We expect to sustain market-leading demand growth by driving depth and breadth of prescribing and continued positive momentum in new patient starts supported by high written-to-infusion conversion ratio and best-in-class patient persistency. In Europe and international operations, significant work is being done preparing for the launch of Vyepti in Asia. And if approved, we see this region as a significant opportunity to drive further growth for Vyepti. Next slide, please. Now moving on to Rexulti. Rexulti continues to perform well and deliver consistent growth propelled by continued strong progress within the AADAD segment in the U.S. Reported revenue was DKK 5.745 billion, increasing 23% for the full year 2025 versus prior year. Importantly, revenue growth in the U.S. was driven by strong underlying TRx demand, delivering 24.2% growth in 2025 compared to 2024. Rexulti AADAD volume is becoming increasingly important to overall Rexulti brand growth, and we expect this to continue through 2026 and beyond. AADAD monthly TRx volume has increased 725% versus pre-indication baseline and the AADAD contribution to overall Rexulti demand has grown to 24.4%. Importantly, the 65-plus segment now contributes 34.8% or more than 1 out of every 3 Rexulti TRx claims based upon the most recently available claims data. The team in the U.S. is continuing to focus on the levers to drive continued growth for Rexulti, informed by our margin return on investment analysis. As you may recall, we reallocated a portion of our DTC advertising for AADAD to expand our sales footprint, and this is mainly in the primary care segment. The first wave of the expansion of our multi-specialty sales force team was deployed during 3Q 2025, and we're encouraged by the early results. The second wave is ongoing, and we expect to be fully deployed during first quarter 2026. Overall, we're pleased with the momentum of Rexulti demand exiting 2025 despite an increasingly competitive market and evolving policy landscape. TRx demand in fourth quarter 2025 grew 24.2% versus fourth quarter 2024. Precision execution across the marketing mix, including our expanded sales team in primary care is expected to reinforce the long-term growth for Rexulti and help address increased competition. Michala, over to you. Michala Fischer-Hansen: Thank you, Tom. Let's turn our head to the Abilify franchise performance, where 2025 was another year of solid growth momentum for the franchise, growing at 10% versus last year overall, now at DKK 3.776 billion. If we look at the U.S. first, the Abilify franchise delivered a 9% growth compared to the year before, and that was also resulting in a gain of 1.1 percentage point market share. Importantly, as the U.S. is transitioning from franchise maximization to conversion maximization, ASIMTUFII continues to be a key growth driver with an encouraging 22% NBRx weekly conversion rate. If we turn to Europe and International operations, the franchise delivered 10% growth versus last year. This was driven by continued launches of Abilify 960 milligram, which is now launched in a total of 27 markets across Europe and international operations. We continue to see strong conversion rates across our key markets with several markets surpassing 20%. Across the markets, we also continue to see encouraging conversion rates from other oral atypicals and LAIs that are outside of our Abilify Maintena franchise. Looking ahead, conversion maximization remains a critical strategic focus. And with regards to generic competition for Abilify 1M in Europe and international operations, we expect to see generics in the market in Q2 of 2026. Next slide, please. If we turn to the 2026 outlook, as Charl said, we are pleased to see that despite the pressures from generics that we expect, the strong performance of our strategic brands reinforces our confidence in updating our 2026 growth outlook, where we're pleased to guide a 5% to 8% revenue growth in constant exchange rates. Let me unpack that for you. In 2026, we expect to see headwinds from increased generic pressures on Abilify Maintena and Brintellix, the reprioritized resources with the Takeda agreement in the U.S. as well as emerging competition on Rexulti. This is outweighed by a continued strong performance of Vyepti, Abilify, Asimtufii and Rexulti. 2026 will also reflect in-year commercial adjustments that impact on our reported revenue and growth. As mentioned by Charl, in December 2025, we implemented a sharpened commercial model where we introduced 27 partner-driven markets. These partners will receive a commission fee of 25% to 30% of our revenue, which will reduce our net revenue compared to 2025. In addition, as part of the transition to the partner model, the partners are building up inventory in the market, which is expected to amount to approximately DKK 500 million positive revenue impact in '26, which will be a onetime effect for this year. When adjusting for the partner model impacts, we're encouraged that our underlying performance is expected to be at 6% to 9% underlying growth, reflecting strong fundamentals as a result of the strategic decisions we have taken in 2024 and 2025. Specifically for our guidance for '26, as stated, we're pleased to guide a 5% to 8% constant exchange rate revenue growth for 2026, which is driven by our continued strong brand execution and our accelerated capital reallocation towards high-value opportunities globally. Joerg will come back to this in his section. With this, I conclude the performance section and hand over to my esteem colleagues, Maria and Johan for a portfolio update. Johan Luthman: Thank you, Michala and Tom. It's great to see the continued very strong commercial performance throughout the full year '25. Maria and I will take you through the portfolio update. Overall, during '23 and '24, we paved the way for the pipeline to go through critical value inflection points in 2025 with positive data emerging from several early-stage projects. Thus, this means, as you heard from Charl, that we can with confidence say that we will have 5 to 6 mid- to late-stage assets in the pipeline by end of 2026 for 6 to 8 indications. So, from an R&D perspective, 2025 has been a solid year of execution and progression. We have continued to advance our research pipeline with innovative assets with highly innovative and strong programs entering into development. I'd like to highlight that we initiated a strategic partnership with Contera, marking Lundbeck's first entry into oligonucleotide-based medicines. As I mentioned, maturing the Phase I portfolio has triggered several programs to progress towards Phase II starts during 2026. At the same time, we have executed well on our late-stage development programs as well as continue with critical brand support, primarily for Vyepti. In early-stage development, we have made extensive use of focused Phase Ib exploratory proof-of-concept studies, allowing us to generate patient data and progress programs with strong biological and clinical validation. As you have seen in the last 2 quarters, this has led to data supporting progression of our D1/D2 agonist 996 in Parkinson's disease and our CD40 blocker 515 in thyroid eye disease to Phase II initiation. Next is our anti-ACTH mAb909, now with the INA name Asedebart. Maria and I will return to Asedebart in a few minutes. For late-stage programs, 2025 marked the year executing on our 2 Phase III programs, Bexicaserin and Amlenetug with progressing recruitment and continued health authority interactions. In Q4, Bexicaserin was granted breakthrough designation in China for DEE, and Amlenetug received Fast Track designation with the FDA as well as orphan drug designation in Japan. Also, during 2025, we completed enrollment in the PROCEED Phase IIb trial. Finally, turning to our strategic brands Vyepti, we have now completed the Asia filings based on the Sun programs in 2025 with submissions in China and Japan in Q4, completing the global rollout of the program. On Vyepti, we also continue to generate strong data on efficacy and effectiveness in severe migraines. Overall, this reflects a year of discipline and generally very successful pipeline progression. Next slide, please. Our pipeline progression is underpinned by strong scientific momentum. During 2025, Lundbeck maintained broad engagement across the scientific and medical community with many medical conference attendance and with 114 scientific presentations and several high-impact publications in peer-reviewed journals. This level of activity is not just about visibility. It enables continuous external dialogue and validation of our science with clinical and academic experts. Importantly, this momentum continues in 2026 with strong presence planned at several medical conferences. Let me showcase some of those. For ADPD here in Copenhagen, we'll present Phase I data for our D1/D2 agonist 996 with further data being presented at the MDS meeting. Also, at AD/PD, we'll present the design of the innovative approach in the Amlenetug pivotal program. For AAN, we have 4 programs presenting data, Vyepti, including new data from the INFUSE real-world evidence study in prior anti-CGRP treatment failures. Bexicaserin data from its Phase II PACIFIC trial and Amlenetug expert input in what would constitute a clinical meaningful effect. Finally, for 202, our Anti-PACAP mAb will present data from 2 Phase I trials. However, much more importantly, for 222, we will present the PROCEED IIb headline results at the American Headache Society Meeting as well later in June at the European Academy of Neurology. Since Lundbeck in recent period has obtained very encouraging data in neuroendocrinology for the CD40 blocker 515 and Asedebart, we will showcase our emerging presence in this space at the ENDO conference in June. As promised, we will now turn over to speaking more about Asedebart. So Maria? Maria Alfaiate: Thank you. And as Johan just outlined and Charles mentioned in his opening remarks, our pipeline is progressing with increasing clarity, focus and value inflection, and Asedebart is a strong illustration of that strategy in action. Asedebart represents one of our most differentiated first-in-class programs moving forward with a clear scientific rationale and a well-defined development path. Asedebart is an anti-ACTH monoclonal antibody designed to address the root cause of cortisol and androgen excess. This mechanism directly differentiates it from existing therapies that focus on downstream hormone control rather than disease modification. We are advancing Asedebart in 2 rare endocrine indications, ACTH-driven Cushing's syndrome and congenital adrenal hyperplasia. Together, these indications represent more than 80,000 patients globally, currently underserved and share a common prescriber base, enabling efficient development, regulatory alignment and future commercial leverage. Importantly, we have already secured orphan drug designation in CAH in both the U.S. and EU, reinforcing the regulatory attractiveness of the program. From an unmet need perspective, the rationale is clear. In ACS, patients lack targeted disease-modifying options and are often exposed to complex polypharmacy with significant safety limitations. In CAH, currently approved treatments provide suboptimal disease control and rely on chronic glucocorticoid exposure with well-known long-term risks. Asedebart's differentiated profile positions it to create value across different stakeholders. For patients, it offers the potential for improved tolerability in ACS and superior efficacy in CAH. For payers and reimbursement authorities, meaningful differentiation on key outcomes supports reduced total cost of care. For health care professionals, it enables a simpler, more predictable approach to long-term disease management for Lundbeck, solidifying our ambition in neuro-rare diseases, supporting long-term pipeline and value growth. In summary, consistent with the pipeline progression Johan described, Asedebart perfectly exemplifies how we are advancing focused, high-impact assets with clear differentiation, regulatory momentum and significant upside potential. And for a more detailed look into one of these indications, I will hand back to Johan. Johan Luthman: Yes. Thank you, Maria. Next slide, please. Yes. So, with that unclear medical need defined by Maria, let me show an example of the strong data we obtained for Asedebart, in this case, for congenital adrenal hyperplasia. In CAH, chronic ACTH elevation drives adrenal overstimulation, leading to excess production of androgens and the precursors. Current treatments primarily rely on glucocortoids, cortisol replacement, which suppresses ACTH indirectly. But as you heard from Maria often with the cost of long-term overexposure and associated complications. By directly targeting ACTH, Asedebart is designed to intervene upstream in the disease pathway, reducing adrenal overstimulation and downstream hormone excess at its source. This provides a clear strong biological rationale. 17-hydroxyprogesterone, 17-OHP is a precursor in the production of cortisol. When cortisol production is hindered by CAH, the body produces excess of 17-OHP in the adrenal glands and donuts and thus elevated 17-OHP is a diagnostic biomarker for the indication. In an ongoing multisite open-label multiple dose trial in patients, we could demonstrate effective engagement of the ACTH pathway. As you can see, following effusion Asedebart, at 24 hours, there is a 90% to 98% reduction of 17-OHP from baseline. We also looked at androstenedione or A4, a key marker used to monitor treatment efficacy and disease control. Like 17-OHP, we see a reduction in A4 following Asedebart infusion ranging from 65% to 90% compared to baseline. These pharmacodynamic effects provide a strong reason to believe in the potential of Asedebart to address core disease drivers in CAH. From a safety perspective, Asedebart was well tolerated with no serious or severe adverse events reported. With this data set, we can now conclude the Phase Ib part of the ongoing Phase I/II study and move into the Phase II part of the study. Next slide, please. Finally, let me place this in the broader pipeline context. In addition to CAH, we also have data for Asedebart in a similar Phase I/II open-label study in Cushing's disease. Cushing's a condition caused by ACTH secreting pituitary adenomas, leading to excess cortisol production by the adrenal glands. We have now very encouraging Phase Ib data to be presented at ENDO, supporting progressing Asedebart to Phase II for this indication. Together with our CD40 blocker 515 and Thyroid Eye Disease and our D1/D2 agonist 996 in Parkinson's disease, we have 3 assets across 4 indications progressing towards larger Phase II trials. As mentioned already, 222 headline results from PROCEED Phase IIb is near-term catalyst. And if positive, the program holds potential to expand our migraine efforts into franchise with the addition of a novel mechanism of action product. In conclusion, while progressing our current Phase III programs, we are progressing several additional first-in-class and sometimes first-in-indication programs supported by clinically validated biology, building a solid mid- to late-stage pipeline. With this, I'd like to hand over to Joerg. Joerg Hornstein: Thank you, Johan and Maria. And please allow me a few opening remarks before we turn to our key figures. Over the past 2 years, we have executed within a very clear financial framework, prioritizing growth behind our strategic brands, accelerating innovation and funding this through disciplined capital reallocation. This focus is clearly reflected in our results. From a growth perspective, we delivered strong double-digit revenue growth in '24 and '25, exceeding expectations and underpinned by exceptional performance from Vyepti and Rexulti. This has translated into a strong gross profit growth, providing operational leverage, allowing us to both expand margins and step up investments where it matters most. This is why we enter 2026 with confidence and a clear strategic intent. We have strong commercial momentum, a sharpened operating model and a significantly strengthened mid- to late-stage pipeline with several key milestones ahead, including PACAP. From a financial standpoint, this supports both our growth outlook and the guidance ranges we have provided. With that, I will now turn to the financial performance for '25 and our guidance for 2026. Next slide, please. Revenue reached DKK 24.6 billion, growing 13% at constant exchange rates, driven by strong momentum across our strategic brands grew 19% predominantly reflecting accelerated growth in Rexulti and Vyepti. The adjusted gross margin was 87.5%, impacted by a reservation fee related to a manufacturing contract for Amlenetug. Sales and distribution costs decreased slightly by minus 2% to DKK 7.7 billion, reflecting the execution of the focused innovator strategy alongside disciplined resource allocation and capital reallocation. Administrative expenses reached DKK 1.5 billion, corresponding to a slight increase of 4% at constant exchange rates, in line with expectations. R&D costs increased by 10%, reaching DKK 4.9 billion, mainly driven by the continued progression of our Phase III programs for Bexicaserin and Amlenetug and a maturing mid-stage pipeline. The increase was partially offset by the Marly impairment loss recognized in '24. Other operating expenses reached DKK 969 million, primarily reflecting an impairment loss of a nonstrategic production site in Italy of around DKK 600 million and commercial restructuring costs of around DKK 400 million related to the transition of 27 markets to a partnership-led model. Adjusted EBITDA grew 24% at constant exchange rates, mainly driven by the strong performance of our strategic brands. Adjusted EBITDA margin expanded to 32% up 3.2 percentage points, reflecting our strong performance in '25, continued disciplined capital reallocation, more than offsetting the R&D cost increase from the acquisition of Longboard Pharmaceuticals and the shift to a more mid- and late-stage R&D pipeline. Next slide, please. EBIT rose 59% to DKK 5.3 billion, driven by higher gross profit and lower sales and distribution costs. This performance was partially offset by higher R&D costs and other operating expenses associated with our commercial restructuring and an impairment loss of a nonstrategic production site, as earlier mentioned. Net financials reached an expense of DKK 788 million, mainly due to higher interest costs related to the new debt obtained in connection with the acquisition of Longboard and unfavorable currency effects, especially from the U.S. dollars. Our effective tax rate was 28.9% compared to 15.5% in '24. '24 was positively impacted by the reversal of a provision related to the U.K. tax audit that was closed with no adjustments. The increase in '25 in the effective tax rate to 28.9% is driven by 2 nonrecurring items in Q4. The primary driver was a nondeductible impairment related to the planned divestment of our manufacturing site in Italy, combined with the finalized outcome of a U.S. advanced pricing agreement adjustment that had a larger tax impact than previously expected. Looking ahead, we are guiding an effective tax rate of 20% to 23% for '26, reflecting the absence of these one-off items and a more stable tax position following the APA finalization. Net profit increased by 2% to DKK 3.2 billion and adjusted net profit increased by 5%, reaching DKK 5.2 billion, again, reflecting strong performance and capital reallocation, partially offset by higher financial expenses and income expenses. In line with our dividend policy, it is proposed to pay out a dividend of DKK 1.15 per share per share, which is an increase of 21% compared to '24. The proposed dividend corresponds to approximately 36% of Lundbeck's net profit and 30% of net profit adjusted for the impairment loss for our manufacturing site in Italy. Next slide, please. Cash flow from operating activities was in line with EBIT performance, reaching DKK 5.5 billion, reflecting strong EBIT growth and a significant working capital improvement. Keep in mind that the change in working capital in '24 was highly impacted by around DKK 2.8 billion of acquisition-related transaction and settlement costs. Cash flow from investing activities was an outflow of DKK 611 million, reflecting the purchase of intangible assets and property, plant and equipment, whereas '24, again, was highly impacted by the acquisition of Longboard. Cash flow from financing activities was an outflow of DKK 6 billion, mainly driven by the repayment of the loan facility used for the acquisition of Longboard, partially offset by a EUR 500 million bond issued in Q2 to refinance the loan facility. Next slide, please. An essential part of Lundbeck's focused innovator strategy is our capital reallocation program through which we have taken a number of deliberate decisions to support funding for growth and innovation. During '25, we increased our level of ambition and continue to operate with a high degree of discipline, maintaining our target of freeing up approximately DKK 1.3 billion to DKK 1.5 billion by 2027, as communicated last year. Importantly, we have been able to absorb the Longboard costs while still expanding margins in 2025. The capital reallocation program is built around several strategic pillars, spanning both value creation and efficiency initiatives. These have been successfully executed across '24 and '25, providing strong financial flexibility and a solid foundation as we enter 2026. One key pillar we acted on in the fourth quarter is our production model optimization. As part of this, we have initiated a planned divestment of a noncore production site, which will further reduce complexity and streamline our manufacturing footprint. In summary, we have more than delivered on the commitments we made 2 years ago during our Capital Markets event and remain firmly on track to achieve our midterm targets. Next slide, please. Let me now turn the focus on the outlook for 2026, where we expect to deliver another year of profitable growth, building on the strong momentum we achieved in '25. For 2026, we are guiding a revenue growth of 5% to 8% at constant exchange rates. This guidance is underpinned by continued strong underlying growth across our core portfolio, particularly our key brands, which remain the primary drivers of value creation. As explained by Michala, there are a couple of onetime effects impacting our '26 revenue. While the sales from the new partner markets are reduced by the partner commission fee, this decline is partially offset by a onetime inventory impact of approximately DKK 500 million in Q1 2026. This impact is specific to '26 and relates to inventory buildup within the partner channel and is not expected to be a recurring driver of revenue growth. Excluding these onetime effects and restating '25 on a comparable basis, our underlying revenue growth would be in the range of 6% to 9%. Turning to profitability. We're guiding adjusted EBITDA growth of 4% to 12% at constant exchange rates in 2026. This range is driven by strong gross profit growth, reflecting again, continued momentum in Vyepti and Rexulti. At the same time, we are increasing investments in R&D to support long-term growth. With several critical clinical trial initiations and readouts plans during '26, especially PACAP, our guidance, therefore, assumes a wider adjusted EBITDA margin range. The wider range still points towards margins within our midterm guidance. And with that, I would like to hand over back to Charl. Charl van Zyl: Thank you, Joerg, and thank you to the entire executive leadership team for these outstanding results. I will make a few closing remarks on the next slide, please. So, you've seen clearly from us the 2-year window of where we've put some of the fundamentals in place that allow us to now extend our growth very clearly into 2026 with very clear priorities. We are extending our growth, as we said, with clear focus on our strategic assets. But fundamentally, you've also seen a transformation in the pipeline that allows us to really bring those 5 to 6 mid- to late-stage assets further into their cycle of development, allowing us to continue our strategic path of developing them for the long-term success of Lundbeck. So, we enter into 2026 really from a position of strength with a very clear strategic path. And as I said, these results are not by chance, but really by clear strategic intent and choices we've made that allow us now to enter '26 in this very strong position. So, we want to open it now for your questions, and I'll hand it back to the operator. Operator: [Operator Instructions] The first question comes from Charles Pitman-King from Barclays. Charles Pitman: Two from me, please. A first question just on Rexulti growth dynamics. I was just wondering if you could provide a little bit more detail on how you're thinking about the potential impact of the IRA listing Rexulti from '28 ahead of the '29 LOE. And coupled with that, just I know it's super early, but if you're able to comment at all on the initial impact from J&J's CAPLYTA on Rexulti's growth trajectory. I'm just wondering kind of can MDD and schizophrenia keep growing into that '28 kind of erosion timeline now? And then just secondly, on M&A. Back in November, Lund pursued a potential acquisition of Avadel. So just wondering if you could provide some thoughts more on the potential commercial opportunity within the narcolepsy space that you saw what the rationale behind your approach was for that asset? And just thinking about kind of the future BD and the rise of M&A activity at the end of last year, how you're kind of viewing the market today and what therapeutic areas you're most interested in pursuing? Charl van Zyl: Thank you, Charles. And I just -- I will -- before I hand to Tom to speak more about Rexulti, just one word to say on Rexulti is that what you've seen and what we're guiding is very much as expected and also planned in our strategic outlook for the brand. But I think Tom can talk more to that. And then I will come back and speak about M&A. But Tom? Thomas Gibbs: So, thanks for the question, Charles. Just first off on the IRA, based upon the established role of Rexulti as a treatment option for many Medicare patients with MDD, schizophrenia and AADAD, Rexulti did meet the criteria for selection of the IRA price setting in 2028. And I think it's important to note that this was aligned with our expectations. I think it's also important to note that since approval in 2015, Rexulti has treated over 1 million patients across all these indications. Lundbeck and Otsuka are committed to ensuring as many patients as possible have access to Rexulti and will formally enter into the CMS process. Because the negotiation process is just the beginning, it is too early to really comment about our expectations related to the impact of the IRA. But what I will say is that, we believe Rexulti is and remains a key growth driver for Lundbeck and our focus remains on driving growth of this brand. And I think this is evident, as you said, in the fourth quarter. Overall TRx demand growth, and this is in the fourth quarter of 2025. So, it's really important as we think about the exit momentum was 24.2% versus the same period last year. That's 16.6% growth in MDD and 63.8% growth in AADAD. So overall demand in fourth quarter 2025 is similar to what we saw throughout the year. As it relates to CAPLYTA, I think it's also important to note that there's so much unmet need when we think about mental illness, additional products is welcome for patients. And again, it's very early to look at the impact of CAPLYTA, but I think CAPLYTA from their perspective is probably doing a pretty good job. But I think it's important for us to understand where their source of business is coming from. If you look at their source of business for MDD, 26% are coming from anxiolytic, 25% from SSRIs and SNRIs, 12% for mood stabilizers and 10% from generic atypicals. If we look at Rexulti specifically, it's 1.5%. So even within the context of a new competitor, as you can see, Rexulti is still growing strongly within MDD, but most importantly, across the overall franchise. Charl van Zyl: Charles, to talk about M&A, again, I think the example you raised of Avadel is a normal process that we go through in bolstering our innovation. We keep looking externally. in our M&A BD strategy in this notion of a string of pearls like we've spoken before, where we look at opportunities that can either strengthen our positions we have. So, we often look at them through the lens of the neuro-rare space or neurospecialty where we can have synergies with our existing pipeline or our sales organization to build sufficient scale. In the case of the space of sleep disorder, I mean, this is, of course, one of the spaces that we keep looking at. We also have some early programs that we will speak more about later in the year that would be in this space of sleep disorder, but it's not the only space that we are looking at. So, thank you for your question. Operator: The next question comes from the line of Xian Deng from UBS. Xian Deng: Also 2, please, from my side. First one, maybe just to follow up on Charles' previous question regarding M&A. So just wondering, you also have this year moving 4 of your programs into Phase II. But in the meantime, you also made the bid for Avadel last November, but then in the end, didn't increase a bit further, so you didn't have the deal in the end. So just wondering if you could maybe help us to reconcile your strategy in terms of R&D, considering both internal and external opportunities, please? So, is that kind of -- do you mainly look at external for the late stage while developing prioritizing internal for early stage? Or any color on that, that would be great. So that's the first question. The second one is on Rexulti, please. So, understanding the underlying trends on TRx, everything looks great. But still this quarter, you have a 9% miss versus consensus. So just wondering, is there any stocking patterns that we should be aware of? If yes, I wonder if you could quantify that, please. Charl van Zyl: Good. So let me start with the M&A topic. So, first of all, I think to just emphasize further what I mentioned, it is an ongoing process of how we build a sustainable pipeline. So, we look at this through the phases of Phase I, II and III and of course, how do we create more optionality long term. So, we have a full pipeline, which is a great thing. We are investing in that pipeline. But we will not be agnostic to looking at other innovations that are coming from outside. If they are more interesting, have more potential than what we have, we will make some of those choices and trade-offs in the pipeline. So, from that perspective, yes, we really look across the range, and we feel that it's very much part of how we will build the long-term sustainability of Lundbeck by looking both at the external environment that supplements exactly what we are doing also internally to build a compelling pipeline. Good. Then the second question, we go to Tom. Thomas Gibbs: Thanks for the question, Xian, and I'm glad we can clarify this for you. I said overall, as we talked about, TRx demand growth exiting the year was 24.2%, and we saw strong growth across both of our key indications. I think some of the mechanics to help close the gap between what was reported for revenue and the underlying demand, I think, are twofold. One is there's one less shipping day this year. And I think it's important to note that we only ship to the 3 big wholesalers on Mondays and Tuesdays. So basically, one, when you have 1 day missing, in 1 day, we'll ship 1/3 of the orders for the day and then 2 for the week. And then the second day, we'll ship 2/3 of the orders for the week. So, I think that's a dynamic that's worth noting. And then secondly, as we look at inventories, we exited the year for inventories at the low end of our normal range. And I think it's those 2 dynamics that will help bridge the gap for you. Xian Deng: So just wondering, the last part, you mentioned the inventory low end of normal range. This is relating to the wholesalers, right, not your inventory? Thomas Gibbs: Yes. It's the wholesalers. We're just quoting the days on hand for wholesalers. Operator: The next question comes from the line of Kirsty Ross-Stewart from BNP Paribas. Kirsty Ross-Stewart: Kirsty Ross-Stewart from BNP. Two questions from me. So, on the broad R&D expense range, I understand that PACAP progression is kind of a key swing factor. So, can you talk to your thoughts on kind of probability of success here, especially in light of the positive HOPE data that we've already seen? And outside of that progression decision, are there any other kind of moving parts that we need to be aware of? You mentioned the Phase II starts, but I think we already knew that they were moving to Phase II. So, can we assume that those are incorporated into the bottom end of the guidance? And if there's anything else just contributing to that broad range? And then a second question on Asedebart, the anti-ACTH. Interested on your perspectives on the Phase II data that we saw from Kinetics in CAH in January this year, which showed kind of good reduction of ACTH production and how you see this asset from a competitive perspective and how your antibody approach is differentiated versus the kinetics molecule at Amlenetug. Charl van Zyl: First, just a very quick question before I hand to Johan on the views on PACAP. I mean, overall, from an R&D perspective, yes, it is one of the important investment triggers. But of course, you know that we also have Bexicaserin and Amlenetug in Phase III. So these are also sizable investments that we are making to complete these studies. And so, from that perspective, we have sort of a healthy pipeline to fund, which is reflected also then in the range of R&D spend that we see. But I think, Johan, do you want to make comments on your views of what you think you can say at this point on PACAP and then maybe on your thoughts on kinetics. Johan Luthman: I mean obviously, you'd like to know some PRS, how we view this, but we'll get the data soon and we take a look at it. There are, of course, prior information. And if you believe in prior, there is, of course, the HOPE trial. And then recently in June, I believe, last year, Lilly presented data from their very early terminated program in 38 patients that showed also an effect. So, there is, of course, overall, encouraging data in the field. And now we just need to expand this with a much wider dose finding range. And we'll see what the data will get. So, you can draw your own conclusions based on that basically. For kinetics, yes, we were happy to see that data. It's a good validation that the pathway is really to be addressed and you can see effects. I'd like to remind you that Kinetics working with the ACTH receptor blocker, MC melanocorticin receptor 2 blocker. So, it's at the adrenal gland stage. So, it's further down in the biology, which means that you don't cover all the different aspects of the overproduction in the system. So here, we have the ability with this mechanism to have a broader symptomatic effect across different adrenal hormones that are hyperactive in this condition. So great data, but we believe it can have even broader effect with this molecule. Charl van Zyl: Then going forward, I think what we again guided for was the range of DKK 5.5 billion to DKK 5.9 billion for '26, and that principally encompasses Bexicaserin and Amlenetug and also the advancement of anti-PACAP and anti-ACTH. I think on the rest of investments, that's always dependent on, you can say, milestone outcomes. Operator: The next question comes from the line of Tobias Berg Nissen from Danske Bank. Tobias Nissen: I have a question on Vyepti here. It's been a very solid '25 with accelerating growth here over the last 3 quarters. I'm just wondering if you can quantify some of the growth drivers here for '26. You have lifted the persistency ratio quite significantly over the last few years. Are you hitting the ceiling here? And also, if you can give some insight into like the dosing mix and what you expect here in exit '26 and also perhaps on expected approval and first-time sales timing here for the APAC region, both Japan, China, South Korea. Charl van Zyl: Thank you, Tobias. So let me ask Tom to comment more on the growth drivers for the U.S. But just to emphasize that this is, of course, a key asset of investment for us, both in U.S. and in Europe. And then we have filed in Asia and so expect to see more of the sales impact on Vyepti in Asia more in '27. But I think, Tom, you want to just talk quickly about how you see your insights on '25, how it carries forward to '26? Thomas Gibbs: Yes. So, thanks for the question. And as you stated, we're pleased with the progress that we're making on Vyepti. As we think about the key drivers for growth, it all starts with new patient starts. That's where our focus is and new patient starts by being able to drive Vyepti further up the treatment paradigm to be used earlier in treatment. And then within that context, also to make sure that we're maximizing the written-to-infusion ratio as part of our patient-centric model. As it relates to the 100 milligrams versus 300 milligrams, for the most part, we saw that allocation between 100 and 300 milligrams pretty stable over the course of 2025. We expect that to continue. But we will also say that the majority of patients are on 300 milligrams because we -- the observation from clinicians is that you see improved efficacy for the -- at the 300 milligrams for most patients. Operator: The next question comes from the line of Alyssa Larios from Leerink. Alyssa Larios: This is Alyssa on for Marc Goodman. I was wondering if you can give us a little bit more color on how the partnership model is expected to impact total revenue for Vyepti and Rexulti. And also related to the onetime inventory build, should we think about the impact of being more front-loaded in the year? Or will there be some inventory stocking spread across the quarters as some of the international partners kind of come online? Charl van Zyl: Alyssa, could I just clarify your last question? We didn't quite get a clear line there. Alyssa Larios: Yes. So related to the onetime inventory build, is that going to primarily be seen in Q1? Or will there be some stocking across the quarters as well? Charl van Zyl: Very clear. Michala, do you want to comment on your thoughts on how that's going? Michala Fischer-Hansen: Yes. So, first of all, with the partnership model, as you know, we have, of course, the provision we need to or the commission we pay the partners, as I explained. And then we have the one-off effect of inventory, which we expect to be a Q1, and it relates specifically to partners needing to build up safety stock in the market. So, it's, you can say, a technicality, so to speak, of them taking over the distribution of our assets or our products in these markets. In terms of our expectations, I think you asked about our expectations for Rexulti and Vyepti in the partnership markets, and we don't guide specifically at brand level. But generally, of course, our expectation is that the partners will be able to continue to deliver with the momentum we've seen when we have the business in our own hands. So, we expect to see that, that will continue. Operator: The next question comes from the line of Alexander Moore from Bank of America. Alexander Moore: Two from me. One on Abilify Maintena. Slide 8 shows conversion to 2 monthly continuing to increase in Europe and IO. I just wondered if you could give any color on what your conversion rate assumptions are factored into the full year guidance? And then secondly, just one on pipeline. Slide 36 highlights potential benefit of limit -- little to no monitoring requirements for Bexicaserin. I wondered if you could just give any color on what monitoring is currently included in the Phase III DEEp SEA and DEEp OCEAN trials. Charl van Zyl: Thank you, Alexander. So Abilify conversion ratio, do you want to start, Michala, with that? Michala Fischer-Hansen: Yes. So generally, as I stated for EIO or European International, we see an average of 19%. And of course, what you have to bear in mind is that we're launching at different times. So not all markets have launched at the same time. And that, of course, also impacts the conversion rate as it progresses. But when we look to '26, we expect this to continue. And as I also mentioned, we expect to see generics in Q2, where we previously expected to see them earlier. So of course, that also gives us a chance to convert more patients. So, we continue to focus on that. Charl van Zyl: Tom, on your views on the U.S.? Thomas Gibbs: Yes. Well, I think if we look back over the course of the last 2 years with Abilify Asimtufii, our focus has really been on franchise maximization, and we've been able to grow our market share over the past year for the franchise 1.1 share points to 24.9%. I think as we look into 2026, our focus is really going to be moved from maximizing conversions. And we have seen some good momentum in NBRxs. With the latest week, we saw a 22% conversion ratio. And our expectation is -- and ambition continues to be to exceed the conversion rates of the other benchmarks in the LAI marketplace. Charl van Zyl: I think the question from Alexander, Johan, is on Bexicaserin Phase III, what are we -- what are the endpoints? What are we monitoring? Johan Luthman: Yes. First of all, it's a trial in what we call DEE, which is the broad indication here across all developmental enphalopathies. -- we have 2 trials, as you know, DEEp SEA and DEEp OCEAN. What we're monitoring is, of course, how we are progressing with the trials. In terms of progressing with the global rollout, we are doing well. We have now activated all sites across the world. But remember, we started the trial during early 2025, and it's been a gradual rollout of the trial. What in monitoring in terms of blinded data in the trial, we're very careful with that. We have some monitoring of data acquisition, and we know that we get the right kind of populations in at the front door that we have a good balance between various parts of the spectrum, and we're doing well on that. There are little differences in enrollment between the 2 trials in Dravet syndrome is more challenged, but that is a stand-alone trial, and the balance is good across the whole system. In terms of medical monitoring, we have good views on what's going on so far with the patients and no concerns there, what we've seen so far. And as you know, we are out of the box having to have a cardiovascular monitoring with this mechanism. So that is the big benefit for trial sight. But how much I can say, and we're looking forward to try to wrap up the randomization during the year. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Charl van Zyl for any closing remarks. Charl van Zyl: Yes. So, thank you again for joining today. And again, I want to reiterate very strong position we are in from the last 2 years of focused innovative strategy. And we are, of course, very confident as we enter into '26 with another strong year of performance ahead of us. So, thank you again for joining today.
Operator: Hello, and welcome, everyone, to the 4Q 2025 LATAM Airlines Group Earnings Conference Call. My name is Becky, and I will be your operator today. Before I turn the call over to management, I'd like to remind you that certain statements in this presentation and during the Q&A may relate to future events and expectations and as such, constitute forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance or guidance are forward-looking statements. These statements are based on a range of assumptions that LATAM believes are reasonable, but are subject to uncertainties and risks that are discussed in detail in the published 20-F, 2026 guidance, earnings release, financial statements and related CMF and SEC filings. The company's actual results may differ significantly from those projected or suggested and any forward-looking statements due to a variety of factors, which are discussed in detail in our SEC filings. If there are any members of the press on the call, please note that this call for the media is listen only. I will now hand over to your host, Ricardo Bottas, to begin. Please go ahead. Ricardo Dourado: Hello, everyone, and good morning. Welcome to our fourth quarter 2025 conference call, and thank you all for joining us today. My name is Ricardo Bottas, and I am the CFO of LATAM Airlines Group. Here with me is Roberto Alvo, our CEO; Andres Valle, Corporate Finance Director; and Tori Creighton, Head of Investor Relations, and we will present the highlights and results for the fourth quarter and full year 2025. I will hand it over to Roberto to share his opening remarks about the quarter and year's highlights. Roberto Alvo Milosawlewitsch: Good morning, and thank you, Ricardo. 2025 marked a year of continuous consolidation and delivery. The strong results we're presenting today are the product of a model that LATAM Group has been building over the last 6 years, anchored first in the people and the customers, focused on impeccable execution and in the design of a superior experience. All of this in the context of an ever stronger passenger cargo networks, frequent flyer program, a very strong balance sheet and cash generation, a disciplined cost delivery and a highly diversified business model, all of which make our results resilient and less much subject to external factors and industry cycles. At the heart of this performance and more than 41,000 employees working at the different affilities of the group, their daily commitment, whether at customer touch points or behind the scenes, continues to be LATAM's Group most powerful asset. The culture of passionate, engaged people translated directly into the customer experience. In 2025, the group achieved a record Net Promoter Score of 54 points, which is a 3-point increase versus 2024, the highest full year results in our history. When our people thrive, customers feel the difference. Internally, the Organizational Health Index reached 83 points, placing LATAM Group in the top decile of the global benchmark for the first time. In terms of the operations, the group transported more than 87 million passengers during the year, including 23 million passengers in the fourth quarter alone. This was boosted by a capacity increase of 8.2% for the full year and 7.7% in the quarter, demonstrating the group's ability to grow efficiently while maintaining a healthy load factor of 84.4%. This ability to connect passengers to, from and within South America was enabled by the modern and efficient fleet that the group operates. In 2025, LATAM received a total of 26 aircrafts, 7 of which were incorporated in the fourth quarter. This includes the first Boeing Dreamliner with GE engines and brought the total fleet to 371 aircraft as of the end of the year, a 7% increase versus 2024, enabling the group to launch 22 new routes, of which 15 were international. On the financial side, adjusted operating margin reached 16.2% for the year, while adjusted EBITDAR came at almost $4.1 billion. Net income totaled approximately $1.5 billion, resulting in earnings per ADS of $4.95, highlighting the group's ability to translate operational performance into bottom line results. This bottom line grew by 50% versus the income generated in 2024. With this, in December, LATAM was able to distribute $400 million in interim dividends aligned with its capital allocation strategy determined by the financial policy. 2025 was just not a strong year. It was a reaffirmation of LATAM's structural strengths translated into consecutive years of margin expansion in the context of high capacity growth and driven by a strategy that combines a focus on people, a differentiated customer experience, an unmatchable footprint, disciplined cost control and a resilient balance sheet. This is what defines this new LATAM. This performance and design set the base for expected 2026 strong performance highlighted in our yearly guidance, of which we feel very confident at the moment despite fuel and currency volatility. I'm very proud to be here leading a group of 41,000 souls and to highlight and discuss our performance. With that, I'll hand it over to Ricardo, who will walk us through the achievements of this fourth quarter and full year 2025. Ricardo Dourado: Thank you, Roberto. Let's move to Slide 4. LATAM delivered a solid financial performance during the fourth quarter with improvements across all key metrics. Total revenues reached almost $4 billion, increasing 16.3% year-over-year. This growth was driven by the passenger segment, which rose 20.3%, supported by the strong demand and capacity growth. Cargo revenues declined 9.6% in the period, explained by a particular high comparison base as the fourth quarter of 2024 had delivered an exceptionally strong performance. Despite the full year cargo revenues increased year-over-year. As a result, the group delivered an adjusted EBITDAR of $1.1 billion, representing a 30.4% increase versus 4Q 2024. Adjusted operating income came in $661 million, up 42.7% year-over-year, and net income totaled $484 million, increasing 78.1% compared to the fourth quarter of last year. Margins also improved with adjusted operating margin standing out at 16.7%. This quarter, we saw an increase in unit cost ex fuel with passenger CASK ex-fuel reaching $0.047. About $0.02 of this can be explained by the appreciation of the local currencies during this period, along with another $0.02 related to the other nonrecurring costs in wages and benefits, which include a special onetime bonus approved on this last quarter. While quarterly unit costs were elevated, it's worth highlighting that full year passenger CASK ex-fuel came in at $0.044, fully within the updated guidance range for 2025 provided on last November. Importantly, this 7.9% increase in unit cost was more than offset by an even stronger improvement in unit revenue. Passenger RASK increased by 11.7%, reflecting LATAM's ability to sustain its value proposition and capture customer preference in an environment of healthy demand. Please join me on this next Slide 5 to take a deeper dive on the drivers for revenue performance across the different affiliates and business units. Overall, the fourth quarter showcased a well-balanced dynamic between capacity deployment and demand across our network, supported by healthy load factors and target commercial actions. On a consolidated level, capacity grew by nearly 8%, while maintaining a solid load factor of 85%, showcasing our ability to grow efficiently. Looking at the LATAM Airlines Brazil's domestic capacity expanded by 12% and demand kept pace with load factors increasing by 0.7 percentage points. This balance supported by a solid passenger RASK performance with growth of 14% in U.S. dollars and 10% in local currency, highlighting the strength of LATAM's value proposition in this market together with the resilience of demand. In domestic Spanish-speaking affiliate markets, passenger RASK grew by 23% in dollars and nearly 20% in local currency, driven by a disciplined capacity allocation that resulted in an increase in the load factor to 1.7 percentage point higher than before. Turning to the International segment. Capacity and passenger volumes both grew at a high single-digit pace. While load factor declined slightly year-over-year, it remained at a very healthy 85% levels. In parallel, unit revenues increased by 6%, supported by a well-diversified network, both in the regional and long-haul international operations and a strong execution. Altogether, these results reflect the robustness of LATAM Group's commercial model and its ability to grow profitable. The fourth quarter confirms that the network strategies and the disciplined capacity deployment continue to deliver strong outcomes across the board. Turning now to our value proposition and customer experience on Slide 6. During 2025, LATAM Group continued advancing initiatives focused on enhancing services across key touch points with a particular emphasis on consistency, reliability and design. At the center of this improvement is our continued focus on the premium segment, where LATAM has made significant upgrades to its value proposition. During the year, we introduced a renewed business class experience, launched the signature check-in and our new signature launch in Lima and announced the future enhancements like the investments in Wi-Fi on wide-body fleet beginning in 2026 and the new premium comfort cabin coming in 2027 as well as the investments on the new and the brand-new launch in Guarulhos. As part of this ongoing focus, LATAM was once again recognized internationally. In the fourth quarter, the group received the most improved brand award globally by the Design Air, a recognition that adds to early achievements such as Skytrax' Best Airline in South America, the APAC 5-star Global Airline Award and the Air Cargo Airline of the Year award by Air Cargo News, all serving as third-party endorsements that we are on the right path. The customer experience enhancement initiatives demonstrate the group's commitment to delivering a consistent and differentiated travel experience across the region and further strengthen the customer preference for LATAM, and the results are validating these investment decisions. For the full year, premium revenues accounted for 23% of passenger revenues and continue to grow faster than the passenger revenues overall. While passenger revenues grew 12% year-over-year, premium revenues increased by 14%, highlighting the continued momentum of this segment, which provides LATAM with access to a customer base that is structurally more stable throughout the year, less exposed to seasonality and more resilient to potential macroeconomic headwinds. Coupled with this, the LATAM PASS program plays a critical role in accessing this segment, fostering loyalty among customers who travel more frequently and generate higher expense through the wide range of benefits the program offers. LATAM PASS is by far the largest airline loyalty program in the region with almost 54 million members, accounting for nearly 60% of LATAM's passengers revenues. This combination of a resilient customer segment and a highly effective loyalty program reinforces the sustainability of LATAM's revenue base and equips the group with the tools to continue driving profitable growth. Jump to Slide 7. You see on this slide that the way that we are translating this into tangible results. Customer satisfaction reached record levels. Net Promoter Score rose to 54 points, as Roberto mentioned, for passenger operations, while among premium travelers each reached 58 points, the highest ever recorded by the group. This is a clear indication that our customers are recognizing and valuing the improvements. At the same time, premium revenues continue to show an upward trend, supporting by growth, customers' preference and a more differentiated onboard experience. And importantly, we have managed to achieve these results while maintaining costs stable since 2019, confirming that LATAM can deliver a differentiated experience, all while keeping its cost base stable. Let's move to Slide 8. We have spoken a lot about structural improvements and the sustainability of the profitability stemming from the unique ecosystem of LATAM Group. Passionate people, a financial foundation, an exceptional product, premium revenues and a focus on cost containment, all of that supports a virtual cycle that results in these numbers year after year. This year, LATAM expanded its revenues in 11.2% and its adjusted operating margin to 16.2%, reflecting the profitable growth strategy and the continued disciplined capacity execution. Over the course of the year, the group received 26 aircraft, launched 22 new routes and grew capacity by 8.2%, making the 3.5% margin expansion, a clear reflection of LATAM's ability to grow strategically, not just in volume but in the profitability targets. It's also a testament to the group's deep knowledge of its markets and disciplined execution over time. Adjusted EBITDAR grew by over 30% year-over-year to $4.1 billion, supported by revenue growth and efficiency across the operation, all within the guidance range. At the bottom line, net income increased significantly by 50% versus last year, further reinforcing the group ability to deliver sustainability financial results. These results are part of a broader trend, one of continuous improvements and reliable execution. LATAM enters 2026 on solid footing with a strong foundation to continue creating long-term value. Please join me on Slide 9. As you can see on this slide, LATAM's strong performance is not only reflected in earnings generation, but also in its ability to consistently translate those results into cash generation. During 2025, adjusted operating cash flow reached $3.3 billion, supported by strong operational and financial performance. This cash generation enabled the group to fully fund its core business needs, including maintenance and growth investments with $1.5 billion invested in CapEx net of financing while also covering interest payments. As we highlighted earlier, our CapEx investments have been directed towards enhancing the customer experience, but they have also been focused on accelerating LATAM's digital transformation across the business. With that, LATAM generated close to $1.4 billion in cash after covering all business-related commitments. Over the course of the year, the group executed 2 share repurchase programs totaling $585 million. Also, LATAM Group distributed $400 million in interim dividends in the fourth quarter, bringing total dividends for the year close to $605 million. Even after all of these, LATAM still delivered almost $200 million in positive cash generation in 2025, demonstrating its ability to invest in the business, meet its key obligations and also allocate capital towards additional initiatives, all while considering defined financial policy range. Let's move to Slide 10 and see how this is reflected in our balance sheet metrics. Balance sheet strength has been one of LATAM's key priorities over the past few years, and liquidity is one of the clearest expression of that focus. The group has consistently grown its nominal liquidity, reaching $3.7 billion by the end of 2025. As we just reviewed on the previous slide, it was through the additional capital allocation initiatives carried out in 2025 that LATAM was able to bring liquidity as a percentage of last 12 months revenues closer to the top of the policy range at 25.7%, demonstrating the flexibility the group has to allocate capital across multiple fronts while aiming at the final financial framework. At the same time, on the debt side, adjusted net leverage reached 1.5x below the last year and the maximum policy level of 2x, placing LATAM in a strong position heading into 2026 with the flexibility to continue investing while also preserving financial strength. Moving to the next slide. Let's take a look on the continuous optimization of the cost of capital and debt tenure. LATAM has taken important steps over the past 2 years to improve its cost of debt. Through refinancing exercises carried out in '24 and '25, the group successfully reduced the weighted average cost of debt from 10.7% in 2023 to 6.6% as of the end of 2025. In parallel, LATAM debt amortization profile is well balanced with no short and midterm relevant maturities. And furthermore, LATAM holds call options in '26 and '27 that offer potential opportunities to reprofile these maturities and also reevaluate the potential tender split to improve even more this debt profile. Let's move now to the Slide 12. As reflected in 2026 guidance published back in December, we expect it to be another year of continued profitable growth. Capacity is projected to grow between 8% and 10% and to deliver an adjusted operating margin between 15% and 17%, reflecting LATAM's focus on efficiency and disciplined execution. In terms of cash, adjusted levered free cash flow is expected to exceed $1.7 billion from $1.5 billion this last year, reinforcing the group's ability to consistently translate earnings into liquidity. We also expected liquidity above $5 billion for the end of 2026. And as we have mentioned in Investor Day held in December, given our financial policy range, we would have between $1 billion and $1.6 billion after CapEx investments and minimum dividend payments available for additional capital allocation initiatives in 2026. This year, LATAM will continue investing in key strategic areas, including the customer experience, the renewal of the fleet, efficient focused innovations and the continued reinforcement of balance sheet discipline. Again, to remind you of the main figures that were disclosed in the Investor Day, the CapEx plan for this year, net of finance -- the fleet of financing is about $1.7 billion. For the year, the group is expecting to receive 41 aircraft, of which 3 are wide-bodies and 12 correspond to the first Embraer E2s. The last slide, Slide 13. And before we move to the Q&A, let me briefly highlight the key message from 2025 performance. 2025 was another year of strong and consistent performance for LATAM, both operationally and financially. Operational excellence was matched by record levels of customer and employee satisfaction with NPS and Organizational health index reaching all-time highs. The group transported a record number of passengers, expanded the network with discipline and delivered a significant improvement in profitability with adjusted operating margin increasing 3.5 percentage points year-over-year to 16.2%. This profitability was translated all the way to the bottom line with annual net income closing at $1.5 billion. These results reflect the group's ability to grow efficiently while maintaining a focus on margins and operational excellence. During 2025, we fully funded investments in the business and met all financial commitments while generating cash. LATAM generated $1.4 billion in cash before executing 2 share repurchases and separately distributing dividends while still holding a strong liquidity level and low leverage. At the same time, we strengthened our balance sheet, aiming at the financial policy targets and focus on reducing the cost of debt, which now stands below 7%. Looking ahead, we are entering 2026 with solid momentum. Our guidance reflects continued profitable growth, supported by healthy demand, commercial discipline and a clear focus on the strategic priorities. With that, we will now open the line for your questions. Operator: [Operator Instructions] Our first question comes from Julia Orsi from JPMorgan. Julia Orsi: So we have 2 questions on our side. The first one is on yields. So we saw a strong pricing performance this quarter. Congratulations on that. Can you provide additional details on how yields are tracking across the regions? And the second one, based on recent trends, how is the booking curve and demand environment evolving? Is there any particular region that has been outperforming or underperforming? Roberto Alvo Milosawlewitsch: Julia, this is Roberto. Thanks for the questions. We saw, in general, strong and stable demand over all of the business areas where we operate. In the last couple of months of the year, domestic Chile was a little bit slower as compared to particularly 2024, but at an industrial level, and you can see that on the public figures. But we have seen already a recovery in the first months of the year. So I would say that all the business performed on a relatively good basis in 2025 last quarter in the passenger segment. Cargo, it was also good. Again, as Ricardo said, a very strong basis of comparison the last quarter in 2024. It still was robust and the current appreciation of the currencies will probably increase import demand into the region in the upcoming months. Booking curve for early 2026 looks healthy. We see no issues that concern us today. And in general, all the segments are performing well. As it has happened in the past 2 or 3 years, the segment that has been growing the most is international, and this is also reflected in our capacity during 2025 and also the guidance that we provided for [indiscernible]. But in general, we see no concerns on the demand side going forward, at least for the first quarter. Operator: Our next question comes from Michael Linenberg from Deutsche Bank. Michael Linenberg: A couple of questions here. Great way to end 2025. These are fantastic results. The when you talked about the CASK impact of 0.2% from the impact of the weak dollar. As we think about LATAM and how you have evolved your structure and the seasonality and the geography of your network, where do you come out with respect to the dollar? Is a weaker dollar overall better, even though I realize there's a cost headwind, is it just better overall for the performance of the company? And I'm just sort of in the context of the last 12 months, we've seen about a 10% depreciation of the dollar. How should we think about that on your business? Roberto Alvo Milosawlewitsch: Michael, thanks for the question. A great question. So let me give you -- at the end of the day, for us, a stronger local currency is more positive than a weaker local currency. And this derives from, a, on the domestic markets, basically, most of our revenue is expressed in local currency or happens in local currency and a significant portion of the cost is in dollar. So domestic markets work like import industries, if you want. And in the case of international, for us, it's also beneficial because even though the countries become more expensive for traveling into the region, if you want, purchasing power for traveling abroad is higher and our point-of-sale balance is higher on our South American side than our long-haul side. So the balance that we see is that a stronger currency vis-a-vis the dollar, net of higher cost because of the same effect are net positive. Michael Linenberg: Great. That's super helpful. And then I just -- I want to talk about CapEx for 2026. Last year, you took 26 airplanes. I believe this year is going to be a heavy delivery year. I know that the Embraers coming in are a big component of that. I think you're taking delivery of over 40 airplanes, 40, 41 airplanes. Can you just refresh us and how we should think about CapEx in 2026? Ricardo Dourado: Michael, it's Ricardo. And you are right. We are expecting to receive 41 aircraft and the CapEx is $1.7 billion net of financing. Remember that a relevant part of the CapEx delivers is going to be financed through [indiscernible] and also finance lease. And we are holding the increase in the investments that we have. And remember, we have a lot of investments in the retrofit of the cabins, still the renovation and the starting of the process to implement the new premium content and so on and so far. So that's the overall picture that we have. And remember, from these 41 deliveries that we are expecting, we expect to receive 3 additional 787s and also the first 12 Embraers on the last quarter, the last quarter. Roberto Alvo Milosawlewitsch: So the balance is [indiscernible], Michael. Neil Glynn: Okay. Great. And the balance is... Ricardo Dourado: 26 from the A320 family. Operator: Our next question comes from Jens Spiess from Morgan Stanley. Jens Spiess: Congrats on the results. I have a question on the net debt coming in at $5.9 billion, which was around 8% above your guidance. So if you could just elaborate on what turned out to be different versus your initial expectations. I would appreciate that. Ricardo Dourado: Sure. Actually, when we provide that guidance was before the announcement and the decision to distribute the $400 million dividend. So that was the main difference from the guidance that we disclosed before, Jens. Jens Spiess: Makes sense. Makes sense. So going forward, you will be updating your net debt guidance, right, for the potential dividends you will be paying. Is that correct? And just a follow-up question, if I may. On the E2s, when do you expect to deploy them? And what is your thought process on allocating that capacity? Will it be mostly targeting new routes and destinations? Or what's the plan there? Ricardo Dourado: Okay. So only for that reason in terms of the debt update, we don't need to update the guidance for that because we disclose all information related with that. And if and when we need to update other specific situation from the guidance, we will update everything. Roberto Alvo Milosawlewitsch: Jens, this is Roberto. Just complementing and clarify one thing on what Ricardo said. So our guidance doesn't provide any distributions on top of the minimum statutory dividends that we have to pay by law here in Chile, which is 30%, okay? So that's why you see $5 billion of liquidity going forward. But as Ricardo explained as well, over and above our finance policy, we have around $1 billion to $1.6 billion, and the Board will further decide on opportunities for capital allocation. If we end up doing something and if we will inform the market at the right time, and we will update the figures related to that with those potential things happening, okay? With respect to the A2s, so this will be deployed in Brazil domestic, the first 12 that we will receive this year. The strategy is that they will based out of our hubs. So we expect to see them flying out of Guarulhos, out of Brasilia, out of Fortaleza. And you can think about this in 2 ways. They allow us to fly new cities where the 319s, even though at the same time, their economics don't allow us to operate those cities. So you will see new destinations. You will also see probably increased frequencies on certain routes where we currently operate A320 related fleet and some combinations of these that we have never flown when you combine these 2 things. So you will see domestic Brasilia routes, both in opening new routes and increasing frequency in certain routes. Jens Spiess: Okay. Very clear. And just one quick follow-up, sorry, on the dividend distribution and the net debt guidance. So looking at 2026, everything that will be forward-looking is only the regulatory or mandated dividends that you're factoring in there. Anything in excess basically would only be updated on like looking backwards basically on what you already paid or what you already announced, right? Just to make sure we'll be modeling this correctly. Ricardo Dourado: Yes, you are correct. So as Roberto mentioned, the range that we disclosed as a calculation under the financial policy to have between $1 billion and $1.6 billion available, it's the consideration regarding the 21% and 25% range of the guidance in terms of liquidity. And that amount is not considering the guidance that we provide. So we only consider the CapEx that is expected and also the minimum dividends. Operator: [Operator Instructions] Our next question comes from Filipe Nielsen from Citigroup. Filipe Ferreira Nielsen: So I have 2 on my side. One is related to the costs that we saw this quarter. Just trying to break it between potential one-offs or costs that you think it could be something more structural during 2026. We know that there are effects from a weaker dollar, stronger local currency. So if you could like clarify which impacts were more like one-offs in the quarter and which ones were -- could remain for longer during 2026? And my second question is regarding the cargo operations. Just wanted to check your sense on how cargo yields should evolve in 2026. We have the guidance for volumes, but I just wanted to make sure how the top line on cargo should evolve. Ricardo Dourado: Okay, Filipe. Just to give you, I think, the more color in terms of the impact that we have in the fourth quarter, we disclosed that from this 4.7, we have 2 different impacts. 0.2 coming from the weaknesses of the U.S. dollar in the fourth quarter, 0.2, and the other 0.2 as what we call one-offs from this quarter. But remember, I would like just to emphasize the guidance that we provided for 2026. There is nothing structural. So we are confident that the level of investments that we have in all initiatives. Remember from the Investor Day, we disclosed that we have more than 700 initiatives internally in the company to provide more efficiency. We have this cost containment structural behavior in the company. And the guidance that we provide for this year is well aligned with the same trend between $0.043 and $0.045. So there is nothing material, nothing structural to be considered that could represent any risks from our perspective. But yes, we also have -- remember, in our guidance, the assumption to have, for instance, the BRL at 5.5. The BRL is now at 5.2, and then we have to reflect. But on the other hand, as Roberto explained in another question, we also have another positive impact in terms of RASK. So I also emphasize on the slide in terms of the results from the fourth quarter. The CASK have increased to 7.9%, but the RASK have increased even more to 11.7%. Roberto Alvo Milosawlewitsch: And the cargo question, Filipe, we don't disclose our unit revenues on cargo, but let me give you a couple of data points that are important. Northbound traffic is export traffic. Southbound traffic is import traffic. Import traffic normally has higher yields than export traffic just because of the nature of what is exported. It's basically raw materials going north and it's, if you want, perishables -- technological perishables coming south. So there may be a potential change in the mix just because of the currency appreciation that we will see if it happens during the year. But we don't see today significant issues in the demand side to believe that our -- that the unit revenues in cargo are going to be materially different. The start of the year is always low because people send inventories to close the prior year, and now we have the Chinese New Year, which is very relevant on the cargo side because basically China shuts off for a week. But the basis of growth and the stability of the market is [indiscernible]. We have no -- nothing to concern us at this point in time. Operator: Our next question comes from Gabriel Rezende from Itau BBA. Gabriel Rezende: Congratulations on the set of very strong results. Two questions here on our side. Correct me if I'm wrong, but you mentioned that around 23% out of your passenger revenue came from those more premium-related revenue. Just trying to understand where the company is targeting to land this number along 2026. So how much can this 23% increase along the year, what is the company's target at this point? And also, we talked a lot during the call about this positive FX environment, especially here in Brazil. And also, we are seeing a favorable oil price environment as well. Just trying to understand whether you see the sector at some point in time, perhaps this year, accommodating yields into a slightly lower base versus where we are at this point. Roberto Alvo Milosawlewitsch: Thank you. So second question first. We see -- I mean, Brazil was out of the 10 largest domestic markets in the world, the one that grew the most in 2025 which is quite impressive, I think. And we see momentum from that perspective. And at this point in time, I think that the capacity outlook for the industry in Brazil, together with the demand perception leads us to believe that it's going to be a stable year as compared to what it was in 2025. So we see potential for development of our strategy and our network over there as we have done it in the last 2 or 3 years. So I don't think at this point in time that we will see a significant change in dynamic of the market, at least for 2026. We don't see the elements of that. And more generally, I think that the capacity situation in the industry as a whole with the engine situation and the manufacturers still trying to catch up to replace older aircraft and to meet their commitments in deliveries is going to mean that 2026 is going to be similar to 2025 in terms of global capacity. I forgot the first question. Can you remind me, sorry, please? Unknown Attendee: What percentage -- with regard to our premium revenues, how we see that target going forward given the fact that we reached 23% of premium revenues. Roberto Alvo Milosawlewitsch: We don't disclose the target for premium revenue, but we believe that premium revenue will still grow faster than our total revenue and our capacity during 2026 as it has happened in the last few years. Operator: Our next question comes from Savanthi Syth from Raymond James. Savanthi Syth: Just a couple of questions from me. First one, just on the corporate side. I know you mentioned demand strong widely across the regions. But I was curious what you're seeing on the corporate side, if there's any acceleration there or any trends to call out? And then just secondly, I'm wondering there's one of your competitors that have kind of refocused on premium offering. And just wondering what you're seeing in the region and if there's still kind of maybe premium growth in offering is still outstripping or actually maybe demand is outstripping the supply. Roberto Alvo Milosawlewitsch: So corporate recovered probably 1.5 years ago from before 2020 already. Growth in corporate demand looks stable. I think what's most relevant is that we have been gaining consistently market share in corporate segments. And that you can see very clearly on public information provided by travel agency in Brazil, for example, where you can see that public information figure. And the set of what we have created, the network, the execution, the frequent flyer leads us to believe that this position we have is going to be maintained or even be increased in the upcoming future. So no concerns with respect to corporate demand at this point in time. And I think that LATAM has put itself in a very strong position to serve corporate customers, whether it's because of our network, because of our FFP, because of our delivery. And the second question, it's interesting. You mentioned premium offer. I think I said it in my speech, and it all starts with people. you are not going to be able to attract customers that want to fly again with you and particularly demanding customers as customers -- as premium customers only with hardware. You need software. And in that sense, I think that LATAM stands out completely with respect to not only its direct competition in the region, but also in many regions across. And this is one, I think, of the learnings of the last few years and what has started the cycle where now you see profitable growth that we have. At the same time, we believe that we can improve on execution, and I believe that we can still improve significantly on hardware, on the physical delivery of our product. As Ricardo mentioned, we just inaugurated a launch in Lima. We're going to reinaugurate a bigger launch in Guarulhos next year. We'll have premium economy on wide-bodies, we'll install WiFi and wide-bodies, which I think is an important lag. And at the end of the day, even though maybe our competitors are trying to catch up to us, we continue improving. But the DNA of this organization and the people, I think, is unmatchable at this point in time. Operator: [Operator Instructions] Our next question comes from Felipe Ballevona from Santander. Felipe Ballevona: I have a follow-up on Jens question about net debt. You stated that you ended up missing the guidance due to the $400 million dividend announcement. However, you said that the minimum dividend is considered in the guidance. And if I'm not mistaken, those $400 million wouldn't be extraordinary dividends, but minimum ones. So how can I put this 2 together? And also on a separate note, what's the currency breakdown of your debt? Roberto Alvo Milosawlewitsch: Yes. I'll pass to Ricardo on the second one. But I mean, just maybe it's good to clarify, minimum dividends 30%, but they are paid the following year, normally after the shareholders' meeting, and that happens in Chile normally in April, okay? What we did is that we advanced a significant portion of minimum dividend in December, and we paid $400 million in December. So as what you are seeing is net debt as of 31 of December, and that was not in the previous guidance, you have to adjust for those $400 million, okay, which means that in April, the company would have already counted those $400 million for the calculation of the final dividend that it would. So that's probably the clarification on this, okay? With respect to currency... Ricardo Dourado: Is that clear, no, the question regarding -- okay. And in terms of currency, I think almost 100% of our debt are in U.S. dollar. We only have one local bond that close to $160 million in local currency. So it's almost everything in U.S. dollars. Roberto Alvo Milosawlewitsch: And that's local currency... Operator: We currently have no further questions. So I'll hand back to Ricardo for closing remarks. Ricardo Dourado: Again, thank you all for connecting this morning. Please note that our Investor Relations team is available for any further questions. Have a great day, and thank you again. Operator: This concludes today's call. Thank you for joining. You may now disconnect your lines.
