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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.
Operator: Good day, and thank you for standing by. Welcome to the Suncor Energy Fourth Quarter 2025 Financial Results Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Suncor Energy's Senior Vice President of External Experience, Mr. Adam Albeldawi. Please go ahead. Adam Albeldawi: Thank you, operator, and good morning. Welcome to Suncor Energy's Fourth Quarter Earnings Call. Please note that today's comments contain forward-looking information. Actual results may differ materially from the expected results because of various risk factors and assumptions that are described in our fourth quarter earnings release as well as in our current annual information form, both of which are available on SEDAR+, EDGAR and our website, suncor.com. Certain financial measures referred to in these comments are not prescribed by Canadian generally accepted accounting principles. For a description of these financial measures, please see our fourth quarter earnings release. We will start with comments from Rich Kruger, President and Chief Executive Officer; followed by Troy Little, Suncor's Chief Financial Officer. Also on the call are Peter Zebedee Executive Vice President, Oil Sands; Dave Oldreive, Executive Vice President, Downstream; and Shelley Powell, Senior Vice President, Operational Improvement and Support Services. Following the formal remarks, we'll open the call up to questions. Now I'll hand it over to Rich to share his comments. Richard Kruger: Thanks, Adam. Our fourth quarter of 2025 was about finishing a very good year on a very strong note and that is exactly what we did. I'll review operational performance. Troy will cover financial. Let me start with safety. 2025 was the safest year in company history, our third consecutive safest ever across the board fewer incidents, lower severity, both personnel and process safety. Relative to 2022, injuries and incidents are down 70% in 3 years. This is a credit to our people, our priorities and our processes. Now I recognize we put out an operational update earlier in the year, so I'll be relatively brief in summarizing some operational performance. Upstream production. 909,000 barrels a day in the fourth quarter, our best quarter of any quarter ever, 34,000 barrels a day higher than our previous past, which was the fourth quarter of '24. Full year at 860 kbd, again, best ever by 32,000 barrels a day versus '24 our previous best. And 20,000 barrels a day above the high end of our original guidance. Over the last 2 years, we've increased production, 114,000 barrels a day with the same asset base, no costly acquisitions, no major capital-intensive projects, growth from within upgrader utilization, an outstanding 106% for the quarter and 99% for the year, again, best ever. Refining throughput 504 kbd in the fourth quarter our best quarter of any quarter again ever, 12,000 barrels a day higher than our previous best, which was literally the prior quarter. Full year at 480 best ever, by 15,000 barrels a day by -- versus 2024, our previous best and 30,000 barrels a day above the high end of original guidance. Over the last 2 years, we've increased throughput 60,000 barrels a day with the same asset base, no costly acquisitions, no major capital-intensive projects, growth from within. Refining utilization 108% for the quarter, 103% full year, both best ever. All 4 refineries operated at 100% or higher for the second consecutive quarter. Product sales, 640,000 barrels a day in the quarter, our best fourth quarter ever, 27,000 barrels a day higher than our previous best, which was last year. Full year at 623 kbd, also best ever, by 23,000 barrels a day versus '24, our previous high. And 38,000 barrels a day above the high end of our real guidance. Over the last 2 years, product sales have increased 70,000 barrels a day, supported by the same assets. After never having achieved 600,000 barrels a day sales in any quarter ever, we've now exceeded 600,000 barrels a day in 6 consecutive quarters. Capital and cost, OS&G. Full year $13.2 billion within 1.5% of 2024 despite nearly 4% higher upstream production more than 3% higher refining throughput and nearly 4% higher refined product sales, higher absolute volumes, lower unit costs. Capital full year at $5.66 billion, down $510 million versus '24 and $540 million below original guidance. Yet we executed our business plan as designed. We simply delivered it at a lower cost. How? Through rigorous value testing, challenging design bases, quality job planning, disciplined cost stewardship and superior execution once in the field. To institutionalize, we now perform detailed readiness reviews before we spend money and comprehensive post-execution reappraisals after we spend money. Simply put, we are increasingly better stewards of our shareholders' capital. Final reflections on 2025. Best ever in most all regards, safety, operational integrity, reliability, et cetera, with volumes every category upstream and downstream, quarterly and full year was best ever, breaking records largely set a year ago for more than 2 years, Peter's upstream team, Dave's downstream team and Shelley's central support team have not only been breaking records. They have been shattering records all above the high end of guidance for 2 years in a row. How? Through crystal clear priorities, establishing ambitious daily, weekly, monthly performance targets, embracing industry best practices, promoting collaboration and teamwork and by rewarding our teams when they deliver with performance-based incentives. We continue to systematically raise the bar delivering higher, more reliable, more ratable operational results and consequently higher, more reliable, more ratable cash flow. Now I'll turn the clock back 2 years, Suncor's Investor Day in the spring of 2024. We outlined a series of commitments for a 3-year period 2024 through 2026, including upstream production growth, reduction in WTI breakeven, increase in annual free funds flow reduction in annual capital spend and a net debt target with 100% of excess funds to buybacks that are after 1 year ago, February '25, we detailed progress after the first year of the plan. Recall, we achieved nearly 2 full years of progress in 1 year. At the time, I hinted at the possibility of perhaps achieving a 3-year plan in 2 years. However, behind the scenes, I challenged our team to do exactly that. Now 2 years into an ambitious 3-year plan, very pleased to report, we indeed achieved 3 years of performance improvement commitments in 2 years, 3 and 2. 114,000 barrels a day of production growth in 2 years versus a target of 108,000 barrels a day in 3. Greater than $10 a barrel reduction in breakeven in 2 years versus a target of $10 a barrel in 3, greater than $3.3 billion increase in annual free funds flow in 2 years versus a target of $3.3 billion in 3 years. Capital reduced to $5.7 billion in 2 years versus a target reduction of 3 years. net debt of $8 billion achieved in the third quarter of 2024, 9 months early, and that $6.3 billion today, our lowest in more than a decade. Bottom line, we met or exceeded every single target of full year or more early. In life, trust and credibility are earned by delivering on commitments and today's Suncor delivers. So what does all this mean? We're bigger, better, higher performing, more reliable, more ratable, financially stronger and more resilient, better equipped to compete and win. We were previously a high-cost producer. Now we are a low-cost producer. Our balance sheet is rock solid with net debt nearly half of what it was 3 years ago. In fact, the lowest level since explicitly 2014 with tremendous flexibility and optionality, like an industrial machine increasingly generating cash with less relative dependence on oil prices. Proof year-on-year, WTI was down at 15%. Our AFFO was down 8% and our free funds flow down 6%. In 2025, share buybacks of more than $3 billion were $250 million per month throughout the year. increasing to $275 million in December. We were $250 million a month in January of '25 with WTI at $75 a barrel, and we were $275 million in December with WTI at $58 a barrel. We previously announced our plan to continue at this 10% higher level in 2026. And buybacks were independent of oil price in 2025 despite low oil price in 2026. Over the past 3 years, we've repurchased 163 million shares, more than 12% of our float at an average price of $50 a share. Along with dividends, buybacks are a fundamental tenet of our shareholder value proposition. So now what's next? 2026 and beyond. That's the exciting part. We are far from done yet. We know that you don't make the Hall of Fame with a few good seasons or in Bill Belichick's case by deflating footballs before a championship game. It takes sustained excellence, high performance, exceptional and consistent delivery of results, so we will detail a new value improvement plan on March 31 in Toronto, 2 horizons short term, the next 3 years, longer term in the next 15 years. The longer-term horizon will focus on bitumen supply and development options. We know it needs to be bold and ambitious, clear and compelling to keep your interest and support. So stay tuned, I wouldn't miss it. I can't wait to hear what we have to say. With that, I'll turn it over to Troy. Troy Little: Thanks, Rich. I think the strong performance of the quarter and full year have been covered very well, and you can all find the detailed financials in our quarterly disclosure, so I won't repeat any of that here. Instead, as we transition from 1 year to the next, I would like to focus in on our financial resiliency and how that benefits those who choose to invest in us over the long term. Starting with our balance sheet. As Rich mentioned, our net debt closed the year at a greater than 10-year low of $6.3 billion, well under 1x debt to cash flow at $50 per barrel WTI and even lower current strip commodity pricing. Looking behind that number. During the quarter, we renewed our credit facilities with a consortium of Canadian, U.S. and international banks for tenors of 3 and 4 years, providing us with $5.2 billion in available liquidity not including our cash on hand. In addition, in November, we took the opportunity to refinance CAD 1 billion debt in 2 note tranches of 2 and 5 years, achieving the lowest Canadian energy industry spreads in those tenders in more than 15 years. When the near-term commodity price environment is uncertain, we believe investors look for companies that tangibly demonstrate their balance sheet resilience. And I would like to thank both our banks and our bondholders for the confidence they have shown in our business. Next, as you would have seen, our year-over-year share buyback -- share buybacks and dividend per share increased by 4% and 5%, respectively, when over the same time period, average crude prices decreased by $11 per barrel. This ability to offer stable, predictable shareholder returns is backed up by a WTI breakeven in the low 40s, a uniquely integrated set of assets, the flexible character of our capital expenditure plans as well as the continuous improvement mindset that is embedded at every operation and with every one of our 15,000-plus employees to our recently implemented operational excellence management system. At Suncor, our future is not defined by commodity cycles. It is instead defined by how well we perform through them. There is perhaps no better proof point of that than a comparison of the first and fourth quarters to 2025. Q4 AFFO of $3.2 billion was 6% higher than Q1 even though the average oil price had decreased from $71 to $59 per barrel. Finally, Rich referred earlier to the stewardship of our shareholders' capital and I wanted to expand on that a little, specifically as it relates to shareholder returns. I hear many companies refer to returning surplus cash to their shareholders in the form of share buybacks. Suncor doesn't think of our shareholders' money that way. We don't pay you what is left open. We pay you first. We look at our cash flow results, pay our dividends, fund our buybacks and only then consider our spending on other things. On that note, I'm pleased to say that we have continued share repurchases of $275 million per month into January and February, a level started in December of 2025, which represents an increase of 10% over the average monthly buyback in 2025. With that, I will turn the call back over to Adam so that we can take some questions. Adam Albeldawi: Thank you, Troy. I'll turn the call back to the operator to take some questions. Operator: [Operator Instructions] And our first question will come from the line of Greg Pardy with RBC Capital Markets. Greg Pardy: Incredible rundown, incredible year. Rich culture, the shift in the company's culture since your arrival and the reconstitution of the team and so forth, there's obviously been a huge driving force in underlying the performance. When it comes to successorship in the past, it almost looked as though a lot of those changes have been sort of preordained for years in the future. How does that change now under your watch? Richard Kruger: Well, Greg, I think if I step back, I would say leadership development and succession planning. When I say leadership, that can be technical leadership, operational leadership and fundamental business leadership. To me, great companies have continuous pipelines of leadership development candidates. So more than 2 years ago, we started out with the development of a new leadership development framework. It is now in place. And Suncor is more about what you know, not who you know. And we value functional excellence and expertise versus generalist experience broad-based experience sets. But you need both, but we believe you need to know your business, know it extremely well. We conceptually target multiple candidates, 3 -- for example, kind of a 3:1 ratio of candidates for higher-level jobs in succession planning because things happen in life. But I would just wrap that up with succession planning and leadership development in the broadest sense are extremely high priorities. They have been high priorities from day 1 when I arrived. And quite frankly, it was one of a very short list of material commitments I made to the Board of directors. Greg Pardy: Okay. And I'll shift gears on you a little bit. Just the mining operations performed very well in the fourth quarter. You had very mixed conditions. I'm just wondering, have there been changes that you've implemented sort of year-over-year to drive that performance? Richard Kruger: Yes. I'll make a comment or 2, and then I'll ask Peter to expand on that. The unique thing about mining, of course, is we have to operate in a wide range of weather conditions. And when you think of mining, there's really it's more than this, but 2 fundamental areas that affect your performance during weather events. The condition of the mine itself and the condition of haul roads. And so haul roads are to mining like tracks are to a rail company. You have to design, operate and maintain them exceptionally because they're kind of the tracks or the arteries of your ability to sustain. So we put a very high priority in that. And so although there were a lot of conditions in the fourth quarter, wet conditions, of course, the cool off things like this. Our fourth quarter was our best quarter ever. And as you would expect, many of the months in that quarter were our best months ever. But Peter, why don't you comment further on what we've done, particularly around the autonomous haul system and the ability to operate in all weather conditions. Peter Zebedee: Happy to do that. And so we worked really closely, Greg, with our supplier, Komatsu in this case, a base plan to implement some technology on the truck. We call it mud mode but essentially, it reduces slippage and stoppage of the autonomous trucks and soft conditions. That was really successful. We also learned a lot during the implementation of that. In fact, we're working on a mud mode 2.0, if you will, to implement here by the spring of this year. So we're excited about kind of the next iteration of that technology. But really, in reality, it's a combination of multiple improvement activities across our mining operations both in our autonomous operations, which were now fully deployed at base plant up to 140 haul trucks running autonomously and in our staffed operations where we're continuing to work on the fundamentals, improvement activities such as more increased load factor on our trucks, reduce fueling time for pieces of equipment, optimizing our shift change. Just across the Suncor mining portfolio, last year, we moved 1.4 billion tons of material. It's a 12% increase year-over-year in total material movement at essentially the same cost base. And so we're just continuing to drive that efficiency year-over-year. We always talk to our teams about how little things add up to a lot in the mining business. And that's what the teams are focused on these little opportunities, adding up to a lot over the 1.4 billion tons to drive value. Richard Kruger: Yes. I'll just make one last comment, and then we'll continue. You mentioned the word culture or cultural changes, Greg. One of the big things and it's hard to see from the outside is our shamelessly embracing industry best practices wherever they exist in mining, whether that's hard rock mining, in Canada outside of Canada, oil sands mining. So increasingly our leaders, our teams observe, listen, learn and apply. And that is looking from the outside in on how we can get better. And so we have embraced and modified historic practices across the board when we see someone who does something better than us, that is a very cultural a cultural aspect of today's Suncor that I believe is quite different than we were not too many years ago. Operator: One moment for our next question and that will come from the line of Dennis Fong with CIBC. Dennis Fong: First off, congrats on obviously another very strong quarter. My first question here, I wanted to follow a little bit along the lines of what Greg was addressing the second question. But I wanted to maybe remind the call back to Q1 '25 where you Rich highlighted a lot of field-driven optimization. Can you provide maybe a bit of an update on like the backlog of these field-driven optimization opportunities that you see, frankly, across upstream and the downstream. And obviously, how that has really improved cost structure despite headwinds in things like mine plan or some of the mining KPIs. Richard Kruger: One of the things that start with, Dennis, is it's a bit less of a backlog of field-driven optimizations because what we do now when we see that opportunity, we team tackle it. We get on with it. And what we see is, again, it ties a little bit to that cultural is that we continue to replenish our ideas and opportunities. And it's been a huge part of why our refining network is now consistently at or above 100% utilization. Because we have been optimizing those assets, pots and pans and fundamentally increasing the denominator. And Dave, do you have an example or 2 you maybe share with Dennis. Dave Oldreive: Sure. Maybe Dennis, I'll give an example out of Montreal. Montreal we've seen some pretty significant increases in our throughput 2 years ago, we were about in that plant about 120,000 barrels a day, but we knew and the team in Montreal knew they could do more and really didn't have a signal to challenge constraints. So we came up with a new philosophy in our downstream of value and volume. So we run our refineries full, and we challenge our sales teams to sell full. And with that signal, Montreal went after a few things. One of the things they went after is -- and it's in the theme of small improvements that add up big, and this is like field operators, challenging constraints and flagging ideas. We've replaced 2 control valves, 1 pump and power and a small motor, $100,000 investment gave us 20,000 barrels a day at the Montreal refinery. That's a $100 million a year improvement for $100,000 investment. We have lots of other opportunities like that and lots of improvements in that space that are similar. That's a good example of what we're... Richard Kruger: And it starts with leadership, being interested boots on the ground, in the field, listening to people who do the work and understand it better than anyone. And then when they see that opportunity supporting it, promoting it and making it happen. And when you start doing that, you engage your workforce, and they come forward with more and more ideas. So you've heard us say multiple times, we're not done yet. It's not necessarily because we have this long list of things to do, but we are embedding and ingraining a culture of continual improvement in driving. And always, in any facility, you will always have a limiter or the bottleneck. And if you systematically identify what that is and attack it then something else becomes the bottleneck. So I think on this one -- in this particular topical area, we will never be done. Dennis Fong: That's obviously a lot to frankly look forward to. My second question and maybe carrying along the lines of kind of continuous improvement, finding where all the limited happen to be. I believe it was in the last conference call you highlighted single train capacity at Fort Hills to be about 110,000 barrels a day. How have you looked at the after performance of the facility? Have you been able to identify opportunities to further and consistently run at that high level and maybe even further optimize beyond the we'll call it, 220,000 capacity of the 2 trains, especially as we go forward to opening up mining availability. Richard Kruger: One quick comment, and then Peter will expand on it. As we look at this opportunity for continued growth from within, the areas where we see the most -- the biggest opportunity set are Fort Hills and Firebag with the identified opportunities where we're confident we can continue to increase their overall production level. Peter, why don't you comment explicitly on Fort Hills and your 2 Ferraris, you have up. Peter Zebedee: And yes, we have been, as we mentioned in the last call, really testing what the stream day production capacity is of the Fort Hills asset. We're pleased to rates up over 220,000 barrels a day from both trains. We are looking to ensure that we can deliver that to reliably day in, day out, and that is really going to come down to ensuring that we've got the right material movements from the mine in front of us that we're able to deliver the production volumes into the plant and do that sustainably while maintaining a healthy mine inventory. That is all really dependent on making sure that we're opening up our North pit, which is the last and final pit at Fort Hills in the right manner and sequencing the material into the plant in a way that is sustainable along with enhancements, I would say, to the front end of the plant, where we look to kind of metal up and protect against some of that erosion that comes with the higher material throughput that we're running. So I know the team is really highly focused on doing this. And yes, we've seen some success and you've seen the calendar day rates come up through the fourth quarter, and we look forward to more of that here as we go along. Richard Kruger: Dennis, I'm a lot like you. I don't remember all the numbers or get involved in a lot of the details on that stuff. But for example, why do you guys smile? One of the things we've had the name plate at Fort Hills is 194,000 barrels a day and had a target of 175,000 from a production level. So kind of a 90% level. Our belief is with that a bigger denominator that 220,000 or something, a production level in the order of 200,000 barrels a day should be the more near-term ambition. And you want to save a few things for Investor Day. But I think I've just established Peter, what the minimum there might be for 4 barrels. Operator: One moment for our next question. And that will come from the line of Menno Hulshof with TD Cowen. Menno Hulshof: I'll start with a question on buyback guys. $275 million per month. You mentioned that the $250 million per month in 2025 was fairly oil price agnostic and that you've repurchased $275 million in January and February and that buybacks are quite senior within the capital stack. But presumably, there are conditions where you would reconsider your $275 million guide or maybe not. Any thoughts there would be helpful. Richard Kruger: I'll make an opening comment, and then obviously, we'll turn it to Troy on this. A real key enabler in our ability to do this and make this commitment has been to reduce our overall net debt materially over a relatively short period of time and this really dramatic reduction in our breakeven. And what we've said, we wanted to buy back shares at a rate at least consistent with dividend growth so that our overall dividend burden doesn't grow and increase our breakeven and we found -- we've achieved all of those. But Troy, you want to talk more explicitly about the buyback. And Menno, my sense is you might be suggesting what if we were in a lower oil price world, what might that mean? But Troy, do you want to comment further? Troy Little: Yes, sure. I would say to answer that question, I would look at the makeup of our business because I think when you do, you will see something unique and how we're going about this. Our level of integration and I don't just mean between the upstream and the downstream, I mean within the upstream itself allows us to capture margin opportunities over the short term that others can't. It also drives greater utilization of the assets, both under normal conditions and also when anyone ask that experiences planned downtime. Both of these allow us to maximize and make more predictable and stable our profitability. I would also point to this attitude that I think we've conveyed about paying our shareholders first. So ultimately, they'll rather than count on my own words, much as you pointed out, Menno, look at our 2025 track record and just watch what we're going to do in 2026. Menno Hulshof: Terrific. Maybe I'll just -- I'll follow up with a follow-up question to Greg's on Q4 production, which was clearly very strong. Do you think production would have been even higher in the absence of wet weather in October and extremely cold December? Or was there no weather impact at all, given the mitigation work that's been undertaken. Richard Kruger: We run an outdoor business. We mine. We mine come hell or high, wet, dry, cold, hot, and we got to design and operate for that and maintain our assets. So we put on -- when it rains, we put on raincoats. When it's cold, we put on mittens. But no, we delivered throughout the entire quarter. Operator: One moment for our next question and that will come from the line of Neil Mehta with Goldman Sachs. Neil Mehta: I guess, Rich, just wanted your perspective on the refining market, particularly in Canada, you ran well, but you also captured very well in the margin premium relative to the U.S. has kind of been sustained. And so for those of us who probably have less visibility into the Canadian refining market in particular? Just how do you think about the sustainability of the Canadian refining premium relative to the U.S.? Richard Kruger: Neil, if you look back and you can look back over quite a long time. 15 years or so, you were going to -- if you were choosing to be a refiner anywhere in the world and profitability was at the top of your list, I think you had to pick Canada. And then when you say, well, why is that? Well, we've got product pricing based on import parity, we have locally advantaged crude prices. We've got a lot of structural things that contribute to an advantage but then what you've seen here for this company now for 2.5, 3 years, is an advantaged structural setting with high-quality asset base but increasingly run and operate it better and better and better, more opportunistic for the market. So I think that's part of the commentary that Troy had a little bit, the integrated nature, how we manage and maximize the value of molecules and as craps go up and down, I think those -- the majority of those fundamental advantages we will retain those here. Dave, do you have anything else, particularly around margin capture or whatever to add? Dave Oldreive: Yes, Rich, what I'd add to that, and I think you characterized it well. I mentioned earlier, we have our signal of value and volume. And really, we run our refineries full. We have a signal to cellphone. And then over time, we improve our yields and our sales channel mix. And over the last year, we had record crude throughput, as you know, but we also had record gasoline production, record diesel production and record jet fuel production. So we're translating those that throughput into valuable products. And we've also increased our percent branded channel mix as well by growing our retail mostly and a little bit on our wholesale side of our business. So we're selling that through our most profitable tiers. So that's probably the biggest thing we've been doing is making sure the yields are strong with the additional throughput and selling through the optimal channels to keep our margin capture. Richard Kruger: One other thing I'd add to it, Dave, I think what your teams have done in the collaboration between the operations, the supply and trading and the marketers. Those are 3 functional areas of expertise, but how they work together, increasing jet fuel production in the East, optimizing diesel in the West, things to really target the market and to fine-tune or moderate our facilities to meet the market demand I think that's been -- I mean, I've been a part of seeing that evolve. I think that is stellar. And every molecule and every dollar matters. And last time I checked, your teams aren't dropping too many on the ground. Dave Oldreive: No, they're not. And tune in for Investor Day, we have some really great stories to tell on yield improvements as well. Neil Mehta: That's great. That's great color. Just a follow-up is as some quarter earned the license to do M&A at this point, I mean your mousetrap seems to be working really well. And for a long time, it was about fixing the business organically and getting the multiple up but a lot of that's happened. And to the extent that there are other companies that could benefit from the way that you are running your business. Are you a natural consolidator? Or is the story you're going to tell at the end of March is one of organic and more stay-the-course? Just your perspective on that would be helpful. Richard Kruger: Yes. I'll start out with what our goal is to be a value creator for our shareholders. And that largely starts on a per share basis, whether that's free funds flow or whatever. In terms of earning or credibility trust, we talked about that, it's based on delivering on commitments. I think we're past -- wow, these guys had a good quarter or 2. I think we've passed that. So I hope there's probably others listening that can answer this better than I, that we've earned the trust and credibility that any and all actions we do internal or organic or inorganic will be in the shareholders' best interest to increase their ultimate value. Operator: One moment for our next question. And that will come from the line of Doug Leggate with Wolfe Research. Douglas George Blyth Leggate: Rich, I know you don't want to get in the front any more than you already have perhaps of March 31. But I wonder if I could ask you to maybe put some gating items around your spending levels beyond 2026. Should we expect the $5.6 billion, $5.8 billion to be like a cap? Or how do you think about it in terms of the proportion of cash that goes back to shareholders. Now if I may just add on to this, some of your peers talk about a percentage of cash flow. Some talk about a percentage of free cash flow. You've obviously talked about 100% going back to shareholders because of where your debt is. But but that's free cash flow, which is discretionary on your level of spending. So what's the capping item on CapEx. Richard Kruger: Yes. Doug, I think it's a really relevant question in things. As we look at this, our view is competing and winning in today's oil and gas world, there's a whole bunch of components. Obviously, your size and scale, the quality and longevity of your resource base on and on. But when -- in capital, we were increasingly talking about it's not only return on capital, but return of capital. And I think Troy's introductory comments were aimed at amplifying what we believe is important to the majority of our shareholders and what we strive to provide. And so I've kind of hit on this at some investor meetings and broadly on calls, we have been constructing a longer-term plan where we can have our cake and eat it too, where we can develop incremental resources over time and we can continue to return capital to shareholders while we're doing that. We won't have to stop the presses for a multiple year period while we have our capital expenditures blows out. And key in doing that is having the optionality within the resource base, which will be a big part of our conversation on March 31. One is our resource base, not only our 2P reserves, but our contingent resources, what we believe we have there, the advantages we believe those have in terms of capitally efficient development, Lewis, Firebag South or Firebag Phase 5 as we call it, but how we think we can do all that and do it within a capital construct that stays kind of at or below about that round numbers about that $6 billion level. And then in a $60, $65 a barrel world, we continue to grow dividends. We can invest and replace production decline, perhaps even grow it. And we can continue, and this was not in a priority order, to return cash to shareholders via buybacks. So we are carefully assembling this orchestra in such a way that we think we can offer the most value, not only long term but each and every quarter, each and every year to shareholders. Troy, do you have anything you'd add to that? Troy Little: Doug, I'll just add. I think if you look at the model of the company that we've built here, a lot of it is around stability and predictability. You've seen that the last 3 years with respect to our OpEx, which is roughly remained in the same range even though we've significantly increased both our production and our refining utilization. I think you're going to see that in CapEx. And I think we've demonstrated that so far. It's certainly our plans for the long term. And you've also already seen it shareholder returns. We really want to be a company that investors can count on largely regardless of what's going on in the external environment. Richard Kruger: I'll just add one comment to that. It's not like we operate and perform and then see, okay, what are we? What can we do? We have had a very conscious-focused vision of what we want this company to be and where the unique space in investors' portfolio, we believe we could occupy if we achieve that. And all of our efforts have been geared toward creating that company. And I think you're seeing that more and more predictable, ratable, reliable, industrial machine like the ability to return on and return of capital. All of this has been part of a very deliberate vision or plan for several years running, and we've been putting the building blocks in place and you're starting to see it now. And we're having fun with it and we're not done yet. Douglas George Blyth Leggate: I appreciate those answers, guys. Rich, I wonder if I could do a quick follow-up. I know it does not affect you because your model is uniquely integrated. But obviously, there's a lot of focus on what's happening to crude spreads in Canada. I just wonder if I could ask you to just reiterate your immunity to any weakness that we see in WCS and perhaps offer any color as to what you see as a dynamic beyond the normal seasonality. Are you seeing anything materially different because your colleagues over at Imperial didn't seem to think there was anything materially changing. I'd love to hear your opinion on that. Richard Kruger: Well, I think, Doug, you accurately flagged one of the really fundamental attributes that makes us different. And it is this immunity or the lack of any material movement in our economic performance with WCS differentials. And that gets back to again, this integrated aspect all the way from our upstream to our downstream, our ability to upgrade bitumen or heavy crudes to light crudes and things. There is a unique asset base that is different for us. And so when we look at like world events and things, you just look back over the last decade or so, what differentials have done here. They've been tight of late, they've widened here a little bit. They bobble around when there's news on Venezuela and other things and/or tariffs and I don't mean to dismiss it at all but much of that outside noise from a Suncor perspective is kind of much to do about nothing. Because of, again, what we are, who we are and how we're constructed. Now we look for opportunities in that. And there may be opportunities for us when others catch COVID or catch flu, we might sneeze and have a little bit of a sniffle. So there's opportunities in that for us when others have more volatility than we have. And we think the creation of shareholder value often occurs under weaker or distressed market conditions more so than it does under strong and growing market conditions. So our vision for a number of years now has been to strengthen ourselves to build that resiliency that flexibility and optionality. So when we see something we like or we want to do something that makes sense, we can do it confidently and without hesitation. And I think I'm kind of getting off the track of your question a little bit, but I think that's where we are. So the market conditions were largely market takers. But I think our unique construct gives us a -- we don't overreact or panic as things change. And our view right now is there's things going on around the world, but I don't think any of them are going to be fundamentally material to how we continue to deliver value. Operator: One moment for our next question and that will come from the line of Manav Gupta with UBS. Manav Gupta: I actually wanted to follow up a little bit on the refining macro. So if you look at last year, there was a very bearish sentiment in refining, but as the year progressed, fears were proven completely wrong. And you guys generated almost $4 billion in your cash from operations from refining. And we started this year with pretty much the same sentiment on refining, which was pretty negative. But when we look at the fundamentals, the cracks Jan to Jan are actually up. And the capacity additions are more limited. So I'm just trying to understand from where you're sitting in terms of refining macro, if you can make some comments, in terms of diesel and gasoline, do you expect 2026 to be somewhat of a similar year for 2025, which was a very strong year. If you could just talk a little bit about that. Richard Kruger: I'm going to ask Dave to comment explicitly in a minute. But I'll tell you, as a large miner and a big upstream company and understanding the geopolitical uncertainties and the importance of breakeven and stuff. When I go to bed at night and say my prayers I thank God for the downstream. Because the level of integration we have, it provides this natural hedge and support. And sometimes upstream goes up, downstream goes down and vice versa. So it is a really fundamental part of this value proposition and what we deliver. Dave, so other than that philosophy, do you want to offer some specifics on that? Dave Oldreive: Yes, for sure. I mean, specifically, if you look even at today's cracks, Manav, and as you're aware, we're soft -- gasoline is pretty soft in the Mid-Continent. L.A. market is strong across the board. The harbor is strong on diesel, particularly with recent cold weather and reasonably good on gas cracks. Distillate margins through '25 were strong. and they really peaked in October, November. And I would expect diesel to continue to remain strong through the first quarter, and we've seen that trend over the last few years where diesel has been above gasoline. That plays the Suncor's strength. We have a pretty low G to D ratio. We also have pretty good G to D flexibility, and we can win in any environment, but we really like good diesel cracks. In the fourth quarter, we achieved not only record refinery utilization but record diesel production. And how do we do that? I'll give you an example out of Edmonton, this is a little sneak preview of maybe some things we'll share at Investor Day. The first half of the story or the second half of the story, stay tuned. In the Edmonton refinery, we made a few simple routing changes that took advantage of some improved catalysts that we put in during our turnaround and structurally increased diesel yield by 8,000 barrels a day. And that resulted in a correspondingly lower diluent production, so much higher value product on the diesel side. We did that for $140,000 investment and that delivers about $45 million a year in incremental value. And then we were able to move that through our -- we did that through the third and fourth quarter of last year. Richard Kruger: Third and fourth quarter. So it really had minimal impact on 2025. And it's all... Dave Oldreive: We see this into '26, and we think there's opportunity to grow that even further in 2026. And then we sold that through our domestic channels as well as we have export capacity on both coasts. But we're not done yet Tune in for more on that one, on that story in March. Manav Gupta: Perfect. My quick follow-up is and maybe you'll again talk more about the Analyst Day, but you took over the operations of Syncrude. We are seeing some improvements. Help us understand that you -- the changes you brought about once you kind of started operating that asset on your own versus the JV entity that existed in between. If you could talk a little bit about that. Richard Kruger: I think some of the key things is Syncrude is fully part of the Suncor family. And so what that means is best practices, central support and just the scale and efficiency that come with as opposed to being a joint venture in kind of an island, you're now part of a continent. And so we have brought the best to bear. We have also -- whether it's best practices or people. We've moved people into Syncrude, moved Syncrude individuals out to other operations. So they're just getting the full benefit of the storyline we've told how we're systematically reducing variation asset to asset. And while we're doing that, we're elevating the overall performance across the enterprise. So Syncrude being fully fledged part of the family has been a big part of that. Everything we're doing applies to them equally as it would to any other asset, and that makes a difference. Manav Gupta: Congrats on the great result. And again, once love the choice of the song that placed before the call starts. Operator: [Operator Instructions] And our next question will come from the line of Patrick O'Rourke with ATB. Patrick O'Rourke: Congratulations on a strong quarter. I was going to ask on Syncrude, but that was a very comprehensive answer there. So maybe I'll talk about sort of the refinery, the throughput levels that you've had here, been able to achieve over 100% and you spoke to raising the denominator earlier on the call, at what point do you think about sort of formalizing those levels here? Richard Kruger: I'll give you a little bit of a peek behind the curtain with what we have been doing to systematically across the entire network debottleneck and add capacity, we now run 2 sets of books. So externally, the nameplate of our system is 466,000 barrels a day. It's been that way for a long time. As we continue to report to you, that's the denominator. But what you're seeing is you were getting north of 100%, what you really know is the denominator is bigger than that. And so the second set of books is the internal books, the drive to be the best we can be. So this team in this room sits down weekly, monthly and literally daily and looks at performance and we compare to performance to our internal books with a bigger denominator. So instead of looking at 103%, 105% of might be looking at something that's 95%, 96%. And then as opposed to patting ourselves on the back for being north of 100%, we're saying, at 95%, 96%, where is that last 4%, 5%. So that's the philosophy of how we're doing things. And we need to think about when we go externally and say, okay, the new denominator is x because we don't want anybody to miss the memo when we do that in a year from now and say, well, how these guys, they were 103% in 2025, and now they're only 97%. Man, their performance went down. You got to look at the barrels and the percentages, but we know as we get -- as we continue to be north of 100% at some point in time, we have to come clean on what we -- what is the real capacity of this network and it's well above 466,000. Patrick O'Rourke: Okay. Great. And then maybe just on the return of capital, thinking about the debt position of the company here. $6.3 billion versus the $8 billion target? I know there's been a working capital impact in the fourth quarter and historically a bit of a reversal of that in the first, but let's say we get towards the end of the year and the commodity conditions have been such that you're still sitting well below that $8 billion. How do you think about the signals for releasing that to shareholders? And sort of what's the preferred vehicle if you do make that decision? Maybe I'll add this sort of since you touched on inorganic, is there any potential that you would see that as dry powder where you can create per share accretion? Richard Kruger: Troy, do you want to comment a bit? Troy Little: Yes. I don't think we look at dry powder for -- and I think you're suggesting acquisitions in terms of where the balance sheet is. I think we let the opportunities to find whether we want to do something like that. And I think we have an excellent track record of it, both from a disposition perspective as well as an acquisition perspective. When we think of return on capital, we do look at it over a longer time period than 1 month, look at it over a full year. You are right that the normal trend is for us to have a working capital release in Q4 and then actually usage in Q1. I don't expect that to be any different this year. It's important to go back to what I said about the order in which we pay things as people think about the balance sheet and how it's used around share buybacks or capital ultimately, there's some clarity in the order we're doing or paying out our cash flow because we actually look at it as though we're looking at the benefits of what our capital spending is versus the cost of any leverage that are associated with it. So it's not so much funding the buybacks themselves off the balance sheet. It's actually funding what's at the end of the line. So stay tuned if operations continue to improve on the path they have, that gives us more direction to increase those buybacks, but it's not so much related to where our debt levels are. Operator: Thank you. I'm showing no further questions at this time. I would now like to turn the call back to Mr. Adam Albeldawi for closing remarks. Adam Albeldawi: Thank you, everyone, for joining our call this morning. If you have any follow-up questions, please don't hesitate to reach out to our team. Operator, you can end the call. Operator: This concludes today's conference call. Thank you all for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the American Financial Group 2025 Fourth Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Diane Weidner, Vice President, Investor Relations. Please go ahead. Diane P. Weidner: Thank you. Good morning, and welcome to American Financial Group's Fourth Quarter and Full Year 2025 Earnings Results Conference Call. We released our results yesterday afternoon. Our press release, investor supplement and webcast presentation are posted on AFG's website under the Investor Relations section. These materials will be referenced during portions of today's call. Joining me this morning are Carl Lindner III and Craig Lindner, Co-CEOs of American Financial Group; and Brian Hertzman, AFG's CFO. Before I turn the discussion over to Carl, I would like to draw your attend to the notes on Slide 2 of our webcast. Some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties that could cause our actual results and/or financial condition to differ materially from these statements. A detailed description of these risks and uncertainties can be found in AFG's filings with the Securities and Exchange Commission, which are also available on our website. We may include references to core net operating earnings, a non-GAAP financial measure, in our remarks or in responses to questions. A reconciliation of net earnings to core net operating earnings is included in our earnings release. And finally, if you are reading a transcript of this call, please note that it may not be authorized or reviewed for accuracy. And as a result, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements. Now I'm pleased to turn the call over to Craig Lindner to discuss our results. Craig Lindner: Good morning. I'll begin by sharing the highlights of AFG's 2025, 4th quarter and full year results, after which Carl will walk through more details about our P&C operations and share AFG's business plan assumptions for 2026. We'll then open it up for Q&A, where Carl, Brian and I will respond to your questions. The fourth quarter marked a strong finish to a great year for AFG. Our compelling mix of specialty insurance businesses, entrepreneurial culture, disciplined operating philosophy and highly skilled team of in-house investment professionals collectively have enabled us to outperform many of our peers and continues to position us well for the future. Carl and I thank God, our talented management team and our great employees for helping us to achieve these results. As you'll see on Slide 3, AFG's core net operating earnings were $10.29 per share for the full year 2025, generating a core operating return on equity of 18.2%. This ROE is calculated using an average of the 5 most recent quarter-end balances of shareholders' equity, excluding AOCI. We closed out the year with an exceptionally strong fourth quarter. As you'll see on Slides 4 and 5, core net operating earnings