Operator: Good morning, and welcome to the Champion Homes Third Quarter Fiscal 2026 Earnings Call. Here to review the results are Tim Larson, Champion Homes President and Chief Executive Officer; Dave McKinstray, Champion Homes Executive Vice President, Chief Financial Officer and Treasurer; and Laurie Hough, Champion's former Executive Vice President, Chief Financial Officer and Treasurer, who announced her retirement in December. Yesterday, after the market closed, Champion Homes issued its earnings release. As a reminder, the earnings release and statements made today -- during today's call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the company's expectations. Such risks and uncertainties include the factors set forth in the earnings release and in the company's filings with the Securities and Exchange Commission. Please note that today's remarks contain non-GAAP financial measures, which we believe can be useful in evaluating performance. Definitions and reconciliations of these measures can be found in the earnings release. I will now turn the call over to Champion Homes CEO, Tim Larson. Unknown Executive: Good morning, and welcome to the Champion Homes Third Quarter Fiscal 2026 Earnings Call. Here to review the results are Tim Larson, Champion Homes' President and Chief Executive Officer; Dave McKinstray, Champion Homes Executive Vice President, Chief Financial Officer and Treasurer; and Laurie Hough, Champion's former Executive Vice President, Chief Financial Officer and Treasurer, who announced her retirement in December. Yesterday, after the market closed, Champion Homes issued its earnings release. As a reminder, the earnings release and statements made during today's call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the company's expectations. Such risks and uncertainties include the factors set forth in the earnings release and in the company's filings with the Securities and Exchange Commission. Please note that today's remarks contain non-GAAP financial measures, which we believe can be useful in evaluating performance. Definitions and reconciliations of these measures can be found in the earnings release. I will now turn the call over to Champion Homes CEO, Tim Larson. Timothy Larson: Thank you, and good morning, everyone. I'd like to begin by welcoming Dave McKinstray. Dave officially joined Champion on January 12 as CFO. He has a record of delivering results in complex environments and driving growth and execution of operational initiatives across consumer products and manufacturing businesses. We look forward to the benefits of Dave's experience and leadership and are excited to have him on the Champion Homes team. On behalf of the Board and management team, I'd like to recognize and thank Laurie Hough for her 2 decades of dedicated service to Champion Homes. During her tenure, she has helped build us into the industry leader we are today. We hope that she will enjoy her well-earned retirement and wish her all the very best. Before we turn to our results, I'd like to acknowledge our Chair of the Board, Tawn Kelley. Tawn has been a valued Board member since 2023 and became Chair of our Nominating & Governance Committee in August of 2024. We are thrilled that Tawn was elected as Chair of the Champion Board of Directors last November. Her leadership and expertise will be instrumental in guiding us on our next phase of growth. Now I'll cover our fiscal third quarter highlights and progress on our strategic priorities that are advancing across Champion Homes. As I've shared previously, increasing awareness and demand for our products and brands is one of our strategic priorities. Building trust with consumers is one of the most impactful ways to build awareness and referral. We are proud to share that our Skyline Homes brand was named America's most trusted manufactured homebuilder by Lifestory Research. This marks the sixth year in a row that our Skyline Homes brand has earned this recognition, and it's based on an independent survey of over 47,000 consumers. It is also exciting to see the top 3 brands from the industry study are from the Champion Homes family of brands. Skyline Homes and the Champion Homes brands are 1, 2 and completing the podium is Genesis Homes, our builder developer brand. This recognition underscores the strength of the Champion portfolio and our relentless drive to deliver a great experience for the families that purchase and live in our homes we design and build. Product innovation is one of our strategic priorities, and our team continues to launch new home plans at varying price points, including homes targeted for a broader segment of new buyers and expanding the addressable market for off-site built homes. This strategy is reflected in the Emerald Sky home we launched at the recent Louisville show. A stunning 1,600 square foot, 3-bedroom, 2-bath home at a consumer retail price of approximately $185,000. When combined with land cost in each market, that places the total price for our home well below the new home ASP in the United States that's hovering around $500,000. We are pleased with the feedback in response to a range of new products featured at the Louisville show. We will continue to bring homes to market that provide our channel partners with the ability to offer buyers a great monthly payment and with all the benefits of a new home. On the legislative and regulatory front, there has been considerable activity recently, and I want to spend a few moments on the latest developments as each are at different stages of the legislative process. We previously shared updates on the ROAD to Housing Act. In December, the act was not included in the final National Defense Authorization Act as was originally anticipated by most in the industry. However, the House of Representatives has been drafting their package called the Housing for the 21st Century Act and we are following it closely as it includes elements that support the expansion of offsite-built homes. There remains a strong bipartisan focus on solving the housing crisis and we believe that is the foundation for the Senate and the house to work together to enact meaningful legislation. We were also encouraged to see the house pass the Affordable HOMES Act, which reaffirms HUD as the final authority and manufactured housing standards. This legislation eliminates duplicative federal rules and ensures that energy efficiency improvements are made in a way that preserves affordability. We continue to monitor legislation and zoning reform at both the local and national level and remain encouraged to see policymakers working to address affordability issues in the broader housing market. In late January, I was able to spend time with HUD Secretary, Scott Turner's team in Dallas. We had the opportunity to tour a Burleson, Texas plant with his team and regional HUD leadership. These efforts demonstrate HUD's commitment to helping to provide affordable housing Americans and we look forward to continuing to spend time with them in anticipation of the HUD Code evolving from the legislation I just mentioned. Now I'll review our third quarter's performance, which was in line with our expectations as we navigate a challenging macro in the consumer environment. Our strong performance relative to the broader housing market was a result of our team's execution of our strategic initiatives, reflected in higher ASPs from a shift to more multi-section homes and increased prices on new home sold through company-owned retail stores as well as the contributions from the Iseman transaction. Our teams continue to thoughtfully pace production with demand in each market. Manufacturing backlogs at the end of December decreased sequentially by 15% to $266 million. The average backlog lead time ended the quarter at 7 weeks compared to 8 weeks at the end of the prior quarter and 10 weeks at the end of December last year. Manufacturer orders were up in the quarter compared to the same period last year. Third quarter net sales increased 2% year-over-year to $657 million, and total homes sold during the period decreased by 2% to a total of 6,485 homes. As a reminder and consistent with what we shared on our last earnings call, we anticipated the year-over-year volume contraction due to the prior year period benefiting from deliveries impacted by weather shifting into Q3 from Q2 and fiscal year '25. From a channel perspective, sales to our independent retail channel decreased year-over-year and were flat sequentially as a result of the prior year comp dynamic I just mentioned. We continue to receive positive feedback and adoption of our dealer portal that is a one-stop digital experience that brings together lead management, order information, inventory and valuable sales resources for our dealers. It's a key capability that leverages our investments to generate leads for our independent retailers through our direct-to-consumer strategy. At captive retail, sales increased year-over-year benefiting from the execution by our combined sales teams with the acquisition of Iseman Homes and from an increase to our average selling price. Captive retail sales represented 38% of consolidated sales in 3Q and versus 35% last year. The retail team continues to provide timely new products and home features at the right price value for today's buyers. Moving to the community channel. As anticipated, our community sales were down in the third quarter versus the same period last year as we paced inventory levels with moderating order rates and softer consumer confidence in the period. We received encouraging responses to our new products from our community customers at the Louisville Home Show, which is a positive leading indicator for us as we move into the spring selling season. I particularly enjoyed connecting with our community customers in Louisville. We believe in the great price value that our community customers offer and the critical role they play in solving the affordable housing crisis. Sales through builder developer channel grew in the third quarter versus the same period last year. We were pleased to be part of the launch with our customer, TCM Capital at the Blythe Village project in Fresno, California this week. This build-to-rent community with 67 units was designed with our HUD product. It is a great proof point as to what's possible through our build developer team, products and partners. In addition, we are excited to showcase our builder developer capabilities in a new home at the International Builders' Show in Orlando this month. Both initiatives reflect our continued commitment to the expansion of this channel in our portfolio. Champion financing continues to produce strong results and allows us to provide diverse financing options for our retailers and consumers. Triad's Capital Partners had a chance to join us in Louisville, where they shared positive responses to our homes and our strategic initiatives. Their interest in offsite homebuilding is a testament to our opportunities ahead and the broader engagement in the sector. We are also pleased that the sale of Triad's parent company, ECN Capital to Warburg Pincus is progressing well and received shareholder approval in January. The transaction is expected to close in the first half of the year. The transaction will extinguish our 19.7% ownership in ECN Capital with ECN shares valued at $3.10 per share delivering proceeds to Champion of approximately CAD 189 million. In connection with our support of this transaction, we agreed to extend our Champion financing joint venture for additional 3 years. We look forward to the continued collaboration with the ECN and the Warburg team. I will now turn the call over to Dave and Laurie to talk further about our financial performance. David McKinstray: Thanks, Tim, and good morning, everyone. I'd like to begin by expressing how excited I am to be joining Tim and the rest of the Champion Homes team. Champion has an impressive legacy of delivering innovation, affordable housing solutions, and I'm energized to contribute to our next chapter. In my first few weeks, I've been impressed by the team and by the opportunities ahead of us. I'm grateful to Tim for his vision and leadership, and we've had time to deep dive into the strategic initiatives that he has established for the company. I look forward to driving these initiatives with Tim and the rest of the team. I'm going to turn the call over to Laurie to review the quarter, and then I will come back to share my view of Q4. Laurie Hough: Thanks, Dave, and good morning, everyone. I'll begin by reviewing our financial results for the third quarter, followed by a discussion of our balance sheet and cash flows. During the third quarter, net sales increased 2% to $657 million compared to the prior year period, with U.S. factory-built housing revenue also increasing 2% year-over-year. The number of U.S. homes sold in the third quarter of fiscal 2026 decreased 3% to 6,270 homes due to a decrease in sales to the community REIT channel as well as a function of the prior year period, having an outsized benefit of homes sold as a result of weather that shifted sales from the fiscal second quarter to the fiscal third quarter of last year. These decreases were partially offset by the inclusion of the acquisition of Iseman Homes in the current year period. The average selling price per U.S. homes sold increased 5% to $99,300 due to changes in product mix and increased prices on new homes sold through our company-owned retail sales centers. On a sequential basis, U.S. factory-built housing revenue decreased 4% in the third quarter compared to the second fiscal quarter due to normal seasonality and as anticipated, a decrease in sales to the community REIT channel. Manufacturing capacity utilization was 59% compared to 60% in the second quarter. On a sequential basis, the average selling price per U.S. home sold remained relatively flat. Canadian revenue during the quarter was $26 million, representing a 3% increase in the number of homes sold versus the prior year. The average home selling price in Canada decreased 2% to $120,000 compared to the prior year period, primarily due to a change in product mix. Consolidated gross profit decreased 5% to $172 million in the third quarter. Our gross margin of 26.2% came in slightly better than our expectations but decreased 190 basis points compared to the prior year period. The year-over-year gross margin compression was primarily due to higher manufacturing material costs relative to price and less absorption of fixed costs due to lower sales volumes, partially offset by higher ASPs and new homes sold through our company-owned retail sales centers and a higher percentage of total sales through our company-owned retail sales centers. SG&A in the third quarter increased to $110 million from $108 million in the same period last year primarily due to the inclusion of the Iseman Homes acquisition. SG&A as a percent of sales was 16.7%, which is relatively flat compared to the prior year period. The company's effective tax rate for the quarter was 18.3% versus an effective tax rate of 21.1% for the year ago period. The effective tax rate was positively impacted by an increase in recognition of tax credits related to the sale of energy-efficient homes in the current year period. Net income attributable to Champion Homes for the third quarter decreased by 12% year-over-year to $54 million or earnings of $0.97 per diluted share. The decrease was primarily driven by lower gross margin. Adjusted EBITDA for the quarter was $75 million, a decrease of 10% compared to the prior year. Adjusted EBITDA margin decreased by 150 basis points to 11.4% compared to the prior year period. As of December 27, 2025, we had $660 million of cash and cash equivalents, and we generated $100 million of operating cash flows during the third quarter. In the quarter, we once again leveraged our strong cash position and returned capital to our shareholders through $50 million in share repurchases. Additionally, our Board recently refreshed our $150 million share repurchase authority, reflecting confidence in our continued strong cash generation. Before I conclude my earnings call remarks, I want to express my appreciation for my time with Champion Homes. I've been fortunate to meet and work with incredibly talented individuals across my tenure and while I look forward to my retirement, I will miss the team that made working for Champion so rewarding. It has also been a great pleasure to work with our sell-side analysts and investors over the years. Thank you for the interactions and the relationships that have been fostered as a result. I look forward to watching Champion Homes continue to execute on its strategy. And with that, I'll turn the call over to Dave for some remarks on the company's near-term expectations. David McKinstray: Thank you, Laurie. Looking ahead to the fourth quarter, we expect revenue to be up low single digits versus the prior year with gross margin anticipated to be in the 25% to 26% range. These expectations reflect cautious consumer sentiment, the seasonally lower winter selling period and softer demand in certain markets and customer channels. Additionally, weather-related disruptions, including recent extreme weather events, have the potential to create additional variability in delivery timing and quarterly results. As a reminder, consolidated gross margin can vary quarter-to-quarter due to changes in product mix, channel mix between independent dealers and company-owned retail locations. While continuing to manage SG&A prudently, we remain focused on advancing our strategic growth priorities. Additionally, it's important to remember, in Q4 in advance of the spring selling season, participation in several fourth quarter trade shows is expected to drive a modest increase in fixed SG&A versus other quarters. Lastly, as we go forward, we expect to continue to drive strong operating cash flow, and I'm excited by the many opportunities we have to utilize our balance sheet. We will be assessing our capital allocation strategy to ensure we're investing in long-term sustainable growth and maximizing shareholder returns. With that, I'll turn the call back to Tim. Timothy Larson: Thank you, Dave. We appreciate the time to share our third quarter results and how it reflects the Champion team's unwavering focus on our customers and executing on our strategic priorities. We look forward to finishing the fiscal year strong and continue to expand demand for our products and deliver attainable housing solutions to our customers. And now let's open the line for questions. Operator: [Operator Instructions] The first question comes from Greg Palm with Craig-Hallum. Greg Palm: Maybe just a little bit more color on kind of the environment, what you saw in the quarter geographically. And then just as it relates to the current quarter, how we should sort of think about some of these weather-related impacts? And what -- are you taking into account any of that in the guidance specifically? Timothy Larson: Greg, thanks for the questions. In terms of the geography, nothing unusual that happens between quarter-to-quarter movement. You're always going to see that in the HUD data. And a lot of those things happen based on mixed factors and local factors. We're encouraged in our buyer data that we're seeing new consumers to offsite-build homes, and that really impacted our quarter. Additionally, in terms of your question on the weather. Really, there were some delays that impacted production days. Our goal is to be able to make that up within the remaining part of the quarter. So it comes down to how many of those days are we going to make up. And then the delivery side, how is deliveries impacted if there were local areas where the ability to get the home ready for set. So ultimately, we're going to work through those in the quarter and I know the team is driving to do that in a thoughtful way. And then I think in terms of the overall trends that we saw, we're encouraged by the team's ability with new products and in the marketplace to attract more consumers. And that's really the strategy that we've been focusing on in this environment. So all in all, it was a solid quarter and also, we're focused on executing the fourth quarter with those things in mind. Greg Palm: Okay. Makes sense. And I think you mentioned higher ASPs in captive. And I guess I just wanted to clarify something. Was that a byproduct of mix? Or are you saying specifically that pricing on a like-for-like basis was higher? I guess what I'm kind of getting at is, you aren't seeing any change or deterioration in the pricing environment? I just wanted to confirm that. Timothy Larson: Yes, it was both. And it's year-over-year. We saw both some price and then also mix, as we mentioned, some more of the multi-section homes. Greg Palm: Okay. And then I guess, just broadly, in light of some of these more recent comments on housing, whether it's affordability or ramping up supply, maybe this is just a good opportunity for you to kind of remind us all of what sort of role that you think factory built could sort of play in this? Timothy Larson: Yes. I think it plays an important role and frankly, a critical role when it comes to the price point. As I talked about in my remarks, we've got products now that really zero in on that -- expanding addressable market for off-site built. And when you combine that with the legislation that's being discussed that's really focused on affordability, it's a great time to be in this business. And I think part of what we've spoken to is how we're preparing with our channels, with our products, our go-to-market to be able to engage a broader set of consumers, and that's really the strategy that we're executing. So there's going to be ebbs and flow in the legislative process. You see that. But ultimately, it's clear there's bipartisan support. And so we're eager to see those items pass so that we continue to build and grow the industry. Operator: The next question comes from Matthew Bouley with Barclays. Matthew Bouley: I guess, first, I wanted to just touch on the volumes relative to the industry. I think obviously, we've all seen the industry data that was down kind of, what, low double digits, low teens through the first 2 months of the quarter. And I don't know if December was really different, but given you guys and your peer were kind of only down at a single-digit rate. I'm just curious and kind of comment on your own volumes versus the industry. And obviously, what I'm trying to get at is, what that implies about the go forward in terms of what your own out-the-door sales might look like? Timothy Larson: Yes. In terms of the team, they did a really good job executing with our channel partners, and that included leveraging the digital investments I mentioned. And we've also been evolving our product and being very agile product in each market and that certainly helped us in the quarter over some of the dynamics you mentioned. The other thing is that includes our captive retail stores. And as a reminder, when we report our units that includes both our retail and manufactured, and so each quarter, channel mix is a driver of that. And certainly, there was positive from a retail in the quarter. And as we think about going forward, as Dave mentioned, we signaled growth quarter-over-quarter in the fourth quarter for us and it builds on some of those drivers that we just talked about. So I think it's encouraging, as I mentioned, that we're seeing consumers come in from the broader housing market, and that helps us in an environment within our own industry. So I would say those are the drivers that really we're focused on as we execute through this quarter as well. Matthew Bouley: Okay. Got it. Got it. And then secondly, the community channel. I mean -- I think what you said was it was down year-over-year, which was in line, which you had said, of course, last quarter. But it sounded like maybe there was some encouraging commentary coming out of Louisville. So yes, with your community channel partners. So just any color on kind of what -- maybe what they're waiting for and sort of what their own inventories are looking like and if there is an outlook at some point in calendar '26 to maybe see a kind of recovery in the community channel? Timothy Larson: Yes. We certainly have worked closely with our community channel partners on their demand plans for the upcoming season, and they did give us positive feedback about our new products and as we worked with them on their execution. What we're seeing is in each market, depending on where their consumer is at, what their demand levels are, they're pacing, obviously, their product and inventory, and we work very close with them on that. So as we head into the spring selling season, we'll be working with them in terms of those demand plans and volume in terms of the execution. What I would say is there's similar macro environment trends that they're seeing. So if we see a stronger consumer as the spring selling season grows, there's the benefit of that. At the same time, it can be choppy. And so we're working very close with our community channel, and I'm proud of the team, how they've created products release that focused on that community segments, and we're prepared as their businesses grow and they need to grow. But we're really balanced about the community channel given those factors. Matthew Bouley: Congratulations to Laurie and Dave as well. And good luck. Operator: The next question comes from Mike Dahl with RBC Capital Markets. Michael Dahl: First one, I just wanted to dig in a little bit on the margin commentary for the following quarter. And if we look at it kind of sequentially, can you help us understand what are your assumptions and the puts and takes around kind of price cost? So if you could break that down in both pricing and costs. What your mix assumptions are and what role shifts in utilization rates and fixed cost absorption may play in just the sequential decline in gross margin that you're projecting? And if you could be specific, that would be great, but ballpark or directional would help as well. David McKinstray: Yes. I appreciate the question. I think if you start at the top, and we said in the prepared remarks, we'll have variability in our gross margin. We've seen that over time, and there are shifts. You mentioned some of them, right, the product mix, channel mix, all those different drivers. As we mentioned to Q3 was in line with our expectations of gross margin. As we look out to Q4, one dynamic that we're watching, I think is something that's important as we continue to shift more towards captive retail, that will increase the amount of potential swings we see. And one of the things that we're seeing in Q4 is, we're actually seeing an inventory build in captive retail, which is a timing thing really from a gross margin perspective, but is a headwind on the Q4 period sequentially versus Q3. So that's one nuance that will be specific to Q4. Again, over the long term, it will work itself out. The other factors that you mentioned, I would suggest that they're going to be roughly in line with what we saw in Q3. The dynamics underpinning the market will continue from Q3 to Q4. We don't expect any wild variables between ASPs, between input costs or mix from what we saw in Q3. Michael Dahl: Okay. That's very helpful. And then in terms of, I guess, just to pick up on that last comment about the inventory build in captive retail. Can you broaden that out and talk a little bit more about what those sell-in versus sell-through dynamics have been and whether you think they're -- there's some -- either -- because I didn't know if there was actually some destocking. And in some ways, it sounds like you're actually putting more inventory into your channel. So just help us understand that a bit. David McKinstray: Yes. Thanks for the follow-up. So I think, first, my comment was forward-looking. If you look back, and I think the company spoke about this -- we spoke about this on prior calls was, as we went forward over the last 2, 3 quarters, we actually drove down or drew down on inventory within our captive retail. As we go forward, there's the spring selling season. So it's really in preparation of the spring selling season that we're going to see that uptick in inventory. So it's more of a seasonal dynamic than an underlying dynamic within the business. Timothy Larson: Yes, that's right, Dave. The only thing I would add is, it's planned to be able to be ready for the spring selling season rather than a slowdown in sales in that channel. It's really preparing for the product lines as we go to market. And it also relates to our strategy with margin. As we come out with new products, we're always thoughtful about how to make sure we have a strong margin with each of those products depending on their various price points. And so it really comes together in terms of the strategy to make sure we're prepared at our captive retail for the spring selling season and driving our goals that we talked about. Michael Dahl: And congrats again, Laurie, on an amazing career and Dave on the new appointment. And as Matt said, good luck and talk to you soon. Operator: The next question comes from Phil Ng with Jefferies. Philip Ng: Congratulations, Laurie. It's been a pleasure working with you and looking forward to partnering with you, Dave, going forward. I guess to kind of kick things off, Tim, what's the early read on spring selling season? I mean backlog did dip sequentially, but that feels more seasonal in nature. So just give us a pulse in terms of what you're hearing, what you're seeing, whether it's traffic, orders from your customers and how the different channels effectively are managing inventory, particularly. I'm most curious on the inventory side for REITs. Timothy Larson: Yes. I appreciate that, Phil. In terms of the trends, what we've been seeing and we carried in some order growth, we mentioned in Q3, we had orders growing, and that's going to benefit us in Q4, and we signaled a year-over-year growth to the start of the calendar year in our fourth quarter. We certainly anticipate, hopefully, as consumers have some tax relief and other elements with rate trends that those can be in our favor, balanced with the macro and consumer drivers and choppiness that we've seen in the market of late. And I think as we think about our strategy, we've put ourselves in positions with our key channels with the right product in this environment. And in terms of your question of the community channel inventory, if you remember years ago, there was quite a bit of buildup and then it took a while to have that come back. What I'm encouraged by is, we've been very calibrated with our community channel partners. So if they see an opportunity, we're going to be able to move quickly versus having that kind of languished in terms of the timing of their inventory. So our approach there is to stay in sync with them and make sure we're flexible as we go through the spring selling season in our community channel specifically. But I think our outlook as we think of this year going forward is how we continue to earn more of those consumers from the broader housing market and the product strategy we have laid out is to drive that. Philip Ng: But just everything I'm hearing -- I'm not hearing anything noticeable shift in terms of how you kind of view the consumer and your REIT partners. Certainly, there was some inventory management last quarter, but it feels reasonably steady as we kind of go into the spring selling season. Is that a correct interpretation? Timothy Larson: Yes. I think to be specific, what we've signaled is we're working with them closely in certain markets, it may be a little bit more pace given the environment in that market, where other projects that are starting up, they're looking to do more new demands and builds. And so at the community channel, we're really watching closely in terms of moderating our inventory with them. So we've seen it year-over-year, quarter-over-quarter, we saw some abatement there. It's more of a balanced approach with our community customers as we go through the spring selling season. And given seasonality, we need to get more into that spring selling season, and we'll be updating you in Q4 about the community channel trends within the quarter. Philip Ng: Okay. Super. On the legislation front, Tim, can you expand on some of the nuances between the bills from the House versus the Senate as it relates to manufacture homes, certain elements like the steel chassis it was something that was highlighted, perhaps on the zoning. But any more color to kind of nuances between the 2 bills, I'm sure you spent a little more time unpacking it. And then next steps from here? And any color on a timing perspective? Timothy Larson: So yes, specifically, the Senate bill that we've been talking about that included the chassis was not included in the defense bill. However, the House bill does also include the HUD homes without a chassis that was in the Senate bill. And so that's just beginning the process with the House. So we're encouraged that, that ability to have a HUD code home without a chassis, is still part of the legislative process. Clearly, it's got to move through the House and then into the Senate, and we believe it will, based on bipartisan support, but there's going to be ebb and flow of part of the legislative process. Obviously, you're seeing out of Washington, a lot of focus on housing, affordability, increasing the supply of affordable homes. All that certainly are the right things that we're hearing in terms of that. So we'll see how the legislative process plays out. It appears that there's a lot of bipartisan support to drive that and we're preparing accordingly. But at the same time, we got to focus on what we can control as the legislative process takes its place, and that's what we're doing every day in anticipation of it, but also doing projects, like I mentioned in build a developer with local municipalities that can prove out how affordable housing can be delivered in each city. So I think it's the combination of the federal and the local, and we're driving execution with whatever those bills are coming out, we'll be ready for. But at the same time, it's going to take time within that process. So our goal is, hopefully, it happens sometime this year, but we'll see how the legislative process plays out in the upcoming months. Operator: The next question comes from Daniel Moore with CJS Securities. Dan Moore: Dave, welcome. And just quickly echo Laurie, thank you for all the help over the last several years and best of luck and enjoy it. Maybe jumping -- just expanding on a couple of the questions. I appreciate the color and the look into fiscal Q4, both from revenue and a gross margin perspective. In terms of the revenue guide, what are your expectations for backlog on a sequential basis, assuming we're kind of in that revenue guidance as we get to the end of fiscal Q4? And from a gross margin perspective, slight incremental pressure from here. Would you expect that to start to level off? What are your expectations kind of looking out over the next 2 to 4 quarters from a gross margin perspective based on the visibility we have today? David McKinstray: Yes. Thanks. I think first, from the revenue standpoint, Tim just talked about some of the dynamics that we're seeing in the order flow, which as you think about what that means from a backlog perspective, then it's going to be kind of a continuation of what we saw in Q3, where the sequential improvement, if you will, quarter-on-quarter continues. So I feel good about the orders that we got in Q3 and the orders that we're seeing here early in Q4. Your question on margin, as I mentioned in the previous question, is most of the dynamics are going to be the same from Q3 to Q4. We're not seeing any significant variables within that. There is that one seasonal variable that I talked about on the, call it, readiness inventory for spring selling season at captive retail, but those underlying dynamics are expected to continue. Over the long term, our goal is to continue to drive gross margin, and we're doing that through driving value to the consumer. So we don't see any huge variables beyond Q4. We're managing it within this range, and we feel good about where we're setting up for Q4 from a margin perspective. Dan Moore: Very helpful. Appreciate it, Dave. Just as I think back, I know the trade show SG&A issue certainly cropped up in the past. I think, as I recall, a few million dollars, maybe $3 million to $5 million, something like that. Is that overly aggressive? Just any quantification there on the incremental SG&A for the quarter? David McKinstray: Yes. You hit the seasonality of SG&A for us. The show season, if you will, in Q4 hits us. I would say just as a road map, if you look at last year as a percent of sales, Q3, we were basically in line from SG&A as a percent of sales. I think that's a good road map for how you can think of Q4. Dan Moore: Very helpful. And then just capital allocation, bought back $50 million of stock in the last 3 quarters. Obviously, the Board re-upped the authorization. Is that a run rate you expect to continue given the incremental capital coming in from ECN? Or might you be even more aggressive considering the kind of the recent pullback in share price? Just how are we thinking about balancing that? David McKinstray: Yes. In the near term, I don't foresee any changes. As we think about it over the long term, we're going to continue to assess our capital allocation. And as I mentioned in the prepared remarks, our goal is to make sure that we're driving those investments towards the highest return items that are going to drive the highest return for our shareowners in line with our strategic priorities. So near term, don't expect any changes. And then over the long term, that's a continued assessment that we're going to make to make sure we're driving the most potential value. Operator: The next question comes from Jesse Lederman with Zelman & Associates. Jesse Lederman: Congrats again to Laurie and look forward to working with you, Dave. I'd like to follow up on the policy front. It was recently announced a program called Trump Homes with several large public site-built homebuilders potentially building roughly 1 million homes over an undefined period of time with investment from private investors. I'm just curious if -- amidst the focus from the administration on housing affordability, is Champion Homes or even to your knowledge, industry advocacy groups getting involved in that conversation to try and provide or fill the administration's in for and the nation's in for affordable homes as incremental to what you're already doing operating the business as it stands? Timothy Larson: Jesse, yes, I certainly read about that from yesterday's remarks. And I would say from a strategic perspective, it's definitely in line with the execution that we're driving with our products, our channel strategy, our builder developer capability. As I mentioned, a few weeks ago, I was with the HUD team, and they got to see firsthand the capabilities we have. And if you think about the messages that are coming out, a lot of the policymakers in Washington, they've been talking about how off-site built homes, manufactured housing industry is a core part of that solution because when you think about the price points that we need to get to in our country, those $150,000, $200,000, $300,000 homes that's really made possible in an off-site model, which is what we've been delivering. So we're encouraged by, obviously, the policy, but also the messaging, and we're going to stay tuned into what those specifics are to make sure we're positioned well to realize the opportunity that comes from that. Jesse Lederman: Okay. Great. Last quarter on gross margin, Laurie, you kind of pegged the tariff impact at about 0.5 percentage of material costs and noted that you expected it to rise kind of towards 1%. So I was curious, where did that shake out relative to your expectations in the third quarter? And maybe, Dave, going forward, what's the assumption incrementally for fiscal fourth quarter? Is that going to be an incremental headwind that's driving the margin a bit lower sequentially as well? Or where do you see that tariff impact shaking out? David McKinstray: Yes. Thanks for the question. I think, first, the team has done a great job managing our tariff impact and working with our various suppliers to do that. So really applaud and appreciate that effort. And what we saw in Q3 was it came in pretty significantly below the 1% that we've talked about in the past. And so as we look forward to Q4, again, similar to some of the other commentary I had on gross margin, we're assuming those same dynamics into Q4. Now, of course, on tariffs, it's an evolving situation. So that can change based on the next potential news on it, but it's something we're always watching and we'll continue to react as that news comes, and we'll manage it accordingly. Jesse Lederman: Great. Good to hear. And if I may sneak in one more. Tim, since quarter end, as far into the quarter as you're willing to share, maybe even December as well, what are you seeing from a retail perspective in terms of maybe key leading indicators for the spring selling season, whether that's dealer traffic or quote activity or anything along those lines you can share? Because I know you mentioned that you're a little bit cautious on the consumer. So any intel from that perspective would be helpful. Timothy Larson: Yes. To be specific, the consumer caution was is more of the trends that we've seen over the last year, some of the ebbs and flows by market, particularly on the community side. But from a broader consumer, certainly, the demand is there for affordable housing. And we see that in our leads, our engagement in terms of our digital platforms, and we saw it at retail. Obviously, some of the weather pockets affected some of that for a bit, but we're planning for a continued strong spring selling season, and that's how we're approaching the business. Obviously, our ability to share that we're going to be up quarter-over-quarter in Q4 is based on some of those indicators. But we know what our backlog is, and we're managing through that, but also thinking through how we continue to drive demand through the quarter. So it's going to come down to that execution, but also do we get the consumer support through the quarter. So Jesse, I'd say we're balanced about it and focusing on the things that we control and driving the business and engaging our customers digitally and obviously, with the new products that were coming out at our retail stores and with our community partners. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Tim Larson for any closing remarks. Timothy Larson: Thank you, everybody, for joining today, and we'll just reiterate our congratulations to Laurie and welcoming to Dave, and we appreciate today's call and everybody joining us and your continued interest in Champion Homes. We look forward to updating you on our fourth quarter and full year end here in a few months. Thanks, everybody. Have a great day and rest of your week. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Philip Ludwig: Welcome, everyone, joining us today for the Melexis Fourth Quarter and Full Year 2025 Earnings Call. I'm Philip Ludwig, Investor Relations Director at Melexis, and I'm joined today by our CEO, Marc Biron; and CFO, Karen Van Griensven. Earlier today, we published our press release and presentation, which can be found on our website. We will start with some brief remarks on the business and financials before taking your questions, starting with Marc Biron. Marc, the floor is yours. Marc Biron: Thank you, Philip. Hello, everyone, and welcome to this earnings call. Let me start by sharing some perspective on the full year of 2025 and how we see 2026 as of today. Then we will discuss the last quarter of 2025. Looking back at 2025, at the beginning of the year, we had entered a phase of customer inventory correction later than our peers. We are now in a period with more geopolitical uncertainties and more short-term volatility in demand. The period of customer inventory correction was largely completed by the summer. As a result, our sales were stable or grew sequentially as the year has progressed. High in-quarter ordering has started in Q2, which we could serve from our strategic inventory. Still in 2025, sales in our largest region, APAC, has increased as a percentage of group sales. China has followed an alternating pattern of very strong sales in one quarter, lower the next quarter and strong again in the following quarter as it was in Q4 when we recorded our highest ever sales in China. Now looking ahead to 2026, we remain in the recovery phase of the automotive demand cycle. We expect that these sales will not be linear given all the uncertainties and the late ordering behavior of our customers. Following the very strong Q4, sales in China continued their alternating pattern in Q1, also influenced by Chinese New Year mid-February. We are also facing the expected volatility in our nonautomotive business such as digital health application. Finally, we have to factor in the impact of the annual pricing agreement that we have closed at the end of 2025. Those effects translate to a similar level of sales in the first half of '26 in comparison to '25. We expect growth in the second half of '26 with a similar dynamic as in '25. Now turning to the last quarter of '25. Sales of EUR 214.5 million means that we returned to a year-on-year growth of 9%. China posted its highest ever sales and the rest of Asia was also strong. Total APAC sales were up double digit year-on-year and sequentially, while Europe and the Americas were lower sequentially. On the innovation front, we leverage our technology leadership with strong design wins and an expanded pipeline of opportunities across China, Europe and South Korea. This trend is also valid in robotics with the pipe of opportunities up by a factor of 5 in Q4 versus the previous year. We have launched 19 new products targeting structural growth trends in automotive and robotics. In the last quarter, this included a game-changing inductive sensor for steer-by-wire application that simplifies design and reduces cost, paving the way for the next generation of electrified and autonomous vehicle. We have launched also a code-free driver for automotive ambient lighting, which streamlines the development cycle and reduce the cost of our customer. We also see the high potential in power electronics, and we are extremely proud to offer a world premier protective device called snubber. This unique solution protects and enhance power density of silicon carbide power module. All major power electronic manufacturers have shown interest in our product. A great example is Leapers Semiconductor, a Chinese manufacturer of advanced power module incorporating our snubber in their next generation of module. Our new protective device family will continue to expand to meet the evolving needs of power modules and emerging power applications. We have been growing faster than many peers in China over the past 5 years with our broad offering on high-performance and high-quality product and our strong local team to support customers. From my side, I came back from China 2 weeks ago. I'm really impressed how hybrid is gaining traction and how content reach -- are reaching mid-range car much more heavily than in Europe. To continue our trajectory in China, we are accelerating the implementation of our China strategy, including localization of our supply chain. A key step is to have local wafer supply, and we are fully on track to start shipping product this summer based on the 12-inch wafers from our local partner. We also established a dedicated robotics team in China to respond to the stronger interest with more than 60 projects currently underway. As part of our strategy to win in faster-growing markets, we are increasing our effort in India, where we enjoy strong double-digit growth. India presents great opportunities in automotive as well as in alternative mobility, playing to our strengths. We are finalizing the setup of a Melexis entity in India to show our commitment to serve customers locally and further develop in this attractive and growing market. I will now hand it over to our CFO, Karen Van Griensven, to provide more detail on our financial results and outlook. Karen Van Griensven: Thank you, Marc. So sales for the full year 2025 were EUR 839.6 million, a decrease of 10% compared to the previous year. The euro-U.S. dollar exchange rate evolution had a negative impact of 2% on sales compared to 2024. The gross result was EUR 324 million or 38.6% of sales, a decrease of 19% compared to the last year. R&D expenses were 13.8% of sales, Q&A (sic) [ G&A ] was at 6.5% of sales and selling was at 2.4% of sales. The operating result was EUR 134 million or 16% of sales, a decrease of 39% compared to EUR 219.9 million in '24. The net result was EUR 112.5 million or EUR 2.78 per share, a decrease of 34% compared to EUR 171.4 million or EUR 4.24 per share in 2024. Sales for the fourth quarter of 2024 were EUR 214.5 million, an increase of 9% compared to the same quarter of the previous year and stable compared to the previous quarter. The euro-U.S. dollar exchange rate evolution had a negative impact of 3% on sales compared to the same quarter of last year and no impact on sales compared to the previous quarter. The gross result was EUR 82.3 million or 38.4% of sales, an increase of 6% compared to the same quarter of last year and a decrease of 1% compared to the previous quarter. R&D expenses were 14.5% of sales. G&A was at 6.7% of sales and selling was at 2.5% of sales. The operating result was EUR 31.5 million or 14.7% of sales, an increase of 14% compared to the same quarter of last year and a decrease of 17% compared to the previous quarter. The net result was EUR 22.6 million or EUR 0.56 per share, an increase of 24% compared to EUR 18.3 million or EUR 0.45 per share in the fourth quarter of '24 and a decrease of 18% compared to the previous quarter. Now turning to the dividend. The Melexis Board of Directors approved on February 2 '26 to propose to the Annual Shareholders' Meeting to pay out over the result of '25, a final dividend of EUR 2.4 per share, which will be payable after approval of the Annual Shareholders' Meeting. This brings the total dividend to EUR 3.7 per share, including the interim dividend of EUR 1.3 per share, which was paid in October 2025. Now for our outlook. here, Melexis expects sales in the first quarter and first half of 2026 to be around the same levels as the previous year. Sales in the second half of 2026 are expected to grow compared to the first half of 2023. For the first half of 2026, Melexis expects a gross profit margin around 40% and an operating margin around 17%, all taking into account a euro-U.S. dollar exchange rate of EUR 1.17. And for the full year 2026, Melexis expects CapEx to be around EUR 40 million. Our outlook includes the first benefits of our cost actions taken in 2025, such as improvement in the cost of yield. We remain disciplined in executing our cost improvement road map, for example, a shift in some operations to be closer to customers in Asia, and this to keep moving towards our long-term margin objectives. This concludes our remarks. We can now take your questions. Philip Ludwig: Thank you, Marc and Karen. [Operator Instructions] Operator, can you now give instructions and open up for Q&A? Operator: [Operator Instructions] The first question is coming from Aleksander Peterc from Bernstein. Aleksander Peterc: I think the first one was pertaining to your guidance. So as in last year, this year, you also refrained from a full year guidance, could you give us a bit more color. So just help me understand if I got this right. So H1 flat. And then I think, Marc, you said in your introductory remarks that second half should be higher than the first half in a similar manner to what we've seen in '25. So is it then right to assume we're looking at a ballpark something about flattish for the full year? I'm not trying to extract the full year guidance for you. I'm just asking if the math is correct here. And then I have a quick follow-up. Marc Biron: Yes, I confirm your understanding. In my introduction speech, I have indeed mentioned that H2 will grow in a similar manner than H2 last year. Karen Van Griensven: But we can indeed -- yes, that volatility remains -- it's very low. So the -- if you look purely at Q1, we see that mostly Asia is staying behind. So Asia was very strong at the end of last year. We see it -- the order intake there is much lower than, for instance, for Europe. Europe is actually increasing. So it's all attributable to Asia and particularly also China. And we know that in China, there is a lot of volatility in order behavior and also very late ordering. So I want to put that also in that perspective. Aleksander Peterc: Very useful. And then secondly, on China versus Europe, we have a lot of debate going on about Chinese vendors, automotive brands gaining share in Western markets. What does this imply for your market share? Do you have your market share with local Chinese players that is similar to what you have in Europe? Or is there a discrepancy there? Marc Biron: Looking at the past 5 years, the CAGR of Melexis grew by 10% -- a bit more than 10% over the last 5 years. And in China, the CAGR grew 14%, which is higher than the majority of the peers in China. And I do believe we are gaining market share in China if we compare to the CAGR of Melexis with the competition. And there is nothing structural that would tell me that this will change in short term. And I would say, in the longer term, when we consider our design win, our pipe of opportunities, we see also that those design wins and the opportunity pipe is increasing faster in China or in Asia than in Europe. Operator: The next question is coming from Amelia Banks from Bank of America. Amelia Banks: Yes. My first question is just on gross margin. You sort of said last quarter that you saw around cumulative sort of 4 percentage points of temporary headwind stemming from yield issues and wafer inventory revaluation. I'm just wondering if you could maybe break down what you were seeing in Q4 and then also in terms of bridging sort of how you're seeing that guide to get to 40% in H1? Karen Van Griensven: Yes, we still had that same headwind in Q4 indeed because of inventory revaluation. We also still had high cost of yield. But this we -- this cost of yield, both effects -- well, particularly cost of yield is what will drive margin improvement in 2026. It will be a major contributor, and that is the reason why we expect around 40% gross margin in the first half of the year. Amelia Banks: Okay. And is that largely just reliant on sort of revenues picking up and demand picking up to get sort of through the sort of yield issues, the wafers that you're seeing in your inventory. Is that the main sort of driver of that? Karen Van Griensven: No, it's that we get more material out of one wafer. So it's not volume related. Amelia Banks: Okay. I just remember last quarter, you were saying about how you have sort of yield issues in one of your fabs, and that's led to sort of impacted wafers in your inventory that you're still having to work through. Is that still relevant? Karen Van Griensven: Most of that material has now been -- is now out of the inventory. So we now have in inventory wafers with higher yields, and that is helping us to improve the margin. Amelia Banks: Okay. Perfect. And then just my quick follow-up. Just on the sort of annual price resets. So just wondering if you could maybe guide on what sort of ASP change you've been seeing in '26 sort of versus 2025. Karen Van Griensven: I believe the average selling price in '26 will be close to the '25 average selling price. That is the expectation today. Operator: The next question is coming from Janardan Menon from Jefferies. Janardan Menon: I'm just looking for your second half guidance. I'm just wondering what is giving you the confidence that you will see the kind of increase in the second half like you saw last year, especially given your commentary on quite a lot of volatility in the China market. Are you expecting that market to stabilize over the next couple of quarters and therefore, give you some upside there? And just associated with that question is we just came off the Infineon call, and they said that perhaps because some of the customers, including in automotive and other areas is concerned about strong AI demand getting to -- giving rise to supply tightness even in areas outside of customers are willing to put more longer-term lead time orders now just to avoid any future capacity tightness. So is that something that you're seeing, which is also giving you some confidence on the second half of the year? Marc Biron: I think there is indeed multiple reasons for this statement on the second half of the year. First, we know that the inventory at our [indiscernible] in Asia, in particular in China is very low. And we know that they will reorder later in Q1 or in Q2 because the inventory is really low, especially in China and especially for the magnetic products, I would say. The second reason is we are -- in many big customers, we are changing the version of the products. And this change of version will happen in Q2, Q3. And it's why our customers are now busy to reduce their inventory of the previous version before they order the new version, let's say, the more modern version. This is clearly visible for drivers product, but also for some ASIC. Yes, in our price negotiation that has been finished in December, we have also received the forecast from our customers. And clearly, the forecasts are stronger in H2 versus H1. Those are the different reasons, let's say, that bring this comment. To follow up on your question about the, let's say, the supply problem, we have some sign, let's say, for example, of assembly house, where indeed those assembly house are moving, let's say, their capacity to different kind of package, more complex package in order to incorporate those complex AI chips. Yes, we have this view, let's say, from the assembly house, no really yet consequence on Melexis, no real consequence on any allocation, but there is indeed this trend, which is a bit more than the noise, I would say. Operator: The next question is coming from Craig McDowell from JPMorgan. Craig Mcdowell: The first one, I'll just go back to the gross margin. And just can you help us understand the step-up from Q4 into Q1? On the face of it, the sequential improvement, I think, around 150 basis points. It looks quite difficult given volumes, annual price inflation kicking in, currency likely worse. Just trying to understand what's going to get us to that sort of 150 basis point step-up in the face of those headwinds. I've got a follow-up as well. Karen Van Griensven: Yes. I can only repeat the biggest reason why that will happen is indeed that we have gone in inventory through most of the products with high cost of yield loss. So we will -- and as you remember, that was a high contribution of reduction in gross margin in '26, close to 2%. So -- but as we are now leaving that mostly behind, we will see improvement as of Q1 already. Price erosion that we also see in Q1, of course. We still expect a step-up because of this big improvement in cost of yield. Craig Mcdowell: And then just a follow-up. I realize it's early, but I appreciate your thoughts on the acquisition announced with MSO around sensor portfolio by Infineon. Just wondering your reaction of how that might change competitive dynamics in that segment of the market where obviously you're strong. Marc Biron: Yes. In our, let's say, product scope or application scope, yes, OSRAM is not a real competitor of Melexis, meaning that I think this acquisition will not change a lot for us. Operator: The next question is coming from Francois Bouvignies from UBS. Francois-Xavier Bouvignies: I have actually really one question. I mean when I look at your revenues, so you mentioned flat year-on-year in Q1 and Q2. Now when I look at your competitors like Allegro, for example, which I think is the closest, I mean, they are growing their auto revenues by more than 20% year-on-year in December quarter and March, by the look of it, is still 19%, 20% year-on-year. So they are really growing significantly. You mentioned China growing 14% in the last 5 years, but I would imagine that the growth in China was actually higher than 14%. I mean, given all the EV growth that you have seen, the car sales as well in there. So the content and the growth in China was clearly higher than that. So what I'm trying to understand is, is there anything structural here? I mean, a bit more because it feels a bit more than an inventory correction, especially when you compare the growth with some other peers. Even NXP is growing 11% in autos. TI is growing low teens. STM is growing mid-teens in March quarter. So you seem to be well below the others. So I'm just wondering why is that? Marc Biron: I think there is for sure, nothing structural. I repeat that I was in China last -- 2 weeks ago. Yes, my conclusion from the trip, which was the same when I was in China in November, I think that the Chinese customers, they like the Melexis product. They have a lot of trust on our quality. Yes, they like our support, technical support is very important in China. I confirm there is no structural -- there are no structural problem in China, also not in Europe. Yes, we are facing this volatility. The order in China was very high in Q4. In Q1, it is lower because of this Chinese New Year, also because the incentive scheme for EV in China have changed from '25 to '26. But from my perspective, we still have the same traction. And we -- when we refer to the design win or when we refer to all the pipe of opportunity, the discussion with customers, I don't feel any problem there. Karen Van Griensven: Yes. And I also want to add that Melexis went -- started the cycle much later than all the other players in the market. Usually, we started later, but we also come out later. In general... Francois-Xavier Bouvignies: I understand that. Yes. But versus Allegro, I mean, I would say why they would see differently than you. I mean they do similar things, not only the same. But what is your revenue in China? I mean, in Q1, was it -- how much down it is China, you would expect to be? Karen Van Griensven: China, it will be down quite a bit compared to -- well, based on the order intake we have now because January was still strong. February, March is still obviously still order intake. February looks quite weak, but that's probably a lot to do with China New Year. And March, yes, orders are still coming in. So it's also -- even in Q1, it is difficult to predict where exactly we will be landing because of, yes, the very late order intake, certainly also in China. But it's particularly low compared to Q4. But as I mentioned, we don't -- yes, there is no reason to believe why that wouldn't throughout the year pick up again. Q1 tends to be always a lower quarter -- well, not always, but usually a lower quarter in China anyway. Francois-Xavier Bouvignies: So on the year-on-year China, what do you expect your guidance? Karen Van Griensven: On a year-on-year, yes, it will be probably close to what we had a year ago. It might be slowly lower. But like we said, order intake is coming in quite late. Philip Ludwig: Francois, maybe just to come back to some of your comparisons, it's Philip here. Allegro, I think the 5-year CAGR is 2% to '24, okay? We can update for '25 as well, whereas ours is 14%. In China, we outgrow Allegro as well over a 5 years period. So I know we look ahead. Of course, we also look ahead. But I think if we look over time, as Karen mentioned, the quarters are not always in sync. I think the long-term growth track record of Melexis stacks up well versus many, if not the majority of our peers. Operator: The next question is coming from Robert Sanders from Deutsche Bank. Robert Sanders: Yes. Sorry, the line just went bad. I didn't hear the answer to the last question. Did you say the year-on-year decline in U.S. dollars or euros for Q1 China alone? Did you answer that? Karen Van Griensven: Well, like I said, order intake is very late. There could be a decline in the first quarter, although in January, we haven't seen it yet. And this is what -- that's the reality. February and March is still in orders. So very difficult to predict even in 1 quarter where we will land, particularly for China. Robert Sanders: Got it. My question was more around in the medium term. So you've seen a lot of the BEVs being canceled by Western OEMs, more than 30% of launches have been canceled. It looks like EV demand is just not flying without big fingers on the scale. And now that they're taking away subsidies in the U.S. and China, it just doesn't seem to be as strong. So you're going to see a lot of people moving back to plug-in hybrids and zonal architectures as a kind of bigger source of differentiation. So does that affect your TAM growth? Because if I remember rightly, you brought it down at the CMD, your long-term growth. Does it affect how you think about that? Or are you kind of agnostic still to that trend? Marc Biron: I share your view indeed that hybrid, let's say, seems to be the preferred option for many of the customers and many of the manufacturers. And I would say hybrid is great for Melexis because there is -- and an electric engine and a combustion engine. Then we -- let's say, we win 2x because we contribute to the electric engine and we contribute to the ICE. Then for us, it's the best of both worlds, the hybrid motorization. And what I said during the introduction speech, in China, I was really impressed how much those hybrids were taking over because initially, let's say, the hybrid had a battery with, let's say, 50 kilometer range, but now it's 100, 150 and 100 to 150 kilometers. In Shanghai, for example, it's more than enough to move in the city during 1 day. And it's the reason why this hybrid is gaining traction. Robert Sanders: And what you see at the Western OEMs, obviously, they're restarting their development. I mean, a lot of their combustion engine R&D was shut down. Now they're restarting those teams. Is that a good thing for you because they will get more involved in the engine management side? Or is it there's a short-term issue because of cancellations and then a long-term gain because of plug-in hybrid ramps? Marc Biron: Yes, discussing with our customer, the Tier 1, the Tier 1 have faced indeed in '25, a lot of or some cancellation of platform. I think it's also one of the reasons of the current situation. They all told me that '27 will be different. And in '27, they forecast a lot of new platform, which is one aspect. And to answer your question, for Melexis, what is important is that either the electric engine or the combustion engine come with a new platform because the new platform is usually much more electronic rich with much more comfort, much more safety features, then those new platforms are always a benefit for Melexis. But it could be combustion engine or electric engine, it doesn't make a lot of difference for us because we are -- we have the same kind of contribution in both type of motorization. I repeat my previous answer, but hybrid is the best of both worlds for us. Operator: The next question is coming from Guy Sips from KBC Securities. Guy Sips: My question is on the inventory level of EUR 300 million plus. We see it increasing quarter-over-quarter. How comfortable are you with this inventory level? And do you expect that we are now on the peak? Karen Van Griensven: Yes, it is our -- it's indeed a peak level. As we progress in '26, we will probably keep it around that level, maybe a bit lower. But we don't have the intention to further increase it. Marc Biron: And I think this inventory is a strategic asset for Melexis because we have a lot of in-quarter order, and we can respond positively to those in-quarter order because we have the inventory with the right product. And when the business will pick up anytime soon, we'll be ready to ship to our customers, thanks to these inventories, and we really see this as an asset. And I think it's much more expensive to lose business in the future than to keep this inventory as it is today. Guy Sips: And a follow-up question on your sales in Europe, which is just above EUR 50 million in the fourth quarter of '25. And I think you have to go back to COVID times to see this kind of level. What is actually -- what could be a point for your European sales? Is it -- yes, can you elaborate a little bit on that? Marc Biron: Yes, the center of gravity of the business is indeed for the time being, at least moving from Europe to China or to Asia. That being said, yes, Europe remains very important. Also U.S. remains important. But this move from Europe to China is indeed the trigger for us to focus our organization on China. We have -- at the end of '25, we have updated our organization in China in order to give to this organization in China more autonomy, more autonomy in the business aspect to give them the opportunity to answer very quickly to our customers because we do realize that in China, speed is really a essence, and we should avoid the communication flow between China and Europe, then the autonomy has been given to the China team to be on top of the business discussion. And I think this is a very important asset for the future to strengthen our China team because indeed, for the time being, and I repeat for the time being, the business is moving to China. But we also see that in the expectation of the OEM, the European OEM in '26, but even more on '27, they will launch more and more new car with new platform, EV, cheaper, and it's not impossible that a kind of rebalance will happen later this year or later next year. Karen Van Griensven: And I just want to repeat that Europe had a strong start. Q1 is higher than Q4. Marc Biron: Yes. Operator: The next question is coming from Marc Hesselink from ING. Marc Hesselink: Yes. First, I would like to come back a little bit on the volatility that you call out on the revenue because I think the fourth quarter was a bit below what you initially expected, then another step down in the first quarter and a quite significant step-up in the second quarter sequentially. Just trying to understand that a bit better. What changed there? Because I think earlier, we talked more about small sequential improvements quarter-over-quarter. And now you certainly see this volatility. I think you discussed it, but just to really square what is really happening causing this volatility? Karen Van Griensven: Yes. So like we mentioned, what we -- the drop is fully for Asia and then also particularly for China. And China from one quarter to the other also last year can really move up EUR 10 million in one -- easily move up close to even EUR 10 million from one quarter to the other. So we don't have really snubber reason than there is huge volatility in China in general and that it is obviously also impacted seasonally by China New Year. Marc Biron: Yes. And it has been also amplified, sorry. It has been amplified by the change of incentive scheme in China at the end of '25. Marc Hesselink: Okay. Okay. And then the second one is a clarification on what you said on the pricing because I think you said that the ASP will be very close to '26 level to the '25. But you do call it out as one of the reasons for maybe a bit slower revenue in the beginning of the year or less -- no growth in the first half of the year. So just wanted to understand if you -- like product for product, are the ASPs stable? I think that would be probably a bit better than what you initially guided, which was the normal decline of 3%, 4%, I guess. Karen Van Griensven: No, we need to make that -- we need to clarify that. Stable ASP doesn't mean that we don't have price erosion. The price erosion is mid-single-digit expectation for '26, but the product mix has a positive effect in '26. This can vary from 1 year to the other, the product mix effect. Operator: The next question is coming from Michael Roeg from Degroof Petercam. Michael Roeg: I have a question about the China business, which was very strong in Q4. Do you have a sort of a crude estimate how much of your products end up with the top 5 Chinese carmakers and how much ends up with all the other names? Marc Biron: On the top 5 carmaker, I cannot answer. What we know is that, let's say, half of the Chinese business is for Chinese OEM and the other half is for the European OEM. Michael Roeg: And within those Chinese OEMs, you do not really have a good view on how much ends up with sort of the big companies, the familiar names and how much ends up with that very long tail? Marc Biron: No. Michael Roeg: Okay. Do you see a risk that if there eventually will be a shakeout of all those smaller players that eventually their car volumes will move to the big players, the big domestic players, which have much better pricing power than those smaller players? Have you done scenario analysis for that? How much that could impact your business? Marc Biron: Yes, the consolidation will indeed happen. There are a lot of OEM in China then for sure, consolidation will happen. But we don't have an accurate answer to your question. I think indeed, innovation will also help at the end, it's all about new products that we bring on the market to compensate this price erosion. Yes, we have -- in the product that we have launched recently, we have products with much more ASP, much more margin. I don't see any reason why this consolidation will be negative because on the other hand, having a lot of small customers, it's also -- it requires a lot of effort to support all those customers, especially in China, we have a lot of application engineers working with all those small customers, then there is also a very negative effect to have so many small customers. And I could also add that it's the case in Europe. In Europe, we have a lot of big customer and a very limited number of small customers, then it will probably indeed move in this direction in China, but we are able to manage it in Europe, then we will manage it in the same way in China. Michael Roeg: Okay. Well, my impression was that the bigger OEMs in China have much more favorable purchasing conditions so that if the volumes were to move to them, that it could affect your overall ASP in China. But you will be -- you think there will be some compensation in being able to lower your OpEx. Marc Biron: I think it's the same in Europe. The big customers in Europe. Our big customers in Europe have also a better pricing than the small customer. And it's why also we like this long tail for the reason you mentioned. But yes, it will be the same in China, and we will manage the situation in the same way. I think it's -- the price metric is always high volume, lower price. Karen Van Griensven: But overall, we expect high price erosion in China than in the rest of the world. That is calculated in our model. Operator: We go on now to the last question, and it's from Nigel van Putten from Morgan Stanley. Nigel van Putten: I just wanted to talk about the growth or the guidance for the full year, which is flat, maybe not comparing it to others, which have indeed sort of implied some growth you guys aren't able to. So how do I sort of get from -- I think in the past, you would say on sort of 0 SAAR growth still penetration would add, what, high single digits. Let's say that's mid-single digits today. You said pricing in the mix is kind of flat. There's no real inventory digestion going on. So how do I get from, let's say, mid- to high single-digit volume growth to 0 on the euro side? Is that the dollar? Is that sort of headwinds from the nonautomotive business? Is there a mix? Could you just give us some more color on the pieces -- the building blocks how to get down from a volume number to revenue number in euro? That's my first question. Marc Biron: It's a mix, as you mentioned, we did not discuss in the Q&A about the nonautomotive business. I mentioned it in the introduction speech. But yes, one of our big nonautomotive customer has decided to alternate their supplier. And I think it's quite normal. We had the chance to be during 3 years in a row in the application. In '26, they have decided to make the alternate, which affects our revenue. Yes, again, it's not abnormal. We are -- we have good hope that we will come back in the next years. We have good technical features. But this is indeed in the midst of answer. This is one of the reasons that we did not mention in the past. Nigel van Putten: It's great to receive one of the reasons. Can you quantify the impact and also give us just a bridge from -- because it's -- yes, I mean, I've covered companies for quite a while. It's always been volume growth. It used to be teens and high single digit. I think it's now mid-single digit, but still this is a material step down. And I don't have any ways to calculate that, then it would be super helpful, very helpful for you to guys to give a little bit more disclosure and color on how to model the business into '26 and what are the moving parts? Marc Biron: And our customer and probably also OEM are navigating to cautious recovery in auto, and it's why this volatility in sales order is coming. I think it's difficult to give more color and really to give the building block for your answer because of this high volatility. Nigel van Putten: But the whole volatility in the near term, and then I'll move on after this one. But I do want to try again. It's for the full year. So it shouldn't be -- it's not exactly normalized, but it's not the month-to-month volatility that you point out. I fully comprehend that. But it's just compared to peers and also compared to your -- the financial model, the growth model that I'm used to, this is very different. I mean I could have understand it. It used to be the bullwhip inventory effects, that is a big impact, but that doesn't seem to be driving it. So I'm just -- I need to update my understanding about how I model your top line, I think, and it would just be helpful if we can get a little bit more color on that. Marc Biron: In the longer term, we confirm our high single-digit growth. What we have mentioned to the CMD is still fully valid. We have the design win, we have the opportunity pipe. We have in our development, the relevant product to reach this growth. And in long term, I think the model did not reach. In short term, we have this volatility that we mentioned. We have the price erosion that we have mentioned, mid-single digit, low to mid-single digit. This is the reason of the change. But I repeat in long term, we are fully confident that what we have said to the CMD is still valid. We need now to face the short-term headwind. Nigel van Putten: Okay. More math now on the gross margin. I think, Karen, you've talked about the potential of sort of 4 percentage points worth of idiosyncratic or self-help or specific items. I think 2 percentage points related to the yield improvement. I think that's probably what we're seeing in the first half, if I'm not mistaken. And then on top of that, there was potential further improvement or the dollar, I think some normalization would have helped. You've mentioned the restructuring impact of about 1 percentage point before. So I'm just trying to get to the full year gross margin. It seems like given there's no growth either, we probably should assume like 40% for the full year. Yes, can you maybe elaborate a little bit if that's the correct way of thinking? Or is there an element missing? Karen Van Griensven: That is correct. Indeed. We need more operating leverage to push it beyond that 40%. Nigel van Putten: Okay. And maybe then just a quick follow-up. You've guided first half gross margin, not first quarter. I think it's just how you usually talk to the market. But should we assume that improvement towards 40% in the first quarter? Or is it more towards the second? So we step up from I don't know, 39.5% and then... Karen Van Griensven: From Q1, we expect. Operator: This was the last question in the queue. There are no more questions at this time. So I hand the conference back to the speakers for any closing remarks. Marc Biron: Thank you, operator. To summarize, 2025 was a year of navigating through cautious and choppy demand while maintaining our cost discipline. In parallel, we have introduced many innovations for automotive applications, grew business opportunities, accelerated our China strategy and took action to improve margins. These efforts will start to deliver in '26, and we will continue to build on them to further strengthen our business and to move towards our long-term objective. Thank you for joining the call, and goodbye. Operator: Thank you for joining today's call. You may now disconnect.
Operator: Good day, and welcome to the American Assets Trust, Inc. Fourth Quarter and Year-End 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Meleana Leaverton, Associate General Counsel of American Assets Trust. Please go ahead. Meleana Leaverton: Thank you, and good morning. The statements made on this earnings call include forward-looking statements based on current expectations, which statements are subject to risks and uncertainties discussed in the company's filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements as actual events could cause the company's results to differ materially from these forward-looking statements. Yesterday afternoon, American Assets Trust's earnings release and supplemental information were furnished to the SEC on Form 8-K. Both are now available on the Investors section of its website, americanassetstrust.com. It is now my pleasure to turn the call over to Adam Wyll, President and CEO of American Assets Trust. Adam Wyll: Good morning, everyone, and thank you for joining us to review our fourth quarter and full year 2025 results, as well as our outlook for 2026. For the full year, we earned $2 of FFO per share, about 3% above our initial expectations. As we discussed coming into the year, we positioned 2025 as a reset, reflecting several known offsets versus 2024, including the roll-off of onetime revenue items and the end of capitalized interest on certain projects. At the same time, we continue to invest in office leasing at our development and redevelopment projects, and recycled capital into a high-quality San Diego multifamily acquisition that has performed in line with our underwriting. Against that backdrop, delivering above our initial guidance speaks to the quality of our assets and the teams executing across our markets. In fact, portfolio-wide same-store NOI ended slightly positive for the year, supported by strong collections and disciplined expense management, with our office and retail segments offsetting mixed performance from our multifamily and mixed-use segments. Importantly, our 2025 results reflected the themes we highlighted throughout the year. Office made continued progress leasing newer and redeveloped space with tenant engagement improving in the second half and increasingly concentrated in well-located Class A product. Retail, again stood out, supported by low vacancy, limited near-term expirations and a smaller watch list than a year ago. Multifamily worked through elevated new supply in our markets, which constrained near-term rent growth and our teams focused on occupancy, revenue management and expense discipline. And in Waikiki, we operated through a softer tourism year than expected, and our hotel results reflected that. But we believe that asset remains well positioned within its competitive set as conditions improve. While macro uncertainty persists, we believe our coastal infill locations and high-quality real estate position us to capture demand as it materializes. With that context, I'll walk through each segment and then conclude with our priorities for 2026. Across our West Coast office markets, we are seeing continued signs of stabilization and gradual improvement in leasing activity with tenant engagement increasingly concentrated in the best assets. Conversations are becoming more active, decision time lines are improving and demand is extending beyond renewals. In markets like San Diego and San Francisco, vacancy trends are showing early signs of stabilization, supported by declining sublease availability and a more active leasing environment. In Bellevue, while overall vacancy remains relatively elevated, conditions have been comparatively much stronger than in Seattle with improving demand dynamics, reduced sublease pressure, and increased interest from technology and innovation-driven tenants, particularly in the CBD, which we expect over time to spill over into the surrounding suburbs. In Portland, our scale and long-standing presence continue to be an advantage in a market with relatively few institutional owners, which helps us compete effectively and win more than our fair share of leasing opportunities. Overall, while office market conditions continue to normalize at different paces, we are encouraged by the direction of travel and believe our portfolio is well positioned to benefit as leasing momentum continues to build. Our office portfolio ended the quarter 83% leased, and our same-store office portfolio was 86% leased, up about 150 basis points from Q3. In addition, we have approximately 140,000 square feet of signed office leases that have not yet commenced paying cash rents. Same-store office NOI increased just over 1% for the quarter, and nearly 2.5% for the full year. Looking ahead, roughly 8% of our total office square footage is scheduled to expire this year, which is consistent with the typical level of expirations we see each year. We are actively engaged on that rollover, and that figure includes known move-outs of about 4% of our office square footage, which we anticipated and are managing as part of our leasing strategy. During the fourth quarter, we executed 23 leases totaling over 193,000 square feet, with positive cash leasing spreads of 6.6% and GAAP leasing spreads of 11.5% for the quarter, and achieved our highest ever average base rents in our office portfolio. For the full year, total office leasing volume increased 55% over 2024, and leasing spreads increased 6.4% for cash and 14% for GAAP. We continue to see the strongest interest for well-located space that is move-in ready and amenity supported, and that is where our development and redevelopment efforts have been concentrated. At La Jolla Commons Tower III, we ended the quarter at 35% leased with another 15% in lease documentation currently and our active prospect pipeline is growing. At One Beach Street, we ended the quarter at 15% leased and subsequently executed leases for an additional 21%, bringing the property to 36% leased today, with proposals for another 46% currently in negotiation. In response to increased demand for move-in ready space, we are advancing spec suite development at One Beach Street with permitting complete and work underway. As we move into 2026, we started the first quarter with momentum, having already executed approximately 68,000 square feet of leases with an additional 214,000 square feet in lease documentation. We have meaningful prospects engaged across the portfolio and remain focused on converting activity into signed leases and commenced rent. While larger blocks still require thoughtful execution, velocity has improved and the path from engagement to execution is shortening. At this point, we are targeting to end the year between 86% to 88% leased across our entire office portfolio, an increase of about 400 basis points at the midpoint from the end of 2025. We will do our best. Turning to retail, which remains a cornerstone of stability and represents 26% of portfolio NOI, we ended the year at 98% leased. Fourth quarter leasing totaled 43,000 square feet with positive cash and GAAP leasing spreads for the quarter. In fact, for the year, leasing spreads were 7% on a cash basis and 22% on a GAAP basis, all supported by healthy sales and steady traffic across our centers. While a moderating labor market is impacting the broader consumer, higher income households continue to drive a disproportionate share of spending. Given the quality, location and demographics of our retail assets, that backdrop remains supportive of demand across our centers. As we've said in prior quarters, we really like the setup for our retail platform. Nationally, retail availability is expected to remain near record lows given limited new supply, which should continue to support asking rents. Our portfolio benefits from high barrier supply-constrained submarkets, strong occupancy and a well-laddered expiration profile, which includes just 4% of our retail square footage expiring this year. Looking to 2026, we expect continued favorable performance and we will stay disciplined on renewals, tenant quality and CapEx prioritization. In multifamily, we ended the year 95.5% leased, excluding the RV Park, and achieved approximately 1% net effective rent growth year-over-year versus the fourth quarter of 2024, a steady result in a competitive leasing environment. At the same time, operating conditions remain influenced by new supply across markets such as San Diego and Portland, which continues to weigh on near-term rent growth. Occupancy held stable through 2025, while pricing remained competitive as deliveries were absorbed and concessions persisted in certain submarkets. Consistent with the broader industry backdrop, we are not assuming a rapid improvement in 2026, which we view as more a period of stabilization and recovery, and we remain focused on execution, optimizing pricing and concessions by submarket, maximizing occupancy, enhancing the resident experience and tightly managing controllable expenses. In San Diego, our communities ended the fourth quarter 96% leased, excluding the RV park. Renewal rents increased while new lease pricing was more competitive as we prioritized occupancy, including more meaningful use of concessions late in the year. Genesee Park continues to perform in line with our underwriting, ending the year 97% occupied, and we continue to see attractive long-term mark-to-market opportunity as we execute the value-add plan. In Portland, Hassalo on Eighth ended the year 91.5% leased. Blended net effective rents were approximately flat between new leases and renewals. At Waikiki Beach Walk, 2025 reflected softer tourism trends, which pressured both rate and occupancy at different points during the year. While overall visitation moderated, spending per visitor was steadier, supported by longer stays and higher daily spend. Industry data reflected this mix with RevPAR down year-over-year despite relatively steadier demand among higher spending guests. Bob will provide more details on the strength of our balance sheet and capital allocation, but I want to address a point of significant frustration for our management team and Board, which is our current share price. It is clear that many listed real estate companies have remained largely out of favor with the broader investment community throughout much of 2025, often trading at a substantial discount to the intrinsic value and quality of the underlying assets. AAT is no exception. The public market valuation, in our view, fails to reflect the trophy nature of our primarily coastal portfolio and our long-term growth prospects. While we cannot control macro sentiment, it is our job to close that disconnect to the best of our abilities by delivering consistent operational execution, demonstrating the cash flow durability of our new developments and redevelopments, continuing to execute our strategy with discipline to create long-term value for our shareholders and position AAT to capture opportunities, whether or not the environment is volatile or stable. Note that our Board has declared a quarterly dividend of $0.34 per share for the first quarter, payable on March 19 to stockholders of record on March 5. At this point in time, we expect to maintain the dividend at current levels with the outlook for our dividend coverage ratio improving as our office developments stabilize and begin to contribute more meaningfully to cash flow. That said, our approach remains measured, and we will continue to allocate capital prudently and reevaluate as conditions evolve. Looking ahead, we view 2026 as an opportunity to build upon the progress we made in our reset year. Our priorities are straightforward. One, continue to drive office leasing with a focus on converting improving prospect activity into signed leases and commence revenue at our newer and repositioned assets. Two, maintain retail momentum by keeping our centers full, proactively managing expirations and staying focused on tenant quality. Three, manage through the multifamily supply cycle with disciplined revenue management and cost control, positioning the portfolio for better growth as supply moderates. Four, operate our hotel prudently, while staying responsive to market demand and focused on managing costs and driving performance. And five, continue to be thoughtful with our capital and strengthen the balance sheet, all with the obvious goal of improving our valuation over time. You'll note that our FFO guidance in 2026 at the midpoint is 1.5% above 2025, and portfolio-wide same-store NOI growth, excluding reserves, is over 2%, which Bob will provide more details on in just a minute. Note that these estimates reflect our current view of leasing velocity, market rent growth and operating costs across the portfolio, as well as the timing of lease commitments and the cadence of operating expenses across the year. As always, we take a realistic, yet conservative, approach to guidance with the goal of executing ahead of our midpoint over time. In closing, I want to thank our employees for their dedication and our tenants, partners and shareholders for their continued confidence and support. With that, I'll turn the call over to Bob to discuss our financial results and initial guidance in more detail. Bob? Robert Barton: Thanks, Adam, and good morning, everyone. Last evening, we reported fourth quarter and full year 2025 FFO per share of $0.47 and $2, respectively. Net income attributable to common shareholders for the fourth quarter and full year 2025 was $0.05 per share and $0.92 per share, respectively. Fourth quarter FFO decreased by approximately $0.02, to $0.47 per share compared to Q3 '25. This decline was primarily attributable to termination fees recognized in Q3 that did not reoccur in Q4. Let's talk about same-store cash NOI. For the full year ended 2025, same-store cash NOI increased by 0.5% compared with 2024. The key drivers of same-store NOI were: Number one, office increased 2.3% for the year, driven primarily by higher base rent and improved expense recoveries, including contributions from the Databricks expansion and new leasing at City Center Bellevue, partially offset by known move-outs at First & Main, Torrey Reserve and Eastgate. Secondly, retail increased 1.2% for the year, reflecting strong first half growth of 5.4% in Q1 and 4.5% in Q2, '25, partially offset by the impact of 4 tenant move-outs in Q3 and Q4, two at Waikele Center and two at Gateway Marketplace. Of note, the Gateway spaces have since been backfilled through an expansion by Hobby Lobby, and new lease with Wingstop, both scheduled to commence rent on July 1, 2026. Thirdly, multifamily declined 3.2% for the year, driven by flat to modestly lower rents, elevated concessions amid new supply in our two markets, and higher operating expenses, trends we've seen across the multifamily industry in our markets as well. And fourth, our mixed-use declined as well by 6.7% in 2025 versus 2024. As softer Waikiki hotel demand, continued pressure from Japan-related travel and higher operating expenses weighed on results. Occupancy averaged roughly 82%, about 360 basis points lower year-over-year, while ADR was essentially flat at about $370, driving RevPAR down approximately 7% to about $296. Despite the soft year, we continue to outperform our comp set in Waikiki, and we believe the fundamentals of Waikiki remain attractive over the longer term as this cycle normalizes. Meanwhile, the retail portion of Waikiki Beach Walk increased 8% year-over-year, driven by higher base and percentage rents and lower bad debt expense. As it relates to liquidity, at the end of the fourth quarter, we had liquidity of approximately $529 million, comprised of approximately $129 million in cash and cash equivalents, and $400 million of availability on our revolving line of credit. We are currently in the process of renewing our credit facility, which now matures in early July. As a reminder, we previously extended the maturity to move the renewal cycle away from the first week of the year, which created timing challenges for all parties. We expect to close on our recast in Q2. Additionally, as of the end of the fourth quarter, our leverage, which we measure in terms of net debt to EBITDA, was 6.9x on a trailing 12-month basis and 7.1x on a quarter annualized basis. Our objective is to achieve and maintain long-term net debt to EBITDA of 5.5x or below. Our interest coverage and fixed charge coverage ratio ended the quarter at 3x on a trailing 12-month basis. Let's talk for a moment regarding the dividend payout ratio. For a REIT, we look at it as total dividends divided by funds available for distribution, also known as FAD or AFFO. As Adam mentioned, we continue to expect our dividend to remain at current levels. While our 2025 payout ratio is just under 100% due primarily to elevated CapEx spending, our 2026 outlook implies a payout ratio of approximately 89%. Assuming continued progress in leasing and a stable operating environment, we would expect the payout ratio to trend lower beyond 2026 towards our goal of 85%, and we will continue to monitor coverage closely. Let's talk about 2026 guidance. We are introducing our 2026 FFO per share guidance range of $1.96 to $2.10 per FFO share, with a midpoint of $2.03, which is approximately 1.5% increase over 2025 actual FFO of $2 per share. Starting with 2025 FFO of $2 per share, there are 9 items in aggregate that drive the change to our 2026 midpoint. They are, number one, same-store cash NOI for all segments combined, excluding reserves, which I will discuss in more detail in a few minutes, is expected to increase by 2.2% in 2026. By segment, and on the same-store NOI basis versus 2025, the expected contribution to FFO per share is as follows. Office is expected to increase approximately 3.3% or $0.06 per share. Retail is expected to increase approximately 1.7%, or $0.02 per share. Multifamily is expected to increase approximately 2.2%, or $0.01 per FFO share. And mixed-use is expected to decrease approximately 3.3%, or $0.01 per FFO share. For Embassy Suites in Waikiki, our 2026 outlook prepared in collaboration with our partners at Outrigger assumes approximately 2.5% revenue growth and 4% expense growth, reflecting inflationary pressures in Hawaii, including food, labor and overhead. Within that, we assume average occupancy is expected to increase by approximately 1%. Average ADR is expected to be flat and increase approximately 0.5% from $360 in 2025, to $362 in 2026. Average RevPAR is expected to increase approximately 2% from $296 in '25 to $302 in 2026. Number two, let's talk about non-same-store cash NOI. It's driven primarily by two assets. La Jolla Commons III, which was completed in the second quarter of 2024 and Genesee Park, our multifamily acquisition that closed in the first quarter of 2025. Together, these non-same-store assets are expected to contribute approximately $0.03 per share to FFO in 2026. Number three, credit reserves that we are budgeting are expected to reduce 2026 FFO by approximately $0.04 per share. Of that amount, roughly $0.02 per share is allocated to office and $0.02 per share to retail. In total, these reserves represent about 64 basis points of our expected 2026 revenue, which we believe is a reasonable level. As we did last year, we are taking a conservative approach given the uncertainty in the macro environment, and our goal is to reduce these amounts over the course of the year as performance and collections materialize. Number four, G&A is budgeted to decline in 2026, which we expect will contribute approximately $0.04 per share to FFO. This is primarily due to meaningfully lower professional fees and other nonrecurring costs that were incurred in 2025 and are not expected to repeat at the same level in 2026. Number five, interest expense is expected to increase in 2026, primarily due to the end of the capitalized interest related to La Jolla Commons III, which we expect will reduce FFO by approximately $0.02 per share. Number six, other income is expected to be lower in 2026, primarily due to lower budgeted interest income, which we expect will reduce FFO by approximately $0.02 per share. Number seven, nonrecurring termination fees recognized in 2025 will not be included in our 2026 guidance, which will reduce FFO by approximately $0.025 per share. Number eight, 2026 GAAP adjustments are expected to increase FFO by approximately $0.01 per share. The majority of the variance relates to the related impact of straight-line rents. Number nine, we have no contribution from Del Monte Center in 2026 following its sale in 2025. Because the asset contributed for roughly 2 months in 2025 prior to the sale, the year-over impact is expected to be a reduction of approximately $0.01 per share. These items in aggregate represent approximately $0.03 per share, which bridges 2025 FFO of $2 per share to the midpoint of 2026 guidance of $2.03 per FFO share. While we believe the 2026 guidance is our best estimate as of the date of this earnings call, we do believe that it is possible that we could perform towards the upper end of this guidance range. Key factors that would support that include, number one, converting a meaningful portion of our speculative office leasing activity earlier in the year. Number two, continued rent collections from the tenants for which we have reserved. And three, better-than-budgeted performance in both multifamily and mixed-use through improved occupancy and pricing, and/or lowering operating expenses. As always, our guidance, our NOI bridge and these prepared remarks exclude any impact from future acquisitions, dispositions, equity issuances or repurchases, future debt refinancings or repayments other than what we have already discussed. We will continue our best to be as transparent as possible and share with you our analysis and interpretations of our quarterly numbers. I also want to briefly note that any non-GAAP financial measures that we discussed like NOI are reconciled to our GAAP financial results in our earnings release and supplemental information. I'll now turn the call back over to the operator for Q&A. Operator: [Operator Instructions] The first question comes from Haendel St. Juste with Mizuho. Haendel St. Juste: Appreciate all the detail. Maybe I wanted to start with the office portfolio. I noticed that TIs, especially for renewals were elevated. I guess I'm curious if that's the strategic decision you're making there, more reflective of a weak demand environment, concerns about AI? And what can you tell us about the conversations for your upcoming expirations? The rents on some of those, I think, are pretty elevated. Curious kind of how that compares to current market. Adam Wyll: Let me kick that off, and I'll hand it over to Steve real quick. And hello, Haendel, nice to have you on the call today. As you know, it's true that office leasing today obviously carries a higher capital burden than pre-pandemic, mainly from whether that's amenities or TIs, commissions and the investment needed to deliver space that's move-in ready. And we expect that to moderate over time as occupancy improves and availability tightens, particularly in our better buildings and submarkets. The pricing power and the concession levels will tend to normalize. But Steve's got some more specific information in particular to our portfolio that he can share on that front. Steve Center: Haendel, good question. And there's a really positive answer to it. Really, it skewed high because of Autodesk going as long as they could on the second floor, which is a critical space for them. They approached us to add term early. So their lease wasn't up for a couple of years, but that second floor is critical to them. So they came to us and said, would you extend? And we did that at almost -- well, a very positive rate, and we gave them $35 a foot TIs to do so. And that's a big -- that's 45,000 feet. So added to that Smartsheet did the same thing. They extended their second floor space, which is where the company gathers. They extended it by 6 years. They came to us early, said, this is a critical space for us. We want to rejigger it. And so we need some money to do that, and we want to go 6 years longer. So when you strip those two renewals out of the metric on the TIs, the remainder is at $6.41, versus $31. So I would agree... Adam Wyll: Yes, those two don't create a trend. Those are an anomaly. Haendel St. Juste: Got it. Got it. No, I appreciate that, Steve. I wanted to also ask about the balance sheet, Bob. I know you've got some pretty good liquidity on hand. The leverage is still sitting here at kind of 7x plus EBITDA. You mentioned the 5.5x target. I guess I'm curious if there's any sense of time line to get there? I'm presuming that's going to come from kind of internal cash flow. But just curious kind of what the steps and potential time line to get to that target. Any thoughts there would be appreciated. Robert Barton: Haendel, good question. The time line is really -- as soon as we lease up La Jolla Commons III and One Beach, and Steve will have more information on that in a few minutes. But the sooner we can get those properties leased up, we will be at the very low end of 6x. And then from there, we'll work down to the 5.5x. We were at 5.5x before COVID. So a lot of things have happened. But anyway, that's the time line. Haendel St. Juste: Got it. I appreciate that, Bob. And then last one, if I could. Adam, just going back to some of the comments you made in your initial remarks, I understand the frustration with the stock. And obviously, it seems front and center for you guys. I guess just curious on kind of what some of the steps you might be willing to take there beyond the kind of the execution as you laid out? Are you open to any strategic asset sales to capture that arbitrage between where the private market is, where your stock is trading? Any asset sales? I mean, anything that perhaps you see that you can -- from an action perspective, steps you could take to really reinvigorate the stock, the multiple? Adam Wyll: Yes, that's a good question. It's a billion-dollar question. Look, Haendel, we continue to be pragmatic on asset sales. If we can sell an asset at a price we think reflects long-term value and redeploy those proceeds to improve the balance sheet, or fund higher return opportunities, we'll do that. But we're not going to sell assets at a discount just to check a box either. So the main messaging for us is more so discipline. And as retail continues to perform well and office really seems to be improving from what we're seeing, we feel like we have time on our side to be selective. So to kind of force that issue is not something we're going to do. But we'll continue to look at opportunities. The bar is high for us to find something to buy. We would certainly need a compelling basis, durable cash flows, a clear path to value creation. And at today's pricing and financing levels, that's a much narrower set for us. So we're just trying to be smart with what we've got and not chase external growth for the sake of activity. Operator: The next question comes from Todd Thomas with KeyBanc Capital Markets. Todd Thomas: First, I just wanted to ask about the guidance assumptions in the office segment first related to the 86% to 88% year-end lease rate. Relative to where you ended the year, 83.1% for the total portfolio. Where are you today pro forma what's been leased already year-to-date, including One Beach Street where it sounds like there's been some good progress and all of the known move-outs that you discussed? I'm just trying to get a sense for how much of that target is speculative in nature as you move through the year. Steve Center: So right now, I think Adam mentioned it, we've got -- we signed 68,000 feet in 11 deals already this year. And we have another 13 deals in lease documentation for a total of 214,000 feet. And then behind that, we've got another 235,000 feet of proposals that I'd put better than 50-50. So the pipeline is significant. They're in that 86% to 88%. There is speculative leasing. But we've had some really interesting positive surprises lately. For instance, we had a full floor tenant in Portland that was a known move-out that came back and said, we're no longer interested in moving to the suburbs. We're back to being committed to the downtown market. And so we have RFPs to renew them, and downsize them, slightly in the existing space that they're in. And also our First & Main property is a candidate for them as well. But candidly, we think we're going to get a letter of intent today that makes First & Main not a viable alternative anymore. So that's one example. We've had tenants come out of nowhere that turn into leases, looking at a spec suite, touring it 1 week and then we're in leases the next. That happened at Torrey Reserve. That happened -- we had a tenant that thought they were going to be purchased. This is City Center Bellevue, a 7,000-foot space. They thought they were going to be purchased. They turned it down, took additional VC money. And now they signed a lease for 7,000 feet there. And we had another one do the same thing at City Center. So we're seeing a lot of positive surprises, and we're fortunate we've been making the investment to make these spaces ready to move into because we're reaping the benefits of that now. So to that end, at La Jolla Commons III, for example, we spec-ed out the fourth floor and with a lease that we have out for Signature, we have one space left on that floor. We're delivering the fifth floor spaces later this year, end of summer, early fall. We've already leased one of them, and we're in play on a handful of others. So the spec suite development and delivery leads to very quick lease -- we can convert to leases and cash flow. And so I think we're speccing about 44% of our vacancy right now. And so with these experiences I'm telling you about and the pipeline we've got ahead of us, we're feeling pretty good. Todd Thomas: Okay. All right. That's helpful. And then is there additional leasing assumed in the non-same-store portfolio, I guess, primarily La Jolla Phase III as it pertains to the guidance? I guess I would have thought that the contribution from lease-up could be potentially more meaningful. What's assumed in the guidance for lease-up at La Jolla Phase III? Robert Barton: Yes. Well, what we said -- I mean, is driven primarily by the two assets, La Jolla Commons III and Genesee Park. So La Jolla Commons III, I think Steve touched on that just a minute ago. So -- yes, we've put approximately -- the two assets together was approximately $0.03 per share of FFO that's contributing on the non-same-store cash NOI. Adam Wyll: And Todd, as we -- this is first-generation space at La Jolla Commons III. So we're not reflecting those rents until they commence and those are later in the year. Todd Thomas: Okay. Got it. Right. So there's concessions initially. I guess, Bob, yes, you've talked about $0.30 of FFO from the combination of La Jolla, One Beach, and I think the Bellevue redevelopments. Can you sort of provide an update as to how much of that is expected to be online in '26, versus how much more there is to come beyond '26 from that -- from those assets and the lease-up and stabilization? Robert Barton: Yes, we can put something together, but I don't -- kind of put those numbers together with the activity that Steve has just recently seen at One Beach. I think it's going to be positive, significantly positive. But Steve, do you want to mention anything on that? Steve Center: Well, sure. The first lease signed at One Beach, 13,000 feet roughly on -- that's going to commence April 2. That's when we move them in. And then that same tenant is taking the rest of the floor. That lease commences February 1 of next year. And there's 2 months of free rent on that one. So you're going to get a bunch of cash flow next year from that one. The spec suites are -- at La Jolla Commons III are going to produce revenue this year. We've got a larger tenant for 25,000 feet that we're in lease documentation with that will take us to -- and one spec suite in play that will take us to 50% leased. The small spec suite 4,000 feet, that rent will commence immediately as soon as we sign the lease. And then the larger deal will take some time to build out. That's going to be a tenant build that will start paying rent next year. And then let's talk about 14Acres or Eastgate. We've got a spec suite program in place there, but we've got several deals that are signed already, or in the process of being signed that will kick in. So we've made really good progress there. That's one where we have known move-outs that are offsetting that progress, but we're leasing the spaces that we're delivering in spec conditions. So that's another big contributor. Robert Barton: Yes. So Todd, just to get back to your question on that $0.30 that we had talked about on one of our presentations, and we'll update that in the next month or so. But basically, I stick to that $0.30. It's just a question of timing. Steve Center: 14Acres in Q4, we signed two deals totaling 19,000 feet. At La Jolla Commons III, we signed three deals totaling 17,500 feet. One Beach, we signed the 13,000 footer, and we just signed yesterday the remainder of that third floor. So that's just some color on Q4 and where we are right now. Todd Thomas: Got it. That's helpful. So it seems like some of the leasing progress will be better reflected when cash rent commences later in '26, and really more meaningfully in '27 at the rate and pace that activity is picking up here. And then I just wanted to ask one more question, just back on the balance sheet and Bob, your comments around the revolver. Any expectations on changes in pricing as you look to, sort of, amend the facility? And do you plan to maintain the $400 million of capacity? Robert Barton: Well, we -- our banking syndicate supports us whether we go $400 million or $500 million. So we're just talking internally, trying to make the best decision, what's the best outcome for us on that. Right now, we're leaning towards the $500 million. But if we go $400 million, that's okay, too. So we have a very supportive bank syndicate. It's just an absolute -- it's a great team to work with, and they're open to whatever we want to do on that. So -- but pushing it out to a July -- early July maturity will be better for all people. I mean we used to have the cadence where everybody, both the banking syndicate and AAT were running in circles trying to get that closed every 4 years. And so now it's a lot easier for the banking syndicate and our team just to push it out a little bit further. Adam Wyll: And Todd, we expect the pricing grid to stay the same. Operator: The next question comes from Ronald Kamdem with Morgan Stanley. Unknown Analyst: This is Matt on for Ron. You guys mentioned in your prepared remarks, there's a lot of leasing activity going on with One Beach and La Jolla Commons. Could you guys talk to any of the tenant types driving the demand? How you guys are feeling about the stabilization of the assets compared to the past few quarters? Just any additional color there would be helpful. Adam Wyll: Steve, you want to start? Steve Center: One, we're feeling very positive. We're feeling much better about the pipeline. The quality of the tenants at La Jolla Commons III, it's diverse. We have a legal Software as a Service. We have a really prominent insurance company that we just signed up. So it's -- and then we had an international bank, and it's a wealth management arm of an international bank. So we're seeing these really high-quality tenants that -- they're looking to take advantage of that A+ environment. And so we're just seeing more and more of that. We just signed a letter of intent. We're in leases, as I alluded to earlier, with another -- it's a consulting firm. It's an engineering firm -- an international engineering firm that this is their headquarters in San Diego. So we're going to -- we expect to see more of the same and diversity, but really high-end tenants at La Jolla Commons III. At One Beach, the first tenant is AI, and several of the tenants we're seeing in Bellevue are AI as well. The other proposal we're entertaining right now is not AI. It's not -- well, it's technology related, but it's not part of the AI wave. So it's good. That would be a long-term lease and take the entire second floor. So we'll see how that plays out. Unknown Analyst: Okay. Great. And then I also noticed in the quarter that 92% of the office leasing was from renewals versus 70 -- I want to say 73% in 3Q. Was that just largely due to the large renewals that you guys did in the quarter with Autodesk, some of the other top tenants? And if we could expect kind of more of the same going forward? Or is that just like a lumpiness factor? Steve Center: No, it's a great question. I'm glad you asked it because I think there's a gap in what we exhibit. So what I'm getting at is, we did 193,000 feet in the quarter of leasing. What you're talking about the 135,000 feet is comparable leasing, new and renewal. We did 60,000 feet of new leases on top of that. So all of the Tower III, One Beach and all of the leases we're doing at 14Acres or Eastgate are all noncomparable leases. And so if you look at the year, we did 246,000 feet of those noncomparable leases in 2025. That's 5.8% of the portfolio that if you just look at same-store or comparable leasing, you're going to miss that. And so we need to do a better job of articulating that going forward. And then in terms of the overall year, over 53% of the leases were new or expansion. Operator: The next question comes from Dylan Burzinski with Green Street. Dylan Burzinski: Most of my questions have already been asked. But I guess just going -- maybe speaking a little bit to the credit reserves of $0.04 that you guys have baked in the guidance. Can you kind of just talk about that? I know you mentioned half office, half retail, but are these sort of tenants that are -- have a looming bankruptcy? Or are you guys, just sort of, baking in some sort of conservatism as we get into 2026 here? Adam Wyll: Yes, Dylan. So on the retail side, which we mentioned is a steadier part of the portfolio. We're not really seeing much of a broad-based deterioration in tenant health right now. And so our watch list is manageable. We're keeping an eye on a theater in one of our projects and maybe a few on the fringe like pet supply companies. But other than potentially mom-and-pops, there's nothing on the radar that we're expecting. So we're just kind of taking a kind of a generalized reserve on retail. And then on the office side, it's kind of a hybrid of credit reserve and speculative leasing reserve. Like we're ambitious in our office leasing expectations and the credit quality, of course, but we want to be measured, too. So there's no specific office tenant that we have kind of acute concerns about. But we're just going to take a reserve because things fall out throughout the year every so often, and we just want to model appropriately. Dylan Burzinski: That's helpful. And then maybe just touching on the office side of things. You guys mentioned expectations for a big jump in office lease percentage this year. I guess, how do you guys sort of envision the path back to sort of 90% plus occupancy? Do you guys view that as sort of being able to do that in the next sort of 2 years? Or is that sort of more a longer-term goal in your guys' mind? Robert Barton: I would say 2 years is reasonable. Adam Wyll: I mean it's within the realm of reason for sure, but we don't want to overpromise that. That's our goal to get back to the 90% threshold, but we're going to take it a year at a time or quarter-to-quarter and get there. But we're really poised to do it. Now we've made the investment in the spec suites. There'll be -- everything we're doing is completed this year. So we've got really -- a lot of great inventory that's not going to take a bunch of time to deliver. So we're anticipating some good results. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Adam Wyll for any closing remarks. Adam Wyll: Thanks, everybody, for joining us on the call today. We appreciate your time and continued support, and hope you have a great first quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Horace Mann Educators Fourth Quarter and Full Year 2025 Investors Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rachael Luber, Vice President, Investor Relations. Please go ahead. Rachael Luber: Thank you. Welcome to Horace Mann's discussion of our fourth quarter and full year 2025 results. Yesterday, we issued our earnings release, investor supplement and investor presentation. Copies are available on the Investors page of our website. Our speakers today are Marita Zuraitis, President and Chief Executive Officer; and Ryan Greenier, Executive Vice President and Chief Financial Officer. Before turning it over to Marita, I want to note that our presentation today includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The company cautions investors that any forward-looking statements include risks and uncertainties and are not guarantees of future performance. These forward-looking statements are based on management's current expectations, and we assume no obligation to update them. Actual results may differ materially due to a variety of factors, which are described in our news release and SEC filings. In our prepared remarks, we use some non-GAAP measures. Reconciliations of these measures to the most comparable GAAP measures are available in our investor supplement. I'll now turn the call over to Marita. Marita Zuraitis: Thanks, Rachael and hello, everyone. Yesterday, Horace Mann reported record 2025 full year core earnings per share of $4.71 and shareholder return on equity of 12.4%. These are the highest earnings. Horace Mann has ever reported and a powerful confirmation of the strength of our business strategy and execution. All segments are in line with or exceeding our profitability targets and top line momentum continues across the board. Total revenues were up 7% over prior year with net premiums and contract deposits earned up more than 7%. Individual supplemental sales increased nearly 40% over prior year, while Group Benefits recorded a 33% increase. I'm proud of all of our Horace Mann's team members for their contributions in exceeding our 2025 goals. We delivered record core earnings while providing our deserving educator customers with distinctive service. Today, I want to review the highlights of our 2025 performance as well as add some detail to our financial targets for the next 3 years. We delivered record earnings in 2025 on the strength of solid underlying business performance and continued growth momentum. Results also reflected unusually light severe weather activity with pretax catastrophe losses of $62 million, contributing approximately $28 million or about $0.55 per share to core earnings relative to our original assumptions. Let me walk through performance by segment. In Property and Casualty, the underlying combined ratio was 84.3%, a 5-point improvement year-over-year reflecting rate and non-rate actions we've taken to reduce segment earnings volatility. P&C sales increased 6% year-over-year policyholder retention in both auto and property remains stable and continues to compare favorably with industry peers. In auto, the reported combined ratio of 96.5% and improved nearly 2 points over prior year. Given we are in line with our mid-90s profitability target with solid retention, we are well positioned to navigate a competitive auto environment in 2026. In Life and Retirement, top line momentum continued with record life sales in the fourth quarter, up 21% over prior year. These results build on the success we saw last quarter and reflect the continued improvement in our marketing campaigns, growing brand awareness, higher agent productivity and stronger engagement with educators. Retirement deposits increased 4% in the quarter and for the full year, net written premiums and contract deposits for the segment rose 7%. Supplemental and Group Benefits delivered record sales results in 2025, this high-margin, capital-efficient business generated 25% of core earnings, playing an important role in diversifying our earnings and reducing volatility. Overall, this segment's benefit ratio of 37% continues to move toward our long-term expectation. Individual supplemental delivered record results with sales up nearly 40% year-over-year, reflecting strong demand, improved distribution reach and deeper customer engagement. Group Benefits also posted record sales up 33% over the prior year, supported by expanding distribution. Over the past year, we have meaningfully expanded our distribution organization and strengthen our marketing capabilities to support sustained profitable growth. A few highlights. Through disciplined increases in marketing investment, and thoughtful execution of strategic partnerships, we have significantly strengthened Horace Mann's brand awareness in our target market. Unaided brand awareness reached 35% in 2025, up from less than 10% a year ago. We are increasing recognition within the educator market through partnerships with trusted brands like Crayola. Recently, we partnered with Get Your Teach On, an organization that provides top professional development for teachers and school leaders. Through this partnership, we will reach a highly engaged audience of more than 800,000 educators through e-mail, social, live events and other channels. We continue to optimize our marketing programs to be more efficient and effective. New business customer interactions are up 37% in the fourth quarter, and we are realizing productivity gains from our spend. We continue to enhance our distribution channels to ensure educators can research, shop and purchase with us when, where and how they choose. We increased points of distribution by 15% across all channels. Upgrades to our website and an improved digital customer experience led to website traffic and online originated quotes more than doubling over the course of the year. We have also expanded our commitment to supporting the educational community. This week, we introduced the Horace Mann Club, a new platform that lets educators access financial wellness tools, classroom resources and educator-specific perks in 1 place. The club creates a strong foundation for delivering resources, services and programs that reward, celebrate and give back to educators. We will continue to expand the club over time, ensuring it meets the changing needs of educators and provides unique benefits to support them in and out of the classroom. In the fourth quarter, we donated $5 million to the Horace Mann Educators Foundation. Created in 2020, this charitable organization provides funding to support students and educators success. This includes grants to fund food and security programs, essential classroom supplies and educator professional development. Looking ahead to provide a clearer baseline to evaluate Horace Mann's strategic progress, we have included a normalized 2025 core earnings per share exhibit in our investor presentation. This excludes the earnings benefit from catastrophe losses that came in below our original guidance assumptions as well as other items not included in management guidance. This normalized view aligns with how management internally evaluates performance and represents the appropriate baseline to compare our 2026 guidance. While 2025 catastrophe losses were unusually favorable, driven by fewer catastrophe events and lower overall activity, we do not expect a similarly low level in 2026 or subsequent years. Against that normalized 2025 baseline, our 2026 core earnings per share guidance range of $4.20 to $4.50 represents progress consistent with the financial goals outlined at Investor Day. As a reminder, those goals include delivering a 10% average compound annual growth rate in core EPS and a sustainable 12% to 13% shareholder return on equity. To achieve these goals, we will continuously evaluate and balance growth initiatives and expense optimization. In times of outperformance, such as the record year we had in 2025, we may choose to accelerate investments in growth initiatives. Last year, we accelerated investments in marketing, infrastructure improvements for distribution force and product and distribution expansion in supplemental and Group Benefits. We will continue to thoughtfully invest in initiatives that expand our capabilities and support long-term growth. And we are confident that these actions, combined with ongoing operational efficiencies position us to achieve our targeted 100 to 150 basis point reduction in the expense ratio. While more of that improvement is expected to be realized towards the back half of our 3-year plan, we have a clear line of sight to the actions and execution required to deliver on that goal. Our balance sheet remains strong and well positioned to support strategic growth and shareholder returns. We continue to take a disciplined approach to capital allocation, balancing reinvestment in the business with returning capital to shareholders. In 2025, we deployed $21 million of capital to share repurchases, the highest annual level since 2022, and the Board's additional $50 million authorization in May underscores our commitment to using share repurchases as a meaningful lever for shareholder value creation. In closing, 2025 was a record year that underscores the strength of Horace Mann's value proposition for the educator market. By maintaining business profitability, delivering sustained profitable growth optimizing our enterprise spend and strategically investing in growth enablers, we will achieve our 3-year goals. We are operating from a position of strength. We have a strong competitive advantage and we have the confidence that we will deliver sustained market-leading growth and accelerate shareholder value creation. Thank you. And now I'll turn the call over to Ryan. Ryan Greenier: Thanks, Marita. I'll walk through how we think about normalized 2025 earnings, outline our 2026 outlook in key assumptions and then review full year 2025 performance by segment. 2025 was a record year for Horace Mann with core earnings of $196 million or $4.71 per share, an increase of 39% over the prior year. Trailing 12-month core return on equity increased to 12.4%, reflecting continued strong underlying profitability across the business. Total net premiums and contract charges earned increased 7% and with total revenues also up 7% year-over-year. As Marita discussed, 2025 benefited from a few favorable items that are not assumed in our planning framework, when we normalize for catastrophe losses that were more than one standard deviation below historic averages in 2025 as well as favorable prior year reserve development, opportunistic share repurchases and incremental strategic spend. normalized core earnings per share were approximately $3.95. This is in line with our original 2025 guidance range of $3.85 to $4.15 and represents the appropriate baseline to compare 2026. Importantly, even on a normalized basis, our businesses delivered strong underlying profitability with all segments in line or exceeding profitability targets and top line momentum continued across the board. Against that normalized baseline, we expect 2026 core earnings per share to be in the range of $4.20 to $4.50 and a nearly 10% increase consistent with the 3-year financial goals we outlined at Investor Day. Guidance includes total net investment income in the range of $485 million to $495 million. In our managed portfolio, we expect net investment income between $385 million to $395 million, which reflects the continued benefit of higher new money yields in our core fixed income portfolio. Commercial mortgage loan fund returns of 6.5% and limited partnership returns of 8%. Looking specifically at commercial mortgage loan funds, one fund, Sound Mark Partners is in runoff. And as I've mentioned before, we expect continued underperformance from this one fund, which will modestly pressure reported commercial mortgage loan fund yields. This impact is idiosyncratic, well understood and already reflected in our planning assumptions. Turning to catastrophe losses. Our full year assumption of approximately $90 million reflects our established planning framework which uses a blend of industry standard catastrophe model losses and our own historic experience. Our approach to setting guidance has not changed and continues to provide a consistent basis for managing variability across cycles. Now I'll turn to full year 2025 results by segment. In Property and Casualty, core earnings were $112 million, more than double the prior year. Net written premiums increased 7% to $830 million, driven by higher average premium. The reported combined ratio of 89.7% improved more than 8 points year-over-year, reflecting strong underlying results, lower catastrophe losses and favorable prior year development. The $19 million in favorable prior year development was driven primarily by lower-than-expected claim severity and continued improvements in claims handling across shorter tail property and auto coverages. As we've stated, prior year reserve development is not assumed in our guidance, and we continue to approach reserving with a prudent long-term view. Auto net written premiums increased to $502 million, the combined ratio improved nearly 2 points to 96.5% in line with our mid-90s profitability target. Household retention remains near 84% and continues to rank in the top quartile relative to industry benchmarks. Property net written premiums increased 14% to $328 million, reflecting rate actions and solid sales momentum. The combined ratio of 78.3% improved significantly primarily due to lower catastrophe losses, while retention remained strong, above 88%. We completed our 2026 reinsurance renewal in January with very favorable results, including a nearly 15% reduction in rate online, we use that improvement to increase the size of our property catastrophe tower. Purchasing $240 million of coverage while maintaining a $35 million attachment point consistent with the prior year. We purchased additional coverage to maintain our disciplined approach to risk and capital management which includes the recent update to air catastrophe models. Coverage at the top of the tower was attractively priced, and it was a prudent risk management decision. Importantly, even including the additional coverage, our total annual reinsurance spend remains flat year-over-year. In Life and Retirement, core earnings increased 13% to $61 million and net premiums written and contract deposits grew to $612 million, up 7% year-over-year. In the Life business, mortality experience for the year was modestly favorable relative to expectations. Life persistency remained strong, near 96%. In the retirement business, net annuity contract deposits increased by nearly 7% and persistency rose to 92%. Moving to supplemental Group Benefits. The segment contributed $59 million of core earnings and net written premiums rose to $267 million. Individual supplemental net written premiums increased 4% to $126 million. The benefit ratio of 26.8% reflects favorable policyholder utilization trends. Persistency remained steady over 89%. Group Benefits net written premiums increased 6% to $142 million. The benefits ratio of 45.8% moved closer to our longer-term expectations. Total net investment income on the managed portfolio increased more than 6% year-over-year, primarily driven by strong limited partnership returns and improved commercial mortgage loan fund results. Core fixed income performance remained strong with a full year new money yields of 5.51%. Sales performance was strong across the business with record results in both individual supplemental and group benefits. Individual supplemental sales increased 39% to $24 million and Group Benefits delivered record sales of more than $12 million, up 33% year-over-year. As Marita mentioned, 2025 was a year in which we deliberately reinvested to position Horace Mann for sustained profitable growth. At the same time, we took several targeted actions to optimize our cost structure and improve long-term efficiency. These included the termination of a legacy pension plan, the continued rollout of straight-through processing and automation initiatives and early productivity gains from technology investments. While some of these actions resulted in onetime costs in 2025, they are expected to generate meaningful ongoing run rate savings as we move forward. In addition, late in 2025, we introduced an early retirement offering as part of a broader proactive workforce planning effort. As we continue to invest in new technologies, automation and advanced capabilities, this program allows us to thoughtfully align our workforce with the skills and roles needed to support our long-term business strategy. The early retirement offering provides flexibility for eligible employees who may already be considering retirement or another life transition while allowing the company to manage workforce planning in a proactive and respectful way. Expenses associated with the early retirement offering will be treated as noncore and excluded from core earnings. This program is expected to generate run rate expense savings that will more meaningfully impact 2027. Stepping back, the combination of all of these expense optimization initiatives have resulted in more than $10 million of annualized savings, which we can both reinvest in the business and use to improve our expense ratio over time. Consistent with our Investor Day commentary, we expect the majority of our targeted 100 to 150 basis point expense ratio improvement to be realized in the later years of our 3-year plan as scale builds and these actions fully earn in. Roughly, that means a 25 basis point improvement in 2026. An additional 25 to 50 basis point improvement in 2027 and another 50 to 75 basis point improvement in 2028. Our balance sheet remains strong. and capital generation continues to support both strategic growth initiatives and consistent shareholder returns. In 2025, we repurchased nearly 0.5 million shares at a total cost of $21 million at an average price of $41.83. In 2026, we continue to buy back shares. And through January 30, we have repurchased approximately 140,000 shares at a total cost of $6 million at an average price of $43.36. We have about $49 million remaining on our current share repurchase authorization. Tangible book value per share increased more than 9% year-over-year, reflecting strong underlying earnings, disciplined capital management and the value of our diversified business model. In closing, our record 2025 results reflect the strength and stability of Horace Mann's earnings profile. We are entering 2026 from a position of strength with a clear growth strategy and strong momentum. We are confident in our ability to achieve our long-term financial targets, a 10% average compound annual growth rate in core earnings per share and a sustainable 12% to 13% core return on equity all while delivering sustained market-leading growth and accelerating shareholder value creation. Thank you. Operator, we are ready for questions. Operator: [Operator Instructions] First question comes from Jack Matten with BMO Capital Markets. Francis Matten: Question just on the distribution initiatives and the shift to more of a specialist model that you discussed in detail in the Investor Day last year. Just any perspective that you can share on how those initiatives are going so far, including the implementation? And then regarding the outlook for policy count growth, especially in the P&C business. I'm wondering if you think that trend line will start to improve more meaningfully as we head into 2026. Marita Zuraitis: Yes. Thanks for the question. From a distribution perspective, I think 2025 will probably go down as our strongest year. We have strong sales momentum across all the businesses, and that is really coming from the distribution efforts that I think we laid out pretty clearly at Investor Day. From a distribution perspective, our brand awareness up over 35%. Our website traffic up significantly with the increase in digital experience that we provided to our customers. Our quoting from that website traffic is more than double what it was last year. Significant partnership with companies like Crayola and other similar-minded companies in the educator space. Just a real concentrated effort, we are at record numbers in our agency force, up over 15% where we were last year across the board. Our traditional EAs selling our traditional products and then benefit specialists in the supplemental and group benefits space up record numbers as well. So more people selling the product, better support from a marketing and distribution perspective. And on all 3 of those growth levers that we outlined at Investor Day, we are really, I'd say, probably ahead of where we expected to be at this point, and you're seeing it come through in strong production momentum that we have across the board. Francis Matten: That's helpful. And maybe one just on the moving pieces regarding the EPS outlook for '26, which I know it implies double-digit growth on a normalized basis. And it sounds like you might expect that to then maybe accelerate into 2027 and beyond if you see CML returns closer to your long-term trend. And then you also mentioned some of the expense actions that you're taking to have more of an impact on 2027. I guess given those is it fair to expect kind of an accelerating growth trend over time, or are there other offsets that we should be thinking about? . Ryan Greenier: Jack, this is Ryan. Thank you for the question. Directionally, you're thinking about it the right way. When we laid out our financial targets at Investor Day, we said we would achieve a 10% annual earnings per share growth rate. And on a normalized basis, we're on track to do that this year. With that, we also said that we would expect accelerating top line growth as the investments we're making to generate increased sales and revenue growth come to fruition. And that revenue growth, we would expect to pick up over that 3-year period. And finally, we were -- I was pretty specific because we get a fair amount of questions around the timing of the expense initiatives earning in. And right now, we are using a lot of that savings to invest back in the business. We were very intentional about accelerating certain initiatives in 2025 to drive growth in all of our channels, and you're seeing signs of success there. And those savings I outlined for you kind of how to think about that in '27. Francis Matten: Great. If I could squeeze one more in, just on the catastrophe loss assumption in your guide, I think it implies to get a lower ratio as a percent of premiums than your prior expectation. Is that mostly reflecting the improvements to the reinsurance program that you've talked about? Or is there a meaningful kind of benefit from the kind of the terms and conditions changes that you've implemented in the property business as well? . Marita Zuraitis: Yes. I think it's before I turn it over to Ryan for a little more of the detailed color there. I think it's important for us to just reflect a little bit on the 2026 guidance that I think we were pretty clear in our scripted comments, but it was very important for us to normalize 2025 earnings, especially as you pointed out, the unusual level of low cap as well as prior year development, which management does not include in its guidance and why we wanted to add a new exhibit to our investor presentation to make that very clear. And on a normalized basis, it is a 10% increase over a pretty strong number that we had even last year. So I'll turn it over to Ryan to see if there's anything more specific to your question . Ryan Greenier: Sure. Let me dive into both of those, Jack. On the cat, our approach to setting a cat target, it's kind of like predicting the weather literally. You're probably going to be wrong. But you -- we take a consistent year-over-year approach. We look at industry modeling. We look at our current footprint from a property perspective. We look at our historical loss experience. But we don't assume or under or outperformance based on 1 year's individual results. So said another way, we are expecting kind of a consistent approach with the $90 million of cat guide for next year. . On prior year development, I just wanted to comment and be crystal clear, we do not include any prior year development favorable or adverse in our planning assumptions. We have a prudent quarterly approach. We call it like we see it. And while we understand that from a reserve perspective, the industry and us coming out of COVID had very unusual loss patterns to react to. And you saw the industry as a whole, increased reserves and over the last couple of years, you've seen us and the broader industry release. These large swings in reserves will normalize as we go back to a more normal loss trend, which is what we're seeing, we're confident that the reserve this outsized prior year reserve releases will begin to temper. I will say, when I look at the macro backdrop, there's a fair amount of uncertainty in terms of inflation trends, impact potentially from tariff and like other auto insurers, we do see the impact of social inflation in our numbers. We're insulated but not immune. Think about our policyholders, not super high limits compared to commercial auto or high net worth type of books. But we do see that impact. So we're being very prudent, particularly on the liability coverages. And I'll highlight that the majority of our release in '25 was related to shorter tail or physical damage type of coverages. So I hope that helps. The last thing I would say is if you look at where the Street is sitting from a consensus estimate for prior year development, if you back that out, you are right within the midpoint of our guidance range for this year. Operator: The next question comes from Matt Carletti with Citizens. Matthew Carletti: Marita, a question for you. I'm looking at your slides, Slide 13. It's where you kind of dice up the 8 million or so K-12 households into kind of where you are today, those you can currently access for those who don't have access to. And if I'm looking at kind of last quarter, right, there was a pretty big shift, almost 1 million households that kind of went from, you don't access to you currently access, kind of change that bucket. Can you talk a little bit about kind of what drove that? . Marita Zuraitis: Yes. Thanks for the question, Matt. It's really been multidimensional and across the board. We started last year, as you pointed out and the slide pointed out at about 1 million or so predominantly educator households and ended the year close to 1.1 million households. That's 100,000 household increase, if you will. And that's kind of how we think of the world. We're not a monoline auto provider. We're a niche marketer to a homogeneous set of customers. We understand the market dynamics of the auto line, and we posted our best P&C combined ratio at a very long time. For us, a lot of folks ask the auto-specific question. We do expect our risks in force to turn positive in the second half of this year. A little bit longer due to the competitive dynamics. Many of those auto customers we keep, we just placed them through the Horace Mann General Agency if we're not willing to go to the auto price that may be another competitor would set. So in 2025, we had strong sales momentum across the board in all businesses. We increased individual supplemental by 40%, Group by 33%. Life was, what, 8% and 21% in the fourth quarter. P&C was up 6% with auto being 5.5% of that. And that auto growth didn't come from customers where we reduced the auto rate to buy the business, if you will. Retirement deposits were up 7%. These are all new customers that have at least one product with Horace Mann that we can eventually cross-sell. So for us, it's really about the investments that we're making in marketing and distribution, which I've already talked about that have driven some of the numbers that I just answered and are included in the script. So we feel really, really good about the momentum. The strategic partnerships that we're pushing, the amount of brand awareness that we've gotten by joining forces with companies like Crayola. The foundation donation that we've put out there to help with professional development for educators, classroom supplies and other things have really helped that reputational brand awareness and the fact that 1 in 3 educators on an unaided basis know who we are and are beginning to engage with us is pretty powerful. The 3 levers that we outlined at Investor Day that are on that slide are the levers that our strategic priorities and the initiatives that support them are aligned to. We're getting better in the game that we're playing today, and you see that in the amount of agents that we have selling the product, the productivity of those agents, how quickly they get up to speed in that first layer in that second layer, entering new school districts where we've never been before by warming up that territory and using the things I talked about, so that when we put an agent in place, they know who Horace Mann is as opposed to that agent spending the first year building that brand awareness independently. It's really quite powerful. There may be sets of educators that are already engaging with Horace Mann electronically that now that agent can begin to wrap their coverages and build that relationship with Horace Mann around. And then that third lever, we haven't really talked a lot about but the work that we're doing with homeschoolers and seeing home school employees, not big numbers yet, but really like the early signs there. The work that we're doing with alumni and these are universities that are spitting out educators and have large colleges of education. Those numbers, they're not in the tens of thousands yet. But they're in the thousands and really good start of momentum in that area. All that is driving that increase in educator household count that's driving this kind of momentum across the board. And I appreciate the question because I think that's what it's all about. And I feel really good about the strong momentum that we're seeing. Matthew Carletti: Maybe a question for Ryan just a numbers question. I could be wrong here, but I kind of recall when thinking about retirement, kind of a long-term target of like net interest spread of kind of 220 to 230 basis points. Is that still the case? Or I guess, said another way, what is the long-term target for kind of net interest spread in retirement? . Ryan Greenier: Matt, yes, that's a good question. The target you're referring to is one that we've historically put out there, and it's for our fixed annuity block. So the fixed annuity block is the preponderance of our retirement assets. And we do target a 200 basis point spread on that block. What I will say is we are -- we were running behind that in 2025. A lot of that was driven by the commercial mortgage loan underperformance. The majority of our commercial mortgage loan investments are in the retirement block. In addition to that, when I think about limited partnerships, we had a very strong year, we had over 9% return on our LP strategies. The strategies that outperformed were private equity, in particular, and that is skewed more towards the P&C business. So P&C benefited from a very strong LP type of return. Longer term, we continue to target that 200 basis point for fixed. The overall profitability of the retirement business, we do have variable annuity as well as some fee-based retirement advantage products as well. And so those -- when I look totality of the product mix, we're comfortable in our at target profitability overall for that mix of business. And when I say target profitability, that's implying that we have returns in line or above our ROE targets. Operator: The next question comes from John Barnidge with Piper Sandler. John Barnidge: My question is focused on the first one on the early retirement offering to align the workforce how many -- as a percent of the employee base, how many employees took that opportunity. Marita Zuraitis: Yes. John, I think it's important first to mention the fact that it was only about 8% of our employees that would have been eligible for early retirement in the first place. We used a combination of tenure and age. So these were employees that would have naturally been considering retirement in the foreseeable future. So I think it's important to start with the purpose. The purpose of this was really to allow us to accelerate some workforce planning. As you know, when you think about the future, where we're going, what we've built. I think what we've laid out very strategically as far as our potential and you're seeing that in the momentum, the skills required the future ability of the place is going to require us to hire some of those more future skills, if you will, as we look forward. And this offering allowed us to accelerate some of the retirement plans of our more tenured individuals. We got a pretty nice participation rate. We're very pleased with the numbers that we're seeing from this, and we feel like the right people chose to opt in to that ERO program. I don't know if you have anything to add to that, Ryan. Ryan Greenier: No, I think Marita summed it up well, John. And as a reminder, any costs associated with it because it was onetime nonrecurring will be in non-core so below the line. Marita Zuraitis: And we're also excited by the fact that when we look at this, the result was twofold. We will be able to reinvest some of that spend in skills necessary for the next leg of the journey, if you will, but we'll also be able to use some of the savings to drop to the bottom line. We made a very clear commitment to improve that expense ratio. I think Ryan laid it out very specifically and clearly in the script and this, along with other, I think, very thoughtful strategic plans like the retirement of our legacy pension program and other larger things that we have underway help us meet the commitment that we laid out at Investor Day. And obviously, we knew about these plans when we laid that out, and some of the savings will drop right to the bottom line. John Barnidge: My second question seems like share repurchase, is there another lever to be opportunistic, not embedded in guidance. How should we be thinking about a run rate level of free cash flow conversion of operating earnings targeted in your Investor Day goals . Ryan Greenier: John, that's a great question. Thank you for that. For 2025, we achieved -- we exceeded our free cash flow targets. We came in about 80% on a free cash flow conversion perspective for 2025, we're targeting north of 75% for that. And if you think about the mix of businesses that we have and with the acceleration in sales for our more capital-efficient businesses, individual supplemental and group. That bodes very well for continued strong free cash flow conversion. And then if I sit back and think about uses of capital, you saw we've been quite active in the share buyback front. We've put $6 million of work in the month of January alone. And we do believe that is an attractive lever for us to continue to pull as we move through 2026, especially at current multiples given our confidence in our growth outlook. . Operator: Our next question comes from Wilma Burdis with Raymond James. Wilma Jackson Burdis: Could you talk about the investment in sub and Group segment and how Horace Mann see sales and margins playing out, especially after the favorable benefits year with respect to the 39% blended benefit ratio guidance. Does the benefit ratio continue to rise -- sorry, after a favorable year. I was asking if the benefit ratio has continued to rise. Yes, you got it. Marita Zuraitis: Thanks for that. I can start on the investment and growth side, and then I'll turn it over to Ryan to talk about the benefit ratio. I mean I got to tell you, we are very pleased with the progress that we're making in both individual supplemental and group benefits and the momentum is excellent. It is a smaller business for us, as you know. But excellent earnings diversification just as we had planned and a really good source of new educator households for eventual cross-sell like I said when I was addressing Matt's question. With individual supplemental sales up 40%, a record number of agents selling group momentum up 33%. On the group side, it is smaller for us. It is newer. It is lumpy. That's the nature of the longer sales cycle. And it is an even smaller business than the individual supplemental side for us, but it's building. And I think that the way to think about it is the way we thought about Horace Mann all along, go back to that PDI strategy. It's about building the product, making sure the products are relevant, including what we've done by adding the paid family medical leave portion to the product in states like Minnesota, it's -- we have all the products we need, both on the individual side and the group side and we evolve those products to make sure it's relevant to our market niche. And I feel good about the product development work we did and the fact that we built products that fit our niche, which are part of the -- why we feel strongly about these segments. From a distribution side, the amount of benefit specialists that are facing off with these products in the schools, the amount of districts that we're touching, those numbers are all going in the right direction, and we feel really good about our distribution efforts. I'd also say that the corporate branding, marketing, distribution work that we're doing also benefits this space as well. educators know who we are when we enter these schools, and that's very helpful in this space as well. And then lastly, on the infrastructure side, we are modernizing this space and improving the infrastructure and how we face off with these schools. Very early thought. We have now the ability to do straight-through processing on individual supplemental. We haven't done a lot yet. It's, like I said, in very small numbers. but we are starting to significantly modernize this space as well. So I think we took a very strategic approach to building the products that are relevant in our space, improving and expanding our distribution and improving our infrastructure. And I think that's why you see the early signs of success in this business. And as I said, the earnings diversification that we planned with these acquisitions. I don't know if you want to add anything to the benefits ratio . Ryan Greenier: Sure. I'll take the nuts and bolts, the numbers, Wilma. So on a blended basis, we target a benefit ratio for both businesses at about 39%. And individual supplemental runs lower than that and group runs higher than that. Both segments, if you look at the full year benefit ratio for 2025, the benefit ratio on the individual supplemental was in the high 20s. That's better than what we would expect on a long-term average that reflected favorable morbidity experience throughout the year. On the group side, we were in the mid-40s. Again, a little bit of favorability, but closer to what we would expect there. One thing I will comment on as I think about the longer-term target, on the individual supplemental product, in particular, utilization in early policy years typically is higher. And so if you think about that, during a period of high sales, which we're clearly seeing, you're going to see a little bit of an uptick, and we've factored that into the pullback towards the historic experience. We did see a decline in utilization post COVID that is beginning to normalize. So that kind of combo of more typical utilization combined with a return or an acceleration, I should say, of sales is going to move the individual supplemental product closer to those longer-term averages? I hope that's helpful. Wilma Jackson Burdis: That was very helpful. Second question, does softening of reinsurance pricing factor into the '26 margin outlook? And if so, give us some color there. Ryan Greenier: Sure. So Wilma, this is Ryan again. So in my script, I talked about some of the decisions that we made from a risk management perspective around the reinsurance tower. We did use the favorable reinsurance rate environment to add additional coverage at the top of our tower. There were some modeling updates from one of the P&C model tools. And as a result of that, we looked at that. We looked at the mix of all tools and decided it was prudent to increase the top of the tower. So our total spend was flat. So from a guidance perspective, we're spending dollar for dollar the same amount as last year. So it's incorporated, obviously, in our outlook. But we used some of that savings to buy a fair amount of cover at the top end. . Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Rachael Luber for any closing remarks. Please go ahead. Rachael Luber: Thanks for joining us on the call today. If you have any follow-up questions or would like to schedule a meeting, please reach out. We will be at AIFA in March, and we'll be happy to look at schedules to find time. So thanks again. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Powell Industries Fiscal First Quarter 2026 Earnings Conference Call. [Operator Instructions] This event is being recorded. I would now like to turn the conference over to Ryan Coleman of Investor Relations. Please go ahead. Ryan Coleman: Thank you, operator, and good morning, everyone. Thank you for joining us for Powell Industries conference call today to review fiscal year 2026 1st quarter results. With me on the call are Brett Cope, Powell's Chairman and CEO; and Mike Metcalf, Powell's CFO. There will be a replay of today's call, and it will be available via webcast by going to the company's website, powellind.com, or a telephonic replay will be available until February 11. The information on how to access the replay was provided in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, February 4, 2026, and therefore, you are advised that any time-sensitive information may no longer be accurate at the time of replay listening or transcript reading. This conference call includes certain statements, including statements related to the company's expectations of its future operating results that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties and that actual results may differ materially from those projected in these forward-looking statements. These risks and uncertainties include, but are not limited to, competition and competitive pressures, sensitivity to general economic and industry conditions, international, political and economic risks, availability and price of raw materials and execution of business strategies. For more information, please refer to the company's filings with the Securities and Exchange Commission. With that, I'll now turn the call over to Brett. Brett Cope: Thank you, Ryan. Good morning. Thank you for joining us today to review Powell's fiscal 2026 1st quarter results. I will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. Our fiscal year is off to a strong start. As our first quarter results continue to demonstrate Powell's unique and advantaged position against a backdrop of what are secular and increasingly durable growth trends, the growing and broad investment in power generation and grid modernization to support data center and AI capacity growth, domestic manufacturing, electrification and the nationally important export of energy resources like LNG, are validating our now nearly decade-long strategic effort to transform Powell into a more diversified manufacturer of electrical distribution products and systems. During the first quarter, we saw revenue grow 4% compared to the prior year. And as a reminder, our first fiscal quarter typically exhibits some level of seasonal disruptions associated with fewer working days. While ongoing high levels of project execution drove improved profitability compared to the prior year. Gross profit expanded 20% to drive a gross margin of 28.4%, an improvement of 380 basis points year-over-year. We recorded $439 million of new orders, the highest quarterly total in over 2 years, as activity was widespread across oil and gas, specifically LNG, data centers and the electric utilities markets. Within our total bookings number, we were awarded a contract for a large LNG project that exceeds $100 million to support gas liquefaction and export along the U.S. Gulf Coast. As the permitting process for LNG restarted a year ago, activity in support of new greenfield and brownfield trains resumed and Powell has and continues to support this strategic market. We anticipate activity within the LNG market to continue in 2026 relative to the more modest activity levels throughout 2024 and most of 2025. Commercial dynamics within our commercial and other industrial markets have accelerated in recent quarters as we continue to see increased demand within the data center market. During the first quarter, our commercial and other industrial market accounted for nearly 1/2 of the order total and included our first mega project order for a single data center, which totaled roughly $75 million. Our commercial and other industrial market now comprises 22% of our backlog as of quarter end, with data centers accounting for roughly 15% of our total backlog, both of which are record levels for Powell. Over the past few quarters, we have continued to experience increasing levels of interest among a growing list of data center customers. The increasing power demand driving greater compute power and the desire to expedite construction time lines creates a value proposition that is well aligned to an increasing portfolio of Powell's electrical distribution products and automation solutions, including our first orders in the United States for our newest team members at Remsdaq Limited in the U.K. In response to the growing market demand, we continue to take measures to expand productive capacity, including adding additional leased facilities to support the expansion of production lines, increased inventory needs, broader collaboration with our supply base to ramp supply and improve cycle times as well as rebalancing and reallocating the manufacture of select products across our facilities in North America to further optimize capacity. Meanwhile, order trends in our Electric Utilities segment remained very encouraging as we experienced another solid quarter of award activity from this end market. Overall, the oil and gas and petrochemical business remains healthy. We are experiencing some degree of divergence across markets and geographies that we compete with some performing very well and others exhibiting softer activity levels in areas such as refineries and polyethylene and polypropylene facilities. We finished the quarter with a backlog of $1.6 billion which was sequential growth of 14% compared to the September quarter and is the highest in Powell's history. The growth in our backlog over the past year has been primarily driven by booking trends in the electric utility and commercial and other industrial markets as these 2 markets now account for the majority of our backlog for the first time ever. Overall, our backlog is well balanced across the markets we serve, and we continue to benefit from a healthy mix of large projects as well as small and medium-sized core projects that help maximize productivity across our manufacturing plants. We also benefit from project visibility that now extends into our fiscal 2028. The expansion of our Jacintoport facility is progressing on schedule and remains on track to be completed during the second half of our fiscal 2026. This incremental capacity will be critical to ensuring our ability to support all of our end markets, but specifically, our oil and gas customers as we anticipate the wave of LNG project development work that is projected to come to market over the next 3 to 5 years, and this investment ensures that we continue to advance our industry-leading role in the fabrication of engineered to order power distribution solutions for critical applications. We continue to actively review and evaluate our total manufacturing capacity to ensure the delivery and execution of our project backlog. This includes the potential for future investments in plant and equipment, along with actions noted earlier in my comments, where we are now adding lease properties to support near and midterm growth in our medium voltage distribution products. As we look ahead through the remainder of 2026, the commercial environment for each of our major end markets remains positive. We continue to have robust activity in support of the North American gas market. The fundamentals of the U.S. natural gas market continue to support investments in LNG and the funnel of projects that we are tracking compares favorably to past cycles in terms of the total number of projects moving forward. The outlook for our electric utility market remains robust and balanced across the customers and geographies that we serve. The growing wave of investment in electrical infrastructure to meet growing demand levels is broad and durable and we expect another strong year of activity in 2026. Lastly, we are increasingly encouraged by order trends and demand levels within our commercial and other industrial markets. The acceleration of order activity driven by data centers leaves us confident in our ability to continue to grow our presence in this dynamic market. Overall, we are very pleased with our first quarter performance and our outlook for fiscal 2026. Demand trends remain robust, and we are well positioned to execute our backlog and grow within our targeted markets. With that, I'd like to turn the call over to Mike to walk us through our financial results in greater detail. Michael Metcalf: Thank you, Brett, and good morning, everyone. In the first quarter of fiscal 2026, we reported net revenue of $251 million compared to $241 million or 4% higher versus the same period in fiscal 2025. New orders booked in the first fiscal quarter of 2026 were $439 million, which was 63% higher than the same period 1 year ago and included 2 mega orders. The first mega orders for a large domestic liquefied natural gas project valued at greater than $100 million, which is being constructed on the Gulf Coast. In addition to this LNG mega order, the business also secured a number of orders during the quarter, supporting the electrical infrastructure for various data center projects. Collectively, these data center orders totaled more than $100 million in the first quarter of fiscal 2026. These data center orders booked in our commercial and other industrial sector included a notable mega order for electrical distribution equipment and was valued at approximately $75 million that will be deployed at a single data center. Notwithstanding these significant wins, the orders cadence across most of our reported market sectors continues to be active, particularly across our domestic end markets. As a result of this commercial activity, the book-to-bill ratio in the period was 1.7x. Reported backlog at the end of the first quarter of fiscal 2026 was $1.6 billion, $219 million higher than 1 year ago and $191 million higher sequentially and continued strength across the oil and gas, utility and commercial and other industrial sectors. As we exited the first fiscal quarter, backlog across our oil and gas and utility sectors, each represent roughly 30% of the total backlog while the commercial and other industrial sector has grown to 22% of the backlog, increasing substantially on both a sequential and year-over-year basis. Compared to the first quarter of fiscal 2025, domestic revenues were slightly lower by 1% or $3 million to $195 million while international revenues were up 29% or $13 million to $44 million in the current fiscal quarter. The increase in our international revenues during the quarter was driven in large part through the projects that we're currently executing in the Middle East and Africa, Asia Pacific and Europe regions. From a market sector perspective, revenues across our utility sector marked the most substantial increase during the quarter, higher by 35% compared to the same period 1 year ago, while revenues from the oil and gas sector increased by 2%, offset to some degree by the petrochemical sector, lower by 31% versus the first quarter of fiscal 2025. Lower revenue in the petrochemical sector was mainly driven by the completion of a large project booked in fiscal 2023, coupled with softer commercial activity in this market. In addition, the commercial and other industrial sector was 8% lower on project timing, while the light rail traction power sector was 5% higher on a relatively small revenue base. Gross profit in the current period increased by $12 million to $71 million in the first fiscal quarter versus the same period 1 year ago. Gross profit as a percentage of revenue was higher by 380 basis points versus the same period 1 year ago at 28.4% of revenues primarily driven by strong project execution, generating a higher level of project closeouts versus the prior year. Sequentially, gross profit was lower by 300 basis points on the predicted seasonal softness. As we noted in our fourth quarter release, we anticipated a challenging sequential comparison considering that our first fiscal quarter is historically the softest quarter across our fiscal year due to the holiday period. Selling, general and administrative expenses were $25.2 million in the current period and were higher by $3.7 million on increased compensation expenses across the business versus the same period a year ago. SG&A as a percentage of revenue increased 110 basis points to 10% in the current fiscal quarter. In the first quarter of fiscal 2026, we reported net income of $41.4 million, generating $3.40 per diluted share which is a 19% increase compared to a net income of $34.8 million or $2.86 per diluted share in the same period of fiscal 2025. During the first quarter of fiscal 2026, we generated $43.6 million of operating cash flow on favorable income generation through the period. Investments in property, plant and equipment totaled $2 million in the quarter, with the capital deployed primarily to address capacity and productivity initiatives. At December 31, 2025, we had cash and short-term investments of $501 million compared to $476 million at September 30, 2025, and the company does not hold any debt. As we look ahead to the remainder of fiscal 2026, we remain encouraged by the commercial tailwinds across all of our end markets. Given the current market conditions, coupled with a stable pricing environment, we are optimistic that we can sustain the quantity and the quality of our backlog throughout fiscal 2026. Combined with our ongoing focus on optimizing margin levels, increasing product throughput and the overall strength of our balance sheet, Powell is well positioned to deliver strong revenue and earnings throughout the rest of fiscal 2026. At this point, we'll be happy to answer your questions. Operator: [Operator Instructions]. Our first question comes from John Franzreb with Sidoti & Company. John Franzreb: Congratulations on another great quarter. I'd like to start with the comments on the gross margin that you can -- that based on what your current backlog looks like that you can sustain the 2025 gross margin profile. I wonder, does that consider potential change orders or short-cycle business? Or is that just based on the backlog configuration? Michael Metcalf: John, this is Mike. I'll address that question. So we had a very strong quarter with respect to project closeouts as I noted in my prepared comments, 380 basis points overall on reported margin versus prior year. Of that $300 million was attributable to project closeouts, which was favorable to last year and that was really driven by strong execution and risk management and our ability to recover costs via change orders, et cetera, in the project environment. The remainder of that upside was just playing productivity and operating leverage across the business. As a barometer of level of margin levels over time, I would point to the trailing 12-month performance. If you took a look at the trailing 12 months in the business, our reported margins are running about 30% and of this, there's approximately 175 basis points of project closeout gains, again, which includes change orders and the like changes in estimates. So maintaining a base level margin in the upper 20s while continuing to drive for 150 to 200 basis point upside resulting from favorable closeouts is a reasonable assumption. And that reflects what we see that base assumption is what we see in our backlog. John Franzreb: Got it. Got it. That's very helpful, Mike. And I'm actually kind of curious about the record backlog, it's great to have. It's wonderful to see. But I'm wondering if there's any concerns that customers are just buying to get in line and that the backlog might not be firm in use past given maybe the new customer shift. And just any thoughts about that? Brett Cope: John, it's Brett. It's a good question. We've talked about that in the past, and we -- are we open to cancellations, what would that potentially do? I don't think -- yes, I think the 1.6% is very durable. Some of the new market growth in the commercial and other is, if you look at the timing and our understanding of the project, I feel very good about it. I think as we look out what's going on in that space, are people talking to us and others about reservations and locking capacity, yes, those conversations are happening. And Mike and I and the management team are discussing what that might look like in the next couple of quarters, the next couple of fiscal years as the demand looks like it continues how to best handle that risk potential. So that -- I think that's a future concern that's on our radar, and we're taking it quarter by quarter, but not currently in the backlog. I feel pretty good with what we've got here today. Operator: Our next question comes from Chip Moore with ROTH MKM. Alfred Moore: I wanted to ask drilling on data center, maybe a little bit more. I think you're talking about larger and more numerous opportunities and obviously, that megaproject great to see. Maybe just -- can you expand, Brett, maybe on cadence of deliveries in data center? And then I believe many of these facilities are being built in phases, just potential for follow-on orders at some of these sites. And capacity questions. You mentioned adding some leased facilities, just how quickly you can ramp and get the switchgear supply going up. Brett Cope: Yes, I could have probably done a whole script on the data centers when you look at us in the broader market out there that's involved in the space because we are admittedly learning a lot as it's growing quickly in Powell. First of all, on the cadence of the activity that's ongoing. There is an interesting dynamic. It is project work, but still, a lot of our backlog that we just shared in the prepared comments is still outside the data center, even this large mega project. It is a large amount of work for a project to handle a lot of the outside of the work. And it's a lot of design one, build many. So it is supporting more of a product strategy. It's a project as we look at it as Powell. And so -- but it's going to create a lot of -- a lot more flow down production lines. We think there is a lot of opportunity there that we're working through over the -- and we will be working through in the next couple of quarters about efficiency, productivity and delivery. So we spent a lot of time last quarter, quarter before, working on supply chain, doing the blocking and tackling on the production line. The prepared comment, we added a 50,000 lease square foot lease facility, which we're just taking ownership now. During the quarter to support this product line flow to store the inventory that needs to ramp to match. But it's going to be a lot of that repetitive product build down the line, and we anticipate more of that in the next quarter or 2. We're evaluating -- we're under evaluation right now, some additional facilities. We're challenging whether or not we should go larger and along with even investment in our model. We like to own our PPE. But right now, the lease makes sense. As we better understand and become more confident, we'll build out more permanent investments, I think, to match, not just this, but of course, the things we've been doing organically to drive growth in all of our 3 verticals. Alfred Moore: Very helpful. I appreciate the color there, Brett. And if I could ask one more. Supply-demand environment, I guess, more broadly to the point on margins, a lot of announcements around capacity expansion from a number of equipment suppliers floating out there? Just maybe it sounds like things are quite stable right now, but just how you think about the future several years out, what might take place? Brett Cope: Every quarter, I'm getting more confident. The -- notwithstanding John Franzreb's question about the concern on this massive demand environment. I mean the number of customers were having more thoughtful strategic discussions with is increasing, and they're engaging Powell in a way that fits us well. And so I talked early on, maybe a year ago about finding alignment with clients that meet well with what we do culturally and how we do it, we'll learn from that and we'll grow. So we're not going to stay static as to who we were. We want to build a part of the company that is quicker on the cycle, can meet the need. There is a lot of demand. We understand the urgency and the return on their capital. But at the same time, we want to make sure we're hitting the dates for all 3 verticals that we're serving. So the number of customers is increasing. It is going out further in time and the programmatic approach about your comment about phasing, yes, we see the initial on the initial design and the potential train -- I'll call it, train expansion, but the size of the data center potential that could be added on to it is definitely part of the conversation. So that fits our model, right? If we execute and deliver for our client. We absolutely want these relationships to be sticky, just like there are other verticals, and we're very open with them in that approach. And so we use that as a an early-on engagement sort of screening discussion of, hey, we'd like to help all of you, but we want to align with those that really match us well. Operator: Next question comes from Manish Somaiya with Cantor. Manish Somaiya: Michael and Brett, it's Manish Somaiya. Just a couple of questions. One is on pricing. Perhaps if you can just give us some comment on what you're seeing as far as pricing in your end markets, the intensity of competition pertaining to that? And then related, how should we think about raw material prices and how they get passed along and what you absorbed? Perhaps if you can just give us a sense as to how you protect yourself in this ad of rising commodity prices. Brett Cope: Manish, thank you for joining today. I'll take the first part of that. Mike can add some color and jump into the input cost side. On the pricing environment, we've been asked that last couple of quarters. No real change. I think everything is holding pretty steady in all our verticals in terms of the competitive status of the market, if you will. The one dynamic that I would point to that we are learning, and I touched on this with Chip in the last call -- last question a little bit, is that on these data center jobs, they are with how we price in the market. I would say, that said, the way we're going to build these lines, I anticipate we have some potential upside because in the long cycle project -- when we build a project and they're large full of products and integrated scope in their year, 2 years, 3 years, these have a much quicker cycle on average compared to some of those on their demand curve to meet the need. And so when we get up to speed and build these products over and over and over, I think that the efficiency factor, something that we don't largely do as Powell today, and we're building out that product side of the company. I think there's -- I think we'll see some potential upside in there. I don't know how much yet. But I do think that we see the potential for it. So that in a sense would be price. If you back calculate it in the next couple of quarters, I think that will become more apparent to our to our understanding. Michael Metcalf: And following on that, Manish, this is Mike. Regarding the input costs, clearly, we watch this very closely. We kind of bifurcate it into 2 buckets. The raw materials, as you noted, copper, steel, very volatile. The metals market is very, very volatile today. We do hedge our copper to some extent and any drastic increases that we see, we roll those into our pricing models internally. The second bucket, I would note, are we buy a lot of engineered components, things that we don't make, HVAC, fire systems, things of that nature. And as you know, our projects could range from 1 year to 3 years. So we lock those not those commodities, those engineered components, in when we signed the contract. So we're locked into the engineered components and we watch the commodities very closely and roll those into the pricing model. So that's how we manage those businesses -- those elements of the business to mitigate the risk. Manish Somaiya: And then just as a follow-up, how should we think about the lead times on specific components like switchgear, for example, obviously, you have a significant backlog at this moment. What are sort of the potential constraints on the component side that could impact revenues? Brett Cope: That's a discussion we have every day and along with per couple of comments on the capacity additions that we're working through. I think we're in a good spot. If you look at the mix of products that we make and if you just kind of go back to data centers, Manish, the power levels have increased coming off utility or if they're doing GTG, self-generation on site or any kind of multifuel, there's a lot going into the 38 kV line, and that is ramping quickly. That's a product that we're rarely adept at. It actually fits Powell really well. But when you look at the 5 and 15 different product levels, they're not as robust. We actually have capacity. And so some designs of data centers out there, if you look at how they're doing their data halls, not all of them are just massive 1 gigawatt or 3x 300 gigawatts. There's new designs coming out that are 90 or 100 or 150-megawatt data halls that we still have really good capacity running 35 to 40 weeks on gear, which is very competitive in the market for 15 kb. So when you get into the mix of how they're doing their power design, we are driving future capacity for those higher levels that are really under demand, but then there are other designs that we still have opportunity to fill out that will benefit the back half of this year and into the early part of '27. So those are the really thoughtful conversations we're having with those clients that engage us that way. We can fate, we can build, we can invest meet their needs and then we can phase our deliveries to really make a win for both parties. Operator: Our next question comes from John Braatz with Kansas City Capital. Jon Braatz: Brett, you've spoken a lot about doing things to increase capacity and product flow and so on and so forth. And I guess, 2 questions. Number one, how much might you have to ramp up your CapEx spending to achieve that? And then secondly, when you think about your capacity now and what you want to bring on board in the future, if your top line, if you could do, let's say, if your top line growth was x percent, what might that new capacity be able to drive revenue growth in the future? Are we talking about mid-teens then? Or what kind of new growth -- new top line expectations might there be with this new capacity? Brett Cope: Well, that's a really good question, John. First, on the CapEx side, yes, we've been evaluating for the better part of the year a new facility owned by Powell. A lot of that started off in support of our organic investment in R&D and some of the products we aspire to bring to market to pursue more share of wallet and utility spend. I really like the utility vertical for Powell long term, and we've done really well in there. And I really think the team is -- what we've done is really driving value for our client in the utility space and vice versa. And so we don't want to lose focus on that. So add to that what's going on in the market in this newer dynamic, we're considering right now something on the order of another $100 million type facility. We've not pulled the trigger on that. Really active discussions with the Board. Meanwhile, we saw an opportunity on the lease side. When you look at both in terms of how they could potentially drive revenue, yes, I think double digits is possible. We got to get a few more products organically out like I noted earlier, if we -- and maybe a little bit more -- I'd hedge a little to say when, given how many data center companies are engaging us get inside the data center, -- it will be a pretty chunky add. The low-voltage content, even on the AC designs that are going on now and the momentum that's built because there's a lot of talk on the future DC designs, which we're also involved with but it will be a step change. And some of that with that -- with the investment we did last year at the breaker plant here in Houston, the 50,000 square foot, we're already prepped for some of that. Well, we could quickly need some additional facilities beyond that just to hold the inventory. So we can see out there some potential nice steps to add to the growth of the company. Jon Braatz: Okay. And Brett, on the LNG market, obviously, it's a little bit different today than it was 3 years ago when sort of the initial construction rollout began. Is the competitive environment a little bit different today than 4 or 5 years ago? Brett Cope: It's different, but it's no less intense. And my color comment on that would be, if you go back 4 or 5 years ago and you look at the players that were in the market from the international people that we compete with, along with some of the local building makers and integrated partners at the -- our competition would use, there was a set of competitors that was x. If you look at today, 5 years on and you look at like in our investor deck, we present who we think about every day when we get up to compete on the electrical side. What's changed is their strategy, I think. Our core strategy around industrial oil and gas utility, which we've been working at for the better part of a dozen years. And now this latest piece, we're not going to forget who we are in these first 2 verticals. And we really enjoy that complex industrial hard to do job. And so there's still competition, it's still intense, but there are some new players because of changes on the other side that happened from 5 years ago, maybe the focus is different, I don't know. You have to listen to their calls. But for us, we're still focused on that. And we really like that business, and we're very engaged on it. And the investment we've made in offshore is built for that, and we're out trying to earn all that business that's potentially coming through FID in the next couple of quarters. Jon Braatz: Okay. So Brett, if you -- when you look at the margin that you achieved a couple of years ago on the new projects, new LNG projects, do you think you can see similar margins going forward? Brett Cope: I think so. I mean, there's -- all the segments, that's the one that is given the size of the capital investment in these facilities. There's still a lot of focus on the return of the facilities. And so it's good, but I -- you got to be careful to be fair and what you're really looking to do. And so if there's something that's unique or there's time elements that we can provide, that's unique to our model, for instance, using our offshore facility for large single piece that will help reduce cost at site. We just asked a rare value in return for that for the site, but not to be silly about it. Operator: Our next question comes from John Franzreb from Sidoti & Company. John Franzreb: Brett, I'm just curious about the opportunity pipeline. It seems phenomenal. I wanted to kind of look at it and say, listen, we're going to have an exit book-to-bill ratio of above 1 point for the next coming 2 years. Is that something reasonable to expect? Brett Cope: I think it's reasonable, John. I mean there's no guarantee of future results. You know the phrase -- the amount of conversations we're having across all 3 verticals. I think it's a reasonable expectation, which is why we had chats with the Board, and we had the change in some of the metrics that we're driving the company for. And so the volume potential is definitely there. And as a team, we've got to solve that. And I feel good that we've got the right team and the right environment to make that happen for all the stakeholders. John Franzreb: Got it. And I was wondering, has the Board considered a stock spread at this level? I mean, compared to historic levels, it's fairly impressive. Brett Cope: Yes. We have -- some of the color on that really is more, if you think about our team and the growth of the employees as just critical to the success of all the stakeholders' interests using equity within our structure has become very much more of the forefront discussion with the Board and Mike and I and our CHRO. And so yes, the stock split from a math standpoint about making sure it's a tool that we use for our team to support their engagement in the process here is definitely very active. John Franzreb: Got it. And I guess kind of just one last one. How should we think about the cash on the balance sheet, over $500 million when does that number start to get drawn down a little bit as you use more working capital as these larger projects come on board? Brett Cope: Well, let me just make a couple of comments there and let Mike jump in. As I noted, already this morning, I definitely think we're thinking about allocating some of that to some new facilities. I can't really pin down the timing yet. We've got a board here, 2 weeks. It will be in the discussion -- and then we're not slowing down on the M&A side, even though we did the one with Remsdaq in last summer. There are still some ideas out there that when we can get out in the market and do the strategic work. There's still some really nice potential out there. So there's that. And then I think the capital needs, Mike. Michael Metcalf: Yes. As a follow-up on that, John. From a working capital perspective, roughly 40% to 50% of that balance will be deployed at some point in the future to that $1.6 billion backlog number. But that said, when you look at what's the free cash available for the capital deployment in some way, shape or form, it's probably $200 million to $225 million mentioned that we're thinking about capacity requirements across the business. So I'm sure some of it will get deployed in that fashion. Operator: Our next question comes from Chip Moore with ROTH MKM. Alfred Moore: Just one more for me on Remsdaq, I think you called out getting some traction here in the U.S. So just an update there now that you've had them for not too long, but a little longer -- and then service more opportunity, I guess, more specifically around data center, in particular, just talk to that. Brett Cope: Well, thank you for the question. Yes, Remsdaq, great strategic add, great set of folks in the U.K. We -- when you have these dynamic times in the market, Chip, you -- every market has an approved approach, the way they bring in technology. Remsdaq was so experienced in their market in the utility space. That was one of the things that attracted us to them initially plus their technology road map. The data center market, the commercial and other industrial has definitely opened the door to allow us to get that technology in quicker than we anticipated into the U.S. market. So we've had some technical meetings with some of the customers that have come to us on applying this technology to the powertrain that speeds in the data center for some protective and control logic and it's opened the door. And it's created new opportunities for us even on the high-voltage side. We just took our first order for a high-voltage control protection substation the utility connect, if you will, the high voltage into the medium voltage, which would be a new space for Powell. And again, that was underscored by our ability with having Remsdaq and their technology as an enabler. So super exciting time. I have high expectation for the growth of this business. It is accretive to margin significantly, and Powell has a long history of success here. Service. yes. Thank you, Mike. On the service piece, yes, there is clearly opportunity on the data center front, the commercial and industrial. We haven't taken anything significant yet. But over the last quarter I've been involved myself in some of the discussions where we do see an opportunity for service to come in. On the build side, quite frankly, initially, we've not entered on the OpEx side after. I think that will come. Still a new market for us. And as these assets get installed, I think we'll see some installation and long-term support work. But we right now are developing some ideas with clients on how our team can help the constructability, the timing, given our know-how on the skid and the integration of the mechanical side of these solutions with how they're trying to speed up the time line. And so our service team is engaged and we're actually out providing some quotes for what we think we can do. We haven't closed anything yet, but it would be -- we do see it as a big opportunity as we go forward. Operator: Our next question comes from Manish Somaiya with Cantor. Manish Somaiya: Mike, I'm not sure if you mentioned the next 12 months backlog. Would you mind giving that to us? Michael Metcalf: Manish, you'll see that in the Q that we submit later today. Of the $1.6 billion backlog, roughly 60% of that is convertible over the next 12 months , I think in the Q, you'll see $933 million. And on top of that, we refresh what the book and bill rates been on average over the last 12 months. And that's running $65 million to $70 million cadence every quarter. So those are 2 of the key metrics as you look forward. Manish Somaiya: Okay. Wonderful. And then, Brett, you talked about strong demand across the board, strong activity, strong backlog my big question is the shortage of skilled labor in this country. And is that going to be a constraint as far as your growth ambitions are concerned? Brett Cope: Well, it's always a concern, Manish. It has been the entire 15 years I've been at Powell through any cycle. Is it a concern today? Absolutely. The management team discusses it routinely. On the variable side, there's always a time where there's a skill set within the company that has a need. On the variable side, we're doing fairly well. In fact, I'd say in the last couple of quarters, we've solved some problems. As I sit here today on the fixed side, we do have some needs that are challenging us with this step change in -- especially on the commercial side. The growth in this segment is challenging some growth needs today on engineering. So that's a problem that we're out working and I feel confident in the next 90 days or so, we'll figure out how to solve that one. But it's not unique or new to us. We -- because we are a long-cycle project company by historical sense, we've been here before, and I'm confident the team will find a way to solve the need. But given the growth of the backlog, yes, we've got some needs right now, and we're going to go out and solve them. Manish Somaiya: Well, thank you again, and congrats on the quarter. Operator: This concludes our question-and-answer session. I would like to turn the call back over to Brett Cope, CEO, for any closing remarks. Brett Cope: Thank you, Bailey. Our first quarter delivered solid performance with improvements in our top and bottom line. Powell's employees consistently embrace the challenge while keeping our core focus on executing the most complex of industrial electrical distribution projects, our team is responding to meet new and growing market opportunities, which underscore our ability to secure future business and drive new strategies to improve productivity and profitability. I would like to thank our valued customers and our supplier partners for their continued trust and support Apollo. We're very pleased with our first quarter, and we expect another strong year for Powell. Mike and I look forward to updating you all next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the ATS Corporation Third Quarter Conference Call and Webcast. This call is being recorded on February 4, 2026, at 8:30 a.m. Eastern Time. [Operator Instructions] I'd now like to turn the call over to David Ocampo, Head of Investor Relations at ATS. David Ocampo: Thank you, operator, and good morning, everyone. On the call today are Doug Wright, Chief Executive Officer; Ryan McLeod, Chief Financial Officer; and Anne Cybulski, Vice President, Corporate Controller. Please note, our remarks today are accompanied by a slide deck, which can be viewed via our webcast and available at atsautomation.com. We caution that the statements made on the webcast and conference call may contain forward-looking information and our cautionary statement regarding such information, including the material factors that could cause actual results to differ materially from the statements and the material factors or assumptions applied in making the statements are detailed in Slide 3 of the slide deck. As many of you know, this is Doug's first conference call as CEO of ATS. We're very pleased to welcome Doug as the new leader of our organization. With that, it's my pleasure to turn the call over to Doug. Doug, over to you. Douglas Wright: Thank you, David, and good morning, everyone. I'm pleased to be with you here today. As you know, I joined ATS in mid-January. While it's still early in my tenure, my focus has been on rapidly translating learning into action, particularly around execution discipline, margin performance and capital allocation. This focus has included spending time with our teams across the organization, building a deeper understanding of the business and our day-to-day operations. I've also participated in our President's Kaizen Events, listening to and meeting with teams, including at our Cambridge, Ontario head office. What stood out from this year's group of Kaizens was the depth and breadth of our people's technical capabilities and the high-performance nature of our culture anchored by the ATS business model. During my career, I've had the opportunity to serve several organizations in different parts of the world, focusing on automation and diversified industrial technologies. In bringing an analytical lens rooted in my engineering background and applied in multiple general management and CEO roles, one key takeaway for me is that companies built in a strong lean operating system are better positioned to execute and deliver sustained results. That lean culture is deeply embedded at ATS through the ABM and our focus will only get sharper going forward. These fundamentals, along with our attractive market positions in growing end markets and our high-quality customer base have reinforced my decision to join this organization. Importantly, that foundation is supported by a deep and capable leadership bench, positioning us well to execute on our strategic priorities. In Q3, we welcomed Sarah Moore as our new Life Sciences Group Executive. Sarah brings over 20 years of experience across Healthcare Diagnostics, Medical Devices and Life Sciences, along with a deep sector expertise and a strong operations background to lead our presence in one of our key end markets. We also recently appointed Simon Roberts, a long-tenured ATS leader to lead our Packaging & Food Technology business. This brings a leader with strong operational background to this key end market. This appointment coincided with our decision to embed our growing Services business within our operating units. This change strengthens accountability, improves customer alignment and allows each business to manage services as a recurring margin-enhancing component of their solution offering. Our focus on people and leadership continues to be acknowledged externally. Our U.S. operations recently received a certificate of recognition from the Top Employers Institute, and we were once again named a top employer in the Waterloo area. From an operating standpoint, I expect we can continue to build on the systems, rigor and accountability required to build long-term value with an emphasis on driving margin expansion across the portfolio. There are meaningful opportunities ahead through increased asset utilization and operating leverage, improved mix and continued advancement of the ATS business model. That same discipline also guides our capital investment decisions across the portfolio. Our focus remains on allocating capital where it generates attractive risk-adjusted returns and enhances long-term shareholder value. We continue to evaluate opportunities that support growth and profitability, reinforce our core capabilities and remain consistent with our leverage framework. This approach aligns with ATS' long-term capital allocation strategy and the priorities of our Board. Before I move on, I want to recognize Ryan McLeod for his contributions to ATS. Ryan has played an important role in strengthening ATS' financial foundation and building a strong finance team. We thank him for his leadership and wish him continued success in his new chapter. Ryan's transition is orderly and planned. Anne Cybulski, a trusted member of our leadership team, will resume as interim CFO and provide the continuity. Our finance organization has been built by Ryan and Anne and is stable and capable. As I continue to deepen my understanding of the business, I'll provide additional perspectives as appropriate. With that, I'll turn the call over to Ryan to walk through our third quarter performance and outlook. Ryan McLeod: Thank you, Doug, and good morning, everyone. Before moving to the quarter, I would like to welcome Doug to ATS. Doug brings a proven track record in lean operations and a disciplined approach to capital allocation. I'm confident that under his leadership, ATS will build on its strong foundation and continue to drive value creation for shareholders. Turning to the quarter. I'll start with a brief overview of our Q3 performance before providing an update on our end markets. Anne will provide additional financial details in her remarks. Starting with our financial value drivers. Order bookings were $821 million, up almost 12% sequentially, supported by activity across multiple end markets. Q3 revenues were $761 million, up almost 17% from Q3 last year, driven primarily by organic growth, including continued momentum in services. From a profitability standpoint, adjusted earnings from operations in Q3 were $80 million, in line with our expectations. Moving to our outlook. We ended the quarter with an order backlog of approximately $2.1 billion. Our backlog reflects a well-balanced mix across end markets and geographies. Looking ahead, our funnel remains healthy and diversified. Within Life Sciences, order backlog was $1.1 billion, and revenues for the quarter were $391 million, the second highest in ATS' history. Demand remains constructive in our end markets with ATS' global scale supporting consistent execution in multiple regions and multisite customer programs. Radiopharma led by our Comecer business remains a key growth market supported by strong customer relationships and expanded services footprint and a proven track record. Our unique capabilities in this market are driving engagement with both established and emerging customers across the development and commercial phases of radiopharmaceutical programs. Within GLP-1 auto-injectors, ATS is executing against a healthy backlog and partnering with customers as they scale production. As device requirements evolve and new therapeutic applications emerge, our teams continue to support customers throughout the product lifecycle. In Food & Beverage, quarter end order backlog was $203 million. Funnel activity in Food & Beverage remains strong, driven by brand recognition in core processing markets, including tomato and other fresh fruit applications. In Energy, order backlog was a record $296 million, up 87% over Q3 last year, driven by refurbishment and life extension projects for nuclear reactors. These refurbishment programs are longer cycle in nature and include service components that support both execution and ongoing operational requirements. Alongside refurbishment work, activity continues to progress in new build programs, including both large-scale reactors and SMRs. ATS is engaged early in the project lifecycle, supporting front-end design, engineering and prototyping activities. This work spans fuel production, fuel handling and modular fabrication across multiple reactor technologies. Within Consumer Products, backlog reached a record $321 million, supported by a large enterprise warehouse packaging automation program that leverages ATS' global manufacturing and aftermarket capabilities. Consumer Products funnel remains steady with ongoing opportunities across warehouse automation and packaging. In Transportation, the funnel continues to reflect smaller scale opportunities in both commercial and traditional vehicle platforms. In summary, quarter reflects steady execution across our priorities, supported by a strong order backlog and diversified end markets. Before we move to the financial review, I want to take a moment to express my confidence in the depth, capability and professionalism of the organization I've had the privilege to lead. I've worked closely with Anne for many years, and I've seen firsthand the strength of her leadership and that of the broader team. I'll be moving on knowing the business is in very capable hands, supported by a strong leadership team and an organization deeply committed to operational excellence and disciplined execution. I also want to convey my sincere appreciation to the entire ATS team for their dedication and unwavering commitment to the company's success. With this continuity in place, ATS remains firmly focused on the business and well positioned to deliver long-term value for shareholders. Now I'll turn the call over to Anne. Anne, over to you. Michael Anne Cybulski: Thank you, Ryan. The entire team and I wish you success in your next chapter. I share your confidence in ATS' experienced leadership and finance teams. I also echo both David's and Ryan's words of welcome to Doug. Doug, we're happy to have you on board. On to our operating results for the quarter. Order bookings were $821 million, down 7% compared to Q3 last year due to the expected lower run rate in Transportation and the inclusion of several larger enterprise bookings in Life Sciences and Food & Beverage last year. Notably, our trailing 12-month book-to-bill ratio at the end of Q3 remained healthy at 1.06:1. Revenues for the third quarter were $761 million, up 16.7% compared to last year, including organic growth of 12.6%, along with a 4.1% benefit from foreign exchange translation. Of note, revenue increased in all market verticals, except for Transportation as expected. Moving to earnings. Third quarter adjusted earnings from operations were $79.9 million, a 21.6% increase from Q3 last year, primarily on higher revenue volumes. Gross margin for Q3 was 29.6%, a 111 basis point decrease from last year, mainly due to program mix. Put another way, the decrease is a reflection of timing of programs being executed across our market verticals, which have different gross margin profiles. On SG&A, excluding acquisition-related amortization and transaction costs, expenses in the third quarter totaled $141.9 million, an $11.3 million increase over the prior year, mainly due to foreign exchange translation and, to a lesser extent, increased employee costs and professional fees. Excluding the mark-to-market impact related to changes in our share price, stock-based compensation expense was $3.1 million in Q3. Earnings per share were $0.48 on an adjusted basis. Moving to our outlook. We ended the quarter with an order backlog of approximately $2.1 billion. Q4 revenues are expected to be in the range of $710 million to $750 million. As a reminder, this assessment is updated every quarter, taking into account revenue expectations from current order backlog and new orders booked and billed within the quarter. During the quarter, we incurred $5.5 million of restructuring costs under the program we disclosed last quarter. As we identified additional opportunities to further realign our cost structure, total costs under the program are now expected to be approximately $20 million. The associated payback period remains unchanged. We do expect some reinvestment in strategic growth areas while also supporting our operating leverage, mainly as we move into fiscal '27. As we head into the last quarter of this fiscal year, we are pleased with our overall revenue growth of 13.6% on a year-to-date basis, including approximately 8% organic growth. Adjusted earnings from operations are up 14% on a year-to-date basis. ABM discipline and tools will continue to support focused execution across all of our value drivers, supported by the strong lean pedigree amongst our leadership team. In addition, Doug's experience and focus on lean discipline is clear. While the macro environment remains dynamic amid geopolitical and trade uncertainty, once again, we can confirm that we have not been materially impacted by tariffs across our different geographies. Most of our exports from Canada to the U.S. continue to be covered under the USMCA. Our global decentralized operating model positions ATS well to adapt and serve customers where capital is being deployed. As a result, we continue to execute, maintain leadership in our key submarkets and advance our growth priorities. Moving to the balance sheet. In Q3, cash flows from operating activities were $115 million. Our noncash working capital as a percentage of revenues was 16.4%, an improvement sequentially and also from Q3 last year. As a result, we moved closer to our targeted working capital value of less than 15% of revenues as we received some larger milestone payments before the end of the quarter. As always, payment timing can affect this ratio around period ends, but our goal is to continue to sharpen our working capital efficiency and more broadly, overall asset efficiency. During the quarter, we invested $16.6 million in CapEx and intangible assets, supporting innovation and the continued strengthening of our capabilities. For fiscal '26, we expect our CapEx and intangible investment to be between $70 million and $90 million, slightly lower than the previously disclosed range. On leverage, our net debt to adjusted EBITDA ratio was 3x, reflecting continued progress towards the top end of our target range of 2 to 3x as expected and previously disclosed. In summary, the third quarter results were in line with our expectations, supported by a strong order backlog and diversified end market exposure. Our leadership team and global employee base remain focused on leveraging our opportunities for margin expansion and capital efficiency across our business to drive shareholder value. Now we will open the call to questions from our analysts. Operator, could you please provide instructions. Thank you. Operator: [Operator Instructions] Your first question today comes from the line of Maxim Sytchev from National Bank Financial. Maxim Sytchev: Doug, congratulations on joining the company. And maybe the first question, if I may, for you. Do you mind maybe talking about your maybe 90-day and kind of 6 months priorities in terms of what's going to be on your slate? Douglas Wright: Sure. Thanks, Maxim. So while it's early, I do have a few observations that I'll share with the group. First, I believe that we're aligned to strong and growing end markets in the portfolio. And growth has been strong. And while there's a few areas that need some improvement, our focus will be on -- continuing to focus on those core end markets that we're in today. So we're not -- I wouldn't say that my appointment brings any outlook change in terms of the end markets that we're focused on. Secondly, we recognize that margin expansion potential has not been realized. And I think we have a lot of runway in front of us. And while I'm not ready to establish a new target for the organization yet, our team knows that we need to do better. There's opportunity in both ABM type improvement, which are a great set of tools that we just need to drive harder at executing as well as commercial actions to get more value for the important work that our teams do. And third, as our leverage ratios are now back into our targeted range, we will deploy capital with a high level of discipline as usual, but with an emphasis on improving our margins, our aftermarket mix and bringing in new technologies that complement our portfolio within our existing end-market framework. So those are some of the key observations I would make today, and you can kind of convert that into what I'm focused on in the early days, both with the executive team, our operating units as well as with our Board. And I really remain very optimistic for the outlook for ATS. Maxim Sytchev: That's excellent. And one quick question for Ryan. And Ryan, obviously, all the best, and it's been a pleasure. If I may, do you mind maybe connecting a little bit the improvement in margins that you were telegraphing at the beginning of the year and how that correlates to the gross margin change in the mix perspective and how I guess we should be thinking about modeling the rest of the year? Ryan McLeod: Yes. Thanks, Maxim. I appreciate it. I'm going to let Anne walk through the margin dynamics. Michael Anne Cybulski: Thanks, Ryan. So Max, I would say from a gross margin perspective, we talked about mix, and it really is reflective of the -- what we're seeing the -- what we've got in our backlog and what we're executing on. I wouldn't call it anything unusual there. We've been pretty consistent in terms of performance there and in line with our expectations. We still -- as Doug said, we still got opportunities across the board, but specifically on gross margin through some of our levers that we'll continue to pull, including the usual standardization, supply chain, operational excellence initiatives. So overall, I think some of the work we've got in our backlog right now is more -- you've seen nuclear bumping up, and we've talked about that being, generally speaking, lower gross margin, but accretive to the bottom line. So I don't think there's anything unusual, but there are some dynamics there and then the levers that we have available to us remain available, and we'll continue to focus on them. Operator: Your next question comes from the line of Sabahat Khan from RBC Capital Markets. Sabahat Khan: Great. Just maybe starting at a high level on the revenue side. Obviously, you provided a bit of color on the outlook for each of the segments in your release. So maybe if you could just dig a little bit more into the nuclear, the Energy side and the Life Sciences side. One, were you just sort of expecting the nuclear side numbers to be that big? Are there new orders that came through the year that drove sort of that size growth in nuclear? And then on the Life Sciences side, if you can maybe just talk about what you're seeing on the outlook there in terms of maybe things that could drive mid- to high single-digit type growth that segment seen times in the past? Michael Anne Cybulski: Yes. So maybe, Saba, I'll start with the numbers and then Doug can chime in on the outlook. So from an Energy perspective, as we've talked about, the majority of the work that we have in our backlog right now is focused on life extension projects, and those tend to run out over 18 to 24 months, in some cases, from a top line standpoint. That said, we also have good backlog that we're continuing to generate in terms of our participation in new builds, both SMR and traditional reactors. And an example in the quarter, we did have an order for new build reactor for fuel fabrication. So good participation there and not specific to any one technology. So I think a good demonstration of our team's capabilities beyond the [ CANDU ] technology that is the majority of the life extension work. From a Life Sciences standpoint, we've continued to build out that part of the business. And of course, we have the custom integration piece of the business, but we've also got a good portfolio from a products and services standpoint that we'll continue to focus on driving the business forward from a top line standpoint. So Doug, go ahead. Douglas Wright: Sure. So I would just add in terms of the outlook, Saba, that the -- we've obviously -- in the nuclear side, we've obviously had a very long-standing relationship with a number of customers on the CANDU platforms, and we're really pleased that we're continuing to support those life extension and refurb programs. But inside of our pipeline and kind of looking forward, we are also active on, I would call it, a handful -- a full handful of SMR customers in the early-stage activities in both modular fabrication and fuel handling. And we do expect that over time, these customer relationships will expand as projects gain traction and evolve into operations. Obviously, this is a long-term investment for the company to get involved early. And we have to obviously be prudent in how we manage uncertainty that comes with new technology and new regulatory frameworks, but we feel like ATS is in a strong position to support those evolving technologies as they go forward. I would say on the Life Sciences side of things, we really are pleased with the improvement in the diversity in the -- at the application layer within the pipeline and the backlog in Life Sciences. We're really excited about some of the new innovations that our customers are working on around radiopharma, visual inspection, other med tech applications, including things like mail order pharmacy. So we believe that we have a pretty good stable of new applications coming in that portion of our business that will allow us to help continue to support those great innovations that are happening with our customers. Sabahat Khan: Great. And then just for my follow-up, I guess, a bit more on the capital side, leverage moved in the right direction. And if you can just maybe comment a little bit on sort of the working capital target that you guys have, any initial plans there? And then understanding it's early days, but just your views on where M&A ranks in capital allocation as the leverage moves further in the right direction. Douglas Wright: Sure. So it's a little premature for us to set new financial targets in terms of the working capital ratio, but you can be sure that in future calls with you, we will be reviewing those targets and coming forward with an updated framework. I think the team did make a lot of progress here in the last quarter on working capital. And that's -- honestly, improving working capital is actually quite hard operationally. So I think it shows a good level of execution by the team. And of course, my job is to keep pushing to make it even better than it has been. So you can count on that. I think in terms of capital allocation models, I would think about it like this. We're not going to change our level of discipline and focus and our committed leverage architecture that we've communicated to investors. We recognize that there's a view that as our leverage ratio gets back into our targeted zone that we can become more thoughtful about deploying M&A capital, and you can be confident that internally we are doing that. We have a pretty rich pipeline that across a number of our end markets that we are continuing to evolve. And as I'm meeting with our business unit leaders and our corporate development team and getting an understanding of what's in their pipeline, I'm pretty confident that we've got the ideas to utilize to deploy capital. But obviously, as I said, we will remain quite disciplined in how we do that, but you should expect us to favor deploying capital toward M&A going forward. Operator: Your next question comes from the line of Patrick Sullivan from TD Cowen. Patrick Sullivan: Like everyone said, good luck, Ryan, and then Doug, welcome to the call. I guess first question I had was, it looks like there's a specific line -- kind of aligning opportunities outside of GLP-1 in the Life Sciences sector. So I guess, has there been any updates to customer plans within that market for you guys? Is there still significant capacity that needs to be constructed? Or have advancements in other oral therapies kind of influenced capital expenditure plans more recently? Douglas Wright: Sure. I would say, obviously, Patrick, the GLP-1 ecosystem has a lot of dynamics involved in terms of both the ramp-up of capacity that we're participating in now as we're shifting into the delivery phase of the great upfront capacity partnerships that we entered a while back. But there's still a significant amount of new therapies around GLP-1s, new delivery form factors such as multi-use devices or more sustainable concepts in the devices themselves as well as new trials and customer activities around continuing to deploy new therapies around these therapeutics. So I would say that the long term, the auto-injector market for us with respect to GLP-1s, it will -- it's obviously going to go through its lumpiness in the order cycle. But from a revenue perspective, we still see a pretty strong pipeline of incremental opportunities to continue to support those therapies. Now being prudent, we obviously have to improve the diversity of our pipeline for other types of therapies we mentioned in our prepared remarks. There's a lot of excitement around radiopharma, oncology and other activities that we think will -- well, we're not -- we don't think it is diversifying our pipeline, and that will start to diversify our revenue footprint as time goes on. So we're committed to continuing to work with our GLP-1 and auto-injector customers. We recognize that there's a lot of press now about different companies guiding different views on utilization of orals and other traditional and new therapies around GLP-1s. And I would say that from our perspective, our customers are still being pretty consistent that there's a lot of long-term opportunity in GLP-1s that we'll continue to support over time, recognizing that we have to diversify the portfolio to make sure that we can keep the machine running. Michael Anne Cybulski: And just a small bit of extra color on the quarter. Within the quarter, we saw good examples of that diversification that Doug is referring to. Outside of GLP-1, we had orders in radiopharma and other areas of med device, which are a good demonstration of our team's capability and our capacity to execute across those submarkets. So just hopefully, that adds a little bit extra color for you there. Patrick Sullivan: Yes, that's great. If I could ask one more. ATS often talks about cultivating assets as it relates to acquisition targets, sometimes over many years. Doug, is that approach consistent with your experience? Was that part of your mandate in previous roles? I guess any experience you can elaborate on with respect to that strategy would be great. Douglas Wright: Yes. Thanks for the question, Patrick. I think the answer is very simple. I am very committed to the idea that I have a role and my executive team have a role in working with innovators, founders, sometimes families and other -- we work in a universe of strong levels of innovation that often start as small businesses and then evolve into opportunities to join a larger organization like ATS. That does require a lot of kind of pick and shovel activity on the ground to cultivate those relationships. And it is something that I have a lot of experience in. And I think we'll continue to have a pretty -- a very tactical focus on getting out and meeting partners and working with them over the long term to put us in a better position to make those acquired companies feel at home inside ATS. Operator: Your next question comes from the line of Justin Keywood from Stifel. Justin Keywood: Just following up on the outlook for Life Sciences. We've seen some substantial CapEx investments over the last 6 to 8 months. By our math, about $480 billion has been announced, much of which are ATS' customers. And this is in part to potentially sidestep tariffs and reshore with U.S. manufacturing. I'm wondering if that narrative is leading to increased business for ATS? Or is it just a regular business as it goes as far as new CapEx and if you have any additional color there? Douglas Wright: So Justin, I think specifically, we probably -- I think at a high level, we certainly are aware that there's a lot of discussion within the broader sort of Healthcare and Life Sciences space around reshoring and tariff mitigations. And we certainly are probably seeing some benefit from that in our own pipeline. But I can't -- I think at the end of the day, most of our customers are being very balanced in being close to their large markets as they build out their capacity. So I wouldn't say that it's necessarily dependent on tariff dynamics. I think it's related to just the dramatic increase in demand for these therapeutics and just needing raw capacity. And if you're doing -- if you're adding new capacity in an environment where tariffs and geopolitical items are volatile, it's kind of rational to spread your capacity out among different geographies. I think that's common across a lot of the industrial tech landscape as well among our peers. So I think that's kind of a natural outcome. And -- but you're correct that there is still a significant amount of capacity in the pipeline. And our job is to be able to serve that whatever geography the customer decides to land in. Justin Keywood: Understood. That's very helpful. And then for the Transportation or EV segment, we saw continued pressure this quarter. Our expectation was it was near bottom levels last quarter. Are we at that range where we should see some stabilization going forward? And also, how strategic is the EV or Transportation segment to the overall business going forward? Douglas Wright: Sure. So I think we look at Transportation holistically, the way we look at all of our end markets through a long-term value creation lens. And part of that specific to Transportation is we recognize that we have a lot of technology and value to bring to the EV ecosystem. But it's frankly going to be more targeted than it has been historically. I think we recognize that pursuing mega projects in the, call it, the broad Transportation sector has -- carries a lot of risk that we're not comfortable with. But within sort of niches, within the Transportation segment, maybe it's assembly of batteries or hybrid engines or other sort of unique targeted areas where our technology can bring value and we can be rewarded appropriately for it. We still have a significant amount of pipeline in transportation, but we're going to be more cautious in how we go after the shiny objects. We're going to be more disciplined in how we pursue those projects. So it's still a market that we feel optimistic about. But on a relative scale, it will -- relative to our larger segments that we're participating in now, I think it will stay kind of in its current range. Michael Anne Cybulski: And Justin, just to add, I mean, that's -- what Doug said is reflective of what we see in the backlog and also in bookings in the quarter as well as the funnel. So -- and I think that's a fair reflection of what we'd expect going forward. Operator: [Operator Instructions] Your next question comes from the line of Patrick Baumann from JPMorgan. Patrick Baumann: I know it's been a couple of months already, but we haven't spoken yet. So I wanted to say congrats to Doug on the new role. And also, thanks to Ryan for all the help and guidance while we've been following the company and best of luck in your new role. I had a couple of questions. First on sales. So generally, like when I look at the quarterly -- I know you guys don't like to talk about quarterly, but when I look at the quarters over time, you see a growth rate from third quarter to fourth quarter like in the mid-single-digit range sequentially. Can you help me understand why that might not happen this year? Is it -- was there some sales pulled ahead to the third quarter maybe? Any color on that would be helpful. Michael Anne Cybulski: Yes. Patrick, I can take that one. So from a -- on a full year basis, we're still expecting what we talked about before in terms of high single-digit growth, and we're happy with where we are from an organic growth perspective on a year-to-date basis, especially given some of the market dynamics. The Q3 number, I mean, there was some benefit from scope adjustments and things that just timing of execution of the program. So what we have in our guide for Q4 leaves us consistent with what we would have expected on a full year basis. And I don't think there's anything unusual that I'd call out. Patrick Baumann: Okay. That's helpful. And then the second one is on backlog. And so I guess I just wanted to understand the sequential decline in context of the positive book-to-bill. It looked to me like maybe in Transport, there was a rescoping or something of that nature. Is that right? And if you could provide any color on that, that would be helpful. And then also on the orders front, like consumer looked like it had a big order in there. Could you provide any color on that? Michael Anne Cybulski: Yes, I'd be happy to. So just with respect to the backlog, I mean, just -- about half of our business, roughly half is products and services. So as that portfolio continues to grow, I mean, we kind of look at a number of metrics across the board. So in our guide, we look at the shorter-term businesses. We kind of look at where we are from an execution standpoint on our larger projects. So there's some timing stuff in there. But I would say we're happy with the book-to-bill staying above 1. And even if it does dip below 1 in any particular market or period on an individual quarter or trailing 12-month basis, if we're executing off of a healthy backlog that doesn't give us cause for concern. So I think -- and then your question on consumer, we did have -- we have had some strength in that area, again, reflective of the capabilities of the team. So that work will get executed over a normal time frame, consistent with the other work in our backlog, we typically say 12 to 18 months. Operator: Your next question comes from the line of Jonathan Goldman from Scotiabank. Jonathan Goldman: Maybe just the first one, circling back on the bookings. What are you guys thinking in terms of bookings growth this year? I'm just -- if you can give us any help parsing all the different puts and takes on funnel commentary, the strong revenue this quarter. You're lapping the enterprise orders last year, the timing as well. But how are you thinking about the full year cadence of bookings? Michael Anne Cybulski: So from a -- you mean -- sorry, Jonathan, just to clarify for this year? Or what do you... Jonathan Goldman: Yes for this year? Michael Anne Cybulski: Yes. I mean we're -- we'll continue to -- there's -- obviously, in our Custom Integration business, there's some timing things that may impact the number. But on a full year basis, we're happy with where we've come in from a year-to-date perspective, and the funnel is healthy across the board, as we've talked about. And even if -- and as auto-injector orders modulate based on where customers are in their buying cycles, the funnels in the rest of the submarkets remain healthy. If there's anything, Doug, you'd like to add, go ahead. Douglas Wright: No, I think it's -- I think we've got a great pipeline, and there's obviously some economic uncertainty that we live with every day. And I think the team has calibrated the orders outlook effectively. That's why we provide a range. And -- but I think it's -- the pipeline is robust, and we've got, I think, a pretty good opportunity to continue to deliver the type of growth that we've delivered in Q3. And obviously, our job is to beat those expectations. Jonathan Goldman: Okay. That's helpful. Maybe switching to SG&A. You upsized the restructuring charges this quarter. I think you talked about maybe reinvesting some of that in strategic areas. What sort of areas are you planning to reinvest those savings in? And if we're thinking about kind of payback on restructuring, is this more of a top line payback or a cost payback at this point? Michael Anne Cybulski: So yes, I mean, I would expect that it will be a mix. So we've -- the bump up in the range is basically just associated with some additional opportunities we've identified for efficiency across the program, including with -- associated with our services shift. I think some margin protection measures in a few parts of the business that have seen lower volumes, but nothing that I would call out that's material. From a reinvestment standpoint, I mean, we've had a history of investing in innovation, and that's been critical to our success and will continue to be going forward. So that would be where some of the reinvestment would be as well as in areas of growth, we've talked about nuclear, which is a People business. So there, for example, in other areas -- other market focus areas, including Life Sciences. And as we work through the timing of some of this from a bottom line perspective, the piece that would flow through to operating -- to help with operating leverage would primarily be into fiscal '27 just based on the timing of the execution of the program. Douglas Wright: Yes. And I think, Jonathan, one of the things that I'm -- as I've gotten around to meet our division leaders and talk to some of our innovators, these new therapies that are evolving in Life Sciences and these new kind of energy form factors that we're seeing evolve in our Energy business are very exciting, and I think create -- it's a great alignment between the technology that we have in-house and the needs that these customers have to support their evolution of their product as they kind of bring, in some cases, game-changing new technologies to the marketplace. So I think it's a very prudent action for us to take our restructuring savings and redeploy investments in those growth areas. So when we talk about diversifying our pipeline and making early-stage investments in these new technologies, that's generally the destination for any incremental investment dollars that we get. And that's, I think, a pattern you'll see us repeat. Jonathan Goldman: Okay. That's fulsome color. And maybe just one housekeeping one. The sequential increase in the SG&A, how much of that was due to FX? Michael Anne Cybulski: It would be relatively in line from a proportionate standpoint to what we saw from the top line perspective. But we can follow up with you, Jonathan, on the specific values. Operator: Your next question comes from the line of Michael Glen from Raymond James. Michael Glen: Doug, maybe to start, we've heard a focus on margin expansion mentioned a few times. Are you able to speak to some of your prior roles, any of the margin initiatives you implemented in those roles and maybe highlight some of the success you realized in expanding margins in prior roles. Douglas Wright: Nice to meet you, Michael. Sure. I think I kind of categorize the margin improvement opportunities in 3 areas, all of which I've had extensive experience in my prior roles. So first is amplifying the deployment of our ABM tools to find productivity opportunities. This could be reducing cost, improving lead times, which helps us drive market share. The tool set that we have inside ATS is very strong. They're very familiar tools to my prior roles that I -- companies I've served. And I think there's just a need within the team to drive more focus in executing them, perhaps being prioritizing a little differently. So I'm pretty comfortable that we actually have the tools in mind, but we'll be working harder to more effectively deploy them where we can move the needle on margins. And it could be looking at 80/20 pricing. It could be looking at low-cost country supply chain. It could be on finding labor productivity through value stream mapping exercises at the shop floor level. All up and down the architecture of the company, we have opportunities to deploy ABM to drive more efficiency. And I'm confident that we'll be able to accelerate that. The second area is around focusing our R&D and commercial efforts on applications within our current end markets, but that require more advanced technology and application knowledge that we have inside ATS. And that then brings us the opportunity to enjoy improved gross margins. Some of the new applications that we talked about in our pipeline and emerging into our backlog around Life Sciences, nuclear, the examples that we talked about earlier, these are all areas where the physics challenges of creating something for our customers is quite a big challenge, and we bring technology to the table to help them solve those problems, and that gives us the opportunity to have a better yield and share in that value creation. And then the third area, which has been a focus of the company, but I think has further opportunities is in increasing our mix of aftermarket. I think being -- having a significant portion of our business being in the CapEx cycle, we recognize that from an earnings volatility standpoint, having a higher share of aftermarket can both improve our margin profile as well as smooth out the natural ebbs and flows that come with the CapEx side of the company, as one of the reasons that I supported the decision that the team made to move the services teams into the business units to provide more of an end-to-end model with our end users from -- all the way from conceptual engineering through lifetime service and support. I think that's very logical, and it will start to allow us to pursue organic strategies to expand our service potential. And even in our capital deployment discussions, one of the criteria that we talk about is the same things. We talk about, is there a potential to employ ABM to improve the target company's performance? Do we have the ability to use the technology to create something new for our customers? And does it improve our aftermarket mix. So both in the internal work that we're doing as well as in our capital deployment work, those are kind of the themes that I've seen work in other enterprises similar to ATS, and that's what the team and I are going to be working through. And we'll -- once we have a more definitive framework about what that's going to mean to the economic, we'll come and share that with you. Michael Glen: Okay. That's a great amount of detail. And then just my second question, kind of plays off the first one, but you did see quite a move higher in the run rate on your services bucket revenue in the quarter. And are you able to give some context as to where that move higher did come from? Michael Anne Cybulski: I can cover that one, Michael. So there's -- included in our service revenues, we have some refurbishment work that is ongoing. And so a good chunk of the increase in the quarter came from that work. And beyond that, though, the service -- the rest of the services deliverables are tight, streams of revenue continue to perform well, but the majority of the increase was from refurbishment work, which is being executed. Michael Glen: And would that -- we would expect that to continue in future quarters as well? Michael Anne Cybulski: So that specific refurbishment program is ongoing, although nearing completion, but we -- refurbishment is an important part of our services portfolio in addition to other areas like spares, on-site support, asset management, those types of offerings. Operator: And we have reached the end of our question-and-answer session. I will now turn the call back over to Mr. Wright for closing remarks. Douglas Wright: Thank you, operator, and thank you, everyone, for joining us today. I'm excited to be part of the team here at ATS, and we look forward to speaking with you further on our Q4 call in May. Operator: This concludes today's conference call. We thank you for your participation. You may now disconnect.