per share were $3.65 per share, producing an annualized fourth quarter core return on equity of 25.2%. Capital management is one of our highest priorities. Returning capital to our shareholders is a key component of our capital management strategy and reflects our strong financial position and our confidence in AFG's financial future. In 2025, we returned over $700 million to shareholders, which included $334 million or $4 per share in special dividends, $274 million in regular common stock dividends and $99 million in share repurchases. Over the past 5 years, dividend payments and share repurchases have totaled $6.3 billion. Additionally, we increased our quarterly dividend by 10% to an annual rate of $3.52 per share beginning in October of 2025. Now I'd like to turn to an overview of AFG's investment performance and share a few comments about AFG's financial position, capital and liquidity. The details surrounding our $17.2 billion portfolio are presented on Slides 6 and 7. Looking at results for the 2025, 4th quarter Property and Casualty net investment income was approximately 12% lower than the comparable 2024 period as lower returns from alternative investments more than offset the impact of higher interest rates and higher balances of invested assets. For the full year ended December 31, 2025, P&C net investment income, excluding alternative investments, increased 5% year-over-year. Approximately 65% of our portfolio is invested in fixed maturities. In the current interest rate environment, we're able to invest in fixed maturity securities at yields of approximately 5.25%. The duration of our P&C fixed maturity portfolio, including cash and cash equivalents, was 2.9 years at December 31, 2025. The annualized return on alternative investments in our P&C portfolio was 0.9% for the fourth quarter of 2025 compared to 4.9% for the prior year quarter. Although the overall returns on our multifamily investments continue to be impacted by an excess supply of new properties in some of our targeted markets, we are seeing signs of recovery. New starts have fallen nearly 50% since 2022, and completions peaked in 2024 and are rapidly declining. We continue to believe that in the last half of 2026, the tightening supply and significantly reduced pipeline will drive higher rental and occupancy rates. Importantly, a sizable portion of our portfolio of multifamily properties is located in desirable geographies with strong job and wage growth. Longer term, we continue to remain optimistic regarding the prospects of attractive returns from our overall alternative investment portfolio with an expectation of annual returns averaging 10% or better. Please turn to Slide 8, where you'll find a summary of AFG's financial position at December 31, 2025. During the fourth quarter, we returned $240 million to our shareholders through the payment of a $2 per share special dividend in November and a regular $0.88 per share quarterly dividend. In conjunction with our fourth quarter earnings release, we declared a special dividend of $1.50 per share payable on February 25, 2026 to shareholders of record on February 16, 2026. The aggregate amount of the special dividend will be approximately $125 million. With this special dividend, the company has declared $55.5 per share or $4.7 billion in special dividends since the beginning of 2021. AFG ended the year in a strong capital position. Our leverage ratio was less than 28%. We have no debt maturities until 2030 and our insurance company financial strength ratings are at the A+ level for AM Best and Standard & Poor's. We expect our operations to continue to generate significant excess capital in 2026, which provides ample opportunity for acquisitions, additional special dividends or share repurchases over the rest of the year. We evaluate the best alternatives for capital deployment on a regular basis. We continue to view total value creation as measured by growth in book value plus dividends is an important measure of performance over the long term. For the year ended December 31, 2025, AFG's growth in book value per share, excluding AOCI, plus dividends was 17.2%. We're extremely proud of the value we've created for shareholders over time. I'll now turn the call over to Carl to discuss the results of our P&C operations and our business plan assumptions for 2026. Carl Lindner: Thank you, Craig. Please turn to Slides 9 and 10 of the webcast, which include an overview of our fourth quarter results. Fourth quarter underwriting profit set a new quarterly record for AFG, led by exceptionally strong profitability in our crop insurance operations. Nearly all the businesses in our diversified specialty P&C portfolio continue to meet or exceed targeted returns, and we continue to feel confident about the strength of our reserves. We've assembled a diversified portfolio of Specialty Property and Casualty businesses that helps us navigate the peaks and valleys of the insurance cycle and respond to changing economic conditions. The noncorrelation of many of our businesses, both each other and to the broader insurance market has been instrumental to AFG's strong and consistent performance over many years. Turning to Slide 9. You'll see that underwriting profit in our Specialty Property and Casualty insurance businesses grew 41% and generated an outstanding 84.1% combined ratio in the fourth quarter of 2025, an improvement of nearly 5 points from the prior year period. Results for the 2025 4th quarter include 2 points related to catastrophe losses compared to 1.1 points in the 2024 4th quarter. Fourth quarter 2025 results benefited from 1.6 points of favorable prior year reserve development compared to 1.8 points of adverse prior year reserve development in the fourth quarter of 2024. Fourth quarter 2025 gross written premiums were up 2% and net written premiums were down 1% when compared to the same period in 2024. For the full year, gross written premiums increased 2% and net written premiums were flat. As noted, we continued to benefit from the diversification across our 36 businesses and achieved premium growth in many of them as a result of a combination of new business opportunities, a good renewal rate environment and increased exposures, while remaining disciplined and focused on underwriting profitability in some of the more challenging markets. Average renewal rates across our Property and Casualty Group, excluding workers' comp, were up approximately 5% for the quarter, in line with the previous quarter. Average renewal rates, including workers' comp were up approximately 4% overall. We've reported overall rate -- renewal rate increases for 38 consecutive quarters, and we believe we are achieving overall renewal rate increases in excess of prospective loss ratio trends allowing us to meet or exceed targeted returns. Now I'd like to turn to Slide 10 to review a few highlights from each of our Specialty Property and Casualty business groups. Details are included in our earnings release, so I'll focus on summary results here. The businesses in the Property and Transportation Group achieved an outstanding 70.6% calendar year combined ratio in the fourth quarter of 2025, an improvement of nearly 19 points from the comparable 2024 period. Record yields for corn and soybeans and favorable commodity pricing trends throughout the growing season, which contributed to a very strong crop year and lower year-over-year catastrophe losses in our property exposed businesses were drivers of these exceptional results. Fourth quarter gross written premiums for 2025 in this group increased 5% from the comparable prior year period for the fourth quarter of 2025, while net written premiums were approximately 2% lower year-over-year. The increase in gross written premiums was due primarily to growth in our crop products that are heavily ceded, and to a lesser extent, growth in a transportation captive that has higher premium sessions. Overall renewal rates in this group increased approximately 6% on average in the fourth quarter of 2025, consistent with pricing in the previous quarter. Pricing for the full year for this group was up approximately 7% overall. We continue to remain focused on rate adequacy, particularly in our commercial auto liability line of business where rates were up approximately 15% in the fourth quarter and up 14% for the full year. The businesses in our Specialty Casualty Group achieved a 96.7% calendar year combined ratio overall in the fourth quarter, 5.3 points higher than the 91.4% reported in the comparable period in 2024. Combined ratios at this level for these longer-tailed lines of business typically generate returns on equity in the high teens or better. Fourth quarter 2025 gross and net written premiums increased 2% and 3%, respectively, when compared to the same prior year period. Primary drivers of growth included new business opportunities, favorable renewal pricing in our targeted markets business, new business opportunities in our mergers and acquisition business, growth in our workers' comp businesses and new premiums from one of our start-up businesses. Growth was tempered by lower year-over-year premiums in our executive liability and excess and surplus lines business, where we experienced heightened competitive pressures for both new and renewal business. Overall, renewal pricing in this group was up about 5% during the fourth quarter. Average renewal pricing, excluding workers' comp, was up 6% in the fourth quarter. For the full year, pricing excluding workers' comp was up about 8%. I continue to be pleased that we continue to achieve renewal rate increases of 10% or better during the quarter and several of our social inflation exposed businesses, including our social services and excess liability businesses with full year increases across these lines in the range of 13% to 15%. In addition, our workers' compensation businesses collectively achieved a modest pricing increase during the quarter, similar to our results in the third quarter. Moving on to the Specialty Financial Group continued to achieve excellent underwriting margins reported an excellent 83 combined ratio for the fourth quarter of 2025, 2.3 points higher than the prior year period. Fourth quarter 2025 gross and net written premiums in this group decreased by 4% and 10%, respectively, when compared to the same prior year period. Higher year-over-year premiums in our European operations were more than offset by lower premiums in our financial institutions business, which has produced very strong growth over the past several years. Net written premiums were tempered by our decision to seed more of the coastal exposed property business in our financial institutions business beginning in the second quarter of 2025. Now as we look to 2026 in lieu of providing formal earnings guidance, we have provided several key assumptions underlying our 2026 business plan, which you'll see summarized on Slide 11. We believe these assumptions are among the most relevant and helpful to analyst investors in modeling AFG's business and informing an investment thesis. These assumptions for 2026 include growth in net written premiums of 3% to 5% from the $7.1 billion reported last year, a combined ratio of approximately 92.5% a reinvestment rate of approximately 5.25% and an annual return of approximately 8% on our $2.8 billion portfolio of alternative investments. We expect that performance in line with these assumptions would result in core net operating earnings per share of approximately $11 in 2026 and generate a core operating return on equity, excluding AOCI, of approximately 18%. As we consider our outlook on growth, we're optimistic about several of our start-up businesses and the near completion of numerous underwriting actions taken in our Specialty Casualty businesses. However, we're mindful of pockets of softening rates and continued competitive conditions and we'll maintain our disciplined bottom line focus as we pursue opportunities to grow profitably in 2026. Our assumptions include an average crop year. So we believe that the combination of our reserve strength, a continued healthy rate environment, prudent growth and the ability to invest at a rate that exceeds our current portfolio yield positions us well as we enter 2026. Craig and I are pleased to report these exceptionally strong results for the fourth quarter and full year, and we're proud of our proven track record of long-term value creation. Our insurance professionals have exercised their Specialty Property and Casualty knowledge and experience to skillfully navigate the marketplace and our in-house investment team has been both strategic and opportunistic in the management of our $17.2 billion investment portfolio. We look forward to continuing to build long-term value for our shareholders this year and beyond. I will now open the lines for the Q&A portion of today's call. Craig and Brian and I would be happy to respond to your questions. Operator: [Operator Instructions] Our first question comes from the line of Hristian Getsov from Wells Fargo. Hristian Getsov: My first question is on the 2026 business plan. I guess, what does that business plan assume in terms of rates relative to the 5% P&C renewal pricing ex comp we saw in the Q4, and is there any assumption of prior period releases in the 92.5% combined ratio target? Brian Hertzman: So when we're looking at our combined ratio overall, we're really not necessarily specifically identifying any amount for prior year development. But as you can see historically for AFG, overall, we've tended to be conservative and have favorable development in most periods, not that we're immune from adverse development, but we're hopeful that our our reserving strategy set us up for a likelihood of favorable development, more than adverse development. That being said, we would expect -- if you kind of look at what's happened in 2024 -- in 2025 -- '24 and '25 going into '26. In '24 and '25, we continue to have a lot of unexpected favorable development at workers' comp, but that was offset by some adverse development and social inflation exposed businesses going into 2026, not that we have a crystal ball, but we would expect that the workers' comp will not continue to develop as favorably as it has in the past. But we also given rate actions and reserving actions that we've taken would not expect the adverse development from the casualty lines to reoccur. As far as pricing goes, I think we feel confident that we'll be still to continue to get good price increases where we need them. There are other businesses like our financial institutions business where rate increases have moderated, but these businesses are very profitable and manageable levels that they are. Hristian Getsov: Got it. And then -- for the quarter, we saw a pretty meaningful uptick in the casualty underlying loss ratio. Was there any change in loss picks? Or was that more reflective of just being conservative given continued elevated loss trends -- or was there something you saw in the quarter that led to the change? And I guess, is that pick something that we could run rate going forward? Or any other color there would be appreciated. Brian Hertzman: Sure. So when you look at the -- so you only get accident year loss ratio, excluding [ CATS ] for the Casualty Group in the quarter. What you'll see there is continued caution around our social inflation exposed businesses like our central services business, public entity business and certain excess liability businesses where you've seen intermittent small pockets of adverse development in recent periods. So we are being cautious there in our current picks. Also when you look at our relatively small book of California workers' compensation insurance, with the legal environment and things like cumulative trauma in that area, we are also being cautious in our accident year pick there. When you couple that with the rate increases that we have achieved and are achieving or hopeful that those loss picks will set us up for a better chance of favorable development in future periods. Operator: Our next question comes from the line of Gregory Peters from Raymond James. Charles Peters: I guess I just wanted to follow up on the workers' comments, Brian. Was there something unusual in the frequency or medical trend in a particular state this year that led to the results you reported or was this across the book? And I was interested in your comment about cumulative trauma. I know that's popped up and is on the radar for other workers' comp companies. I wonder if you could provide some color on how you're viewing that risk right now. Carl Lindner: For the most part, Greg, our loss trends -- our loss ratio trends continue to be pretty benign and that positive trends around frequency, severity, not being abnormal. So again, our workers' comp business, we our overall results for workers' comp, both on a calendar year and an accident year basis in 2025 continue to be excellent. That said, the calendar year combined ratio for overall comp business in '25, it was a few points higher than last year. And I've been kind of pointing that out probably every quarter. And we probably would expect the same to happen into '26. But the good news is the results continue to be excellent. We would expect workers' comp to continue to be a very profitable line. California comp would be the exception. California, as you know, the industry probably has a combined ratio in excess of 120 probably the -- there was an approval of a rate increase in September of about 8.7% kind of a guideline rate that was put out there. When you look at pricing in California, we're getting probably a 10 -- a healthy 10% price increase in the fourth quarter. So it seems like there's beginning to be a bit more of a backbone in the competitive environment in California, which I'm happy to see and happy to see us get some rate. Our combined ratio isn't 120 plus, but we're unhappy with it and working hard to improve it in that. So California is kind of probably the one state that would be the exception. The cumulative trauma, sure that impacts Republic or California comp subsidiary. I think we've already -- we've been taking into account in our loss reserve picks that aspect for years. That's not something that's a big surprise to us. So I think we've already been taking that into account. Our workers' comp -- last year, our workers' comp business overall grew about 1%. I think as -- when you look at overall pricing trends, I think I mentioned in comp, we actually had a modest price increase in the fourth quarter. I think from a growth standpoint, I would think we would probably see some growth this year, maybe 3% to 5% overall growth or something in workers' comp, which is a positive. I hope that gives you some insight into your questions? Brian Hertzman: Just to add on that same subject, just to size that California workers' comp business, is less than $200 million of net written premiums for the year. Carl Lindner: Yes. It's less than 15%. . Brian Hertzman: It's not a real big portion of our workers' comp business that in our overall business, but we do react to what we're seeing in the environment overall, both in setting our reserve picks and also, more importantly, informing us what we need to do from rate increases, leading to things like the near 10% in the fourth quarter. Charles Peters: Got it. During your comments, you also highlighted start-up businesses. And maybe if you could just spend a minute and just share with us some information -- more information about what's behind the start-up businesses and sort of your expectation especially considering I think we're -- admittedly, the broader PC market is -- the rate environment seems to be softening up. So just curious about the areas of the market where you think there's opportunity. Carl Lindner: Yes. We've -- every year, we make investments and we start up businesses in that. And I think after making some investments and grinding through the early start-ups and a few things. So we're beginning to see some success and progress things like specialty construction. We have E&S binding business, we would expect to see some more premium in that area. So areas like that, we have 4 or 5 different start-ups that I think will begin to show more progress in that. And the Embedded Solutions area, I think, is an area a new area for us that we're excited about, and we think we'll bear some fruit this year. Charles Peters: My final question, and I know you've commented on this before, but the crop business. Is there any spillover into the first half of '26 from the results of the 25-year crop year? Carl Lindner: Yes. There always is based off of area coverage results for a reinsurance year or some citrus and that type of thing. We obviously had a very strong year and -- so usually, there's always a true-up in the first quarter, and I think we'd be positive that there will probably be some positive true-up as the crop reinsurance here. And as you know, we're kind of in the February discovery period for commodity prices and that. And I mean, so far, as it relates to spring discovery, if the prices kind of remain kind of where they've been looks like corn is discovery futures price down maybe 3%, soybeans up 2%, but that would mean good things as far as stability on the premium base. I think if we have that kind of a scenario, I think we'd be looking at seeing the crop business maybe even grow a little bit, assuming spring discovery prices kind of stay in the range that they are right now. Operator: Our next question comes from the line of Michael Zaremski from BMO. Unknown Analyst: It's Dan on for Mike. My first one, just sticking with the Property and Transportation segment. So is the current accident year improvement this quarter just driven by favorable crop or -- what are you seeing in the other businesses in that segment? I understand maybe those are performing a little bit better, too. I'm just trying to get a better sense of the run rate there. Brian Hertzman: Sure. So definitely, the big driver of the lower loss ratio as well as the lower expense ratio in Property and Transportation is coming from the very strong crop results. The rest of the businesses in that segment have performed very well and are pretty stable. I think when you get to looking at our annual statements that we file, I think you'll see that we continue to be cautious in our loss picks on commercial auto liability as well for the same reasons we talked about in casualty. But overall, very, very strong results across the whole segment. And even in commercial auto liability, where we -- where I mentioned that we're being cautious on the loss picks, we still have a small underwriting profit for the year, overall -- for overall commercial auto. So I think if you're trying to sort of normalize things, I think the big driver of the strong is the above-average crop year versus 2024 being more of an average crop year and then looking to 2026. As Carl mentioned, our models would would build in an average crop year versus the very strong crop year this year? Unknown Analyst: Okay. That's helpful. Then switching gears maybe to Specialty Financial and specifically on the lender-placed business there. Just curious about what drove the inflection in pricing a little bit sequentially from plus 1 from minus 2 in the prior quarter. And then bigger picture just with increased political focus on personal lines profitability. Is there any concern about that business just from a political lens on the lender placed? Carl Lindner: No, I don't think we have concerns on the political front. I think the farm bill actually got extended into September 2026. And it's supported by both sides, both Republicans and Democrats generally in that. As far as the pricing goes -- as far as pricing goes, these -- our customers are large groupings of properties in that in our -- and so it kind of depends quarter-by-quarter based off of, say, how -- what a client might have in the way a coastal property and that may require a greater price versus an account that doesn't. So you can always expect some lumpiness around pricing. That said, this business is extremely profitable. And I think that rates have plateaued. I think there still is an effort to continue to move the vast -- the biggest part of the business to ensuring on a replacement cost value versus unpaid mortgage balance. So I think that continues to be a positive for this business. We have -- we did, I think, as I mentioned, in the second quarter of last year, we did make a decision to see more of the coastal exposed property business, which did have some impact mainly towards the last half of the year. I think this year, we would expect kind of low single-digit growth in this business, all things considered. Operator: Our next question comes from the line of Paul Newsome from Piper Sandler. Jon Paul Newsome: I was hoping if you could give us a little bit more color about some of the social inflation related businesses that you remediating in the last year. So it sounds like those businesses are maybe stabilized. Are you in a position where you can now grow those businesses? Or are they just sort of stabilized? So maybe little bit of thoughts on that and whether those businesses, they take a little longer before they go back to a growth potential. Carl Lindner: Yes. I think as we've mentioned in the past that we feel that we've kind of work through a cycle of corrective steps in our nonprofit business and in our excess liability business restructuring to lower average limits and et cetera, et cetera, as well as price. I think if you noticed in the third quarter -- I mean, in the fourth quarter, Specialty Casualty grew, we had low single-digit growth in that quarter, which is a positive. And I think when you look at, say, the excess liability business overall, it grew overall. So I think that points towards this year, I think, an opportunity to see some mid-single-digit growth potentially in both excess liability or nonprofit business, and that. So I think we would see, again, as I mentioned before, those businesses returning and having some growth opportunities and Specialty Casualty in general. Jon Paul Newsome: Makes sense. I wanted to ask a little bit of an extra question on the alternative investment portfolio. You're obviously hoping for expecting a higher return this next year, but maybe not quite as high as it's historically been. Are there certain maybe macroeconomic things or particular things about the portfolio that as an outsider, we should be looking towards that would signal that extra couple of percent back to normal. Craig Lindner: Paul, this is Craig. As I think you know, around 50% of the alternative portfolio is in multifamily. And there has been a big oversupply the last couple of years of new multifamily properties that have been delivered. And the absorption rate is actually very strong, but we think it's probably going to take another couple of quarters to get back to a more normal environment. . Historically, even with the poor returns in the recent past, over the last 5 years, we've still earned between 10% and 11% total return on our multifamily investments and Goodyear's significantly above that. So -- to get back to the historical levels of returns on the alternatives, it is going to require the multifamily properties to have a better rate environment, which as I said in the conference call script, we're seeing clearly a bottoming, and we're seeing some favorable signs in terms of absorption and new stores at a 10- or 12-year low. So we think sometime in the last half of the year, we're going to see a better environment in 2027 and going forward for some number of years, we think is going to be a pretty favorable environment for multifamily. But that's what is going to be required to get back to our historical return levels on alternatives. . Jon Paul Newsome: So the insights. . Carl Lindner: So the group per is mentioning that -- on the question about lender-placed property and the political exposure, I think I was talking about the crops on the lender side, I think when you look at the regulation of that business, it's been more state by state in that. But I don't see lots of political risk with regards to lender-placed property. I think it's to the lenders. I think it's providing service, particularly when a lot of the business is due to cancellation of a homeowner's insurer by homeowner's insurer. So it really provides a healthy backstop to financial institutions to make sure that there's coverage. So I don't see much political risk there. Operator: Our next question comes from the line of Meyer Shields from KBW. Meyer Shields: My first question is on the premium growth. Business turn assumption of 3% to 5%. Just curious if you guys could elaborate on which specific business lines are seeing the most favorable pricing getting into 2026? And what you see the greatest opportunities for profitable growth within our 3% to 5% premium growth on assumption? Carl Lindner: Yes. I think the good news is that at this point for the vast majority of our businesses, we think that we have an opportunity for premium growth this year. I think also when you look at the profitability of our businesses. Almost all of our businesses are really meeting or exceeding the targeted returns that we require. So I think we'd love to have as much opportunity as we can get within pretty much all of our businesses in that . Meyer Shields: Got it. My second question will be on the Specialty Financial Group. You guys reported a decline in net written premium due to the increase on ceding of coastal exposed property business in the financial institutions. Just curious if you can provide more color on the reinsurance strategy change made there and whether this level of session is expected going forward in 2026. Carl Lindner: Yes. We started that in the second quarter, '25. So that book would have rolled on a different reinsurance basis through the first half of this year. If you're familiar with us, historically, we're a company that's had a relatively lower catastrophe exposure than our peers and we've had a lower appetite right or wrong or otherwise, for coastal property, pure earthquake risk, et cetera, et cetera. So I think we carefully manage FIS is probably the business that has our biggest property exposure. So we very carefully manage that to what our the coastal exposures to what our overall company philosophy is. And when you look at our 1 in 250 or 1 in 500 exposure to capital, Brian, 1 in 500 exposure today for hurricane. Brian Hertzman: Yes, it's less than 3%. So compared to industry numbers that might be closer to double digit. Operator: [Operator Instructions] Our next question comes from the line of Andrew Andersen from Jefferies. Andrew Andersen: You had previously been doing some reunderwriting on Casualty around social services and I think within some pockets of E&S. Are you done with these underwriting actions as we head into 2026 and they're no longer headwind. Carl Lindner: Yes. For the most part, we might have a couple of million dollars of business that still to be non-renewed this year particularly in the daycare side of things, we're pretty much through the nonrenewal actions in housing accounts and that -- so last year, the premium was down. I think this year, as I think I mentioned earlier, I think we would expect kind of some modest premium growth in this business and that some. Andrew Andersen: And then, Brian, if we go back to Specialty Casualty and the underlying loss ratio there, I'm just trying to understand the $69 million in the quarter. Was there an intra-year catch-up in the fourth quarter? I suppose I'm just trying to get better color on what was the true underlying trend and what is maybe the kicking-off point for '26 underlying? Brian Hertzman: Sure. So we look at our loss picks every quarter and make adjustments throughout the year. So in some of those units, things haven't been adjusted all year, the one that probably had a larger adjustment in the fourth quarter was the California workers' comp. But again, that's on the business that for the full year is less than $100 million of premium. So I wouldn't say that that's a run rate. I think the California workers' comp adjustment probably elevates the loss ratio a little bit. I think if you look at the full year loss ratio for casualty, that's probably a better indication of like a run rate type of number. Andrew Andersen: Okay. And then maybe one more. Just looking at the expense ratio, I think as we came into '25, there was maybe some business mix shift headwind and some commission changes. Have those kind of find their level now and perhaps we could see some improvement into '26. Brian Hertzman: Yes. There will always be a mix of impact -- mix of business impact there. Like Carl mentioned something like our embedded insurance that could lead to some growth of that. When we look at businesses, we look at the ROEs overall and the combined ratios to drive those ROEs. So if we grow in a business with a higher expense ratio, that would have a negative impact. What I would say -- in terms of the other things that might affect that we continue to invest in the future for the company. So we continue to have some initiatives around customer experience, data analytics, which would include things like AI and machine learning as well as IT security that can have a sort of a negative impact in the current period, but it's setting us up for strong ROEs in the long run. So I think that we should be good there. Not that you wouldn't see some upticks or downticks. But I think -- and I think another thing that I guess to know if you're looking at the expense ratio overall is to remind you that in some of our businesses, we receive ceding commissions that vary with the profitability of the business. So like in the fourth quarter, the expense ratio of our property transportation looks very low. That's because with the very strong crop year, the ceding commission is higher and some ceding commissions reduced underwriting expenses. The expense ratio looks very strong there. And then on the other side, in the financial segment where we have the very profitable underplace business, some of the commissions that we pay to brokers and agents vary with profitability over a long period of time. So as you add on collective strong performance quarter after quarter in that business, those profit-based commissions go up. So you see improved loss ratios in that business, but then because the broker commission goes up, it can cause the expense ratio to be a little higher. Operator: Our next question comes from the line of Michael Zaremski from BMO. Michael Zaremski: Just one more for me on capital management. I see the special dividend announcement. But just curious why there are no buybacks or material amount this quarter. You've done buybacks at valuation levels in previous quarters. Just wondering, should we think about share repurchases to resume in 2026? Or how should we be thinking about that? Craig Lindner: Yes, Mike, this is Craig. I wouldn't read too much into no share repurchases in the fourth quarter. We said previously, we're opportunistic in terms of repurchase programs. And when our shares are trading at a meaningful discount, we like to keep enough dry powder on hand to be in a position to buy a significant amount of shares in. I would comment that we did make a decision to reduce the special dividend that we're paying in a first quarter by $0.50 versus the previous year to save a little more dry powder to -- for other alternatives, including the potential for share repurchases. Operator: Thank you. At this time, I would now like to turn the conference back over to Diane Weidner for closing remarks. Diane P. Weidner: Thank you all for joining us this morning and for the great opportunity to answer your questions and share a little bit more about AFG story. So we look forward to chatting with you all again next quarter when we share our first quarter results. Hope you all have a great day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning and good afternoon, and welcome to the Novartis Q4 Full Year 2025 Results Release Conference Call and Live Webcast. [Operator Instructions] The conference is being recorded. A recording of the conference call, including the Q&A session, will be available on our website shortly after the call ends. With that, I would like to hand over to Ms. Sloan Simpson, Head of Investor Relations. Please go ahead, madam. Sloan Simpson: Thank you, Sarah. Good morning and good afternoon, everyone, and welcome to our Q4 2025 Earnings Call. The information presented today contains forward-looking statements that involve known and unknown risks, uncertainties and other factors. These may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Please refer to the company's Form 20-F on file with the U.S. Securities and Exchange Commission for a description of some of these factors. The discussion today is not a solicitation of a proxy nor an offer of any kind with respect to the securities of Avidity Biosciences or SpinCo. The parties have filed relevant documents with the U.S. SEC, including a proxy statement for the transactions and a registration statement for the spinoff. We urge you to read these materials that contain important information when they become available. Before we get started, I also want to remind our analysts to please limit yourselves to one question at a time, and we'll cycle through the queue as needed. And with that, I will hand over to Vas. Vasant Narasimhan: Terrific. Thank you, Sloan, and great to be with everyone today. With me in the room are Harry Kirsch, our Chief Financial Officer; and Mukul Mehta, our Chief Financial Officer, Designate, who will be taking over for Harry in mid-March. So let's dive into the results. And when we start on Slide 5, Novartis delivered high single-digit growth, as you saw earlier this morning. And importantly, we achieved our 40% core margin goal 2 years ahead of plan. And I think that demonstrates the strong operational performance of the company. On the full year, our sales were up 8%. Core OpInc was up 14%, as I mentioned, the 40.1% core margin, $21.9 billion now on Core OpInc. I think significant growth over the years. On quarter 4, sales did decline impacted by both the gross to net, which we'll talk about a bit more as well as the Entresto LOE and Core OpInc is up 1%. We did have some important pipeline highlights, which we'll cover over the course of the call, but I think a few I wanted to highlight upfront. First, remibrutinib, we achieved the submission in the most common type of CIndU that was based on positive Phase III results as well as interactions with the FDA. And we'll have the remaining readouts for the 2 other subtypes of chronic inducible urticaria over the first half of this year. And with pelabresib, we now have a path forward for both the EU and the U.S. I'll go through that data and the path forward on a future slide. So overall, we met our upgraded full year 2025 guidance. We expect to grow in 2026 through the largest patent expiry in Novartis' history, which I think demonstrates the strong performance we have on our key growth brands as well as our pipeline replacement power. Now moving to Slide 6. The growth drivers in the quarter continued their strong trajectory as well as on the full year. Here, you see the full year numbers. You can see Kisqali was up 57% on the full year. Kesimpta was up 36%. Scemblix up 85%; Pluvicto on the PSMAfore launch, having dynamic growth as well. We'll talk about each of these brands in turn. Overall, a 35% growth in this portfolio, and this is a portfolio that will carry us through the end of the decade as well with many of these brands taking us into the mid-2030s. Now moving to Slide 7. On Kisqali, we grew 57% in the quarter -- on the year to $4.8 billion, outpacing the market for CDK4/6. Now when you look at the chart on the lower left, our growth was 44% in Q4. When you remove the U.S. RD adjustments, our global sales grew at 54% and our U.S. sales growth was at 62%. So in our view versus the consensus, the entire miss really came from these onetime RD adjustments. We remain fully confident on the $10 billion peak sales outlook for the brand. And what's underpinning that confidence is the very strong volume growth we're seeing across geographies. When you look at the middle panel, U.S. eBC NBRx is now above 60% and holding steady. I think that really demonstrates the strong preference providers have for Kisqali, particularly in settings where we are uniquely positioned. And in Germany, we have over 80% NBRx share in the early breast cancer setting, which I think shows again this early strong performance for the launch in Germany, which we hope to carry over now to other ex U.S. markets. So going to the last panel, I already went through many of the key elements, but I think I wanted to also note that eBC NBRx share is leading in both the overlapping and the exclusive population. Outside of the U.S., we have important launches in Italy and Spain coming up in 2026. And finally, we continue to bolster the data profile for Kisqali, both with data that we recently presented at San Antonio and ESMO. We'll continue to follow up these patients over the long run, and that should allow us to continue to have mature OS data over time, which we think will continue to bolster the portfolio. So very excited. Kisqali continues to be -- have the outlook to be the largest brand in Novartis' history. Now moving to Slide 8. Kesimpta grew 36% to $4.4 billion on the year. You can see the continued steady performance of this brand, driven by the continued expansion of the B-cell class within MS. In the U.S., we had 27% growth in quarter 4. Importantly, we see increasing adoption in naive patients, which are now 50% of our NBRx is now in first line. Outside of the U.S., we are leading now with NBRx share in 9 out of the 10 of the major markets that we track. And the core opportunity we see ex U.S. going forward is to continue to expand B-cell therapies in the 67% of patients who are not on B-cell therapies and receiving disease-modifying therapies in MS. So we continue to generate additional value for Kesimpta. We continue to progress also our every 2-month formulation for Kesimpta. So I think we're on a solid track with this brand to fully achieve our peak sales guidance of $6 billion plus. Now moving to the next slide. Pluvicto now really showing dynamic performance with the PSMAfore launch, 42% constant currency growth. We reached $2 billion in sales now overall globally. And that strong performance was driven primarily in the U.S., where we continue to see strong uptake in the pre-taxane setting. Sales grew 75%. We saw a 4x increase in our PSMA share since approval, now reaching 16% in that setting. We also see continued growth on provider set, across provider settings, including the highest growth in community, where we now have over 790 treatment sites. Outside of the U.S., importantly, we've secured approvals in Japan and China, which also allowed us to continue to drive that ex U.S. strong growth. And we expect that growth to accelerate now with the Japan and China launches upcoming. Now the next phase for Pluvicto as we expect to kind of get to the peak of the PSMAfore population over the course of this year will be the launch in the hormone-sensitive setting, which adds about 75% additional patients to the patients we already have from the VISION and PSMAfore population. That sNDA has been submitted to the FDA as well as the NMPA in China and PMDA in Japan. We have the right foundation for that launch to be, we think, a rapid uptake with 2/3 of eligible hormone-sensitive patients already with existing treaters or providers. So the capacity is well established. I did want to flag as well that we have new manufacturing sites that are coming online in California, in Florida as well as in Japan and China. We have over 440 treatment sites now outside of the U.S. as well. So we've really taken this to scale, which positions us well for the Pluvicto launches, ongoing Lutathera business as well as our future RLT portfolio. Now moving to Slide 10. Leqvio reached blockbuster status in the quarter, an important milestone for this brand as we continue that steady trajectory that we often see for cardiovascular launches, 57% growth on the full year, 46% on the quarter. In the U.S., we continue to outpace the overall advanced lipid lowering market. And our real focus is increasing depth in the health systems we prioritize where there's strong capabilities within the buy-and-bill setting, strong interest in getting patients to goal, also focusing more on specialty areas as we've guided in the past. We saw a 33% growth in the setting versus the prior year. Now a key milestone for us outside of the U.S. will be the NRDL listing, which we achieved in China and is now already now started in the first part of January. As you have heard on previous calls, we have had very strong uptake in China in the private setting. And now with the NRDL listing, the early signals are very strong for a rapid uptake in the China market for Leqvio. So we're quite excited about that, and it's a key focus area for us in 2026. We continue to build the evidence base for Leqvio, important publications in various journals, mostly focused on adherence rates as well as our ability to drive LDL-C down to goal regardless of which background therapy patients are on. Now moving to Slide 11. Scemblix had another strong quarter. We've reached again blockbuster status with this brand, and we have NBRx leadership in the U.S. and Japan. 87% growth in Q4. Now if I could focus your attention on the middle panel in the U.S., we've reached 41% NBRx share now across all lines of therapy, and we plan to continue to grow that. But the most important thing for us now is to drive the growth in the first-line setting where we're trending ahead of our plan. We're already now in the mid-20% range in the frontline setting. We want to drive that up. And I think as we get -- as we've now secured broad access, we have the opportunity now to continue to make Scemblix the medicine of choice on the front line for patients with TML. And now outside of the U.S., we also continue to have our leadership in the third-line setting with 72% share across the major markets that we track. The early line indication is now approved in 60 countries, and we've already just launched in Germany, and we expect to get other EU markets online in the front line with launches expected in 2027. I think one ex U.S. market to note, which I think shows the ability we have to drive Scemblix outside of the U.S. is in Japan, where we already have 45% frontline market share -- NBRx share and 74% second-line NBRx share. So really strong outlook, confident in the $4 billion-plus outlook for this medicine. Now moving to Slide 12. Cosentyx grew 8% overall in the year, getting to $6.7 billion on the steady march up to our $8 billion peak sales guidance. You can see the 11% growth on the quarter. In the U.S., we had 9% growth. That was driven by higher demand we saw both in hidradenitis and in IV. Right now, we're the #1 prescribed IL-17 across indications, and that's really because of the strong access that we have frontline access. In HS now, we are the NBRx leader in naive patients with 51% share and 47% overall. And the naive market is 2.5x the switch market. Certainly, we've seen our competitor get traction in the switch market, but we're very much focused on that naive market where we have a really strong position. And the IV is also steadily advancing 8% a steady growth, 200 new accounts, and we expect that to continue over the coming years. Outside of the U.S., no major changes, continued very strong growth, leading originator biologics in the EU and China. And overall, we would forecast Cosentyx to have, on average, mid-single-digit growth over the coming years as we get to that $8 billion peak sales potential. I did want to also flag that we have completed the submission with the U.S. FDA for polymyalgia rheumatica. And so we're excited about that as an additional launch now for Cosentyx. And we've also are on track. We're also on track to file in the EU and Japan in the first half. So moving to Slide 13. Our renal portfolio has continued its rollout, I think, with steady progress. And separate from that, we also have amended our zigakibart Phase III protocol, which I wanted to talk about in a bit more detail. Starting with our renal portfolio, our IgAN portfolio contributed 50% of the NBRx market growth versus prior year, driven equally by Vanrafia and Fabhalta. So I think we see steady uptake across these 2 brands. Also in C3G, also continued steady adoption across the top accounts. So we hope to see that accelerate now over the course of 2026. And outside of the U.S., Fabhalta is now approved in C3G in 45 countries. Vanrafia had its EU submission. So I think across these 3 brands, we have the opportunity to continue to build out a strong position. We do expect to be able to provide the full data set on the Fabhalta eGFR readout in IgAN soon and also move forward with the filing for a full approval in IgAN for Fabhalta. Now on -- and we also expect, I should also note the Vanrafia full eGFR data set in the first half. On zigakibart, we have made the decision in order to optimize the overall label positioning and the competitive positioning to align our UPCR readout with the interim eGFR readout, which we expect in the first half of 2027. And we expect that to support our BLA for a full approval. This was a decision based on our analysis of the Phase I and II data. We think we have the opportunity to be second to market with both proteinuria and the eGFR benefit. And so that, I think, is going to hopefully position us well to have a fourth renal agent in our portfolio. We also have combination trials underway because we certainly see the opportunity in having a hemodynamic agent, having a Fabhalta and having zigakibart, the opportunity to use combination to optimize care for these patients. Now moving to Slide 14. Rhapsido's U.S. launch, which is obviously something we're very closely tracking is delivering encouraging results. We are optimistic with already what we're seeing in the early days for this launch. We see strong demand with an encouraging mix of patients, both patients who are post antihistamines as well as post a biologic failure. We have a strong and positive response from allergists and dermatologists. The sampling and bridge program has over 2,000 HCP starts. And I think that when we benchmark that versus other highly successful dermatology launches, it's right in line with some of the most successful dermatology launches. We're also seeing early access wins. I think access will be now the gating factor. Every few months, we expect to bring on additional access on board. That will allow a steady pickup in sales over the course of the year with more of a steady pickup in the second half of the year. And I think for that second half, I would encourage everyone to watch as we get that access together. And as a reminder, I think you all know well, clean safety, no box warnings, no contraindication, no required routine lab monitoring, no liver safety issues in the label, fast relief across a broad population as fast as 2 weeks. Anecdotally, we hear reports as fast as a day or 2 days, patients are starting to see benefit. And it's the only oral therapy approved by FDA who remain symptomatic despite antihistamine therapy. Now moving to Slide 15. Now Rhapsido is one of these brands that we hope over time could become one of the largest brands in Novartis' history. This is an opportunity over multiple indications. I mentioned CSU launch, the CIndU now positive data that we have in hand for type, 2 more types coming, an HS readout in 2028. We have positive food allergy data, which we'll be presenting in Q1 of this year, and that's leading us to now initiate a broad Phase III program in food allergy. We are on track for the RMS readout second half of this year, but really mid of this year is the opportunity that we have to read out the RMS -- 2 RMS studies, SPMS and myasthenia gravis ongoing. So when you take that together, you clearly have an opportunity with a medicine with a clean safety profile. and strong efficacy with an oral -- as an oral option to have a significant long-term sales potential. Now moving to Slide 16. Now Itvisma, which we haven't had as much attention, but it's something we continue to believe has a significant overall sales potential, total potential for this brand across the IV and IT of $3 billion plus. This is a U.S. approval that brings the onetime gene therapy in children 2 years and older. It's a broad label across patients who are non-sitters, sitters and walkers, no AAV9 antibody titer limit for this treatment. There's a strong value proposition, single administration, durable efficacy, solid safety profile. So we see a multi-blockbuster opportunity for this brand. 