Philip Ludwig: Welcome, everyone, joining us today for the Melexis Fourth Quarter and Full Year 2025 Earnings Call. I'm Philip Ludwig, Investor Relations Director at Melexis, and I'm joined today by our CEO, Marc Biron; and CFO, Karen Van Griensven. Earlier today, we published our press release and presentation, which can be found on our website. We will start with some brief remarks on the business and financials before taking your questions, starting with Marc Biron. Marc, the floor is yours. Marc Biron: Thank you, Philip. Hello, everyone, and welcome to this earnings call. Let me start by sharing some perspective on the full year of 2025 and how we see 2026 as of today. Then we will discuss the last quarter of 2025. Looking back at 2025, at the beginning of the year, we had entered a phase of customer inventory correction later than our peers. We are now in a period with more geopolitical uncertainties and more short-term volatility in demand. The period of customer inventory correction was largely completed by the summer. As a result, our sales were stable or grew sequentially as the year has progressed. High in-quarter ordering has started in Q2, which we could serve from our strategic inventory. Still in 2025, sales in our largest region, APAC, has increased as a percentage of group sales. China has followed an alternating pattern of very strong sales in one quarter, lower the next quarter and strong again in the following quarter as it was in Q4 when we recorded our highest ever sales in China. Now looking ahead to 2026, we remain in the recovery phase of the automotive demand cycle. We expect that these sales will not be linear given all the uncertainties and the late ordering behavior of our customers. Following the very strong Q4, sales in China continued their alternating pattern in Q1, also influenced by Chinese New Year mid-February. We are also facing the expected volatility in our nonautomotive business such as digital health application. Finally, we have to factor in the impact of the annual pricing agreement that we have closed at the end of 2025. Those effects translate to a similar level of sales in the first half of '26 in comparison to '25. We expect growth in the second half of '26 with a similar dynamic as in '25. Now turning to the last quarter of '25. Sales of EUR 214.5 million means that we returned to a year-on-year growth of 9%. China posted its highest ever sales and the rest of Asia was also strong. Total APAC sales were up double digit year-on-year and sequentially, while Europe and the Americas were lower sequentially. On the innovation front, we leverage our technology leadership with strong design wins and an expanded pipeline of opportunities across China, Europe and South Korea. This trend is also valid in robotics with the pipe of opportunities up by a factor of 5 in Q4 versus the previous year. We have launched 19 new products targeting structural growth trends in automotive and robotics. In the last quarter, this included a game-changing inductive sensor for steer-by-wire application that simplifies design and reduces cost, paving the way for the next generation of electrified and autonomous vehicle. We have launched also a code-free driver for automotive ambient lighting, which streamlines the development cycle and reduce the cost of our customer. We also see the high potential in power electronics, and we are extremely proud to offer a world premier protective device called snubber. This unique solution protects and enhance power density of silicon carbide power module. All major power electronic manufacturers have shown interest in our product. A great example is Leapers Semiconductor, a Chinese manufacturer of advanced power module incorporating our snubber in their next generation of module. Our new protective device family will continue to expand to meet the evolving needs of power modules and emerging power applications. We have been growing faster than many peers in China over the past 5 years with our broad offering on high-performance and high-quality product and our strong local team to support customers. From my side, I came back from China 2 weeks ago. I'm really impressed how hybrid is gaining traction and how content reach -- are reaching mid-range car much more heavily than in Europe. To continue our trajectory in China, we are accelerating the implementation of our China strategy, including localization of our supply chain. A key step is to have local wafer supply, and we are fully on track to start shipping product this summer based on the 12-inch wafers from our local partner. We also established a dedicated robotics team in China to respond to the stronger interest with more than 60 projects currently underway. As part of our strategy to win in faster-growing markets, we are increasing our effort in India, where we enjoy strong double-digit growth. India presents great opportunities in automotive as well as in alternative mobility, playing to our strengths. We are finalizing the setup of a Melexis entity in India to show our commitment to serve customers locally and further develop in this attractive and growing market. I will now hand it over to our CFO, Karen Van Griensven, to provide more detail on our financial results and outlook. Karen Van Griensven: Thank you, Marc. So sales for the full year 2025 were EUR 839.6 million, a decrease of 10% compared to the previous year. The euro-U.S. dollar exchange rate evolution had a negative impact of 2% on sales compared to 2024. The gross result was EUR 324 million or 38.6% of sales, a decrease of 19% compared to the last year. R&D expenses were 13.8% of sales, Q&A (sic) [ G&A ] was at 6.5% of sales and selling was at 2.4% of sales. The operating result was EUR 134 million or 16% of sales, a decrease of 39% compared to EUR 219.9 million in '24. The net result was EUR 112.5 million or EUR 2.78 per share, a decrease of 34% compared to EUR 171.4 million or EUR 4.24 per share in 2024. Sales for the fourth quarter of 2024 were EUR 214.5 million, an increase of 9% compared to the same quarter of the previous year and stable compared to the previous quarter. The euro-U.S. dollar exchange rate evolution had a negative impact of 3% on sales compared to the same quarter of last year and no impact on sales compared to the previous quarter. The gross result was EUR 82.3 million or 38.4% of sales, an increase of 6% compared to the same quarter of last year and a decrease of 1% compared to the previous quarter. R&D expenses were 14.5% of sales. G&A was at 6.7% of sales and selling was at 2.5% of sales. The operating result was EUR 31.5 million or 14.7% of sales, an increase of 14% compared to the same quarter of last year and a decrease of 17% compared to the previous quarter. The net result was EUR 22.6 million or EUR 0.56 per share, an increase of 24% compared to EUR 18.3 million or EUR 0.45 per share in the fourth quarter of '24 and a decrease of 18% compared to the previous quarter. Now turning to the dividend. The Melexis Board of Directors approved on February 2 '26 to propose to the Annual Shareholders' Meeting to pay out over the result of '25, a final dividend of EUR 2.4 per share, which will be payable after approval of the Annual Shareholders' Meeting. This brings the total dividend to EUR 3.7 per share, including the interim dividend of EUR 1.3 per share, which was paid in October 2025. Now for our outlook. here, Melexis expects sales in the first quarter and first half of 2026 to be around the same levels as the previous year. Sales in the second half of 2026 are expected to grow compared to the first half of 2023. For the first half of 2026, Melexis expects a gross profit margin around 40% and an operating margin around 17%, all taking into account a euro-U.S. dollar exchange rate of EUR 1.17. And for the full year 2026, Melexis expects CapEx to be around EUR 40 million. Our outlook includes the first benefits of our cost actions taken in 2025, such as improvement in the cost of yield. We remain disciplined in executing our cost improvement road map, for example, a shift in some operations to be closer to customers in Asia, and this to keep moving towards our long-term margin objectives. This concludes our remarks. We can now take your questions. Philip Ludwig: Thank you, Marc and Karen. [Operator Instructions] Operator, can you now give instructions and open up for Q&A? Operator: [Operator Instructions] The first question is coming from Aleksander Peterc from Bernstein. Aleksander Peterc: I think the first one was pertaining to your guidance. So as in last year, this year, you also refrained from a full year guidance, could you give us a bit more color. So just help me understand if I got this right. So H1 flat. And then I think, Marc, you said in your introductory remarks that second half should be higher than the first half in a similar manner to what we've seen in '25. So is it then right to assume we're looking at a ballpark something about flattish for the full year? I'm not trying to extract the full year guidance for you. I'm just asking if the math is correct here. And then I have a quick follow-up. Marc Biron: Yes, I confirm your understanding. In my introduction speech, I have indeed mentioned that H2 will grow in a similar manner than H2 last year. Karen Van Griensven: But we can indeed -- yes, that volatility remains -- it's very low. So the -- if you look purely at Q1, we see that mostly Asia is staying behind. So Asia was very strong at the end of last year. We see it -- the order intake there is much lower than, for instance, for Europe. Europe is actually increasing. So it's all attributable to Asia and particularly also China. And we know that in China, there is a lot of volatility in order behavior and also very late ordering. So I want to put that also in that perspective. Aleksander Peterc: Very useful. And then secondly, on China versus Europe, we have a lot of debate going on about Chinese vendors, automotive brands gaining share in Western markets. What does this imply for your market share? Do you have your market share with local Chinese players that is similar to what you have in Europe? Or is there a discrepancy there? Marc Biron: Looking at the past 5 years, the CAGR of Melexis grew by 10% -- a bit more than 10% over the last 5 years. And in China, the CAGR grew 14%, which is higher than the majority of the peers in China. And I do believe we are gaining market share in China if we compare to the CAGR of Melexis with the competition. And there is nothing structural that would tell me that this will change in short term. And I would say, in the longer term, when we consider our design win, our pipe of opportunities, we see also that those design wins and the opportunity pipe is increasing faster in China or in Asia than in Europe. Operator: The next question is coming from Amelia Banks from Bank of America. Amelia Banks: Yes. My first question is just on gross margin. You sort of said last quarter that you saw around cumulative sort of 4 percentage points of temporary headwind stemming from yield issues and wafer inventory revaluation. I'm just wondering if you could maybe break down what you were seeing in Q4 and then also in terms of bridging sort of how you're seeing that guide to get to 40% in H1? Karen Van Griensven: Yes, we still had that same headwind in Q4 indeed because of inventory revaluation. We also still had high cost of yield. But this we -- this cost of yield, both effects -- well, particularly cost of yield is what will drive margin improvement in 2026. It will be a major contributor, and that is the reason why we expect around 40% gross margin in the first half of the year. Amelia Banks: Okay. And is that largely just reliant on sort of revenues picking up and demand picking up to get sort of through the sort of yield issues, the wafers that you're seeing in your inventory. Is that the main sort of driver of that? Karen Van Griensven: No, it's that we get more material out of one wafer. So it's not volume related. Amelia Banks: Okay. I just remember last quarter, you were saying about how you have sort of yield issues in one of your fabs, and that's led to sort of impacted wafers in your inventory that you're still having to work through. Is that still relevant? Karen Van Griensven: Most of that material has now been -- is now out of the inventory. So we now have in inventory wafers with higher yields, and that is helping us to improve the margin. Amelia Banks: Okay. Perfect. And then just my quick follow-up. Just on the sort of annual price resets. So just wondering if you could maybe guide on what sort of ASP change you've been seeing in '26 sort of versus 2025. Karen Van Griensven: I believe the average selling price in '26 will be close to the '25 average selling price. That is the expectation today. Operator: The next question is coming from Janardan Menon from Jefferies. Janardan Menon: I'm just looking for your second half guidance. I'm just wondering what is giving you the confidence that you will see the kind of increase in the second half like you saw last year, especially given your commentary on quite a lot of volatility in the China market. Are you expecting that market to stabilize over the next couple of quarters and therefore, give you some upside there? And just associated with that question is we just came off the Infineon call, and they said that perhaps because some of the customers, including in automotive and other areas is concerned about strong AI demand getting to -- giving rise to supply tightness even in areas outside of customers are willing to put more longer-term lead time orders now just to avoid any future capacity tightness. So is that something that you're seeing, which is also giving you some confidence on the second half of the year? Marc Biron: I think there is indeed multiple reasons for this statement on the second half of the year. First, we know that the inventory at our [indiscernible] in Asia, in particular in China is very low. And we know that they will reorder later in Q1 or in Q2 because the inventory is really low, especially in China and especially for the magnetic products, I would say. The second reason is we are -- in many big customers, we are changing the version of the products. And this change of version will happen in Q2, Q3. And it's why our customers are now busy to reduce their inventory of the previous version before they order the new version, let's say, the more modern version. This is clearly visible for drivers product, but also for some ASIC. Yes, in our price negotiation that has been finished in December, we have also received the forecast from our customers. And clearly, the forecasts are stronger in H2 versus H1. Those are the different reasons, let's say, that bring this comment. To follow up on your question about the, let's say, the supply problem, we have some sign, let's say, for example, of assembly house, where indeed those assembly house are moving, let's say, their capacity to different kind of package, more complex package in order to incorporate those complex AI chips. Yes, we have this view, let's say, from the assembly house, no really yet consequence on Melexis, no real consequence on any allocation, but there is indeed this trend, which is a bit more than the noise, I would say. Operator: The next question is coming from Craig McDowell from JPMorgan. Craig Mcdowell: The first one, I'll just go back to the gross margin. And just can you help us understand the step-up from Q4 into Q1? On the face of it, the sequential improvement, I think, around 150 basis points. It looks quite difficult given volumes, annual price inflation kicking in, currency likely worse. Just trying to understand what's going to get us to that sort of 150 basis point step-up in the face of those headwinds. I've got a follow-up as well. Karen Van Griensven: Yes. I can only repeat the biggest reason why that will happen is indeed that we have gone in inventory through most of the products with high cost of yield loss. So we will -- and as you remember, that was a high contribution of reduction in gross margin in '26, close to 2%. So -- but as we are now leaving that mostly behind, we will see improvement as of Q1 already. Price erosion that we also see in Q1, of course. We still expect a step-up because of this big improvement in cost of yield. Craig Mcdowell: And then just a follow-up. I realize it's early, but I appreciate your thoughts on the acquisition announced with MSO around sensor portfolio by Infineon. Just wondering your reaction of how that might change competitive dynamics in that segment of the market where obviously you're strong. Marc Biron: Yes. In our, let's say, product scope or application scope, yes, OSRAM is not a real competitor of Melexis, meaning that I think this acquisition will not change a lot for us. Operator: The next question is coming from Francois Bouvignies from UBS. Francois-Xavier Bouvignies: I have actually really one question. I mean when I look at your revenues, so you mentioned flat year-on-year in Q1 and Q2. Now when I look at your competitors like Allegro, for example, which I think is the closest, I mean, they are growing their auto revenues by more than 20% year-on-year in December quarter and March, by the look of it, is still 19%, 20% year-on-year. So they are really growing significantly. You mentioned China growing 14% in the last 5 years, but I would imagine that the growth in China was actually higher than 14%. I mean, given all the EV growth that you have seen, the car sales as well in there. So the content and the growth in China was clearly higher than that. So what I'm trying to understand is, is there anything structural here? I mean, a bit more because it feels a bit more than an inventory correction, especially when you compare the growth with some other peers. Even NXP is growing 11% in autos. TI is growing low teens. STM is growing mid-teens in March quarter. So you seem to be well below the others. So I'm just wondering why is that? Marc Biron: I think there is for sure, nothing structural. I repeat that I was in China last -- 2 weeks ago. Yes, my conclusion from the trip, which was the same when I was in China in November, I think that the Chinese customers, they like the Melexis product. They have a lot of trust on our quality. Yes, they like our support, technical support is very important in China. I confirm there is no structural -- there are no structural problem in China, also not in Europe. Yes, we are facing this volatility. The order in China was very high in Q4. In Q1, it is lower because of this Chinese New Year, also because the incentive scheme for EV in China have changed from '25 to '26. But from my perspective, we still have the same traction. And we -- when we refer to the design win or when we refer to all the pipe of opportunity, the discussion with customers, I don't feel any problem there. Karen Van Griensven: Yes. And I also want to add that Melexis went -- started the cycle much later than all the other players in the market. Usually, we started later, but we also come out later. In general... Francois-Xavier Bouvignies: I understand that. Yes. But versus Allegro, I mean, I would say why they would see differently than you. I mean they do similar things, not only the same. But what is your revenue in China? I mean, in Q1, was it -- how much down it is China, you would expect to be? Karen Van Griensven: China, it will be down quite a bit compared to -- well, based on the order intake we have now because January was still strong. February, March is still obviously still order intake. February looks quite weak, but that's probably a lot to do with China New Year. And March, yes, orders are still coming in. So it's also -- even in Q1, it is difficult to predict where exactly we will be landing because of, yes, the very late order intake, certainly also in China. But it's particularly low compared to Q4. But as I mentioned, we don't -- yes, there is no reason to believe why that wouldn't throughout the year pick up again. Q1 tends to be always a lower quarter -- well, not always, but usually a lower quarter in China anyway. Francois-Xavier Bouvignies: So on the year-on-year China, what do you expect your guidance? Karen Van Griensven: On a year-on-year, yes, it will be probably close to what we had a year ago. It might be slowly lower. But like we said, order intake is coming in quite late. Philip Ludwig: Francois, maybe just to come back to some of your comparisons, it's Philip here. Allegro, I think the 5-year CAGR is 2% to '24, okay? We can update for '25 as well, whereas ours is 14%. In China, we outgrow Allegro as well over a 5 years period. So I know we look ahead. Of course, we also look ahead. But I think if we look over time, as Karen mentioned, the quarters are not always in sync. I think the long-term growth track record of Melexis stacks up well versus many, if not the majority of our peers. Operator: The next question is coming from Robert Sanders from Deutsche Bank. Robert Sanders: Yes. Sorry, the line just went bad. I didn't hear the answer to the last question. Did you say the year-on-year decline in U.S. dollars or euros for Q1 China alone? Did you answer that? Karen Van Griensven: Well, like I said, order intake is very late. There could be a decline in the first quarter, although in January, we haven't seen it yet. And this is what -- that's the reality. February and March is still in orders. So very difficult to predict even in 1 quarter where we will land, particularly for China. Robert Sanders: Got it. My question was more around in the medium term. So you've seen a lot of the BEVs being canceled by Western OEMs, more than 30% of launches have been canceled. It looks like EV demand is just not flying without big fingers on the scale. And now that they're taking away subsidies in the U.S. and China, it just doesn't seem to be as strong. So you're going to see a lot of people moving back to plug-in hybrids and zonal architectures as a kind of bigger source of differentiation. So does that affect your TAM growth? Because if I remember rightly, you brought it down at the CMD, your long-term growth. Does it affect how you think about that? Or are you kind of agnostic still to that trend? Marc Biron: I share your view indeed that hybrid, let's say, seems to be the preferred option for many of the customers and many of the manufacturers. And I would say hybrid is great for Melexis because there is -- and an electric engine and a combustion engine. Then we -- let's say, we win 2x because we contribute to the electric engine and we contribute to the ICE. Then for us, it's the best of both worlds, the hybrid motorization. And what I said during the introduction speech, in China, I was really impressed how much those hybrids were taking over because initially, let's say, the hybrid had a battery with, let's say, 50 kilometer range, but now it's 100, 150 and 100 to 150 kilometers. In Shanghai, for example, it's more than enough to move in the city during 1 day. And it's the reason why this hybrid is gaining traction. Robert Sanders: And what you see at the Western OEMs, obviously, they're restarting their development. I mean, a lot of their combustion engine R&D was shut down. Now they're restarting those teams. Is that a good thing for you because they will get more involved in the engine management side? Or is it there's a short-term issue because of cancellations and then a long-term gain because of plug-in hybrid ramps? Marc Biron: Yes, discussing with our customer, the Tier 1, the Tier 1 have faced indeed in '25, a lot of or some cancellation of platform. I think it's also one of the reasons of the current situation. They all told me that '27 will be different. And in '27, they forecast a lot of new platform, which is one aspect. And to answer your question, for Melexis, what is important is that either the electric engine or the combustion engine come with a new platform because the new platform is usually much more electronic rich with much more comfort, much more safety features, then those new platforms are always a benefit for Melexis. But it could be combustion engine or electric engine, it doesn't make a lot of difference for us because we are -- we have the same kind of contribution in both type of motorization. I repeat my previous answer, but hybrid is the best of both worlds for us. Operator: The next question is coming from Guy Sips from KBC Securities. Guy Sips: My question is on the inventory level of EUR 300 million plus. We see it increasing quarter-over-quarter. How comfortable are you with this inventory level? And do you expect that we are now on the peak? Karen Van Griensven: Yes, it is our -- it's indeed a peak level. As we progress in '26, we will probably keep it around that level, maybe a bit lower. But we don't have the intention to further increase it. Marc Biron: And I think this inventory is a strategic asset for Melexis because we have a lot of in-quarter order, and we can respond positively to those in-quarter order because we have the inventory with the right product. And when the business will pick up anytime soon, we'll be ready to ship to our customers, thanks to these inventories, and we really see this as an asset. And I think it's much more expensive to lose business in the future than to keep this inventory as it is today. Guy Sips: And a follow-up question on your sales in Europe, which is just above EUR 50 million in the fourth quarter of '25. And I think you have to go back to COVID times to see this kind of level. What is actually -- what could be a point for your European sales? Is it -- yes, can you elaborate a little bit on that? Marc Biron: Yes, the center of gravity of the business is indeed for the time being, at least moving from Europe to China or to Asia. That being said, yes, Europe remains very important. Also U.S. remains important. But this move from Europe to China is indeed the trigger for us to focus our organization on China. We have -- at the end of '25, we have updated our organization in China in order to give to this organization in China more autonomy, more autonomy in the business aspect to give them the opportunity to answer very quickly to our customers because we do realize that in China, speed is really a essence, and we should avoid the communication flow between China and Europe, then the autonomy has been given to the China team to be on top of the business discussion. And I think this is a very important asset for the future to strengthen our China team because indeed, for the time being, and I repeat for the time being, the business is moving to China. But we also see that in the expectation of the OEM, the European OEM in '26, but even more on '27, they will launch more and more new car with new platform, EV, cheaper, and it's not impossible that a kind of rebalance will happen later this year or later next year. Karen Van Griensven: And I just want to repeat that Europe had a strong start. Q1 is higher than Q4. Marc Biron: Yes. Operator: The next question is coming from Marc Hesselink from ING. Marc Hesselink: Yes. First, I would like to come back a little bit on the volatility that you call out on the revenue because I think the fourth quarter was a bit below what you initially expected, then another step down in the first quarter and a quite significant step-up in the second quarter sequentially. Just trying to understand that a bit better. What changed there? Because I think earlier, we talked more about small sequential improvements quarter-over-quarter. And now you certainly see this volatility. I think you discussed it, but just to really square what is really happening causing this volatility? Karen Van Griensven: Yes. So like we mentioned, what we -- the drop is fully for Asia and then also particularly for China. And China from one quarter to the other also last year can really move up EUR 10 million in one -- easily move up close to even EUR 10 million from one quarter to the other. So we don't have really snubber reason than there is huge volatility in China in general and that it is obviously also impacted seasonally by China New Year. Marc Biron: Yes. And it has been also amplified, sorry. It has been amplified by the change of incentive scheme in China at the end of '25. Marc Hesselink: Okay. Okay. And then the second one is a clarification on what you said on the pricing because I think you said that the ASP will be very close to '26 level to the '25. But you do call it out as one of the reasons for maybe a bit slower revenue in the beginning of the year or less -- no growth in the first half of the year. So just wanted to understand if you -- like product for product, are the ASPs stable? I think that would be probably a bit better than what you initially guided, which was the normal decline of 3%, 4%, I guess. Karen Van Griensven: No, we need to make that -- we need to clarify that. Stable ASP doesn't mean that we don't have price erosion. The price erosion is mid-single-digit expectation for '26, but the product mix has a positive effect in '26. This can vary from 1 year to the other, the product mix effect. Operator: The next question is coming from Michael Roeg from Degroof Petercam. Michael Roeg: I have a question about the China business, which was very strong in Q4. Do you have a sort of a crude estimate how much of your products end up with the top 5 Chinese carmakers and how much ends up with all the other names? Marc Biron: On the top 5 carmaker, I cannot answer. What we know is that, let's say, half of the Chinese business is for Chinese OEM and the other half is for the European OEM. Michael Roeg: And within those Chinese OEMs, you do not really have a good view on how much ends up with sort of the big companies, the familiar names and how much ends up with that very long tail? Marc Biron: No. Michael Roeg: Okay. Do you see a risk that if there eventually will be a shakeout of all those smaller players that eventually their car volumes will move to the big players, the big domestic players, which have much better pricing power than those smaller players? Have you done scenario analysis for that? How much that could impact your business? Marc Biron: Yes, the consolidation will indeed happen. There are a lot of OEM in China then for sure, consolidation will happen. But we don't have an accurate answer to your question. I think indeed, innovation will also help at the end, it's all about new products that we bring on the market to compensate this price erosion. Yes, we have -- in the product that we have launched recently, we have products with much more ASP, much more margin. I don't see any reason why this consolidation will be negative because on the other hand, having a lot of small customers, it's also -- it requires a lot of effort to support all those customers, especially in China, we have a lot of application engineers working with all those small customers, then there is also a very negative effect to have so many small customers. And I could also add that it's the case in Europe. In Europe, we have a lot of big customer and a very limited number of small customers, then it will probably indeed move in this direction in China, but we are able to manage it in Europe, then we will manage it in the same way in China. Michael Roeg: Okay. Well, my impression was that the bigger OEMs in China have much more favorable purchasing conditions so that if the volumes were to move to them, that it could affect your overall ASP in China. But you will be -- you think there will be some compensation in being able to lower your OpEx. Marc Biron: I think it's the same in Europe. The big customers in Europe. Our big customers in Europe have also a better pricing than the small customer. And it's why also we like this long tail for the reason you mentioned. But yes, it will be the same in China, and we will manage the situation in the same way. I think it's -- the price metric is always high volume, lower price. Karen Van Griensven: But overall, we expect high price erosion in China than in the rest of the world. That is calculated in our model. Operator: We go on now to the last question, and it's from Nigel van Putten from Morgan Stanley. Nigel van Putten: I just wanted to talk about the growth or the guidance for the full year, which is flat, maybe not comparing it to others, which have indeed sort of implied some growth you guys aren't able to. So how do I sort of get from -- I think in the past, you would say on sort of 0 SAAR growth still penetration would add, what, high single digits. Let's say that's mid-single digits today. You said pricing in the mix is kind of flat. There's no real inventory digestion going on. So how do I get from, let's say, mid- to high single-digit volume growth to 0 on the euro side? Is that the dollar? Is that sort of headwinds from the nonautomotive business? Is there a mix? Could you just give us some more color on the pieces -- the building blocks how to get down from a volume number to revenue number in euro? That's my first question. Marc Biron: It's a mix, as you mentioned, we did not discuss in the Q&A about the nonautomotive business. I mentioned it in the introduction speech. But yes, one of our big nonautomotive customer has decided to alternate their supplier. And I think it's quite normal. We had the chance to be during 3 years in a row in the application. In '26, they have decided to make the alternate, which affects our revenue. Yes, again, it's not abnormal. We are -- we have good hope that we will come back in the next years. We have good technical features. But this is indeed in the midst of answer. This is one of the reasons that we did not mention in the past. Nigel van Putten: It's great to receive one of the reasons. Can you quantify the impact and also give us just a bridge from -- because it's -- yes, I mean, I've covered companies for quite a while. It's always been volume growth. It used to be teens and high single digit. I think it's now mid-single digit, but still this is a material step down. And I don't have any ways to calculate that, then it would be super helpful, very helpful for you to guys to give a little bit more disclosure and color on how to model the business into '26 and what are the moving parts? Marc Biron: And our customer and probably also OEM are navigating to cautious recovery in auto, and it's why this volatility in sales order is coming. I think it's difficult to give more color and really to give the building block for your answer because of this high volatility. Nigel van Putten: But the whole volatility in the near term, and then I'll move on after this one. But I do want to try again. It's for the full year. So it shouldn't be -- it's not exactly normalized, but it's not the month-to-month volatility that you point out. I fully comprehend that. But it's just compared to peers and also compared to your -- the financial model, the growth model that I'm used to, this is very different. I mean I could have understand it. It used to be the bullwhip inventory effects, that is a big impact, but that doesn't seem to be driving it. So I'm just -- I need to update my understanding about how I model your top line, I think, and it would just be helpful if we can get a little bit more color on that. Marc Biron: In the longer term, we confirm our high single-digit growth. What we have mentioned to the CMD is still fully valid. We have the design win, we have the opportunity pipe. We have in our development, the relevant product to reach this growth. And in long term, I think the model did not reach. In short term, we have this volatility that we mentioned. We have the price erosion that we have mentioned, mid-single digit, low to mid-single digit. This is the reason of the change. But I repeat in long term, we are fully confident that what we have said to the CMD is still valid. We need now to face the short-term headwind. Nigel van Putten: Okay. More math now on the gross margin. I think, Karen, you've talked about the potential of sort of 4 percentage points worth of idiosyncratic or self-help or specific items. I think 2 percentage points related to the yield improvement. I think that's probably what we're seeing in the first half, if I'm not mistaken. And then on top of that, there was potential further improvement or the dollar, I think some normalization would have helped. You've mentioned the restructuring impact of about 1 percentage point before. So I'm just trying to get to the full year gross margin. It seems like given there's no growth either, we probably should assume like 40% for the full year. Yes, can you maybe elaborate a little bit if that's the correct way of thinking? Or is there an element missing? Karen Van Griensven: That is correct. Indeed. We need more operating leverage to push it beyond that 40%. Nigel van Putten: Okay. And maybe then just a quick follow-up. You've guided first half gross margin, not first quarter. I think it's just how you usually talk to the market. But should we assume that improvement towards 40% in the first quarter? Or is it more towards the second? So we step up from I don't know, 39.5% and then... Karen Van Griensven: From Q1, we expect. Operator: This was the last question in the queue. There are no more questions at this time. So I hand the conference back to the speakers for any closing remarks. Marc Biron: Thank you, operator. To summarize, 2025 was a year of navigating through cautious and choppy demand while maintaining our cost discipline. In parallel, we have introduced many innovations for automotive applications, grew business opportunities, accelerated our China strategy and took action to improve margins. These efforts will start to deliver in '26, and we will continue to build on them to further strengthen our business and to move towards our long-term objective. Thank you for joining the call, and goodbye. Operator: Thank you for joining today's call. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Prudential's Quarterly Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Tina Madon. Please go ahead. Tina Madon: Thank you. Good morning, everyone, and thank you for joining us. Representing Prudential on today's call are Andy Sullivan, Chief Executive Officer; and Yanela Frias, Chief Financial Officer. We'll start with prepared remarks by Andy and Yanela, and then we'll address your questions. Before we begin, I want to remind you that today's discussion may include forward-looking statements. It is possible that our actual results may differ materially from those statements. In addition, remarks made on today's call and in our quarterly earnings press release, earnings presentation and quarterly financial supplement, which can be found on our website at investor.prudential.com. include references to non-GAAP measures. For a reconciliation of such measures to the most comparable GAAP measures, and a discussion of the factors that could cause actual results to differ materially from those in these forward-looking statements. Please see the slide titled Forward-looking Statements and non-GAAP measures in the appendices to our earnings presentation and quarterly financial supplement. With that, I'll now turn the call over to Andy. Andrew Sullivan: Good morning, everyone, and welcome to our earnings call. Before turning to our full year results, let me take a moment to address the employee misconduct in our Japan business described in our press release yesterday afternoon. I want to emphasize that doing right by our customers is a core value of our company, and a cornerstone of what we stand for, and we are taking this issue extremely seriously. For nearly 40 years, Prudential has been a symbol of exceptional customer care in Japan and we are committed to restoring the standing that has long set us apart in that market. In January of this year, Prudential of Japan announced findings of an internal investigation in the instances of misconduct by certain of its employees. This misconduct very clearly does not meet our standards or what our customers expect of us. In consultation with the regulators in Japan, we have made the decision to voluntarily halt new sales at POJ for a 90-day period. To fully address the root causes of the misconduct, we are implementing a series of actions across the business which includes strengthening oversight of sales practices, governance and risk management. We will also be restructuring employee compensation and enhancing education compliance training and recruiting standards for all POJ employees. While we have set a 90-day suspension of sales, we will not resume distribution through the Life Planner channel, until we are comfortable that our internal compliance and oversight environment supports doing so. This could result in an extension of the 90-day period. These actions are essential to restoring trust in this important market. While there are financial implications to the sales suspension, we believe that this is the prudent path forward in addressing the misconduct and positioning our business in Japan to rebuild customer trust. We are working with local regulators and other key stakeholders to address these issues thoroughly. Implement the necessary remediation measures and uphold the highest standards of governance and customer care going forward. We expect an impact on 2026 pretax adjusted operating income of $300 million to $350 million, equivalent to approximately 5% of 2025 PFI earnings. Yanela will cover more details on the financial implications in her remarks. We're also establishing a customer reimbursement program that will be developed and administered by an independent oversight committee. We intend to make this right for these customers, and we remain deeply committed to responding in a manner that places customer trust as our highest priority. That is who we are, and we are confident we will come out of this as a stronger company. Now moving to our financial results. Last year, I set out 3 priorities that are essential to delivering stronger performance, more consistent results and sustained long-term value for our shareholders. These were evolving and delivering on our strategy, improving on our execution and fostering a high-performance culture. Our issues in Japan only reinforce that these are the right priorities and we must continue on the path my team has set. While we have more work to do across the company, I am encouraged by the tangible progress we have made. Over the last year, we sharpened the focus on our businesses in large and growing addressable markets where we have differentiated capabilities and believe we can earn superior returns. We executed with greater accountability and discipline as we streamline the organization and strengthened our core franchises. This progress makes clear that our brand, customer value proposition and scale our unique competitive advantages that position us for durable long-term growth as we reposition our company globally. In 2025, we delivered solid progress in results. For the full year, our pretax adjusted operating income was $6.6 billion or $14.43 per share, and our adjusted operating return on equity was approximately 15%, up nearly 200 basis points from the prior year. We also delivered nearly $3 billion to shareholders in the year through dividends and buybacks. Our full year performance displayed improved and more disciplined execution and demonstrated the momentum we believe we are building across our businesses as we continue to meet growing demand for our products fulfilled through our diversified distribution platforms, resulting in higher sales growth. Let me now recap the highlights across each of our businesses. In PGIM, we delivered strong investment performance last year with solid traction across our core capabilities, including public fixed income, securitized products and asset-backed finance as well as indirect lending. We also saw continued progress in newer vehicles, such as ETFs and are beginning to see tangible benefits from our new centralized distribution model. 2025 was a transformative year for PGIM. We moved quickly to integrate our asset management capabilities into one unified platform, enabling deeper client cross-sell engagement and reducing costs over time. Additionally, bringing together our public and private fixed income capabilities into a single $1 trillion global credit platform positions us as one of the largest and most differentiated credit managers in the industry. Clients value the ability to access the full spectrum of credit from liquid public markets to bespoke private solutions through one integrated platform with consistent underwriting, deeper origination and the scale to source opportunities others cannot. And as I've said many times before, I am a deep believer in being proactive in the marketplace which means we're continuing to be vigilant for the best opportunities to enhance our capabilities, scale our business and better serve our customers around the world. Alongside this momentum, it is important to acknowledge areas where we see pressure. As I noted on our last call, our fundamental active equity platform, Jennison, is not immune to broader industry trends and is experiencing systemic outflows with the continued shift from active to passive management. These outflows have weighed on PGIM's organic growth and earnings momentum. In addition, this quarter's net flows were impacted by a single low fee fixed income client withdrawal at the end of 2025, which was unrelated to performance. We continue to manage through these headwinds and expect offsetting growth over time as PGIM's diversified offerings across public fixed income, private credit and real estate continue to grow. The bottom line is we generated over $30 billion of total net inflows last year from these 3 asset classes. Additionally, our momentum is building in key growth areas, such as asset-backed finance, direct lending and ETFs. This success will be enhanced going forward as we start to realize the benefits of our newly integrated distribution model. The results of our U.S. businesses reflect the actions taken over the last year to sharpen our focus and leverage our competitive strengths. In retirement strategies, we delivered $40 billion of sales across our institutional and individual channels for the year. Reflecting solid demand, diversified distribution and our ongoing leadership in meeting the evolving needs of retirement customers. We continue to strengthen our solutions, improve the mix of products we sell and refine the capital and asset strategies that underpin our business. In Institutional Retirement, we remain well positioned to lead the large pension and longevity risk transfer markets in both the United States and Europe. In 2025, we delivered nearly $26 billion of sales, including our second longevity risk transfer transaction in the Netherlands. In Individual Retirement, we generated sales of $14 billion in 2025, capping an eighth consecutive quarter of more than $3 billion in sales, reflecting strength in RILA as well as growth in fixed annuities supported by strategic reinsurance partners, including Prismic. Our diverse product set and distribution strength are driving strong top line growth, a clear proof point of our focus on consistent execution. Group Insurance generated full year sales of over $600 million, up 11% year-over-year, underscoring the benefits of further product diversification and increasing our market presence in our premier segment. These are key areas of strategic focus as we continue to grow and expand the profitability of this business. In Individual Life, full year sales of $955 million increased 5% over the prior year as we continue to pivot our focus towards less capital-intensive accumulation products, including FlexGuard Life. We continue to deliver this new business growth at solid returns on capital. Now turning to our international businesses. In Japan, we are highly focused on the issue in POJ. That said, we are capturing growing customer demand for retirement and savings products, which now account for a majority of our sales in the country. Over the past 3 years, we have launched 10 new products in this category which have steadily gained traction and accounted for nearly 1/4 of 2025 sales. Now turning to emerging markets. This business reported record full year sales of $386 million on a constant currency basis, up 6% from the prior year. This growth is primarily driven by broader distribution in Brazil. As we turn to 2026, we will continue to evaluate our global footprint to ensure that we are prioritizing markets and geographies that are large and growing and where we believe we are competitively positioned to win and can deliver industry-leading returns on capital. The decision to exit our PGIM Taiwan business last quarter and our insurance business in Kenya last month are prime examples of us executing on this priority and driving stronger discipline across the company. As part of our focus on talent and high-performance culture, we continue to refine our management structure to make the organization more results-driven and accountable and to improve the speed of decision-making. The changes we made last year bring me closer to our businesses and their leaders as well as our customers as we execute our growth strategy in 2026. To conclude, we believe we've established the foundation for the broader reimagining of Prudential, one that positions us to lead and win in the markets we choose to compete in. While we are still early in this transformation the momentum we're building gives us great confidence in the road ahead. With that, I'll hand the call over to Yanela. Yanela del Frias: Thank you, Andy, and good morning, everyone. I will begin with covering our fourth quarter financial results before turning to the financial implications related to POJ. Our fourth quarter results reflected continued progress against the 3 priorities we outlined in early 2025, capping a solid year of financial performance. We reported fourth quarter after-tax adjusted operating income of approximately $1.2 billion or $3.30 per common share. These results include an after-tax onetime charge of $107 million or $0.30 per commenter, primarily related to severance, which I will discuss in more detail later on. Excluding the impact of this charge, after-tax adjusted operating income per share was $3.60, reflecting an increase of 22% over the prior year quarter. Let's now turn to Slide 4, which provides a high-level summary of our quarterly operating results by business. PGIM reported pretax adjusted operating income of $249 million. down slightly from the prior year quarter. Higher asset management fees driven by market appreciation were more than offset by higher expenses related to ongoing business investments including the continued expansion of our asset-backed finance platform and our technology and data strategy. Other related revenues were also weaker due to lower seed and co-investment income. Our U.S. businesses delivered pretax adjusted operating income of approximately $1.1 billion, a 22% increase compared to the prior year quarter. This result was driven by higher spread income and retirement strategies, coupled with more favorable underwriting results in Individual Life and Group Insurance and lower expenses in Individual Life due to onetime transaction costs that occurred in the prior year quarter. Partially offsetting these positives was lower fee income resulting from the ongoing runoff of our legacy variable annuity block. Our International Businesses generated pretax adjusted operating income of $757 million, modestly higher than the prior year quarter as higher spread income and more favorable underwriting results were partially offset by higher expenses primarily related to timing as we noted last quarter. Now turning to the key highlights on Slide 5. PGIM's assets under management of approximately $1.5 trillion increased 7% from the prior year quarter, driven primarily by market appreciation and strong investment performance. PGIM experienced net outflows of approximately $10 billion in the quarter across third-party and affiliated channels, reflecting the industry trend away from active equities as well as a single low fee fixed income withdrawal. Additionally, our VA runoff and the inherently lumpy nature of PRT new business impacted our affiliated net flows. As we noted last quarter, we expect PGIM to deliver over 200 basis points of margin expansion in 2026, accelerating the path towards our 25% to 30% margin target. Now turning to the key highlights on Slide 6. Our U.S. businesses again produced strong quarterly results, reinforcing the benefit of our diversified sources of earnings from fees, spread and underwriting income. Institutional Retirement reported sales of approximately $4 billion, including $1 billion of pension risk transfers across 4 middle market deals. While fourth quarter activity was relatively muted, our strong brand and our proven track record in executing large complex transactions position us well to lead in the sizable pension and longevity risk transfer opportunity across our core markets in the U.S., U.K. and the Netherlands. Individual Retirement delivered more than $3 billion in sales, driven by fixed and registered index-linked annuities. Our broad product portfolio provides flexibility to deploy capital where returns are most compelling. Additionally, we continue to innovate to address evolving customer and adviser needs. However, the runoff in our legacy variable annuity block remains a headwind. For 2026, we continue to expect $3 billion to $4 billion of quarterly account value runoff which translates into approximately $10 million to $15 million of pretax adjusted operating income runoff per quarter, compounding to $100 million to $150 million annually prior to market impacts on account values. Now turning to Group Insurance. Sales totaled $56 million in the quarter, reflecting continued momentum in our Premier segment in both Group Life and Disability as we execute our product and market segment diversification strategy. The benefit ratio of 82.5% in the quarter came in below our target range reflecting favorable life underwriting results and less favorable disability experience driven by higher new claims, coupled with lower resolution. In Individual Life, quarterly sales totaled $269 million, down from the prior year record quarter as we continue to pivot towards more capital-efficient products. On a full year basis, we increased sales traction and accumulation-focused variable life products, fueled by our strong brand and distribution footprint. Now turning to the key highlights on Slide 7. Sales in our International businesses of $525 million were up 4% on a constant currency basis compared to the prior year quarter, driven by growing demand for retirement and savings products in Japan and record sales in Brazil. While surrender activity in Japan moderated in 2025, it remains a headwind that will partially offset new business growth. We continue to closely assess macro indicators, including the value of the yen, which has been extremely volatile. We estimate that the impact to 2026 earnings from the excess surrenders that we experienced in 2025 will be roughly $50 million. Now turning to the key highlights on Slide 8. Our capital position and strong regulatory capital ratios support our AA financial strength and our ability to grow our market-leading businesses. Our cash and liquid assets were $3.8 billion, which is above our minimum liquidity target of $3 billion, and we have substantial off-balance sheet resources. The Board has authorized share repurchases of up to $1 billion in 2026 and increased the common stock dividend for the 18th consecutive year. Consistent with our approach across the enterprise, we remain well capitalized and manage our Japanese entities to levels aligned with our AA objective. ESR results remain well above our 150% operating target outlined last quarter, even with a sharp increase in long-term Japanese interest rates last month. Now let me take a moment to outline a few key financial highlights heading into 2026. First, as I mentioned earlier, we recorded a pretax charge of $135 million in our corporate and other operations related to our ongoing efforts to improve our organizational efficiency. These changes are expected to deliver approximately $150 million in pretax run rate benefits in 2027. I want to emphasize that the benefits from these actions were already embedded in our intermediate financial targets, including the target for our operating expense ratio. Second, on Slide 17, we have provided additional earnings considerations specific to 2026. And third, as Andy noted in his remarks, we have made the decision to voluntarily hold new sales in POJ for a 90-day period. I want to share our preliminary view of the financial implications for both the new sales suspension and the remedial actions we are taking. We currently believe that the impact to our 2026 pretax adjusted operating earnings will be in the range of $300 million to $350 million. There are 3 components to this estimate. The first is the impact of the 90-day new sales suspension, which we expect will be in the range of $150 million to $180 million. This range reflects the anticipated costs associated with sustaining the business and compensating the distribution force during the suspension period. The impact of suspending new sales activity, and anticipated higher surrenders. The second component is $70 million of estimated onetime costs, of which roughly 70% relates to customer reimbursement. The third is roughly $80 million in estimated lower earnings attributable to the gradual ramp-up of new sales through the remainder of the year once we resume sales. The lower sales and higher surrenders we expect this year will also have an impact on 2027 results. However, based on what we know today and assuming the 90-day new sales suspension, we expect the overall impact will be considerably lower in 2027. Now let me tell you what this means for our intermediate EPS growth target of 5% to 8%. Recall that our intermediate targets are for the 2024 through 2027 period. In 2025, we met our internal expectations for earnings growth, and we are on track with the actions and expense efficiencies that underpin this intermediate term guidance. That said, the financial impact associated with the POJ issue could bring us to the low end of this range by the end of 2027. In addition, to the extent that the magnitude and/or duration of the POJ issue is different than we currently anticipate we may not hit the low end of the EPS range by the end of 2027. We are providing these estimates to help frame the range of potential financial implications. But as Andy noted, we will not resume new sales until we are satisfied that our internal compliance and oversight environment supports doing so. We are closely monitoring each element of the financial waterfall that I just laid out, and we'll update you as we gain better visibility into the trajectory of POJ sales, surrenders and earnings. Despite these headwinds, it is important to remember that we are a large, diversified company with multiple sources of earnings and cash flows, and we are confident in the path ahead as we reposition Prudential to deliver strong value to shareholders. And with that, we're happy to take your questions. Operator: [Operator Instructions] Our first question today is coming from Suneet Kamath from Jefferies. Suneet Kamath: I wanted to start with Japan and the 90-day sales suspension. How did you arrive at the 90-day period? And was this done in conjunction with the FSA and other regulators in Japan? Andrew Sullivan: As you can imagine, voluntarily suspending sales in such an important channel for us was a very carefully considered decision and something that we didn't take lightly. We have the leadership in POJ right now focused on 4 major initial actions. Customer reimbursement, which Yanela spoke to. Life Planner training, which obviously will be a major focus during the shutdown period, enhancing our sales supervision and then Life -- redesigning our Life Planner compensation. As we looked at those 4 actions and the time frame it would take to make major progress, we thought that 90 days was a reasonable time frame to make meaningful progress. But I would reiterate what we -- what I said in my opening comments and what Yanela said in hers as well that we're not going to resume distribution in the channel until we're comfortable that the internal compliance and oversight environment really supports us reopening it. As far as your question on the FSA, I would reiterate that this was a voluntary decision. But as you would expect, we work closely with our regulators in every market, every single week. So we consulted with the JFSA before announcing this decision. Suneet Kamath: Okay. Got it. And then have you done a similar review for Gibraltar Life in terms of sales practice issues? And does the suspension have any impact on Gibraltar or any of the channels that you're talking about in Japan? Andrew Sullivan: Yes. So Suneet, yes, the answer is yes. We are conducting a similar review of Gibraltar. This is underway and in process and will conclude a few months from now. You should expect this, right, from a leadership team perspective here at PRU, we take the responsibility for making sure that every one of our operations in every market and every channel is conducted in the right way and that we keep our customers upfront as job #1. As far as any effects that we've seen so far, the only effect we've seen in Gibraltar is some modest pressure is the way I would frame it on recruiting of life consultants. But we intend to be very assertive in restoring the trust and confidence that people have of us half of us in Japan, and we intend to come out of this stronger. Operator: Next question is coming from Tom Gallagher from Evercore ISI. Thomas Gallagher: Andy, a few follow-ups on Japan. I guess, will you also suspend hiring new Life Planners while you shut down sales? Or are you going to continue normal course with hiring plans? And is the plan here to pay out special bonuses that vest over a number of years from a retention standpoint? Just want to see what you're doing to make -- to kind of ensure that you keep your -- one of your best assets, which is the Life Planner system intact while you go through this? Andrew Sullivan: Yes, Tom. So let me start by just saying thank you for your last comment because we really do believe that this is a special company and an incredible asset. To take your first question, we are not stopping recruiting of new Life Planners in the channel that will continue. But we are taking decisive steps that is every bit intended to preserve the distribution force. Two things I would specifically mention. The first is investing in our Life Planners in their training and development. So we always do that, but over the next 90 days, it will be at a much enhanced level. And the second is providing financial support to them to retain them over the longer term. I'm not going to get into the exact specifics of what that looks like. We do have confidence that these actions are going to help us retain this special asset. But I would mention one other thing, Tom, that I think is really, really critical. Taking these actions also ensures that we have a company that our employees could be incredibly proud of and that they want to work for. And in particular, in Japan, that is one of the most important elements that goes into retention. So that combination of actions will help us retain the life planners, but we know will also help us with the broader employee population. Thomas Gallagher: And for my follow-up, I had read a news report that indicated the FSA was going to conduct an on-site investigation for POJ as well and it said it was going to start in February. Just want to see if you can confirm whether that's begun? Is that going to be going on side by side while PRU does its own due diligence? Andrew Sullivan: So Tom, what I would say is we don't comment on specific ongoing interactions with the regulators. Obviously, this is something that, as I said earlier, we were in -- discussed with the FSA before we voluntarily see sales. We have regular ongoing interactions with the FSA every single week. But as far as the specifics of ongoing regulatory actions and the actions they take, I'm not going to comment. Operator: Your next question today is coming from Wes Carmichael from Wells Fargo. Wesley Carmichael: My first one, also on Japan, but maybe a little bit of a different topic. In terms of surrender activity that you're seeing, I mean, I think there's a couple of components. Maybe one is FX with the yen at [ 156, 157 ] versus your guidance for strengthening to [ 135 ]. And I just wanted to ask on loan rates being much higher, are you seeing an impact to surrenders there? And then just maybe on POJ with any kind of fallout from this conduct. Is there any way you can dimensionalize those 3 impacts, please? Yanela del Frias: Yes, it's Yanela. So let me start on the surrenders. So in terms of the impact of the yen, the depreciation of the yen since 2022, has driven an elevated level of U.S. dollar product surrenders. We've been talking about this for several quarters. The surrender rates declined to mid-single digits through third quarter 2025, in line with the stabilization that we saw at that time. But we did see it pick up this quarter, fourth quarter '25 with the renewed yen weakening. So we have seen the volatility as well. So to give you a sense, fourth quarter '25 surrender rate increased to 6.3% from 5.6%, so a slight uptick. But we're still below the rates that we've seen earlier in the cycle. And the fact here is that the customers with heightened sensitivity to FX rates have already surrendered. And frankly, this kind of leaves us with a block that is less sensitive to FX movement. So that's how I would position that. You did hear in my opening remarks that for the full year 2026, we expect the impact of 2025 surrenders to be in the range of $50 million. With regards to rates, frankly, we view the impact of rates in terms of earnings and sales as a positive. It allows us to offer more attractive yen-denominated products and invest in new money rates that are higher. Andrew Sullivan: Wes, I would just add because I think you also mentioned, given our misconduct issues. We expect sales and surrenders obviously, to be impacted in the short term that's included in the financial estimates that you heard from Yanela at the opening of the call. We're going to continue to do the right things and put our customers first. What I would say is, remember, we have an exceptional all-weather product portfolio that really protects our customers and helps them in both protection and retirement so while we expect near-term impacts, we gave very thought -- a lot of thought and care to the numbers that we provided to you. Obviously, it's early days, but we'll continue to monitor this, but we know that over the longer period of time, will be stronger. Wesley Carmichael: That's very helpful. And just my follow-up on ESR, I know that's coming up for publication shortly. But just wondering if you could touch on what -- how that moved in the quarter, higher yen rates. I think Yanela, maybe a couple of quarters ago, you gave a little bit of sensitivity on ESR. But did that pressure the ratio in the quarter, perhaps there's some positive equity market performance. But if there's anything you can help us with, that would be great. Yanela del Frias: Yes. No, absolutely. So first of all, I would start with ESR remained well above our 150% operating target that we outlined last quarter. As you know, that's the target that we believe is consistent with AA standards. And this is the case even after the sharp increase in rates that we saw in January so we still remain above that target. And frankly, as we discussed last quarter, we are managing ESR to a level at normal times that is well in excess of what we believe to be the AA standard and that provides ample cushion following market stresses, and that cushion has absorbed some of the increase in rates that we saw. And so the sensitivity I shared a few quarters ago still holds if Japanese rates rise 50 basis points and equity markets decreased by 10%. We do not expect ESR to be binding in terms of Japanese cash flows. I do recognize that there's been a sharp rise in rates. So I would also add that from where we are today, around above 3.5%, right above 3.5% for the 30-year rates, even if rates were to increase by approximately another 100 basis points, 90 to 100 basis points, we would still be within the operating target range. Operator: Our next question today is coming from Bob Huang from Morgan Stanley. Jian Huang: I just have one question circling back on the 90-days sales suspension. If we look at prior other companies miss behaviors when they get caught, it generally felt like the penalty is a lot longer than 90-days. Do you feel that the 90-days is enough to kind of regain the public trust, so to speak, is 90-days enough for you to normalize back to a normal sales environment, I guess, is what I'm trying to get at? Or do you think the public will naturally give you a much longer penalty time frame in this particular situation? Andrew Sullivan: Yes. So Bob, thank you for the question. So first, let me start just by reiterating what I've said earlier, which we sized the 90 days based on the set of actions that we felt was necessary to begin that restoration of customer trust. So there's 4 items I went through earlier. And we believe that 90 days is that right time frame. That said, as you referenced, we won't talk about any specific situation. every situation is unique. There certainly have been a variety over the last decade or so of other companies that have had cessation periods, some of those not being voluntary. But what you should understand as part of this is this is a collective set of actions that we're taking. The cessation of sales is one of them in order to begin this beginning of the restoration of trust and confidence and we're obviously going to work very closely with the regulators. But this is much more, as you heard me emphasize, this is about when we feel as a leadership team and as a company, that we can resume sales and feel fully confident in the customers being placed first. We think 90 days is the right estimate for that, but we will share information if that changes in the future. Operator: Your next question today is coming from Joel Hurwitz from Dowling & Partners. Joel Hurwitz: Just given the macro with the yen and JGB movements and the lost earnings from the POJ sales issues and remediation, what's the impact to your cash flow from international? And does that drive any impact to your overall capital deployment outlook? Yanela del Frias: Yes. Joel, so we do not expect a significant impact to cash flows out of our Japan businesses. I would remind you, we generate these cash flows from multiple sources and legal entities. This includes the 3 legal entities in Japan, POJ, Gibraltar, PGFL. It also includes Prudential Insurance, our U.S. statutory entity, which has historically reinsured a good amount of Japan's U.S. dollar business; and thirdly, Gibraltar Re, our Bermuda entity, which also reinsurance business from Japan. So the fact is that we're not overly reliant on any single vehicle to deliver cash flows to PFI either in Japan or across our businesses. Of course, we continue to monitor the Japan situation carefully, but we do not expect an impact to our capital deployment plans or our shareholder distribution. Joel Hurwitz: Got you. That's helpful. And then just a follow up on Wes' question on surrenders in Japan. Any impact from the higher JGB yields on the yen business that you write? Yanela del Frias: Yes. No, there's some modest impact but the reality is that 90% of our earnings come from U.S. dollar products. So it's really the yen impact that will drive our earnings sensitivities. Andrew Sullivan: And Joel, the only thing I would add to that, and we've talked about this in previous quarters. I think there's 2 things to keep top of mind. One is that we have this all-weather portfolio, where we now have a much better blend of yen and U.S. dollar-denominated products. And we, over the last couple of years due to the surrender headwinds had actually enhanced our staffing across our distribution teams and across our service teams because even if there is pressure from some of these, I'll call them, economic type things. At the end of the day, the customers still have needs and generally move from one type of product to another and we make sure that we have the right staffing and the right engagement with the customer to catch those flows. Operator: Your next question today is coming from John Barnidge from Piper Sandler. John Barnidge: I wanted to -- my question, the first one is on kind of the exiting the businesses in Taiwan and Kenya over the recent several quarters, are you able to dimension the size of the businesses that are kind of like up for a review in international markets where you don't view yourself as a leader? Andrew Sullivan: So John, maybe what I would do there is just talk more about strategically how we think about the strategy. As you've heard me say before, we are evaluating our global footprint to prioritize markets that are large and growing that are -- where we're well positioned to win, given our differentiated capabilities and are spots that we think we can deliver industry-leading returns. The other part of this is we are focusing our capital and our investment dollars because we think that is very, very important in order to be a winner in our chosen spots. For emerging markets, our main focus is twofold. It's Brazil, and Brazil is running very, very well. We had another record sales quarter there. And second is our Habitat business where we have a very successful pension business. As far as when you say dimensionalizing, obviously, our -- I'll use the words by far, predominant or Japan and in our international operations and as far as the percentage of earnings. So that's the lion's share. John Barnidge: My follow-up question on Japan. If we get an extension of that 90-day suspension, does the impact from less sales volume actually compound and grow similar to how the runoff of the VA block compounds? Yanela del Frias: So John, so let me maybe walk through the components of the $150 million to $180 million, which is the impact -- the direct impact from the suspension. So we have a couple of components there. The direct impact of the lost sales is roughly 20% of that number. We also anticipate higher surrenders. That's also about roughly 20% of that number. And now with regards to surrenders, it is uncertain whether they'll continue at the level that we're expecting and anticipating but that's the number that we built into the 3-month number. And then the remainder is related to anticipated costs associated with providing financial support to our distribution force. That is not something that carries over. That is a discretionary decision that we've made during that 3-month period. And so therefore, that is really tied to the period where we have suspended sales. Operator: Next question today is coming from Mike Ward from UBS. Michael Ward: I was just wondering if you guys had any update on in Japan on policyholder behavior in January or year-to-date thus far? And I think the comments sort of largely pertain to '25 activity. Andrew Sullivan: Mike. So yes, it pertains to '25, but I would tell you, there's nothing new or different as far as '26 other than, I would break this into a couple -- into the 2 components, right? There's the impacts on policyholder behavior that are more driven by, I called it earlier, the economic effects, the FX rate, the interest rates. And obviously, those -- all of a sudden wouldn't change '25 to '26, they're directionally similar. The thing that is different is the effects of the misconduct and the perception issues and public reaction. The press release was done in January. The press conference was held and was quite prevalent in the media. So 2 different effects. But maybe one thing I would tag on is the change in the interest rate environment in Japan is, I think, something to really take note of and is for historical terms, quite dramatic. But the things we're observing, and this is over a longer period of time, not just the beginning of '26. One is demand for yen products is gradually increasing because of that. We think that's a good thing, right? The fact that there is an interest rate there, we could deliver products of greater value. And the other thing is we've talked about in the past is the government is incentivizing their citizens to take more investment risk and seek higher yield. And we are seeing customers that have a higher risk profile or a higher risk tolerance and are seeking improved returns. So as those shifts are occurring we feel very good about our all-weather product portfolio, the strength of our distribution to capture the changing nature of this marketplace. Yanela del Frias: And Mike, what I would say is that the assumption or the estimate that we have embedded in the $100 million to $180 million of impact of the sales suspension for surrenders, is informed by what we have seen since the press release and since the results of the internal investigation have been published publicly. Michael Ward: Okay. That's helpful. And then one of the things I'm wondering -- I don't think we've really touched on this, but just the inflows and outflows. I'm curious if you can quantify at all like the level of outflows that you can absorb thinking about capital and liquidity and the fact that you're basically cutting off new business. I'm just trying to get some comfort in this dynamic. Yanela del Frias: Yes. So Mike, I'll start -- I mean from a capital liquidity perspective, as I mentioned in the answer to the other question, we do not expect this to impact our cash flows out of our Japan operations. Part of it is because we have multiple sources of cash flows, as I mentioned. From a liquidity perspective, we -- the majority of the Japan portfolio is in JGBs. We do not expect an impact of this on liquidity. And again, we've sized the impact of surrenders during this 3-year period -- 3-month period, and it is roughly 20% of the $150 million to $180 million or $30 million. Andrew Sullivan: Yes. So Mike, all I would add is, obviously, we've been in the market for 40 years. These are very, very large of in-force blocks of business. So the impact of new sales, I don't want to underplay it because, obviously, this was a difficult decision and very important, and we frame the financial impacts for you compared to the in-force this cessation is -- compared to the in force, it's not large. So that's why Yanela just went through the numbers, and we're comfortable with those numbers. Operator: Next question today is coming from Jimmy Bhullar from JPMorgan. Jamminder Bhullar: So first, Yanela just on your comments on cash flow not being impacted based on this. I realize in the short term, there's not exact correlation between income in the businesses and cash flow. But eventually, there should be an impact to the extent that earnings in the business are depressed either because of fines or just other actions or just spending to remediate what's been going on. Wouldn't there be an eventual impact on cash flows beyond this year or next year if the earnings, in fact, are depressed in the business? Yanela del Frias: Yes. No. So what I've given you is what we expect for 2026, and that is correlated to the $300 million to $350 million impact we expect this year. As I said, if you assume the 90-day sales suspension, the impact to '27 would be less lower than that. If the impact continued, we would see an impact on continue to expand on cash flows but what we're giving you is based on what we know today. Jamminder Bhullar: And then just, Andy, on -- the business has fairly high persistency. So obviously, sales don't -- or the lack of sales doesn't really affect earnings in the short term that much. To mean the bigger impact of the lack of sales would be just your ability to retain agents because if people are not able to earn income for much more beyond 3 months than the sort of distribution channel begins to melt away. But I don't know if you view that as a credible risk and sort of what are your view -- what are the sort of things that you could do to ensure that you can retain the agents if, in fact, the suspension period is running longer. Andrew Sullivan: Yes. Jimmy. So yes, first of all, that is of paramount importance because this is -- we consider this to be an incredibly valuable franchise and one of the best operations in Japan. I'll just go back to my earlier comments. We are taking decisive steps to make sure that we preserve the Life Planners, but also the other employees in POJ. And the 2 predominant actions is investing in our Life Planners, training and development. And second is providing them ongoing financial support so that we do retain them over the longer term. But I would also reiterate what I said, people work here at Prudential because they're proud of the company. We're a purpose-oriented company and us taking assertive action and my words leading from the front on this issue. We'll make sure that people are proud to work here and that's as important to retain people as the compensation and the training. Operator: Our next question today is coming from Jack Matten from BMO Capital Markets. Francis Matten: Just one follow-up on Japan. Regarding Japan FSA, it sounds like you're in contact with them regarding the actions that you're taking voluntarily. But just wondering if there's a possibility that they could impose either a fine or some other financial or operational impact beyond those voluntary actions? Or are you comfortable that they're satisfied with the proactive steps that you're taking? Andrew Sullivan: So Jack, I'll go back to what I said, which is we won't comment or speculate on what the regulators actions are or may be. But we are working in collaboration with them on a weekly basis. They were aware of our voluntary decision to cease selling and the most important thing that we could do to make sure that we come out of this as expeditiously as possible and as strong as possible is stay focused on the set of actions that I've already shared. Francis Matten: Got it. Okay. And then can you just follow up on free cash flow generation more broadly. I know you have the target of 65% of net income over time. From a payout standpoint, you're on track to do, I think, around $3 billion again in '26, including dividends and buybacks. That $3 billion would apply a pretty high conversion rate relative to where your net income has been running in recent years. Just want to make sure you feel that the level of return sustainable given that net income trend and the potential impacts in Japan that you've talked about? Yanela del Frias: Yes, Jack. So we have not changed our capital deployment priorities. So we are continuing to focus on balancing the preservation of financial strength and flexibility, investing in our businesses and shareholder distributions. The fact is that cash flows and dividends from our operating entities are not linear and throughout the years and across the year so that's why the 65% is an overtime measure. And the 65% correlates to the distributions that we have put out there, the $3 billion. So we are confident in our cash flow generation, again, recognizing that the timing of cash flows can be volatile in that linear, but also that is based on our capital allocation decisions as well. So we actively manage capital deployment decisions through out the year. This is a dynamic process for us. And again, I would just say, I would also highlight that we have strong cash balances at the holding company and strong financial ratios at our operating entities. Operator: Our next question today is coming from Yaron Kinar from Mizuho. Yaron Kinar: Just going back to Japan for a second. The $350 million expected impact to operating income, does that include reimbursements to customers on the civil side? I'm not talking about the regulatory potential fines and whatnot? Yanela del Frias: Hi Yaron, yes. So the $300 million to $350 million, if you think about that, the second component I mentioned, the $70 million onetime cost does include and it's about 70% of the total customer reimbursement. Yaron Kinar: Got it. Okay. And then moving away from Japan, I'm sure you'd like to. On the -- sorry, RILA sales slowed down in 2025, fixed annuity sales picked up. Can you talk a little bit about spreads and expected returns in each? Andrew Sullivan: Yes. So let me take that and let me just more broadly address what's going on in the space. So obviously, we've talked about the RILA market becoming more competitive, and that remains to be true. We've gone from 5 competitors to '25. And we always look for ways to differentiate ourselves that beyond price. We have a great all-weather product portfolio. We have very strong service and our brand matters. So while our RILA sales were down somewhat, our fixed annuity sales were up. In essence, we've done a lot of work to innovate and broaden our product portfolio that enables us to lean into the customer demand across a whole range of market environments. As far as the pricing environment, we're always going to be disciplined and ensure that we have profitable sales. And we're not focused on just driving a sales number. So it's more -- it's about returns and profitability. But this is an area given the longevity needs, the income needs of the U.S. society that is a sizable market that's going to grow for a very long time. and we're really well positioned to take advantage of that secular tailwind. So we don't get overly exercised quarter-to-quarter or specific product to specific product. It's more about long term, we know we're going to be a winner. Yaron Kinar: And specifically on the returns there, can you compare the returns in the RILA book versus the FA book as they are today? Andrew Sullivan: Yes, Yaron. I'm not going to provide product-specific spreads or returns. Operator: Our next question is coming from Tracy Benguigui from Wolfe Research. Tracy Benguigui: Staying with Japan, since the value of new business takes a while to materialize, how should we think about the longer-term impact to earnings from pausing new business? Should we look at that $80 million third component of that $300 million to $350 million for '26 and carry that over to '27 and beyond? Yanela del Frias: Tracy, no. I wouldn't -- no, we wouldn't do that. So the way to think about it is of the $150 million to $180 million component of stopping sales, 20% of that is due to not selling, right? So that's about $30 million. Then the $80 million is really what we think about when we ramp up because we don't assume that we immediately go back up to full sales. And frankly, so we're ramping up throughout the year, getting up to about 90% sales levels through 2027. So the $300 million to $350 million includes no sales for 90 days and then a slow ramp-up throughout the year that gets to 90% by the end of 2026. So in total, what this results in is that POJ sales will be 50% lower in 2026 from normal levels. Tracy Benguigui: Okay. I just to give you a breather on Japan. I like seeing your private credit disclosure. I'm just curious, in your definition of traditional, are you including private letter ratings and on that? If you could just give a breakout between the large 3 versus the smaller agencies? Yanela del Frias: Yes. So we primarily rely on the 3 large agencies. And what I would say in terms of sort of the smaller ones and Egan-Jones specifically, we virtually have no exposure to Egan-Jones Tracy Benguigui: Okay. And just if I could throw another quick one in. I saw an announcement that PGIM is expanding $1 billion into private credit secondaries. Will the general account be part of that ? Yanela del Frias: Yes. I mean, look, the general account is -- we're always looking at asset diversification, how that matches up with our liabilities. We are very comfortable with private credit as a long-term asset supporting our liabilities. The reality is we've been investing in underwriting private credit for a long time. We see value in private credit for the general account, and we see opportunities in terms of where we can pick up additional investment yield portfolio diversification and get better downside protection at the end of the day. So we continue to see this as a good asset class. 85% of our private credit exposure is investment grade. These are largely private placements with strong covenants and downside protections. And historically, we've consistently performed better in these private credit investments than equally rated public during economic downturn. So this is a good asset class for us. Andrew Sullivan: Yes. And Tracy, maybe just let me add in from the PGIM business perspective. We're really excited about the secondary space in general across asset classes. I think you probably recall, we bought Montana Capital Partners, a private equity secondary business back in 2021. That's now fully assimilated into PGIM. And we believe that we could combine our world-class credit prowess with this deep secondary's expertise. And we're already seeing -- so we just talked about the general account. We're already seeing strong third-party client interest in this capability, and we see this as a really good growth extender PGIM. Operator: Our next question is coming from Alex Scott from Barclays. Taylor Scott: Thanks for squeezing here in the end. First, I do have one on Japan. I just wanted to see if you could opine at all about what this does just at a more high level to the trajectory of revenue. And I'm just sensitive to it because I think you guys been talking about maybe some of the Life Planners beginning to sell more financial products and we'll be interested in does this set that back and by how much? Or is it more permanent? Because I think we may have had something for that is an offset in our revenue growth. And I just want to make sure that I get that consistent with what you're expecting? Andrew Sullivan: Alex, it's Andy. I'll take that. So I guess the first thing I would say is, this is really early days in navigating the situation. But I would always turn to long-term trends and secular tailwinds. And in reality, what we're seeing in Japan is, it's one of the wealthiest markets in the world where we have incredible distribution despite this near-term challenge. If 10,000 captive agents, we have incredible bank access, great independent agent access. We are looking to rotate more towards retirement and savings and investment. If anything, we are seeing very clear evidence that the consumers in Japan want to seek higher yield and want to seek investment type products. So while I would expect that we're going to see pressure on the protection side, I think we have everything we need to rotate as the market rotates. And while it's early days to talk about specifically this issue, there's a longer-term secular tailwind that we would expect to be able to grow over the longer term. Taylor Scott: Got it. Okay. That's helpful. And then maybe my last one on PGIM flows. They generally been doing pretty well over the last year but a little bit of a setback. I think there's some lumpiness to it this quarter. Is there any element of that that's sort of some of the yen-based investors that have been investing in USD and maybe higher rates in Japan is causing some lumpiness in terms of accounts being pulled back to just invest in yen? I mean, is that something you're seeing there? Or is there not that kind of dynamic, and we should see this kind of revert back to positive flows? Andrew Sullivan: Yes, Alex, let me start directly and then talk more broadly about flows. So directly, I do not believe that, that is in any way kind of the factor that you're seeing show up in our flows that may be more of a minor factor or more specific to certain individuals, but it's not really the story when it comes to our flows. And as you know, when we talk about flows, we talk about total flows. What we're seeing on the third-party side is consistent with things we've talked about in the past and just be very upfront, we're not pleased with our flows this quarter. In retail, we're seeing this very heavy headwind from active to passive management. Jennison is a great platform. and customers expect public equity as part of their portfolio. So it certainly is an important part of our system, but that is quite a headwind to overcome on the retail side. On the third-party institutional, we have some of the largest clients in the world. And that can inherently make things lumpy on a quarter-to-quarter basis. And what we saw, as I said in my upfront was a fairly sizable low fee redemption that was one of these lumpy quarter-to-quarter. We've seen that go the other direction in the past as well to our benefit. So I don't think the yen is a driver here. It's more of those other factors I spoke to. Operator: Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further closing comments. Andrew Sullivan: So thank you again for joining us this morning. As we outlined, we are moving fast. We're moving with discipline to address the issues in POJ. Our commitment to the highest standards of customer care is absolute. At the same time, we remain focused on executing on our 3 priorities and driving momentum across our businesses as we lay the foundation for a stronger, more durable growth pattern. We're moving with speed to deliver the value that our customers and our shareholders expect and deserve from Prudential. I just want to close, as I always do, by recognizing our employees around the world for the dedication and commitment that they show every single day. Thank you for everything that you're doing for our customers and for each other. And with that, we'll conclude our call. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Please stand by. Welcome to McKesson Corporation's Third Quarter Fiscal 2026 Earnings Conference Call. Please be advised that today's conference is being recorded. At this time, I would like to turn the call over to Jeni Dominguez, VP of Relations. Please go ahead. Jeni Dominguez: Thank you, operator. Good afternoon, and welcome, everyone, to McKesson Corporation's Third Quarter Fiscal 2026 Earnings Call. Today, I'm joined by Brian Tyler, our Chief Executive Officer, and Britt Vitalone, our Chief Financial Officer. Brian will speak first, followed by Britt, and then we'll move to a question and answer session. Today's discussion will include forward-looking statements such as forecasts about McKesson Corporation's operations and future results. Please refer to the cautionary statements in today's earnings release and presentation slides available on our website at investors.mckesson.com and to the Risk Factors section of our most recent annual and periodic SEC filings for additional information concerning risk factors that could cause our actual results to materially differ from those in our forward-looking statements. Information about non-GAAP financial measures that we will discuss during this webcast, including a reconciliation of those measures to GAAP results, can be found in today's earnings release and presentation slides. The presentation slides also include a summary of our results for the quarter and guidance assumptions. With that, let me turn it over to Brian. Brian Tyler: Thank you, Jeni. Good afternoon, everyone. Appreciate you joining McKesson Corporation's fiscal third quarter earnings call. Today's results once again demonstrate the strength and durability of our business. Revenue and adjusted EPS grew double digits driven by continued momentum across oncology, biopharma services, and North American distribution. The consistency of this performance gives us the confidence to raise full-year EPS guidance to a range of $38.80 to $39.20, which reflects 17 to 19% year-over-year growth. I want to thank team McKesson for their unwavering commitment to excellence and innovation, driving tangible impacts every day for our stakeholders and keeping patients at the center of everything that we do. Today, my remarks will focus on the continued progress of our company priorities and the momentum we are driving across the organization and, of course, recognizing the dedication and engagement across team McKesson. Then, as is customary, I'll hand it over to Britt for a more detailed review of the financials. So let me start where I usually do with our people and our culture. We aspire to be the best place to work in health care, and supporting our employees' growth and success remains a top priority. Our employee resource groups play a critical role in strengthening connections and reinforcing our culture of care and belonging. These employee-led networks empower colleagues to come together to advance the business and to build an environment where everyone can thrive. This year, we're pleased to see membership of more than 30%. Participation in these groups results in increased employee engagement, improved retention, and better business outcomes. Now let me move on to our two strategic growth pillars: oncology and multispecialty and biopharma services. Within our oncology and multispecialty business, we continue to support a growing network of providers through a portfolio of services including distribution, practice management, commercial services, and clinical research. Today, the US Oncology Network has approximately 3,400 providers, and Prism Vision brings together over 200 providers in retina and ophthalmology. During the quarter, we continued to make progress in the integration of Florida Cancer Specialists and Prism Vision, contributing meaningfully to the strong performance of the segment. Oncology continues to be a compelling growth area, and we're leveraging our scale, leadership, and connectivity in the community space to stay ahead of the market's evolving needs. Recently, we released our advancing community oncology report highlighting the central role of community practice in cancer care and the anticipated growth in precision medicine and innovative therapies. These insights underscore the strength of our platform and the opportunity to leverage our solutions to deepen provider and biopharma partnerships, to expand access to next-generation treatments, and to address barriers to care in the community setting. The report highlights our role in helping community providers navigate a dynamic policy environment. We have and will continue to be actively engaged with lawmakers, patient coalitions, and provider organizations to advocate for changes that will expand patient access and support the growth of community practices. We firmly believe in the unique value of community-based care and the importance of advancing high-quality local cancer care in particular. In November, we hosted our inaugural McKesson Accelerate conference, an annual event focused on the future of community oncology. With more than 1,500 industry leaders in attendance, the event brought together the people, the insights, and the innovations that will strengthen care delivery and advance patient outcomes. It reinforced the powerful momentum across our oncology platform and the critical role McKesson Corporation plays in shaping the future of cancer care together with our many partners. Moving on to our 50 new programs across 43 unique brands to our platform, highlighting the strong demand for our access and affordability solutions. With the pace of drug innovation accelerating, we're energized by the tremendous opportunity to bring novel therapies to patients and to enable real-world impact. To achieve this goal, we continue to invest thoughtfully across the business, modernizing and expanding the services we provide to our biopharma partners and building next-generation patient access and affordability solutions. As an example, we're investing in capabilities to simplify the electronic patient enrollment process, reducing time from days or weeks to sometimes just minutes, while reducing administrative errors and improving accuracy. Today, we're digitizing enrollment for more than 1,600 specialty medications, creating an opportunity to apply our experience in improving access to retail medications and helping stakeholders navigate through the complex enrollment process for specialty medications. Our evolving suite of solutions will accelerate the patient authorization workflow, speed up the process for patients to access medication, introduce transparency with real-time prescription benefit check, and improve affordability with automated searches for financial assistance programs. We're also focused on opportunities that improve our own workflow efficiency. By applying technology automation and enhancing training to streamline our operations and elevate the customer experience, we are improving our efficiency. As an example of this, in our annual verification season, each full-time employee is successfully supporting 120 more patients than we achieved last year. This is a meaningful increase in our productivity. Let's move on to our pharmaceutical distribution business in North America, which I would remind you includes our combined footprint in the US and Canada. We continue to see strong broad-based momentum, supported by stable utilization trends, strength in specialty, and focus on operational excellence. Our growth is underpinned by the strength of our long-standing strategic partnerships with manufacturers. Together, we're navigating an evolving market, shaping the future of health care, and advocating for solutions that will improve the access and affordability of care. In January, the Inflation Reduction Act's plan Medicare Part D price changes went into effect. We work closely with our manufacturer partners to ensure a smooth transition. As a trusted distribution partner, we bring unmatched scale, deep supply chain expertise, and broad channel reach to deliver exceptional quality every day. We're positioning the business for long-term growth by investing in capabilities that meet the evolving needs of our customers and the market. An example of this would be our multiyear plan to expand the refrigerated capacity across our network. We're halfway through this five-year effort, and once completed, we will have increased refrigeration capacity at many of our forward distribution centers by more than 50%. This expansion strengthens our ability to support temperature-sensitive products and further strengthens our commitment to meeting customer requirements with operational excellence. Within our North American pharmaceutical business, our teams continue to leverage AI and automation to drive efficiencies. In Canada, we're modernizing our contact center digital operations to create a more advanced and simplified customer care experience. It includes capabilities like agent assist and enhanced live chat. Our early pilots are demonstrating strong results, close to 100% service accuracy and reliability while reducing turnaround time. In the US, we launched an AI chat tool in November to specifically handle customer inquiries related to the Drug Supply Chain Security Act. By enabling natural language answers to complex DSCSA data questions, we prevented 75% of inquiries from being escalated and materially improved first contact resolution. These are strong examples of how we're using technology to simplify the supply chain at scale while improving customer experience. And lastly, I'd like to note in this segment, I'm proud to share with everyone that recently our HealthSmart Pharmacy franchise was honored as a recipient of the 2026 American Pharmacists Association HAB Dunning Award. With this award, we're joining a prestigious list of chain pharmacies and other industry supporters who are dedicated to advancing the practice of pharmacy. Let me give you a brief update on our portfolio. We continue to progress in our separation of the medical-surgical business. On January 1, we reached a major milestone in the separation journey with transition service agreements now in place across the enterprise. This is an important step as we prepare the medical-surgical business to be an independent operation. We continue to focus on the next steps, which include establishing an independent organization and capital structure. We continue to track towards the timeline of an IPO by the second half of calendar 2027, subject, of course, to market conditions and customary regulatory approvals. In January, we announced the completion of the divestiture of our Norwegian business, marking the final step in our full exit from the European region. Over the past four years, our teams executed this multi-stage initiative with dedication and focus, ensuring a smooth process and a successful outcome. With the invaluable experience we've gained, we're confident in our ability to focus on our current portfolio actions, optimizing our assets, portfolios, and accelerating growth for the enterprise. So let me conclude my remarks. McKesson Corporation delivered another strong quarter of results. Our strategy is working, it continues to propel us forward as we advance our mission, as we grow the business, and as we drive meaningful value for our shareholders. Looking ahead, I continue to be confident in our ability to extend the momentum and execute against our strategic priorities. Our broad portfolio and our diversified solutions position us to continue to drive sustained long-term growth. With that, Britt, I'll turn it over to you. Britt Vitalone: Thank you, Brian, and good afternoon. Today, we reported another strong quarter of execution, advancing our strategic priorities with clear measurable performance. We reported record quarterly revenue and adjusted operating profits and saw year-over-year double-digit adjusted operating profit growth in our oncology and multispecialty and biopharma services platforms and continued strength across North American pharmaceutical distribution. These results demonstrate the resilience of our portfolio, disciplined and consistent strategy, deep customer relationships, and scale and breadth of McKesson Corporation's portfolio. Before turning to our adjusted results, I want to begin with two brief updates starting with the divestiture of our Norway operations. On January 30, we completed the divestiture of our retail and distribution businesses in Norway included in our other segment. This transaction marks the final step in our planned exit of Europe. In the third quarter, held-for-sale accounting for Norway contributed $0.05 to adjusted earnings per diluted share. For fiscal 2026, we now anticipate the Norwegian businesses to contribute approximately $1 billion of revenue and approximately $70 million of adjusted operating profit, which is inclusive of approximately $0.10 adjusted earnings per share accretion due to held-for-sale accounting. The completion of this transaction reflects disciplined execution, strategic clarity, and commitment to sustained long-term value creation for our shareholders. Additionally, during the third quarter, we recorded a GAAP-only pretax credit of $160 million or $118 million after tax within the North American pharmaceutical segment related to the bankruptcy of Rite Aid. The remainder of my comments today will refer to our adjusted results. I'll begin with our third quarter fiscal 2026 performance and then address our full-year outlook. Consolidated revenues increased 11% to $106.2 billion, reflecting broad-based growth across the business. Higher prescription volumes from retail national account customers within our North American pharmaceutical segment, continued momentum in our oncology and multispecialty segment, including expanded distribution of oncology and multispecialty products, and contributions from recent acquisitions contributed meaningfully. Gross profit was $3.7 billion, an increase of 10% led by provider growth and continued strength in specialty distribution within the oncology and multispecialty segment. Operating expenses increased 7% to $2.1 billion, reflecting higher expenses in our high-performing growth platforms within the oncology and multispecialty and prescription technology solutions segments, including current year acquisitions. We delivered strong operational execution and enhanced efficiency, driving a 138 basis point improvement in operating expenses as a percentage of gross profit as compared to the prior year. At the same time, we're making targeted investments to modernize our operations through automation and AI-driven capabilities, which we anticipate will accelerate growth while creating enterprise-wide efficiencies. Operating profit was $1.7 billion, an increase of 13% year-over-year. This growth reflects increased demand for access solutions in our prescription technology solutions segment as well as strong growth in specialty distribution volumes in both the oncology and multispecialty and North American pharmaceutical segments. Interest expense was $59 million, a decrease of 5% year-over-year driven by effective cash and portfolio management. The effective tax rate for the quarter was 23%, compared to 23.9% in the prior year. Third quarter diluted weighted average shares outstanding were 123.7 million, a decrease of 2% reflecting ongoing share repurchase activity. Third quarter earnings per diluted share increased 16% to $9.34 driven by strong operational performance, including contributions from acquisitions within the oncology and multispecialty segment. Turning now to third quarter segment results can be found on Slides eight through 12 and starting with North American Pharmaceutical. Revenues were $88.3 billion, an increase of 9% driven by higher prescription volume, including higher volumes across retail national account customers and continued specialty product distribution strength. GLP-1 distribution revenues were $14 billion in the quarter, up $3 billion or 26% when compared to the prior year. GLP-1 sequential revenue growth was 7%. Segment operating profit increased 6% to $872 million, benefiting from growth in the distribution of specialty products, including to health systems. As a reminder, prior year results included a $19 million benefit from held-for-sale accounting related to the sale of our Canada-based Rexall and Well.ca businesses. The prior year held-for-sale accounting benefit had an approximate 3% impact on year-over-year segment growth. Turning to the Oncology and Multispecialty segment. We delivered another strong quarter demonstrating the strength of our differentiated platform and the value we deliver to our providers. Revenues increased 37% to $13 billion driven by strong provider growth, expanded specialty distribution, and contributions from acquisitions completed this fiscal year. The acquisitions of Prism and Core Ventures contributed 13% to third quarter's second segment revenue growth. Operating profit increased 57% to $366 million led by growth in provider solutions and specialty distribution, including contributions from acquisitions. Excluding the impact from acquisitions, organic operating profit increased 15% highlighting the segment's strong underlying performance. In the prescription technology solutions segment, we delivered another strong quarter of performance. With revenues increasing 9% to $1.5 billion supported by higher prescription volumes across our third-party logistics and technology services businesses. Operating profit rose 18% to $277 million driven by continued demand for our access solutions, including prior authorization services. Our connectivity and workflow integration remain key differentiators for patients, providers, and biopharma partners. Turning to medical-surgical solutions. Revenues were $3 billion, an increase of 1% compared to the prior year, driven by higher specialty pharmaceutical volumes. Operating profit decreased 10% to $265 million reflecting lower volumes across physician office settings and lower incidence of seasonal illness. Wrapping up our review with corporate. Corporate expenses were $156 million, which included increased technology infrastructure investments. Corporate expenses also included pretax gains of $11 million or $0.07 per share from equity investments within McKesson Ventures portfolio as compared to gains of $6 million or $0.04 per share in the prior year quarter. Turning to third quarter cash and capital deployment, which can be found in Slide 13. We ended the quarter with $3 billion in cash and cash equivalents. Third quarter free cash flow was $1.1 billion, which included $175 million in capital expenditures. For the trailing twelve months, McKesson Corporation delivered free cash flow of $9.6 billion, demonstrating strong operational performance and working capital management. During the quarter, we also returned $781 million of cash to shareholders, which included $680 million in share repurchases and $101 million in dividend payments. Our balance sheet remains a significant source of strength, underpinned by strong cash generation and disciplined capital allocation. This robust financial position gives us the flexibility to invest in growth initiatives while continuing to return cash to shareholders. We move now to our fiscal 2026 outlook. We continue to see sustained momentum across our core businesses, as demonstrated by our fiscal third quarter results and improved full-year outlook. We're raising and narrowing our fiscal 2026 earnings per diluted share guidance range to $38.80 to $39.20, representing 17 to 19% growth over the prior year. We anticipate revenue growth of 12 to 16% and operating profit growth of 13% to 17%, reflecting our strong third quarter performance and the confidence that we have in the trajectory of the business. The consistency of our strategy, operational execution, and disciplined portfolio management led to outstanding long-term results. Over the past five years, we've delivered a compound annual growth rate in operating profit and adjusted earnings per share of 11% and 18%, respectively. Turning to the segment outlook for fiscal 2026. In the North American pharmaceutical segment, we continue to deliver a differentiated and dependable value proposition, providing best-in-class solutions to our customers and their patients. We anticipate revenue to increase 10 to 14% and operating profit to increase eight to 12%. The increased operating profit outlook reflects strong third quarter performance, stable utilization trends, strong specialty distribution growth, and our continued focus on operational excellence and efficiency. In the core distribution business, we anticipate continued growth of GLP-1 medication. However, we anticipate this growth may vary from quarter to quarter. And as a reminder, prior year results include a $0.15 impact from the divestiture of our Canada-based Rexall and Well.ca businesses at the end of 2025. In the oncology and multispecialty segment, we anticipate revenue growth of 29 to 33% and operating profit growth of 51% to 55%. The guidance includes the acquisitions of Prism Vision and Core Ventures completed in 2026. We're pleased with the performance of these acquisitions, and we anticipate that they'll contribute approximately 30 to 34% to the fiscal 2026 segment's operating profit growth. Our full-year outlook reflects the impact of these acquisitions and strong organic specialty distribution volume growth. We remain well-positioned to support innovation and growth across the oncology and multispecialty markets through our diversified portfolio of assets spanning the care continuum. In the prescription technology solutions segment, we anticipate revenue to increase by nine to 13% and operating profit to increase 14% to 18%. We remain confident in the outlook for this segment, driven by organic volume growth across our access and affordability solutions. Our improved full-year outlook reflects the strength of our annual verification program, and we've observed meaningful year-over-year volume increases through January. Brian Tyler: Our full-year outlook also anticipates Britt Vitalone: technology infrastructure and capability investment. We anticipate fiscal fourth quarter technology investments to be an approximate $0.05 incremental cost as compared to the prior year. As I previously discussed, revenue and operating profit trends in this segment are not linear, and results can vary from quarter to quarter due to a range of factors, which includes utilization trends, the timing and trajectory of new product drug launches, the evolution of a product's program support requirements as it matures, which could result in the shift to other services or a program termination, product delays and supply chain dynamics, payer utilization and formulary requirements, the annual verification programs that occur in our fiscal fourth quarter, and the size and timing of investments to support and expand our product portfolio. Moving now to the 2% to 6% growth. We're closely tracking the development of the current illness season. We've observed soft illness season demand in our fiscal third quarter. In December, illness severity levels peaked based on CDC data. Variability remains a key factor. Timing, severity, and the duration of each illness season can drive variation and meaningfully affect results on both a quarterly and annual basis. We continue to execute the separation of the medical-surgical segment with discipline and focus. With the transition service agreements in place, we're making significant progress to establish the medical-surgical segment as an independent company. Intesa has a strong track record of advancing our mission and unlocking shareholder value in complex and strategic transactions. In recent years, we've demonstrated this multiple times, including the exits of Change Healthcare, Europe, and our Canada-based retail operations. These portfolio actions have streamlined the company, sharpened strategy, and created significant shareholder value, including more than doubling returns on invested capital. Looking ahead, we remain confident in our ability to execute on the planned separation, accelerate growth across our differentiated platforms in oncology, multispecialty, and biopharma services, and maximize shareholder value. We anticipate corporate expenses to be in the range of $620 to $650 million, which includes the year-to-date impact of $15 million of pretax gains from equity investments within the McKesson Ventures portfolio. Turning now to items below the line. We're narrowing the guidance range for interest expense to $215 to $235 million. We anticipate income attributable to noncontrolling interest to be in the range of $230 to $250 million, driven by the continued success of ClarusOne's generic sourcing operations. And we anticipate the full-year effective tax rate of approximately 19%. Wrapping up our outlook with cash flow and capital deployment. For fiscal 2026, we anticipate free cash flow of approximately $4.4 billion to $4.8 billion. Our outlook includes plans to repurchase approximately $2 billion of shares with weighted average diluted shares outstanding of approximately 124 million. We remain committed to a disciplined capital allocation framework that balances investment in high-return growth opportunities, return of capital to shareholders, and the preservation of a strong balance sheet supported by an investment-grade credit rating. Our focus on accelerating growth across the portfolio of businesses aligned with our strategy continues to deliver superior shareholder value creation. This consistent focus and execution has increased return on invested capital by more than 1,900 basis points since fiscal 2020, and now exceeding 30%. Our financial strength and flexibility remain a competitive advantage, enabling us to invest for future growth while returning meaningful value to our shareholders. In summary, McKesson Corporation delivered strong third quarter results, driven by performance across our core businesses and accelerated growth in our strategic growth platforms: oncology, multispecialty, and biopharma services. The updated outlook reflects our confidence to build on this momentum, delivering optimized value creation for our shareholders. Our continued focus on executing against our strategies, combined with disciplined portfolio management and thoughtful capital deployment, provides the foundation for a durable financial profile and positions us for sustained future growth. With that, let's move to the Q&A session. Operator: Thank you. If you would like to signal with questions, please press 1 on your touch-tone telephone. If you are joining us today using a speakerphone, please make sure the mute function is turned off to allow your signal to reach our equipment. Again, that is 1 if you'd like to ask questions. Britt Vitalone: And our first question will come from Allen Lutz with Bank of America. Good afternoon and thanks for taking the questions. A two-part question Brian Tyler: question, first for Brian. You talked about technology and automation, allowing some of your employees to support more patients in the annual verification season. Can you talk about the specific investments you're making there? And then as a follow-up to Britt, how should we think about the longer-term opportunity to improve margins in that segment? It seems like through this annual verification season, you're seeing really strong margin pull-through there. Just curious what those margins can look like longer term. Britt Vitalone: Thanks. Brian Tyler: Thanks, Allen. Yeah. We were very pleased to say the investments we've been making in technology and that we've call it AI or large language models or generative AI or just other general tech tools. To improve, basically, the workflows we experience internally to allow, for example, emails to be automated and read and queued up to agents in a way they're able to work through them, in a much more rapid fashion. And, and that translated into a a big boost in productivity and what you all know, is a very you know, person intensive, blizzard season for us. So we were we're very pleased with that, and that's you know, not a sole example. I also gave an example of how for DSCSA, which is a new process being set up around a new regulatory requirement, Britt Vitalone: We sort of Brian Tyler: built it digitally native from the start so that we're able to to autonomously resolve 75% of customer inquiries, which is obviously a great outcome for the customer, and it's a great outcome for us for an efficiency and a productivity standpoint. I could really go through examples like this throughout the entire business. We think of it in three different areas. We think about our employee experience, how do we make it easier to be an employee at McKesson Corporation so there's less kind of paperwork that has to be done, and all your time can be focused on the job at hand. And it's just a great experience to work at McKesson Corporation. We wanna focus on our patients and our customers. We wanna make their experience with us seamless can be. And then, obviously, we want to focus on things where we think we can translate it into efficiency, productivity, leveraging the scale of the business. So it's really I could if I wanna give me the rest of the twenty eight minutes, I could go through, you know, company by company, business by business. I don't think we wanna do that, but we're very excited And we think these are strong proof points that the investments we've been making in technology are yielding results for the company. Britt Vitalone: Allen, maybe I'll just follow-up on your question. I I don't have a lot more to add than what Brian said, but I as we look at the portfolio within the segment, I just would remind you that half of the revenue of the segment is related to third-party logistics services, which are more distribution related. But the other half are technology service businesses, that support biopharma. And as Brian pointed out, we look to position the portfolio to continue to automate capabilities and automate services and products on behalf of our biopharma partners. And I think we like the trajectory that we're seeing in the business. If you look at the segment, we've seen operating margins grow over a 130 basis points year over year. So, again, focusing on positioning our capabilities and our services to Brian Tyler: automate Britt Vitalone: those products for for biopharma partners is gonna continue to improve that trajectory going forward. Operator: Next question, please. And next will be Brian Tanquilut with Jefferies. Hey, good afternoon, guys, and congrats on the quarter. Maybe, Brent, just as I think about Brian Tyler: 2027 fiscal twenty twenty seven guidance, obviously, a little earlier just with one quarter behind us. Just curious any puts and takes you would call out or any nuances that we need to consider And then as I think about just oncology and multi specialty margins, I think those were down almost 50 basis points sequentially versus down 10 last year for comparable period. So any callouts there that you would share with us especially since the moving pieces of the segment are new to the street Thanks. Britt Vitalone: Hey, Brian. Thanks for the question. Let me try to address that for you. You know, as as we think about 27 as we typically do, we will provide you a full set of our outlook and and guidance thoughts in May when we get to our fourth quarter call. But I would just point out a few things that you know, clearly, we're seeing in the business. Brian and I both talked about stable utilization trends. We continue to see very strong specialty distribution growth and specialty product growth. And that's playing out very well not only in our North American pharmaceutical segment, but also in the oncology multispecialty segment where we're investing We're acquiring providers and building out platforms and that certainly is is having an impact on the positive growth that you're seeing. You know, I think some of the things that Brian also talked about, we just chatted here briefly about the operating efficiency that we're seeing across the company and as I mentioned, we saw a hundred and thirty eight Operator: You know, really positive building blocks as we as we move forward into FY '27. As I as I think about the segment itself to your to your question, you know, we're really pleased with the growth that we're seeing in the segment. I talked about the organic growth of the business. And we had 24% organic revenue growth. You know, you when you strip away the acquisitions at about 15% organic adjusted operating profit growth, you know, quarter to quarter to quarter, you're gonna have some variability from mix. Generally speaking, we're pleased with the with the with how the segment is building and progressing on both revenue operating profit dollars, and the overall margins, In adding acquisitions like Prism, and Core Ventures are going to be accretive to all of those. Next question, please. Brian Tyler: And next will be Lisa Gill with JPMorgan. Thanks very much. Britt, I just want to follow-up to that comment. So if I go back to last quarter, you talked about $51,000,000 of a non-recurring gain. In oncology and multi specialty. So actually, if I back that out, it looks like the margin improved in that division by nearly a 100 basis points. So you also made the comment today that between Prism and Core Ventures that, you know, the contribution still represents same as what you said last quarter, 30 to 34%. So I I wanna ask the question in a different way. It appears to me that margins are improving quarter over quarter. And I'm just curious, what's driving that. I know at our conference, Brian and I talked about, for example, ambient scribing, making that more of the physician more effective. We talked about biosimilars. Is there anything you would call out specifically as to what's driving that margin improvement? And and how we think about that going forward. Operator: Yeah. It's a it's a good point, Lisa, and again, that gain that you mentioned, that was in the second quarter. As we added the the providers to the platform for Florida Cancer, as we continue to build out our vision platform, those are positive mix attributes to the segment. We're also seeing continued growth in specialty and specifically in oncology products. So those are those are favorably impacting the overall operating margins of the segment. And to the point that Brian made, we are early in our journey of automating and and building AI capabilities for our customers, but we are seeing that have an impact, and we would expect that impact will continue to build over time. Quarter to quarter, you'll you'll have some variability. You'll have some mixed variability, but you know, overall, as I mentioned in my comments to to Brian, we believe that the additions of both Prism and Ford of Cancer are accretive, not only to revenue and and operating profit dollars, but also to the margins over time. Brian Tyler: Next question, please. And next will be Michael Cherny with Leerink Partners. Operator: Good afternoon, and thank you so much taking the question. Really nice job on the quarter. Maybe if I can hone in a bit on North American Pharma for 4Q. Britt Vitalone: The Operator: implied guidance still, indicates a pretty nice acceleration. Terms of overall growth quarter over quarter. I guess, for the full year. Is there anything we should consider relative to the growth trajectory, anything that's driving that, within the North American side, And then relative to what it's a wider range than normal Stephen Baxter: way we should be thinking about differences in the puts and takes on the top and bottom of the range? Operator: So, again, I think if you if you think about our third quarter results, as I mentioned, we had the held for sale accounting benefit last year. That created about a 3% year over year impact to the segment. So our results were still quite strong in the quarter As we continue to move into the to our fourth quarter, we're pleased with the growth that we're seeing in specialty. I mentioned the growth that we're seeing specifically in health systems and that, you know, overall, the efficiency gains that we're seeing. Again, I mentioned the operating expenses as a percentage of gross profit. That's been consistently improving for for us. That's the efficiency and the operational excellence and some of the investments that we've been making across our distribution center and in other areas to support our business, whether that be inventory management or demand planning. So I think just generally speaking, the momentum in the business is good. You know, I don't know that there's anything else specifically that I would call out. But, overall, the momentum, the mix, the the scale of our operations is is performing well. Brian Tyler: Next question, please. And next will be Eric Percher with Nephron Research. Thank you. Maybe a question on the regulatory front. And Brian, I would ask you, George Hill: it feels like the distributor value prop has held up very strong in the face of IRA, NFP. Seem to be a lot of variables in DC right now. Be interested in your view of what areas you're leaning into the most and how you try to influence things that may be outside of your direct negotiation like MFN and changes to gross to net? Operator: Yeah. Sure. I'll Britt Vitalone: I'll attempt to tackle that one. Michael Cherny: As it relates to IRA, Part D, the first 10 drugs that went live just went live in January. So that's obviously not in our Q3 numbers, but it is in the increased guidance range that we have provided to you. And as you know, these kinds of things are you know, they happen routinely. And so, you know, we sit down with our manufacturer partners continuously and talk about evolution in their portfolios and their pricing strategies and the value that McKesson Corporation brings and, you know, speak in a very constructive way. We feel feel good about how those conversations have progressed. You know, as we've talked in the past about MFN, for example, you know, we think that it's the way it's rolled out today, it's largely a niche population of cash paying patients that those with commercial insurance will still access their medicines through the same way. We will continue to monitor it. We'll continue to watch it. As you know, we have lots of assets that, can support and and help scale those if we thought that that's what the direction the market was was gonna go. And then as it relates to the policy landscape in general, there's a lot out there. But as we have evaluated it, we know, continue to think that the implications for McKesson Corporation are quite navigable. You know, if you take something like Globe, which is Part B, you know, it's it's exempts anyone that already has an IRA drug out there. It only applicable to 25% of of the ZIP codes. It's only about 35% of oncology Medicare business. And as you start to do the math and chunk it down, we don't think it's gonna be that material. And the fact is that mechanism that they're using to administer the rebate is really goes doesn't impact the provider reimbursement in any way. It's direct from manufacturer to Medicare. So the policy landscape is dynamic. We continue to have a great team in DC that is very engaged in the conversation. We take the approach try to understand the problem that they want to solve. And then help find a solution that is supportive of the industry and, importantly, is supportive of care being practiced in the community. Where it's lower cost, it's higher accessibility, and we think it's the right answer for Americans. Brian Tyler: Next question, please. And next will be Glenn Santangelo. With Barclays. George Hill: Yes. Hello, and thank you for taking my question. I just also wanted to follow-up on Michael's question regarding the North American Pharmaceutical segment operating profit. Britt, I hear if you sort of Kevin Caliendo: back Rexall out of last year, it looks like the growth in that segment was sort of 9% this quarter, if I'm doing my math right. And then if I look at your full year segment guidance you're you're kind of implying growth of five to 18%. And you know, again, as Michael suggested, it's a little bit wider than normal. And I and I think I asked because kinda looking at the stocks today, obviously, the market is paying a little bit more attention about the the potential for decelerating growth in that core. And so I'm just kind of curious if you're seeing anything that registers on on your radar screen positively or negatively heading into fiscal four q and fiscal twenty seven. That that we should be paying closer attention to. Positive or negative for that matter. Operator: You know, Glenn, thanks for the question. Let me just Britt Vitalone: stop and just Operator: make sure that we're on the same page here. We took our adjusted operating profit growth targets for the full year from five to 9% to eight to 12%. So the the width of the range is the same. What we've done is just simply increased it One, for the performance that we've seen through the first three quarters of the year, and two, really, the confidence that we have in the trajectory through the through the balance of the year given really the strong specialty distribution growth that we're seeing, our continued focus and execution on operational excellence, the utilization trends that we're seeing, all of those are supportive of the raise that we provide you today for our full year outlook, again, with the same width of the range at eight to 12%. So I and we are very pleased with performance. We are very pleased with the the trends that we're seeing. You know, certainly, the the growth that we're seeing in specialty distribution, the strength that we're seeing across the business in retail pharmacy as well as health systems and as I mentioned, the operational efficiency gains that we're seeing. So all of those are are certainly positive. And have led to the the raise that we gave today for the full year adjusted operating profit. Britt Vitalone: Next question, please. Brian Tyler: And next will be Elizabeth Anderson with George Hill: ISI. Brian Tyler: Hey, guys. Thanks so much for the question. Given the IT investments you talked about in response to Alan's questions and certainly makes sense in the long term vision of the company. If we think about your cap deployment priorities and always talked about this portfolio management, should we expect sort of a shift more towards those internal growth investments versus what we've seen recently in terms of being more acquisitive? Or would we expect to sort of continuation of what we've seen in the historical pattern? Thanks. Michael Cherny: Yeah, I don't I don't think we've changed our philosophy at all, and we have continuously know, for the last many years, been investing back into our businesses to innovate new products, add new features, extend our differentiation, and we've similarly deployed capital sometimes to acquire capability that we think is is is better to acquire than take the time to build internally. But our capital allocation framework is is still the same. We still are excited about the opportunities we have to continue to scale through inorganic acquisitions that that are aligned to our strategy that fit our business model, and that meet our financial returns, But our first priority is always to invest back in the growth of the business, and that can take two forms. That could be internally. We can invest in people, technologies, other resources to help expand the differentiation and and mix maybe our market opportunities, or we can do it through inorganically. And we're I think we've got a a successful track record of doing both, and we would look to continue that. Maybe I'll just add one more comment here just to talk about our balance sheet. Operator: And the financial position that we have. We have strong cash flows. And as I mentioned, our balance sheet is a competitive advantage for us. And it gives us the ability to not only continue to invest back into the business, to acquire assets that are on strategy, and then it will accelerate our growth opportunities. But, also, at the same time, to return capital to shareholders and maintain a very strong balance sheet and investment grade credit rating. We're able to do all of those given the execution that we have, the focus that we have of being disciplined, and that strength of the financial position, I think, is an is an advantage for us. Britt Vitalone: Next question, please. Brian Tyler: And next will be Charles Rhyee with TD Cowen. George Hill: Yes. Thanks for taking the question. Brett or Brian, just wanted to ask, you know, obviously, results here and, you know, you saw accelerating core growth in both North America Pharma and Oncology. And multi specialty by our estimates here. You know, some of your competitors are, you know, kind of seeing maybe a little bit more deceleration in performance on a year over year basis. Thinking specifically that you're doing or seeing specifically in your business that's Kevin Caliendo: contributing to that? Britt Vitalone: Well, Michael Cherny: I don't wanna talk about my competitive business, but I love to talk about my my business. And I think it boils down to a clear strategy that's been in place for know, an extended period of time. A focus management team that is investing and deploying capital and resources to advance those strategies, some good deployment of capital this past year both you know, Prism Vision and Florida Cancer were great additions that fit right into our model. That we're very we're very, very pleased about. And then just great execution in the day to day by teams across the business. And really embracing the possibilities of of of improving the business, having that mindset every day, how do we improve and make the business better. So I think it's a combination of right strategy, good execution, focus, discipline, and execution against that. And that's what I think has produced the momentum we've seen over the last several years. Britt Vitalone: Next question, please. Brian Tyler: And next will be Erin Wright with Morgan Stanley. Great. Thanks. So as it relates to Stephen Baxter: Prism and FCS, I guess, can you speak a little bit more about how the transactions are progressing? You you maintain the guidance in terms of the contribution for those deals. Is that true for both assets? And and anything you can break down in terms of underlying MSO business growth and how we should think about that longer term? Anything to call out that you're seeing now on the MSO side? It it excluding or stripping out that distribution component of that segment? Operator: Yeah. Well, I would say that we we maintain the full year year the year one accretion guide that we provided But as I've mentioned before, not only are we pleased with the business, we're pleased with the integration. We're pleased with the the volumes that we're seeing thus far. We did make a small acquisition to add to the Prism platform. Earlier in the fiscal year. And and I think, generally speaking, both businesses are performing on their acquisition case in the case of of Prism, maybe slightly ahead. So I think we're everything that we saw going into it and what that we guided you, we has come to fruition. And in addition to that, I think we're we're really pleased with the integration work that's been done and and certainly the volumes have been stable and growing. And all of those have led to at least maintaining the guidance that we provided. And as I mentioned, maybe just slightly ahead of our our acquisition case. Britt Vitalone: Next question, please. Stephen Baxter: And next will be Daniel Grosslight with Citi. Kevin Caliendo: Hi, guys. Thanks for taking the Congrats on a soft quarter here. I want to focus a little bit more on the RxTS segment, particularly the strong operating profit results Hoping you can provide a little bit more detail on on the drivers there. It sounds like it was mostly and affordability on the on the bottom line, but much of that growth is coming from GLP-one related programs versus other specialty drugs? And given the significant growth we've seen in the cash pay GLP-one channel, particularly with the launch of of oral GLPs. Or Wegovy. Are you seeing any shift in prior authorization behavior I'll start Michael Cherny: and, Britt, feel free to add on if you want. I I spoke briefly in my opening remarks about the quarterly results adding 50 new programs across 43 different unique brands. And that was really you know, not concentrated in any particular area. So it was loyalty script. It was hub services. It was access and affordability programs. So, you know, we continue to find the market very receptive to the the solutions that we have that improve access and and affordability. And in a technology business, you know, this the scale of adding new customers, is is very constructive. The business. Know, it was also we talked about the impacts of running the business more efficiently, and that certainly added to the performance of the business. But I would say we're just pleased with the breadth of the product portfolio and the market support we're seeing for the solutions that we offer. Operator: I would just make the the point that as I mentioned in my remarks that what we've seen thus far in terms of our annual programs is they've been off to a really good start as well. We're seeing meaningful volume growth, and to Brian's point, where we're adding new programs and new customers, we're seeing good volumes across all of those, not just GLP ones, but the new brands and programs that we're adding. And so all of this is is certainly accretive to the business on a year over year basis, and we're certainly comfortable in raising the outlook for the full year based on that. Britt Vitalone: Next question, please. Stephen Baxter: And next will be Kevin Caliendo with UBS. Operator: Hi. Thanks for taking my question. George Hill: You had called out Operator: earlier, you've made positive comments about annual verifications. I'd love a little bit more color on that. And also, do you see GLP ones possibly introducing new utilizers on the prior authorization side? Like, is that is that part of the thing that's giving you more confidence in the business? How is that trending? How should we think about it? I think we're all wondering sort of how our XTS is gonna continue to grow at the same pace into fiscal twenty seven and beyond and what the other drivers are. If you could expand on those two, that'd be great. Michael Cherny: Yeah. The look. The it's very early days for the oral GLP one launch, so it's really hard to try to dissect trends from the given the size of the injectable market versus you know, a few weeks of launch of the oral drug. But we we are we are seeing some prior authorizations come through there. You know, I think we'll have to track this over time. I mean, I don't think anyone could tell you what share of GLP one oral growth will come at the expense of the injectable or what share of it will be net new customers So that's something that we'll we'll watch, but it we we're very confident the category will continue to grow. Britt Vitalone: Next question, please. Stephen Baxter: And next will be George Hill with Deutsche Bank. George Hill: Hey, good afternoon, guys. Thanks for taking the question. Brian, I'm not sure which one this which question which of you guys' question is for. But we know that going into your fiscal fourth quarter, we're going to see a significant number of brand drug manufacturers take price decreases. It doesn't look like it's going to hit your income statement at all, either at the revenue line Kevin Caliendo: or at the operating earnings line. But, Fred, I would just love if you could opine what you've seen from pricing actions from branded drug manufacturers George Hill: whether we should expect to see any impact? I know that you don't want to speak to fiscal 'twenty seven. And I'd love to hear you talk about how McKesson Corporation's negotiated around its value proposition and maintain its economics. Operator: Yeah, George. I'm happy to do that. You know, we've maintained very strong relationships with our manufacturing partners, and we have continual conversations with them about the products that they need us to support and about the fair value for the services that we provide. So we've continued to have very constructive conversations. We've continued to to maintain the value that we're providing in our pricing, in our agreement to the manufacturers and what we've seen thus far in terms of pricing activity and changes in prices has been right in line with our expectations. There's really nothing out of line and really consistent with what we've seen over the past few years. So you know, there's been a lot of a lot of changes over the last several months, but nothing that has impacted our economics. At least from the bottom line perspective. You know, pricing declines will have an impact on revenue, but it's not really material to to our results. And you know, I think we're really pleased with the strength of the relationships that we have with our manufacturing partners and the ability to retain the value. Britt Vitalone: Thank you for the question today. Michael Cherny: Great. Well, yes. Thank you, everyone. Appreciate the the great questions and really appreciate you joining the the call tonight. I'd like to thank Cynthia for facilitating the call. You know, we McKesson Corporation is really proud of the strong results that we delivered in our fiscal third quarter. We we continue to demonstrate our strong and our compelling value proposition and our ability to deliver superior returns for you, our shareholders. I would be remiss to end this call without thanking all of our employees for their outstanding contributions and their unwavering commitment to McKesson Corporation and the execution of our strategies. Together, we're all excited in the progress we're making to advance health outcomes for all. Thanks again, everybody. I hope you have a terrific evening. Britt Vitalone: Thank you for Stephen Baxter: joining today's conference call. You may now disconnect. Have a great day.
Operator: Welcome to the OMV Results January to December Q3 2025 Conference Call and webcast. [Operator Instructions] Please be advised today's conference is being recorded. At this time, I would like to refer you to the disclaimer, which includes our position on forward-looking statements. These forward-looking statements are based on beliefs, estimates and assumptions currently held by and information currently available to OMV. By their nature, forward-looking statements are subject to risks and uncertainties that will or may occur in the future and are outside the control of OMV. Therefore, recipients are cautioned not to place undue reliance on these forward-looking statements. OMV disclaims any obligation and does not intend to update these forward-looking statements to reflect actual results, revised assumptions and expectations and future developments and events. This presentation does not contain any recommendation or invitation to buy or sell securities in OMV. I would now like to hand the conference over to Mr. Florian Greger, Senior Vice President, Investor Relations and Sustainability. Please go ahead, Mr. Greger. Florian Greger: Thank you, and good morning, ladies and gentlemen. Welcome to OMV's earnings call for the fourth quarter 2025. With me on the call are OMV CEO, Alfred Stern; and our CFO, Reinhard Florey. Alfred and Reinhard will walk you through the highlights of the quarter and discuss OMV's financial performance. Following their presentations, the 2 gentlemen will be available to take your questions. And with that, I'll hand it over to Alfred. Alfred Stern: Thank you, Florian. Ladies and gentlemen, good morning, and thank you for joining us. Before I discuss the details of our fourth quarter performance, I would like to briefly reflect on the operational and strategic highlights of last year. Despite the challenging economic and geopolitical backdrop, we achieved a strong performance across our 3 business segments. In Energy, we were able to almost reach the prior year oil and gas production level if we exclude the divestment of the Malaysian business. We slightly increased our Fuel sales volumes reinforcing our position as a supplier of choice in the downstream sector. And in Chemicals, total polyolefin sales volumes, which include the joint ventures, rose by 3% year-on-year, underscoring our product strength in a challenging market environment. Our Clean CCS operating result reached a strong EUR 4.6 billion; however, decreased by 10% compared to the prior year quarter. Importantly, despite the difficult backdrop, our cash flow from operations, the basis for shareholder distributions amounted to EUR 5.2 billion and thus was just 4% lower than the year before. This resilience demonstrates again the strength of our integrated business model, delivering robust cash flows in a volatile market environment. A particular achievement worth noting is that by the end of 2025, we have already surpassed 70% of our efficiency program 2027 target demonstrating our steadfast commitment to operational excellence and supporting our strong cash flow generation. We have maintained a disciplined approach to investments. Our balance sheet remains very strong, reflected in a very healthy leverage ratio of only 14%. This strong financial position provides us with the necessary flexibility to navigate market uncertainties, while continuing to invest in future growth opportunities and OMV's transformation. Ladies and gentlemen, as promised, our shareholders will directly benefit from our success. For the financial year 2025, we will propose to the Annual General Meeting a regular dividend of EUR 3.15 per share and again, an attractive additional dividend of EUR 1.25. In total, this will amount to a cash dividend of EUR 4.40 per share, resulting in a dividend yield of 9.3% based on the closing price of last year. This payout will represent 28% of our cash flow from operating activities. Despite the weaker economic environment, OMV will once again offer attractive shareholder distributions. Let me briefly highlight our strategic progress in 2025. In the Energy segment, the flagship gas project of OMV Petrom, Neptun Deep remains firmly on track and within budget for a targeted start-up in 2027. This marks a major milestone in our ongoing commitment to diversifying and securing gas supply. We strongly believe in the Black Sea's potential for the region and have reinforced our position through further exploration in Bulgaria, partnering with NewMed Energy and the Bulgarian state. Exploration drilling in Han Asparuh began in December 2025 with the Noble Globetrotter 1 vessel contracted to drill 2 exploration wells. Having 2 rigs simultaneously in operation, 1 offshore Bulgaria and another offshore Romania, represents a significant achievement of OMV Petrom. We have successfully diversified our cost portfolio, ensuring continuous and uninterrupted supply to all our customers since more than 1 year. As a result, we are no longer dependent on any single supplier and now have the strongest gas portfolio in OMV's history. In Renewables, OMV Petrom achieved notable progress by expanding its renewable power capacity, advancing towards a leadership in Southeastern Europe. We have advanced geothermal energy projects. We completed drilling and the successful production test in Vienna and are on track to commission our first geothermal plant by 2028. In October last year, we have made an oil discovery in Libya in the Sirte Basin with estimated recoverable volumes between 15 million and 42 million boe. What makes this especially promising is the location, just 7 kilometers from existing infrastructure. Turning to Fuels. Our coprocessing plant is operational and producing renewable diesel. In April last year, we started up our 10-megawatt electrolyzer plant in Schwechat, the biggest of its kind in Austria. Construction of the SAF/HVO plant at Petrobras is progressing as scheduled with start-up targeted for 2028. We are also investing in around 200-megawatt electrolyzer capacity in Austria and Romania. These green hydrogen projects are fully integrated with our refineries and primarily designed to supply our own facilities captive demand. In Retail, we have nearly doubled our EV charging network in 2025 and rebranded our retail stations, underscoring our commitment to sustainable mobility and enhanced customer service. In Chemicals, the game-changing agreement with ADNOC to form Borouge Group International establishes a global polyolefin powerhouse and more resilient chemicals growth platform. We successfully commissioned our ReOil chemical recycling plant and continue to advance key growth projects such as Kallo and Borouge 4. Kallo is expected to start up in the second half of this year, while Borouge 4 production is expected to ramp up through 2026, as units are commissioned and brought online. First unit of Borouge 4 should come online till this quarter. Aligned with our Strategy 2030, we remain focused on an agile transformation, responding to evolving customer needs all while maintaining strong cash flow discipline and carefully managed investments to ensure attractive returns for our shareholders. Let me update you on the status of Borouge Group International. We made very good progress regarding the closing of the transaction and expect this, as previously communicated, in the first quarter of this year. We are pleased to report that we have already secured all necessary foreign direct investment approvals as well as almost all the other required regulatory clearances. In addition, in preparation for the acquisition of Nova Chemicals, we have successfully completed our financing process. We have secured $15.4 billion ensuring that sufficient liquidity is in place to support the transaction. At this stage, the primary remaining tasks are to obtain the outstanding clearances. Discussions regarding the recruitment of BGI Executive Board and Executive Leadership team positions are nearly complete. Announcements regarding these appointments, along with nominations for the Supervisory Board will be made in due course. Finally, the active collaboration between ADNOC, OMV, Borouge, Borealis and Nova Chemicals has resulted in detailed plans for day 1 and beyond. And we have established a robust framework from the very outset of the integration to realize the synergies of more than $500 million. Overall, these developments clearly demonstrate strong momentum, and we remain confident in the successful closing and integration of Borouge Group International. Let me now move on to the details of our fourth quarter performance. Our Clean CCS operating result reached around EUR 1.15 million, representing a decrease of EUR 222 million or 16% compared to the same quarter of 2024. Excluding the positive net effect of EUR 210 million arbitration award received in the fourth quarter of 2024, our Clean CCS operating result would have been broadly in line with the prior year quarter despite lower oil and gas prices. The quarter was marked by significant geopolitical volatility. Brent crude prices declined, driven by weak short-term demand outlook and increased OPEC+ output. The introduction of new U.S. sanctions against major Russian oil exporters were somewhat supportive. European gas prices also fell despite the onset of the winter season as demand was easily met thanks to ample LNG supply. Refining margins increased further, supported by product tightness resulting from the announced sanctions on Russian refiners and unplanned outages at other refineries. In the Chemicals market, we observed some improvement of the olefin indicator margins. However, overall demand remains subdued with many customers focused on reducing their inventories before the end of the year. The Clean CCS tax rate saw a significant decline from 50% to 36%. This was mainly due to a reduced share in the overall group of certain companies in the Energy segment located in high-tax countries as well as stronger contribution from equity-accounted investments. As a result, Clean CCS earnings per share remained nearly stable at EUR 1.7 per share. At EUR 1.7 billion of cash flow from operating activities was truly exceptional this quarter, jumping by over 60% year-on-year. This very strong operating cash flow clearly demonstrates our continued ability to generate strong liquidity even in the face of a challenging market environment. The clean operating result in the Energy segment dropped markedly to EUR 586 million. Around 40% of the decrease is explained by one-time effects. The Malaysia divestment and the net arbitration award of EUR 210 million received in the prior year quarter. The remainder approximately EUR 390 million was largely attributable to decreased oil and gas prices as well as lower sales volumes. The realized oil price fell by 13% to $62 per barrel, mirroring the movement in Brent prices. Our realized gas price decreased by 14%, averaging EUR 26 per megawatt hour, thus less than European gas hub prices, which declined by 28%. This was mainly due to changes in portfolio composition following the divestment of SapuraOMV. Additionally, negative currency developments impacted our results by about EUR 80 million compared to the prior year quarter. Production volumes decreased by 11% to 300,000 boe per day. The main reason was the sale of the Malaysian assets, which had contributed 24,000 barrels of oil equivalent per day in the fourth quarter of 2024. Excluding the effect from the divestment, E&P production declined by about 4% due to production declines in Norway, Romania and New Zealand, reflecting their fields natural decline, partly offset by slightly higher output in the UAE. Unit production costs rose slightly to above $10 per barrel. This increase resulted mainly from lower production volumes and unfavorable exchange rate movements. Cost reductions -- cost reduction measures taken had a mitigating effect. Sales volumes decreased by 65,000 boe per day, thus stronger than production. In addition to the missing volumes from SapuraOMV, the sales in Norway and Libya were lower due to the lifting schedule. The result of gas marketing and power declined to EUR 116 million, primarily due to the missing positive impact from the arbitration award received in the fourth quarter of 2024. Aside from the arbitration award, Gas West decreased mainly due to lower release of transport provision. The contribution of Gas East rose strongly, driven by excellent results across both the gas and power business lines, supported by higher gas sales volumes and increased production of the Brazi power plant in the context of power market deregulation. The Clean CCS operating result of the Fuel's segment more than tripled to EUR 346 million, primarily driven by substantially stronger refining indicator margins, a significantly higher contribution from ADNOC refining and global trading and improved results of the marketing business. This strong performance was partially offset by, amongst others, negative production effects related to repairs at the Burghausen refinery. The European refining indicator margin rose sharply to $14 per barrel, while the refining utilization rate remained high at 89%. The marketing business delivered a higher contribution compared to the prior year quarter with retail performance benefiting from slightly improved fuel margins due to a more favorable quotation development for oil products, higher nonfuel business profitability and slightly higher sales volumes following the acquisition of retail stations in Slovakia. The performance of the commercial business came in slightly better as well, supported by higher contributions from the aviation business and increased sales volumes. The contribution of ADNOC Refining and Global Trading increased significantly to EUR 51 million, mainly due to a better market environment. The Clean operating result of the Chemicals segment rose sharply to EUR 236 million, driven to a large extent by the stop of Borealis depreciation. In our European business, we recorded favorable market effects totaling EUR 58 million, reflecting higher olefin indicator margins. Inventory effects were slightly lower. The utilization rate of our European crackers stood at 72%, which is significantly below the level of the prior year quarter. This was mainly because of weaker demand and inventory optimization measures at year-end. Nevertheless, the result of OMV-based chemicals improved due to stronger olefin margins. The contribution from Borealis, excluding joint ventures, increased to EUR 89 million, mostly driven by the stop of depreciation. However, the results of both base chemicals and polyolefins declined. The base chemicals result was affected by lower utilization rate as well as decreased feedstock advantage and phenol margins. Improved olefin indicator margins in Europe and lower fixed costs provided some support. For polyolefins, the contribution decreased primarily due to softer indicator margins and greater market discounts. This was partially counterbalanced by reduced fixed costs. Polyolefin sales volumes for Borealis, excluding joint ventures, grew by 4%, largely attributable to higher sales in the infrastructure and consumer product sectors. Contributions from our joint ventures rose by EUR 41 million, mainly reflecting the deconsolidation of Baystar. The contribution from Borouge remained broadly stable versus the fourth quarter of 2024, as a less favorable market environment in Asia was compensated for by substantially higher sales volumes. Thank you for your attention, and I will now hand over to Reinhard. Reinhard Florey: Thank you, Alfred, and good morning from my side as well. At the beginning of 2024, we launched a comprehensive efficiency program aimed at generating at least EUR 0.5 billion of additional sustainable annual operating cash flow by the end of 2027. This initiative helps to mitigate inflationary cost increases we have experienced over the past years as well as effects from lower commodity prices. In October, we had announced that even considering the BGI transaction and resulting deconsolidation of Borealis, we expect to achieve the originally targeted at least EUR 500 million, from the efficiency program, as we introduced a new cost savings program of EUR 400 million by end of 2027, further derisking the program's implementation. This program is well on track. By the end of 2025, we successfully delivered more than EUR 350 million of additional cash flow compared to 2023, which represents around 70% of our 2027 target. We achieved this through technical improvements in oil production, optimization of gas flows, reduction of E&P cost base as well as various margin improvement measures and refining optimization related to utilities, crude supply and energy efficiency. Overall, more than EUR 100 million are attributable to operational cost reduction measures. This builds upon our continued drive for operational excellence, following initiatives from prior years with the impact clearly visible on our cash flow from operating activities. Turning to cash flows. Our fourth quarter operating cash flow, excluding net working capital effects, was EUR 821 million. This figure was impacted by a significant net cash outflow related to CO2 emission certificates of around EUR 330 million, which is always booked for the year-end in the fourth quarter. In the fourth quarter of 2024, the net cash related to CO2 emission certificates was around EUR 270 million, largely offset by the one-off net gas arbitration award of more than EUR 200 million. The year-on-year decline also reflects a lower contribution from energy, partially compensated by lower tax payments and a higher contribution from fuels. Net working capital cash inflows were very strong. At EUR 860 million, it more than reversed the minus EUR 400 million recorded in the third quarter of 2025. This was largely driven by substantial inventory reduction in the fourth quarter 2025, whereas in the prior year quarter, we recorded a negative effect of around EUR 140 million. As a result, the cash flow from operating activities amounted to around EUR 1.7 billion in the fourth quarter of 2025, an increase of more than 60% compared with the previous year's quarter. Let us now look at the full year's picture. At EUR 5.2 billion, cash flow from operating activities was once again very strong, only 4% below the high 2024 level. After payment of dividends of EUR 2.3 billion, our free cash flow stood at positive EUR 180 million, supported by inorganic cash inflows coming from the Ghasha divestment and Bayport loan repayment. Our balance sheet remains very strong with a leverage ratio of only 14% at the end of 2025, despite ongoing macro challenges. Our financial strength is also reflected in our investment-grade credit ratings, A- from Fitch and A3 from Moody's, both with stable outlook. This strong rating underscores our healthy capital structure and prudent financial management. Following the closing of the BGI transaction, we anticipate our leverage ratio to increase mainly as a result of the deconsolidation of Borealis equity and net debt from our balance sheet as well as the agreed equity injection of up to EUR 1.6 billion into BGI to equalize OMV's and ADNOC's shareholdings. I think it's worth highlighting that even after this game-changing transaction, we anticipate our leverage ratio to be in the low 20s by year-end, well below the mid- and long-term threshold of 30%. This reflects our commitment to maintaining a robust capital structure and healthy balance sheet. Such a strong financial position provides us with the ability to do both, continue with attractive shareholder distributions and moving forward based on our headroom with our strategic growth initiatives. We once again deliver on our promise and offer our shareholders attractive distributions. We will propose to the Annual General Meeting an increased regular dividend of EUR 3.15 per share plus an additional dividend of EUR 1.25 per share. Thus, we will distribute total dividends of EUR 4.40 per share, which is an attractive yield of 9.3% based on the closing price year-end 2025. With the total payout of 28% of our operating cash flow, we once again went to the upper part of the guided corridor of 20% to 30% of operating cash flow. Since 2015, we have delivered every single year on our progressive dividend policy, which aims to increase the dividend every year or at least maintain it at the respective prior year level. Over that period, we have more than tripled our regular dividend from EUR 1 per share to now EUR 3.15 in [ 2022 ] to further enhance our shareholder distributions. We had introduced an additional variable dividend, which we now also paid for the fourth consecutive year. OMV remains committed to pay attractive dividends to its shareholders. As announced on our Capital Markets update in October last year, we are introducing a new dividend policy effective as of this financial year that builds upon our previous approach and incorporates the clear benefits arising from the BGI transaction for our shareholders. Under the new policy, OMV will distribute 50% of the BGI dividend attributable to OMV in addition to distributing 20% to 30% of cash flow from operating activities from our consolidated businesses. Our dividend will continue to consist of 2 components: a progressive regular dividend, which we strive to increase each year or at least maintain at the previous year's level; and an additional variable dividend, which will be paid if our leverage ratio remains below the 30% threshold. This approach aligns with our commitment to deliver attractive and growing shareholder returns supported by strengthened cash flows and a solid capital structure. Based on the estimated closing in the first quarter of this year, we expect Borouge Group International to pay at least the floor dividend for the full year 2026, which means net to OMV at least USD 1 billion. The dividend will be paid in 2 tranches. Now let me move to the outlook, beginning with capital spending. For the year 2026, we expect organic CapEx to be around EUR 3.2 billion, substantially lower than the past few years reflecting the deconsolidation of the Borealis business and our ongoing capital discipline. The major growth projects in 2026 are the Neptun Deep project, which is scheduled to start up next year, the South HVO plant in Romania and the green hydrogen plant in Austria and Romania. In the following years to 2030, the average organic CapEx will be below the guided level of EUR 2.8 billion per annum outlined at our Capital Market updates. About 60% of our organic CapEx in 2026 will be allocated to energy with the majority of the remaining spend going to fuels. Following the BGI transaction and the deconsolidation of the Borealis business, organic investments explicitly shown in our financial statements in Chemicals will be relatively small, reflecting only our fully consolidated Chemicals business, specifically the refinery integrated crackers in Austria and Germany and the new plastic waste sorting plant in Germany. The latter is expected to start up this year. Around 70% of our organic CapEx in 2026 is dedicated to growth, positioning OMV for the future. In addition to Neptun Deep, major organic growth project initiatives include developments in Norway, Austria, the UAE and renewable power initiatives in Romania. In the Fuels segment, we are advancing key projects like the SAF/HVO plant as well as the 2 hydrogen plants in Romania and Austria. Around 30% of the investments planned for 2026 are allocated to sustainable projects in line with our average guidance for 2030. Please note that our guidance for organic CapEx of EUR 3.2 billion in 2026 excludes any expenditures related to Borealis. Let me conclude now with our outlook for key market assumptions and operations for 2026. We forecast an average Brent price of around $65 per barrel. The average TAG gas price is estimated to be above EUR 30 per megawatt hour, while the OMV average realized gas price is expected to be below EUR 30 per megawatt hour. In Energy, we expect average oil and gas production of slightly below 300,000 boe per day, reflecting natural decline and assuming no interruption in Libya. The unit production cost is expected to stay below $11 per barrel, supported by various plant cost initiatives. Exploration and appraisal expenditure for the group is expected to be below EUR 200 million, in line with previous year's spending. In Fuels, the refining indicator margin is projected to be around $8 per barrel. We anticipate the utilization rate of our European refineries to be above 90%. No major maintenance is planned throughout the year at our refineries, supporting high operational availability. Total fuel sales volumes are expected to be higher than last year. Retail margins are projected to be slightly below the levels seen in 2025, while commercial margins are also anticipated to decline. In Chemicals, we do not anticipate a significant market recovery in the first half of 2026. Following the closing of the BGI transaction, Borealis will become part of the new company in which OMV and ADNOC will hold equal shares. BGI will be reported at equity within our financial statements. Hence, we will no longer report separate KPIs for the polyolefin business, these will henceforth be published by BGI. However, we will continue to provide an outlook for European olefin indicator margins, which will impact our fully consolidated Chemicals business. We expect market indicator margins to be slightly below the levels of the previous year with realized margins continuing to be affected by prevailing market discounts. The utilization rate of our 2 crackers is expected to rise to approximately 90% in 2026. There are no major turnarounds planned for the year. The clean tax rate for the full year is expected to be around 45%. Thank you for your attention. Alfred and I will now be happy to take your questions. Florian Greger: Thank you, Alfred and Reinhard. Let's now come to your questions. [Operator Instructions] We begin the Q&A session with Josh Stone from UBS. Joshua Eliot Stone: Yes. Two questions. Firstly, on CapEx. It looks like there was a slight overspend in '25 as compared to your initial guidance. So anything you want to flag on what might have been driving that? And then also for 2026, at least the spending outlook a bit higher than what I had in or certainly higher than the long-term guide. So any comments around what the key building blocks within that? And any potential risks that you can see in this year's budget? And then second one, I wanted to focus on your Chemicals result, particularly on the olefins side, which everyone has been extremely bearish on European chemicals and you've got sort of almost doubling of your monomers profit this quarter. What would you say is driving that better results? And any one-offs? And then if we're thinking about next year, given this is the business that will stay on your balance sheet, what should we be thinking? Alfred Stern: Okay. Maybe let me start a little bit with chemicals and olefins part and then Reinhard will add and explain the CapEx. On the Chemicals side, I would really say, as you could see, right, 2024 our Chemical sales went up some 10%, last year was plus 3%. And this is really because of the position that we have in the Borealis crackers with mainly Nordic crackers having light feedstock advantage. They are on the -- they are very cost competitive and thus able to run at high rates. While the OMV crackers in Germany and in Austria are fully integrated into our refineries, and we can use that integration advantage to also optimize our margins. So while we see, as you can see on our outlook for 2026 more or less flat kind of margin expectation for ethylene and propylene. We do believe that we are in a strong position also as a local and integrated supplier here. Reinhard Florey: Yes, Josh. Regarding your CapEx observation, you're, of course, right. I would rather like to explain. We had guided for EUR 3.6 billion, we came out with EUR 3.7 billion. In fact, we only had an overrun of EUR 90 million, which is around 2%. And this happened very much in the downstream part with the new activities, specifically around our big projects with electrolyzers and the HVO plants where we already started with some spending on long lead items. So this is more or less distributed among a variety of projects. There is not a significant big overspend in one project. In 2026, it is very clear that we start with a higher CapEx compared to the average of the years until 2030 because we still have the Neptun project in full, the HVO/SAF plant in full and also the main part of the spending on the electrolyzer plant. So therefore, this average is, of course, a little bit distorted and we are geared towards a little bit higher but significantly lower though compared to 2025. So therefore, regarding risks that you see, we do not see significant risks of overspend because we have contracted out the projects in a very, very high degree. That is also true for Neptun project. And we are going with the speed that we anticipate in spending in order to make sure that 2027 is the year for start-up of Neptun project. Florian Greger: Thanks a lot, Josh, for your questions. We now move to Gui Levy from Morgan Stanley. Guilherme Levy: I have 2 questions, please. First one, maybe on working capital. The company, of course, enjoyed a very strong release in the fourth quarter. And you know it's still early in the year, but I was wondering if you could say a few words in terms of how much and how quickly you would expect that working capital release to reverse over the course of this year? And then secondly, on exploration, if you could share with us if you have any initial results from your exploration well in Bulgaria, expectations in terms of drilling completion and also following the recent announcement of the Bulgarian Government joining the block, if you are currently happy with your stake in that asset? Or if we could -- you expect further dilution for OMV Petrom from here? Reinhard Florey: Let me start with the working capital. We indeed enjoyed a strong cash inflow from working capital optimization in the fourth quarter. However, this does not reflect any, I would say, unnatural levels. This, on the one hand side, reflects very much the business environment in which we operate and we were able to significantly also reduce our inventory levels actually in all 3 segments. Why am I saying that because also the inventory levels in the Energy business with our gas storage are now at a lower level, maybe compared to earlier years. This is a attribute to the cold winter and also to the very, I would say, small summer-winter spreads that have been available throughout 2025. So we anticipate that also after first quarter, we will come out with even lower level of inventories of storage in there. How fast will the recovery be? It depends very much on the boundary conditions that we see. If economy picks up strongly in both refining as well as in chemical, of course, also our inventories will go up. This is not what we expect as a situation in the first half of 2026. And we will also then, in Q2 and Q3, see how much of gas storage will be available for decent prices that we can lock in and then put the gas storages again on the level appropriate for surviving the next winter for all our customers. So this is something that will come across the full year in smaller stages. But as I said, this is not an unusual levels of working capital that we have at this point of time. Alfred Stern: Okay, Gui, and regarding the exploration in the Black Sea in Bulgaria. Maybe just to recap here quickly, OMV Petrom is operator with a 45% share, together with Newmet Balkan with 45% share and the Bulgarian Energy Holding with 10% share. And we have contracted the Noble's Globetrotter 1 drillship that will drill 2 offshore exploration wells. The first drill started in December. And then as it is with all these explorations, right, we need to beat for the results what we get there. Maybe also on the estimated costs for the 2 wells, that's about EUR 170 million for the 2 wells together and the agreements that OMV Petrom made with the partners are such that total cost for OMV Petrom for both wells will be about EUR 30 million. But it's exploration, right, so let's wait and see what we find. Florian Greger: Thank you, Gui, for your questions. And now we come to Henry Tarr, Berenberg. Henry Tarr: Two, if I may. The first, just on the Fuels business. We've obviously seen weaker refining margins this year. Where are you averaging sort of Q1 to date? And how do you see the outlook here for the rest of the quarter and then 2026? Alfred Stern: You said 2 questions, Henry. Henry Tarr: That's the first. I can come back on the second... Alfred Stern: Yes, yes. Okay. Then let me try and answer your question. Yes, indeed, the refining indicator margins what we what we found in the fourth quarter last year, we were at about 14%, but with declining kind of thing through the quarter, right? So in December, we saw the margins coming down and then we picked up in January at around 8%. So more or less, what we see as an expectation for the average for the year. I have to say, right, looking back at the last years refining indicator margins were extremely volatile, very difficult to predict. Supply chains are rearranging themselves, we see outages and so on. So our prediction would be around 8% January also started around that level. And I would see that maybe that's about what's the predictability of the segment, let's say, right? Henry Tarr: Okay. That's great. And then the second question is just on BGI and the floor dividend. So I think you've said but I just wanted to double-check that if the merger goes ahead as planned and completes in Q1, you'd expect the floor dividend to be paid in 2026. I guess are there any -- if the merger takes a little bit longer, is there a risk that the dividend gets prorated or anything like that just for this year or is it fixed for '26 at that floor dividend level? Reinhard Florey: Yes. Thanks, Henry. The floor dividend contractually is fixed to be a full dividend for 2026. That is our expectation, and this is the way how we also calculate. Personally, I do not have any doubts that we will not close in Q1. Florian Greger: Thanks, Henry, for your questions. We now come to Adnan Dhanani from RBC. Adnan Dhanani: Two for me, please. Just 1 follow-up on the BGI dividend. Just in the context of your comments earlier saying that the 2026 dividend would be at least at the floor level. I think at the CMD, you mentioned that the dividend would likely be the floor for 2 to 3 years. So is there a change in the thinking there that it could be at least floor level this year could be higher? Or is that still the thinking that it's going to be 2 to 3 years of just being at the floor level? And then the second question, just on your upstream production guidance. Obviously, with the 2030 target that was upgraded, just wanted to get your view on the current M&A landscape and just how you're seeing the market right now for barrels? Reinhard Florey: Yes. Adnan, maybe on the first questions. You know me, I never lose my optimism. But realistically speaking, I expect that there will be the floor dividend, which already is a very attractive thing for the current situation of the market. But theoretically, if the market picks up and the whole economy fires up, then I'm confident that also the dividend policy will kick in and could have an upside. But realistically speaking, I calculate with the floor dividend level and enjoy around USD 1 billion coming to OMV. Alfred Stern: Okay. And let me try on the upstream, Adnan. So just as a reminder, right, we said from 2025 level, we have natural decline and then we have organic projects. One is a very big Neptun project, which contributes directly the 50% share in OMV Petrom 70,000 barrels to our production target and then there's other organic projects that we have across our portfolio that contribute in the 70,000. And that means we have about another 70,000 more or less that we need to close inorganically and we said our strategy will be that we want to strengthen the portfolio in and around Europe that we have to make sure we can move this forward. We are actively trying to fill a pipeline to do that. But at this point, nothing has progressed enough that I could give you specifics on any kind of deal. Florian Greger: Thank you, Adnan, for your questions. Before we come to the next, we have one more in the queue. [Operator Instructions] And now let's come to Oleg Galbur from ODDO BHF with the next question. Oleg Galbur: Congratulations on the robust results. I have 2 questions. The first one is on the Fuel segment and more specifically, the marketing business. In the past, you were disclosing the average EBIT contribution per filling station. And I wonder if you could already give us the number for 2025? And my second question is on Chemicals. You mentioned earlier the startup expected at or planned PDH Kallo and Borouge 4. So taking into consideration that the recovery of the petrochemicals market is not yet in sight. What level of annual EBITDA would you expect to be delivered by PDH Kallo and Borouge 4 in the current market environment? And since I'm at the end of the list, maybe I can take advantage and ask a very short third question. On Libya discovery, you mentioned earlier, when do we expect the new discovery to start contributing to production from Libya? Alfred Stern: Oleg, thank you for your questions. Let me start with the fuel question on the marketing business. So what we did in the Capital Market update last year, we updated to give, let's say, a deeper look into our Fuels segment, we updated on the EBIT contributions of our retail marketing type of business. We do not and we have not regularly in the quarterly updated on this number, right? But what I can tell you is that this is something that helped last year and also in the fourth quarter that we were able to continue to not just grow the contribution from the fuel business in retail, but also nonfuel has grown there and making good contributions and we continue to see this as a value growth driver that we can do. This is our VIVA stores where we sell both [ gastronomy ] and other shop products, but it is also around EV charging, it is also around car washing and so on. So good contributions from this will continue to grow. Then on your Chemical question. I would maybe go -- want to go back to also what we disclosed in the Capital Market update that hasn't changed. We think Kallo will contribute EBITDA after full ramp-up of about EUR 200 million. And then on Borouge 4, we have said it's about $900 million, yes, that will be at full ramp-up. However, right, so we the Kallo or PDH more towards the second half of this year. And we see Borouge 4 is a very big complex with 1.5 million tonnes of production. And there is multiple plants involved, and you will see that we need to take those into operation step-by-step in stages. The first stage -- first plants will come on stream in the first quarter, but then you will see that throughout the rest of the year ramping up. You were -- so and last, your question around the Chemicals segment. I do believe, and you can see in our sales volume growth that we have, both in Europe, but also with Borouge and our joint ventures, you can see that there is underlying demand there. However, the challenge is supply/demand and unbalance. There is too much supply, new capacity that has come on stream. And -- but what we see now is increasingly old, not optimal plants being taken out of operation. In total, this is more than 20 million tonnes globally now, a big part of this is in Europe, a significant part in South Korea, but it looks like there are some first actions now also in China on rationalization with their evolution program that they have in China. Florian Greger: Thanks, Oleg, for your questions. We now come to Sadnan Ali from HSBC. Sadnan Ali: Two, please. The first one on -- just want to go back to Neptun Deep. I know you mentioned that the project is on track to deliver a start-up in 2027. I just wanted to check if you can provide any more clarity on when in the year we can expect it to start up? And what are the key milestones we should expect between now and then? And do you see any risks to that time line or any of those elements that would present more of a risk to delay if there's a delay in the project? And secondly, just wanted to clarify, your comments today said I believe that post BGI closing, you're expecting leverage in the low 20s by year-end. Just want to clarify, if I'm not mistaken, the prior communication was, I think, it was at 22% after the deal closes, so does this now mean potentially that you expect something higher than 22% upon closing immediately and that's to taper off by year-end? Alfred Stern: Let me maybe start with the Neptun project and then Reinhard will follow up on your second question. So project progress, right, just as to recall here, Neptun Deep consists of 2 fields. One is the Pelican field and the other one is the Domino field. In the Pelican field, which -- we -- OMV Petrom wanted to drill 4 wells. They have done so in 2025 and now the Transocean Barents rig is moving on to the deepwater wells in Domino field, where it's 6 wells that have to be drilled. Then there's, of course, not just the wells, but there's a lot of other activities that need to happen to bring this into production. One was the construction of natural gas metering station, which is making good progress, is ongoing and the equipment is arriving there to the site. We have also finished a microtunnel that is basically bringing then the underground pipeline connection to the onshore. We have also made good progress on the shallow water platform that is moving ahead on the construction and then has to be transported into the Black Sea later this year with good progress on umbilicals, field support vessels and so on. So all this is running. And so far, we are on track according to the plan. We have not finalized completely when in 2027 this startup will happen, but we will be able to do so in the course of the year. Reinhard Florey: Yes. And Sadnan, thanks for your question on the leverage. I admit that it's courageous to predict leverage on the single-digit percentage. I still stick to what we said that after close, we will be around 22%. And for the rest of the year, so if that happens in Q1, we still have Q2, 3 and 4. We want to reaffirm by that statement that we stay in the low 20s percentage, which should be really an affirmation of our statement of low leverage, including also the transaction of BGI. Florian Greger: Thank you, Sadnan, for your questions. There is a follow-up question from Oleg Galbur. Oleg Galbur: Yes. Well, it's rather the question that I asked, but was not answered about Libya discovery when do you expect it to turn into production? Reinhard Florey: Oleg, sorry, that we overlooked the third question. First of all, Libya has been a successful discovery and the beauty about this discovery is that it's only around 10 kilometers from existing infrastructure. This means that the tie-in of that well should go rather fast, and we're expecting it the latest by next year. Florian Greger: Apologies, Oleg, for not taking the third question, but now we come to Ram Kamath from Barclays. Ramchandra Kamath: I have a question on natural gas sales. So can you talk a little bit about what you are seeing in the gas business on demand side particularly? Because I note that the sales in your West business, in particularly, was -- I mean, has come down. I think possibly this year, it's averaging around 40 terawatt hours down from over 50. So how do you see shaping up here, particularly on if you can talk about if it is particularly on the industrial sector demand, which is coming down. And of this volatile time, how do you see this business evolving or the demand evolving? Alfred Stern: Yes. Ram, let me try and provide some insights into this. I think if you look further back a little bit, we -- so before the Russian attack on Ukraine. Since then, we have seen significant decline in market demand, both in industrial areas, but also in household and other areas. I think this was driven by very high gas prices and so on. However, last year, there was, in the markets, some rebound into the gas usage probably also again driven by normalization of the gas prices as we saw that last year. What we have done in OMV, of course, is also that we have also commercially optimized our gas portfolio, diversified it into different sources, and this is probably what you are seeing from our sales figures there. However, looking out a little bit longer, we do see the demand signals now that Europe will remain a net importing gas region until 2050, at least. And this is also the opportunity that we want to address with our Neptun Deep or some of our other gas production projects. Florian Greger: Thanks, Ram, for your questions. We now come to the end of our conference call and would like to thank you all for joining us today. Should you have any further questions, please contact the Investor Relations team. We will be happy to help you. Thank you again, and goodbye, and have a nice day. Alfred Stern: Thank you very much. Have a good day. Reinhard Florey: Thank you. Bye-bye. Operator: That concludes today's teleconference call. A replay of the call will be available for 1 week. The replay link is printed on the invitation, or alternatively, please contact OMV's Investor Relations Department directly to obtain the replay link.