7,500 children, teens and adults have not been treated yet with Zolgensma IV. We also have an extensive experience in the U.S. and ex U.S. with this medicine. Outside of the U.S., we've already been approved in the UAE 1 day after the FDA approval and Europe and Japan submissions are completed. And as a reminder, for Zolgensma, actually, our sales are larger outside of the U.S. than in the U.S. So there's certainly a significant opportunity ex U.S. for Itvisma. Now moving to Slide 17. As I mentioned on the first slide, for pelabresib, we read out in the quarter 4, the 96-week data from the Phase III MANIFEST program, which both on safety and efficacy has now given us a path forward to, we believe, get this medicine registered, assuming successful regulatory and clinical trial Phase III trials. In that study, we showed deep and durable responses and a comparable safety profile to ruxolitinib in myelofibrosis. You can see the data here on the left in terms of the spleen response. When you look at the data that we presented, we had a deep and durable spleen volume reduction for the spleen volume, 35% reduction landmark, 91.5% versus 57.6%. We also saw sustained improvements in symptom scores and anemia. We had 2x as many patients reaching goal with the spleen volume reduction and the TSS50. So we believe this medicine has disease-modifying potential. We saw improvements in bone marrow pathology on the anemia. There was importantly now from a mortality standpoint, fewer deaths and progressions observed with pelabresib and ruxolitinib versus ruxolitinib alone. And the overall safety now has proven comparable with ruxolitinib, including comparable leukemic transformation rates, which was one of the topics that was holding this program back. So with this data set, we have now an agreement with the EU to file in 2026 based on this data. And in the U.S., China and Japan, we'll be starting a new Phase III study focused on patients who have high TSS50 at baseline, where we believe we have the data set now to show we can achieve the regulatory milestone to ultimately get approval. Now moving to Slide 18. I did want to also take a moment to mention our impact on global health. As I think many of you know, Novartis has been in global health for nearly 100 years, working on malaria and other neglected tropical diseases. With our Coartem medicine 25 years ago, we started a real sea change in the treatment of malaria, reaching now well over 1 billion patients with Coartem. And now with the recent data we presented in November, we have the opportunity to bring the first new malaria medicine, novel medicines so in 25 years. This is KLU156, ganaplacide plus lumefantrine. It disrupts the parasites internal protein system, very positive data here. You see on the adjusted basis, 99.2% cure rates versus 96.4% versus a 5-day course, a 3-day course, opportunity to block transmission, very solid safety profile. So we're quite excited to bring this forward as part of our mission in global health. So moving to Slide 19. Now taken together, a very good year for us from a pipeline standpoint in 2025. You can see we met the vast majority of our milestones and trial starts. And I think that really shows the strong execution machinery we have now in R&D at the company, very aligned across research and development and strong execution across our global development organization. And turning to Slide 20. For 2026, we're on track for 7 pivotal readouts with the potential to strengthen the midterm outlook that we're guiding to, including the mid-single-digit sales growth we expect in the 2030s. A few particular readouts, which I haven't mentioned, which I'll call out. And on the left side, you can see pelacarsen for CVRR. We do expect to read out middle of this year. It will be second half, but it will be middle of this year, which, if positive, would allow us for a U.S. submission this year. We also are on track for our submissions for Ianalumab in Sjogren's disease. and as well as the Del-zota DMD U.S. submission, which assuming the closure of the Avidity deal would also happen in the first half of this year. Number of pivotal readouts. I mentioned pelacarsen. There will be the Ianalumab readouts in hematology, which could have significant potential to drive that brand to very large long-term potential. Of course, remibrutinib as well as the Del-desiran DM1 Phase III readout, again, assuming the closure of the Avidity. We also have the additional readout of the DUX4 interim data readout as well, which could support accelerated launch in FSHD. However, that we would characterize as an upside case. And then a number of key study initiations you can see on the right-hand side of the chart. So another exciting pipeline year to continue to bolster our long-term growth profile. Now moving to Slide 21. I will hand it over now to Harry. Harry Kirsch: Yes. Thank you, Vas. Good morning, good afternoon, everybody. I now walk you through our financial results for the fourth quarter and the full year of 2025, which, as Vas mentioned, was very strong despite midyear significant U.S. generic entries. And as always, my comments refer to growth rates in constant currencies, unless otherwise noted. So on Slide 22, 2025 marked another year of excellent execution. So over the last 5 years, as you can see here, we delivered an 8% sales average growth rate and a 15% core operating income average growth rate, driven by strong commercial execution, a great late-stage readout and disciplined productivity programs. This translated on the right side into more than 1,000 basis points of core margin expansion in constant currencies. And as you can see, in reported currencies, allowed us to reach our midterm core margin target of 40% 2 years earlier than planned. As you may recall, we initially planned for 2027. Now we have achieved it in 2025. With these results, I hope you agree, but I believe we have really elevated the company to a new level of sales performance, margin profile and as I'll discuss later, free cash flow generation. On Slide 23, just a quick summary. You see that we have delivered our full year guidance in 2025 after upgrading twice throughout the year, and we guided to high single-digit sales growth, and we delivered 8%. For core operating income, we guided to low teens. and achieved 14%. And this is a strong result in the year, as I mentioned, where U.S. generic entries for Entresto, Promacta and Tasigna happened, and it speaks really for the momentum of our priority brands, as Vas already laid out, as well as disciplined cost management. Turning to Slide 24. So here, a few more details. For the full year, we delivered the described solid top and bottom line growth, record core margin and record free cash flow, almost $18 billion. The core margin in the year improved by 210 basis points to 40.1% and core EPS rose 17% to $8.98. Free cash flow grew 8% to $17.6 billion. Now for the quarter, on the right side here, as expected, the U.S. generics had an impact, which we see in quarter 4, and then Mukul will lay it out first half of next year or 2026, but then again, back to growth. Anyway, sales declined 1%, whilst core operating income increased by 1%. And the results were a little bit noisy due to some U.S. R&D adjustments, a positive impact in quarter 4 of 2024, so last year financially and a negative impact this year in quarter 4, 2025, mostly on generic -- so excluding this adjustment, underlying quarter 4 sales growth would have been positive 3%. As said, the vast majority of the gross net adjustments were Entresto and other generic brands like Promacta and U.S. Core EPS in the quarter, $2.03, up 2%. Now on Slide 25, you can see our continued progress on free cash flow generation, which reached $17.6 billion, all-time high for the company in 2025. I think it shows you also besides the financial, the power of being a pure-play pharma company. As you know, many years back with even 6 businesses or even before the Alcon and Sandoz spin, these numbers were usually in the $10 billion to $12 billion range. And now this is the earnings power of a focused and very successful pharma business. We remain, of course, focused on ensuring that the growth in core operating income translates into high-quality earnings and strong cash flow generation. This robust cash flow allows us to reinvest in the business, pursue bolt-on acquisitions and continue to return attractive capital to the shareholders through growing dividend and share buybacks. On 2026 -- on Page 26, a quick reminder on our unchanged capital allocation strategy. And as you see, we continue to execute our balanced shareholder-friendly capital allocation in 2025. We invested more than $10 billion in R&D, an 8% increase versus prior year, announced 4 acquisitions, 10 licensing deals, strengthening our key platforms and pipeline across all of our 4 therapeutic areas. On returning capital to our shareholders, we completed our $15 billion share buyback program in early July, and we launched a new up to $10 billion program targeted to be completed by the end of 2027. Approximately $7.7 billion of that remains to be executed. In addition, we distributed $7.8 billion in dividends during the first half of 2025. Now speaking of dividends. Turning to Slide 27. We are proposing a dividend of CHF 3.70 per share, a 6% increase in Swiss francs and even double digit in dollars. And it's our 29th consecutive dividend increase in Swiss francs since company creation '96 and including years following the Sandoz and Alcon spins when we did not rebase the dividend at all. This reflects our long-term and long-standing commitment to a growing dividend in Swiss francs per share. That concludes my remarks. Before handing over, I'd like to briefly acknowledge that this will be my final earnings call as CFO of Novartis. It has been a privilege to serve in this role in the last 13 years and to work alongside Vas and so many other great colleagues to help guide the company through a period of significant transformation and performance improvement. I'm very pleased to hand over to Mukul, a long-time colleague. In fact, we both started maybe at different stages of our career in 2003 at Novartis and very intensively worked together, especially in the last 10 years. So with that, I turn it over to Mukul to take you through 2026 guidance. Mukul Mehta: Yes. A big thank you to you, Harry, for everything. It's been -- it is an honor to step into the role that you're leaving me with, and I look forward to getting to know everybody on the line in the months to come. So if you can go on Slide #29, please. For 2026, we expect sales to grow low single digit and core operating income to decline low single digits. And this reflects the 1 to 2 percent points of core margin dilution related to the Avidity deal that we had previously indicated. Importantly, in 2026, we will be growing top line through a period of highest GX impact in our company's history. At the same time, we will make sure that we continue to invest in R&D. We fund our launches appropriately while driving forward with the productivity improvement plans that the company has. As previously noted, we expect to close the Avidity deal in the first half of 2026. Looking ahead, we remain very confident in our 5% to 6% sales CAGR in the '25, '30 period, and we expect to return to 40% plus core margin in 2029 as laid out in our Capital Markets Day. For 2026, we expect core net financial income expenses to be around $1.7 billion. This is higher than the '25 levels, and this is largely due to the anticipated funding costs related to the Avidity deal, which we have previously indicated is primarily going to be debt funded. We also expect core tax rate to remain around 16.5%. Moving to Slide 30, please. As we have previously indicated as well, 2026 is going to be a year of 2 halves. We expect -- we continue to expect strong volume growth from our priority brands throughout 2026. But we have to understand that for the first half of the year, we will have a tough prior year base with Entresto, Promacta and Tasigna generics having entered the U.S. market mid-2025. With that, we expect the first half of the year sales to decline low single digit and core operating income to decline low double digit. Additionally, Q1 will be impacted by the 2% positive gross to net impact that we had in the base Q1 '25, which will weigh on the quarter-on-quarter growth rate in Q1. That said, in the second half of the year, we expect a clear improvement with sales growing mid-single digit and core operating income growing mid- to high single digit. This takes us to our full year guidance of low single digit on top line. So moving to Slide 31, please. If exchange rates remain as at their late January levels, we expect a positive 2 to 3 percentage point impact on our full year sales and a positive 1% point impact on core operating income. And as a reminder, which Harry has conveyed previously, we published updated FX estimates monthly on our website. So that concludes my remarks, and I hand it over back to Vas. Vasant Narasimhan: Yes. Thank you, Mukul. I want to take a moment as well to acknowledge Harry Kirsch's incredible contributions to Novartis over 23 years. Over my tenure as CEO, now entering my ninth year, Harry has been by my side as we've transformed the company into a pure play and I think unlocked really outstanding shareholder returns, outstanding financial performance. But probably less visible is the strength of the finance organization Harry has built as well as the culture he's created in the company around productivity, financial discipline and operational excellence. He'll surely be missed, but will continue his legacy in the years to come. And a big welcome to Mukul, who I've known for many, many years. It will be a great addition to the team and continue the strong track record of Novartis finance and delivering strong operational execution. Now moving to the next slide. I do want to take a moment to build on Mukul's comments on our confidence in the -- our 5% to 6% sales CAGR to 25% to 30%. That includes the impact of Entresto in 2026 as well as the U.S. MFN agreement impact. You can see in the chart, we do expect some generic impact. So a lot of that is front-loaded in the first -- early part of the 5-year trajectory here. A number of brands where we believe we can drive dynamic growth in the middle column. And then lastly, a strong set of assets that we probabilized in our pipeline. This ranges from lanalumab, our various Pluvicto and actinium PSMA, pelacarsen as well as the Avidity assets, amongst others, that give us the opportunity to not only hopefully deliver the 5% to 6%, but if we're successful on those pipeline assets, we could even drive higher growth in the period. So moving to Slide 34. and in closing, strong performance in 2025. We delivered the guidance that we outlooked and got to our 40% core margin early. Our priority brands continue to outperform, and that's what's going to drive our growth through the second half of '26 and then through the 5 years to come. We're advancing the pipeline meaningfully in 2020 -- we advanced meaningfully in 2025 with 7 pivotal readouts this year. And we're confident in that mid- to long-term growth guidance. So move -- so with that, we can close this section and move to questions. So operator, we could open the line. Thank you. Operator: [Operator Instructions] We'll start with our first question, and this is from Sachin Jain from Bank of America. Sachin Jain: Perhaps I'll just kick off with thanking Harry for support and insight over the years. The question, I guess, for that on remi. You talked about avoiding liver monitoring in MS given no high law. Competition recently has been vocal avoiding monitoring in the label when monitoring has been involved in the studies could be difficult. So I wonder if you could just give us any color on FDA conversations around this topic and whether monitoring in the studies picked up events that required dose changes? And then a quick follow-on on efficacy. Any color on what you're targeting on relapse or progression given we have no Phase II to go here. Vasant Narasimhan: Yes. Thanks, Sachin. So I think first on liver, I think we should first take a step back and note that we already have an approval and an approved label without any liver safety discussion in the label, which just points to the fact that remibrutinib structurally does not have the off-target toxicities we believe that the structures of some of the other molecules do. And so that we didn't have any of that in the existing TSU label. I think I have an abundance of caution given the findings of the other competitors, FDA asked us for a limited liver monitoring to our understanding that's more limited than the liver monitoring that our competitors have had to add to their programs. And our full plan is assuming that we -- and as we've seen to date, no liver signals in our study, we fully plan to advocate to FDA that we should stick to the current label in the absence of any information to really -- any data to really change the current label with respect to that. I'd also note that for -- in general, for competitors, when there is a Hy's law case, at least to our understanding, whether it's 1, 2, 3 cases, that generally leads to REMS programs, leads to monitoring, does lead to warnings and precautions, just given the safety risk that these -- that creates for patients who have alternative therapies. And in RRMS, there's numerous alternative therapies. So safety is absolutely paramount. So I think that's our overall perspective on the safety. We're very confident in overall remi's safety and assuming 2 positive Phase III trials this summer, the potential for this to be a very significant medicine. Now with respect to efficacy, I think it's very fair to point out, we don't have Phase II data. We went to Phase III based on the findings that we saw from competitors. So -- but I think given that we know that we hit the target very well at 25 milligrams BID and we move up to 100 milligrams BID in the study, we think we'll definitely have strong target saturation. We think the molecule is very well designed when we look at the PK and the PD of the molecule. So that gives us confidence that assuming the class is effective against RRMS, we will have a compelling profile from an efficacy standpoint and with the safety profile and with the fact that we're established now in the market having already launched should give us a strong value proposition. Operator: We'll take our next question today, and this is from Simon Baker, Rothschild & Co Redburn. Simon Baker: Two, if I may, please. Firstly, on -- just continuing on remibrutinib. -- going on from Sachin's question. I just wonder if you could give us your updated thoughts on the commercial opportunities here in MS because it kind of feels like that your enthusiasm for remi in MS has increased over time. A couple of years ago, there was talk of almost MS being playing second fiddle to CSU. So just updated perspectives on your thoughts on the commercial opportunity. And then moving on to pelacarsen. You've now guided to a 2H '26 readout. Given this is an event-based study, could you just give us any thoughts on potential risks and risk mitigation for this what appears to be significantly lower event rate, does this run the risk of creating additional noise in the study? Or is that more than offset by the powering assumptions and the design that you've built in there? Any thoughts on that would be very helpful. Vasant Narasimhan: Yes. Thanks, Simon. So first on the commercial opportunity, I think it's really going to be data-driven. I think our base case assumption is that an oral drug will struggle to have the same level of efficacy as monoclonal antibodies in hitting the B-cell pathways in MS. And because of that, that still B-cell monoclonal antibodies will be the dominant class, but there will be a number -- large number of patients that would want an oral option and who don't want to go through injectable therapy. I mean, as I noted in my slide, still 25% of patients in the U.S. and 65% outside of the U.S. are on DMTs and are not on B-cell injectable B-cell therapy. So there's a large market there on its own. And then I think it will depend if the efficacy and safety profile overall, particularly the efficacy profile in the case of remi in our hand is compelling enough to have a broader market. So I think we'll certainly see based on the data. But even if we take it as a given that there is a large B-cell monoclonal class out there, there is a large market opportunity beyond that, which we think is important. And then, of course, the question is with the brain penetrant properties of our molecule, does that lead to other opportunities either in SPMS or in the control of RRMS that provides another dimension, and that will all be data driven as well. So in this case, I'll exceptionally take the second question, but if everyone could limit themselves to one question. Pelacarsen, so we expect a midyear readout. The study is going to completion in terms of the number of events that we had originally outlined. We had powered up the study, you'll recall, during the process of the Phase III. So we feel like we're adequately powered to demonstrate both at the 70-milligram per DL cutoff and the 90-milligram per DL cutoff, the CVRR that we're targeting. And so I don't think there's necessarily any risk associated with going in full. I think what it does indicate is that the event rates are lower than what we had modeled from the published literature. And I think that's just something that is just the reality now that we found. We suspect it has to do with the fact that we've really optimally managed these patients for all other risk factors, particularly LDL lowering. And I think that, of course, has an impact on event rates as well. So we'll see, and we're excited to see this data and hopefully creating an entire new class of medicines that can help a whole group of patients that have no other option. And so I think with a positive study, we have the opportunity to give these patients a hopeful solution against sudden cardiac death and some of the other things that can happen for patients with elevated Lp(a). Operator: And the next question today is from Matthew Weston, UBS. Matthew Weston: Can I also add my thanks to Harry for all his support and best of luck for the future, Harry. Vas, Kisqali is building into a fantastic and highly profitable medicine for Novartis. And I guess the only challenge is it has an LOE just after your 2030 time window. What are the options in-house to extend the franchise further in breast cancer? And given the SERD data that we've seen from a competitor, what other options are there from BD that could potentially -- or is oncology, I should say, a category where BD looks like somewhere you should supplement the Novartis pipeline? Vasant Narasimhan: Yes. So I think there's actually 2 questions in there, but I'll also take both of these, Matthew, because it's you, Matthew. With respect to Kisqali, I think right now, we guide to a mid-2031 with the pediatric exclusivity that we would expect for this brand in the U.S. I think it's longer outside of the U.S. depending on the market. Our core goal at the moment is our CDK2, CDK2/4 and CDK4 programs, all of which now are in the clinic, and we're advancing as fast as we can to see which of these medicines can provide either additional benefit in the post- Kisqali setting or either in combination and we'll see what we ultimately learn. Of course, we also are advancing our radioligand therapy portfolio. We have HER2 RLTs now in the clinic. Those will be important to watch as well as the [ neobombesin ] RLT as well in breast cancer. So a number of shots on goal. And I think those will all be very important for us to continue to life cycle manage Kisqali, as you rightfully point out, beyond the mid-2030s. I always think about it as a full year 2032 effect for this brand. Now I think with respect to BD and M&A, I think absolutely, I mean, we see amongst our therapeutic areas, clearly, oncology is one we'll have to focus on. So we'll continue to focus there as we have. I would say we've had just more opportunities and traction in the last years in cardiovascular, immunology and neuroscience. You've seen us do a large number of deals in those spaces. We'll continue to see, and of course, it's a high priority to continue to build oncology now that we have the scale we're building from Scemblix, Pluvicto, Kisqali. And so if we find good opportunities, good assets, we'll certainly go after them. Operator: Next question is from Peter Verdult, BNP Paribas. Peter Verdult: Peter, BNP Paribas. Just on Rhapsido and ianalumab. Given we're now in an MFM world, how should we be thinking about ex U.S. launch plans for what are clearly mostly significant assets. I'm basically just pushing my life to see how specifically you're comfortable being about changing in rest of world launch strategies for important assets like ianalumab. Vasant Narasimhan: Yes. So I think this is high in our minds. We're working through strategies here on Rhapsido, given that it's already launched, of course, we would be exposed on the first pillar of the MFN approach, which is on the Medicaid rebate it's more limited. And I think there we can manage. We think we have good options to manage the ability to launch Rhapsido globally. Of course, we'll have tighter pricing corridors, but that's something we think we can manage. Ianalumab is more complex as we get to launches in 2027 in the G7 countries. There, of course, it's on the entire market of U.S. net price, not just Medicaid. And so we're working through strategies. Absolutely, it's our aspiration to get these medicines launched in all of these markets given the patients that need them. But we certainly can't adversely affect the U.S. market. And so we're just going to have to be thoughtful about looking at where are there opportunities to price appropriately for the value that ianalumab brings. Given the PPP adjustments and some of the other elements of how pricing is looked at, are there things we can do to manage this. It's all in the works. I think we'll have a better sense over the course of this year on ianalumab. But on Rhapsido, we feel confident we have a way forward to get a global launch moving ahead. Operator: Next question is from Steve Scala from TD Cowen. Steve Scala: On pelacarsen, Novartis has said previously, that a delay in the HORIZON trial readout would stem either from overestimating the baseline risk or underestimating the treatment effect. Do you have a sense of what is at work here I would think the baseline risk, if it were overestimated would question the value of lowering LPA in the first place. And I would think that Novartis should have a better handle on treatment effect based on early studies. So any color of Novartis' view at this point would be helpful. Vasant Narasimhan: I wish we knew, Steve. Honestly, obviously, I can only give you an opinion. I can't actually give you a fact because we're completely blinded, and we have no database insights. We believe that we have appropriately estimated the baseline risk. And that's not so many rounds of looking at it. So it might be that baseline risk is more prominent at higher Lp(a) threshold. I think in my mind, it really comes on to what Lp(a) threshold that we appropriately thinking about the baseline risk and how -- and this is, again, I think not in our -- no way to know if this is correct, but my assumption is that at lower Lp(a) levels, there could be more interactions with LDL and other risk factors. And that Lp(a) becomes more dominant as you get to higher Lp(a) levels and because the risk goes up almost linearly at a higher Lp(a), that becomes the dominant risk factor. And so the studies obviously have some portion of patients at the 70 to 90 to 100. We've, I think, announced in our papers that overall, our median is 108. So that's kind of our best guess in terms of the risk profile and how we've estimated. Obviously, we would love for this to be that our treatment effect is larger than we expect, and that would be the reason for this, but there's just no way to know that at this time. Operator: Next question comes from Richard Vosser, JPMorgan. Richard Vosser: Just a question on Itvisma. Just how should we think about the ramp of that product in the U.S. and ex U.S. could imagine that there are some patients that are potentially waiting for the therapy. So have you seen warehouse patients? And how should we think about the launch? Vasant Narasimhan: Yes. Thanks, Richard. In general, for gene therapies, we see often a pretty fast ramp as we get through the kind of prevalent pool of patients. And then it kind of comes down to a more steady state. And I think over the next 2 to 3 years, we would expect really Itvisma to penetrate the majority of the kind of relevant patient pool that it has. And then come back down as we saw with Zolgensma more to a steady state because of the nature of the onetime therapy. So I think relative to other brands, the ramp will be on the faster side. It won't be in 6 months, but I think over the first few years, will get to peak relatively quickly and then come down from there. And we do have, I think, warehouse patients, we do have patients that we really understand. We also have strong access, we think, in many markets. And as we build that access forward, I think that will really allow us to maximize the medicine. Operator: Next question is from Graham Parry from Citi. Graham Glyn Parry: So I reiterate the best wishes for Harry, of course. And then a question on Kisqali and the outlook for the year. So how much of the gross to net impact that was impacting fourth quarter carries through into the next year because of a different channel mix versus how much is one-off? And so to what extent does that give you an easy base for comparison in 2025 into 2026? And then any thoughts you have on the risk that oral SERDs might pose to encroaching on CDK4/6 combinations in the adjuvant setting? Vasant Narasimhan: Thanks, Graham, and great to have you back. On Kisqali, I think the higher gross to net, we believe, is a onetime effect where we saw higher Medicare utilization than we had forecast in 2025. We do expect as the early breast cancer launch continues to accelerate and our mix shift to younger and younger patients that this will net out back towards where we had historically expected. And I think we should be fine from that point forward. And Harry wants to add something. Harry Kirsch: Yes, Graham, thank you very much. And by the way, everybody, for your nice words. So on Kisqali, I mean, one thing to note is that actually in quarter 1 of '25, with a positive gross to net as Mukul pointed out. So in quarter 1, that's a higher base due to one-timers. As Vas mentioned, the quarter 4, what we have noted here out-of-period adjustments. So if you take that out, it's really the true quarter 4 performance. And then quarter 4 of '26, there should be a bit of a lower base because of this negative this year. But overall, the -- basically, these gross to net adjustments are all out of period, so one-timers and the underlying is what you see. Vasant Narasimhan: And then with respect to the oral SERDs, we've had a lot of discussion, and we feel confident that when we look at the profile of Kisqali and what we hear from physicians that physicians want a CDK4/6 inhibitor for patients who can benefit. And they, of course, need to look for an endocrine therapy option. Certainly, the oral SERDs now have the opportunity over time to become the standard of care endocrine therapy option. We already know that roughly half of patients in the early breast cancer setting in the U.S. are already now on a CDK4/6, and as we continue to penetrate that base of patients, we think that the opportunity will be CDK4/6 plus the choice of historical endocrine therapy or the oral SERDs, and that's how this market will play out. At the margin, could there be some physicians who choose an older endocrine therapy plus a CDK4/6 or an oral SERD and not a CDK4/6. Certainly, that dynamic will happen, but we don't expect that to be the predominant approach in the U.S. or in any of the other core markets. That's what gives us confidence in the $10 billion-plus guidance that we have and are sticking to. Operator: Next question today is from Seamus Fernandez of Guggenheim Securities. Seamus Fernandez: And just would echo, Harry, we'll miss you, for sure. Vas, hoping you could maybe give us your thoughts on the overall food allergy opportunity within your overall portfolio, obviously, Xolair has done extraordinarily well in this space with excellent growth opportunity. Just hoping to get your perspective on that as well as the opportunity that you see potentially within your broader portfolio, not just for the BTK, but beyond. Vasant Narasimhan: Yes. Thanks, Seamus. We've had a long history looking at food allergy. It goes back to medicine. Some of you will remember called QGE031, which was a high affinity IgE. There was supposed to be a follow-on for Xolair. In the end, we weren't able to show a stronger effect than Xolair has ultimately shown in food allergy. So we know the space well. once we saw the Phase II data for remibrutinib and food allergy, I think it changed our perspective to really think now how could we build this out to be a significant market opportunity. So we'll be sharing that data, as I mentioned, in the coming month or two. And with that data set and now the agreement with FDA on how to advance into Phase III studies, we see the option for a safe oral medicine to be able to hopefully be given broadly to patients. And you know that a lot of the patients in food allergy that are most interested or at risk to be treated are children. And so versus ongoing injections, having an oral high efficacy safe option, we think would be pretty compelling. So I think overall, we see food allergy is a multibillion-dollar opportunity. I certainly with the potential to make something major out of this. We're going to obviously run through the phase Phase III program. We're excited to share the Phase II data as well. And then beyond that, now we are evaluating are there other opportunities within the pipeline earlier at Novartis. And, of course, externally as always, to see can we further bolster our food allergy portfolio. So I think it's definitely a shift, but something we're getting quite excited about. Operator: Next question is from James Gordon at Barclays. James Gordon: The question was on pelacarsen and what a win now looks like. So you talked about a potentially lower event rate. Where is the latest magnitude of efficacy? I think the original design was a 20% benefit in the broader population, a 25% benefit in a narrow population with a longer study and maybe some other tweaks. Is that sort of the minimum? Is there a possibility that you could actually have a benefit for either of those groups that were statistically significant, but didn't quite hit the her? And if so, would that still be a product with strong commercial prospects? Vasant Narasimhan: Yes. Thanks, James. So you are correct. It is a 20% powered for 20% in the 70 mg per DL group and 25% for the 90 mg per DL group. We can win on the study with a relative reduction that's lower than that. And so certainly, there is the opportunity to win with CVRR in the mid-teens. I think we have to evaluate, I think, for patients who have no other option. And if we were to win at that lower level, what would be the right approach to bring it to market. And that's something we'll have to see based on the data. But that's certainly something we'd have to look at. Of course, we hope for a much higher CVRR impact either at the lower cutoff or the higher cutoff, but we're going to ultimately have this to be data driven. There have been no other changes, though, from a protocol standpoint, from a study design standpoint, everything is as it was when we originally started the study with respect to powering, et cetera. Operator: Next question is from Michael Leuchten from Jefferies. Michael Leuchten: A question for Harry, please, given it's your last time with us. Harry, the SG&A expenses in the fourth quarter were extremely tight. Very good performance there, helped you to gear the margin in underlying terms. As I think about the margin for 2026, obviously, you do have the Avidity dilution. But if that SG&A control continues, I struggle to see how you're going to get as much dilution, especially if avidity doesn't quite close as quickly as maybe it could. So can you just talk about the repeatability of that SG&A performance in the fourth quarter into 2026? Harry Kirsch: Yes. Thank you, Michael. Actually, any 2026 question is kind of for Mukul, so I will hand over in a second. But Historically, we always had quite an increase in quarter 4. So we took this year to say, look, this is inefficient to have such a peak in a quarter where you have 1 to 2 weeks of Christmas and you have also the U.S. Thanksgiving and so on. It shouldn't be actually a big peak here. So we took that in order to even a bit out. And overall, we will continue and Mukul, of course, will drive productivity programs, right? But Avidity, just one thing. I mean, when we -- a day before quarter 3 earnings, when we took you all through the Avidity deal, we said it would be a 1% to 2% margin point dilution effect given the unusual high development cost burden in the next 2 to 3 years of a late-stage development product with a very expensive medicine from a COGS, especially when it is under contract manufacturing. So not everybody has figured this into the consensus. It's okay when people don't follow everything we say, but we have mentioned it to you. And 1 to 2 points, if you take 1.5, it's pretty much what you get when you have a low single-digit increase on sales and a low single-digit decrease in core operating income. So we feel we have implemented exactly that without Avidity would have been unchanged margin basically. But Mukul, what do you think? Mukul Mehta: Harry said it all. I think it's -- the short answer -- the short add-ons to the answer that Harry gave was, the SG&A cost control, productivity plans within the organization is something that we, as a company, feel very proud of on what has been achieved in the last 4, 5 years. And as we go into our next 5-year journey, this will absolutely continue going forward. There is a certain bit of margin dilution that we had predicted. And if we -- and that's the reason that we gave clarity on H1, H2 because if you look at how once the GX for this year are going to come off the base, we actually see core operating income starting to grow. And that kind of sets the base or sets the expectations for what to expect of our P&L in the next 4 years to come. Operator: We'll take the next question, and this is from Thibault Boutherin from Morgan Stanley. Thibault Boutherin: Just a question on Cosentyx and the dynamic in the HS market. It looks like shares have been stabilizing for some time between Cosentyx and the main competitor in terms of NBRx and total script. So from here, is it fair to assume that both drugs should grow in line with the market. And I think the last is to say the HS market should expect a growth around 15%. So I just want to know if it's the type of growth that just you're seeing today? Vasant Narasimhan: Yes. Thanks for the question, Thibault. So you rightfully point out, we've seen stabilization in the overall NBRx share in the market. As I noted, we're kind of in this 48% to 50% range. And then we see the two other medicines splitting the remainder. We're doing very well in the naive population. And then in the switch segment, we see our competitor performing very well. So I think that's kind of the dynamic. We've seen that dynamic kind of stabilize now. So we would expect that dynamic to continue going forward. So I think both -- all brands will grow based on the market. Now clearly, the market potential here is quite large. It's just a matter of how effective we are at getting patients to come in to get to get treatment. So we continue to see this kind of $3 billion to $5 billion market opportunity, but could it be larger if we were able to mobilize with two competitors and potentially more future competitors coming in, the market growing faster certainly. And we, of course, want to capitalize on that. And that's part of the reason why we studied Rhapsido in HS because we see the opportunity here to build this market hopefully, with a high efficacy safe oral to then go make the market even larger. So something we'll continue to work to build and hopefully get more of these patients are kind of lost to treatment, probably we're on a TNF ultimately not successful get those patients back into the medical home and backlog therapy. Operator: [Operator Instructions] We will now take the next question, this is from James Quigley from Goldman Sachs. James Quigley: My thanks and congrats to Harry as well for the next chapter. My question is on the Lp(a) portfolio. So as you showed in the slide, you started a new trial Phase II trial for DII235. Firstly, what are the dosing intervals by testing for that drug? And secondly, at the media management event, as you were saying that if HORIZON were positive, that could then lead a decision to move some of the longer-acting Lp(a) straight into Phase III. So are there other assets in the portfolio that you're holding back, waiting for HORIZON to move into Phase III. Is this Phase II a function of a pushout in HORIZON? Or is it just you want to see more data beforehand before making a final decision here on which assets to take forward? Vasant Narasimhan: Yes. Thanks, James. So for DII235, our partner, Argo Biosensors, I think, publicly released that this is has had already strong data in the early Phase II study and has a potential for an annual dosing interval. And we are prepared to move that study -- that program directly into Phase III based on the HORIZON data set. So there's no change in our plan. I don't know if there might be different things happening between the studies and their studies and et cetera. But our strategy very much is based on the HORIZON readout, to then based on the data we've seen with DII235 on an annual dosing interval to move that forward then into late-stage studies. We do have, of course, a range of other programs earlier stage as well on the range of cardiovascular assets. We've talked about that in the past. HMG coA Reductase, annual PCSK9, of course, the angiotensin 2 siRNA and then combination programs as well that we're working on, both at the 6-month interval and at the 1-year interval. And so both because we life cycle manage Leqvio but also be prepared that pelacarsen is positive. So the HORIZON is positive to seem to be ready to come with what we think will be the preferred market option we want to be ready for all these eventualities. Operator: And the next question is from Peter Verdult, BNP Paribas. Peter Verdult: Just a follow-up for you, Vas, on the pipeline. Just on this basket of cell therapy programs in autoimmune, I think some of them do read out next year. Just wondered if you've got it in the top of your head in terms of which ones and which indications and perhaps a general temperature check on your behalf in terms of your level of enthusiasm for these programs. Vasant Narasimhan: Yes. Thanks, Peter. We remain enthusiastic. We have a huge effort internally on YTB as a first instance, currently in pivotal studies, aligned with FDA over 4 indications and then with follow-on programs that are now in proof-of-concept studies in 3 -- 4 additional indications as well. and then additional exploratory work that's ongoing. And then behind that, trispecific and bispecific monoclonals also to explore can there be alternative options for certain patient groups in the immune reset. I think the first readouts we'll have will be in SLE lupus nephritis. That's building off of the data we presented last year on 20, 23 or 24 patients where we showed, I think, pretty spectacular results for those patients in terms of winding the progress of their disease other than the permanent damage that has happened to the kidneys. And so quite exciting data. That's allowed us, I think, to move forward on that study quite quickly. But we also are advancing all the other programs. And some of them, if we're fortunate, might even be able also to read out next year depending on enrollment patterns and enrollment time lines. So we're advancing these as fast as possible. Depending on the program, many of them have alignment with FDA that we can file off of a single arm and then continue on to provide data on randomized data sets. Others need the randomized upfront. So that all varies based on indication. But I think a lot of the enthusiasm and focus inside the company. Operator: Now take the next question, and this is from Michael Leuchten from Jefferies. Michael Leuchten: Vas, just on Scemblix, you helpfully provide the share data across lines of therapy for the product. It looks like it's plateauing in first line in the U.S. a little bit over the last few quarters. What's stopping the momentum to continue? Vasant Narasimhan: Yes. Thanks, Michael. So we have looked into that. One thing to note is that data is very noisy because with CML, it's a rare disease, most physicians only see 1 or 2 patients. And so the data here always is getting restated. Overall, our view based on our internal assessments is we continue to see steady share growth on the frontline setting. Actually, I would say our frontline share growth is ahead of our plan and our original planning assumptions. And so we see the opportunity here to really continue to grow. We have really strong broad access. One of the biggest things we're trying to overcome is the perception that we don't have strong access to get that access perception to where we want it to be. And then, of course, as we've outlined in the past, you do have Gleevec loyalists out there who want to stay with a product that they've used for a long period of time. That will be more of a refractory group. But to get from the mid-20s up to the 40% to 50% share range is absolutely what our ambition is, and we see a path to get there. Next question I think this might be the last question, operator. Operator: So the last question today is from James Quigley from Goldman Sachs. James Quigley: I've got one quick one on Zigakibart. The data has been pushed out a little bit in order to have the eGFR data on the label at launch. But as you think about sort of the strategy here with your other assets, whether you had the UPCR data first and then adding the eGFR data. Is this a case that the data were quite close together so it is worth having a delay, just trying to understand the rationale here versus the mechanism? Or is there something around the Zigakibart mechanism that could lead to a stronger benefit on eGFR relative to UPCR. Vasant Narasimhan: It's a great question, James. I think when we looked at the number of competitors entering in the [ anti-APRIL ] space. We asked ourselves, given we already have a strong portfolio in the nephrologist office, what would give us the most compelling data package to kind of cut through all of the various launches that are ongoing. And we felt coming right away with hopefully the second medicine with a full approval, clear proneuria reduction and eGFR benefit would give us a very compelling proposition. I mean theoretically, assuming everything goes as we hope, we would have three medicines in IgAN with eGFR outcomes benefit across Fabhalta, Vanrafia, Zigakibart, and that will give us a very compelling proposition. So we thought that was prudent given that the time that passes here is three quarters, it's not the end of the world, and then we would have a much more compelling data set to provide to FDA. All right. Well, thank you all very much for joining the conference call. We look forward to keeping you up to speed, and we wish you all a great 2026. Thank you. Operator: Thank you. This concludes today's conference call. Thank you for participating, and you may...
Operator: Good afternoon, and welcome to the Fourth Quarter 2025 Connection Earnings Conference Call. My name is Lisa, and I will be the coordinator for the call today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question and answer session. As a reminder, this conference call is the property of PC Connection, Inc. and may not be recorded or rebroadcast without specific permission from the company. On the call today are Tim McGrath, President and Chief Executive Officer, and Tom Baker, Senior Vice President and Chief Financial Officer. I will now turn the call over to the company. Please go ahead. Samantha Smith: Thank you, operator, and good afternoon, everyone. I will now read our cautionary note regarding forward-looking statements. Any statements or references made during the conference call that are not statements of historical fact may be deemed to be forward-looking statements. Various remarks that management may make about the company's future expectations, plans, and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the Risk Factors section of the company's annual report on Form 10-Ks for the year ended December 31, 2024, which is on file with the Securities and Exchange Commission as well as in other documents that the company files with the commission from time to time. In addition, any forward-looking statements represent management's view as of today and should not be relied upon as representing views as of any subsequent date. While the company may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so other than as required by law even if estimates change. And therefore, you should not rely on these forward-looking statements as representing management's views as of any date subsequent to today. During this call, non-GAAP financial measures will be discussed. A reconciliation between any non-GAAP financial measure discussed and its most directly comparable GAAP measure is available in today's earnings release and on the company's website at www.connection.com. Please note that unless otherwise stated, all references to fourth quarter 2025 comparisons are being made against the fourth quarter 2024. Today's call is being webcast and will be available on PC Connection, Inc.'s website. The earnings release will be available on the SEC website at www.sec.gov and in the Investor Relations section of our website at www.connection.com. I would now like to turn the call over to our host, Tim McGrath, President and CEO. Tim? Timothy McGrath: Thank you, Samantha. Good afternoon, everyone. And thank you for joining us today for PC Connection, Inc.'s Q4 2025 conference call. I'll begin this afternoon with an overview of our fourth quarter results and highlights of our performance. Tom will then walk us through a more detailed look at our financials. I'm pleased to share that in the fourth quarter, we delivered record gross profit in our business solutions and enterprise solutions segments as they each performed above our expectations. The results in our public sector segment were disappointing and below prior year levels. This was primarily due to a non-repeating project that straddled both Q4 2024 and Q1 2025. In addition, there was a delay in several project rollouts. The strong execution across our business solutions and enterprise solutions segments drove gross profit performance led by growth in software, including cloud and security, and supported by steady growth for endpoint devices. These results underscore the strength of our strategy delivering higher value solutions driving long-term customer relationships, and executing with consistency and discipline. Beginning this quarter, we are disclosing gross billings which represents the total dollar value of goods and services billed during the period net of customer returns and credit memos, and any applicable sales or other taxes and also includes agency fees and free. Gross billings increased by 2.9% to $1,060,000,000 compared to $1,030,000,000 from the prior year. The increase in gross billings demonstrates the overall growth in customer demand despite the headwinds experienced in the public sector. Now I'd like to highlight our consolidated performance. Gross profit increased 4.5% year over year to $135,600,000. Gross margin expanded 100 basis points to 19.3%, reflecting our disciplined approach to pricing as well as a shift in product and customer mix. Total net sales were $702,900,000, down 0.8% from last year due to the public sector challenges previously mentioned. Excluding these headwinds, underlying sales were healthy, especially in software including cloud and security, endpoint devices, and displays. Now let's take a look at the segments. Business solutions delivered a standout quarter with broad-based growth and meaningful margin expansion. Net sales increased 4.2% to $273,500,000 while gross profit rose 11.4% to $69,800,000. Gross billings grew 4.7% to $430,300,000 and gross margin expanded by 160 basis points year over year to 25.5%. These results reflect double-digit growth across desktops, notebooks, NetComm, and software, including cloud and cybersecurity solutions. In public sector solutions, net sales were $90,800,000, down 36.8% from a year ago for the reasons previously mentioned. While the public sector business experienced some headwinds this quarter, we believe conditions will improve later in 2026. Gross billings declined 23.7% to $170,700,000 even with lower revenue gross margin expanded 400 basis points to 19.4% due to changes in customer and product mix. Enterprise Solutions delivered robust top-line growth with net sales increasing 11.9% to $338,700,000 driven by strong demand for advanced technologies and endpoint devices. Gross profit grew 7.1% to $48,200,000 while gross billings increased 16.1% to $457,800,000. Gross margin was 14.2%, down 70 basis points year over year, reflecting changes in subscription license programs and product mix. We continue to focus on operational efficiencies and expense management. In the quarter, we executed a voluntary retirement offering for our tenured employees. These associated charges are reflected in the severance expenses and other charges in the income statement. This, in addition to severance charges in the quarter, totaled $3,100,000. Operating income was up 4.2% to $23,600,000. Excluding severance expenses and other charges, operating income was up 17.8% to $26,700,000 compared to the prior year, underscoring our strong expense discipline while continuing to invest in areas of our business that will drive future growth. Diluted earnings per share were $0.82, an increase of 5.1%, while adjusted diluted earnings per share was $0.91, an increase of 16.7% compared to the prior year. Looking ahead, our strategy remains clear and unchanged, expanding our solutions-led business, deepening our customer relationships, and driving profitable growth in cloud, cybersecurity, AI, and services. We continue to see strong customer engagement as organizations modernize their infrastructure and invest in AI-driven technologies. These are several areas where we deliver differentiated value and where we expect sustained momentum. While funding cycles and project timing can impact quarter-to-quarter results, the long-term trends supporting our business remain firmly intact. With improved gross profit, expanding margins, and a growing base of recurring and solutions-driven revenue, we enter 2026 with confidence and strong strategic positioning. I'll now turn the call over to Tom to discuss additional financial highlights from our income statement, balance sheet, and cash flow statement. Tom? Thomas Baker: Thanks, Tim. Earlier, Tim briefly discussed the new key performance metric, gross billings. We believe that this metric will provide additional insight into the company's periodic performance. We use the gross billings operating metric for evaluating the sales performance of our operating segments by providing insight into the total value of our business transactions. We believe that gross billings provide the same insight to investors. In the fourth quarter, SG&A increased by 1.7% year over year, driven primarily by higher variable compensation tied to the increase in gross profit. We remain highly disciplined on expenses. In fact, our headcount is down 2% year over year, allowing us to keep total payroll costs flat while continuing to invest in our high-priority growth areas. As previously mentioned, we took action in the quarter to further streamline our cost structure resulting in a $3,100,000 severance charge. These actions align our expense structure with our strategic priorities and enhance operating leverage as demand continues to build. SG&A was 15.5% of sales, up 40 basis points year over year, reflecting both the increase in variable compensation and change in sales mix. Operating income margin improved to 3.4% compared to 3.2% last year. Excluding severance expense and other charges, operating income margin improved to 3.8%. Interest income for the quarter was $3,600,000 compared to $4,800,000 last year, resulting from lower average cash balances as we deployed capital and a lower interest rate environment. Our effective tax rate for the quarter was 23.7%, down from 24.1% in the prior year. As a result, net income for the fourth quarter was flat at $20,700,000 year over year. Excluding severance expenses and other charges, net income increased $2,300,000 or 11.3% compared to last year. Diluted earnings per share were $0.82, up $0.04 year over year, while adjusted diluted earnings per share were $0.91, an increase of $0.13 year over year, highlighting the strength and underlying stability of our earnings profile. On a trailing twelve-month basis, adjusted EBITDA was $126,400,000 compared to $118,900,000 a year ago, an increase of 6%. In addition to the Q4 voluntary retirement offering previously mentioned, we completed additional targeted headcount reductions in January. These actions are expected to result in total charges of $5,900,000 to $6,200,000 over Q4 2025 and Q1 2026, of which $3,100,000 was recognized in Q4. Together, these initiatives are expected to generate approximately $7,000,000 to $8,000,000 in ongoing annual cost savings split between both SG&A and cost of goods. During the quarter, we continued to return capital to shareholders through both dividends and share repurchases. We paid a quarterly dividend of $0.15 per share and repurchased approximately 179,000 shares at an average price of $59.53 per share, for a total cost of $10,700,000. In 2025, we repurchased over 1,200,000 shares at an average price of $62.64. In 2025, between the share buyback of $76,100,000 and dividends paid of $15,300,000, we returned $91,400,000 to shareholders. At the end of the year, we had $33,600,000 remaining for stock repurchases under our existing stock repurchase program. But as we announced earlier today, our Board of Directors authorized an additional $50,000,000 to be added to our existing share repurchase program. We also announced today that our Board of Directors has declared a $0.27 per share dividend, a 33% increase. The dividend is payable on March 6, 2026, to shareholders of record as of February 17, 2026. Turning to the balance sheet and cash flow. Operating cash flow for the year ended 2025 was $65,400,000. This reflects working capital investments including a $48,500,000 increase in inventory and a $38,400,000 increase in accounts receivable, partially offset by a $38,100,000 increase in accounts payable. The increase in inventory was intentional as we procured ahead of the anticipated price increases and support customer rollouts. The increased accounts receivable was primarily due to the timing of customer deliveries. Cash generated from investing activities totaled $42,800,000, driven by $108,800,000 in proceeds from the sale of investments and $205,600,000 in investment maturities, partially offset by $264,100,000 of new investment purchases. Cash used in investing activities was $93,400,000, reflecting our ongoing share repurchase activity of $76,300,000 and dividend payments of $15,300,000 to shareholders. We ended the quarter with a strong liquidity position of $406,700,000 in cash, cash equivalents, and short-term investments, which we believe provide significant flexibility to support our strategic priorities and continued shareholder returns. We believe our disciplined approach to capital allocation, continued focus on margin execution, and targeted strategic investments position us well for 2026 and beyond. I will now turn the call back over to Tim to discuss current market trends. Timothy McGrath: Thanks, Tom. Let me take a moment to walk through how our key vertical markets performed. In retail, net sales grew 22% driven by several large deployments as retailers continue investing in technology to improve employee productivity and operational efficiencies which enhance the customer experience. In financial services, net sales were up 28% and gross profit increased 13% year over year. The focus here remains on modernizing infrastructure and improving security. Areas where our solutions and expertise continue to resonate with our customers. Health care grew net sales 19%, while gross profit improved 18% year over year. PC Connection, Inc. had a strong Q4 in health care, attributed to large enterprise deployments for electronic health record management and security. Looking ahead in an AI-first IT environment, we see demand building across our customer base. Customers continue to move forward with refresh initiatives and modernization plans as AI adoption expands. We expect infrastructure strategies to evolve and security requirements to remain front and center. While there are near-term factors that can influence the timing of this demand, such as memory supply constraints, these do not change the strength or scale of the opportunity ahead of us. Rather, they may affect the pace at which demand is realized. We are building for the future, advancing our three-part growth strategy, driving data center modernization, digital workplace transformation, and supply chain solutions. With our differentiated portfolio, disciplined execution, and loyal customer relationships, we believe we are exceptionally well-positioned to capture demand as economic and supply chain conditions stabilize. Our confidence in the business is underpinned by several technology trends that continue to drive pipeline and customer activity. The PC refresh cycle will continue into 2026 as customers modernize aging fleets and increasingly adopt AI-enabled solutions that deliver high performance, strong security, and better user experiences. Data center modernization continues as customers are taking a more balanced approach to hybrid IT, optimizing workloads across on-prem and cloud environments to improve cost predictability, enhance security, and unlock the benefits of server consolidation and infrastructure efficiency. AI-driven demand is expanding across the edge, security, and intelligent endpoints. Customers are moving from experimentation to execution, creating meaningful opportunities for integrated solutions that combine hardware, software, and services. We continue to expand our technical services organization to help customers design, implement, migrate, and manage their IT environments end-to-end. We are investing in training and tools to ensure our teams are fully equipped to guide customers through AI adoption and next-generation architectures with confidence. As we move into 2026, our backlog remains strong. In fact, at the end of Q4, it was at its highest level since 2022. We feel confident about where we are headed and will continue to invest in sales capability, service delivery, and systems while remaining disciplined around cost management and productivity. We are positioning PC Connection, Inc. for sustained long-term growth and expect to outperform the US IT market by 200 basis points this year. As customers rethink how they deploy and manage technology, our strategy meets them where they are. We help them navigate the complexity, modernize with purpose, and make confident, informed decisions that drive real business outcomes. In a world where technology changes fast, expertise wins. And that's where PC Connection, Inc. continues to differentiate. We'll now entertain your questions. Operator? Operator: Thank you. As a reminder, if you would like to ask a question, please press 11 on your telephone. You will then hear an automated message advising your hand is raised. If you would like to remove yourself, please press 11 again. Our first question for the day will be coming from the line of Adam Tindle of Raymond James. Your line is now open. Adam Tindle: Okay. Thanks. Good afternoon. Tim, I think you just kind of wrapped up by saying you expect to outgrow the US IT by 200 basis points. But I guess how would you define what you're thinking of as IT market growth for 2026 as the baseline? And if you could, you know, I know that's a hard question because we've got a bunch of prognosticators trying to figure out what that market growth is. When you look internally, at your customer conversations and, you know, what budget trends are, at the customer and sales quotas and Salesforce, you know, what does growth look like, you know, internally from a budget perspective as well would be helpful. Thanks. Timothy McGrath: Thanks. So right now, the U.S. market is a little tricky to pin down. We've seen a lot of different estimates, but around 4% is a blended growth number that we're working with. Internally, our budget for growth is a little higher than that. And, really, what we're seeing for drivers of demand out there for 2026. Right now, about 61% of our endpoints are AI-enabled, and we do see a demand continuing for AI at the edge. We also see edge product projects starting to expand for 2026. So all of that really bodes well for our business. In addition to the growth we've been experiencing in our cloud business. So clearly, there are some headwinds, Adam, as you know, when we think about things like memory constraint and inflation as a result, those are headwinds. But there'll be some percent of our customer base that try to pull ahead of that. And then some percent that try to push a little beyond that. We're really trying to balance that equation. Adam Tindle: Okay. I mean, as I think about those growth numbers, those are pretty healthy. And then, you know, on this call, you talked about some restructuring, essentially, voluntary early retirement as well as additional actions that you took in January. I guess, you know, maybe just double click on those decisions, you know, at the IT market environment's healthy. You know, why does it make sense to kind of pull back on headcount at this point? And how do you think about headcount on a go-forward basis? Are there more opportunities for additional actions or is this kind of, you know, it at this point? Timothy McGrath: Well, thanks. So internally, for the past few years, we've implemented a number of system improvements and we are now starting to realize those efficiencies, which is really exciting. In addition, as you know, AI is driving some productivity gains throughout the business. So that really is the main driver of our headcount reduction. We want it to be super efficient. We really are working on being operationally excellent in a continuous improvement motion there, and we're starting to realize a lot of that. I don't see additional headcount reductions. I think that demand is going to be solid for 2026, and we're encouraged by all of that. I think we're in a pretty good place right now. Tom, anything to add? Thomas Baker: Yeah. I mean, I think, Adam, if you look at the quarter, right, you know, BSG grew gross profit 11.4%. Enterprise grew their gross profit 7.1%. I mean, that's pretty healthy. You know, one issue we had was we had a very large public sector contract last year that did not renew. So, you know, that was almost a $30,000,000 headwind for us this quarter. And it's been almost a $40,000,000 headwind for us next quarter. However, you know, those other businesses performing the way they are, you know, we can look at the quarter next year. Next quarter is kind of gonna look a little like this quarter, you know, flattish on revenue. Probably low to mid-single digits increase in gross profit. And the way we're managing our costs, we're gonna be sub 3% on G&A. So that's pretty good for that next quarter. And then as we get into Q2, Q3, and beyond, we eliminate that public sector headwind. We're pretty excited about, you know, how the business is looking. Enterprise is adding a bunch of new customers. And, you know, that's just gonna ramp throughout the year. Adam Tindle: That's helpful color. Thanks, Tom. Timothy McGrath: Thank you, Adam. Operator: One moment for the next question. And our next question is coming from the line of Anthony Lebiedzinski of Sidoti. Your line is open. Anthony Lebiedzinski: Good afternoon, and thank you for taking the question. So just wondering if you guys could just comment on the cadence of sales or gross billings during the fourth quarter and whether or not you saw the notable budget flush in Q4? Thomas Baker: Yeah, Anthony. So we definitely saw a market increase in December revenue this quarter. You know, it typically bumps along, you know, 35-ish percent of the quarter. I think it bumped over 38% this quarter. And, you know, buried in that, we saw a couple of things. We did have some customers that were, you know, very focused on consuming their budget before the end of the year. And then we haven't seen that in a number of years. And then we also did see some customers trying to get ahead of the price increases, which is why you see a little bit of a bump in our inventory as well. So I think those two things together, I don't know if it was incredibly material, but it was, you know, it definitely did affect the quarter. Anthony Lebiedzinski: Got it. Okay. Yeah. Thanks for that, Tom. And then Tim, I believe you mentioned earlier about the memory supply constraints, which is certainly something that's been, you know, talked about. Was that an issue in the fourth quarter? Or was that comment more about your concern for 2026? Timothy McGrath: We did start to see in the fourth quarter some price increases, but I do not think it was an issue. Some customers probably pulled their business in, and they moved orders up. And those price increases, of course, are inflationary. And at this point, we're advising all our customers to order, you know, as soon as possible because we see those memory constraints going throughout the year. So it really didn't affect us in the fourth quarter. The inflation that we saw was reasonable, and, you know, we're thinking for the first quarter, again, that will actually spike some demand and we think that'll kind of level out throughout the year. Anthony Lebiedzinski: Gotcha. Okay. And then, with the cost reduction that you have done with the restructuring, how do we think about operating margins here going forward? Any sort of thought on that would be very helpful. Thomas Baker: Yeah. I mean, obviously, it's gonna help us. You know, we talked about $7,000,000 to $8,000,000 of net cost reduction, you know, for the year. And when I say net, that means, you know, some of those people that took retirement, you know, we are gonna have to replace some of them, maybe, you know, different levels, maybe in a little bit different positions, maybe with a little bit more of a technological aptitude. But as we go through the year, the operating leverage is definitely gonna improve. And, you know, we want to move much closer to the, you know, 3.789% is kind of where we think we can get to by the end of the year. Anthony Lebiedzinski: That's very helpful color. Well, thank you very much, and best of luck. Timothy McGrath: Thank you, Anthony. Operator: Thank you. This concludes the Q&A session for today, and I would like to turn the call back over to management for closing remarks. Please go ahead. Timothy McGrath: Well, thank you, operator. I'd like to thank all of our customers, vendor partners, and shareholders for their continued support. And once again, our coworkers for their efforts and extraordinary dedication. Your time and interest in PC Connection, Inc. are appreciated. I'd also like to thank those of you who are listening to our call this afternoon. Have a great evening. Operator: Thank you all for joining today's program. You may now disconnect.
Operator: Greetings. Welcome to A10 Networks Fourth Quarter and Full Year 2025 Financial Results Conference Call. A question and answer session will follow the formal presentation. I will now turn the conference over to your host, Tom Baumann. Sir, you may begin. Tom Baumann: Thank you, and thank you all for joining us today. This call is being recorded and webcast live and may be accessed for at least ninety days via the A10 Networks website at a10networks.com. Hosting the call today are Dhrupad Trivedi, A10 Networks' President and CEO, and CFO, Michelle Caron. Michelle Caron: Before we begin, I would like to remind you that shortly after the market closed today, A10 Networks issued a press release announcing its fourth quarter 2025 financial results. Additionally, A10 published a presentation and supplemental trended financial statements. You may access the press release, presentation, and trended financial statements on the Investor Relations section of the company's website. During the course of today's call, management will make forward-looking statements, including statements regarding projections for future operating results, demand, industry and customer trends, macroeconomic factors, strategy, potential new products and solutions, our capital allocation strategy, profitability, expenses and investments, positioning, and our dividend program. These statements are based on current expectations and beliefs as of today, February 4, 2026. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, that could cause actual results to differ materially, and you should not rely on them as predictions of future events. A10 does not intend to update information contained in forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law. For a more detailed description of these risks and uncertainties, please refer to the most recent 10-Ks and quarterly report on Form 10-Q. Please note that with the exception of revenue, financial measures discussed today are on a non-GAAP basis, unless otherwise noted, and have been adjusted to exclude certain charges. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for prepared remarks in accordance with GAAP and may be different from non-GAAP financial measures presented by other companies. A reconciliation between GAAP and non-GAAP measures can be found in the press release issued today and on the trended quarterly financial statements posted on the company's website at www.a10networks.com. Now I would like to turn the call over to Dhrupad Trivedi, President and CEO of A10 Networks. Dhrupad Trivedi: Thank you, Tom. And thank you all for joining us. Today, A10 Networks reported record quarterly and full-year revenue results. These results reinforce A10's strategic position. A key contributor continues to be the sustained investment in environments supporting AI-driven workloads. As customers scale high-performance computing, inference platforms, and data-intensive applications, they are increasingly focused on traffic management, availability, and security at massive scale. These requirements play directly to A10's strength. For the full year, revenue grew 11% year over year, outpacing growth rates across much of our competitive landscape, and underscoring the increasing relevance of our portfolio with customers. We enter 2026 with momentum supported by macro trends as a result of our agile strategy, strong execution, and excellent industry reputation. Increasingly, we are considered a foundational piece in the development of AI and other infrastructure, in addition to being a critical component for customers operating their current environments. As our customers grow, we grow. In the fourth quarter, we delivered $80.4 million in revenue, our largest single quarter ever. Revenue expanded 8.3% year over year in spite of an unusually strong seasonal fourth quarter last year. Our investments in targeting North America customers have resulted in this portion of our business growing faster than our overall revenue, and we continue to be well-positioned with these customers while maintaining our geographic and customer diversity. Our global diversification continues to enable consistent performance despite macro variability. For the full year 2025, we delivered revenue of $290.6 million, up 11% year over year, and adjusted EBITDA of $86 million, which represents 29.6% of revenue. These are all company records and continue to demonstrate the inherent strength of our strategy, operating model, and disciplined execution. Security-led solutions are now sustainably at our long-term goal of 65% of total revenue. This shift reflects not only the breadth of our portfolio but the increasingly central role security and encrypted traffic play in legacy networks as well as next-generation networks. During the quarter, we closed a win with a large global data and analytics software provider serving customers across highly regulated industries. The customer was experiencing rapidly rising encrypted traffic volumes driven by platform expansion and recent acquisitions, creating both performance and cost challenges. A10 Networks was selected for its ability to deliver high-performance solutions supporting the next-generation network with hardware acceleration and improved security, enabling the customer to consolidate infrastructure, support future growth, and materially improve cost efficiency. We also closed a significant new win with a large global airline operating highly distributed mission-critical digital platforms. The customer was focused on improving automation, performance, and centralized management across a complex hybrid environment while reducing operational costs at scale. A10 Networks was selected for its ability to deliver state-of-the-art cybersecurity, resilient next-generation networking solutions, with deep automation, while supporting consistent performance and availability across an always-on customer-facing operating model. Importantly, these wins are representative of the type of demand that aligns well with our operating model and our strategic growth drivers. They reflect customers prioritizing performance, security, and efficiency at scale. Use cases where A10 Networks can deliver strong value without incremental complexity or disproportionate cost. We continue to drive a disciplined operating model that balances targeted investment with margin expansion, converting growth into profitability and cash, while dynamically reinvesting in strategic priorities. As previously noted, investing in organic growth is one of our strategic priorities, in addition to returning capital to shareholders. We have reallocated our research and development budgets, focusing on accelerating some of our future AI-related solutions and integrating AI across all of our offerings, supporting current and future growth. We remain committed to our long-term operating model, driving revenue growth of more than 10%, adjusted EBITDA margins of 26% to 28%, and EPS growth faster than revenue growth. A10 Networks is well-positioned to serve our customers, and our solutions are well-aligned with the dynamic needs of today's customers. Today, A10 Networks works with nine of the top 10 telecom operators, eight of the top 10 cloud providers, and more than 7,000 customers globally. The investment cycle to support AI specifically and network capacity generally continues to drive sustained demand. A10 Networks is positioned to grow with our customers, and our proven capabilities and industry-leading total cost of ownership are helping us win new business as well. With that, I'd like to turn the call over to Michelle Caron, our Chief Financial Officer, to review the numbers in more detail. After that, I will discuss our 2026 outlook. Michelle Caron: Thank you, Dhrupad. As a reminder, with the exception of revenue, all of the metrics discussed on this call are on a non-GAAP basis unless otherwise stated. A full reconciliation of GAAP to non-GAAP results is provided in our press release and on our website. So now let me turn to the results. As Dhrupad noted, we delivered a strong Q4 and entered 2026 with encouraging momentum. Fourth-quarter revenue grew 8.3% to $80.4 million. This was a record revenue level for A10 Networks. From a mix perspective, product revenue accounted for 61% of total revenue, and service revenue represented 39%. Product revenue of $48.8 million grew percent year over year and typically is representative of future revenue trends. Within our product revenue category, the fourth quarter achieved our long-term target of generating more than 65% of our total revenue from security-led solutions. This demonstrates our ability to deliver differentiated solutions leveraging our strengths in performance, scale, and reliability. Looking at our major verticals, enterprise customers represented 42% of Q4 revenues. The Americas continued to outpace overall enterprise revenue growth for the company in line with our stated strategy. Total revenue, service provider revenue, which was 58%, was weighted towards cloud providers, further indication of our success in strategically aligning our offerings with AI infrastructure build-out. In fact, non-cloud service provider revenue was flat year over year, reflecting an ongoing mix shift as customers prioritize security and next-generation networking initiatives over legacy infrastructure. A10 Networks has evolved its solutions to be well-positioned to capture legacy refresh demand as this market transition progresses, and customers resume investment while continuing to align with their evolving priorities around performance, scale, and security. From a geographical perspective, our Americas region represented 64% of global revenue, reflecting the benefits of A10 Networks' investments in our enterprise segment and the strength of AI infrastructure build-out. Macro-related headwinds, such as persistent inflation and the threat of tariffs in the rest of the world, were more than offset by strength in America. Q4 operating results reflected our continued investment in our strategic initiatives as well as our financial discipline. Non-GAAP gross margin was 80.8%, in line with our stated goals of 80% to 82%. Operating expenses were $43.6 million, with an operating margin of 26.6%, reflecting increased investments mainly in R&D, focusing on next-generation networking and security. Our non-GAAP effective tax rate was 15.7%, resulting in net income of $19.1 million or $0.26 a share. Q4 diluted weighted share count was 72.7 million shares. Adjusted EBITDA was $24.9 million, 31% of revenue. We generated $22.7 million in cash flow from operations in Q4, with CapEx coming in at $6.7 million, bringing free cash flow for quarter four in at $16 million. We've continued to invest in the business while also returning capital to our shareholders. Now I'll turn to the full-year results. Revenue grew 11% to $290.6 million, with non-GAAP gross margin coming in at 80.6%. At the same time, we delivered record adjusted EBITDA of $86 million or 29.6%, reflecting disciplined execution and a highly productive operating model. Net income was $66.3 million or $0.90 a share and was up from $64.8 million or $0.86 a share in the prior year while we invested significantly throughout the year in strategic investments such as AI and security. As a result of this, we were still able to increase EPS on a year-over-year basis. Our growth was driven by increased demand for security-led revenue, which represented 72% of total revenue for the year. Revenue from The Americas increased 30% for the year, while revenue from EMEA increased 12%, offsetting a decline in revenue from APJ, where the region has been experiencing macroeconomic headwinds such as low GDP growth, persistent inflation, and concerns with tariffs. We continue to have deep customer relationships in these regions to preserve our geographic diversity. Turning to the balance sheet, cash and marketable securities were $378 million as of December 31, and our deferred revenue was $142.8 million. During the year, we paid $17.4 million in cash dividends and repurchased $68.9 million worth of shares, returning a total of $86.3 million to shareholders. The Board has approved a quarterly cash dividend of $0.06 per share to be paid on March 2, 2026, to shareholders of record on February 16, 2026. The company has $53.4 million remaining on its $75 million share repurchase authorization. Now we're closely monitoring the broader supply environment, including the memory segment, which has been widely discussed across the industry by customers, partners, and competitors alike. Based on our supply management processes, we don't expect this to impact the delivery to our customers, and we continue to navigate cost pressures along our suppliers and our customers. As a result, we've taken proactive steps around supply planning, supplier engagement, and component flexibility to mitigate potential impacts. We deployed similar measures in previously supply-constrained environments such as 2020, so we feel well-positioned to navigate this. I look forward to speaking with many of you in the coming weeks, gathering your feedback on our strategy and operations. I'll now turn the call back to Dhrupad for a discussion of our 2026 outlook and closing comments. Dhrupad Trivedi: Thank you, Michelle. The results for the fourth quarter and full year validate the strategic investments we have made over the past half-decade to reposition A10 Networks as a valuable partner for addressing the new and emerging challenges related to the evolving technology environment. The demands AI brings to a data center or a CSP are challenges that A10 Networks has a proven track record of addressing. We facilitate East-West traffic, efficiently managing workloads, and dynamically prioritize traffic, emphasizing high throughput and low latency, all with integrated security. As a result, A10 Networks is positioned squarely in front of multiple durable secular catalysts. We are investing to enhance our position across our portfolio. Our business model dynamically allocates resources to address changing market conditions while preserving profitability and shareholder return. In the press release we issued today, we laid out our initial 2026 outlook. On a full-year basis for 2026, we expect to deliver both top and bottom-line growth, including revenue growth of 10% to 12% over 2025 levels. We also expect non-GAAP gross margin in line with historical trends and within our stated business model goals of 82% while navigating input cost pressures. We expect to expand our net and EBITDA margins from current levels, and we expect EPS growth to exceed our revenue growth rate. We will provide additional strategic and solution context around our growth drivers and market positioning at an upcoming Investor Day, including a deeper discussion of the factors that drive these expectations. Operator, you can now open the call up for questions. Operator: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. One moment, please. Or a comment. The first question comes from Gray Powell with BTIG. Please proceed. Gray Powell: Hey, great. Thanks for taking the questions and congratulations on the good results. Dhrupad Trivedi: Thanks, Gray. Gray Powell: Absolutely. So maybe a couple of questions on my side. Just to start off, it was really good to see the improvement in service provider growth in 2025. Just as we think about 2026, how sustainable is the trend there? And then I know you hit on this in the prepared remarks. Just, like, how should we think about the different growth drivers within service providers, you know, like a recovery in traditional communication companies versus continued growth from the cloud providers deploying AI infrastructure? Thank you. Dhrupad Trivedi: Yeah. Great. No. Thank you. Good question. So yeah, so I think as we went through the period this year, I think you can see in the results we saw certainly relative to 2024, an improvement in the service provider segment overall. I would say the two things to note. First is the majority of that growth did come from cloud-oriented companies, whether it's in the US or elsewhere, building out infrastructure towards AI or towards more cloud services. However, I would say as we went through the year into Q3, Q4 period, we saw not return to original levels, but certainly improvement in spending patterns with also the traditional telcos. And the nature of their investment, I would say, is twofold. One was relative to improving their security position and posture for the networks, or the enterprise services that they provide. And second, I would say that because of the nature of our portfolio, the other part of that growth was them simply needing to add capacity to manage more data and more users and more traffic on the network. Right? So without them needing to build a kind of a greenfield new network, both those drivers were relevant to us. One was making their networks more secure. And second is continuing to modernize the network as well as adding capacity while they do that. Gray Powell: Got it. Okay. And then just a quick follow-up if it's okay. Yeah. Dhrupad Trivedi: Yep. Gray Powell: I know it's probably really hard to quantify, and maybe it's, like, too early. But are you seeing it's part of this, like, are you seeing AI drive higher traffic volumes? Like, higher levels of DDoS attacks or something else? And that's driving part of the refresh cycle, or am I getting ahead of myself there? Dhrupad Trivedi: Yeah. No. That's a good question, Gray. I think, you know, we certainly monitor that, and I think your question, it may be a little early. I don't think we are past that point where we could quantify or talk about it. But absolutely, there are two sides of the coin, right, is where AI also facilitates kind of ease of deploying more complex, more sophisticated attacks, and therefore also drives volume. And some of it is related to also the nature of traffic that did not exist on the network before AI. Right? So that certainly is a factor. Little early to quantify. I don't think that, you know, service providers are investing yet on that, but they are certainly viewing that as something to worry about. But they do expect and anticipate increasing volume just from the nature of the volume increase when people constantly feed prompts and get feedback as opposed to not having that topic before. Right? So that certainly also feeds the growth. And the security is something that is on, I would say, everybody's radar, but hard to quantify that yet. Gray Powell: Understood. Alright. Thank you very much. Dhrupad Trivedi: Yep. Thanks. Operator: Our next question comes from Anja Soderstrom with Sidoti. Please proceed. Anja Soderstrom: Hey, thank you for taking my question and congrats on the quarter and the outlook for 2026. Thank you. You have quite an outperformance in the fourth quarter. What was the main surprise here? What changed during the quarter? And sort of how did the quarter trend for you? Dhrupad Trivedi: Yes. I think for us, you know, as we had talked about, right, Anja, is that our focus is obviously, we have a strong position with the service provider segment globally. And, as that, you know, improves, maybe not fully recover, we'll continue to see, you know, some benefit from those deep relationships that we continue to build upon. So that, obviously, you can see in the numbers helped a little bit. Second is, right, we continue to focus on growing our footprint around larger customers, including in the enterprise segment, and we highlighted a couple of new customers. So our ability to land new large customers, obviously, is also helpful to that growth while we benefit overall. Right? And third, as we said in our comments that to the degree, you know, where some maybe a lot, some maybe not so much, people are investing in AI infrastructure. Our portfolio is well-positioned, so we see that. So I would say, you know, SP becoming slightly better was, I would say, better than we expected. Not all the way back, but certainly, you know, something that helped us in the quarter. Our growth on the enterprise side, as well as on AI-led infrastructure, was what we were expecting. Anja Soderstrom: Okay. Thank you. And you mentioned some new customers. Were they, did you displace someone with them? Dhrupad Trivedi: Yeah. I think, so, typically, in most of those cases, we would be displacing them. I think the only exception to that is when we work with customers on some of our security solutions, they may not be using anything today. Right? And they are implementing new security protocols or standards. So in that case, it's not replacing somebody. But outside of that, it would be, certainly in a competitive situation. Anja Soderstrom: Okay. And is it like, one specific competitor you're replacing, or is it more broadly? And has it changed at all recently? Competitive landscape? Dhrupad Trivedi: No. So I would say no real change in the landscape, right, as we have talked about in the past, right, on the enterprise side and security side. It's the same competitive landscape. I think we just continue to work at improving our solutions and be more in tune with customer needs. So I think as that is better aligned, we are seeing better opportunities as well. Anja Soderstrom: Okay. And just one more from me. If I heard you right, there was an uptick in the CapEx spend. What's driving that, and how should we think about that for 2026? Dhrupad Trivedi: Sure. Yeah. So I think, you know, if you kind of look at our trend, there was a little bit of an uptick in CapEx in Q4. There's two real drivers to it. I think one of it is related to our need to invest in some of the back-end infrastructure. So when we, you know, acquire a company like FedEx and we are offering some more services, what that translates to is not necessarily cost from a traditional sense, but on the hosting services, data centers, SOC, and doing our security, right, to strengthen our own security operations and so forth. So some of that investment is really around enabling the solutions that are helping our solutions be more relevant to customers in terms of either hosted solution or back-end infrastructure. So a lot of that is in IT. And then some part of it is as we are, you know, in the early stage with customers doing demos and POCs on AI infrastructure. Obviously, we are investing a little bit of that CapEx in new kinds of processors and chips and GPUs and things like that. Anja Soderstrom: Okay. Thank you. That was all for me. Operator: Thank you, Anja. The next question comes from Hamed Khorsand with BWS Financial. Please proceed. Hamed Khorsand: Hi. Could you just walk through your guidance a bit here? And this is the first time you've been willing to provide any kind of guidance with this specific in, two, three years. How are you seeing that visibility? Is enterprise, the service provider, and how certain are you that this is going to actually be there compared to two, three years ago when you stopped giving guidance? Dhrupad Trivedi: Yeah. No. I think that's a good question. I think kind of the environment has evolved and our products and business have evolved over the last two, three years. Certainly, right, we were much more exposed to just the SP or the traditional SP spending cycle, which is CapEx cyclic and CapEx intensive and so harder to predict over long periods of time. What we did guide even the last three years as, you know, Hamed was, delivering on the gross margin and EBITDA percent. Not as much on the top line because of the level of variability with everything going on, right, with the macro as well as micro. So as we see the last few quarters, I think we have continued to make the base of our revenue more durable. And as we are getting more of that from enterprise or large enterprise, as well as SP as well as AI spending. I think in an aggregate, we think we can sustain kind of the momentum where we are, where, you know, we just finished the year at 11% year-over-year growth. So we feel that based on the visibility we have with the six to nine-month cycle, and more diversified exposure across these markets, that's all it is. Right? But our fundamental outlook of saying, you know, EBITDA 26 to 28%, gross margin 80 to 82%, and EPS growing year over year, has not changed. I've given that guidance every year. Right? Hamed Khorsand: Okay. Great. And my other question was related to your APJ performance. Was that country-specific, or was that multiple countries? Dhrupad Trivedi: Yeah. No. I would say that the majority of it was related to Japan. And I think it's heavily related to the environment there with the low GDP concern over what, you know, the tariff environment could mean. And therefore, SPs as well as enterprise holding off on investment. So I think we certainly are not seeing us losing share, but we are certainly seeing depressed spending. In line with, you know, all the macro news you would see out of Japan. Outside of Japan, I think we were fine. It was not that negative. Probably close to company average. Hamed Khorsand: Okay. Thank you. Dhrupad Trivedi: No problem. Thank you, Hamed. Operator: Again, if you have a question or a comment, please press 1 on your telephone keypad. The next question comes from Michael Romanelli with Mizuho. Please proceed. Michael Romanelli: Yes. Hi. Thanks for taking my question. Enterprise revenue growth was 8% this quarter, obviously much improved from the 10% decline reported last quarter. I guess, did you close any notable deals that perhaps pushed from the 3Q? And I guess going forward and in relation to the 10% to 12% growth outlook for 2026? Or how should we be thinking about enterprise business growth for the full year? Dhrupad Trivedi: Yeah. So I think good question, Michael. And I think if you remember last call, right, I talked about the fact that because we are early in expanding our footprint into that marketplace, it's going to be a little bit choppy, and therefore, even the last quarter, we were highlighting focusing on the TTM growth versus every quarter. Right? So every quarter could be up or down. But on a trailing twelve-month basis, we are confident that that segment will grow at least at the fleet average of 10 to 12%. Michael Romanelli: Okay. Got it. That's helpful. And then, you know, as part of your prepared remarks, Dhrupad, you highlighted a few encouraging wins in Q4, which was great to hear. You know, I guess, like, overall, how would you characterize net new enterprise logo activity this quarter? And, you know, as part of the 2026 guide, like, you know, obviously, you have a very large install base, but how should we be thinking about your ability to sign up, you know, many more new enterprise customers? Thanks. Dhrupad Trivedi: Yeah. No. It's a good question. And I think, you know, what I would highlight again, right, is, as a company based on our technology and value proposition, we are not really focused on an SMB market orientation. So really, we are not looking at how many 100 customers we acquire every quarter and how many churn and everything else. Right? So our goal is really to continue to get new customers typically in large enterprises, who operate complex networks with thousands of users, mission-critical environments. Right? So in that context, obviously, acquiring new customers is very, very important. It's very different than a typical SMB model. And, you know, we don't need to acquire hundreds of customers to get that growth. Right? So, we absolutely have a good pipeline of adding new customers. But even once we have those customers, typically, we continue to expand and sell them more product categories as well over time. So that's an important metric for us, but I would say it's different than maybe an SMB-oriented business. Michael Romanelli: Got it. Okay. Thank you. Dhrupad Trivedi: Thanks. Thank you, Michael. Operator: The next question comes from Hendi Susanto with Gabelli Funds. Please proceed. Hendi Susanto: Good evening, Dhrupad. You highlighted how AI can drive growth in three categories, like modernization, network capacity, and security. How do you rank among those three? Dhrupad Trivedi: Yes. I think, you know, obviously, the core of our growth comes from capacity, whether it's existing or new or new build-outs are growing. As the network. Security is not decoupled from capacity. Right? So obviously, our goal was to get security-led revenue to be 65% of total, and we are there and, you know, we'll stay there. And we are confident we can continue doing that. Modernization, I think there's two aspects to it. One is when people are modernizing applications and use cases, then, obviously, we are relevant. The second part of it is where modernization means somebody has to build a brand new 5G network. Obviously, that's not a growth we bet upon, and we will benefit when that happens more. When somebody builds, you know, kind of a greenfield network. But in the current economic environment, we don't count upon that as a major driver, and our goal is to find growth independent of that. And if that happens, then that's good. Right? So it's really around working with our customers on their current networks and capacity and security. While enabling them with more and more capabilities. And then obviously benefiting more than that if they build new networks. Hendi Susanto: Yeah. Thank you, Dhrupad. And then one more question. There's a growing conversation about Agentic AI as a growth opportunity in 2026. Like an early stage of growth of Agentic AI. I would like to check in in case you have seen some use cases emerging for Agentic AI and how we should be thinking about A10 Networks in that context. Dhrupad Trivedi: Sure. Yeah. So I think, you know, like, like, all of, you know, we hear from a lot of the people in the industry and others as well, right, that it's early in the cycle where we are engaged with customers really is, you know, while we do have AI products per se, where we are much more engaged with customers is how do they plan to use AI for their business goals. And what they do with it. So, you know, some of the examples we have talked about is for over kind of service provider type customers. In the next two to three years, having an ability to do predictive analytics and getting predictive in into their network and performance and capacity planning is, you know, important to them. It's still early because companies are themselves figuring out how to take advantage of AI. Second is, of course, right, as we talked about as companies use more AI, whether it's, you know, on-site model or a global model, they will have new kinds of traffic, new kinds of threat, and new capabilities needed to manage those. And particularly with low latency and more distributed networks. So, in that environment, obviously, we are working with customers also on how to continue to improve their, you know, security posture, with new types of traffic. And also enabling the architecture where they can manage that kind of traffic better on their networks. Hendi Susanto: Okay. Thank you so much, Dhrupad. Dhrupad Trivedi: Thank you, Hendi. Operator: We have reached the end of the question and answer session, and I will now turn the call over to Dhrupad Trivedi for closing remarks. Dhrupad Trivedi: Thank you. And thank you to all of our employees, customers, and shareholders for joining us today and for your continued support. I'm increasingly confident in our strategic orientation with security and AI infrastructure spending patterns. Thank you for your time and attention. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Mark Dedovesh: Good day, everyone, and welcome to the Boot Barn Holdings, Inc. Third Quarter Fiscal 2026 Earnings Conference Call. As a reminder, this call is being recorded. Now I would like to turn the conference over to your host, Mr. Mark Dedovesh, Senior Vice President of Investor Relations and Finance. Please go ahead, sir. Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn's third quarter fiscal 2026 earnings results. With me on today's call are John Hazen, Chief Executive Officer, and Jim Watkins, Chief Financial Officer. A copy of today's press release, along with a supplemental financial presentation, is available on the Investor Relations section of Boot Barn's website at bootbarn.com. Shortly after we end this call, a recording of the call will be available as a replay for thirty days in the Investor Relations section of the company's website. I would like to remind you that certain statements we will make during this call are forward-looking statements. These forward-looking statements reflect Boot Barn's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Boot Barn's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made during this conference call webcast, refer you to the disclaimer regarding forward-looking statements that is included in our third quarter fiscal 2026 earnings release as well as our filings with the SEC reference the net disclaimer. We do not undertake any obligation to update or alter any forward-looking statements whether as a result of new information, future events, or otherwise. I will now turn the call over to John Hazen, Boot Barn's Chief Executive Officer. John? John Hazen: Thank you, Mark, and good afternoon. Thank you, everyone, for joining us. On this call, I will review our third quarter fiscal 2026 results, provide an update on current business, and discuss the progress we have made across each of our four strategic initiatives. Following my remarks, Jim Watkins will review our financial performance in more detail, then we will open the call for questions. We are very pleased with our third quarter results, which reflect broad-based strength across all major merchandise categories in stores and online and across all geographies. During the quarter, revenue increased 16% compared to the prior year to $706 million, including consolidated same-store sales growth of 5.7%. In addition to strong sales growth, merchandise margin rate increased 110 basis points compared to the prior year period. The strength in sales and margin combined with solid expense control resulted in earnings per diluted share of $2.79 during the quarter. I am very proud of the entire team's ability to execute on our four strategic initiatives, which drove very strong results. Now turning to current business. Through the first five weeks of our fiscal fourth quarter, we have continued to see broad-based strength in same-store sales despite the negative impact of recent winter storms. On a consolidated basis, quarter-to-date same-store sales increased 5.7%, which we estimate was negatively impacted by approximately $5 million of reduced revenue due to the storm closures resulting from the recent winter storms. Prior to the winter storms, for the first twenty-six days of the fiscal quarter, consolidated quarter-to-date comps increased approximately 9.1% driven by growth in transactions. We feel very good about the underlying tone of the business and the start to our fourth quarter. I will now spend some time discussing each of our four strategic initiatives. Let's begin with new store growth. We opened a record 25 stores in the third quarter, ending the period with 514 stores. I am very pleased that our new store engine over the past several years has consistently exceeded our sales, earnings, and payback expectations throughout all regions of the country, and these strong results have continued with the stores opened during the past twelve months. As a reminder, new stores on average are on pace to generate approximately $3.2 million in annual sales in their first full year of operation and pay back their initial investment in less than two years. Looking forward, we have planned 15 store openings in the fourth quarter, which would bring the fiscal year total to 70 new stores. As we look towards fiscal 2027, the pipeline remains very strong, and we estimate 20 projected openings in the first quarter, which will begin in April. Given the consistent strength of our new store openings, we believe that we are well-positioned to continue expanding the Boot Barn brand for years to come as we head towards our target of 1,200 stores in the United States. Moving to our second initiative, same-store sales. Third quarter consolidated same-store sales grew 5.7% with brick-and-mortar same-store sales increasing 3.7%. Store comp growth was driven by low single-digit increases in both basket and transactions. From a merchandising perspective, we saw broad-based growth across all major merchandise categories. Our Men's and Ladies Western Boots businesses comped positive high single digits, and our men's and ladies apparel businesses slightly outperformed the chain average, led by mid-teens same-store sales growth in denim. Our work boots business also comped positive mid-single digits during the quarter. From an operations perspective, I'm very proud of the field team's hard work, which resulted in another strong holiday season. The field team continues to provide best-in-class customer service and drive record sales volume while hiring and training seasonal staff, managing inventory flow, and opening new stores. I would like to thank the field and the entire Boot Barn team for their partnership and execution. Moving to our third initiative, omnichannel. In the third quarter, online comp sales grew 19.6%. We are very pleased with the growth in our online channel, particularly the positive results from our new initiative to develop exclusive brand sites. As a reminder, one of our goals beginning this year was to market exclusive brands separately from the Boot Barn brand. Earlier this year, we launched websites for Cody James and Hawx and are very pleased with the initial results on both rollouts, which have primarily attracted new customers. Looking forward, we are planning to launch standalone sites for more of our brands, including Cheyenne, our leading ladies brand, and Cleo and Wolf, our ladies country lifestyle brand. Now to our fourth strategic initiative, merchandise margin expansion and exclusive brands. During the third quarter, merchandise margin increased by 110 basis points compared to the prior year period, driven by buying economies of scale, supply chain efficiencies, and 240 basis points of growth in exclusive brands. I am proud of the team's ability to grow merchandise margin and exclusive brand penetration while staying committed to a full-price selling model, particularly during the holiday season. I would now like to provide an update on our pricing strategy related to exclusive brand products. We will be increasing exclusive brand ticket prices on some products during the fourth quarter. We are pricing our goods in a manner that will allow us to continue to drive growth in merchandise margin rate. Our team has continued to diligently work with our factory partners to mitigate the impact of tariffs through cost concessions, which have allowed us to maintain pricing on some goods. New exclusive brand products that we have added to the assortment have already been priced accordingly at the factory level. Given the fluid environment we are operating in, the team continues to be flexible and look for ways to drive growth in merchandise margin. I would like to now turn the call over to Jim. Jim Watkins: Thank you, John. In the third quarter, net sales increased 16% to $706 million. The increase in net sales was the result of the incremental sales from new stores and the increase in consolidated same-store sales. The 5.7% increase in same-store sales is comprised of a 3.7% increase in retail store same-store sales and a 19.6% increase in e-commerce same-store sales. Gross profit increased 18% to $281 million compared to gross profit of $239 million in the prior year period. Gross profit rate increased 60 basis points to 39.9% when compared to the prior year period as a result of a 110 basis point increase in merchandise margin rate, partially offset by 50 basis points of deleverage in buying, occupancy, and distribution center costs. The increase in merchandise margin rate was primarily the result of buying economies of scale, supply chain efficiencies, and growth in exclusive brand penetration. The deleverage in buying occupancy and distribution center cost was driven by the occupancy cost of new stores. SG&A expenses for the quarter were $166 million or 23.6% of sales, compared to $139 million or 22.9% of sales in the prior year period. Income from operations was $115 million or 16.3% of sales in the quarter, compared to $99 million or 16.4% of sales in the prior year period. Included in SG&A and income from operations in the prior year period was a net benefit of $6.7 million related to the company's former CEO's resignation. Excluding this benefit in the prior year period, this year's SG&A expense as a percentage of net sales leveraged 40 basis points and income from operations as a percentage of net sales leveraged by 100 basis points. Net income per diluted share in the third quarter increased to $2.79 compared to $2.43 per diluted share in the prior year period. Included in net income per diluted share in the prior year period was an estimated $0.22 benefit related to the former CEO's resignation. Excluding this benefit in the prior year period, EPS increased by 26%. Turning to the balance sheet. On a consolidated basis, inventory increased 17% over the prior year period to $805 million and increased approximately 4% on a same-store basis. Total inventory increased as a result of adding 15% new stores, growth in customer inventory, and growth in exclusive brands. We feel good about the health of our inventory, and our markdowns as a percentage of inventory are below historical levels. During the quarter, we purchased approximately 67,000 shares of our common stock for an aggregate purchase price of $12.5 million as part of our authorized $200 million share repurchase program. We finished the quarter with $200 million in cash and zero drawn on our $250 million revolving line of credit. I would now like to provide an update on our fourth quarter guidance, which is outlined in our supplemental financial presentation. As the presentation lays out the low and high end of our guidance range, I will only speak to the high end of the range in my following remarks. For the fourth quarter, we expect total sales at the high end of our guidance range to be $535 million and a consolidated same-store sales increase of 5%. We expect merchandise margin to be approximately 50.5% of sales, a 60 basis point decrease from the prior year period. Included in our fourth quarter guidance is 20 basis points of expected growth in product margin, offset by a combined 80 basis point increase in shrink and freight expense compared to the prior year period. As a reminder, we are up against extremely strong merchandise margin expansion last year of 110 basis points, which was helped by very favorable shrink and freight. Our guidance for the fourth quarter of this year contemplates more normalized shrink levels and embeds the current run rate for freight expense, which, while higher than the prior year period, is lower than historical levels and in line with the third quarter. We expect gross profit to be approximately 36.1% of sales, which includes 50 basis points of deleverage in buying, occupancy, and distribution center costs. Our income from operations is expected to be $59 million or 11.1% of sales. We expect earnings per diluted share to be $1.45. Based on our year-to-date performance and fourth quarter outlook, we are raising our full-year guidance. For the full fiscal year, we now expect total sales to be $2.25 billion, representing growth of 18% over fiscal 2025. We expect same-store sales to increase 7% with a retail store same-store sales increase of 6% and e-commerce same-store sales growth of 15%. We expect merchandise margin to be approximately 50.8% of sales, a 70 basis point increase over the prior year period. This margin increase includes exclusive brand penetration growth of 240 basis points. We expect the gross profit to be approximately 38% of sales. Our income from operations is expected to be $301 million or 13.4% of sales. We expect net income for fiscal 2026 to be $226 million and earnings per diluted share to be $7.35. Now I would like to turn the call back to John for some closing remarks. John Hazen: Thank you, Jim. I'm very pleased with our third quarter and year-to-date results, and I believe we are well-positioned for a strong finish to our fiscal year. I would like to thank the entire team across the country for their dedication to Boot Barn and our customers. Now I would like to open the call for questions. Operator: We will now begin the question and answer session. On your telephone keypad, if you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. As this call is scheduled for one hour, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Matthew Boss with JPMorgan. Please go ahead. Congrats on another nice quarter. John Hazen: Thanks, Matt. Matthew Boss: So John, on the 9% comp, for the first twenty-six days of January before the storms, could you elaborate on the drivers of acceleration that you had seen relative to the third quarter? Was the sequential improvement broad-based or any specific category call-outs? And what did you embed for the remainder of the quarter? To get to the three to five guide? John Hazen: Yes. Thanks, Matt. Great question. When we look at those January and the nine-one, it was broad-based across most major merchandise categories. The one category worth calling out was the work business. The work apparel business was a little soft given some of the warmer weather we saw in January. And as we came into the winter storms or winter storm Fern, we saw the needs-based business both on the work boot and the work apparel side pick up from their incoming trend as we had the first five weeks of business, that got us to that five-seven despite the closures on the Saturday and Sunday, the end of fiscal January and beginning of fiscal February. And outside of the work business, which is driven by outerwear and some warm weather, it was broad-based acceleration across all major merchandise categories. When we look at the remaining of the quarter and getting to that three to five guide, you know, we looked at the March business, as a reminder, is close to half the quarter's business. A five-week month combined with Houston Rodeo. And the comps get a little bit tougher in that March time frame. And we use that along with our typical forecasting to get to that 3% to 5% comp despite starting with a nice January, up nine-one. And that implies, Matt, the February and March combined comp is a 4.5% consolidated, 3.6% in stores, and 13% e-com. Matthew Boss: Great. And then maybe a follow-up, John, just take a step back. FY '26, now the second consecutive year of mid to high single-digit comps. Could you speak to your level of overall visibility today as you plan the business? Are there any structural constraints that you see to sustaining this kind of momentum? Anything changing from a productivity perspective as you look at the box by category, just kinda thinking ahead relative to the last two years that we've seen. John Hazen: Yeah. No, Matt, if we look back historically, we can comp in that low to mid-single-digit range. And we have done it many of the last ten years. And we feel great about the new store. We feel great about the new store pipeline, the broadness of the performance across all major merchandise categories, so structurally, there's nothing that gives us concern in comping the comp. Matthew Boss: Great. Best of luck. John Hazen: Thanks, Matt. Operator: The next question comes from Steven Zaccone with Citi. Please go ahead. Steven Zaccone: Great. Afternoon. Thanks very much for taking my question. I wanted to ask on the merchandise margin outlook for the fourth quarter. Could you just elaborate on it a little bit more detail? Because it sounded like supply chain came in better than expected in the third quarter. So is this outlook for 4Q? The freight impact kind of unchanged versus how you're speaking to it previously? And then on the product margin being up 20 bps ex freight and shrink, much of that suits your brand penetration? And you just wanna talk through buying economies of scale. John Hazen: No problem, Steve. You know, as a reminder, we're for the fourth quarter merchandise margin were up against two ten points of expansion last year. So tougher comps are part of that. Your first part of your question was on the shrink and freight, guess, more specifically, we're expecting 40 basis points of a headwind on the shrink side of things. It was abnormally low last year. Versus what we were accruing for this year. We're expecting that to be more in line with what we've got accrued when we do our full physical inventory counts here over the next couple of months. As far as the freight goes, yes, we have had overall this year, we're expecting the freight expense to be better than it was last year as a rate as we about, think it was on the last call, that's a little bit lumpy throughout the year. Where we've seen I think, the first quarter was really good freight. The second quarter was a headwind. And this quarter, was the third quarter was positive again. And the fourth quarter works expecting that to be down. I think that normalizes a little bit more as we head into next year. We had some a lot of fluid activity with tariffs and bringing product in sooner and later. And we've also been negotiating with transportation partners and getting some of those rates down. That's helped us in some of those quarters. And so that's really been the story of freight. The fourth quarter freight is really kind of in line with our Q3. It's just the prior year comparison that's a little challenging. And then on the product margin, the exclusive brand penetration, we're expecting that to be about half of the 20 basis points of product margin expansion and the other half coming from buying economies of scale and getting better and pricing. Steven Zaccone: Okay. Thanks for that detail. And then you gave a commentary about openings of, I think, 20 in the first quarter. How should we think about level of openings for fiscal 'twenty seven? I know preliminary at this point, but how should we think about that overall? John Hazen: Yes, great question. Yes, pipeline is very strong for the first quarter with about 20 lined up in the first quarter. The timing of the rest of the stores and ultimate number as we roll out the rest of the year, we feel confident that we'll be able to open within our 12% to 15% new unit range. But it's as far as how that flows out, it's still a little early for us to tell. Steven Zaccone: Okay. Fair enough. Best of luck. Thanks again. John Hazen: Thank you, Steve. Operator: The next question comes from Peter Keith with Piper Sandler. Please go ahead. Alexia Morgan: Hi. This is Alexia Morgan on for Peter Keith. For taking our question. We were wondering what the strength of Work Boots in the quarter and the success of some of those new strategies you've talked about to reinvigorate that category. Are you reevaluating where you think category can go long term? And then similarly, are there other categories that you think could be optimized in a similar way? John Hazen: Yeah. Great question. I've been very pleased with the performance of Work Boots thus far. Again, a mid-single-digit comp when the entire business in the quarter was a 5.7%. We think the marketing, the remerchandising of work boots, getting some better choices for the consumer in from various brands are all helping that performance. All that being said, the work business tends not comp comp up. As quickly or comp down as quickly as some of some of the other business. It's a very needs-based kind of stable business. Blue-collar employment has been stable. So I don't see any outsized growth coming. I think we are reinvigorating it, and growing from where it was. But it always is a little more stable than what we see in the rest of the business. In terms of other merchandise categories that we're looking at, we're always looking at places where we can improve. I'm not going to share some of these on this call, but there's a couple of major merchandise categories I feel strongly there's opportunity in and up competitive reasons, I'll keep those to myself for right now. Alexia Morgan: Okay. Thank you. And then one more. We were wondering the sales impacted by the winter storm. Are those stores kind of up and running again? Is trend back to normal there? And then when you've seen storm impact in the past, are sales typically made up or is it delayed or more eliminated? Thank you. John Hazen: Yeah. The sales impact of the storms, the first of those two winter storms that went across the country, Fern, were more impactful to the business second one hurt us on the in the Northeast last week. Business seems to be back to normal. And recovering. As far as a snapback or people going back into the stores and recovering, those sales, that's not something we typically will gain back after a storm. Alexia Morgan: Thank you. John Hazen: Thanks, Alexia. Operator: The next question comes from Dylan Carden with William Blair. Please go ahead. Dylan Carden: Thanks. Jim, you've kind of addressed this, but the upside to gross margin relative to the initial outlook for the last three quarters is that just some of the volatility in shipping tariff mitigation uncertainty and should we kind of limit expectations for that kind of upside go forward? And a related question, kind of as the leverage point on occupancy has kind of crept up here as you've accelerated your store growth, I think there's some sort of growing anxiety around kind of margin and how you kind of keep improving profitability. Any broader kind of longer-term outlooks of leverage points and merchandise margin opportunities would be appreciated. Jim Watkins: No problem, Dylan. As far as the upside of the gross margin, you're right. It's been a really nice year for us, particularly on the merchandise margin with the full year looking to come in at the high end of the range. 70 basis points better than last year. When we first guided back in May in the middle of all of tariff news and things coming forward, we had guided merch margin, you know, down 30 to flat. And so it's been a really nice pickup for us throughout the year. And I think that's come from a variety of things as we've seen exclusive brands continue to do really well and outgrow what we was going to be 100 basis points of expansion this year. We saw the benefit of the hard work that the merchant team and the planning teams had done around buying the right product and getting that in into the stores and in front of our customers and selling that. And so that's provided some upside on the you know, what we call buying economies of scale and some of those vendor discounts. And so it has been a nice year. And then the freight, we had some renegotiated transportation contracts that also provided some upside. So it has been a really nice year and it's kind of culminated here with seven years. The last seven years, we've had over 740 basis points. I think 740 is the number. Basis points of merge margin expansion. So you're right. The track record has been great as we look to next year. We're planning to continue to grow merchandise margin. Obviously, we're not guiding how much that we're going to guide for next year, but typically, we would say that it's going to be somewhere in that 25 to 40 basis point range is our starting point. But we'll get back to you on man what that number looks like. We're not out of ideas. I mean, John's talked about sourcing opportunities and we're always looking at things around supply chain, logistics, as we continue to grow sales at a fast clip that allows us to go back and get better discounts from our vendors or our factories. So we're pretty optimistic looking forward on the margin opportunity. As far as the leverage points go, we do have a leverage point for buying an I think that's maybe where the question is focused, buying occupancy and distribution center costs. We need a plus seven to leverage that. And that's really just a function of growing 15% new units as we've talked about in the past. This year, that's going to be a little bit higher because of the we've got those 20 stores we're talking about opening in Q1, and those are going to open earlier in Q1 than what we originally anticipated. And so that puts a little more pressure on the current year. But the leverage point, I expect that to continue to be somewhere in that 7% range as we get into the year, but we'll give you an update on that. What's been nice through all of this is I know the leverage point's high. It maybe makes some people nervous. But we've we're able to looks like we're on track to grow our earnings you know, per share 25% this year, expand our EBIT margin to 90 basis points at the high end of the guide. So feel pretty good about where things are. And, you know, this is all generating some really nice profitability for us. Dylan Carden: Really appreciate it. Thank you. Jim Watkins: Thanks, Dylan. Operator: The next question comes from Janine Stichter with BTIG. Please go ahead. Janine Stichter: Hi, thanks for taking my question. I was hoping you could elaborate a bit on the pricing strategy for exclusive brands. It sounds like you're taking those prices throughout Q4, but I think that you've done some more to speak on what you're seeing. And then maybe just speak to what the rollout looks like. In terms of raising prices throughout Q4. Thank you. John Hazen: Great question. As we talked about the last couple of calls, we had held lower for longer on exclusive brands. We had gone to the holiday season. We knew I knew we were going to take price increases. We didn't want to disrupt the store team during the holiday. So we had the room as you saw in the margin growth during Q3 to hold until post-holiday. We get to the January time frame, and now we're going style by style. And looking at where we can take a price increase that covers the margin rate for product or maybe a little bit more if we decide to hold on another particular product. So this is a style by style conversation. If you look at the price increases, as well as the concessions from our factory and new product that we're bringing in from those factories. You know, these are rough numbers, of course, but you could say it's a third, a third, a third of where we will see either, not we don't need to make a price increase because of concessions. We're gonna do the price increases at the source at the factory since it's new inbound product. Or these are products that are already on the ground here and we need to, you know, quote unquote catch up and retag those products either in our DC or in our stores. And that is underway today. So, the retags, which is the piece that has to happen here, is happening as we speak. We had a slug of products that were repriced in January, and we will continue to do another group in February. And, the remainder in March. Janine Stichter: Great. And then you mentioned the concessions you got during the peak of tariffs from your suppliers. Is there anything we should be aware of as we think about starting to lap some of those initial concessions? I'm just thinking of things that might not repeat next year. Jim Watkins: I think it's a great question, right? As the tariff rolled out throughout the year, initially, it was a big wave and we went back and were able to get some concessions. But as things have normalized throughout the year, we've gotten to a pretty good steady state with many of our factory partners. And those concessions are pretty run rate at this point. Our focus as we look into next year is working on expanding our merchandise margin rate. And so working with our good partners moving some product around to other countries that have lower rates, The latest update on India tariffs going to 18% is a positive for us as well. So we think that as we head into next year, we're in a pretty good place with our partners. And we'll continue to challenge them and work on improving pricing. We feel pretty good about where we are today. Janine Stichter: Great. Thanks so much. Jim Watkins: Thanks, Janine. Operator: The next question comes from Jay Sole with UBS. Please go ahead. Jay Sole: Great. Thank you so much. My question is about the exclusive brand websites. John, you touched on it a little bit in the open prepared remarks. Just tell us a little bit more about how your thoughts and your plans have developed for these websites in the last ninety days and what you see going forward? John Hazen: Sure. As a reminder, we launched codyjames.com and hawkswork.com. We're the first two exclusive brand sites that we launched. And the goal of these sites always was storytelling. It's the place we can really tell the Cody or the Hawks story to the consumer. It's difficult to do given the way people shop bootbarn.com. You know, they may look for a particular category of product or refining by size and they don't land on those storytelling pages even if we had built them on bootbarn.com. So having a dedicated site, and if you go to codyjames.com, you can see the difference in how the brand is represented there in the storytelling that happening with the videos on the homepage, we can really drive home the ethos of those brands on those sites. So that was the purpose. We want people to want the brands know the brands, and then realize the best place to buy those brands is inside a Boot Barn store. And not online. What has been a nice side effect is the amount of that we've seen on those sites. You know, we didn't expect to and again, this is a percent of a percent of our business. It's, you know, a piece of the online growth to be sure. But it was not something that was expected and the bigger surprise was most of those customers are net new to Boot Barn. And so this isn't a transfer in that's happening from, you know, sheplers.com or bootbarn.com or the stores. These are people that are discovering Hawx and Cody through the social marketing that we're doing for sites. So it's been encouraging and encouraging enough that we are, you know, all in on having similar sites for Bienwolf. Cheyenne, and 45, which is our more rodeo-inspired brand. Jay Sole: Got it. Maybe if I can ask a separate question. In the slide deck, you showing the new store productivity and the payback time on the new stores. I think it looks like based on the deck, the year one net sales of a new store, like $3.2 million. You know, maybe that's called 80% new store productivity or a little bit less than that. Can you just talk about how fast those stores are ramping up to maturity? That's the question. Jim Watkins: Yeah. The new stores open if they're opening at three two and as you mentioned around 75% of what a mature store is. The path to get them up to, call it, point 2,000,000 is around five or six years. The waterfall has been pretty healthy. We talked about the stores that we've opened over the last few years are resulting in about 100 basis point tailwind to the consolidated comps. And that's because this first comp year of a new store is comping roughly in line with chain average, maybe slightly better. But then that second comp year, we're seeing roughly a five-point improvement over the chain average which helps obviously get their volumes up. And then after that second comp year, they continue to outperform the chain at about three or four to five points better. And so that gets them up there. I think that takes about five or six years to get them up to that chain average. Jay Sole: Got it. Okay. Thank you so much. Jim Watkins: No problem, Jay. Operator: The next question comes from Jonathan Komp with Baird. Please go ahead. Jonathan Komp: Yes. Hi. Good afternoon. Thank you. John, I want to follow-up just the that quarter to date acceleration you saw underlying prior to the storms. I know you mentioned it being broad-based, but any other thoughts on the drivers of the strength there? And as you think about the business today, could you talk about just segmenting out what you're seeing across your exclusive brands versus existing third-party brands, but then also new brands as well? John Hazen: Yeah, absolutely. When we look at the acceleration in January and then over the five weeks of quarter to date, it is mostly driven. So there is a bit of back over the five weeks. And if you just look at that the pre-storm time frame, it was transaction-driven. It's balanced. We look at our third-party brands, they are performing well. Our exclusive brands are performing well. Again, it's a small month in the quarter. March is almost half of the quarter as a reminder, and so it's been a nice start. It has been broad-based. Nothing really else to call out around men's and women's western boots or men and women's western apparel either by or exclusive brand versus third-party. It has been very steady across kinda all those different ways you could slice the business. And then Oh, sorry. No, go ahead and jump in. Jim Watkins: John, I mean, plus nine is a big number and as we look back over the last twelve months, the holiday shopper, which is our December shopper, does behave a little bit differently than they behave the rest of the year. And so the plus nine isn't too far out of the range of what we were seeing if you look at our chart on page nine of what we've been seeing in that monthly call. Over the last twelve months. Jonathan Komp: Okay. Great. And then just a follow-up, John, I'm curious on the new units, are there any anecdotes you could call out that give you confidence today looking forward to the long-run target? And then just more broadly on the algorithm, I think pretty consistently in the past, talked about really a 20% EPS growth algorithm. Is that still the construct or the framework that exists here today? Thank you. Jim Watkins: Yes, John. I'll take that one. The 20% EPS is still there. When we moved from we went public, we had a 10% unit growth in our long-term algorithm, like, that got us to 20% EPS growth. As we shifted that to 15% new unit growth and then 12% to 15% that does bring down the EPS slightly. And so maybe it's an 18% EPS growth that room just because of the number of new stores that we're bringing into the at still need to comp up. So that's the math behind it. John Hazen: Then around the unit growth, anecdotally, the new stores perform very much like existing stores. We're not seeing big swings in the merchandise mix. We've said this before, I think on the public call, EEC you see it even skew a little more western perhaps in non-legacy markets outside Arizona, Texas, California, given there's not as many independent retailers or as much competition, So when we open stores in Florida, Jersey, City, the Northeast, Huntington Beach recently opened, The stores, the business, the composition of it looks very similar to our legacy stores. Jonathan Komp: That's great. Thanks again. John Hazen: Thanks, Jonathan. Operator: The next question comes from Max Rakhlenko with TD Cowen. Please go ahead. Max Rakhlenko: Great. Thanks a lot, guys. So first, on exclusive brands, I think previously the strategy was to maintain similar price points. Compared to the national brands. So given some of the changes to pricing on both sides as well as the customer reactions, how are you thinking about the price points the Chewahead? Could EVs potentially be priced a little bit lower, or do you think that that's going to normalize over time? John Hazen: Got it. It appears that is gonna Go ahead, sir. Max Rakhlenko: Yeah. It seemed like you got cut off there. No worries. Yeah. We think believe it will normalize over time. The one place I've told the team I wanna be very careful is if we're breaking through a psychological price point. Right? If we've gotta take a low single-digit price increase on a boot that's gonna break it through $200 and it's sitting at $195 or something along those lines right now. I would rather hold on that and try and preserve and grow that merchandise margin rate with a price increase on a few accessories or other goods that where those price increases could be easily absorbed. Those are one-off cases, but that's why we're doing this style by style. But I think overall, it will normalize. But if there's places where we can be opportunistic and hold on psychological price points, the team is doing that. Got it. That's helpful. And then your comps just broadly are obviously very nicely outpacing the industry. So curious, where do you think you're taking the most share from? And specifically, any comments on the farm and ranch channel and separately DTC as of your vendors are going more direct? John Hazen: Yeah. The DNC, we are 90% stores, right? So the D2C guys, they do a nice job and they can spend a little more on or take a lower ROAS I should say on some of their advertising from a digital perspective. So they have a little bit of an advantage there. At the same time, they're, you know, they're promoting to the world. So, you know, they're not a big concern. When I think of the market share, and our ability to kind of excel from a comp standpoint. I put much of the credit on the team. When I think of the execution from the of inventory, the availability from a sizing standpoint, the field team, and the customer service that we offer. I think those are the pieces that make a difference everybody else. And the everybody else is independent retailers. It's the western competitors and I think it's also general retailers. When you think of us becoming a bit more of a denim destination, I think we're taking market share from traditional department stores where perhaps people bought their Wrangler or their Levi or their bootcut jean at those stores and have discovered our customer service our assortment, and our depth of inventory versus some of those other that I've seen recently in channel checks that I've done myself. Max Rakhlenko: Awesome. Thanks a lot. I appreciate the color. Operator: The next question comes from Chris Nardone with Bank of America. Please go ahead. Chris Nardone: Thanks, guys. We have a quick follow-up on the leverage point discussion. Just wondering, you still feel comfortable with the roughly 1.5% leverage point in SG&A as we look out into next year? And then are there any major cost line items that are seeing more inflation than normal that we should be thinking about? Jim Watkins: Yes, Chris. The leverage point is at 1.5% for SG&A. That is right in the range of where we would expect to see that going into next year. As we look at costs that seeing outsized inflation, can't think of anything, any line item that is tracking higher than in an outsized way as we move into next year. I think the SG&A line should look much more normalized than it was this year compared to last year with some of the onetime things we had last year with some legal fees and the reversal of some incentive comp from some management change. Chris Nardone: Okay. Very clear. And then on the apparel side, outside of denim, are there any specific categories that are gaining momentum either within the third party or private label brands? And is there any way that we can gain comfort that the majority of this momentum in this business is still driven by your core Western customer rather than maybe a more fashion or less sticky customer? Are there any anecdotes or facts you can share to give us some confidence on that front? John Hazen: Yeah. You know, I look at the product and sells every week in our stores. I look at our top 50 products across all the major merchandise categories, and it is very much a traditional western silhouette when it comes to both the tops and the bottoms. Again, we've tried some more contemporary collaborations with different brands that the consumer has self-selected out of. Nothing crazy, nothing on the fashion side, but things that were a little more contemporary and really didn't work in some of those tests. So every week at I look at the boots that are selling, you know, some of these boots have we've been selling the same style for fifteen or twenty years, and a lot of broad square cowboy boots, it's not a fashion r toe roper boot, which is kind of that entry-level cowboy boot on the men's side at least. The women's boots are all very much, you know, brown leather boots and there might be one or two fashion boots in there that have, you know, bedazzling or they're white boots that perhaps someone picked up for a wedding. But by far and large, it is traditional western styles that have been selling for years. So we're not seeing anything in the mix of what is performing that would tell us it's someone coming in, you know, to get ready for a concert or an event or are new to Western. Chris Nardone: Okay. Thanks, guys. Good luck. John Hazen: Thank you. Operator: The next question comes from Jeremy Hamblin with Craig Hallum. Please go ahead. Jeremy Hamblin: Thanks, and I'll add my congratulations on the strong results. I want to come back to the initiatives and in particular, the e-comm developments here of your exclusive brands. So just first, in terms of what you've done so far with Hawke's Cody James, what type of impact are you seeing online for those brands on bootbarn.com? Versus what you're seeing with the Hawks or the Cody James website. What are the costs associated with that? And you know, in terms of just the timing of rolling out the next few, know, are they gonna be kind of all rolled out in a similar timeframe? You know, just wanna see if you could get some color on that. John Hazen: Sure. As a reminder, if you look at the mix of our e-commerce business, we have bootbarn.com, it's our digital flagship by far our largest e-commerce site. And then we have other places that we sell Country Outfitters, Sheffler's, Amazon, are some of the other channels that we sold on for years. When we look at that bootburn.com business, which is the majority of our e-commerce business, it continues to perform incredibly well. The customers buying on Cody and Hawx are net new customers. For the most part, these are not people that are transferring over from stores or from .com. So we're quite confident given, how we look at the customer profiles and bump them up against our be rewarded program, our 10,600,000 be rewarded customers, and seeing that they don't exist in those databases that we're gaining net new customers. The marketing strategy for those sites are also very different from what we do with Boot Barn. We are driving awareness of those brands via social. Where much of the digital marketing we do for Boot Barn is more, Google advertising and all the different tools that, you know, the Google and Microsoft offer to target people who are already typing in. I want to find a white cowboy boot or I wanna find a western yolk shirt. These sites are about brand awareness via social versus targeting people who are already told the search engine that they have intent. So different way to market them. Again, more about storytelling, drive customers into stores, and from everything we see, they are new customers to Barnabas. On the cost side, sorry. On the cost of the sites, one of the to the second question. One of the nice things we've done here, and anybody can, you know, see this if you visit bootbarn.com or these sites. These sites are built on Shopify and it's just much quicker and easier and there's not a heavy lift from a development or a CapEx standpoint to do this. And so that's, you know, a page from the playbook of many, if not all of the D2C players in any industry at this point. And so for you know if the question behind the question is hey, this big CapEx investment on these sites, It's not. We are nimble. They are quick to stand up. We're gonna launch Cheyenne and Cleo here in Q4. And rank will likely be in Q1. Jeremy Hamblin: Got it. Helpful. And then just one more. In terms of traffic counters and what you're learning from conversion rates, how that's you know, tying into some of the storytelling you're doing, and some of the marketing initiatives that you've had? Any learnings that you can share with us? From that? John Hazen: Nothing material right now. We're just about to hit comp traffic. Can So we'll have comp conversion rates. I look at our top-performing stores from a conversion rate standpoint on a regular basis, I'm looking for that positive deviance to kind of tease out what they're doing better than everybody else. The ones with material traffic, of course. And we're gonna use it in this coming fiscal year use those traffic counters for some of the new digital marketing initiatives. One of the adjustments I've made is the amount of digital marketing dollars we're gonna spend against driving folks or with the goal of driving folks or customers into Boot Barn stores, versus just buying on bootbarn.com or any of the other sites. And so, we'll have more to share on that as we get into next fiscal year. Jeremy Hamblin: Great, thanks for taking the questions. Operator: The next question comes from Ashley Owens with KeyBanc Capital Markets. Please go ahead. Ashley Owens: Great. Thanks. Maybe just to start to follow-up on some of the, you know, own brands websites here. But as you prepare to launch Cheyenne, Cleon, Wolf, just how should we think about the incremental TAM expansion as you get from reaching new female customers who may not be shopping at Boot Barn stores yet? John Hazen: I think it's gaining market share more than the expansion of the TAM. We upped the TAM from $40 billion to $58 billion and we're going to do $2.25 billion this year. So when you think of the opportunity, it is more gaining market share than an expansion of the TAM. And it will make us easy it will make it easy for easier for us to tell stories from a meta and TikTok and further up the funnel standpoint when we talk about these brands. So can we gain more market share? I believe we can. That's part of the reason we're building these sites, but it's market share versus expanding the TAM further. I think it's gaining those country lifestyle women's customers in case of Clio and Cheyenne. Ashley Owens: Okay. Got it. And then just a follow-up a little bit on the gross margin for the fourth quarter. Could you just walk us through the clean bridge there as you lap some of the unusually favorable shrink from last year and then I think you mentioned some of the lumpiness in freight. Where you expect those to kinda settle as we normalize into next year? And then another one just on pricing, as you move to that style by style approach for the price increases in the fourth quarter, just how you're thinking about AUR given some of the third-party price increases that we've already seen been taken in the market, just what you've seen so far in terms of elasticity, particularly where third-party price moves may be going you know, already taking place in some of the areas that you have overlap in and then just any specific categories outside of, you know, I think the $1.95 boot price you mentioned that you're more mindful of as you implement these changes. Thanks. Jim Watkins: Yes, I'll jump in and just start with the AUR question as we get into the fourth quarter, we expect that to be in that 2% to 3% increase. For the fourth quarter. And that contemplates all the price increases, exclusive brands and third-party goods. And then as we look into next year, we'll give you an update on that more as we move and get further along. But we typically see kind of a low single-digit AUR increase. And maybe that'll be slightly higher as we move into next just given what we've seen with price increases over the last year. And then as far as the margin bridge, I'd really think about it as a one-quarter blip as far as the shrink and the freight and as we move into next year, those should both normalize, and then we'll be back to growing product margin with maybe a slight benefit next year with freight, just given some of the renegotiated contracts that we've had and some of the favorability there. Assuming that all the transportation costs and rates stay similar or globally. Ashley Owens: Great. Appreciate the color. Thank you. Jim Watkins: Thanks, Ashley. Operator: The next question comes from John Keippur with Goldman Sachs. Please go ahead. John Keippur: Hey. Thank you, guys, for spotting me in. Appreciate it. Just a question about the composition of the 4Q same-store sales guide. It looks like a little bit of a desal online I just wanna get a sense of why that might be the case. Despite the new sites being up and running and given the strength in 3Q. And, it also looks like, you know, the other side of the coin is that retail is looking bit better than I expected. Despite even the storm impact. So I guess on the retail side, what gives you the clarity for you know, behind that guide And kinda, like, what have you seen in terms of same-store sales recovery in retail since the storm has mostly abated? And, I think it's how much of the confidence there is hinging on the March activation maybe around the Houston rodeo? Jim Watkins: Sure. So I think it's a little too soon to talk about the recovery. I mean the second of these storms hit this last weekend and had we had some store closures and on Sunday. And so just a couple days. So I think what's really giving us the confidence to guide the way we have both on e-commerce and in stores is looking at the broader trend coming into February and March, we look back at what we saw in October, November, December, January, the sales volumes that we've seen. And then we go back into historical, seasonality and see how things flow out from a sales perspective based off of what we've seen in the last four months. So nothing that we've seen over the last couple of weeks makes us nervous about the way we've guided that. As far as the Houston rodeo goes, there is a little bit of a shift between February and March. If you're looking at our slides. And so some of last year's March strength really kind of moved over from February. There are also other things happening in March that make it a bigger volume month. Spring is starting. People are there shopping more. And so even outside of the Texas markets where they do kick off the rodeo season, we do see some nice volume there. We're seeing a broad base across the country, and that's given us the confidence to guide where we've been there. As far as the new exclusive brand sites, there's not really any marketing slated for those in the over the next couple of months. It'd be a next year thing. And as a reminder, we'd look at a 3% marketing spend. And so it would really come from within that budget, things and reallocating spend around within that budget. John Keippur: Great. And then a very, very small follow-up. Sorry. Go ahead. Jim Watkins: No, I just can't I couldn't remember if I had covered all of the pieces of the question. So please follow-up with the follow-up. John Keippur: Sure. The last one is just kind of bookkeeping. But you guys mentioned that there would be buying in occupancy costs from 1Q twenty twenty seven landing in 4Q, and you guided for 50 bps of deleverage in 4Q. So that's inclusive of the pull forward So is that that's correct, right? So it seems like the actual customer is organic. So the organic buying and occupancy deleverage is actually sequentially better than it was in March. Jim Watkins: Yeah. Yeah. The right. It's a little bit skewed in the fourth quarter because compared to last year in the fourth quarter, we have more stores opening at the start of the next year than we had a year ago. We the way the bookkeeping works is do record a couple of months of preopening rent while we're getting the store built out, set up, stock. And before we start ringing sales. John Keippur: Okay. Great. It's a good news it's a good news story that we have more occupancy expense. It just pressures us a little bit now in the fourth quarter. But then as we move forward, that's a positive. Jim Watkins: Right. And it implies that the actual kind of without the pull forward from 1Q, it actually is sequentially better in 4Q than it was 3Q. That's sort of what I'm trying to get at. Well, like, it does actually kind of improve on an apples-to-apples kind of basis. John Keippur: Is that right? Jim Watkins: Yeah. That's right. John Keippur: Okay. Great. Thank you. Jim Watkins: Perfect. Thank you, John. Operator: This concludes our question and answer session. And the Boot Barn Holdings Inc. Third Quarter 2026 Earnings Call. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and welcome to Accuray Incorporated's Conference Call to Review Financial Results for 2026Q2, which ended December 31, 2025. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please note this event is being recorded. I would now like to turn the conference over to Mr. Stephen Monroe. Please go ahead. Stephen Monroe: Thank you, and good afternoon, everyone. Welcome to Accuray Incorporated's conference call to review financial results for 2026Q2, which ended December 31, 2025. During our call this afternoon, management will review recent corporate developments. Joining us on today's call are Stephen LaNeve, Accuray Incorporated's President and Chief Executive Officer, and Ali Pervaiz, Accuray Incorporated's Chief Financial Officer. Before we begin, I would like to remind you that our call today includes forward-looking statements. Actual results may differ materially from those contemplated or implied by these forward-looking statements. Factors that could cause these results to differ materially are outlined in the press release we issued just after the market closed this afternoon, as well as in our filings with the Securities and Exchange Commission. We make the forward-looking statements on this call based on the information available to us as of today's date. We assume no obligation to update any forward-looking statements as a result of new information or future events except to the extent required by applicable securities laws. Accordingly, you should not put undue reliance on any forward-looking statements. A few housekeeping items for today's call: All references to a specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our second quarter refer to our fiscal second quarter ended December 31, 2025. Additionally, there will be a supplemental slide deck to accompany this call, which you can access by going directly to Accuray Incorporated's Investor Relations page at investors.accuray.com. As you review our prepared remarks and guidance today, please note that our outlook represents our current estimates and reflects the operating environment as we understand it today, including current tariff impacts and geopolitical conditions. As always, the situation remains dynamic, and we will continue to update investors as visibility improves. With that, let me turn the call over to Accuray Incorporated's Chief Executive Officer, Stephen LaNeve. Stephen? Stephen LaNeve: Thank you, Stephen. Good afternoon, everyone, and thank you for joining us. I want to begin by recognizing the dedication of our employees and the trust of our customers. Over the last ninety days, I've engaged deeply with our teams and customers across our regions, and my conviction in Accuray Incorporated's opportunity has never been stronger. The more time I spend in the field, the clearer it becomes of the opportunity to accelerate top-line growth and to meaningfully expand profitability in the years ahead. Importantly, these insights are already translating into action. The discussions I've had have directly shaped our product and service strategy and the changes we are implementing to support those strategies. From rightsizing our cost structure to reenergizing our commercial organization to more surgically prioritizing product and service investments, I recognize the unmistakable need to streamline how we operate and execute as we grow a global installed base that now spans more than 80 countries. Framing today's discussion, as many of you saw, in mid-December, we announced a comprehensive strategic operational and organizational transformation plan designed to sharpen accountability, tighten cost control, and accelerate execution while positioning Accuray Incorporated for sustained profitable growth. Today, I want to provide an update on the plan and the progress we have made on some strategic initiatives we are pursuing, as well as updates on some operational actions we introduced in December, which are geared towards improving the competitiveness, growth prospects, and profitability of our overall business. I will then discuss the quarter's performance and some insight into the next twelve months. Ali will then discuss the detailed financial results. Our plan started with establishing clear product and service strategies as well as the enablers that we believe are critical to achieving these strategies. The first of those enablers was the rightsizing of our cost structure while improving process efficiency and use of technology. This was coupled with an organizational realignment that centralized certain functions, outsourced non-core activities, and emphasized accountability, control, speed of decision-making, and selling. At the same time, we reallocated engineering resources to focus on high ROI programs to integrate third-party solutions and to better reflect the voice of our customer. These elements of our transformation plan targeted an approximately $25 million improvement in annualized operating profitability, which included a workforce reduction of about 15% and are expected to deliver roughly $12 million of benefit in fiscal 2026, with substantially all initiatives implemented by fiscal year-end. We also indicated that we expect approximately $10 million of restructuring charges across the second, third, and fourth fiscal quarters related to workforce reductions, facility consolidation, contract terminations, and other implementation costs. These measures are not, however, ends in themselves, but rather are enablers of our long-term strategies intended to build substantial value going forward as we take disciplined actions to strengthen our commercial execution and build a more predictable, higher-margin growth engine. Let me briefly highlight a few examples of the initiatives already underway. First, we are working to expand and diversify our service portfolio. We are shifting towards a comprehensive solutions-oriented offering that increases customer uptime, enhances system performance, and drives higher-margin recurring revenue while addressing customer needs and increasing lifecycle engagement across the installed base. Second, we are working towards a more structured distributor partnership and management program. In global markets where distributors are central to our reach, we are in the process of putting in place robust systems, clear performance standards, tighter alignment, more transparency, and critically better support models to ensure consistent high-quality commercial execution. Third, our determination to meet or exceed our customers' expectations has sometimes resulted in us not billing or collecting for services and service levels we have provided. We are now designing and implementing systems, processes, and controls to help ensure we are compensated to the extent to which we are entitled for the work our teams deliver every day. As a fourth example, we are on a path to optimizing pricing across our product and service portfolio. This work will help ensure that our pricing reflects the true clinical and economic value our technology delivers. It will facilitate our winning competitive bids at appropriate margins and should be reflected in our sales and margin growth over time. Collectively, these are the types of actions that, as they are implemented and begin to take effect, are intended to represent a step change in how we drive growth, creating a more diversified revenue mix, a more resilient recurring base, and a more disciplined commercial organization. Strong commercial leadership is also a critical enabler of our strategies, and we hope to announce in the period ahead the appointment of a new global chief commercial officer with a track record and approach that align with our long-term objectives. Overall, these initiatives are already in motion and will play a critical role in strengthening our top line, improving profitability, and supporting sustainable value creation going forward. Against the backdrop of our transformation, our customer conversations have been strikingly consistent across geographies. Health systems appear to be prioritizing three things: reliability, interoperability, and patient throughput. This clarity is helping us sequence our product roadmap and service investments with much greater discipline. From an operating rhythm perspective, we have tightened weekly financial and operating reviews around orders, revenue, margins, service performance, and cash, highlighting KPIs that are critical to improve business performance, enabling faster corrective actions where needed. This rhythm supports the accountability and execution pace we committed to in December. Lastly, from a people and culture point of view, our leadership team knows that we need to emphasize and incentivize teamwork, cross-functional collaboration, data-driven decision-making, and a heightened sense of urgency in order to create a performance-driven environment. I believe strongly that transformations succeed when they are owned by the organization. I'm proud of how our teams have leaned in, maintaining customer focus while embracing new ways of working. We are supporting our people through the transformation, and I want to thank every Accuray Incorporated teammate for their resilience and professionalism. Now turning to the quarter results. From a top-line perspective, this quarter did not meet our expectations. Our business was most notably impacted by the ongoing tariffs and an increasingly unstable geopolitical environment, particularly as it relates to China, which has been a big part of our growth story over the last couple of years. These external pressures affected both demand patterns and the timing of commercial activity in ways that have been difficult to fully anticipate. We are keeping a close eye on all of these factors and will keep you updated as we get more clarity over the next few quarters. Given the visibility we have today, we think it's prudent to reset our fiscal 2026 revenue and adjusted EBITDA outlook for the remainder of the fiscal year. This updated guidance assumes and reflects continued volatility in China, the persistence of current tariff structures, and other ongoing headwinds, but does not assume a material worsening beyond what we are experiencing today. Our revised guidance on the revenue will be in the range of $440 million to $450 million, with adjusted EBITDA guidance of $22 million to $25 million. This compares to our previous guidance of $471 million to $485 million of revenue and $31 million to $35 million of adjusted EBITDA. That said, the underlying trends inside the company tell a different and more encouraging story. We are beginning to translate our strategic intent into operational execution, tightening costs, streamlining decision-making, improving competitiveness, and reallocating resources toward areas where we can drive the greatest value. Despite the external headwinds, we remain firmly focused on delivering against our transformation commitments and strengthening Accuray Incorporated's foundation for sustained profitable growth. Our objectives are clear: drive top-line growth, improve profitability, and create lasting value for patients, providers, and shareholders. With that in mind, we continue to expect to reach a high single-digit adjusted EBITDA margin run rate within the next nine months and to expand that margin to double digits over the medium to long term. With that, I'll hand it over to Ali for a detailed review of our second-quarter results. Ali? Ali Pervaiz: Thanks, Stephen, and good afternoon, everyone. I would like to begin by thanking our global cross-functional teams for their continued dedication and hard work as we continue to execute our transformation plan. Turning to the second-quarter results, net revenue for the quarter was $102.2 million, which was down 12% versus the prior year and down 13% on a constant currency basis. Product revenue for the second quarter was $45 million, down 26% overall and down 28% on a constant currency basis. As Stephen mentioned, most of this decline was due to product revenue in China that was lower than expected as a result of ongoing geopolitical tensions and the impact of tariffs. On a positive note, our service business was quite resilient despite some of these weaker macro trends, coming in at $57.2 million in revenue, up 4% from the prior year and up 3% on a constant currency basis. As we have mentioned on past calls, service is a key part of our recurring revenue growth strategy and continues to benefit from efforts to add to and diversify our offerings as well as continue expansion of our global installed base. Product gross orders for the second quarter were approximately $66 million and represented a book-to-bill ratio of 1.5, a trailing twelve-month ratio of 1.2. We ended the second quarter with a reported order backlog of approximately $33 million, defined to include only orders younger than thirty months. This represents over eighteen months of product revenue, and the backlog remains diversified geographically and supported by long-term customer commitments, and we saw no order cancellations during the quarter. Our overall gross margin for the quarter was 23.5% compared to 36.1% in the prior year. This decline was primarily due to product gross margins, which were 19.7% compared to 43.5% in the prior year. The majority of the unfavorable impact on product gross margins was related to our China business. First, we had lower China margin releases compared to the prior year, which contributed 8.2 points of the decline. As a reminder, in 2025, we released 27 units of China product following NMPA approval of the TOMO C. Second, the year-over-year incremental costs from higher tariffs impacted product gross margins by approximately six points. Lastly, we had five CyberKnife shipments in the prior year versus zero in the current quarter, which impacted product gross margins by approximately 5.4 points. Service gross margins were 26.6% compared to 27.7% in the prior year, primarily driven by higher net parts consumption. Overall, we continue to be focused on margin expansion in our service business, driven by higher pricing, improved product reliability leading to lower labor costs and parts consumption, reducing our cost to serve, and the increased penetration of diverse high-margin service offerings. Quarterly service gross margins can fluctuate due to the timing of parts consumption, which we experienced in Q2. While several of these factors are transitory, such as prior year China releases and product mix, others like tariffs may persist in the near term. Our transformation actions are designed to offset these pressures through cost reduction, operational efficiency, and margin improvement in service. Operating expenses in the second quarter were $35.6 million compared to $37.2 million in the second quarter of the prior fiscal year. The $35.6 million includes $6.1 million of one-time restructuring expenses. Stripping those out, our operating expenses declined almost 21% quarter over quarter. Operating loss for the quarter was $11.6 million compared to income of $4.7 million in the prior year. The $6.1 million in restructuring charges recognized in the second quarter included severance costs and other one-time costs directly related to our restructuring and transformation plans. Adjusted EBITDA for the quarter was a loss of $1.9 million compared to positive $9.6 million in the prior year. We described the reconciliation between GAAP net income and adjusted EBITDA in our earnings release issued today. Turning to the balance sheet, total cash, cash equivalents, and short-term restricted cash amounted to $41.9 million compared to $63.9 million at the end of last quarter, primarily due to working capital usage, cash interest, and restructuring payments. Net accounts receivable were $61 million, up $6.6 million from the prior quarter, largely due to higher sequential quarter revenue. Our net inventory balance was $151 million, down $4.5 million from the prior quarter. And with that, I'd like to hand the call back to Stephen. Stephen LaNeve: Thank you, Ali. In closing, I continue to be excited about the opportunities Accuray Incorporated has in front of it. I fundamentally believe in our differentiated product offerings and am committed to enabling access to these truly unique helical and robotic platform technologies by patients globally. As stated previously, my underlying goal is to foster a performance-driven culture that pairs innovation with execution, strengthens operational discipline, and drives sustainable profitable growth while creating long-term value for patients, providers, and shareholders we serve. As you look ahead to the next several quarters, we believe our progress should be measured by three things: resumption of expansion of our installed base, improved cost discipline and EBITDA margin trajectory, continued resilience and margin expansion in our service business, and evidence that our operational simplification is translating into more consistent execution. I will now turn it back over to the operator for Q&A. Thank you. Operator: We will now begin the question and answer session. To ask a question, please press star then 1. Our first question for today will come from Marie Thibault with BTIG. Please go ahead. Marie Thibault: Good evening, Stephen and Ali. Thanks for taking the questions. I wanted to dig here a little bit on the revenue guidance cut. We've grown very used to Accuray Incorporated having kind of a 40-60 split, 40% of revenue coming in the first half of the fiscal year, 60% in the back half. If I look at what you've done so far in the first half of this fiscal year, you're right on track with 40% for that prior guidance range. So I'm wondering what exactly you saw coming in the back half of the year that sort of made you get more cautious? Is it China alone? Is there just closer visibility on timelines and other projects? Any more detail on the guidance cut because you're certainly right on track for that 40-60 that we're used to. Stephen LaNeve: Yes. Hi, Marie, and thanks for the question. This is Stephen. Maybe I'll just do a very gentle kind of adjustment on the 40-60 comment. I think it's typically been closer to 45-55. So maybe just that, you know, clarification there. And then with respect to China, you know, clearly, we stated in the remarks, the business was impacted by the ongoing tariffs and an increasingly unstable geopolitical environment that I commented on before. And obviously, that's been a big part of our growth story over the last couple of years. And those external pressures affected both the demand patterns and the timing of our commercial activity in ways that have been difficult to fully anticipate. As you likely know, there's a process in China around quota, license, tender, and then funding. And that process flow has slowed. And so the deal dynamics have wound up being different than we had anticipated and have just become more protracted. And it's really as simple and as complicated as that. Marie Thibault: Okay. That's helpful, Stephen. Thank you. And then I guess on product gross margins, they were a little light this quarter, I think related to some of the China JV timing. What should we expect on product gross margins going forward here with this new revenue range and with some of the dynamics that you just showed? Ali Pervaiz: Thanks for the question. So look, I mean, I think in general, product gross margins are going to continue to get hit with the impact of tariffs, which is a new entrant compared to the prior year, and then also just inflation that we continue to have over the last couple of years. We're certainly taking steps to combat that as part of our margin expansion plan, but the headwinds are certainly stronger than the way that we're executing against it. As it pertains to Q2 in particular, in my prepared comments, there are really three main contributors. There was a China JV release of about eight points compared to the prior year. There were tariffs at about six points. And then overall product mix that was roughly another eight points or so. So those are really the key contributors versus the prior year. Again, more headwinds this quarter, so I would not expect product gross margins to continue to hover in the 20% range. I would expect them to be somewhere between 20% to 30%, but that's highly dependent upon the product mix that shipped out and also dependent upon the timing of the releases, which is very China-centric. Marie Thibault: Alright. Very helpful, Ali. I'll jump back in queue. Thank you. Ali Pervaiz: Thanks, Marie. Thank you. Operator: The next question will come from Yung Lee with Jefferies. Please go ahead. Yung Lee: Alright, great. Thanks for taking our questions. I guess, maybe to start, I wanted to hear a little bit more about the new initiatives you put in for, I guess, returning the business to growth. Sort of via solutions-oriented initiatives as well as the structured distributor partnerships. I guess for those, you know, are there any potentials for disruption as things change? When do you expect us to see some results from that? And, yeah, those are the questions. Thank you. Stephen LaNeve: Yes. Thank you, Yung. This is Stephen. Appreciate the question. As we've looked at transformation and spoken about that in the past, obviously, we have spent time on restructuring the organization to really position ourselves for growth. And as we had commented on before, about a 15% workforce reduction. And then looking at kind of the opposite side to the cost savings and the program redirection, really spending time on growth and looking at operating rigor and speed of decision-making, making sure that we establish clear product and service strategies, reallocating engineering sources to focus on high ROI programs. And then specifically to your point on the solutions in the service area, we think there's a great opportunity to build on what we call our select advantage and optimum programs. And those programs go from sort of base level to mid-level to premium level service offerings. And they go beyond break-fix and include potentially areas like training, quality support, user groups and forums, data management, real-time monitoring, software upgrades, consulting, workflow analysis, those sorts of options that we want to build into our services capabilities. It gives us steadier, we think, opportunities to drive top-line growth. It's less lumpy in nature, and we think it changes the way we look at that services business. The company, I think, has focused a lot on products in the past, and we see a great opportunity and a lot of lift on the service side with respect to our transformation activities. And so that's an area that we've kind of doubled down on just in terms of our staff that we've put into that area, our strategy, our structure, our systems, and think there's a lot of upside there. With respect to the dealers and distributors, we have a program that looks at tiered levels, basically a pay-for-performance model. And obviously, for those dealers and distributors that do more for us, the idea would be that they enjoy better margins or transfer pricing, really. It's really about pricing. And we think the addition of a channel leader that really doubles down on looking at those channel management opportunities versus having this maybe at a higher level within the region gives us the kind of focus and precision that we're looking for out of channel partners who do a lot for us in terms of driving revenue. And of course, with our presence in 81 countries, it would be impossible with our current scale to have directly loaded sales organizations in all those locations. And so our distributor and dealer base obviously are very important to us. Yung Lee: Alright. Great. Very helpful. And then, you know, we've been asking several of our companies sort of the same theme type of question. But, you know, new calendar year, just wanted to get your views on, I guess, from your hospital customers' perspective, you know, how is the capital environment from their perspective? Especially in places like the US, China, EU, and key emerging markets. Stephen LaNeve: Yes, so we spend a lot of time talking to our customers directly, and from everything that we're seeing and hearing, we don't see CapEx shifts by hospitals downward. We see increases, and we see opportunities, you know, we believe for our equipment to be purchased or leased depending on how they go about that. There are different acquisition models in different countries. But we haven't heard anything from the conversations that we're having with our various regions or customers specifically where they're concerned about the ability to buy equipment. Doesn't seem to be any shift or trend there that would work against us. Yung Lee: Alright, great. Thank you very much. Operator: Again, if you have a question, please press star then 1. Again, that is star then 1. This concludes our question and answer session. I would like to turn the conference back over to Mr. Stephen LaNeve for any closing remarks. Please go ahead. Stephen LaNeve: Thank you all for joining our call today, and we look forward to speaking with you again in May when we report our fiscal 2026 third-quarter earnings results. This concludes our earnings call. Thank you very much. Operator: The conference call has now concluded. Thank you for your participation. You may now disconnect.
Operator: Good day, everyone, and welcome to Digi International Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To participate, you will then hear a message advising your hand is raised. To withdraw your question, simply press star 11 again. Please note, this conference is being recorded. Now it's my pleasure to turn the call over to the Chief Financial Officer, Jamie Loch. Please go ahead. Jamie Loch: Thank you. Good day, everyone. It's great to talk to you again, and thanks for joining us today to discuss the earnings results of Digi International Inc. Joining me on today's call is Ronald E. Konezny, our President and CEO. We issued our earnings release after the market closed today. You may obtain a copy of the press release through the financial release section of our Investor Relations website at digi.com. This afternoon, Ron will provide a comment on our performance, and then we'll take your questions. Some of the statements that we make during this call are considered forward-looking and are subject to significant risks and uncertainties. These statements reflect our expectations about future operating and financial performance and speak only as of today's date. We undertake no obligation to update publicly or revise these forward-looking statements. While we believe the expectations reflected in our forward-looking statements are reasonable, we give no assurance such expectations will be met or that any of our forward-looking statements will prove to be correct. For additional information, please refer to the forward-looking statements in our earnings release today and the Risk Factors section of our most recent Form 10-Ks and reports on file with the SEC. Finally, certain of the financial information disclosed on this call includes non-GAAP measures. The information required to be disclosed about these measures, including reconciliations to the most comparable GAAP measures, are included in the earnings release. The earnings release is also furnished as an exhibit to Form 8-Ks that can be accessed through the SEC filings sections of our Investor Relations website. Now I'll turn the call over to Ron. Ronald E. Konezny: Thank you, Jamie. Good afternoon, everyone. Digi is off to a strong start in fiscal 2026. And we step closer to achieving our $200 million of ARR and adjusted EBITDA goals. Our first fiscal quarter set several new all-time records. $122 million of quarterly revenues, up 18% year over year. $157 million of annualized recurring revenue, is up 31% year over year in our fifth consecutive quarter of double-digit growth. $32 million of quarterly adjusted EBITDA, which is up 23% year over year. Our 25.8% adjusted EBITDA margin is also a new quarterly record. $36 million of quarterly cash generation. We are encouraged by contribution from all of our product lines and across a variety of vertical industries and applications. This broad-based strength is critical to sustaining double-digit growth rates. Both of our reporting segments contributed to our strong ARR growth this quarter with IoT Solutions growing 32% and IoT products and services growing 26% year over year. The integration of Jolt is progressing well. We have combined the SmartSense and Jolt organizations and offerings into SmartSense One. We're seeing strong customer response to this combined platform, and the cross-selling opportunities we envisioned are materializing. On January 27, we announced the acquisition of Particle, a leading IoT solution provider founded in 2012 and inspired in part by our own Digi XP. Particle has grown into an industrial IoT leader. Particle brings robust AI-ready embedded edge devices coupled with wireless services and a cloud-based solution supporting over 240,000 developers across 14,000 companies. This acquisition strengthens our edge-to-cloud capabilities and expands our addressable market in the IoT device management space. The combination of Particle, with our existing OEM solutions creates compelling opportunities for customers seeking seamless connectivity, and device management at scale. Jacuzzi, Goodyear, and Watsco are amongst the over 150 enterprise customers that have accelerated their go-to-market IoT visions with Particle. We are integrating the Particle and OEM solutions teams to further drive embedded as a service globally. Particle brings our IoT product and services reporting segment $20 million in ARR and further balances ARR contributions across Digi's two reporting segments. Particle provides a catalyst for OEM solutions, which is now named Particle by Digi. Digi's comprehensive industrial IoT portfolio spanning embedded solutions, edge intelligence, and vertical-specific turnkey offerings resonates across a diverse range of industries and positions us to capitalize on secular trends in AI, edge computing, and industrial automation. Our AI initiatives continue to advance. Beyond the internal productivity gains we've achieved, we're now actively embedding AI capabilities into our products and customer-facing solutions. Digi is uniquely positioned to take advantage of the less publicized wave of machine-driven technology advances. Like the wireless and Internet advances that preceded it, AI will ultimately benefit machines like it will humans. DigiSolutions approach aims to accelerate our customers' industrial AI outcomes. Acquisitions remain our top capital deployment priority as we strengthen our balance sheet and we continue to evaluate additional opportunities. Following our successful integration of Jolt just months ago, Particle demonstrates the strength of our organizational structure, and our ability to execute multiple acquisitions while maintaining operational excellence. We remain confident in our goal of achieving $100 million of ARR and $200 million of adjusted EBITDA by the end of fiscal 2028. Strategic acquisitions may accelerate this timeline. Next, Jamie will provide comments on our financial guidance. Jamie Loch: Hi, everyone. For fiscal 2026, our guidance reflects both our updated operational outlook combined with the January 2026 acquisition of Particle. We anticipate ARR growth of 23%, revenue growth of 14 to 18%, and adjusted EBITDA growth of 17 to 21%. The impact of Particle and its expected synergies to this guide is $20 million to $22 million in ARR, $13 to $14 million in revenue, and $1 million to $2 million in adjusted EBITDA. After capturing synergies, we expect Particle to contribute $5 million to our fiscal 2027 adjusted EBITDA. Particle will be integrated into our IoT products and services segment and will not be reported on a standalone basis. For the second fiscal quarter, revenues are estimated to be between $124 million to $128 million. Adjusted EBITDA is expected to be between $31.5 million and $33 million. New for fiscal 2026, we are including interest expense in our adjusted net income per diluted share metric. And we have done the same for comparison period. Adjusted net income per diluted share is anticipated to be between $0.56 and $0.59 per diluted share assuming a weighted average diluted share count of 38.8 million shares. This includes an expected impact from interest, of between $0.05 and $0.06 per diluted share. We provide guidance and longer-term targets for adjusted net income per share as well as adjusted EBITDA on a non-GAAP basis. We do not reconcile these items to their most comparable U.S. GAAP measure as it is not possible to predict without unreasonable efforts numerous items that include, but are not limited to, the impact of foreign exchange translation, restructuring, interest, and other tax-related events. Given the uncertainty, any of these items could have a significant impact on US GAAP results. With that, I will turn the call back over to our operator to take your questions. Operator: To withdraw your question, press 11 again. Our first question comes from the line of Thomas Allen Moll with Stephens. Please proceed. Thomas Allen Moll: Good afternoon, and thanks for taking my question. Good afternoon, Tommy. Ron, my first question is on the demand environment. Can you make any general comment to update us and then if you could go one layer deeper and make a specific comment around data centers, what seeing there, that'd be appreciated. Thank you. Yeah. As we talked in the past, we've got the good fortune of applying our technologies to a wide range of verticals. So at any given time, there are certainly some verticals that are stronger and some that are maybe not as strong. And we're seeing a lot of success in mass transit in utility segment. We're also seeing a lot of success in retail digital signage. We also are seeing some success in data center as well, particularly our OpenGear product line. Maybe just benchmarking versus we spoke a quarter ago, do you get a sense things feel a little bit better, a little bit worse, about the same? Just any general comment would help. Yeah. Think they're improving and increasing. I think we're all worried about how long the AI infrastructure build-out will sustain. But for now, it's been improving. Follow-up for you, Ron, on Particle. Specifically around the sales synergy opportunity. You mentioned, I think, the press release originally, the opportunity to pull sales through your existing team and your channel. That's relatively straightforward. I'm mostly interested in how from an end-user standpoint this technology intersects with your current offering. You mentioned the OEM business a number of times in the press release. Maybe that's a lead-in to your answer. Yeah. I think to date, most of our solution approach has been, I'd say, on the IT side where we're providing a completely enclosed device with software services connectivity. Examples would be the OpenGear solution, cellular routers, in addition to SmartSense and Ventus. This really marks a foray into embedded as a service. Where a lot of times we're now going into an engineering department and we're embedding that IoT solution inside of our customers' machines whether they be spas or whether they be in the ag or industrial field, and that's an area that is newer for I think both the industry as well as for Digi. And so leveraging this as the catalyst to really get OEM solutions more in line with both the company's objectives of ARR and contributing at a relative scale has been really important for us. What does that as a service component look like where it's an OEM relationship? So the device is used in the field by someone else that you don't have a direct relationship. How do you close the loop there with you as a service? Yeah. We actually do have a direct relationship with the end user. The end users that they OEM, we may not have it with the final consumer, if you will. But it's very important that we're in touch with whether it's Goodyear or Jacuzzi or Watsco that we're contacting and staying in touch with them to make sure they're accomplishing their business objectives. But it's very similar to our Ventus offering where it's provided as a service. It includes the edge device software the connectivity, a cloud platform that gives you the insights into both the Digi equipment, in this case Particle, as well as the customer's end device. And that end device is really critical to understand its performance, any conditions that might affect its performance, and in some cases, even perform software updates on that OEM's device. Thank you, Ron. I appreciate it, and I'll turn it back. Operator: Thank you. Our next question is from James Fish with Piper Sandler. Please proceed. James Fish: Hey, guys. Maybe just sticking on Particle here. I think it strategically makes sense. It aligns with what you guys have been doing for many years now. But maybe just walk us through what makes Particle different. And how should we think about you guys managing this for, you know, push behind growing the business as opposed to more or less managing that the profitability? In other words, is it gonna be trying to accelerate the growth of the business given your reach and your customer base? Or is it gonna be, you know, growth growing EBITDA more so? Yeah. But what's attracted us to Particle, who we've known for several years now, what's attracted us is, you know, they were born this way. They were born as a service. And the processes, the way you go to market, the way you price your offering, the culture of the company, is, I think, sometimes harder to appreciate that combination of things. And we're looking forward to bringing that culture inside of OEM solutions. Where traditionally we've been providing more just the device and let the customer arrange for connectivity cloud services. And so we don't underestimate that combination of things and the impact it can have. You saw this with the Ventus acquisition. You've seen it with the combination of SmartSense acquisitions that have led to that company today. So that's very important. And we're looking forward to leveraging the combined company to really do profitable growth. Our game is not growth at all cost. It's profitable growth. We want to scale the business. And when you get to $20 million of ARR, that's when you can really start thinking about that scale profitably. Before then, you're a little bit more in growth mode and you're making pretty big investments on the product, on the go-to-market. And as you start maturing and figure out what wins and what doesn't win, you can be much more selective on resources. So we want to grow the business. Don't get me wrong. It's imperative we grow, but I think Digi's mantra is really profitable growth. And so the crux of it is, is there a way to think about the growth rate of Particle moving forward? And how much overlap with existing products and to layer on here, Jamie, you just helped me here on the guide. As prior guide was about $484 million on the revenue piece at the midpoint, and with Particle adding about $13 to $14 million, that would take us, you know, $498 million or so. But midpoint, is only $499 million. So it's not really much of a raise despite the upside here in fiscal Q1. So can you just walk me through why it's pretty much just raising at this point on Particle as opposed to some of the strength you saw in Q1. Was there any pull-in of demand, or are you guys just being kind of prudent around the rest of the year organically? Jamie Loch: Yeah. It's a good question, Jim. As a rule, we have not increased an annual guide after the first fiscal quarter. From a combination of things. You know, ninety days, you get some timing elements where you have some items that time out to the positive or to the negative historically. And we think it's a little bit more responsible to give yourself at least a mid-year point before traditionally we would do an operational raise. In this instance, there is an impact on the operating performance. If you look at the guide, the guide does have a slight uptick on operational performance, so it's not just on Particle. You look at it. There's about a four-point lift in the guide and about three of those points are Particle. But to your point, one quarter in, we think there's a reason to be prudent. Our historical practice is we don't adjust total year after the first quarter. So it's kind of a combination of those two things. James Fish: Thanks, guys. Operator: Thank you. Our next question comes from the line of Josh Nichols with B. Riley. Please proceed. Josh Nichols: Yes. Thanks for taking my question. Great to see another strong quarter for ARR growth and cash flow generation. On the gross margin front, you know, it's continued to charge upwards as you've been ramping revenue. Just in terms of directions, what should we expect? I know Particle is mostly ARR business, but when we think about gross margins for the remainder of the year, is that gonna continue to tick up from what we saw in the first quarter? Jamie Loch: Yeah. Josh, this is Jamie. I do think we're in that space where it's a combination of as ARR continues to grow at a rate that is at least on pace with revenue, you'll continue to see some margin expansion. Historically, we've seen sort of in that 10 to 15 basis point expansion sequentially. I think we're gonna continue to see that. The variability that you would have from that would be in any particular ninety-day window you could have product mix that could swing that up a tick or down a tick. But if you look at it over a longer range, it's reasonable that those margins will continue to tick off all else constant just as your ARR continues to be a bigger percentage of your revenue. Josh Nichols: Thanks. Appreciate the context for that. And then I think someone touched on it before, but maybe looking at a little different angle. I mean, you've already, you know, executed well in Q1. And you have the guidance with Particle for fiscal 2Q. There's that implies, like, a relatively wide guidance range for the top line. For the fiscal second half. I'm just wondering if you could provide a little bit more granularity on what are puts and takes between, like, what would get you to that higher end versus the lower end of the growth guidance range for this year? Jamie Loch: Yeah. So we are seeing strengths in certain verticals. It's a chaotic time out there in the marketplace between tariffs and prices for commodities. We also, I think, are battling our way through, you know, the highly publicized memory challenges that AI expansion has created. We feel confident we can fight through those, but those are some risks out there. There remain a tremendous number of upsides, including the Jolt acquisition, the Particle acquisition, further strength in adding additional data center customers, especially with Neo Clouds and AI. Our cellular router segment as predicted has started off the year as our fastest growing product line. So continued strength. They've got some new products coming out next quarter. So there's a lot of upside, but there are definitely risks there. And as Jamie said, we have traditionally used that midpoint to update annual guidance with the Particle acquisition. It just makes sense to at least provide an update. We do expect in after FQ2 to do an additional update as we know more information and obviously have another quarter's books. Josh Nichols: Sounds good. I think that's fair. Appreciate it. I'll have back in the queue. Thanks, Josh. Operator: Thank you. Our next question is from Scott Wallace Searle with ROTH. Please proceed. Scott Wallace Searle: Hey, good afternoon. Thanks for taking the questions. Nice job on the quarter. And I hope that you, your families, your team and communities are doing well. During some unprecedented events. Maybe just to dive in, Jamie, I just wanted to clarify, in terms of how you're treating interest now in your guidance, that you are now adjusting that $0.04 to $0.05 is related to interest expense. So all things normalized, in terms of where street and consensus numbers are for the first quarter, it'd be 4 to 5¢ higher would be the app comparison. And then maybe just to dive in on the competitive landscape front on the gateways. Ron, it seems like the dynamics in that market has recovered. I think you're largely through getting higher attach rates on that front. I wonder if you could talk about some of the dynamics for growth there. And what you're seeing in terms of the competitive landscape from I'll call it, a little bit of a faltering cradle point as well as some of the Chinese competitors being pushed out and some of the dynamics moving that business right now. Jamie Loch: Hey, Scott. This is Jamie. I'll take the first part of that question. On the adjusted EPS, consensus and our prior estimate did not include interest. The new metric now includes interest. And if you refer back to our press release the impact of interest on the quarter was $0.06. So if you were to compare apples to apples, you would be looking at 6¢ of impact to the current number that is because of interest baked into it. On the go forward for FQ2, what we indicated in that adjusted EPS guide is that the impact of interest embedded in that number is about 5 to 6¢. So the FQ1 impact of interest was 6, and that's embedded in the number that we reported out now at 56¢. Does that make sense? Scott Wallace Searle: Yeah. It does. Thank you. Ronald E. Konezny: Okay. Yeah, Scott, on the competitive landscape really excited about the momentum building in our cellular router and Ventus business segments. We've got some unique offerings, some new products coming out. We've got a great team with a great culture. And we're really optimistic that the momentum can continue. We can't take it for granted. You mentioned one thing that's in particular, there's certain segments that are very, very concerned about having Chinese originated parts, especially radios. They will literally open up a device and look to make sure that there's no Chinese manufactured radios in particular. And so those are segments where our products really can play well. In addition to rest of world that doesn't have as much concern as some US-based customers, we can offer more price competitive offerings. The big push, as you mentioned, is really becoming more of a solution provider of which the device is a critical component but it's the combination of device connectivity, device management, cloud-based platforms, APIs that allow you greater insight and control of that entire solution, and it really helps with what we continually see as an overburdened set of IT resources at our customer. Scott Wallace Searle: Great. And Ron, maybe just to follow-up on that, guess that's kind of where Particle couples in as well. In terms of some edge compute, edge AI capabilities. I'm wondering if you could talk about how do you see that market opportunity expanding in terms of processing requirements at the edge and how you're positioned to capitalize and deliver on that? Thanks. Ronald E. Konezny: Yeah. Some nice complimentary technologies that we're bringing together with OEM and Particle. OEM has got very strong connect core business, which is powered by NX and STMicro. TACHON brings on Dragon Wing and Qualcomm chipset. We've brought our offering there. On the radio side, Particle brings in LTE CAT one biz. Which further extends the portfolio on our wireless side. Digi's global reach and channel can really help propagate more and more Particle kits out there, those dev kits. In the hands of corporate makers. Some of those grow up to be bushes and trees. And so we think we can amplify what's been a proven playbook for Particle. And in combination with that, we are having really nice conversations with JG Enterprise customers that are looking for a more complete solution set from companies like Digi. And so that combination of leveraging our really long-tenured enterprise relationships with amplifying the kit process. We think that combination is gonna help with growth. Scott Wallace Searle: Great. Thanks so much. I'll get back in the queue. Operator: Thank you. Our next question is from Anthony Stoss with Craig Hallum. Please proceed. Anthony Stoss: Hey, guys. Nice execution. Ron, I wanted to follow-up on your comments on the memory pricing. I'm just curious if any of the device customers of yours are pulling in their horns already or if this is a few quarters out. I'm sure guys are still getting most of what they need right now, but I'm just curious what you think the impact when it would be. And then the second question is just an update on the Jolt synergies. I think you guys are looking for about $11 million in incremental EBITDA. I'm just curious where you stand out of the gate. Thanks. Ronald E. Konezny: Yeah. I'll handle the memory piece. Jamie can comment on your second question. Tony, nice to hear from you. Memory, for those of you that have been around for a while, is a highly volatile business. What goes up can go down and vice versa. The AI push is putting a pressure on DDR4, DDR5 memory as well as the very specific memory components that are mainly in our newer products, our legacy products, are using older technology. We don't see as much pressure. Our number one objective is to make sure we have our supply allocations. And so we fight very hard to make sure we've got the parts available to us. Pricing then becomes a secondary topic, and memory is a portion of our device's price. We can usually absorb and handle certain amounts of variation. One of the challenges in the market is that in some cases, you may issue a PO and that PO actually is accepted with a condition that price may be subject to change. So some of it's a fear of the unknown is our price is gonna change in the future. But we do feel like for the most part, we can handle those price increases. We're, as you know, emphasizing the software and services portion relationship. We don't wanna put that at risk playing games on the product side. And so we think we can navigate it. And we're going in many cases to alternate providers and having our engineering teams qualify those parts just to make sure we have more than one source of memory. But it will be a lot of work as we fight through the AI demand and how stable and how long-running that'll be. I'll let Jamie comment on the Jolt piece. Jamie Loch: Yeah. Tony, good to hear from you. Well, when you break down the synergy, and the integration efforts at Jolt, kind of think of it as field integration and then support services and home office integration. Both of those I think are proceeding right on target. The field teams have really done a great job being in the same space, understanding the offerings, collaborating. Working through both their pipelines as well as a unified front with customers. And in the support services we are right on track in terms of integrating things like finance, HR, all the way from payroll to benefits and all the minutiae details. So right now, it's tracking. When we do an acquisition, we've got a timeline that lays on all the integration activities. And so far, everything is right on time. And nothing that would change our outlook going forward. Anthony Stoss: Very good. Thanks for the color, guys. Jamie Loch: Thank you, Tony. Operator: Thank you. Again, ladies and gentlemen, if you do have a question, simply press 11 to get in the queue. As I see no further questions, I will pass it back to Ronald E. Konezny for closing comments. Ronald E. Konezny: Thank you. Our team's dedication to our customer success and our ability to adapt and evolve is inspiring. Thank you for joining this update on Digi, and have a good night. Operator: Thank you for participating in today's program. You may now disconnect.