Operator: Good day, everyone, and welcome to today's BrightView Earnings call. [Operator Instructions] Please note, this call may be recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Chris Stoczko, Vice President of Finance and Investor Relations. Please go ahead, sir. Chris Stoczko: Good morning, and thank you for joining BrightView's First Quarter Fiscal 2026 Earnings Call. Dale Asplund, BrightView's President and Chief Executive Officer; and Brett Urban, Chief Financial Officer, are on the call. I'll now refer you to Slide 2 of the presentation, which can also be found on our website and contains our safe harbor disclaimer. Our presentation includes forward-looking statements subject to risks and uncertainties. In addition, during the call, we will refer to certain non-GAAP financial measures. Please see our press release and 8-K issued yesterday for a reconciliation of these measures. With that, I'll now turn the call over to Dale. Dale Asplund: Thank you, Chris, and good morning, everyone. We had a strong start to 2026, as we grew total revenue 3% and delivered improvements in EBITDA while accelerating investments in our sales force, adding 80 incremental sellers in the quarter. While the needs of our customers vary geographically during the quarter based on weather, our focus on our frontline employees and delivering reliable service to our customer drove another sequential quarter of improvement in employee turnover and customer retention. Our intense focus on accelerating investments in our sales force, coupled with stronger customer retention, drove improvements in our underlying Land Contract book of business, one of the leading indicators of future revenue growth. More on this in a few minutes. Our accelerated investment in the sales force is proving effective, and we remain on track to deliver on our 2026 guidance, which represents a return to land growth in the third consecutive year of record adjusted EBITDA, as we continue to transform our business and deliver value for shareholders. We are well positioned to execute against our objectives. This quarter's progress reinforces my confidence in achieving our 2026 guidance, and our continued investment across the business positions us to deliver sustainable, profitable topline growth in both the near and long term. We have strengthened the foundation of the business, making significant strides in leveraging our size and scale, unlocking efficiencies and improving profitability over the past 2 years. Now, as we move forward, we will continue to cultivate a world-class sales organization to drive new sales to position BrightView as the investment of choice. With that, let's move to Slide 5, where we continue to see sequential improvement in our frontline turnover. Since day 1, my focus has been prioritizing our frontline crew members. And with ongoing investments, we continue our journey toward becoming the employer of choice. We have seen a considerable decline in turnover with approximately 30% improvement in just 2 short years. As an example of our continued commitment to our frontline, this quarter, we implemented advance pay, allowing our employees to access a portion of their earned wages ahead of the typical pay cycle, providing them with financial stability and flexibility. Our goal of becoming the industry's employer of choice has driven material cost savings that we've reinvested back into our frontline, and our continued improvement in employee turnover has created a more reliable workforce with consistent service levels for our customers. Turning to Slide 6. I'd like to highlight the impact that consistent service levels continue to have on retaining our customers. After reaching a low of approximately 79% in 2023, customer retention has improved by approximately 450 basis points as of Q1 2026, driven by initiatives focused on delivering consistent service levels to our customers, prioritizing our frontline employees and investing record level of capital to refresh our fleet. This is a true reflection of the exceptional service our employees deliver each day. Turning to Slide 7. We've also made significant progress across our branch network in driving retention improvements, in both the top and bottom quartiles. We have seen sequential improvement resulting in a 10% shift in both quartiles. While we are pleased with these results, we remain encouraged with the opportunities that still lie ahead. Our commitment to high-quality customer service has yielded significant improvement in customer retention. And, as we know, the longer a customer stays with us, the stronger relationship we build and ultimately results in us being able to provide a full suite of services over many years. The sequential improvement we have seen in this metric is a key contributor to now 3 consecutive quarters of positive net new sales in our Land Contract business, which I'll touch on in more details in a few moments. Turning to Slide 8. I'd like to update you on the rapid progress we've made in strengthening our sales force. During Investor Day, we outlined plans to expand our sales organization by 50%, representing approximately 500 net new hires by 2030. In the second half of fiscal 2025, we added approximately 100 new sellers, followed by about 80 additions in the first quarter of fiscal 2026, which is an increase of approximately 20% since the beginning of 2025. We are pacing ahead of our initial expectations, as this represents more than 1/3 of our progress toward the 2030 target. There are 2 categories of sellers, as shown in the bottom left, new business sellers focused on acquiring new customers and capturing a larger share of the total addressable market, while our customer-facing support team manages existing relationships and drives ancillary sales on top of contracted services. As new business sellers ramp their productivity and add new contracts, our customer-facing support team will further expand ancillary sales, helping to drive overall growth. Hiring is pacing ahead of our original expectations, and we plan to continue to ramp our sales organization through 2026. Expanding our sales force is critical to driving growth. And with structured training and enhanced technology tools in place, we are encouraged by the early momentum we are seeing in new sales. Turning to Slide 9. Now, I'd like to build on the topic of new sales and talk about a metric that's critical to Land Maintenance growth. This chart shows the improvement we made in our Land Contract book from Q2 2025, underpinned by a sequential improvement in our net new sales, a metric that factors in both customer retention and new sales. Ultimately, a growing contract book is an indicator of future Land Contract revenue growth. In my first year, we have realigned the sales and ops structure and changed the incentive plan to reward sellers for driving profitable new sales. This resulted in our branch managers and sellers working in tandem to align on new sales and equip them with the appropriate go-to-market tools. As we solidify the foundation of our business through reductions in employee turnover and improvements in customer retention, we began ramping the sales force in the back half of 2025. Since then, we have increased our sales force by approximately 180, or approximately 20%, and continue to see sequential improvements in customer retention, 2 key metrics needed to drive growth in our Land business. In Q3 2025, the momentum drove positive net new results, and we have seen 3 consecutive quarters of increased net new contract sales and growth in our Land Contract book of business of approximately 2%. This sustained momentum in improving customer retention and new sales growth gives me confidence that we will return to sustainable topline growth in the back half of fiscal 2026. Moving now to Slide 10. I want to remind everyone of the progress we've made in solidifying the foundation of our business and our focus for 2026 and beyond. In my first 2 years, my focus was on investing in and prioritizing our frontline employees, delivering consistent and reliable service to our customers and unlocking our size and scale as the industry's largest commercial landscaper. This has resulted in sequential improvement in employee turnover, customer retention and margin expansion, all key catalysts to help solidify the foundation of our business. Going forward, we will continue delivering in these key areas while also focusing on driving profitable topline growth in 2026 and beyond. As I mentioned a few moments ago, accelerating investments in our sales force will allow us to capture a greater share of the market. Through new sales and a sustained commitment to quality service, we expect sustained growth in our contract book, allowing our customer-facing support teams to layer in additional ancillary sales. By continuing to solidify the foundation of our business and by making strategic investments in our sales organizations, we are well positioned to accelerate contract growth and deliver sustainable, profitable topline growth. Before I turn it over to Brett, I want to express my appreciation to our more than 18,000 employees for their unwavering commitment to delivering consistent service and strengthening BrightView's position as the provider of choice. A recent example of this, although not an impact to the first quarter, was the team's readiness during the recent winter storms to safely and reliably service our customers. It is events like these that set us apart from other landscapers in the nation. Our ability to provide dependable service to our key customers was highlighted over the past few weeks. Once again, thank you to all our employees for putting the customer at the center of everything we do. With that, I will now turn it over to Brett. Brett Urban: Thank you, Dale, and good morning, everyone. 2026 is off to a strong start with our financial results positioning us to deliver on our guidance, which implies Land revenue returning to growth and delivering a third consecutive year of record adjusted EBITDA. The strategic decisions we have made over the past 2 years to invest in our employees and customers has paid significant dividends, as you can see in our employee turnover and customer retention metrics. And now, our strategy to add to our sales force is already showing positive signs in our selling performance. I am continually encouraged by the momentum we are building in the business to deliver long-term profitable growth. Let's turn to Slide 12 to discuss our results in the quarter. Total revenue for the first quarter was $615 million, which is a 3% increase, driven by heightened snowfall and continued improvement in underlying land metrics. Snow was a major benefit in the quarter, increasing 110% from the prior year, as we saw higher-than-average snowfall in the Mid-Atlantic, Northeast and Midwest geographies. Maintenance land revenue was impacted by weather-related factors, including the year-over-year step over from the 2 named hurricanes in prior year Q1 and increased snowfall this quarter, which limited our ability to perform core land maintenance. However, as Dale just mentioned, we're highly encouraged by the trends we're seeing in employee turnover and customer retention, and now, net new positive contract sales, which is the catalyst for land growth in the back half of 2026. In the Development segment, revenue decreased 7%, driven by timing and mix of projects. I want to be clear that the headwinds we experienced were timing related as we saw this impact start late in 2025 and should not be viewed as lost revenue over the long term. Turning now to profitability on Slide 13. We delivered another quarter of adjusted EBITDA growth, as we continue to transform our business. Higher revenue was a benefit to flow-through, as we are continuing to see advantages of refreshing our fleet, unlocking purchasing power through procurement and realizing efficiencies across the business to drive G&A savings. These benefits were partially offset by accelerated investments in our sales force, as our revenue-generating resources are up 180 employees or 20% over last year. This investment underpins the next leg of our sustainable growth journey. Now, let's move to Slide 14 to discuss our strategic capital allocations focused on driving long-term shareholder value. Our strong balance sheet highlights this strategy, supported by ample liquidity and a favorable debt structure with no long-term maturities until 2029. We continue to accelerate our fleet strategy in 2026, which saw a significant improvement to the average age of our core mowers and production vehicles in 2025. And now on to refreshing our fleet of trailers, this refresh has provided not only P&L benefits in the form of lower rental and repair and maintenance expense, but also intangible benefits through higher employee morale and customer satisfaction, which are major contributors to the improvement we've seen in frontline turnover and customer retention. Additionally, at the start of 2026, we increased our share repurchase authorization from $100 million to $150 million, as we believe our current valuation does not fully reflect our earnings potential. This increase resulted in $14 million in share repurchases in Q1, essentially doubling the quarterly average from 2025, as we continue to see our shares as significantly undervalued. While we currently view our fleet refresh and share repurchases as an efficient use of capital, we remain poised to return to M&A when the time is right, and we've developed a robust pipeline focused on service line density and market expansion. Moving to Slide 15. We felt confident by the first quarter results and underlying trends we are seeing in the business, and we are reiterating our 2026 revenue, EBITDA and free cash flow guidance. This represents the third consecutive year of record-breaking EBITDA, continued margin expansion and a return to Land revenue growth. Additionally, our free cash flow guidance, coupled with ample liquidity, provides significant financial flexibility to continue to reinvest in the business. Before turning the call back over to Dale, I want to reiterate my conviction in the trajectory of BrightView and our ultimate goal, delivering sustainable, profitable topline growth while creating meaningful shareholder value. The investments we've made into our business have paid dividends, as evidenced in our employee turnover and customer retention. And now, we expect our investments into our sales force to do the same. With that, I'll turn the call back to Dale. Dale Asplund: Thanks, Brett. Before we turn to questions, I want to reinforce a core belief that our people are the foundation of our progress. By investing in our employees and building an employer of choice culture, our intense focus on delivering best-in-class service is at the forefront of everything we do. Now, as we continue to ramp our sales organization, we are excited about the contributions the new 180 sellers are going to make. This, combined with leveraging our size and scale and strategically allocating capital, I'm confident in our ability to achieve sustainable topline growth and position the company to deliver long-term shareholder value. With that, operator, you can open the call for questions. Operator: [Operator Instructions] We'll go first this morning to Bob Labick of CJS Securities. Bob Labick: Congratulations on a great start to the year. Yes, I wanted to go back to the sales force investment, obviously. You mentioned you're ahead of pace. Does this mean you're going to pause? Or do you keep your foot on the accelerator? What's the target for the year? And what's the impact on the P&L? I guess, finally, like how long does it take until new salespeople break even and add to the top and bottom line? Dale Asplund: Yes. Great question, Bob, because we're proud of the progress we've made. First, we're going to start off by saying we join you today from our team -- with our team down in Homestead, Florida location. So we're seeing weather all over, and our teams continue to embrace the need for more employees to communicate with our customers. You saw in the quarter, Bob, we added 80 FTEs to support our growth levers. We are not going to slow down. We are seeing benefit. It's building our contract book, and we can talk through the effect it had on revenue in the quarter, as we saw outpaced snow across the country. But everything we've seen from the transition of moving our sales force to work directly with our branch managers is working. Now, it's about making sure as our branch managers request additional go-to-market resources, we're supporting them and continuing to give them people to help us grow this business. The 80 people we added in the quarter on top of the 100 people that we brought in last year, we are going to keep going. Originally, we said we were looking to add another 100 this year on our goal to adding 500 before 2030. We're well ahead of schedule. We're at 80 as of the end of the year. I want to keep promoting to add resources across the whole network. So I feel great about the momentum. It is our future to grow this business. We've done so much to improve the foundation. Now, it's about adding resources. So we're not going to stop at the 100. If there's opportunity and the branches can absorb them, can go get more market share, I'm going to keep giving them those investments to help them grow their business. Brett, do you want to add anything? Brett Urban: No. Bob, I would just say we're excited by it. We've made significant progress in a short period of time to ramp up our sales force. And you go back a little bit over 2 years, when Dale started as CEO, it was all about fixing the foundation, making sure we take care of our employees who in turn take care of our customers. And you look at that strategy now 2 years later, and that's paying huge dividends. Employee turnover is down significantly, over 30%, and customer retention is up significantly. Now, the next leg of our journey is to make sure we can support our branches by getting customer-facing sellers out into the markets. And we're going to do that as quickly as possible. So I'd say, yes, it was higher than expected, but we couldn't be more excited about the progress we're making with adding those sellers to the business. Bob Labick: Okay. Yes, that's great. And, yes, you've done a remarkable job over the last 2-plus years in building the foundation for growth. And obviously, sales force acceleration is part of it right now. You mentioned a few other things. What are the remaining steps to building this core foundation to get the flywheel fully running? And how much longer do you think that part will take until you have the foundation where you want it and you start to see the acceleration in top line? Dale Asplund: Yes. Great add-on, Bob. I think we made great improvements in taking care of our existing customer base. As I said in my prepared remarks, when I joined the company, our customer retention on an annual basis was running at 79%. It is very hard to grow a business when you're losing 21% of your customer base each year. I'm proud of the progress we made. And as we put in the deck, we're up 450 basis points over the last 27 months. So great progress. But what is the most beneficial? I'm so optimistic because we still have ample opportunity. As we put in the deck on Slide 7, you can see we've shifted from 20% of our branches being below 70% customer retention and only 20% being above 90% to just 24 months later, we're at 30% above 90% and 10% below 70%. Now, I'm not going to be happy until none of our branches are below 80% customer retention because that's our path to growth. We cannot lose our existing customer base. There's always reasons we might lose a few, but at the end of the day, we've got to make sure the service we provide our customers each and every day and support our employees that provide that service, make sure our customers recognize the value that we're trying to add to their businesses each day. So we're going to keep going, Bob. That retention is a critical number. We're going to invest in new sales, but we've got to keep chasing that retention number. We're at 83.5%, as we put in the deck. 85% is the next stop on our journey, I hope. Then, I'm not going to stop until I can say one day, we're keeping 90-plus percent of our business. But Brett, do you want to add anything? Brett Urban: I'll just add a little context. Obviously, you could tell the excitement in our voices over here. It starts with taking care of our employees, as Dale said, will take care of our end customers. We've improved that customer retention metric significantly. We've improved our fleet and our go-to-market significantly, just the look and brand of BrightView. And if you look at Page 9 of the deck, the strategy is starting to pay dividends. We continue to share more metrics on the business to give confidence of our ability to grow this in the back half of this year. And if you look at Page 9 of the deck, it's a new metric we're sharing, which is our Land Contract values that we have on the books at any given point in time. It's the annualized amount of these contracts. And if you look over the last 3 quarters, a big piece of this 2% growth in our contract book is coming from that customer retention, but we're now also starting to see those sellers we added back in the last June quarter, right, producing some incremental positive wins in the business and adding to that Land growth. So we couldn't be more excited about the strategy actually paying dividends into the KPIs. And if you look at Page 9, this is the leading indicator that would predict growth in the back half of the year once we get into our busy season. Operator: We'll go next now to Tim Mulrooney of William Blair. Timothy Mulrooney: So Maintenance Land, let's just start there. Yes, your Maintenance Land business was down a little more than 2% in the first quarter, but you maintained your guide for 1% to 2% growth for the full year. That implies about 2.5% growth for the remaining 3 quarters. And I know January is off to a snowy start, so if there's disruption in the second quarter here, then it looks like a lot of that growth in Maintenance Land is going to have to come from those last 2 quarters of the fiscal year. Can you just help us understand where you expect that growth to come from? Help bridge that gap for us. Dale Asplund: Yes. Great question, Tim, because I think it's worth taking a look at the quarter and digesting it for a minute. As everybody saw, and we said in our prepared remarks, snow was very, very high in the quarter, almost a record level for the quarter, being up $36 million. So it's great. We were able to take care of our customers in the market that they needed. If you look at our Land, we shrunk Land $8.9 million, Tim. So let me break apart that $8.9 million. First, we stepped over 2 named storms last year from 2 hurricanes that hit our southern markets, Milton and Helene. That was roughly $3.5 million. And then, $6 million of that other shrink is directly attributed to the markets that saw that outsized snow. So if you think of $6 million that comes out of our Land business that we can't put into the ground with ancillary work, that will position us to roughly flat if we didn't step over the storm and we didn't have the outpaced snow. So we feel great, Tim. We feel like the business would have been flat, as we enter the winter season, and the business is going to be poised to grow, whether it's 2% or 3% as we go across our 2 busiest quarters come April and go through the summer. So we are very optimistic that what you see on a headline for shrinking land, when you really break it down, it was impacted by the amount of snow that we had in those markets. And people saw we've had a very busy snow January based on everything in the news. But we're going to continue to take care of our customers each and every day based on what services they need. And I will tell you, I have seen more positive comments from customers the last 2 weeks than I've seen in many months. They're all reaching out to realize anybody can talk about doing snow services in July, but only true people that invest in the people and the equipment are able to deliver the service when we have as much snow as we've seen over the last several weeks. So we're in a great position, Tim. We are not -- we didn't change our guide. Despite what we're seeing on snow, we are very confident that we will achieve that 1% to 2% Land growth very easily. So we are positioned very well. But Brett, do you want to add anything? Brett Urban: No, I agree with Dale. January is off to a bit of a snowy start. We still have 2 heavy snow months in front of us, in February and March, which are still part of our total snow season. So we'll see how the quarter finishes out here. It is quite cold across most of the U.S. still. So we have optimism there. But as Dale said, look, if the $6 million that we were impacted by snow in Q1, even if we see a little bit of impact in Q2, given some more snowy weather, you'd have to grow the back half of the year north of 2%, like you said, Tim. And we feel ultra confident, especially looking at the contract book growth that we show on Page 9. That is the key, right? That is the number of customers we have, the value of contracts we have, that annuity businesses within our Land business that gives us that confidence to be at that 2% plus growth in the back half of the year. And we'll update as we get through Q2. When we do finish the snow season, we get through February and March, we'll provide a full update on the guide as we enter into Q3. Timothy Mulrooney: All right. That's helpful color, Brett and Dale. Brett, maybe you and I can nerd out on that contract book number that you just highlighted for a second because up 2% does look promising. But honestly, we don't have much to compare this metric to. Can you help us understand what this metric looked like this time last year? Brett Urban: Yes. Absolutely. Well, look, last year, we were still fixing the foundation and making sure we took care of our employees and took care of our customers. So if you go back a year, this is a new metric, we haven't shared it, but you wouldn't see an increase in this metric, right? We were working through kind of some things in the past and getting to a point where we're really significantly improving that customer retention. And now, like I mentioned before, with the sales force adds that we did 9 months ago, we're starting to see those sellers be productive. And we know it takes -- the first year to 6 months of a new seller, they're semi-productive, but not nearly fully ramped up. In that 6- to 12-month tenure range, they start to get ramped up and become productive and really start to sell. And then 12-plus months on, they would become fully productive. So that's why we're so excited about the adds we've made in Q1 to the sales force because that will pay dividends really later this year and really more importantly into '27 in the future. So we are investing in future growth. But going back to Page 9, just to give you a little more detail, if you look at our Land business, we do about $1.7 billion in Land revenue. I'm just going to round some numbers here, $1.7 billion in Land revenue. We've said publicly 2/3 of that is our contract business and roughly 1/3 of that is our ancillary business. So, rough math here, 2/3 of our $1.7 billion would say we have $1.150 billion of contract value on the books. So if you go back, Tim, a year ago, that number would have been less because obviously, the business hasn't been growing. But if you look at the last 3 sequential quarters now with the business growing, that contract value growing, 2% increase on, call it, $1.15 billion, roughly $22 million, $23 million. So that's what gives us the confidence, as we get into the busy season, right? 2/3 of our Land revenue happened between April and September, those last 6 months of the year. So this is definitely a leading indicator to what's going to come to the P&L in the back half of the year. Operator: We'll go next now to Greg Palm of Craig-Hallum. Greg Palm: I wanted to maybe hit on the weather stuff a little bit more just given some of the recent events. So can you talk about kind of what you've seen quarter-to-date in terms of impacts, both positive and negative? And I guess, as I'm thinking about it, just given this elevated amount of snow in certain markets, are you using that as a way to maybe onboard new customers that you can maybe convert to annual Land Maintenance contracts as well? Dale Asplund: Yes. Great question, Greg. Let me start off, and then, Brett can add. So I think, as everybody saw in our release, snow was very, very positive in the first quarter. In fact, we had a lot of questions I know on people asking, why didn't we think about increasing our expectations for snow from the $190 million to $220 million of our initial guide. But like I've said, since I've been in seat, we're only going to deliver good news on snow. Let me give you a little bit of additional data. So January has been a very strong month with storms going from anywhere in Texas all the way out through the Northeast. And this past weekend, we saw some pretty good weather down in the Carolinas and Virginia, so -- but if you look at our typical Q2, let me just give you a statistic, February and March combined in the past has been anywhere from $60 million combined in snow revenue to $160 million combined in snow revenue. So while it's still early, and we are optimistic about where we're going to finish snow, we'll give everybody that upside once we get through Q2. If I just did some quick math, Greg, and this is what we told a lot of our investors, if we did quick basic math, we did $173 million of revenue last year in Q2. We did $68.4 million this year. So you can assume that we're probably going to pace if we don't see any major warming happening. On the snow side, we're probably going to pace ahead of the top end of our range. But we'll update everybody come the end of Q2 once we get full visibility. And then, we'll decide how much of that benefit that we see from snow once we hit the end of Q2, we can reinvest back into the business. So, we feel great about it, Greg. It's only going to be upside for us wherever we land the plane with snow. And we just don't think it's going to create a long-term headwind that our summer months, where we get 2/3 of our Land revenue, we won't be able to outrun to get the growth that we promised for land. Brett Urban: Yes. I'd just add to it, Greg. Look, Dale said it several times here in the last probably month or so. Any competitor and/or landscaper can say they can do snow in July. But when the flakes start flying and snow is hitting the ground, we've actually seen that be quite different. And we've had customers in our markets, especially the southeastern part of the United States in Texas through Georgia, the Carolinas, come to us and say, "Hey, guys, we need help. Can you guys help us in snow"? And we've had a lot of customer outreach to the point of your second question of, is this going to lead to new customer acquisition? Yes, potentially. We're taking care of our customers first. We want to make sure the customers who have us for both land and snow and signed us up early in the season, that we're taking care of those customers first. But where we can and we have capacity, we're starting to pick up additional customers for snow, and now, having conversations with them about picking up their land contract, right? So if they're seeing some struggles from their incumbent landscaper on snow, they'll probably see the same struggles when it comes to landscaping. So that's creating an opportunity for us in the future to create more customer acquisition. Dale Asplund: Greg, let me add a little more color. And remember, this is a tough metric because the way that we price snow is obviously either with time and materials and you don't know how much snow you're going to get or we had tiered pricing for our fixed contracts. My team, who's been working so hard through the first 4 months of the year, gave me some high-level numbers, and these are just high level. I would say they feel like we believe we're going to get somewhere around 5 incremental annual -- $5 million of incremental annual contract value in snow based on customers coming to us to support their business. And they're thinking there could be about the same amount, Greg, in emergency needs for us to go out and service customers because their existing provider failed. Now, those all depend on the amount of volume we get in snow. But I will tell you, for us, that just shows the strength of people coming to us, asking us to do incremental services. So it comes down to making sure our team is prepared. Our team has the materials, our team has the equipment and our team is ready to do the work to take care of our customers. And we've seen that year-to-date. So we feel great that this is going to drive eventually more Land business because like I started off, anybody can talk about doing snow in July. But when you're getting 18 inches and you've got to have a parking lot clear, 24/7, you've got to have the equipment and people to make sure that you can service that property. So that's some more detail for you, Greg. Greg Palm: You answered 2 of my follow-up questions without doing, so I will -- I guess, I'll just pivot to something, maybe a little bit different, thinking back, I don't know, 6, 9 months ago about just sort of the overall discretionary spend environment. I know it's a tougher question in some of these seasonal markets like we're talking about. But overall, what are you seeing now versus that year ago period? And I'm just kind of thinking how this might impact some of the ancillary trends going forward. Dale Asplund: Yes. Look, it's still early, Greg, in the year. And obviously, if we get a lot more weather across those southern markets, especially in the HOA communities, you could feel some headwind on the Land side just because people end up spending a lot more money on snow removal. Nothing we're alarmed of. I would go the opposite way and tell you, we've seen a lot of damage from ice, whether it's plant material dying or whether it's tree damage across the country. We've dispatched tree crews out to many markets to try to make sure we can service our customers who have tree damage. So I would say there's always the possibility of headwinds, but we're seeing existing tailwinds. So I would say it's still too early to say are we going to see any noise from that. Once we get to the end of the second quarter, and we know exactly how much snow we had and where it was, we'll update everybody. But the good news is the commitment we made to take care of our customers and get higher retention and create that relationship continues to promote them to turn to us to actually do more and more of their services. So Greg, we are positioned so well, still too early to say if there's going to be some noise, but I have no worry even if we have some noise, like Brett said earlier, we're going to hit our Land forecast that we gave you in November of growing 1% to 2%. Operator: Gentlemen, we'll go next now to Andy Wittmann of Baird. Andrew J. Wittmann: Slide 9, again, the contract book of business, 3 quarters up 2%, that's great. I just wonder like if there's some context here around like we're in the middle of winter right now. And I know that -- I guess, you guys have said that your selling season has become more of an all-year-round thing. But for those seasonal markets, I have to think that some of your customers are still thinking about what they want to do for the coming green season. So does the 2% more likely look better a quarter from now after you get through some of those people in the seasonal markets making the decision for the year? I'm just trying to understand if this is actually conservative, for lack of a better term, or if I'm making too much out of it. Dale Asplund: No. I think, Andy, it's a great question. I don't think it's conservative because it's historic. So we're just giving you the facts of where we're at. You bring up a great question. We're starting to sell in our northern markets, even though it's a little bit of a challenge when you're getting as much snow as you're getting right now, but our customers are thinking about their April through October Land business. So absolutely, we sell Land contracts all year long. And I will tell you, even to Greg's question a minute ago, when we get additional needs for snow, it gives us the foot in the door to get those Land contracts, as we go into the summer. So Andy, to answer it a different way to say it's not conservative, we feel that momentum will continue to show on this slide. Our goal is not to say we've grown our book 2%. We think with the additional 80 resources we added in sales, we think of the 180 we've added over the past year, we feel great that we're going to continue to see momentum in this metric. Our goal is to keep adding resources to drive new contract book, and then, drive those customer-facing roles to drive all those ancillary services that those customers are going to need. So the teams in the field are very excited. Managing salespeople was a new thing to them a year ago, but now, they're all seeing the power of getting people out there, getting us new business so we can grow our business. And it's been a great journey, and I think 2026 will continue to show that momentum. Brett? Brett Urban: I would just add, we continue to manage this business for the long term. The quicker we can get these sellers added, like we showed on Page 8 of the presentation, the more inflection we'll have on Page 9, the contract book. And we're starting to see those 60 sellers we added last April, May, June, starting to produce and be productive here in Q1 of 2026. So it takes a little bit of time. But as you think about the business, you think about the way we're managing it. The strategy really is, Andy, based on that long-term view of the business. And that's why we went as far as to put our 2030 goals back into this earnings presentation to show we're committed to getting there as quickly as possible. So yes, I agree with you. I couldn't be more excited about the progress we made on Page 9. Whether it's 2% or something north of 2%, we'll continue to kind of share that metric just to show the progression in that underlying contract annuity business that makes BrightView such an attractive investment. Andrew J. Wittmann: I also wanted to ask about your IT tools. These have been some pretty big areas of investments that you guys have been making. Two of the bigger ones were around your HR IT system. I think that you guys are now -- have now gone live on a new system there. I think it was Workday that you put in. I want to know how that's gone, if there's been any disruption growing pains through that. And maybe even more importantly, though, I think you guys are now in the process of rolling out or more thoroughly rolling out your field management software that really kind of gives your guys the tools in the field for all sorts of different things. Maybe, Dale, could you just talk about how that's going? And how disruptive or not disruptive the field software is in particular? Dale Asplund: Yes. I think it's a great question. I would say, first, let's start with the HRIS system. Our employees are our #1 asset, and we've got to make sure we've got visibility and ways to manage them. I think what that tool has given us is added benefit for all of our leaders and made their jobs easier. So from a transition, as we've started to migrate to that for visibility, and we'll continue to have phases, Andy, as we add different modules on to get away from the litany of IT systems we had and put it all in one system. But the field has embraced it. It continues to show benefit, and we'll continue to leverage the different modules as we go forward. On the field service side, that's one that is really starting to take way. We've seen continued progress. We have over 1/3 of our branches on it. Our initial goal was sometime late March, early April was to get all of our branches on field service. The branches that have been on it for 30 to 60 days are seeing benefit in creating capacity with their labor. So that's a positive thing that the teams that are using it to help route and define how many hours for each job it's creating capacity. And that's key for us because I want to use not it as a labor savings tool. I want to use it to create capacity. So as we're growing this business this summer, we have the ability to service customers with the resources we have today. Now, I would say this, Andy, we had a couple of branch managers send me an e-mail, and I'm always there to help them. Obviously, when you get as much snow in a couple of these markets and you have training scheduled, we pushed a couple of branches out because I recognize we've got to service our customers, and we just moved the training out for a few weeks, and we get our team to reassign a date. But we are making wonderful progress on both of those initiatives. And like we said, our IT investments were behind schedule several years ago. These are the first 2 in a litany of different technologies we can help grow our business. So we're enabling our field. We're giving them tools, and our goal is to long term help them be more efficient and spend more time with their customers. Brett Urban: And Andy, I would just add, this is why it's so exciting, we have the balance sheet, liquidity and flexibility to do all these investments, which is fantastic, not only investing in our employees, in our customers, in our fleet, in our sales force, but also invest in technology. So Dale mentioned some of the tools that are rolling out, but that's all supported by the flexibility we have on the balance sheet, so we couldn't be more excited about the ability for us to grow the business, produce higher EBITDA than the year before and continue to invest back into the business. Operator: We'll go next now to Stephanie Moore at Jefferies. Stephanie Benjamin Moore: I wanted to circle back on maybe a question that was asked earlier, but I'm going to ask it a little bit differently. As you think about all of the success you've had thus far to start the year from the investment standpoint, obviously, the strong snow season, maybe just talk about the level of confidence you have in the guide, understanding it's obviously still early in the year and you need to get through your busy season? But I'm trying to understand what could maybe go wrong or in a more negative direction, which would make the guidance a little bit more difficult. So maybe downside scenarios that you guys walk through. Dale Asplund: Yes. I think, like I said, I'll take it into some buckets. Obviously, snow, if we continue to add the volume of snow we saw in Q1 and we saw in January, that could create some delays in our ability to do Land Maintenance service here in the second quarter, especially when you're looking at markets that are getting extreme cold all the way down into Florida. I was out with my teams this week to start the day and dispatch our teams, and we had temperatures in the low 30s across Florida. So we could always get that, Stephanie, more snow. It gives us more upside in the Snow business we do, and then, it will give us some potential delays in our maintenance and our development business. But, all these storms and the ice damage across the country, I would flip it the other way. I feel like long-term, as we go into our busy season with the summer, we had equally as much opportunity to see ancillary grow faster because of the tree work, because of the plant damage that's going to occur because once we get out of winter, people will want to make sure their properties look good. So I feel like there could be some timing. There's no question that when you get as much snow as we've had over the first 4 months, it could create some noise in timing. But at the end of the day, I think there's going to be a lot of opportunity that comes out of a little bit rougher winter. And I think that even in the development business, okay, we're going to have some timing, like we saw in this quarter. Our 3 biggest projects that we're doing right now are all in the northern markets. We could have done more work with them if they weren't under snow for the majority of the quarter. So we feel great, Stephanie. I don't -- you say what risks do we have? We always have risks in every environment, but I feel our upside is greater than our downside right now. Stephanie Benjamin Moore: That's very helpful. And then, maybe switching to capital allocation priorities, obviously, you noted that the M&A pipeline remains robust, but you also have been very active in share repurchases. So maybe just talk through as you evaluate both options, what's more for the near-term priorities, when we might expect to see M&A start again. Any color there would be great. Dale Asplund: Yes. Great question. I'll start off, and I'll give it to Brett. I remind my senior leaders that you have to earn the right to do M&A by growing your own business before you've earned the right to buy somebody else's business. And my guys remind me of that all the time because they're all on the verge of seeing that business grow. So they're all reminding me it's time to get back into M&A. And you saw it. We had a strong quarter of share repurchase. We're buying our equity back at 7.5x at the price that we averaged in Q1. At 7.5x, we'd have a hard time getting a quality company like we have at BrightView for that multiple. We believe we've got a big robust pipeline, a quality company, so even if smaller is going to trade at 8 to 9x. Even if we get a turn on that based on synergies, we're still paying a price that some were higher than what we can buy our own shares back at. So we know the quality of company we have at BrightView. We recognize we're significantly undervalued. So we're going to keep -- and our Board approved us to upsize our share repurchase and get more aggressive. So we feel great about the investments we're making. It's real simple, invest in our people and our fleet, invest in buying our shares back, and then, do M&A. But Brett, do you want to add anything? Brett Urban: No, I would just add that we're currently levered at 2.4x, essentially flat to where we were, very favorable debt structure, no long-term maturity in 2029. And we have plenty of liquidity, right around $0.5 billion to invest in the business of liquidity. So to your question, Stephanie, and Dale's point, I think on Page 14, we've tried to lay out our priorities very clearly. And I think we're executing on those priorities. We've executed on a fleet refresh that has essentially seen all of our core mowers get to our targeted average age. Almost all of our production vehicles, by the end of this year, we feel like they'll be at the average targeted age. And we have some work to do on trailers. But this year is probably going to be our last year of elevated CapEx in the business. We're going to run about 6.5%. And then, we'll come back down more to that 3.5%, 4% normal range as we get through our trailer refresh. But Dale said it well, buying a company comes with some inherent risk of integration and acquisition. And if our stock is going to trade at 7.5x multiple, definitely an accretive use of capital to buy our own shares. And look, we feel like we should be in the 10-plus multiple trading range. So when we get there, and this business is growing, and we get there, we get a re-rate, there's absolutely a tremendous amount of opportunity to go down the acquisition trail. And I will tell you that the pipeline we're maintaining here is significant. So we have a pipeline of potential targets. When the time is right, we'll be able to pull that lever fairly quickly. Operator: We'll go next now to Jeffrey Stevenson at Loop Capital. Jeffrey Stevenson: How should we think about the cadence of development revenue growth this year after the segment was negatively impacted by project timing in the December quarter? And then, has there been any change in the timeline of the 4 to 5 large projects you're working on compared with prior expectations? Or is that in line with what you were expecting when you gave guidance last quarter? Dale Asplund: Yes. We feel great about the progress we saw from Q4 into Q1 for development. It's definitely swinging back. Is there timing differences? Jeff, yes, like Brett said in the script, when you've got a lot of those big projects up in the northern climates and you get the amount of snow, they still grew, but they could have grown more. We had more opportunity. Those projects will still hit our timelines. It's going to be about when we can recognize it. We feel great about what the customers are asking us to do, and we continue to work on them. So I'm not worried about the development business long term. We just got to stay on top of everything we're working on, take care of our customers, communicate to our customers and continue to keep driving forward with the development backlog, so we keep booking work each and every day. Jeffrey Stevenson: Great. No, that's helpful, Dale. And sticking on the development business, I was wondering if you could provide an update on your cold start initiative and the timeline of that this year? And then, also, with the increase you've seen in the sales force, obviously, that's mainly on the maintenance side. But have any of the new hires been on your development business as well? And how will that help with growth over the coming years? Dale Asplund: Yes. Look, I think it's a great question. We updated everybody that our goal is to get several new locations open for development. We have now opened 6 locations across North America that we're seeing green shoots out of. Some of it is markets that we traditionally did remote work in. So we had some development teams there that could do work. But Jeff, yes, about 10% of those new sellers in the quarter, that money that we spent went to the development team because our whole goal is when we add a location, make sure we've got a development sales rep out in the market to get us more and more work. So yes, it's about 10%-90% for that $6 million that we talked about spending in the quarter on sales resources. And we've got 6 of the locations that we've gotten stand-alone P&Ls that they're operating independently versus they used to be doing work remotely. So great progress there, and we're going to continue to keep our foot on the gas and grow as fast as we can with new locations. Operator: [Operator Instructions] we'll go next now to Greg Parrish at Morgan Stanley. Gregory Parrish: I'll just squeeze one in here. Maybe just help us think about snow margin, especially heading into the second quarter with how much we had, had in January, and we'll see how February, March play out. But how much of the snowfall so far is in fixed versus variable? And then, can you talk about the potential for some of these clients, as they move up in tiers, does that potentially add more margin upside in the Snow business in the second quarter? Dale Asplund: Yes. Good question, Greg. I think, when you look at our -- we announced that we basically saw $3 million of improvement from the revenue in the quarter. If you digest that and you really break it down, you look at it and say $6 million of that incremental EBITDA came from that incremental snow revenue, where the shrinkage in development and land, there was about $2 million of negative EBITDA in land and $1 million in development giving us the $3-ish million of net benefit. I would say you were head on. So we've got a big portion of our contracts, where, especially in the northern markets, we went to more fixed tier pricing. Now, as much snow as we saw, the Chicago market saw 3x the normal snow up and from New Jersey up to Boston saw double the normal snow in the first quarter. All those, when we have fixed tier pricing, kind of limit the margin that we're going to have until we start triggering those additional tiers. As we trigger those additional tiers, it becomes more profitable. So we have always said our margin expectation on incremental snow is between 20% and 25%. We feel once we land the plane for the year and we exit Q2, we will be very comfortably in that range. I know Q1, $6 million of benefit on $36 million of revenue is slightly below that on flow-through, but we feel like a lot of that is just timing of how we see those fixed tier contracts. We continue to see more and more customers go to fixed tier, especially after a year like this because some of the markets on the fringe that traditionally took more risk and tried to go to time and material are probably going to want to go look at fixed pricing again, so -- but yes, we feel great. We feel that we're going to get added benefit as we go through Q2, maybe as much on revenue, but more on profit because we're -- right now, it's all about just taking care of the customer. Operator: And ladies and gentlemen, that is all the time we have for questions this morning. At this time, I'll turn things back to Mr. Asplund for any closing comments. Dale Asplund: Look, I want to thank everybody again, and I apologize. I know we still had some questions in the queue. I think it was a great discussion. And operator, thank you. But I'd like to close by reaffirming our confidence in the trajectory of the business, as we continue to work toward its transformation. Over the past 2 years, we fixed the foundation of this business, becoming a unified company and unlocking efficiencies to drive this business forward. All the while, we have started to reinvest back into our sales organization. I am beyond proud of how many resources we were able to add in the quarter, and we are going to benefit from them, not here in Q1, but throughout 2026 and position us for long-term growth. So to all the employees, thank you. Everybody continue to be safe. To all of our investors, thank you for taking the time to listen in today. Everybody, be safe, and we'll talk to you again at the end of the second quarter. You can now end the call, operator. Operator: Thank you, Mr. Asplund, and thank you, Mr. Urban. Again, ladies and gentlemen, that will conclude today's BrightView conference call. Again, thanks so much for joining us, and we wish you all a great day. Goodbye.
Operator: Good afternoon, and welcome to the Artisan Partners Asset Management Business Update and Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Artisan Partners Asset Management. Please go ahead. Ryan Bruhn: Welcome to the Artisan Partners Asset Management Business Update and Earnings Call. Today's call will include remarks from Jason Gottlieb, CEO; and C.J. Daley, CFO. Following these remarks, we will open the line for questions. Our latest results and investor presentation are available on the Investor Relations section of our website. Before we begin today, I would like to remind you that comments made during today's call, including responses to questions, may include forward-looking statements. These are subject to known and unknown risks and uncertainties, including, but not limited to, the factors set forth in our earnings release and detailed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those disclosed in the statement, and we assume no obligation to update or revise any of these statements following the presentation. In addition, some of our remarks today will include references to non-GAAP financial measures. You can find reconciliations of these measures to the most comparable GAAP measures in the earnings release and supplemental materials, which can be found on our Investor Relations website. Also, please note that nothing on this call constitutes an offer or solicitation to purchase or sell an interest in any Artisan investment product or a recommendation for any investment service. I will now turn it over to Jason. Jason Gottlieb: Thank you, Ryan, and thank you for joining the call today. Since our founding in 1994, we have steadily expanded our capabilities across equities, credit and most recently, alternatives. We have done this while remaining true to a consistent business philosophy and approach, high value-added investing, a talent-driven business model and thoughtful growth, all in the pursuit of generating and compounding wealth for our clients over the long term. 2025, we generated significant absolute returns for our clients, delivered strong results for our shareholders and continue to expand our multi-asset class platform. Firm-wide asset-weighted investment returns exceeded 20% net of fees. Our investment strategies generated over $33 billion in returns for clients. Compared to 2024, we grew revenue by 8%, operating income and adjusted operating income by 9% and 12%, respectively, and assets under management by nearly 12%. Turning to Slide 3. Investment performance remains strong across our platform with 79% of our AUM outperforming benchmarks for the 3-year period, 74% for the 5-year period and 92% for the 10-year period gross of fees. Several strategies generated particularly strong results in 2025. In equities, six of our strategies generated over 500 basis points of outperformance net of fees, including U.S. Mid-Cap growth, Non-U.S. growth, Global Equity, Global Value, Select Equity and Sustainable Emerging Markets. The Global Equity, Global Value and Select Equity Strategies outperformed their benchmarks by 2,422, 1,188 and 1,175 basis points, respectively, net of fees. In credit, the emerging markets local opportunity strategy generated a calendar year return of over 24%, 527 basis points above its benchmark net of fees. In alternatives, credit opportunities returned nearly 8%, global unconstrained returned nearly 12% and Antero Peak returned over 20% each net of fees. Longer-term performance across our platform is compelling and broad based. All 12 Artisan strategies with track records over 10 years have outperformed their benchmark since inception net of fees. 14 of 17 strategies in equity, 4 of 4 credit strategies and 3 of 5 alternative strategies have outperformed their respective benchmarks since inception net of fees. Trailing 1-year performance has been weighed down by underperformance in two of our largest equity strategies, International Value and Global Opportunities, both of which have very strong long-term track record. Turning to Slide 4. We ended the year with $180 billion in assets under management, an all-time high at year-end, driven by over $33 billion of investment gains. Our credit platform performed well in 2025. AUM grew by 29% compared to 2024 to $17.9 billion. Net inflows totaled $2.8 billion and organic growth exceeded 20% for the third consecutive year. Our alternatives platform also experienced healthy growth with AUM growing 20% from 2024 to $4 billion. With strong organic growth in global unconstrained in particular. Our equity platform was impacted by higher-than-expected outflows of $15.6 billion. Outflows were primarily concentrated in global opportunities U.S. mid-cap growth and non-U.S. small-mid growth strategies, driven by challenging short-term performance, changing asset allocation preferences and profit taking on the back of strong long-term performance. Maintaining and growing AUM in public equities requires differentiated and compelling investment performance, asset allocation demand, the right vehicles and pricing and effective sales and client service. The bar is high, but we believe we can continue to maintain and grow our equity businesses. In addition, we continue to make meaningful progress towards expanding the breadth of our platforms towards credit and alternatives. Slide 5 provides an overview of our newest investment franchise, Grandview Property Partners. Grandview is a real estate private equity firm specializing in originating, developing, acquiring and managing middle market properties across the United States and joins Artisan as our 12th autonomous investment franchise. The Grandview team led by founding partners, Raj Menon, Dean Sotter, Eric Freeman and Jeff Usas has worked together for an average of 22 years. Since forming Grandview Partners in 2018, the team has delivered top quartile results and consistent DPI realization. Grandview's macro-driven investment approach focuses on growth markets supported by shifting demographic trends and regional supply-demand dynamics. Recent funds have emphasized industrial, residential and power land themes. Grandview has raised three discretionary closed-end drawdown funds and currently manages approximately $880 million in institutional assets across its flagship fund series and co-investment programs. The acquisition of Grandview advances our strategic expansion into alternative investments, establishes a foundation in private real estate and creates new pathways for growth. It also aligns with our long-standing business model, high value-added investing talent-driven and thoughtful growth. We believe we can leverage our institutional and intermediated wealth relationships to further expand and develop Grandview's business. Marketing the team's next fund will be high on the priority list in 2026. With Grandview's acquisition, we have broadened the ways in which we can partner with and onboard differentiated investment talent. We intend to leverage our enhanced transactional and operational capacity to add additional capabilities across our platform with a disciplined focus on allocating capital towards our highest conviction opportunities. I will now turn it over to C.J. to review our recent financial results. Charles Daley: Thanks, Jason. Our complete GAAP and adjusted results are presented in our earnings release. We are pleased with our financial results for the fourth quarter 2025. Assets under management as of December 31, 2025, were $180 billion, up 12% from year-end 2024. Revenues in the December quarter reached a new all-time high of $336 million, up 11% compared to the September quarter and up 13% compared to the prior year fourth quarter. The December 2025 quarter reflects approximately $29 million of performance fees from six different strategies. Strong relative investment performance in the fourth quarter across three performance fee eligible accounts drove performance fees above our third quarter projections. As of the end of 2025, approximately 3% of our AUM is subject to performance fee arrangements and the majority of those arrangements are annual fees with measurement dates at the end of December. Our weighted average fee rate for the fourth quarter was 74 basis points, which includes performance fee revenue. Our recurring management fee rate remained consistent with recent quarters. In the fourth quarter, the Artisan funds completed their annual income and capital gain distributions. Distribution is not reinvested in Artisan funds totaled $1.5 billion for the quarter and $2 billion for the full year. Representing an $800 million increase from 2024. This increase was driven primarily by strong absolute investment performance in our two largest equity mutual funds. Adjusted operating expenses for the quarter were up 4% compared with the third quarter 2025 and up 7% compared with the fourth quarter 2024, primarily from higher variable incentive compensation expense due to increased revenues. While total adjusted operating expenses increased, fixed compensation costs for the quarter declined modestly. Long-term incentive compensation expense was lower in the quarter due to the forfeiture of unvested long-term incentive awards associated with a small number of employee departures. Additionally, we benefited from the quarterly true-up of self-insurance liabilities, which reflected updated estimates. Adjusted operating income increased 23% compared to both the prior quarter and the same quarter last year. Adjusted operating margin for the quarter was 40.2%, an improvement of 400 basis points from the prior quarter. Adjusted net income per adjusted share was up 24% compared to last quarter and up 20% compared to the fourth quarter of 2024, largely consistent with operating income. Full year 2025 revenues were up 8% compared to 2024 on higher average AUM. Full year 2025 adjusted operating expenses increased 5% from 2024, primarily from higher incentive compensation on elevated revenues and the impact of the addition of the January 2025 long-term incentive award. Calculating our non-GAAP measures, nonoperating income includes only interest expense and interest income. As of December 31, we had $152 million of seed capital invested in emerging products. Those investments have produced solid returns. During the year, we realized $20 million of gains from seed investment redemptions in products that no longer require support from firm capital. Those gains, which are excluded from our non-GAAP earnings, provide capital to support dividends as well as future growth through reinvestment in new products, GP investment in private funds or acquisitions. Our balance sheet remains a source of strength. We ended the year with approximately $214 million of cash and a conservatively leveraged capital structure at approximately 0.4x leverage. Importantly, our $100 million revolver remains fully undrawn, providing additional liquidity and downside protection. As a result, we are in a position to return capital to shareholders on a consistent and predictable basis while maintaining the flexibility to invest in the business. Consistent with our dividend policy, the Board declared a quarterly dividend of $1.01 per share with respect to the December 2025 quarter, along with a $0.57 year-end special dividend. In total, dividends declared with respect to 2025 cash generation were $3.87 per share, representing a 98% payout ratio relative to adjusted earnings and an 11% increase versus dividends declared on 2024 cash generation. Year-end special dividend was 14% higher than the prior year, reflecting stronger earnings and cash generation. Based on our stock price on December 31, this equates to a dividend yield of 9.5%. Importantly, even after funding the quarterly and special dividends and our near-term growth initiatives, including Grandview, we retain approximately $80 million of excess capital to fund organic growth and explore potential M&A opportunities. Overall, our capital structure is intentionally designed to be durable through market cycles combining strong cash flows and liquidity, modest leverage and a variable cost model that generates attractive margins. Looking ahead to 2026. Our Board approved the 2026 Annual Long-Term Incentive Award of approximately $72 million, consisting of $51 million of cash-based franchise capital awards and $21 million of restricted stock awards. Consistent with our long-standing philosophy of retaining investment talent, the vast majority of the awards were awarded to our investment professionals. The result of the 2026 grant, we expect long-term incentive amortization expense to be approximately $85 million for 2026, excluding mark-to-market impacts. The acquisition of Grandview closed on January 2 is expected to have an immaterial impact on our 2026 earnings. We expect that the acquisition will be mildly accretive to earnings per share after the final closing of Grandview's next flagship closed-end drawdown fund. Including approximately $20 million of increased fixed expenses from the long-term incentive compensation grant and the addition of Grandview expenses, fixed expenses are expected to increase low single digits in 2026. Low single-digit increase primarily reflects merit-based salary increases and inflationary market data and technology costs. As a reminder, we estimate our fixed compensation and benefits expenses will be approximately $6 million higher in the first quarter of 2026 compared to the fourth quarter of 2025. In closing, we believe our long-standing investment-led culture, disciplined allocation of resources and capital and expanding multi-asset platform positions us well to continue to compound wealth for our clients and shareholders over the long term. I will now turn the call back to the operator. Operator: [Operator Instructions] The first question comes from Bill Katz with TD Cowen. William Katz: Okay. So maybe all things grand view to get started. There's probably a cluster of questions here, maybe accounts for my first question, so if you don't mind. One, the AUM was a fairly lower level than I think maybe many of us were anticipating. I appreciate the close earlier. Maybe you could sort of explain why that happened? And then secondly, as you mentioned in terms of the accretion guidance looking ahead, how do we think about maybe the timeline for the next flagship fund? And maybe what was the previous size of the fund as we can sort of try to lay that through our models. Charles Daley: Bill, I'll start. The AUM was down because in the fourth quarter, there were some realizations on some properties in the first fund, the Grandview Fund I, which is fully invested in the harvesting phase. So there were realized gains as well as distributions out to LPs, which is a good thing. Jason Gottlieb: And Bill, on your question regarding Fund III. Fund III was about $150 million in raised out and committed assets. They're almost through the investment period there. And so that's obviously a lower bar than what we're certainly expecting in Fund IV, which we're going to be actively pursuing, as I mentioned in our prepared commentary, this will very much be a goal of ours -- a top priority of the management teams as well as Grand Views to build out Fund IV, which we're effectively launching as we speak. And so we expect that to build throughout the course of the year. We hope to have a first close sometime in the early to mid part of the summer which will be a good indication as to how we're tracking. But we do expect it to be significantly higher than their last fund launch, which was Fund III. William Katz: Great. And then just sticking with -- I was encouraged by some of your comments in the press release and in your prepared commentary. I was just sort of leaning into the M&A opportunity. I was wondering if you could maybe expand on your commentary a little bit, just sort of where you're seeing the greatest receptivity? How is the portfolio potentially seasoning of maybe 3 months ago? And then just given just everything that's going on in the market, how are you sort of seeing like the bid-ask spread on expectations around purchase price? Jason Gottlieb: Yes. So maybe I'll just talk a little bit about the future pipeline. There's a couple of things that I would highlight. We're clearly not exclusively focused on M&A. We're really letting the talent drive the outcome here. And certainly, there's asset classes where we have a an emphasis in terms of where we're seeking opportunity. And I would continue to focus on the areas that you would expect private credit is one where we've been reasonably active both in the form of lift out and the potential for M&A. Private equity in the form of secondaries has been an area that we remain pretty active. We've seen some really interesting idiosyncratic opportunities within equity that has more recently come back. This is one in particular that we've been talking about 5 or 6 years ago, we were very excited about. There was a little bit of a hesitation, I think, more on their part just due to where they were in their career and what they wanted to achieve and get accomplished before they did something more entrepreneurial, but we're now engaged with them, and we're talking. And another one in particular that is interesting is just the potential to broaden out our credit platform, not necessarily just purely in private, but also on the public side as well as the hybrid side. I would go back to some of the comments I made around Grandview and most of their transactions are off market. And I think that what we saw with Grandview, which was an off-market transaction. I think that, that will continue to be a more fertile hunting ground for us. The transactions that are being shown and prominently shopped, are hard for us to really get excited about. Those tend to be more about dollars and cents as opposed to investments, and we really need to just stay true to who we are and focus on the investment side. But the other -- the last thing I would say about the pipeline, and it goes back to Grandview, we're excited about Grandview for all of the reasons we're excited about the prior 11 teams. And what's great about Grandview is they already are a fully functioning investment platform. It's not like we have to build something. The foundation has been laid. The team has been working together for 20-plus years. They have had great deal of investment success. And so it's really up to us to collectively work with them to build in some and layer in some growth. And so that's different from when you go into a lift out where you have to really drop all your pencils and really focus on everything that's required to make a team successful. And so while we're still going to be there and do that, I think there's less that's required of the middle of the firm, given that this is a team that's operating at a high level already. Operator: The next question comes from Alex Blostein with Goldman Sachs. Anthony Corbin: This is Anthony on for Alex. Maybe just one 2-part question on the international value strategy. So this has been kind of one of the top flowing strategies at APAM for a while now, yet we saw another quarter of elevated outflows despite what seems like an industry kind of rotation out of growth and into value. So what's driving this recent weakness? And how have you seen kind of client demand change recently? Jason Gottlieb: Yes. I don't -- Anthony, it's Jason. I wouldn't put too much emphasis on the elevation of the outflows. I think it's primarily due to the fact that David and the team have just continued to deliver really exceptional absolute returns even in the face of a challenging market for them. They continue to produce great absolute returns with a slight relative headwind. So we haven't seen anything notable or in particular that gives us pause or concern -- or certainly, David and the team. There's been some institutional reductions just largely due to the impact of the equities book of several of our clients just outperforming. And so we're getting a little bit of that rebalanced flow that you naturally expect. And we would expect some of that to continue to happen throughout the course of the first quarter in light of how strong markets were globally, especially ex U.S. So that's there's nothing that we're seeing in the trends or there's nothing underlying that we -- that gives us concern or something that suggests that there's an issue on the horizon. Operator: The next question comes from John Dunn with Evercore ISI. John Dunn: I wanted to maybe get an update on what you're seeing as far as interest in and demand for non-U.S. strategies just given what a contributor is to your AUM base? Charles Daley: Yes. John, yes, it's a good question. I'd say there's probably four -- there's really four areas that I think there's going to be some interesting opportunities for our platform. And I think they aligned directly to your question. So right now, I think our AUM is 70% ex U.S., plus or minus a few percent. And when you think about the big trends that we're seeing, number one, we think there's a reemergence of emerging markets allocations coming on the horizon. We spoke about something last quarter, which was we were aligning some sales efforts and some sales focus and running a campaign specifically in emerging markets. And while it was early days and it remains extremely early days, we're seeing some green shoots and some direct allocations coming out of that effort. I think we raised north of $1 billion in the 5-ish plus months that we enacted that campaign with -- we have four very distinct strategies that are able to capture that, and all four of them had over $100 million in net flows over that very short period of time. We fully expect that, that campaign will be in force throughout 2026 as we see the pipeline grow and build. And so we're very much excited about that area, in particular, you rightly point out the international markets. And I would expand that out to global as well. I think a lot of people don't want to give up the ghost on U.S. and the beauty of global clearly gives you the ability to toggle between U.S. and non-U.S. And we've had a great deal of success in our global franchises. So global value, as I've mentioned in my prepared comments, has just shot the lights out performance-wise our global equity team with Mark Yockey also had an outstanding year. They -- I think they produced a 47% return in their global equity strategy. And then underneath that, we also have some international capabilities that we're excited about. Mark Yockey, again, produced a really outstanding return in 2025, which is on the heels of outstanding returns in prior years as well. And so his record is really compelling. We're starting to see some real activity in that strategy as well. And so we think the engagement in international will remain elevated, and we expect that several of our strategies will be aligned to at least have conversations with the clients about the benefits of how they operate in those markets. Some that are maybe a little less aligned to your question, but still relevant to, I think, the trends that we're seeing in our conversations, we still think that there's a long way to go in credit. And you're seeing that in all of our areas where we have exposure. So the high income team with Bryan Krug and his -- the development of custom credit solutions, we've seen significant uptake in interest from our institutional marketplace where they're really designing a bespoke solution around a specific need, and Bryan is able to accommodate those. So we're seeing really good uptake there. One thing that's been sort of flying a little bit under the radar screen for quite a long time, but we're starting to see some uptake as well as our -- we have a floating rate fund that is top quartile on a 1-year, top quartile on a 3-year that's being run out of Bryan's franchise. We're starting to see some interesting opportunities coming from that. And then when you look at the cross-section of emerging markets and credit with our EMsights team, they're firing on all cylinders, emerging market debt opportunities, emerging market local opportunities continuing to really deliver outcomes to the upside, both in absolute as well as excess returns. And so they're at the intersection of a couple of interesting themes for us. And then lastly, something that we've talked about for quite a while, which is alternatives. Certainly, Grandview is going to play a very important current and future role in the growth and development of our alternatives platform. And then when you think about what's going on, again EMsights as well as in our high income team. EMsights, the global unconstrained strategy through the end of the year, I think we raised about $500 million or $600 million in assets. And this, again, is a top quartile performer with a very, very differentiated return profile that people are really -- it's really resonating with our intermediate wealth space as well as our institutional space. And then lastly, credit opportunities, which I cited as a really strong performer over a multiyear time horizon is continuing to see incremental flows, which we would expect to continue in 2026. John Dunn: Got it. And then maybe just because it's been a swing factor for flows lately. Maybe could you just give us kind of the puts and takes looking forward the institutional side, particularly by region? Charles Daley: Yes. I think institutionally, we're -- if you look at the regions, I'd say where we're probably a little bit more of a little bit more at risk has probably been more in Europe in light of some of the regulatory changes that we've talked about for quite a while. We talked about it in Australia, and it sort of impacted a couple of countries in Europe as well the combination of some of the regulatory changes that are occurring, some short-term performance where -- that is where we have a lot of global exposure, specifically with our growth team and global opportunities. There's going to be, I think, a little bit more of a challenge in that region, specifically because of that. where clients are reallocating the active passive debate rages and then you've got that regulatory overhang is -- causes it to be a little bit more challenging. But institutionally in the U.S. marketplace, we are still continuing to see pretty good opportunities, and it's going to -- it's coming in our emerging markets franchises as well as in our credit franchises. So there's to your point, there's going to be some puts and takes. So it's going to be hard to tell exactly where it all shakes out. But I'd say U.S. is probably a little bit more favorable in that regard institutionally relative to non-U.S. Operator: [Operator Instructions] This concludes our question-and-answer session and the Artisan Partners Asset Management Business Update and Fourth Quarter 2025 Earnings Call. Thank you. You may now disconnect.
Operator: Welcome to the OMV Results January to December Q3 2025 Conference Call and webcast. [Operator Instructions] Please be advised today's conference is being recorded. At this time, I would like to refer you to the disclaimer, which includes our position on forward-looking statements. These forward-looking statements are based on beliefs, estimates and assumptions currently held by and information currently available to OMV. By their nature, forward-looking statements are subject to risks and uncertainties that will or may occur in the future and are outside the control of OMV. Therefore, recipients are cautioned not to place undue reliance on these forward-looking statements. OMV disclaims any obligation and does not intend to update these forward-looking statements to reflect actual results, revised assumptions and expectations and future developments and events. This presentation does not contain any recommendation or invitation to buy or sell securities in OMV. I would now like to hand the conference over to Mr. Florian Greger, Senior Vice President, Investor Relations and Sustainability. Please go ahead, Mr. Greger. Florian Greger: Thank you, and good morning, ladies and gentlemen. Welcome to OMV's earnings call for the fourth quarter 2025. With me on the call are OMV CEO, Alfred Stern; and our CFO, Reinhard Florey. Alfred and Reinhard will walk you through the highlights of the quarter and discuss OMV's financial performance. Following their presentations, the 2 gentlemen will be available to take your questions. And with that, I'll hand it over to Alfred. Alfred Stern: Thank you, Florian. Ladies and gentlemen, good morning, and thank you for joining us. Before I discuss the details of our fourth quarter performance, I would like to briefly reflect on the operational and strategic highlights of last year. Despite the challenging economic and geopolitical backdrop, we achieved a strong performance across our 3 business segments. In Energy, we were able to almost reach the prior year oil and gas production level if we exclude the divestment of the Malaysian business. We slightly increased our Fuel sales volumes reinforcing our position as a supplier of choice in the downstream sector. And in Chemicals, total polyolefin sales volumes, which include the joint ventures, rose by 3% year-on-year, underscoring our product strength in a challenging market environment. Our Clean CCS operating result reached a strong EUR 4.6 billion; however, decreased by 10% compared to the prior year quarter. Importantly, despite the difficult backdrop, our cash flow from operations, the basis for shareholder distributions amounted to EUR 5.2 billion and thus was just 4% lower than the year before. This resilience demonstrates again the strength of our integrated business model, delivering robust cash flows in a volatile market environment. A particular achievement worth noting is that by the end of 2025, we have already surpassed 70% of our efficiency program 2027 target demonstrating our steadfast commitment to operational excellence and supporting our strong cash flow generation. We have maintained a disciplined approach to investments. Our balance sheet remains very strong, reflected in a very healthy leverage ratio of only 14%. This strong financial position provides us with the necessary flexibility to navigate market uncertainties, while continuing to invest in future growth opportunities and OMV's transformation. Ladies and gentlemen, as promised, our shareholders will directly benefit from our success. For the financial year 2025, we will propose to the Annual General Meeting a regular dividend of EUR 3.15 per share and again, an attractive additional dividend of EUR 1.25. In total, this will amount to a cash dividend of EUR 4.40 per share, resulting in a dividend yield of 9.3% based on the closing price of last year. This payout will represent 28% of our cash flow from operating activities. Despite the weaker economic environment, OMV will once again offer attractive shareholder distributions. Let me briefly highlight our strategic progress in 2025. In the Energy segment, the flagship gas project of OMV Petrom, Neptun Deep remains firmly on track and within budget for a targeted start-up in 2027. This marks a major milestone in our ongoing commitment to diversifying and securing gas supply. We strongly believe in the Black Sea's potential for the region and have reinforced our position through further exploration in Bulgaria, partnering with NewMed Energy and the Bulgarian state. Exploration drilling in Han Asparuh began in December 2025 with the Noble Globetrotter 1 vessel contracted to drill 2 exploration wells. Having 2 rigs simultaneously in operation, 1 offshore Bulgaria and another offshore Romania, represents a significant achievement of OMV Petrom. We have successfully diversified our cost portfolio, ensuring continuous and uninterrupted supply to all our customers since more than 1 year. As a result, we are no longer dependent on any single supplier and now have the strongest gas portfolio in OMV's history. In Renewables, OMV Petrom achieved notable progress by expanding its renewable power capacity, advancing towards a leadership in Southeastern Europe. We have advanced geothermal energy projects. We completed drilling and the successful production test in Vienna and are on track to commission our first geothermal plant by 2028. In October last year, we have made an oil discovery in Libya in the Sirte Basin with estimated recoverable volumes between 15 million and 42 million boe. What makes this especially promising is the location, just 7 kilometers from existing infrastructure. Turning to Fuels. Our coprocessing plant is operational and producing renewable diesel. In April last year, we started up our 10-megawatt electrolyzer plant in Schwechat, the biggest of its kind in Austria. Construction of the SAF/HVO plant at Petrobras is progressing as scheduled with start-up targeted for 2028. We are also investing in around 200-megawatt electrolyzer capacity in Austria and Romania. These green hydrogen projects are fully integrated with our refineries and primarily designed to supply our own facilities captive demand. In Retail, we have nearly doubled our EV charging network in 2025 and rebranded our retail stations, underscoring our commitment to sustainable mobility and enhanced customer service. In Chemicals, the game-changing agreement with ADNOC to form Borouge Group International establishes a global polyolefin powerhouse and more resilient chemicals growth platform. We successfully commissioned our ReOil chemical recycling plant and continue to advance key growth projects such as Kallo and Borouge 4. Kallo is expected to start up in the second half of this year, while Borouge 4 production is expected to ramp up through 2026, as units are commissioned and brought online. First unit of Borouge 4 should come online till this quarter. Aligned with our Strategy 2030, we remain focused on an agile transformation, responding to evolving customer needs all while maintaining strong cash flow discipline and carefully managed investments to ensure attractive returns for our shareholders. Let me update you on the status of Borouge Group International. We made very good progress regarding the closing of the transaction and expect this, as previously communicated, in the first quarter of this year. We are pleased to report that we have already secured all necessary foreign direct investment approvals as well as almost all the other required regulatory clearances. In addition, in preparation for the acquisition of Nova Chemicals, we have successfully completed our financing process. We have secured $15.4 billion ensuring that sufficient liquidity is in place to support the transaction. At this stage, the primary remaining tasks are to obtain the outstanding clearances. Discussions regarding the recruitment of BGI Executive Board and Executive Leadership team positions are nearly complete. Announcements regarding these appointments, along with nominations for the Supervisory Board will be made in due course. Finally, the active collaboration between ADNOC, OMV, Borouge, Borealis and Nova Chemicals has resulted in detailed plans for day 1 and beyond. And we have established a robust framework from the very outset of the integration to realize the synergies of more than $500 million. Overall, these developments clearly demonstrate strong momentum, and we remain confident in the successful closing and integration of Borouge Group International. Let me now move on to the details of our fourth quarter performance. Our Clean CCS operating result reached around EUR 1.15 million, representing a decrease of EUR 222 million or 16% compared to the same quarter of 2024. Excluding the positive net effect of EUR 210 million arbitration award received in the fourth quarter of 2024, our Clean CCS operating result would have been broadly in line with the prior year quarter despite lower oil and gas prices. The quarter was marked by significant geopolitical volatility. Brent crude prices declined, driven by weak short-term demand outlook and increased OPEC+ output. The introduction of new U.S. sanctions against major Russian oil exporters were somewhat supportive. European gas prices also fell despite the onset of the winter season as demand was easily met thanks to ample LNG supply. Refining margins increased further, supported by product tightness resulting from the announced sanctions on Russian refiners and unplanned outages at other refineries. In the Chemicals market, we observed some improvement of the olefin indicator margins. However, overall demand remains subdued with many customers focused on reducing their inventories before the end of the year. The Clean CCS tax rate saw a significant decline from 50% to 36%. This was mainly due to a reduced share in the overall group of certain companies in the Energy segment located in high-tax countries as well as stronger contribution from equity-accounted investments. As a result, Clean CCS earnings per share remained nearly stable at EUR 1.7 per share. At EUR 1.7 billion of cash flow from operating activities was truly exceptional this quarter, jumping by over 60% year-on-year. This very strong operating cash flow clearly demonstrates our continued ability to generate strong liquidity even in the face of a challenging market environment. The clean operating result in the Energy segment dropped markedly to EUR 586 million. Around 40% of the decrease is explained by one-time effects. The Malaysia divestment and the net arbitration award of EUR 210 million received in the prior year quarter. The remainder approximately EUR 390 million was largely attributable to decreased oil and gas prices as well as lower sales volumes. The realized oil price fell by 13% to $62 per barrel, mirroring the movement in Brent prices. Our realized gas price decreased by 14%, averaging EUR 26 per megawatt hour, thus less than European gas hub prices, which declined by 28%. This was mainly due to changes in portfolio composition following the divestment of SapuraOMV. Additionally, negative currency developments impacted our results by about EUR 80 million compared to the prior year quarter. Production volumes decreased by 11% to 300,000 boe per day. The main reason was the sale of the Malaysian assets, which had contributed 24,000 barrels of oil equivalent per day in the fourth quarter of 2024. Excluding the effect from the divestment, E&P production declined by about 4% due to production declines in Norway, Romania and New Zealand, reflecting their fields natural decline, partly offset by slightly higher output in the UAE. Unit production costs rose slightly to above $10 per barrel. This increase resulted mainly from lower production volumes and unfavorable exchange rate movements. Cost reductions -- cost reduction measures taken had a mitigating effect. Sales volumes decreased by 65,000 boe per day, thus stronger than production. In addition to the missing volumes from SapuraOMV, the sales in Norway and Libya were lower due to the lifting schedule. The result of gas marketing and power declined to EUR 116 million, primarily due to the missing positive impact from the arbitration award received in the fourth quarter of 2024. Aside from the arbitration award, Gas West decreased mainly due to lower release of transport provision. The contribution of Gas East rose strongly, driven by excellent results across both the gas and power business lines, supported by higher gas sales volumes and increased production of the Brazi power plant in the context of power market deregulation. The Clean CCS operating result of the Fuel's segment more than tripled to EUR 346 million, primarily driven by substantially stronger refining indicator margins, a significantly higher contribution from ADNOC refining and global trading and improved results of the marketing business. This strong performance was partially offset by, amongst others, negative production effects related to repairs at the Burghausen refinery. The European refining indicator margin rose sharply to $14 per barrel, while the refining utilization rate remained high at 89%. The marketing business delivered a higher contribution compared to the prior year quarter with retail performance benefiting from slightly improved fuel margins due to a more favorable quotation development for oil products, higher nonfuel business profitability and slightly higher sales volumes following the acquisition of retail stations in Slovakia. The performance of the commercial business came in slightly better as well, supported by higher contributions from the aviation business and increased sales volumes. The contribution of ADNOC Refining and Global Trading increased significantly to EUR 51 million, mainly due to a better market environment. The Clean operating result of the Chemicals segment rose sharply to EUR 236 million, driven to a large extent by the stop of Borealis depreciation. In our European business, we recorded favorable market effects totaling EUR 58 million, reflecting higher olefin indicator margins. Inventory effects were slightly lower. The utilization rate of our European crackers stood at 72%, which is significantly below the level of the prior year quarter. This was mainly because of weaker demand and inventory optimization measures at year-end. Nevertheless, the result of OMV-based chemicals improved due to stronger olefin margins. The contribution from Borealis, excluding joint ventures, increased to EUR 89 million, mostly driven by the stop of depreciation. However, the results of both base chemicals and polyolefins declined. The base chemicals result was affected by lower utilization rate as well as decreased feedstock advantage and phenol margins. Improved olefin indicator margins in Europe and lower fixed costs provided some support. For polyolefins, the contribution decreased primarily due to softer indicator margins and greater market discounts. This was partially counterbalanced by reduced fixed costs. Polyolefin sales volumes for Borealis, excluding joint ventures, grew by 4%, largely attributable to higher sales in the infrastructure and consumer product sectors. Contributions from our joint ventures rose by EUR 41 million, mainly reflecting the deconsolidation of Baystar. The contribution from Borouge remained broadly stable versus the fourth quarter of 2024, as a less favorable market environment in Asia was compensated for by substantially higher sales volumes. Thank you for your attention, and I will now hand over to Reinhard. Reinhard Florey: Thank you, Alfred, and good morning from my side as well. At the beginning of 2024, we launched a comprehensive efficiency program aimed at generating at least EUR 0.5 billion of additional sustainable annual operating cash flow by the end of 2027. This initiative helps to mitigate inflationary cost increases we have experienced over the past years as well as effects from lower commodity prices. In October, we had announced that even considering the BGI transaction and resulting deconsolidation of Borealis, we expect to achieve the originally targeted at least EUR 500 million, from the efficiency program, as we introduced a new cost savings program of EUR 400 million by end of 2027, further derisking the program's implementation. This program is well on track. By the end of 2025, we successfully delivered more than EUR 350 million of additional cash flow compared to 2023, which represents around 70% of our 2027 target. We achieved this through technical improvements in oil production, optimization of gas flows, reduction of E&P cost base as well as various margin improvement measures and refining optimization related to utilities, crude supply and energy efficiency. Overall, more than EUR 100 million are attributable to operational cost reduction measures. This builds upon our continued drive for operational excellence, following initiatives from prior years with the impact clearly visible on our cash flow from operating activities. Turning to cash flows. Our fourth quarter operating cash flow, excluding net working capital effects, was EUR 821 million. This figure was impacted by a significant net cash outflow related to CO2 emission certificates of around EUR 330 million, which is always booked for the year-end in the fourth quarter. In the fourth quarter of 2024, the net cash related to CO2 emission certificates was around EUR 270 million, largely offset by the one-off net gas arbitration award of more than EUR 200 million. The year-on-year decline also reflects a lower contribution from energy, partially compensated by lower tax payments and a higher contribution from fuels. Net working capital cash inflows were very strong. At EUR 860 million, it more than reversed the minus EUR 400 million recorded in the third quarter of 2025. This was largely driven by substantial inventory reduction in the fourth quarter 2025, whereas in the prior year quarter, we recorded a negative effect of around EUR 140 million. As a result, the cash flow from operating activities amounted to around EUR 1.7 billion in the fourth quarter of 2025, an increase of more than 60% compared with the previous year's quarter. Let us now look at the full year's picture. At EUR 5.2 billion, cash flow from operating activities was once again very strong, only 4% below the high 2024 level. After payment of dividends of EUR 2.3 billion, our free cash flow stood at positive EUR 180 million, supported by inorganic cash inflows coming from the Ghasha divestment and Bayport loan repayment. Our balance sheet remains very strong with a leverage ratio of only 14% at the end of 2025, despite ongoing macro challenges. Our financial strength is also reflected in our investment-grade credit ratings, A- from Fitch and A3 from Moody's, both with stable outlook. This strong rating underscores our healthy capital structure and prudent financial management. Following the closing of the BGI transaction, we anticipate our leverage ratio to increase mainly as a result of the deconsolidation of Borealis equity and net debt from our balance sheet as well as the agreed equity injection of up to EUR 1.6 billion into BGI to equalize OMV's and ADNOC's shareholdings. I think it's worth highlighting that even after this game-changing transaction, we anticipate our leverage ratio to be in the low 20s by year-end, well below the mid- and long-term threshold of 30%. This reflects our commitment to maintaining a robust capital structure and healthy balance sheet. Such a strong financial position provides us with the ability to do both, continue with attractive shareholder distributions and moving forward based on our headroom with our strategic growth initiatives. We once again deliver on our promise and offer our shareholders attractive distributions. We will propose to the Annual General Meeting an increased regular dividend of EUR 3.15 per share plus an additional dividend of EUR 1.25 per share. Thus, we will distribute total dividends of EUR 4.40 per share, which is an attractive yield of 9.3% based on the closing price year-end 2025. With the total payout of 28% of our operating cash flow, we once again went to the upper part of the guided corridor of 20% to 30% of operating cash flow. Since 2015, we have delivered every single year on our progressive dividend policy, which aims to increase the dividend every year or at least maintain it at the respective prior year level. Over that period, we have more than tripled our regular dividend from EUR 1 per share to now EUR 3.15 in [ 2022 ] to further enhance our shareholder distributions. We had introduced an additional variable dividend, which we now also paid for the fourth consecutive year. OMV remains committed to pay attractive dividends to its shareholders. As announced on our Capital Markets update in October last year, we are introducing a new dividend policy effective as of this financial year that builds upon our previous approach and incorporates the clear benefits arising from the BGI transaction for our shareholders. Under the new policy, OMV will distribute 50% of the BGI dividend attributable to OMV in addition to distributing 20% to 30% of cash flow from operating activities from our consolidated businesses. Our dividend will continue to consist of 2 components: a progressive regular dividend, which we strive to increase each year or at least maintain at the previous year's level; and an additional variable dividend, which will be paid if our leverage ratio remains below the 30% threshold. This approach aligns with our commitment to deliver attractive and growing shareholder returns supported by strengthened cash flows and a solid capital structure. Based on the estimated closing in the first quarter of this year, we expect Borouge Group International to pay at least the floor dividend for the full year 2026, which means net to OMV at least USD 1 billion. The dividend will be paid in 2 tranches. Now let me move to the outlook, beginning with capital spending. For the year 2026, we expect organic CapEx to be around EUR 3.2 billion, substantially lower than the past few years reflecting the deconsolidation of the Borealis business and our ongoing capital discipline. The major growth projects in 2026 are the Neptun Deep project, which is scheduled to start up next year, the South HVO plant in Romania and the green hydrogen plant in Austria and Romania. In the following years to 2030, the average organic CapEx will be below the guided level of EUR 2.8 billion per annum outlined at our Capital Market updates. About 60% of our organic CapEx in 2026 will be allocated to energy with the majority of the remaining spend going to fuels. Following the BGI transaction and the deconsolidation of the Borealis business, organic investments explicitly shown in our financial statements in Chemicals will be relatively small, reflecting only our fully consolidated Chemicals business, specifically the refinery integrated crackers in Austria and Germany and the new plastic waste sorting plant in Germany. The latter is expected to start up this year. Around 70% of our organic CapEx in 2026 is dedicated to growth, positioning OMV for the future. In addition to Neptun Deep, major organic growth project initiatives include developments in Norway, Austria, the UAE and renewable power initiatives in Romania. In the Fuels segment, we are advancing key projects like the SAF/HVO plant as well as the 2 hydrogen plants in Romania and Austria. Around 30% of the investments planned for 2026 are allocated to sustainable projects in line with our average guidance for 2030. Please note that our guidance for organic CapEx of EUR 3.2 billion in 2026 excludes any expenditures related to Borealis. Let me conclude now with our outlook for key market assumptions and operations for 2026. We forecast an average Brent price of around $65 per barrel. The average TAG gas price is estimated to be above EUR 30 per megawatt hour, while the OMV average realized gas price is expected to be below EUR 30 per megawatt hour. In Energy, we expect average oil and gas production of slightly below 300,000 boe per day, reflecting natural decline and assuming no interruption in Libya. The unit production cost is expected to stay below $11 per barrel, supported by various plant cost initiatives. Exploration and appraisal expenditure for the group is expected to be below EUR 200 million, in line with previous year's spending. In Fuels, the refining indicator margin is projected to be around $8 per barrel. We anticipate the utilization rate of our European refineries to be above 90%. No major maintenance is planned throughout the year at our refineries, supporting high operational availability. Total fuel sales volumes are expected to be higher than last year. Retail margins are projected to be slightly below the levels seen in 2025, while commercial margins are also anticipated to decline. In Chemicals, we do not anticipate a significant market recovery in the first half of 2026. Following the closing of the BGI transaction, Borealis will become part of the new company in which OMV and ADNOC will hold equal shares. BGI will be reported at equity within our financial statements. Hence, we will no longer report separate KPIs for the polyolefin business, these will henceforth be published by BGI. However, we will continue to provide an outlook for European olefin indicator margins, which will impact our fully consolidated Chemicals business. We expect market indicator margins to be slightly below the levels of the previous year with realized margins continuing to be affected by prevailing market discounts. The utilization rate of our 2 crackers is expected to rise to approximately 90% in 2026. There are no major turnarounds planned for the year. The clean tax rate for the full year is expected to be around 45%. Thank you for your attention. Alfred and I will now be happy to take your questions. Florian Greger: Thank you, Alfred and Reinhard. Let's now come to your questions. [Operator Instructions] We begin the Q&A session with Josh Stone from UBS. Joshua Eliot Stone: Yes. Two questions. Firstly, on CapEx. It looks like there was a slight overspend in '25 as compared to your initial guidance. So anything you want to flag on what might have been driving that? And then also for 2026, at least the spending outlook a bit higher than what I had in or certainly higher than the long-term guide. So any comments around what the key building blocks within that? And any potential risks that you can see in this year's budget? And then second one, I wanted to focus on your Chemicals result, particularly on the olefins side, which everyone has been extremely bearish on European chemicals and you've got sort of almost doubling of your monomers profit this quarter. What would you say is driving that better results? And any one-offs? And then if we're thinking about next year, given this is the business that will stay on your balance sheet, what should we be thinking? Alfred Stern: Okay. Maybe let me start a little bit with chemicals and olefins part and then Reinhard will add and explain the CapEx. On the Chemicals side, I would really say, as you could see, right, 2024 our Chemical sales went up some 10%, last year was plus 3%. And this is really because of the position that we have in the Borealis crackers with mainly Nordic crackers having light feedstock advantage. They are on the -- they are very cost competitive and thus able to run at high rates. While the OMV crackers in Germany and in Austria are fully integrated into our refineries, and we can use that integration advantage to also optimize our margins. So while we see, as you can see on our outlook for 2026 more or less flat kind of margin expectation for ethylene and propylene. We do believe that we are in a strong position also as a local and integrated supplier here. Reinhard Florey: Yes, Josh. Regarding your CapEx observation, you're, of course, right. I would rather like to explain. We had guided for EUR 3.6 billion, we came out with EUR 3.7 billion. In fact, we only had an overrun of EUR 90 million, which is around 2%. And this happened very much in the downstream part with the new activities, specifically around our big projects with electrolyzers and the HVO plants where we already started with some spending on long lead items. So this is more or less distributed among a variety of projects. There is not a significant big overspend in one project. In 2026, it is very clear that we start with a higher CapEx compared to the average of the years until 2030 because we still have the Neptun project in full, the HVO/SAF plant in full and also the main part of the spending on the electrolyzer plant. So therefore, this average is, of course, a little bit distorted and we are geared towards a little bit higher but significantly lower though compared to 2025. So therefore, regarding risks that you see, we do not see significant risks of overspend because we have contracted out the projects in a very, very high degree. That is also true for Neptun project. And we are going with the speed that we anticipate in spending in order to make sure that 2027 is the year for start-up of Neptun project. Florian Greger: Thanks a lot, Josh, for your questions. We now move to Gui Levy from Morgan Stanley. Guilherme Levy: I have 2 questions, please. First one, maybe on working capital. The company, of course, enjoyed a very strong release in the fourth quarter. And you know it's still early in the year, but I was wondering if you could say a few words in terms of how much and how quickly you would expect that working capital release to reverse over the course of this year? And then secondly, on exploration, if you could share with us if you have any initial results from your exploration well in Bulgaria, expectations in terms of drilling completion and also following the recent announcement of the Bulgarian Government joining the block, if you are currently happy with your stake in that asset? Or if we could -- you expect further dilution for OMV Petrom from here? Reinhard Florey: Let me start with the working capital. We indeed enjoyed a strong cash inflow from working capital optimization in the fourth quarter. However, this does not reflect any, I would say, unnatural levels. This, on the one hand side, reflects very much the business environment in which we operate and we were able to significantly also reduce our inventory levels actually in all 3 segments. Why am I saying that because also the inventory levels in the Energy business with our gas storage are now at a lower level, maybe compared to earlier years. This is a attribute to the cold winter and also to the very, I would say, small summer-winter spreads that have been available throughout 2025. So we anticipate that also after first quarter, we will come out with even lower level of inventories of storage in there. How fast will the recovery be? It depends very much on the boundary conditions that we see. If economy picks up strongly in both refining as well as in chemical, of course, also our inventories will go up. This is not what we expect as a situation in the first half of 2026. And we will also then, in Q2 and Q3, see how much of gas storage will be available for decent prices that we can lock in and then put the gas storages again on the level appropriate for surviving the next winter for all our customers. So this is something that will come across the full year in smaller stages. But as I said, this is not an unusual levels of working capital that we have at this point of time. Alfred Stern: Okay, Gui, and regarding the exploration in the Black Sea in Bulgaria. Maybe just to recap here quickly, OMV Petrom is operator with a 45% share, together with Newmet Balkan with 45% share and the Bulgarian Energy Holding with 10% share. And we have contracted the Noble's Globetrotter 1 drillship that will drill 2 offshore exploration wells. The first drill started in December. And then as it is with all these explorations, right, we need to beat for the results what we get there. Maybe also on the estimated costs for the 2 wells, that's about EUR 170 million for the 2 wells together and the agreements that OMV Petrom made with the partners are such that total cost for OMV Petrom for both wells will be about EUR 30 million. But it's exploration, right, so let's wait and see what we find. Florian Greger: Thank you, Gui, for your questions. And now we come to Henry Tarr, Berenberg. Henry Tarr: Two, if I may. The first, just on the Fuels business. We've obviously seen weaker refining margins this year. Where are you averaging sort of Q1 to date? And how do you see the outlook here for the rest of the quarter and then 2026? Alfred Stern: You said 2 questions, Henry. Henry Tarr: That's the first. I can come back on the second... Alfred Stern: Yes, yes. Okay. Then let me try and answer your question. Yes, indeed, the refining indicator margins what we what we found in the fourth quarter last year, we were at about 14%, but with declining kind of thing through the quarter, right? So in December, we saw the margins coming down and then we picked up in January at around 8%. So more or less, what we see as an expectation for the average for the year. I have to say, right, looking back at the last years refining indicator margins were extremely volatile, very difficult to predict. Supply chains are rearranging themselves, we see outages and so on. So our prediction would be around 8% January also started around that level. And I would see that maybe that's about what's the predictability of the segment, let's say, right? Henry Tarr: Okay. That's great. And then the second question is just on BGI and the floor dividend. So I think you've said but I just wanted to double-check that if the merger goes ahead as planned and completes in Q1, you'd expect the floor dividend to be paid in 2026. I guess are there any -- if the merger takes a little bit longer, is there a risk that the dividend gets prorated or anything like that just for this year or is it fixed for '26 at that floor dividend level? Reinhard Florey: Yes. Thanks, Henry. The floor dividend contractually is fixed to be a full dividend for 2026. That is our expectation, and this is the way how we also calculate. Personally, I do not have any doubts that we will not close in Q1. Florian Greger: Thanks, Henry, for your questions. We now come to Adnan Dhanani from RBC. Adnan Dhanani: Two for me, please. Just 1 follow-up on the BGI dividend. Just in the context of your comments earlier saying that the 2026 dividend would be at least at the floor level. I think at the CMD, you mentioned that the dividend would likely be the floor for 2 to 3 years. So is there a change in the thinking there that it could be at least floor level this year could be higher? Or is that still the thinking that it's going to be 2 to 3 years of just being at the floor level? And then the second question, just on your upstream production guidance. Obviously, with the 2030 target that was upgraded, just wanted to get your view on the current M&A landscape and just how you're seeing the market right now for barrels? Reinhard Florey: Yes. Adnan, maybe on the first questions. You know me, I never lose my optimism. But realistically speaking, I expect that there will be the floor dividend, which already is a very attractive thing for the current situation of the market. But theoretically, if the market picks up and the whole economy fires up, then I'm confident that also the dividend policy will kick in and could have an upside. But realistically speaking, I calculate with the floor dividend level and enjoy around USD 1 billion coming to OMV. Alfred Stern: Okay. And let me try on the upstream, Adnan. So just as a reminder, right, we said from 2025 level, we have natural decline and then we have organic projects. One is a very big Neptun project, which contributes directly the 50% share in OMV Petrom 70,000 barrels to our production target and then there's other organic projects that we have across our portfolio that contribute in the 70,000. And that means we have about another 70,000 more or less that we need to close inorganically and we said our strategy will be that we want to strengthen the portfolio in and around Europe that we have to make sure we can move this forward. We are actively trying to fill a pipeline to do that. But at this point, nothing has progressed enough that I could give you specifics on any kind of deal. Florian Greger: Thank you, Adnan, for your questions. Before we come to the next, we have one more in the queue. [Operator Instructions] And now let's come to Oleg Galbur from ODDO BHF with the next question. Oleg Galbur: Congratulations on the robust results. I have 2 questions. The first one is on the Fuel segment and more specifically, the marketing business. In the past, you were disclosing the average EBIT contribution per filling station. And I wonder if you could already give us the number for 2025? And my second question is on Chemicals. You mentioned earlier the startup expected at or planned PDH Kallo and Borouge 4. So taking into consideration that the recovery of the petrochemicals market is not yet in sight. What level of annual EBITDA would you expect to be delivered by PDH Kallo and Borouge 4 in the current market environment? And since I'm at the end of the list, maybe I can take advantage and ask a very short third question. On Libya discovery, you mentioned earlier, when do we expect the new discovery to start contributing to production from Libya? Alfred Stern: Oleg, thank you for your questions. Let me start with the fuel question on the marketing business. So what we did in the Capital Market update last year, we updated to give, let's say, a deeper look into our Fuels segment, we updated on the EBIT contributions of our retail marketing type of business. We do not and we have not regularly in the quarterly updated on this number, right? But what I can tell you is that this is something that helped last year and also in the fourth quarter that we were able to continue to not just grow the contribution from the fuel business in retail, but also nonfuel has grown there and making good contributions and we continue to see this as a value growth driver that we can do. This is our VIVA stores where we sell both [ gastronomy ] and other shop products, but it is also around EV charging, it is also around car washing and so on. So good contributions from this will continue to grow. Then on your Chemical question. I would maybe go -- want to go back to also what we disclosed in the Capital Market update that hasn't changed. We think Kallo will contribute EBITDA after full ramp-up of about EUR 200 million. And then on Borouge 4, we have said it's about $900 million, yes, that will be at full ramp-up. However, right, so we the Kallo or PDH more towards the second half of this year. And we see Borouge 4 is a very big complex with 1.5 million tonnes of production. And there is multiple plants involved, and you will see that we need to take those into operation step-by-step in stages. The first stage -- first plants will come on stream in the first quarter, but then you will see that throughout the rest of the year ramping up. You were -- so and last, your question around the Chemicals segment. I do believe, and you can see in our sales volume growth that we have, both in Europe, but also with Borouge and our joint ventures, you can see that there is underlying demand there. However, the challenge is supply/demand and unbalance. There is too much supply, new capacity that has come on stream. And -- but what we see now is increasingly old, not optimal plants being taken out of operation. In total, this is more than 20 million tonnes globally now, a big part of this is in Europe, a significant part in South Korea, but it looks like there are some first actions now also in China on rationalization with their evolution program that they have in China. Florian Greger: Thanks, Oleg, for your questions. We now come to Sadnan Ali from HSBC. Sadnan Ali: Two, please. The first one on -- just want to go back to Neptun Deep. I know you mentioned that the project is on track to deliver a start-up in 2027. I just wanted to check if you can provide any more clarity on when in the year we can expect it to start up? And what are the key milestones we should expect between now and then? And do you see any risks to that time line or any of those elements that would present more of a risk to delay if there's a delay in the project? And secondly, just wanted to clarify, your comments today said I believe that post BGI closing, you're expecting leverage in the low 20s by year-end. Just want to clarify, if I'm not mistaken, the prior communication was, I think, it was at 22% after the deal closes, so does this now mean potentially that you expect something higher than 22% upon closing immediately and that's to taper off by year-end? Alfred Stern: Let me maybe start with the Neptun project and then Reinhard will follow up on your second question. So project progress, right, just as to recall here, Neptun Deep consists of 2 fields. One is the Pelican field and the other one is the Domino field. In the Pelican field, which -- we -- OMV Petrom wanted to drill 4 wells. They have done so in 2025 and now the Transocean Barents rig is moving on to the deepwater wells in Domino field, where it's 6 wells that have to be drilled. Then there's, of course, not just the wells, but there's a lot of other activities that need to happen to bring this into production. One was the construction of natural gas metering station, which is making good progress, is ongoing and the equipment is arriving there to the site. We have also finished a microtunnel that is basically bringing then the underground pipeline connection to the onshore. We have also made good progress on the shallow water platform that is moving ahead on the construction and then has to be transported into the Black Sea later this year with good progress on umbilicals, field support vessels and so on. So all this is running. And so far, we are on track according to the plan. We have not finalized completely when in 2027 this startup will happen, but we will be able to do so in the course of the year. Reinhard Florey: Yes. And Sadnan, thanks for your question on the leverage. I admit that it's courageous to predict leverage on the single-digit percentage. I still stick to what we said that after close, we will be around 22%. And for the rest of the year, so if that happens in Q1, we still have Q2, 3 and 4. We want to reaffirm by that statement that we stay in the low 20s percentage, which should be really an affirmation of our statement of low leverage, including also the transaction of BGI. Florian Greger: Thank you, Sadnan, for your questions. There is a follow-up question from Oleg Galbur. Oleg Galbur: Yes. Well, it's rather the question that I asked, but was not answered about Libya discovery when do you expect it to turn into production? Reinhard Florey: Oleg, sorry, that we overlooked the third question. First of all, Libya has been a successful discovery and the beauty about this discovery is that it's only around 10 kilometers from existing infrastructure. This means that the tie-in of that well should go rather fast, and we're expecting it the latest by next year. Florian Greger: Apologies, Oleg, for not taking the third question, but now we come to Ram Kamath from Barclays. Ramchandra Kamath: I have a question on natural gas sales. So can you talk a little bit about what you are seeing in the gas business on demand side particularly? Because I note that the sales in your West business, in particularly, was -- I mean, has come down. I think possibly this year, it's averaging around 40 terawatt hours down from over 50. So how do you see shaping up here, particularly on if you can talk about if it is particularly on the industrial sector demand, which is coming down. And of this volatile time, how do you see this business evolving or the demand evolving? Alfred Stern: Yes. Ram, let me try and provide some insights into this. I think if you look further back a little bit, we -- so before the Russian attack on Ukraine. Since then, we have seen significant decline in market demand, both in industrial areas, but also in household and other areas. I think this was driven by very high gas prices and so on. However, last year, there was, in the markets, some rebound into the gas usage probably also again driven by normalization of the gas prices as we saw that last year. What we have done in OMV, of course, is also that we have also commercially optimized our gas portfolio, diversified it into different sources, and this is probably what you are seeing from our sales figures there. However, looking out a little bit longer, we do see the demand signals now that Europe will remain a net importing gas region until 2050, at least. And this is also the opportunity that we want to address with our Neptun Deep or some of our other gas production projects. Florian Greger: Thanks, Ram, for your questions. We now come to the end of our conference call and would like to thank you all for joining us today. Should you have any further questions, please contact the Investor Relations team. We will be happy to help you. Thank you again, and goodbye, and have a nice day. Alfred Stern: Thank you very much. Have a good day. Reinhard Florey: Thank you. Bye-bye. Operator: That concludes today's teleconference call. A replay of the call will be available for 1 week. The replay link is printed on the invitation, or alternatively, please contact OMV's Investor Relations Department directly to obtain the replay link.
Operator: Welcome to the fourth quarter investors conference call. Today's call is being recorded. Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. Actual results may be materially different from any future results, performance or achievements contemplated in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's annual information form as filed with the Canadian Securities Administrators and in the company's annual report on Form 40-F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is February 4, 2026. I would now like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir. D. Patterson: Thank you, Tanya. Good morning, everyone, and welcome to our fourth quarter and year-end conference call. Thank you for joining us today. Jeremy Rakusin is on the line with me and will follow my overview comments with a more detailed review of our financial results for the quarter and the full year. We're pleased with how we closed out the year in an environment that continues to challenge us across several of our businesses. Our fourth quarter results in aggregate were modestly better than our expectation that we communicated at the end of Q3 with revenues up 1%, EBITDA flat with the year ago and earnings per share up 2% to $1.37. For the year, we reported solid results that we're proud of in the face of tough macro headwinds. Revenues finished 5% up over the prior year. Consolidated EBITDA was up 10%, double the revenue growth, reflecting a 40 basis point improvement in margins and earnings per share reflected further leverage with year-over-year growth at 15%. Looking now to separate divisions for the quarter. Revenues at FirstService Residential were up 8% in aggregate, with organic growth at 5%, matching our expectations and the results for Q3. The growth was broad-based across North America and generally reflects net contract wins versus losses. Looking forward, we expect organic growth to continue in the mid-single-digit range. There could be modest movement from quarter-to-quarter with seasonality and fluctuation in ancillary services, but on average, for 2026, we're expecting mid-single-digit organic growth similar to our full year results for 2024 and 2025. We will face organic growth pressure early in the year relating to declines in certain amenity management services that we provide to some of our managed communities, but primarily to multifamily rental and other commercial customers. These services include pool construction and renovation, which is being impacted by the same economic headwinds we're seeing in roofing and home services. It also includes contracts to provide custodian and front desk concierge labor. Several contracts primarily with multifamily apartment owners were not renewed at year-end, some voluntary and a few involuntary, all primarily due to pricing. These cancellations will impact our revenue, but will have little impact to profitability. We expect to be at the bottom end of our mid-single-digit range at 3% or 4% for Q1. This is unrelated to our core community management business, which we believe will carry the division to mid-single-digit organic growth for the year. Moving on to FirstService Brands. Revenues for the quarter were down 3% in aggregate and 7% organically with organic growth at Century Fire more than offset by organic declines with our restoration brands and our roofing platform. Looking more closely at restoration. Paul Davis and First Onsite together recorded revenues that were flat sequentially compared to Q3 and down 13% versus the prior year, somewhat better than expectation due to our pickup in claim activity during the quarter with our Canadian operations. We benefited in the prior year quarter from Hurricanes Helene and Milton and generated about $60 million in revenue from the storms. Excluding these specific events, our restoration brands were up modestly year-over-year. As I described on last quarter's call, revenues from named storms have on average, exceeded 10% of our total restoration revenue since 2019. For 2025, revenues from named storms amounted to less than 2% of total restoration revenues. We finished the year down 4% in restoration relative to an industry that we believe was down over 20%. Our platform investments and focus on day-to-day service delivery continues to drive gains in wallet share with key national accounts and overall market share. Looking forward, we expect to show growth for the full year 2026, assuming we return to historic average weather patterns. Our restoration brands have grown on average by 8% organically since 2019, and we expect that to continue on average going forward. Our backlog at year-end was down from the prior year, pointing to a revenue decline for Q1. However, we've seen an uptick in activity over the last week from the expansive winter storm. It's still very early, but based on activity levels and the nature of the quick response mitigation work, we expect to show Q1 results that are modestly up over the prior year. Moving to our Roofing segment. Revenues for the quarter were up a few percentage points, the result of tuck-under acquisitions made during the year. However, as expected, revenues were down organically by over 5%. The demand environment in roofing remains muted. New commercial construction outside of the data center and power verticals is down significantly. On the reroof side, we continue to see tighter capital expenditure budgets amongst our customers and delays with some larger projects. As I noted last quarter, we're confident that our market position and relationships remain strong. Bid activity is solid and our backlog has stabilized. Our expectation is that we will show modest organic growth this year with sequential improvement quarter-to-quarter. Looking to Q1, we expect revenues to be up mid-single digit versus the prior year and approximately flat organically. Now to our home service brands, where revenues were up by 3% over the prior year, better than expectation and a result we're proud of in an environment where consumer confidence remains depressed. The consumer index was down again in December, marking 5 months of sequential decline. As I set out on the last few calls, our teams are doing more with less by incrementally improving lead to estimate ratios, close ratios and average job size. Current economic and industry indicators do not suggest an improved environment through 2026. Our lead flow in the last several weeks is flat to slightly down with prior year. If this continues, our current conversion metrics would suggest that we will drive higher revenue year-over-year in the low to mid-single-digit range for Q1 and 2026. And I'll finish with Century Fire where we had a strong Q4 and finish to the year. Revenues were up over 10% versus the prior year with high single-digit organic growth. Century continues to experience solid growth on both sides of its business, that is installation and repair service and inspection. The growth is broad-based across almost all our branches at Century. We're benefiting on the installation side of our business from solid activity in multifamily and warehouse with some positive exposure to data center construction. Our backlog is strong and activity levels remain buoyant. Looking forward, we expect another year of 10% growth or more spread evenly across the quarters. Let me now call on Jeremy to review our results in detail and provide a consolidated look forward. Jeremy Rakusin: Thank you, Scott, and good morning, everyone. As you just heard for the fourth quarter, we delivered on our expectations provided on our Q3 call, which culminated in solid annual operating and financial performance. As we look back at our consolidated annual results for 2025, we are pleased with the growth we delivered on the earnings lines, notwithstanding the top line headwinds we were facing throughout the year. I'll first walk through a summary of these financial metrics and then move on to reviews of our segmented divisional performance as well as our cash flow and balance sheet. Note that my upcoming comments on our adjusted EBITDA and adjusted EPS results, respectively, reflect adjustments to GAAP operating earnings and GAAP EPS, which are disclosed in this morning's release and are consistent with our approach in prior periods. During the fourth quarter, our consolidated revenues were $1.38 billion, up 1% versus the prior year period. Our adjusted EBITDA of $138 million was in line with Q4 2024, yielding a margin of 9.9%, slightly down from the 10.1% level during the prior year. Our Q4 adjusted EPS was $1.37, up from $1.34 in last year's fourth quarter. For the full year, consolidated revenues increased 5% to $5.5 billion, and adjusted EBITDA came in at $563 million, up 10% over the prior year and delivering a 10.2% margin, up 40 basis points compared to 9.8% in 2024. Adjusted EPS for the 2025 fiscal year was $5.75, up 15% versus 2024. This 5%, 10%, and 15% top to bottom line annual growth profile reflects the exceptional efforts of our operating leaders across every brand. As they emphasized efficient job execution in the face of market challenges and drove margin improvement where possible. Turning now to a segmented walk-through of our 2 divisions. FirstService Residential revenues during the fourth quarter were $563 million, up 8%, and the division reported EBITDA of $51.5 million, a 12% increase over the prior year period. Our margin for the quarter was 9.1%, modestly up from the 8.8% in Q4 2024. The quarterly performance largely mirrored the full year growth profile for the division. We closed out the year with annual revenues of $2.3 billion, up 7% over 2024 including 4% organic growth. Annual EBITDA increased 13% with our full year margin at 9.8%, up 50 basis points over the 9.3% margin for 2024. In summary, the FirstService Residential division achieved key financial targets for the year, getting back to mid-single-digit annual organic top line growth while also driving profitability to the upper end of our 9% to 10% annual margin band. Looking next at our FirstService Brands division, the fourth quarter included revenues of $820 million, down 3% compared to Q4 2024, and EBITDA was $88.5 million, down 12% year-over-year. These year-over-year decreases were due to declines in organic top line performance and the related negative operating leverage at our restoration and roofing brands, partially offset by another strong quarter of organic growth and profitability at Century Fire Protection. The Brands division margin during the quarter was 10.8%, down 110 basis points from 11.9% in the prior year quarter. For the full year, revenues were $3.2 billion and EBITDA came in at $354 million, both up 4% over prior year. As a result, our full year Brands margin remained in line with the prior year at 11%. Finally, 2 remaining points to highlight regarding profitability below the operating division lines that contributed to the 15% annual EPS growth. First, we reported significantly lower corporate costs both during the current fourth quarter and annually for 2025 versus the comparable prior year periods. Most of the variance was attributable to the positive impact of non-cash foreign exchange movements largely reversing the negative impacts we saw in 2024. Second, our annual interest costs were lower throughout all periods in 2025 compared to the prior year due to lower debt levels on our balance sheet and declining interest rates. I'll now summarize our cash flow and capital deployment. During Q4, operating cash flow was $155 million, a 33% increase over the prior year quarter and contributing to annual cash flow from operations of more than $445 million, which was up 56% versus 2024. Our capital expenditures during 2025 totaled $128 million, and we expect 2026 CapEx to be approximately $140 million, an increase proportionate to the collective growth of our businesses. Our acquisition spending during the year totaled $107 million as we remain selective and disciplined in a competitive acquisition environment. Finally, we announced yesterday, an 11% dividend increase to $1.22 per share annually in U.S. dollars up from the prior $1.10. Beyond financing these capital outlays, our strong free cash flow contributed to further strengthening of our balance sheet throughout the year. At 2025 year-end, our leverage sits at 1.6x net debt to adjusted EBITDA, down from 2x at prior year-end. With cash on hand and undrawn capacity within our bank revolving credit facility aggregating to $970 million, we maintained significant liquidity to direct towards attractive investment opportunities as they emerge. Finally, in terms of outlook, Scott has already provided detailed commentary on the top line growth indicators for the individual brands. On a consolidated basis for the upcoming first quarter, we are forecasting revenue growth to be in the mid-single-digit range. In subsequent quarters, throughout the year, we expect to see an uptick with high single-digit year-over-year increases in revenue, primarily driven by organic growth. Any tuck-under acquisitions during the year will contribute further to this top line growth profile. In terms of consolidated EBITDA for the first quarter, we expect to be roughly in line with Q1 2025. For the balance of the year, we anticipate EBITDA year-over-year growth in the high single digits at similar rates or slightly better than revenue growth. Consolidated EBITDA margin for the full year is expected to be relatively flat compared to the 10.2% annual margin we just reported for 2025. Operator, this concludes the prepared comments. You can now open up the call to questions. Thank you very much. Operator: [Operator Instructions] Our first question will be coming from Frederic Bastien of Raymond James. Frederic Bastien: Scott and Jeremy. Just want to talk about M&A. I mean cracks appear to be showing in private equity various reports suggesting that mid-market firms are holding on to investments, they can't sell and then struggling to raise capital to buy businesses. That in theory, should be positive for strategic buyers like FirstService? From your perspective, are you seeing any change? Is the company -- is the competitive landscape improving from, say, where it was 3, 6, 12 months ago? D. Patterson: We haven't seen it yet, Frederic. It's definitely a slower market than, say, 12 months ago, particularly in roofing, but really across the board. We know of a number of opportunities that have been pulled or delayed until the environment improves. And there's no indication that multiples are trending higher or lower. They still remain high across the board. We haven't seen mid-market private equity deals come to the market. I'm just thinking about it. Really, it's, we haven't seen it yet, I would say, Frederic. Frederic Bastien: Now obviously, recognizing it's still tough out there. Where do you see the best place to deploy future capital? Is it in newer platforms like roofing or restoration or go back to the more long-dated franchises like California Closets. I know you bought like the 20 or so largest franchises in the early probably 10 years ago -- 5, 10 years ago, where do you stand on potentially consolidating the rest of the California Closets franchises? D. Patterson: Yes. I mean definitely, we want to own the major markets over time, particularly if they're underperforming. But it's -- that will be sort of one step at a time as those families are ready to sell. It's been a few years since we pulled in our California Closets franchise. But I think on average, we would expect to pull in one a year. And I think the same at Paul Davis, too, in the best interest of the brand if there's an underperforming market, we will look to pull that franchise in and operate it. And we would expect to see 1 or 2 of those a year as well. Otherwise, it would be tuck-under within our existing platforms. That's our focus. I would say that we are being very patient in the current environment. Multiples are high, and there aren't a high number of quality companies coming to market. So we are focused on picking our spots and finding the right partners, if there's a situation where the founder is looking to exit, that's not a great fit for us. We're focused on partnering and then driving sustainable growth. Operator: And our next question will be coming from Stephen MacLeod of BMO Capital Markets. Stephen MacLeod: I just wanted to just focus in on the margins a little bit with respect to the outlook. Would it be fair to say that your margin outlook in kind of both segments is sort of flattish through the year? Presumably, it sounds like not much movement in the FSR margin, but maybe you'll see some headwinds in Q1. But on a full year basis in Brands, would you expect both segments to be sort of flattish year-over-year? Jeremy Rakusin: Stephen, it's Jeremy. Correct. Full year, both divisions are roughly in line and hence, the consolidated margin in line. The first quarter, we expect residential margins to be roughly in line, again, consistent with the full year and a decline in Brands margins in the first quarter, and hence, the sort of flat EBITDA with a little bit of revenue growth in the first quarter. So Brands margin a little declining and then picking up in sequential quarters as we see a commensurate uptick in revenue growth. Stephen MacLeod: And then just with respect to Scott, you talked about just the recent freeze that we saw through North America and potentially an uptick in activity. I know early days, but is there any way to kind of quantify what that potentially could look like as the year progresses? D. Patterson: No. It's still very early in taking shape and some of the areas are impacted, they're still frozen. So there is an opportunity when the thaw starts, but very hard to quantify at this point. I mean we've attempted it for Q1 just based on some of the activity. As I said, we expect our revenues to be up modestly. Our backlog at year-end was down because we didn't have a carryover from Q4 storms, which was pointing to a soft Q1. We do think the activity will take us back to -- through prior year modestly. But mitigation work comes in, we respond and move on. And for the most part, the jobs are smaller at this point. And the unknown is the reconstruction. Will there be any? Will we get to work and how much revenue will it generate? So that will evolve in the coming weeks and months, but it's still too early to really give you any more than that. Stephen MacLeod: Yes, that's fair. I figured that would be the case. And would it be fair to assume that like in Q4, you had basically 0 revenues from named storms relative to $60 million last year. Is that right? D. Patterson: Yes. Stephen MacLeod: And then maybe just finally, just speaking of capital allocation, would you consider sort of being active on the buyback given where the stock is and given the NCIB you have outstanding? D. Patterson: That is not something that we've discussed. That would be a Board level discussion and it hasn't come up. Operator: And our next question will be coming from Stephen Sheldon of William Blair. Stephen Sheldon: First, just on kind of margins, great year-over-year margin trends in residential once again this quarter. And then full year results came in closer to the high end of that 9% to 10% margin range you've historically talked about there. So can you unpack some of the levers driving that? Is that still mainly being driven by some of the offshoring and AI leverage and I think you talked about accounting and call center operations. And has your thinking on the margin trajectory over the next few years changed at all? I mean, you already talked about kind of flattish for 2026. But is there an opportunity down the road you think you could potentially get the margin in residential into the double-digit range above 10%? Jeremy Rakusin: Yes, Stephen, Jeremy again. The progression, we've done a lot of the heavy lifting in those areas. In fact, they started in '24 and really started to play out on the margin improvement in '25. We're starting to lap those now. So a lot of the -- you saw the margins start to taper towards the margin expansion start to taper towards the back end of the year, which is indicative that we've squeezed a lot of the low-hanging fruit. Team is always working on related initiatives to those that you just called out as well as others. And again, we don't see much for '26. But in terms of going above 10%, yes, that's an opportunity over a multiyear time horizon for sure. And we'll continue to evaluate the team's progress in that and then call out the opportunities as we see them coming through. Stephen Sheldon: And then I wanted to ask about just the roofing side. And I guess from your view, I guess, the new construction piece, that's something that you can look at permits and starts and that's -- it's been very weak and not a lot of pickup that we're expecting here over the next year or 2. But I guess on the reroofing side, what could it take for that to pick up? I guess the question would really be how long can commercial properties wait and push out reroofing as I would assume that, that can only be delayed for so long before that owner or manager takes on bigger risk related to it with a bigger loss potential. So I guess, how long can reroofing really stay kind of depressed? D. Patterson: Yes, certainly, it can't be deferred for long, Stephen. And we do think the market has stabilized. Our backlog certainly has stabilized, and it's heavily weighted towards reroof as you would expect. Historically, we've been 2/3 reroof and 1/3 new construction. And so we're very much focused on the reroof side of that. So the overall market has shrunk certainly. But our momentum in reroof has stabilized. And as I said, we expect to grow this year and look for sequential improvement quarter-to-quarter. And generally, we feel optimistic. We're bidding work. We feel good about our market position. We believe in our leadership locally, branch to branch. And certainly, we will continue to invest in the platform this year and hopefully in further tuck-under acquisition. So we're feeling optimistic that we'll start to see quarter-over-quarter and year-over-year growth from here. Operator: And our next question will be coming from Erin Kyle of CIBC. Erin Kyle: I just want to stick on the Roofing Segment here. Maybe start with more of a macro question. I guess your views as it relates to the new construction cycle in the U.S. And the question is kind of on the basis of if new construction remains depressed here, as it's looking to be -- do you anticipate competition in like the reroof segment to intensify further than it's already been? Or I know you mentioned it's stabilizing, but just anything you can add to speak to just competition in that space would be helpful. D. Patterson: Yes. I mean the competition has intensified. Certainly, there are fewer opportunities and more companies bidding, and it has compressed gross margins. And so we don't expect that to alleviate in the near term until there is an uptick in the new construction market. And I don't know that I can give you more than that, Erin. Erin Kyle: No. That's helpful there. Maybe I'll switch gears on M&A as well. And you mentioned it in response to your previous question. But for 2026, is roofing still a focus area for tuck-in M&A? And then maybe more broadly here, if we think about your commercial maintenance businesses that you currently operate in, what is the appetite maybe for another large platform deal in an adjacent space or any larger M&A? D. Patterson: I think we're focused primarily on tuck-under right now and certainly roofing is an area where we're committed to. Again, I said we're picking our spots. We're very patient and it's about the leadership and the partnership. We're open-minded to larger acquisitions, certainly, and it would be an adjacency. And I'm not sure it would be a platform per our description, which would be sort of a separate operating team. It's more likely to be within restoration or within roofing or within fire, but we're open-minded certainly, but also being cautious around valuation and in a market that's still, in our mind, overheated. Operator: And our next question will be coming from the line of Tim James of TD Cowen. Tim James: My first question, going back to M&A for a minute. I appreciate the comments on kind of the competitiveness in that market. Can you talk about if valuations do remain high, whether it's through '26 into '27. Does that change your approach at all? And what I'm thinking about rather simplistically is, do you change the risk profile of the businesses you buy? Or do you pay higher valuations. How do you approach it as multiples and as the competition for M&A remains relatively elevated? D. Patterson: We would approach it the same way we did this past year. As Jeremy said, we allocated over $100 million on tuck-under, but these are solid good add-ons with great leadership that fills white space for us or adds to our service line. And these are at valuations that we're comfortable with. And in most cases, we were able to differentiate ourselves from private equity. And increasingly, we're seeing opportunities to do that with families and owners that want to be in a family where they're not resold. They want a forever owner. And so we're seeing more opportunities like that. And so I would -- we're not going to change our risk profile unless the returns change to hit our hurdle rates. We'll continue to work hard. And I would think that in 2026, it may well be a capital allocation year similar to '25, and we're comfortable with that. Tim James: And then is there any sort of silver lining here potentially in the roofing business with -- you talked about it being very competitive gross margin pressure. Are you seeing any silver lining in that, that maybe is kind of shaking out some businesses to look for a sale opportunity? Or is it too early to see that yet in the marketplace. D. Patterson: No, I think that's true. I think that's true. There are -- we're seeing opportunities that they're reluctant to transact because their revenue and EBITDA may be down from previous years, but it's -- the market is not going to change dramatically in '26, certainly. And so we are seeing opportunities where the seller comes to grips with a lower valuation based on results that are lower than the past few years. Operator: [Operator Instructions] Our next question will be coming from Daryl Young of Stifel. Daryl Young: Just wanted to circle back on margins for a second. I might have expected to see more margin expansion as opposed to the guide for flattish this year, just given the operating efficiencies you've had. And I wonder if possibly you're toggling between the price volume equation in some of your end markets and maybe giving away some price in order to keep the growth going. Is that the right way to think about it? Or is there something else going on that's keeping margins, call it, lower for longer? Jeremy Rakusin: Daryl, I assume you're talking more on the Brand segment? Daryl Young: Well, even within resi as well. Jeremy Rakusin: Okay. Well, I'll touch on Brands. Scott touched on it in Roofing. The competitive environment, a lot of our competitors that were accustomed to getting a lot of new construction work migrating to reroof and putting pressure on bidding and gross margin. So we're going to see roofing margins, notwithstanding the uptick in the top line through the year, a compression in margins in that business. And that will be offset in the Brands segment by better margins year-over-year in '26 for restoration, again, a function of higher normalized activity levels, higher revenue growth and so forth. So that's really the puts and takes for the most part in the year in Brands. And then in residential, we don't get a lot of pricing in that business. It's a very high variable cost business. So growing revenues and EBITDA in lockstep is the typical path we happen to garner a lot of efficiencies in '25 in the areas that we've spoken about through the year, and we're starting to lap that now. Again, I mentioned it earlier, we'll continue to look at other opportunities for efficiencies, but I wouldn't be baking in a lot of that into the baseline model for 2026. Daryl Young: And then you touched on data centers in one of your remarks. Are these projects getting big enough and fast enough that you could potentially have a cross-sell or a go-to-market approach between, say, Century Fire and Roofing and maybe even restoration where you kind of create national account strategy across all of your divisions to tackle the data center build-out? D. Patterson: No, we're not approaching it that way, Daryl. Century has long-term relationships with a few large general contractors that are involved in new construction of warehouses and also engaged in data center construction. So Century is benefiting from the data center boom. But definitely picking their spots and being cautious about balancing this work in these customers with other day-to-day customers. And I don't see us tilting more to data centers than the current mix reflects. Roofing doesn't have the same relationships. And I think we're very cautious about really leaning in rather than focusing on durable, sustainable growth. We've seen a few of our competitors jump in, and it really consumes them and they've let down their day-to-day customers. So we're approaching it in a different way and only at Century Fire at this point. Operator: And this concludes today's program. Thank you for participating. You may now disconnect.