Operator: Hello, everyone. William: Thank you for attending today's Blue Bird Corporation Fiscal 2026 First Quarter Earnings Call. My name is William, and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press 1 on your telephone keypad. At this time, I would now like to pass the conference over to our host, Mark Benfield, Blue Bird's Head of Investor Relations. Mark? Mark Benfield: Thank you, and welcome to Blue Bird Corporation's fiscal 2026 first quarter earnings conference call. The audio for our call is webcast live on bluebird.com under the Investor Relations tab. You can access supporting slides on our website by clicking on the presentations box on the IR landing page. Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted on the following two slides and in our filings with the SEC. Blue Bird Corporation disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird's president and CEO, John Wyskiel, and CFO, Razvan Radulescu. Then we'll take some questions. Let's get started. John? John Wyskiel: Thanks, Mark, and good afternoon, everyone, and thanks for joining us today. It's great to be here, and we are excited to share with you our fiscal 2026 first quarter financial results. Once again, the Blue Bird team delivered outstanding Q1 sales and adjusted EBITDA. And we are off to a great start. Razvan will take you through the details of our financial results shortly. But I will walk you through some of the key takeaways for the first quarter on Slide six. First, Blue Bird Corporation beat guidance on all metrics for the quarter. This is despite the impact and volatility associated with the administration policy on tariffs. We continue to navigate this situation well and have beat guidance for the thirteen quarters. Validating the strength in our management, and business model. Order intake for the period was exceptionally strong. Our Q1 order intake was up 45% from 2025. Which pushed our backlog to a seasonally strong 3,400 units. This is a great start to the year, especially as we come into the order season. Operationally, we continue to perform with all metrics pointing in the right direction. And the team has been able to execute on a day-to-day basis while simultaneously developing detailed manufacturing plans for the future. In terms of pricing, we remain extremely disciplined. US prices remain higher than the previous year, and the previous quarter. As I've communicated before, this process is just how we manage the business. In the alt power segment, our dominance continues. Our EV backlog is now into 2027, We remain exclusive in propane, which has the lowest total cost of operation, and our gas variant continues to be a leader. Alt Power is a segment we created more than fifteen years ago and we continue to maintain our lead position. We continue to develop our investment thesis as explained before. Our manufacturing strategy encompasses many factory of the future that will be rolled into our new assembly plan. During the quarter, we completed our analysis of automation use cases, and have locked in on a road map. The initiative has a strong return. But this strategy also creates a path for ongoing cost improvement through other industry three point o and four point o opportunities. And finally, we continue to manage the impact of the administration's executive orders and tariff volatility. We are fortunate to be well positioned to navigate this situation to a margin neutral outcome. Consistent with past communications, it is our objective to position this business to be a strong long-term investment. Let's turn the page and take a closer look at the financial and key business highlights for the quarter. On Slide seven. We sold 2,135 buses in Q1 and recorded revenue of $333 million, 6% ahead of last year. On the EV side, we sold 121 vehicles, 6% of unit volume, and our long-term outlook for EVs remains optimistic. Adjusted EBITDA for the quarter came in at $50 million, four million stronger than last year, and free cash flow came in at an outstanding $31 million. Razvan will talk more to this and her outlook later in the call. Turning to the right side of the page, I'll touch on a few points. With the strong order intake I spoke about earlier, our backlog finished the quarter at 3,400 units, This puts us in a good position coming into the order season. And I continue to reiterate the overall market fundamentals are still there. The fleet is aging. We are coming into a heavy replacement cycle. And there's been industry supply issues the last few years, leaving pent-up demand. The horizon ahead looks very good for school bus volumes. In January, we also took our first order for commercial chassis. The market remains excited about this product. We are continuing with the testing, validation, and normal engineering change loops. We are projecting to start production in late Q4 which pushes sales into fiscal 2027. Our emphasis is to get this product right from a design, cost, and quality perspective. And not force timing that can jeopardize any one of those elements. Back to school bus, year-over-year selling price for buses was up almost $8,800 per unit. But, of course, this also includes tariff recovery as part of our margin neutral strategy. With tariffs excluded, pricing was still up year over year. And part sales totaled $25 million for the quarter. All powered buses represented a strong 48% of mix per unit sales in the quarter. Our powertrain strategy is a differentiator in the market, and allows us to maintain strong emergence. But we are not dependent on it. If you look at Q1, RL power mix dipped below 50% but there was no compromise in profitability. At the end of the quarter, we had a 121 EVs booked and 855 EVs in our order backlog, pushing into 2027. Our updated guidance reflects approximately 800 EV unit sales for fiscal 2026. Again, we remain optimistic on EVs in the school bus sector. EVs are a perfect fit for school buses when you look at the duty cycle, available charging intervals, range, and the proven health benefits for our children. Rounds two and three of the EPA clean school bus program remain intact with funds flowing to our end customers. Earlier this month, it seems there was some misinterpretation of media coverage and quotes that suggested rounds four and five would be discontinued. But I will highlight from our subsequent discussions in Washington there has been no such indication. It is our understanding that the EPA is still working through how and when these funds will be administered. And that the program is still bipartisan in support. Overall, when you look at state funding and the fleet EV mandates, we believe this market will remain relevant. And our short-term guidance is not dependent on federal funding for rounds four and five. And finally, the $80 million MES contract with the DOE remains intact. This is for their funding towards our new plant in Fort Valley. There's been a lot of rumor in the area of MassGrants, but, again, there's been no unfavorable direction provided to us from the DOE. As a reminder, this project adds 400 well-paying American jobs to a century-old company with an iconic brand. To build clean school buses, providing our children with the benefits of clean air. As I've said in prior earnings calls, it's a great story. Overall, we beat guidance for the thirteenth consecutive quarter with a 15% adjusted EBITDA. This continued performance reflects the strength in the entire Blue Bird Corporation enterprise. I'm very proud of the team's accomplishments. So I'd like to now hand it over to Razvan to walk through our fiscal 2026 first quarter financial results as well as our full year updated guidance in more detail. Razvan Radulescu: Thanks, John, and good afternoon. It's my pleasure to share with you the financial highlights from Blue Bird Corporation's fiscal 2026. First quarter results. The quarter end is based on a close date of 12/27/2025 whereas the prior year was based on a close date of 12/28/2024. We will file the 10-Q today, February 4, after market close. Our 10-Q includes additional material and disclosures regarding our business and financial performance. We encourage you to read the 10-Q and the important disclosures that it contains. The appendix attached to today's presentation includes reconciliations of differences between GAAP and non-GAAP measures mentioned on this call. As well as other important disclaimers. Slide nine is a summary of the fiscal 2026 first quarter record financial results. It was a strong operating quarter for Blue Bird Corporation, a great start for the new fiscal year, and they beat our guidance provided in the last earnings call on all metrics. In fact, we delivered the best Q1 ever for Blue Bird Corporation. With $333 million in revenue, and $50 million in adjusted EBITDA in percent margin. The team pushed hard and continued doing a fantastic job. And generated 2,135 unit sales volume was just above prior year level. Record Q1 consolidated net revenue of $333 million was $19 million higher than prior year driven by pricing actions, including tariffs, that materialized in this quarter. Adjusted EBITDA for the quarter was a record $50 million driven by high margins, partially offset by increased labor and engineering costs. The adjusted free cash flow was also a record Q1 of $31 million and $9 million higher than the prior year first quarter. This result due to continued strong profitability across all bus and powertrain types. Our liquidity position at the end of this quarter was on record $385 million. Moving on to Slide 10. As mentioned before by John, our backlog at the end of Q1 continues to be solid. At 3,400 units including a record 25% EV. In fact, at the January, have now close to 1,000 EVs sold in Q1 and in backlog, With some of them scheduled to be billed and delivered in fiscal 2027 Q1. Breaking down the Q1, $330 million in revenue into our two business segments, The BOSnet revenue was $308 million up $20 million versus prior year, due to increased prices across all products, including tariffs. As a result, our average bus revenue per unit increased by $9,000 from $135,000 to $144,000 or 6.5%. EV sales in Q1 were 121 units, just 11 units lower than last year as planned. Revenue for the quarter was almost flat with a strong $25 million. This great performance was in part due to increased demand for our parts as the city's aging as well as supply chain driven pricing actions and throughput improvement. Gross margin for the quarter was a record 21.4%, or two twenty basis points higher than last year. Due to pricing actions, manufacturing efficiencies, and quality improvement. Adjusted EBITDA of $50 million or 15% was higher compared with prior year by $4 million, forty basis points. In fiscal 2026 Q1, adjusted net income was a record to one at $32.5 million or $2 million higher than last year. Adjusted diluted earnings per share of $1 was up 8¢ versus the prior year. Slide 11 shows the walk from fiscal 2025 Q1 adjusted EBITDA to the fiscal 2026 Q1 result. Starting on the left at $45.8 million. The impact of the bus segment gross profit in total was $11.1 million, split between volume and pricing effects, net of material cost increases, of $7 million. And operational and quality improvements of $4.1 million. The parts segment gross profit was almost flat and our fixed costs and other income were unfavorable year over year by $6 million. Out of this, $2.6 million comprises of EV emission credits that were sold in fiscal 2025 Q1 sale which did not repeat again so far this year. Sum total of all the above-mentioned developments drives our record fiscal 2026 Q1 reported adjusted EBITDA result of $50.1 million or 15%. Moving on to slide 12. We have extremely positive developments year over year also on the balance sheet. We ended the quarter with a record $242 million in cash, and reduced our debt by $5 million over the last year. Our liquidity is very strong at a record $385 million at the end of fiscal 2026 Q1, a $106 million increase compared to a year ago. Additionally, we have executed another tranche of shares buyback of $15 million during fiscal 2026 Q1, $10 million of which concludes our $60 million prior stock buyback program. And $5 million began our new $100 million program with another $95 million left to go. The operating cash flow was very strong for Q1 at $37 million, driven by great operational execution and margins combined with the large advanced payment received for future EV units, which more than offset the seasonal increase in working capital. On slide 13, we want to share with you our updated fiscal 2026 guidance. Looking at Q1 actuals, we have bid in every metric our guidance past quarter, So we had a very strong start for the fiscal year. Q2 is forecasted to be a repeat of Q1, with additional cost pressures coming tariffs and labor costs and inflation on our SG and A. Continue to plan for a strong second half at 15% to 16% adjusted EBITDA margin with of eight 100 now scheduled for the year. We are maintaining our revenue to a range of $1.45 to $1.55 billion. And given our B21, we are raising our adjusted EBITDA to $225 million or 15% with a range of $215 to $235 million. We will provide further updates at the May after we close Q2. Moving to Slide 14. In summary, are forecasting an improvement year over year to a new record, with revenue up to approximately $1.5 billion, adjusted EBITDA in the range of $215 million to $235 million or approximately 15% and adjusted free cash flow of $40 million to $60 million in line with our typical target of 50% of adjusted EBITDA And after accounting for the extraordinary CapEx of $75 million as our 50% fiscal 2026 portion of the new plant investment funded by a DOE grant which is currently proceeding with the detailed planning and permitting phase. On to slide 16. Today, we are reconfirming the medium-term outlook at 15% margin with volumes of up to 10,000 units, including 500 strip chassis, generating revenues around $1.6 billion and with adjusted EBITDA $40 million Starting in 2029 and beyond, our long-term target remains to drive profitable growth to higher levels, towards $1.8 billion to $2 billion in revenue, comprising of 12,500 units including 1,000 to 1,500 strip chassis, and generate EBITDA of $280 to $320 plus million or 15.5% to 16% plus at best in class levels. The growth comes not only from improved EV mix, driven by sustained state funding and improved total cost of ownership over time, but also from our new global commercial chassis addressable market expansion, as well as our Microboard joint venture new plant in The US. We continue to be incredibly excited about Global's future, and now I will turn it back over to John. John Wyskiel: Thank you, Razvan. Let's move on to slide 17. Blue Bird Corporation is off to a great start for 2026. Starting at the top, we're tracking to 9,500 units for fiscal 2026. But with a 6% CAGR projected for the school bus market, as well as entering new market adjacencies, we see our long-term volume growing to 13,500 units between school bus, and commercial chassis. This translates to a revenue of $1.5 billion for 2026, with an adjusted EBITDA moving up to $225 million But when you factor our growth opportunities, our long-term outlook moves up to $2 billion in revenue, and $320 million in adjusted EBITDA. Expanding to 16% plus. And at the bottom of the page, you will see EV is still very relevant. This year, we are guiding 800 EVs, but continue to see 750 to 1,000 units per annum in our long-term outlook. Overall, Q1 has been a great start. And with the strong fundamentals of the industry, our investment in the future and our strength in this team, the outlook for Blue Bird Corporation is very strong. So as I closed in on my one-year anniversary, and returned to Blue Bird Corporation, I wanted to share a few high-level details about our updated strategy on Slide 18. It is based off of four key elements and positions the company for the future. First, as an almost 100-year-old company, business continuity and long-term stability is a core element. This includes investing and updating our manufacturing facilities and products. A great example is our new assembly plant, which is scheduled to launch in 2028. Infrastructure and competitive products are an essential part of our plan. The next element is a theme that has been consistent the last few years. Profitable growth. Of course, the school bus market is projected to grow over the next few years, and our new plant will allow us to capitalize on that. But for Blue Bird Corporation, it also means organically, expanding our total addressable market by entering new adjacencies. The Blue Bird commercial chassis, and the Microbird JV Buy America shuttle bus is a great example of profitable growth opportunities. Margin expansion is the next element. This area focuses on advancing competitiveness, and cost reduction. For Blue Bird Corporation, this means continuing our industry three point o automation initiative as I discussed at the beginning of the call. We are in a good path in this area with a strong automation road map that will be incorporated into our new assembly plan. But as well, the new plant will allow us further factor the future opportunities, including industry four point o initiatives. And the last area is putting the balance sheet to work. Blue Bird Corporation has strong liquidity and generates solid cash flows. Our balance sheet position allows us to be strategically opportunistic. We have the ability to grow through acquisitions, or exploit vertical integration. This is a tremendous area of opportunity for us. Overall, we have a balanced strategy that positions this great company for the future and delivers value to shareholders. I'll wrap it up on slide 19. This great company and iconic brand is almost 100 years old. Blue Bird Corporation has stood the test of time. We delivered outstanding results in the 2026. We continue to demonstrate credibility by delivering on our target. And looking ahead, our strategy, discipline, and demonstrated execution will set this great company up for the future and deliver value to our shareholders. As always, I want to thank our employees, our dealer network, our supply partners, and, of course, our investors. All are critical to our success. I remain excited about Blue Bird Corporation, and we had a great start for 2026. This company is a great American story with such a rich history and an exciting future ahead. Thank you. So that concludes our formal presentation for today, and I'd now like to hand it back to our moderator for the Q and A session. Operator: Thank you. We will now begin the Q and A session. If you would like to ask a question, If you would like to remove that question, please press star followed by two. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. We will pause here briefly as questions are registered. Our first question comes from the line of Greg Lewis with BTIG. Greg, your line is now open. Greg Lewis: Yeah. Hi. Thank you, and good afternoon, and thanks for taking my I guess I'd like to start off maybe talking a little bit about margins. It was a good quarter around margins. You called out the benefit of maybe some of the cost efficiencies you're driving. And you you've also called called out the, you know, the the the the having to kind of pass through the tariffs. Could you kind of give us some color around how much of that was pricing versus how much of that was maybe efficiencies that you've been able to squeeze out of the company? Razvan Radulescu: Yeah. Hi, Greg. This is Razvan. If you look at the slide 11 about two-thirds came from net pricing and about one-third of it more or less is from better efficiency and quality. Let's I think the split that we have. So so as we look for you. Greg Lewis: Yeah. Yeah. So as we look at yeah. Yeah. So as we look out through, you know, the rest of the year, is is that kinda how we should be thinking about you know you know, the benefit of pricing I does it seem like we have the opportunity to kinda keep pushing that pricing through? Razvan Radulescu: So I would say on the efficiency and quality, these are sustaining improvements that we are making on the pricing side. However, is pricing net of material cost increases, so you have the variability of the cost of goods sold, supplier inflation, maybe volatility in tariffs. While at the same time, our last pricing action was in November for the new model year. Those pricing effects will come in the second half of this fiscal year. So it's a bit too early to tell, especially on the cost goods sold, how the second half of the year is gonna develop. Greg Lewis: Okay, great. Thanks for that. And then I did have a around the backlog. I know that there's as we think about the outlook for EV and you know, just given some of the, you know, some of the delays maybe we've seen and the potential for that backlog to build, Have customers kind of been shifting to the other alternatives, or is it kind of, hey. You know, we were is is I guess what I'm trying to understand is is is as as a percentage of the market, is is has diesel been gaining share here over the last couple quarters? Razvan Radulescu: Yeah. This is Razvan. I'll start and then my colleagues can join in for sure. In terms of the EV, we have a very strong backlog So, actually, between what we sold in Q1 and the backlog, we over a thousand units. And they said already some of these are bleeding into 2027 Q1 fiscal. Mhmm. And this is because of the timing it takes for the infrastructure to be ready at the sites of our customer. I would say on the EV, it's very strong, and we are already starting to 2027. In terms of diesel, we had a strong quarter for the diesel. We you could notice didn't affect our overall profitability because we have very strong margins across all our powertrains and product types. However, as people look at the emission regulations potentially for 2027, is still some uncertainty regarding where that's gonna land. So we may see a little bit pre-buy or a pull forward for some diesel units. Into this year. John Wyskiel: Yeah. And I don't have anything to add. We've always said diesel sticky, and and like you say, you've got this potential pull forward maybe for pricing. With the new regs. Greg Lewis: Okay. Super helpful. Thank you very much. Razvan Radulescu: Sure. Thanks, Greg. Operator: Thank you. Our next question comes from the line of Eric Stine with Craig Hallum. Eric, your line is now open. Eric Stine: Hi, everyone. Maybe we could just stick with that last question and maybe ask it a little bit differently. So, know, obviously, EV has continued to be pretty strong here. I know you've been in all fuels for, what, fifteen plus years, but I'm just curious specific to propane. I know you're exclusive there. You know, school districts still, you know, by and large want to get off diesel. So what kind of trends are you seeing, whether it's this quarter or going forward in propane? You know, what what type of advantage is that? I would think that that continues to resonate a bit in the market. And, you know, how do you see that kind of playing out going forward? John Wyskiel: Yeah. I'll start with a couple comments. I think from a from a marketplace, they still recognize propane as the best, total cost of operation. We also like you know, I guess, the the ease of converting a fleet over because with propane, you can go to a propane seller. They can install the infrastructure relatively easily, you know, as part of the contract for fuel. There's still a pretty strong acceptance, and and, I guess, know, compared to EV, they really like the infrastructure side. In terms of trends, I'm not sure I can comment anything there. Maybe my colleagues might be able to. Razvan Radulescu: No significant change at this point in dynamic. There. Eric Stine: Okay. Fair enough. Know, maybe just then talking about orders. I know on your last conference call, you you you talked about how it hadn't necessarily shown up you know, in terms of order improvement in the quarter that you had reported. But that you were starting to see it in Q1. Obviously, that came to fruition. You mentioned a little bit about EVs, but just curious as we're part of the way into Q2, you know, maybe what you're seeing just on the overall order front and then what you know, how you view as you said, you're you're about to get into, you know, where orders season kinda starts to pick up. You know? So how do you feel about that? What kind of trends are you seeing? John Wyskiel: Yeah. Great question. So a couple comments. Just, first, I mean, very strong order intake period. I think, as you know, we've been mentioned 45% increase. And I think that's validation. Of what we did in terms of stabilizing pricing. Now giving that certainty just allowed districts to go ahead and purchase. So I think that was a strong sign. And then look, whenever we talk about even, like, you know, in the backlog side, I'll talk little bit just for a minute on EV. Continued strong state funding. You know, New York, California, we're Illinois, Michigan all have strong funding, 1 and a half billion dollars. All of that helped contribute as well. So order intake, I'd say good quarter, strong validation, perhaps a little bit of Catch up from Q4. Was in there as well. So, again, pumping up the numbers. In terms of 45%, some of that's just catching up from orders that weren't placed. But overall, good validation. Eric Stine: Okay. And last one for me just on the capital allocation strategy. Obviously, balance sheet quite strong. You mentioned some potential acquisitions. I'm just wondering if you can just expand on your thoughts there a little bit, integration. Makes sense. I would assume if it's if it's something else, it wouldn't be too far afield from what you currently do. Razvan Radulescu: Yeah. This is Razvan. Thanks for the question. So on capital allocation, we have a very strong balance sheet, and we continue to remain focused and evaluate opportunities strategically both on the growth side, but also on the vertical integration side. So at this point, nothing special to talk about. However, our balance sheet is now stronger as it has ever been. And, therefore, it enables us to look strategically at different opportunity. John Wyskiel: Yeah. And, Eric, maybe the only thing I'll add is, look where we are. We can be opportunistic. Lots of options there for us in that regard. And I think, you know, for us, safe accretive, those are key elements of anything we would do in that area. Eric Stine: Okay. That's great. Thank you. Operator: Thank you. Our next question comes from the line of Mike Shlisky with D. A. Davidson. Mike, your line is now open. Mike Shlisky: Good afternoon, and thanks for taking my questions here. You help me frame the potential impact from your comments, John, about adding more, like, automation to the process I was curious whether that was already baked into what you said last quarter, two quarters ago about getting that to that 15% plus or does adding more emission Is that the plus? Do you have more you can do And just sense of just any kind of sense as to the size of the impact that it might have on your margins given what you know today. John Wyskiel: Yeah. Great question, Mike. Look. We're I guess the best way to say it is we've done the use case analysis We know what the returns are. They're favorable. Anything we're putting through. And I think, you know, the way we look at it, we have, a longer-term outlook there, and this know, fits within the outlook. You know, maybe it helps us in in terms of being some some tailwinds as we kind of, move towards that. But a good story overall in terms of the manufacturing story. Manufacturing strategy rather coming together. Mike Shlisky: Great. I also wanted to ask a question about the balance sheet and capital allocation. You know, pre-pandemic, you're operating with cash of, like, $50 million. Now you're at $240 million. And know, adding together your portion of the CapEx for the new facility, what you've got left on your buyback, you know, other things you've got going on. And what you've got probably from a cash flow because for the rest of the year here, you're gonna have probably more cash than you know what to do with. I'm just curious if new M and A A if no M and A comes into view anytime soon, what is your kind of regular plan? Is it just to buy back more shares? Or some other way to that cash to use. I'm just not sure what else you could do if you can't if you don't find a deal. Going forward. Razvan Radulescu: Hey, Mike. Yeah. Thanks for the question. So we outlined our capital allocation strategy in the last earnings call. We didn't repeat it here today. However, you are correct. We have the share buyback program up a $100 million approved by the board. We spent $5 million already. In Q1 out of this program. We are looking at a big capital investment for the new plant of our portion of $100 million or so over two years. We also are increasing a bit our regular CapEx spending and we are investing also a lot in engineering with the different engineering and the emissions regulations that are coming in the next couple of years. But, obviously, as time develop, at least on a yearly basis, we are gonna revisit that strategy. And then potentially consider other avenues Maybe in the future, we could evaluate a dividend program, but we are not quite there yet. Mike Shlisky: Got it. Could I just squeeze one more in here about market share going forward because of some previous issues the last year or two about one of your competitors having some issues with reducing on time, things out out the out the door, were some weird swings in in market share. Do you have anything that you done or that's on your that's on your radar screen for the rest of calendar '26 here as far as any company that's been also acting strangely or new models or things like that that might affect your share one way or the other, or is it pretty steady from here? John Wyskiel: No. I think it may be a couple things. As, you know, one of our competitors had some supply issues. Seems like they've gotten through that, and I think it's maybe normalized the market share that we're seeing right now. I don't know if Mark Rosvan has anything else to add. Razvan Radulescu: Yeah. That's it. From what we see from order intake, it I would say business as usual. Mike? Mike Shlisky: Okay. Outstanding. I'll pass it along. Thank you. John Wyskiel: Thanks, Mike. Operator: Thank you. Our next question comes from the line of Chris Pierce with Needham. Chris, your line is now open. Chris Pierce: Hey. Just one question for me. I guess I know that it's tariff pass throughs on pricing. But I I guess I'm just curious about what you're hearing from distributors, the industry. I mean, when you talk about that $9,000 per bus, is there any sort of pushback out there from buyers? Or kinda what are buyers saying to you? And then what role does pricing play as far as long-term margin guidance as well? Razvan Radulescu: Yes, Chris. So our tariffs are very different between internal combustion engine buses and EVs. So our tariffs for internal combustion are now below $5,000 per bus, but the EVs are above $10,000 per bus. So I'm not sure. Where the $9,000 is. So coming from. But definitely, we see tariffs as a tax imposed by the government, they are working very hard with our supply chain partners to minimize those in a volatile environment. Where different countries go on different lists from time to time. So it's a bit difficult to come up with a consistent supply and sourcing strategy. Geographically in this environment. But we are working to minimize those. At the same time, we are working with our dealers and our customers and providing them certainty going forward right now all the way through June. For fixed tariff pricing, for future delivery. So this point, our target remains to be margin neutral on tariffs. John Wyskiel: Yeah. And I think maybe with that $9,000, I just wanna clarify, Chris, might come from at the beginning, we talked about our $8,800 change in price from prior year. Which we said roughly half is tariff, half is pricing action. Chris Pierce: Yeah. For sure. But in in the end, the customer still have to pay that I just I was kinda curious if you're hearing anything from distributors as far as elevated pricing. Which I know is because of tariffs, but I'm just kinda curious what the market is saying. John Wyskiel: Yeah. Well, look. A couple things. And I know there could be some of you know, we were 45% up for the quarter on order intake. Some of that may be catch up from the prior year. But the reality is know, unfortunately, there's tariffs now that they're all dealing with. But the in terms of if you were to compare it to, is there any fatigue? Maybe there's they're not happy, but at the end of the day, they recognize all the manufacturers have them. And then I think the other side of it is they recognize they have to change the fleet out. You know, there are buses that are coming into that ten-year window right now, a heavy number. That they simply have to change, and it becomes a matter of economics. It's easier to or more effective to replace the unit than to keep it going. Chris Pierce: Okay. That makes sense. Appreciate that the detail. Thank you. Operator: Thanks, Chris. Thank you. Our next question comes from the line of Craig Irwin with Roth ROTH Capital Partners. Craig, your line is now open. Andrew: Guys. It's Andrew on for Craig. First one for me, I kinda touched a lot provide a lot of detail on on kind of the alt fuel buses. But looks like within EVs, you guys kinda nudged up your the midpoint of your annual guide backlog remains solid. You talked about sourcing and EPA funding flowing. So can you just provide a bit more color on what you're seeing in the overall EV market? Razvan Radulescu: Yeah, Andrew. Thanks for the questions. This is Raz. Yeah. We see strong orders supported both by the EPA rounds 23 and the state funding subsidies that are out there. And, yes, we raised our guidance for this year to 800 units. And I would say part of the upside to our to go higher on both revenues and EBITDA for the year is, comes from EV. So to the extent that we can build more and deliver them, we will do that in this year, and this gives the upside to our guidance. On the other side, the the downside to our guidance comes from tariffs. And the cost coming from tariffs that we can't fully predict right now. So those are the two puts and takes for the guidance. And we feel very good about the EV right now. John Wyskiel: Yeah. Maybe just just a couple other things. The you know, of course, there's a federal side that we just talked to with around one through five. But then on the state side, I always reiterate New York California, Oregon, Illinois, Michigan, there's about a billion 5 in funding there. And then a lot of these big fleets just have mandates. They wanna get to certain thresholds in terms of EVs, as a portion of their fleet, and that includes both big fleets as well as states. So when you roll it all together, we've we've continued to say EV is relevant. Andrew: Great. Well, appreciate the color. And then, second from me, I know it's not a big driver in in twenty six, but I know last quarter, you provided an update on the commercial chassis, your prototyping some models with some different body types. Can you just provide some additional color and and update there? And if we can still kind of expect around a 100 units. Towards the latter half of the year. John Wyskiel: Yeah. For sure. So first of all, we took our first order know, first first of '30, I guess, is best way to say it, from one customer. And this is a customer that helped us with the development and know, working through what they wanted to see from a field standpoint. What we're doing now is we're going through normal engineering loops and then we're kinda rolling up our bill and doing all that or bill materials and working that process. Our production SOP now looks like it's gonna be you know, I would say, later fourth quarter, which is gonna push out units into next year. But, again, our focus on this whole thing is this is a new entry, so we wanna make sure we got it right from quality. A durability perspective, from a price perspective. Getting all that right is is important. It matters. Razvan Radulescu: Maybe just to clarify in terms of guidance, we substituted those 100 sales with buses for the total year, so we maintain the 9,500, but due to the timing of production, this strip charges will start to be revenue recognized and sold for the income statement purposes. In fiscal 2027 Q1. Andrew: No worries. Thank you. Operator: Thank you. There are currently no questions registered. So as a brief reminder, if you would like to ask a question, please press 1 on your telephone keypad. There are no more questions waiting at this time. So I would like to pass the conference back over to John for any closing remarks. John Wyskiel: Yes. Thank you, William, and thanks to each of you for joining us on the call today. Blue Bird Corporation has delivered a great start for 2026 with strong results, beating expectations, and raising our guidance, and this is despite a challenging environment. With the fundamentals of the industry and the key elements of our strategy, I remain very optimistic for Blue Bird Corporation and its future. And we look forward to updating you on our progress next quarter. Should you have any follow-up questions, please don't hesitate to contact our head of investor relations Mark Benfield. Blue Bird Corporation continues to be stronger than ever and has an amazing future ahead as we approach our one-hundredth anniversary next year. Thanks again from all of us at Blue Bird Corporation, and have a great evening. Operator: Thank you. That concludes the Blue Bird Corporation Fiscal 2026 First Quarter Earnings Call. Thank you for your participation. You may now disconnect your lines.
Operator: Greetings, and welcome to the ASGN Incorporated Fourth Quarter and Full Year 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operating assistance, please press 0 on your telephone keypad. It is now my pleasure to introduce your host, Kimberly Esterkin of Investor Relations. Thank you. You may begin. Kimberly Esterkin: Good afternoon. Thank you for joining us today for ASGN's soon to be Everforth's Fourth Quarter and Full Year 2025 Conference Call. With me are Theodore S. Hanson, Chief Executive Officer, Sadasivam Iyer, President, and Marie L. Perry, Chief Financial Officer. Before we get started, I would like to remind everyone that our commentary contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties and as such, our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume any obligation to update statements made on this call. For your convenience, our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors.asgn.com. Please also note that on this call, we will be referencing certain non-GAAP measures, such as adjusted EBITDA, adjusted net income, and free cash flow. These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in today's press release. I will now turn the call over to Theodore S. Hanson, Chief Executive Officer. Theodore S. Hanson: Thank you, Kim. Thank you for joining our fourth quarter and full year 2025 earnings call. As we begin 2026, I want to thank everyone who joined us for our Investor Day this past November. If you have not had a chance to view the presentation, a replay of the webcast is available on our website. Our Investor Day provided a valuable platform to showcase our next wave growth strategy and the significant progress we made in our transition toward higher value, higher margin, technology and digital engineering solutions. At this event, we also had the opportunity to introduce several of our solutions leaders, with presentations brought to life by our advanced capabilities in AI, cybersecurity, and enterprise platforms. AI is now a dominant driver of demand, with nearly 80% of enterprises planning to increase their AI spending in 2026. These investments are driving growth in solution capabilities vital to the successful deployment of AI enterprise-wide. Sadasivam Iyer, our president, will speak more on that shortly. Turning to our fourth quarter 2025 results, which we previewed with you in our recent Quinox announcement, ASGN delivered solid results for the quarter. Revenues of $980.1 million were at the top end of our guidance range, with IT consulting revenues comprising 63% of the total, up from 59% in the prior year. Adjusted EBITDA margin was 11%, exceeding our expectation. Commercial consulting bookings had a record $444.4 million, translating to a book to bill of 1.3 times for the quarter, and 1.2 times on a trailing twelve-month basis. Volume of new consulting work continues to grow, as our customers increasingly recognize the importance of preparing data, building infrastructure, and deploying enterprise platforms to harness the full potential of AI. In our federal segment, new contract awards totaled $144.2 million, or a book to bill of 0.9 times on a trailing twelve-month basis. Federal contract backlog was approximately $3 billion at quarter end, or a coverage ratio of 2.5 times the segment's trailing twelve-month revenue. In addition to traditional high holiday-related seasonality, the lengthy government shutdown delayed award activity in the fourth quarter. Nonetheless, we are seeing solid pent-up demand in Q1, and increased defense, intelligence, and national security budgets position our federal business strongly for the future. As we discussed at our Investor Day, our clients are increasingly seeking us out as one of their strategic technology partners. To meet this demand, we have been proactively transforming our business, advancing our solution capabilities, developing proprietary assets and accelerators, and partnering with leading technology companies to better serve our clients' IT needs. Continuing this transformation momentum in 2026, we will be adopting a new customer and investor-facing brand, Everforth, unifying our commercial and federal brands under a single dynamic identity. Our transition to Everforth, a name rooted in forward progress, is designed to unlock our scale as an enterprise and increase cross-selling by bringing the breadth of our solutions to our enterprise clients, all while supporting continued revenue growth and margin expansion. While organic revenue growth remains a primary focus, we will also pursue strategic acquisitions that enhance our solutions capabilities and technology partnerships. I am pleased to report that just two weeks ago, we announced our intent to acquire Quinox, an agile, results-driven digital solutions provider. As an acquirer of choice, we employ a proven, repeatable acquisition strategy, our M&A playbook, which is guided by well-defined strategic filters and rigorous financial criteria. The acquisition of Quinox followed this disciplined approach. From a strategic standpoint, joining forces with Quinox represents a key step forward in our long-term strategy to enhance our digital engineering and global delivery capabilities. Like ASGN, Quinox is exceptionally client-centric, maintaining customer relationships for well over a decade. We are excited to leverage their established client connections to broaden our market presence, and as we did with GlideFast and TopLock, pull Quinox's capabilities across our gold nugget commercial client base. From a financial perspective, Quinox is an accretive transaction that strengthens our market position without compromising the strength of our balance sheet or our financial flexibility. Our disciplined approach to capital allocation enables us to make strategic acquisitions like Quinox while still investing organically and buying back our shares. In the fourth quarter, we generated $93.7 million in free cash flow and bought back $64.2 million in shares. We continue to repurchase shares in the first quarter, and with a newly approved $1 billion share repurchase program, we are well-positioned to provide sustainable shareholder returns. To build upon our discussion, let me now turn the call over to our president, Sadasivam Iyer, to speak about Quinox's digital engineering capabilities and global delivery strength. Sadasivam Iyer: Thanks, Ted. It's great to speak with everyone this afternoon. It has certainly been a busy and productive start to the New Year, and I share Ted's enthusiasm about the acquisition of Quinox. Over the past few months, I've had the opportunity to meet with Quinox's executive team. It is very clear from our meetings that there is a strong cultural fit between our organizations. Cultural alignment is at the heart of a successful acquisition and integral to the comprehensive process that shapes the M&A playbook Ted discussed. During our Investor Day, we spoke about our journey towards becoming a top-tier technology and digital engineering company. I'm proud to report that we're well on our way, expanding our digital engineering capabilities. Fourth quarter bookings for application engineering and services practice nearly doubled quarter over quarter. By integrating Quinox's deep expertise in application management and modernization, analytics, and enterprise platforms into our existing practice, we will immediately expand our market share. In addition, Quinox's alliance partnerships with companies such as AWS, Databricks, Salesforce, SAP, and Calypso complement our own partner network and will enable us to co-create agile, future-ready solutions that accelerate value for our customers. The ability to deliver complex digital engineering capabilities is key for us to be competitive. Quinox significantly enhances our delivery capability and broadens our delivery footprint with its highly global capability centers in India. These centers will form the foundation of our offshore delivery platform and complement our best-in-class nearshore operations in Mexico. As a leader in offshore delivery, Quinox deploys cutting-edge technologies, including AI, across its delivery model. Quinox's proprietary assets combined with an AI-first workforce help promote automation, compliance, and speed to value for every single client. As Ted emphasized, we are an acquirer of choice, and I'd like to believe that part of that strong reputation comes from our unique market positioning. We have the scale of a large IT services player but also the velocity and agility of a startup. An agile, results-driven digital technology company like Quinox aligns seamlessly with our business objectives and supports our long-term growth strategy. With that as background, let's turn to our industry performance for the fourth quarter. In our commercial segment, year-over-year growth was driven by a combination of improvements in healthcare accounts, which improved by mid-teens, and consumer and industrial accounts, which improved by low teens. Growth in the healthcare industry was seen across our provider, pharmaceutical, and biotech clients. In the consumer and industrial space, industrial saw the largest improvement, followed by materials and utilities accounts. We also achieved low single digits revenue growth in the TMT vertical as compared to the prior year. Looking sequentially, on a billable day adjusted basis, we saw growth in four of our five commercial segment industries. Healthcare accounts posted mid-single digit improvements with growth in payers, providers, and pharmaceutical accounts. TMT also improved mid-single digits with telecom, e-commerce, and software and services all increasing. In addition, as we anticipated on our last quarter's call, the financial services industry returned to sequential growth on a billable day adjusted basis, picking up low single digit improvements from 2025. Within this industry, we achieved sequential improvements in wealth management, regional banks, diversified financials, and insurance accounts. In our federal segment, we track our revenues across four types of customers, which are defense and intelligence, national security, civilian, and other clients. Defense, intelligence, and national security accounts continue to comprise approximately 70% of our total government revenues. Government-sponsored entities such as USPS, state and local customers, and commercial entities comprise our other clients category. The other clients category saw mid-teens growth year over year due to expansion of our data, AI, and modernization efforts for USPS, as well as increases in cybersecurity work for commercial clients. Defense and intelligence revenues improved low single digits year over year due in part to additional funding for Project Maven, a flagship geospatial AI contract for the Department of War. For those who have not had a chance to view our Investor Day presentation, I'd highly recommend watching the video on Project Maven, an incredible case study in mission-ready AI. Moving from industries to solutions, as Ted highlighted at the beginning of today's call, we continue to secure projects that strengthen technology infrastructure and enable governance readiness for enterprise-wide AI usage. Let me provide a few examples from the fourth quarter. For a top five US bank, our financial service industry experts were engaged to improve the bank's testing automation and governance ecosystem. Working hand in hand with our client, we deployed a bank-wide modernization program across online banking, mobile platforms, and partner integrations, vastly improving our client's enterprise-wide functionality and governance. Also, within financial services, our team helped a major US online banking and credit card company maintain its system performance as it underwent the merger with another major financial institution. As a part of this DevOps project, our engineering and applications team coordinated infrastructure changes, monitored system health, and managed the building, testing, and deploying of software to ensure a smooth transition as the two banks joined forces. On the theme of data migration, during the fourth quarter, our telecom industry experts partnered with Snowflake, for whom we are an elite AI data and cloud services partner, to enable a major US connectivity and communications company to centralize marketing data from a variety of external vendor systems in Snowflake. Now in 2026, we are laying a governed foundation for Snowflake's Cortex, Snowflake's native AI ML capability that will enable our client to securely run built-in features such as large language models, AI-powered apps, and GenAI Insights. AI's explosive growth, powered by soaring energy demands, is driving unprecedented expansion in data center capacity worldwide. Our cloud and infrastructure team is actively collaborating with clients and rapidly scaling their AI data center fleets. For example, we are currently partnering with a major hyperscaler to operationalize multiple data centers on what is already one of the largest AI data center campuses in the world. For this project, we are responsible for managing the hyperscaler's critical environments and leading the complex logistics required to deploy and integrate the data center's advanced system. Ultimately, scaling AI from concept to production requires addressing long-standing challenges of fragmented tools, governance complexity, and resource constraints. In response to these inherent challenges, in November, we launched our AI Factory, a unified framework designed by our joint commercial and government AI teams to empower organizations to integrate AI seamlessly into their core business strategies. Understanding the challenges around safe and secure AI deployments, our teams have been particularly focused on our solutions related to AI governance. Our federal cybersecurity experts have been busy demoing our AI Factory's Watchtower, a monitoring tool with built-in TrustOps, to both our federal and commercial clients. In addition to building our own assets and accelerators, we are partnering with enterprise platforms to co-deliver high-impact solutions to our commercial and federal clients. Starting with our federal segment, in the fourth quarter, we were awarded additional funding by the Department of Homeland Security and the agency's Continuous Diagnostic and Mitigation Program Office to deploy Elastic's AI capabilities at scale. Our federal team boasts more Elastic certified engineers than any other organization other than Elastic itself and was recently named Elastic's top services partner of the year. In addition to Elastic, we continue to be a leading ServiceNow provider in the federal space, leveraging ServiceNow's agentic capabilities in new initiatives across the Departments of Homeland Security, War, and Energy. We also recently established a strategic partnership with Wiz, a rapidly growing cloud security company in the process of being acquired by Google. In the fourth quarter, we won our first engagement with Wiz for the Centers for Medicare and Medicaid Services, establishing our footprint in the high-value federal healthcare market. On the commercial side of our business, we continue to make great progress in advancing our positioning with Workday. During the fourth quarter, we were selected as one of the first partners approved to deploy Paradox, Workday's candidate experience agent. Paradox uses conversational AI to simplify interactions and deliver better experiences. Conversational AI use cases are growing rapidly. As a part of our Salesforce 360 partnership, for example, we are integrating AgentForce into Slack to enable clients to search their Salesforce CRM with ease. As we expand our value proposition as Everforth, Salesforce, ServiceNow, and Workday will all be central to our cross-platform AI strategy. These are just a few of the many advanced solutions capabilities we deployed in the fourth quarter. We are excited about the future and look forward to continuing to advance our next wave growth strategy. With that, I'll turn the call over to our CFO, Marie L. Perry, to discuss ASGN's fourth quarter 2025 performance and first quarter 2026 guidance. Marie L. Perry: Thanks, Shiv. For the fourth quarter, revenues totaled $980.1 million, at the top end of our guidance range, and relatively consistent with the prior year period. Revenues from our commercial segment were $698.6 million, an increase of 0.9% compared to the prior year and up 2.2% sequentially on a billable day adjusted basis. Assignment revenue totaled $359.2 million, a decline of 12% year over year, reflecting continued softness in portions of our commercial segment that are more sensitive to changes in the macroeconomic cycle. Revenue from our commercial consulting, the largest of our high-margin revenue streams, totaled $339.4 million, an increase of 19.2% year over year. Excluding TopLock, which we acquired in March 2025, consulting revenues improved mid-single digits year over year. Revenues from our federal government segment were $281.5 million, a decrease of 3.7% year over year. Turning to margin, gross margin for 2025 was 28.9%, consistent with the prior year. Gross margin for our commercial segment was 32.6%, which is in line with the prior year. Gross margins from our federal government segment were 19.9%, a decline of 60 basis points year over year due primarily to the loss of higher margin contracts related to Doge. The impact of Doge will anniversary in March 2026. SG&A for the quarter was $210.5 million compared to $197.9 million in 2024. SG&A expenses included $10.7 million in acquisition integration and strategic planning expenses. These items were not included in our previously announced guidance estimate. Also relative to guidance, our estimates assumed an effective tax rate of 28%. In the fourth quarter, our effective tax rate was 36.4%, above the 28% forecast, driven primarily by discrete one-time items not included in our guidance. For the fourth quarter, net income was $25.2 million, adjusted EBITDA was $107.9 million, and adjusted EBITDA margin was 11%, above our guidance range driven mainly by a greater mix of commercial segment revenue. At quarter end, cash and cash equivalents were $161.2 million, and we had approximately $455 million available on our $500 million senior secured revolver. Our net leverage ratio was 2.4x at the end of the quarter. As Ted previously mentioned, we had very strong free cash flow generation in the fourth quarter. Free cash flow was $93.7 million, a conversion rate of approximately 87% of adjusted EBITDA, well above our conversion target rate of 60% to 65%. We continue to deliver value to our shareholders, and in the quarter, we deployed roughly $64.2 million of our free cash flow to repurchase 1.4 million shares at an average share price of $46.5. On a full-year basis, free cash flow was also strong and totaled $288.1 million, or 68.2% of adjusted EBITDA. We deployed $170.1 million of free cash flow to repurchase 3.1 million shares in 2025 at an average price of $55. We have approximately $972 million remaining on our $1 billion share repurchase authorization. Reemphasizing Ted's prior commentary, our strong free cash flow is a hallmark of our business model. It provides a strategic advantage that enables us to fund growth initiatives, opportunistically repurchase shares, and invest in strategic M&A, all while maintaining a healthy balance sheet. By following a disciplined and balanced approach to capital allocation, we can invest in high-return opportunities and prudently manage our leverage, driving sustainable long-term value for our shareholders. With that in mind, in January, we signed a definitive purchase agreement to acquire Quinox for $290 million in cash. The acquisition, which remains subject to HSR approval, is anticipated to close in March. Post-close, we anticipate our net leverage ratio will be approximately 2.9 times after funding the acquisition with cash and borrowings on our revolver. We are committed to reducing our debt over time to bring our net leverage closer to our 2.5 times target. We will, however, continue to opportunistically balance capital deployment with organic investment and share repurchases. Turning to guidance, our financial estimates for 2026 are set forth in our earnings release and supplemental material. These estimates are based on current market conditions and assume no further deterioration in the markets we serve. Guidance also assumes 62 billable days in the first quarter, which is the same number of billable days as the year-ago period, and one more day than 2025. We typically see a low single-digit decline in revenue from the fourth quarter to the first quarter despite the increase in the sequential billable day due to a seasonal reset that occurs annually. Our quarterly estimates do not include any acquisition and strategic planning expenses. As we highlighted during our Investor Day, we are streamlining our technology systems and deploying strategic efforts to generate sizable structural cost savings for our business. These cost savings are progressing as planned and will ramp up further over the coming quarters. Our first quarter guidance incorporates two additional considerations. With regards to adjusted EBITDA margin, the first quarter typically sees an approximate 100 basis point decrease sequentially related to our annual payroll tax reset. In addition, our first quarter guidance does not include a contribution from Quinox. Quinox is expected to generate low to mid-teens revenue growth in 2026 over 2025 revenues of approximately $100 million. We anticipate nine months of Quinox's 2026 revenues will be incorporated into our full-year financials. Quinox also anticipates adjusted EBITDA margin in the low 20% range for the year. With that as background, for 2026, we are estimating revenues of $960 million to $980 million, net income of $25.8 million to $29.4 million, adjusted EBITDA of $93.5 million to $98.5 million, and adjusted EBITDA margin of 9.7% to 10.1%. Thank you. I'll now turn the call back over to Ted. Theodore S. Hanson: Thanks, Marie. We entered the New Year energized by the progress we've achieved and the robust foundation we've established. Our strategic initiatives are firmly in place, and our strong balance sheet and disciplined approach to capital allocation empower us to pursue growth opportunities with confidence. The acquisition of Quinox is a great example of our M&A playbook in action and directly aligns with the strategy to enhance our digital engineering and global delivery capabilities, as we highlighted at our recent Investor Day. The upcoming launch of Everforth, our new unified customer and investor-facing brand debuting in the first half of this year, also marks a transformative step in our Next Wave growth strategy and will enhance our operational efficiency and scale. Ultimately, by integrating cutting-edge technology, world-class engineering, and deep expertise, we are very well positioned to adapt and thrive in today's rapidly evolving AI-driven business landscape. That concludes our prepared remarks. I want to thank all our employees for your incredible efforts this past year. Your unwavering commitment to our clients is evident and will most certainly guide us to success in 2026. With that, let's open up the call to questions. Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. One moment please while we poll for questions. Our first question comes from the line of Jeffrey Marc Silber with BMO Capital Markets. Please proceed with your question. Jeffrey Marc Silber: Thanks so much. I wanted to focus on, I guess, your M&A strategy. If you can tell us what is your focus? I know you've been a little bit more acquisitive over the past. What are you looking for? How comfortable are you in terms of continued leverage? Theodore S. Hanson: So, Jeff, thanks for the question. I'll just go back to the Investor Day. Obviously, organic growth first, that's always the primary focus. We're beginning sequentially and soon here year over year to get back to organic growth rates here on a positive basis. If you think about the acquisition strategy, you know, overall, at the highest level, it's identifying solution capabilities that we see are in the greatest need of our enterprise clients, and then pulling those acquired solution capabilities across our enterprise account base. Our acquisition of GlideFast and ServiceNow ecosystem was a great example of that. Our acquisition of most recently of TopLock within the Workday ecosystem, another example of that. And now with Quinox, real digital engineering capabilities, deep and complex systems, and being able to deploy that across this account base and with it getting an offshore platform delivery capability was really the point here. But again, it's solution capabilities that we see are in demand. And, you know, I think the good thing about this, Jeff, is we get to see these because we're sitting at the table with our clients understanding their strategic IT roadmaps, and then we can pull back from that and say, can we position for that organically or is this an opportunity to buy versus build, if you will, from an M&A standpoint? And I'm sorry. The second part of the question was comfortable being with leverage. Yeah. Well, look. I think we're post-acquisition gonna be at 2.9. I mean, I would say that's still very modestly leveraged. So one, we have to have confidence in our numbers going forward, which we have visibility to. Two, we have to have confidence in the target and their ability to generate the revenues and EBITDA they expect coming in. And then three, we have to have a pathway if we're gonna take on a modest amount of leverage to get the acquisition done to see a path to delever back below our target of two and a half. And so I think all three of those things are in alignment, if you will, this time. And, you know, Jeff, from past acquisitions, when we've made larger platform acquisitions, we've levered up to 3.8 times probably on six different occasions. And within eighteen to twenty-four months, delevered right back down below our target of two and a half. Jeffrey Marc Silber: Okay. Great. Thanks so much. Operator: Thank you. Our next question comes from the line of Tobey O'Brien Sommer with Truist Securities. Please proceed with your question. Tobey O'Brien Sommer: Thanks. Along the same lines of acquisitions, how do you think about the capital allocation tension between buying back your stock, which is at a multiple that you can see, and buying commercial IT consulting businesses that carry higher margin and usually are growing more quickly than sort of the mothership but also fetch a premium to the aggregate multiple of the company? Theodore S. Hanson: Yeah. Well, look, Tobey, I think on the one hand, you know, doing share repurchases is a very accretive thing, where the stock is trading today. But we have to be mindful that that's also a permanent retirement of capital, right? And there's some investment that needs to go into the firm both organically and pointed towards M&A, to position the firm to where we need to be for the future. And we're very fortunate that at this scale, we can do both. Both are accretive. As you said, the acquisition is accretive to growth rates, to gross margins, to EBITDA margins, to cash flow, and to strategy. And so, you know, I think the two of those work hand in hand. So we're certainly mindful of that. But you can't be all one or the other. You have to have a strategy around both. Tobey O'Brien Sommer: Okay. Then for the government consulting business, what's your outlook for that? ODBA funding has been sort of slow to percolate through and work its way into actual contracts and revenue and profit. We do have a budget behind us. What do you think there's an opportunity for your book to bill to kind of materially improve with the convergence of those items over the next two or three quarters? Theodore S. Hanson: Yeah. I said, you know, we kind of are where we were coming out of the third quarter. The only difference was we had a shutdown, which kind of slowed things down for a number of weeks longer than anyone anticipated. But I think in the back half of the quarter, award activity was moving along. I think here in January, we've obviously been dealing with, you know, getting past a shutdown, which by and large we have except for, you know, on the Department of Homeland Security side. And I think as that gets resolved, the cycle is moving here. And I expect award activity to be strong in the areas that are getting budget support, which is Department of Defense and security and intelligence. And I think we're well-positioned for that. So as always, something comes up in this industry segment that seems to push things down the road a bit, but the budget is certainly there now. We feel good about our positioning there. From a solution capability, I mean, we play exactly where dollars are being shifted towards. So I think all those things lined up. I think it's just a matter of timing and what we said coming out of, you know, the third quarter was we thought there would be heavy award in the first half of the year, and those would begin to be realized in terms of growth in the second half of the year. And I think that's still the case. Tobey O'Brien Sommer: Okay. The last one for me, if I can sneak it in. With respect to gross margin, within government consulting, what's a reasonable sustainable range for gross margin here in a, hopefully, a post-Doge world? Marie L. Perry: Certainly. So to your point, with Doge, we will lap in March '26. And so we've really seen consistently what we've talked about, less than 2% total revenues. Probably equates to about $15 million. On a steady state, for federal gross margin, it's probably closer to the 20% gross margin and maybe a little more to that. Operator: Thank you. Our next question comes from the line of Surinder Singh Thind with Jefferies. Please proceed with your question. Surinder Singh Thind: Thank you. Ted, can you provide maybe a bit more color on this idea that, you know, the client demand for AI is beginning to pick up, and you're starting to see demand drive there on the consulting side of the business and maybe talk about the push-pull versus are there maybe offsets within the staffing business or how should we think about the clients' desire to really transform and use your on the consulting side, but then maybe internally, they want to use some of the tools to be more efficient. And the impact on staffing. Theodore S. Hanson: Yeah. Well, let me take the second. I'll let Shiv take the first. I think what's going on in the staffing program is two things, Surinder. I mean, obviously, that business is, you know, kind of sequentially steady, so I don't see a lot of movement either way. On the program opening up wider or having less volume sent through it. It's certainly at a moderated level. And I think it's because, really, there's a buying behavior change going on with our clients, where they used to open up that staffing spigot very wide and let resources flood in to work on internal projects, I think they're being very judicious about that. So way that they control spend also, it's a way they further control outcomes. Right? As if the client more and more is making investments in certain technology outcomes they want to get to, but they're doing it on an outcome basis where there's real scope, real delivery, that they can see what the investment is and what the return is. You know? And with that being impacted by AI, I really don't think that it's not what we view, but you know, I think it's more around the two things I just mentioned. Shiv, on the first part of that? Sadasivam Iyer: Yeah. Look. I think you're right. AI is a big driver of demand on a number of dimensions. You know, if I were to put a spectrum to it all the way from using AI for different use cases are either industry-specific or sort of horizontal. Customer service, any of those. So a lot of work around readiness and modernization of the application stack as well as data. And what we're actually seeing is even for clients that have done some of the readiness work, they're finding that scaling is still challenging because of interoperability considerations, because of just not having a framework to manage this massive AI applications that are being developed. And to be into production, govern, traceability, all of those elements. So demand across the spectrum, whether clients are getting ready or if they're ready, how do you actually take advantage of the technology at scale? Surinder Singh Thind: That's helpful. And then as a follow-up with Marie, could you maybe elaborate on the cost savings plan and what it means for 2026? I think in the prepared comments, you talked about generating, you know, sizable structural cost savings. And that, you know, these are gonna ramp up over the coming quarters. So just any color around magnitudes, run rates, anything like that, that would be helpful. Marie L. Perry: So as we kind of noted with respect to the cost savings, so we gave a net $80 million of cost savings, if you will, over the three-year period. Indicated that that cost savings would be kind of moderate in '26 but really building in '27 and '28. The reference in the prepared remarks was really around the acquisition integration and strategic planning cost of $10.7 million. Operator: Thank you. Our next question comes from the line of Maggie Nolan with William Blair. Please proceed with your question. Maggie Nolan: Thank you. The commercial consulting growth, I think it was nearly 20% year over year. Can you talk about the mix of that? Like what was project-based versus maybe longer duration manager platform-led work? And then tie that into your thinking about revenue visibility in the coming year 2026? Sadasivam Iyer: Oh, so we've seen growth across the board, Maggie. It's a lot of transaction or project-based implementation work, whether it's around our platforms. We've seen a pretty significant growth, as I mentioned, in the prepared remarks in our application engineering and services space, which has been growing pretty rapidly. Our data and AI work is actually also growing pretty rapidly from that perspective. And so we're seeing demand across the board for our solution set. It's a mix of sort of, as you rightly pointed out, more longer-term projects. And, you know, I would say, implementation-driven projects. We're seeing a pretty healthy mix of both of those. We're also seeing more fixed and fixed-price improvements in our pricing from a project perspective. So as you look forward from a revenue outlook perspective, we also noted our bookings for the fourth quarter, which were a pretty significant number ending up at a very healthy book to bill of about, you know, 1.3 plus, which really gives us a pretty good platform to build on. Now keep in mind, as we continue to pivot our business, we're constantly trying to improve the more long-term piece of the consulting business. It's still ramping up that curve. So we still have a lot of work that has finite starts and ends, which sometimes results in bookings converting into revenue over time. Right? Typically happens at the end of Q4 to Q1 where we see revenues ramp up a little bit more. Slower than usual. But that mix is constantly improving, and that's what we're striving to do is to get more secure longer-term projects we don't have to deal with ebbs and flows. Maggie Nolan: Thank you. That's helpful. Can you talk a little bit as well from an end market and perspective? You know, obviously, healthcare and consumer and industrial look pretty good. What are you seeing in terms of financial services or TMT? And, you know, any early commentary on budgets for 2026 from clients now that they finished their budgeting processes? Sadasivam Iyer: Look. I think we're seeing a pretty steady demand, I would say. And it's not like we're, as we've said before, and I said in my prepared remarks, our sequential improvement in financial services was outside of the big banks. So those are the ones we're actually waiting and watching in terms of a pivot. So we're still trying to get an early read. As Ted said before, some of the flow of demand that we're seeing on the staffing side from requisitions and everything else is holding steady. So still trying to get a better handle. So we've not seen what I would call a massive inflection in demand. I think demand is holding steady to moderately positive. We are seeing more uptick in demand in both TMT and software and services, as I noted, because of all the work that is happening around data centers and data center build-out and the demand for those services. Theodore S. Hanson: So, Maggie, if you think about it sequentially, four or five industries up, Q3 to Q4. That's certainly a positive. That's a better progress we've had from an industry standpoint. And then for the fourth quarter, three industries of the five up year over year. Right? Kinda held back by, you know, what's going on with big banks and also what's going on in the services space. Correct. So, you know, it's progress that pulls it will say, and so we're cautiously optimistic. But we do, you know, I would say we need to see some inflection in the big bank area to really contribute to the total to move forward at a little hotter pace than what we're seeing right now. Maggie Nolan: Okay. Thanks, Ted. Thanks, Ted. Operator: Thank you. Our next question comes from the line of Kevin McVeigh with UBS. Please proceed with your question. Kevin McVeigh: Great. Thank you so much. Hey. I just want to clarify. Was there any impact in the quarter from the government shutdown? Theodore S. Hanson: So there was a small impact from the government shutdown during the quarter. Well, we mostly had it programmed in. At the beginning. It went on for a few weeks longer, obviously, than we thought. But, you know, it wasn't material to the outcome for the entire quarter. Kevin McVeigh: Got it. It's helpful. And then if you could on the offshore capability through Quinox were interesting. Is that enhancing what you have, or is that just new capabilities that you're bringing offshore? Sadasivam Iyer: Well, it's all new capabilities we're bringing offshore. You know, we have a very small presence in India, driven by some of our past acquisitions, largely in the realm of those platforms ServiceNow and Infor. But this brings a whole new set of complex, mature delivery capability across sort of the life cycle, whether it's, you know, application modernization management, whether it's, you know, modern application development, a lot of new digital integration capabilities, which are critical as, you know, clients are looking to make some of these AI solutions work from an interoperability perspective. And also some very specific capabilities around platforms, around Salesforce, Calypso, and even SAP. So it's frankly, a lot of truly incremental net new, but a much more advanced complex for, global delivery model. Kevin McVeigh: That's helpful. And then just my last one real quick. Do you have any contracts with DHS? Theodore S. Hanson: We do. So where? They're obviously a pillar customer of ours. An important customer, a lot of important cybersecurity work and other work. I think that look. As we go through this, obviously, they're gonna be adjudicating the, you know, the funding here for DHS, and there are certain things at odds. I don't think any of that affects our work. We don't do a lot or anything that touches some of the areas that are kinda at odds in the conversation in the further funding of DHS forward. Kevin McVeigh: Great. Thank you. Operator: Thank you. Our next question comes from the line of Mark Marcon with Baird. Please proceed with your question. Mark Marcon: Hey. Good afternoon, and thanks for taking my questions. Kevin, Shiv, I'd just like to step back to some of your initial commentary with regards to, you know, AI. Obviously, there's been a lot in the news about AI regarding, you know, fast companies, data retrieval services, that's And what I'm wondering is, you know, when you're taking a look at your client base writ large, to what extent are you seeing them just focus on AI? And to what extent are you also seeing like, we've had other companies that have basically said, that they felt like some of their clients, you know, were basically stalling on some, you know, legacy or more traditional kind of SaaS implementations because they wanted to see how AI was going to, you know, shake out and what needed to be done. And now that they've some of them have come to the conclusion that, you know, maybe they're not quite ready, and so they're proceeding with some projects that they previously stalled and that there was some releasing of pent-up demand. Are you seeing any of that? And when we think about the industry groups that are picking up, and are seeing good sequential growth, to what extent of that is, you know, pure AI type projects as opposed to more legacy or traditional projects? Sadasivam Iyer: Look. I think, Mark, let me start by saying we're not seeing that. Right? I don't think we're seeing large client signals that say they're stopping implementation projects because they think AI can do what those platforms can do for them. Right? And, you know, as Ted and I have repeatedly maintained, these enterprise platforms, at least for our large client, don't we don't believe are going anywhere anytime soon because of just the nature of those systems and how interconnected they are to the workflows and the processes. And where the canonical data truth resides within those organizations. So that's sort of the first part of the question. In terms of your second part, look, we're seeing healthy demand across, as I said, all our capability areas. Look. If you think about I talked about application engineering services. A lot of that is focused on both legacy technologies as well as new product development that these companies are doing. I talked about, you know, data and AI growing very, very fast for us. So a lot of work both in data but data, but also pure AI around use cases. Around governance, around, you know, scalability and trust, in AI. So the demand pattern is pretty healthy across the solution stack. Mark, I don't think there's a we're seeing any massive shift of funds or other stop some things and go fund en masse AI projects at scale. Mark Marcon: Great. That's what I thought. I just wanted to confirm that. And then with regards to Quinox, if I'm getting the right information, it looks like they have between fifteen hundred and eighteen hundred and eighty-eight people. Is that kind of a bench model? And how quickly can that business scale with some of the cross-selling that you're gonna end up bringing in? And what sort of gross margins do they typically produce? Sadasivam Iyer: Yeah. So great questions. So, typically, let me start with the numbers you have are accurate. They're roughly somewhere between the eight to around the 2,000 number, if you may, Mark. It's a very, very robust platform and can actually scale pretty rapidly depending on how we choose to sort of and the speed at which we want to take it and deploy it across our base, if you may. And, because, you know, it's a very well-run machine in terms of its talent supply chain, the ability to scale, and, you know, I may have mentioned it in previous it runs at an attrition level that is half of what the industry average is, which is great because part of the challenge in scaling up tends to be just the ability to replace and replenish talent in India. So all pretty positives. Positive. The gross margins are in the high close high I would say, low forties. And EBITDA margins in the twenties. Theodore S. Hanson: And I think, Mark, if we if there's maybe something of note, I'd say different about this. Versus our past acquisitions. They come into the first year, we really think that because of their ability to scale on their platform, in India from a resource standpoint, and the need from our client base to engage in the opportunities here with them that we can go a little faster on the revenue synergy side. Than maybe we would in a typical acquisition in the first year. So, you know, our hope is that those synergies appear a little sooner. You know, but that'll we'll be careful about picking, you know, a finite number of opportunities and really engaging thoughtfully as we do that. But one of the most attractive things about this acquisition beyond their solution capabilities and their global delivery footprint was the fact that they could naturally scale up very quickly. And if you'll remember, we did the same thing, in our nearshore operation when we acquired EnerSys, which had, you know, maybe about a thousand resources that we moved pretty quickly up to about 2,000 on an organic basis. So we think the same opportunity exists here. Mark Marcon: That's great. Thank you. Operator: Thank you. And we have reached the end of the question and answer session. I would like to turn the floor back to CEO Theodore S. Hanson for closing remarks. Theodore S. Hanson: Great. Well, thank you, everyone, for attending our fourth quarter and 2025 earnings release, and we look forward to speaking with you in a short number of weeks in April on our Q1 2026 earnings call. Have a great evening. Operator: Thank you. And this concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.
Operator: Greetings. Welcome to the Align Fourth Quarter and Full Year 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Shirley Stacy with Align Technology. You may begin. Shirley Stacy: Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO, and John Morici, CFO. We issued fourth quarter and full year 2025 financial results today via Business Wire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately one month. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission, available on our website and at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We have posted historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our fourth quarter and full year 2025 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'd like to turn the call over to Align Technology's President and CEO, Joe Hogan. Joe? Joe Hogan: Thanks, Shirley. Good afternoon, and thanks for joining us today. On our call today, I'll provide an overview of our fourth quarter and full year 2025 results and discuss the performance of two operating segments, System Services and Clear Aligners. John will provide more detail on our Q4 financial performance and comment on our views for 2026. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report fourth quarter results with better-than-expected revenues and clear aligner volumes, as well as non-GAAP gross margin and non-GAAP operating margin, both above our outlook, and the highest non-GAAP operating margin since 2021. Q4 revenues were a record $1,048,000,000, up 5.3% year over year and 5.2% sequentially. For the full year 2025, total revenues were a record $4,000,000,000, up 1% year over year. Systems and services revenues were $790,000,000, up 2.7% year over year. Fiscal 2025 clear aligner revenues were $3,200,000,000, up 0.5% year over year on record clear aligner volumes of 2,600,000 cases, which are up 4.7% year over year. For the year, a record 936,000 teens and kids started treatment with Invisalign clear aligners, up 7.8% year over year for fiscal 2025. Total DSP touch-up cases shipped were over 136,000, up 36% compared to 2024. We also delivered fiscal 2025 non-GAAP operating margin of 22.7%, above our 2025 outlook. In terms of major milestones, as of 12/31/2025, over 296,000 active Invisalign-trained doctors have treated over 22 million people worldwide, including over 6,500,000 teens and growing kids, with Invisalign clear aligners and Invisalign palette expanders. For clear aligners, Q4 revenues of $838,000,000 were up 5.5% year over year and up 4% sequentially. Q4 clear aligner volume was also a record 677,000 cases, up 7.7% year over year and up 4.5% sequentially. On a year-over-year basis, Q4 lighter volume growth was driven by strength in EMEA, Latin America, and APAC, with stability in North America. Q4 clear aligner volume growth reflects strength from adults and teens and growing kids patients, as well as growth in both the GP and ortho channels. On a sequential basis, Q4 clear aligner volumes reflect strong growth from the EMEA region, driven primarily by adult patients, as well as continued strength in Latin America from teens, growing kids, and adult patients. For Q4, 88,000 doctors submitted Invisalign cases globally, a record high for the fourth quarter, driven primarily by a record number of orthodontists submitters. Dental service and orthodontic service organizations, DSOs or OSOs, remain one of Align's most important and scalable strategic growth channels and a major catalyst to making digital dentistry the global standard of care. As DSOs continue to outpace growth rates of traditional retail practices globally, they are becoming one of the most influential forces shaping digital dentistry. In many respects, their scale, operational discipline, and need for consistent tech-enabled workflows make them ideal partners for accelerating adoption of the Invisalign system, iTero scanners, and fully digital workflows across large networks of general dentists and orthodontists. This practice consolidation trend strengthens brand preference and utilization as DSOs increasingly prioritize efficiency, clinical predictability, improved patient experience, and importantly, scale. Align has proven its leadership as the world's most sophisticated treatment planning and 3D printing manufacturing operation. Our ability to scale and meet the patient needs speed, rigor of those rapidly growing DSOs is unmatched globally. Over the past year, we continue to make strong progress with DSOs across all major regions. In The Americas, we deepen partnership with top DSOs, building on our successful Heartland and Spauld doctors relationships. Our top 10 DSOs in The Americas grew double digits year over year, and retention was up double digits in The Americas. These gains helped offset broader orthodontic market softness in North America retail chain where consumer sentiment and patient inflow remained pressured. North America DSO Performance Remained Very Strong. Delivering Double Digit Year Over Year Growth Led By Strength In The Adult Category. In EMEA, 10 DSOs in the region. DSOs continue to drive expansion in both Invisalign case volume and iTero scanner penetration. Across all regions, DSOs remain high growth, digitally forward partners that amplify Align's reach and impact. Their continued adoption of Invisalign and iTero reinforces the strength of our digital platform as DSOs help move more of the industry toward a fully digital standard care. In The Americas, clear aligner volumes were up year over year, representing one of the best growth rates since 2021. This was led by double digit growth in Latin America, which delivered record quarter shipments, driven by more submitters and higher utilization across both the orthodontist and GP channels. With strength across adults, teens, and kids. We also reached a major Invisalign milestone in Q4 by surpassing one million patients treated with Invisalign in Latin America. North America, we focused on driving adoption of Invisalign and saw encouraging results across our portfolio. Our year over year performance reflects higher utilization across all channels. We continue to see that practices taking an active approach to conversion Scanning Every Patient, Using Chairside Visualization Tools, And Offering Patient Financing Or Performing Better Than Those That Don't. While DSOs Are Leading The Way In North America, we're helping retail doctors adopt similar business methods through localized marketing, outside patient financing, and tools that help doctors attract and convert patients. Affordability also remains a priority. Our partnership with the health care financing platform, HFD, continues to grow, and doctors and DSOs enrolled in HFD are seen as incremental lift to Invisalign treatment. With meaningful room for expansion. And by offering more portfolio flexibility, including streamlined configurations with no additional aligners, doctors have more options to meet patients' needs and drive adoption. In EMEA, clear aligner volumes grew double digits. Year over year reaching record Q4 levels. We delivered double digit growth year over year across almost all markets with Iberia, The Nordics, and The UK all delivering double digit growth. During the quarter, we surpassed key patient milestones reaching over a million patients treated in both The UK and Iberia. In APAC, clear aligner volumes grew double digits year over year, achieving a record number of Q4 shipments by China, India and Korea. With strength across teens and growing kids. Growth reflected increases in both submitters and utilization in the GP channel, as well as an increase in ortho submitter utilization. Invisalign First continued to to grow adoption of the Invisalign Palate Expander System Began The Region During The Quarter. Retention Performance Remained Strong Year Over Year, Supported By Increased Utilization Across Both Channels. Regarding China's volume based procurement process or VPP, there continues to be implementation delays, and early phases are expected to begin within the public hospital system before expanding more broadly. As a reminder, over 85% of our business in China is in the private sector. While timing and scope remain fluid, we believe we are well positioned to navigate eventual pricing changes through our established local footprint, including local manufacturing, regulatory, and commercial infrastructure, and a product portfolio designed specifically China's clinical and economic environment. In Q4, over 230,000 teens and growing kids started treatment with Invisalign clear aligners an increase of 7% year over year. This growth was driven by strong performance in APAC, led by China, along with EMEA and Latin America, partially offset by continued softness in North America Sequentially, case starts declined 9.8% as expected, following an exceptionally strong Q3 teen season. From a product standpoint, Invisalign First, the Invisalign pallet expander, and MAOB, mandibular advancement with occlusal blocks, continue to fuel year over year growth across all regions. Invisalign First is used for patients ages six to 10. Addressing phase one needs such as crowding, spacing, narrow arches, and erupting teeth. Our pallet expander system, the first direct printed orthodontic appliance, and the only FDA cleared removable pallet expander, remains a strong driver of early intervention adoption globally. Doctor engagement in the teen and early intervention category remains solid, In Q4, the number of doctors submitting cases for teens and growing kids increased six percent year over year supported by continued strength in Invisalign First, outlet expander, and MAOB. Invisalign system continues to demonstrate broad clinical applicability across younger patients and adults. Reinforced by our global scale and exceptional product portfolio, with more than twenty two million patients treated worldwide, including over six point five million teens. Our treatment planning platform is powered by a robust evidence based ClinCheck Y plan, which can generate initial doctor ready plans in about fifteen minutes. Leverages AI driven planning tools and integrated digital workflows to reduce cycle times, enhance chairside experience, and help doctors convert patients more efficiently. Our portfolio strategy, including products, with lower upfront cost options, is expanding access for doctors while maintaining healthy margins. These configurations give providers more choices around refinements, and pricing that continue to support adoption. We're also advancing direct fabrication transitioning from thermal forming to three d printing of clear aligner appliances. Direct fabrication will unlock new design flexibility, and, over time, reduce waste and lower cost although early production has some dilutive margin impact until scale. We remain on track for limited market release of Invisalign First Direct three d printed retainers and Invisalign Specifics three d printed prefab attachments in 2026 with more complex products expected to follow in 2027. Invisalign specific attachment system is a direct three d printed accessory indicated to bond attachments and engagement features. Over the past year, it has advanced through technical design assessment, and has been used successfully to treat over a thousand patients. Feedback from participating doctors has been consistently positive. Demonstrating strong clinical adoption and market validation. For imaging systems and CADCAM services, which includes iTero solutions and Exocad software, Q4 revenues were 209,000,000, up 4.2% year over year and up 10% sequentially, driven by higher volumes across all regions, and continued adoption of iTero lumina scanner. Lumina represented approximately 86% of full systems units in the quarter, and we continue to drive utilization through full systems installations. During Q4, Exocad delivered sequential year over year revenue growth We continued piloting ExelCAD ART stands for advanced restorative treatment, in several European markets. With broader rollout plan for this year. ART extends a digital platform deeper into restorative and lab workflows. Increasing software driven reoccurring revenue, enhancing efficiency for doctors and labs. Exocad's strong footprint in dental labs provides a critical connection point between restorative dentistry and digital orthodontics. Helping integrate restorative planning more tightly with iActero's scanning and Invisalign treatment. As GPs and labs we are developing across solutions that streamline restorative workflows. Improve communications, and increase predictability. From single tooth restorations to full arch cases. These advancements support broader digital adoption and create more opportunities to incorporate iTero scanning, and, where clinically appropriate, Invisalign treatment as part of comprehensive care. Our growing suite of digital and diagnostic tools, including Align Oral Health Suite, and Align X-ray Insights or AXI helps doctors identify conditions earlier, deliver clearer, more informed treatment recommendations. When combined with the restorative capabilities of exocad, and the visualization strength of iTero, these tools support better long term oral health outcomes and naturally connect straightening, function, and restorative care with a unified digital platform. By strengthening our capabilities across diagnostic, restorative, and orthodontic workflows, we're increasing our relevance in everyday oral health care and positioning Align, iTero, and Exocad as essential partners across the GP and lab ecosystem. With that, I'll now turn it over to John. John Morici: Thanks, Joe. Now for our Q4 financial results. Total revenues for the fourth quarter were $1,047,600,000 up 5.2% from the prior quarter and up 5.3% from the corresponding quarter a year ago. On a constant currency basis, Q4 revenues were unfavorably impacted by approximately $3,000,000 or approximately 0.3% sequentially and were favorably impacted by $14,800,000 year over year. Or approximately 1.4%. Q4 clear aligner revenues were $838,100,000 up 4% sequentially, primarily due to higher volume and mix shift to higher price countries and products partially offset by higher discounts. Higher net deferrals, and unfavorable foreign exchange. Unfavorable foreign exchange impacted Q4 clear aligner revenues by approximately $2,300,000 or approximately 0.3% sequentially. Q4 clear aligner average per case shipment price was $1,240, a $5 decrease on a sequential primarily due to higher discounts, higher net deferrals, and unfavorable foreign exchange, partially offset by a mix shift to higher priced countries and products. On a year over year basis, Q4 clear aligner revenues were up 5.5% primarily from higher volume price increases lower net deferrals, and favorable foreign exchange, partially offset by higher discount and mix shift to lower priced countries and products. Favorable foreign exchange impacted Q4 clear aligner revenues by approximately $12,400,000 or approximately 1.5% year over year. Q4 clear aligner average per case shipment price was $1,240 down $25 on a year over year basis, primarily due to higher discounts mix shift to lower price countries and products, partially offset by price increases. Favorable foreign exchange, and lower net deferrals. Clear aligner deferred revenues on the balance sheet as of 12/31/2025 decreased $33,900,000 or 2.9% sequentially and decreased $61,400,000 or 5.1% year over year and will be recognized as as revenue as additional aligners are shipped Q4 Systems and Services revenues of $209,400,000 were up 10.3% sequentially primarily due to higher scanner system sales and nonsystem sales partially offset by lower scanner wand sales and unfavorable foreign exchange. Q4 systems and services revenues were up 4.2% year over year primarily due to higher nonsystem sales, favorable foreign exchange and flat scanner system sales. Partially offset by lower scanner wand sales. Foreign exchange unfavorably impacted Q4 systems and services revenues by approximately $700,000 sequentially or approximately 0.3%. On a year over year basis, systems and services revenues were favorably impacted by foreign exchange of approximately $2,500,000 approximately 1.2%. Systems and services deferred revenues was flat sequentially. And decreased $24,600,000 or 11.2% year over year due in part to the shorter duration of service contracts selected by customers on initial scanner system purchases. Moving on to gross margin. Fourth quarter overall gross margin was 65.3%, up 1.1 points sequentially primarily due to operational efficiencies, impairment on assets held for sale in the third quarter, excess inventory write off in the third quarter, and lower restructuring and other charges partially offset by higher depreciation expense on assets disposed of other other than by sale. Gross margin was down 4.8 points year over year, primarily due to higher depreciation expense, on assets disposed of rather than by sale partially offset by operational efficiencies. The lower restructuring and lower restructuring and other charges. Overall gross margin was unfavorably impacted by foreign exchange of 0.1 points sequentially and favorably impacted by foreign exchange of 0.5 points on a year over year basis. On a non GAAP basis, which excludes stock based compensation, amortization of intangibles related to certain acquisitions, depreciation expense, on assets disposed of other than by sale, restructuring and other non GAAP charges, gross margin for the fourth quarter was 72% up 1.6 points sequentially and up 1.2 points year over year. Clear aligner gross margin for the fourth quarter was 64.2%, down 0.7 points sequentially, primarily due to depreciation expense on assets disposed of other than by sale, partially offset by operational efficiencies. Foreign exchange unfavorably impacted clear aligner gross margin by approximately 0.1 sequentially. Clear aligner gross margin for the fourth quarter was down six points year over year, primarily due to the depreciation expense of assets disposed of other than by sale and lower ASP. Partially offset by operational efficiencies. Foreign exchange favorably impacted clear aligner gross margin by approximately 0.5 points year over year. Systems and Services gross margin for the fourth quarter was 69.6%, up 8.4 points sequentially primarily due to excess inventory write off in the third quarter partially offset by lower ASP. Foreign exchange unfavorably impacted the systems and service services gross margin by approximately 0.1 points sequentially. Systems and services gross margin for the fourth quarter was up 0.2 points year over year primarily due to operational efficiencies, partially offset by lower ASP. Foreign exchange favorably impacted systems and services gross margin by approximately 0.4 points year over year. Q4 operating expenses were 5 and $28,300,000 down 2.7% sequentially and down 4.4% year over year. On a sequential basis, operating expenses were $14,600,000 lower, due primarily to lower restructuring costs partially offset by slightly higher advertising and marketing and technology spend. Year over year operating expenses decreased by $24,500,000 primarily due to lower restructuring costs. On a non GAAP basis, excluding stock based compensation, restructuring and other charges, and amortization of acquired intangibles related to certain acquisitions depreciation expense on assets to be to be disposed of, other than by sale. And other non GAAP charges, operating expenses were $480,900,000, up 3.8% sequentially and up 1.3% year over year. Our fourth quarter operating income of $155,300,000 resulted in an operating margin of 14.8%, up approximately 5.2 points sequentially and up approximately 0.3 points year over year. Operating margin was unfavorably impacted from foreign exchange by approximately 0.3 points. Sequentially and favorably impacted by foreign exchange by approximately 0.2 points year over year. On a non GAAP basis, which excludes stock based compensation, restructuring and other charges and amortization of intangibles related to certain acquisitions, depreciation expense on assets disposed of, other than by sale, and other non GAAP charges operating margin for the fourth quarter was 26.1%, up 2.3 points sequentially and up three points year over year. Interest and other income and expense net of the fourth quarter was an income of $21,300,000 compared to an expense of $1,600,000 in 2025, primarily due to gain on investments. On a year over year basis, Q4 interest and other income and expense was favorably was favorable compared to an expense of $3,400,000 in '24, primarily by favorable foreign exchange movements and gain on investments. The GAAP effective tax rate in the fourth quarter was 23.1%, compared to 40.1% in the third quarter and 26.3% in the fourth quarter of the prior year. The fourth quarter GAAP effective tax rate was lower than the third quarter effective tax rate, primarily due to the release of uncertain tax position reserves, partially offset by deferred tax adjustments from tax rate changes in certain foreign jurisdictions, and additional taxes accrued on foreign earnings. The fourth quarter GAAP effective tax rate was lower than the fourth quarter effective tax rate of the prior year primarily due to the release of uncertain tax position reserves and lower U. S. Taxes on foreign earnings. Partially offset by deferred tax adjustments from tax rate changes in certain foreign jurisdictions. Additional tax accrued on foreign earnings and change in our jurisdiction jurisdictional mix of income. On a non GAAP our non GAAP effective tax rate in the fourth quarter 20%, which reflects our long term projected tax rate. Fourth quarter net income per diluted share was $1.89 up $1.11 sequentially and up 50¢ compared to the prior year. Our EPS was unfavorably impacted by approximately $05 on a sequential basis and favorably impacted by $0.3 on a year over year basis due to foreign exchange. On a non GAAP basis, net income per diluted share was $3.29 for the fourth quarter, up $0.68 sequentially and $0.85 year over year due to higher revenue and lower operating expenses. Moving on to the balance sheet. As of 12/31/2025, cash and cash equivalents were $1,094,900,000 up sequentially $90,300,000 and up $51,000,000 year over year. Of the $1,000,000,094,900,000 balance, dollars 166,300,000.0 was held in The U. S. And $928,600,000 was held by our international business. During Q4 twenty twenty five, we repurchased approximately 700,000.0 shares of our common stock at an average share price of $142.87 These repurchases were made pursuant to the $200,000,000 open market repurchase plan announced in August 2025. And were completed in January 2026. During twin 2025, we repurchased 2,900,000.0 shares of our common stock at an average per share price of $162.09 for a total of $465,900,000 As of 12/31/2025, $831,000,000,200,000 remains available for repurchases of our common stock under our $1,000,000,000 stock repurchase program. Announced in April 2025. Q4 accounts receivable balance was $1,101,800,000 up sequentially Our overall day sales outstanding was $94 down approximately $7 sequentially and up approximately four days as compared to 2024. And primarily reflect flexible payment terms that are part of our ongoing efforts to support Invisalign practices. Cash flow from operations for the fourth quarter was $223,200,000 Capital expenditures for the fourth quarter were $35,900,000 primarily related to investments in our manufacturing capacity and facility. Free cash flow, defined as cash flow from operations minus capital expenditures, amounted to $187,300,000 Before I turn to our outlook, I'd like to provide the following remarks regarding U. S. Tariffs, as of December 31. Currently, we do not expect a material change to our results of operations as a consequence of the latest U. S. Tariff actions. And we refer you to our 2025 press release and earnings materials as well as our Q2 twenty twenty five webcast slides which includes specifics regarding potential impacts on U. S. Tariffs. Now turning to our outlook. Assuming no circumstances occur beyond our control, such as foreign exchange, macroeconomic conditions, and changes to our currently applicable duties, including tariffs or other fees that could impact our business. We expect Q1 twenty twenty six worldwide revenues to be in the range of $1,010,000,000 to $1,030,000,000 up 3% to 5% year over year. We expect Q1 twenty twenty six clear aligner volume to be up mid single digits year over year. We expect Q1 twenty twenty six clear aligner average selling price to be up sequentially from favorable geographic mix. We expect systems and services revenue to be down sequentially consistent with our typical Q1 seasonality. We expect our Q1 twenty twenty six GAAP operating margin to be 12.4% to 12.8%, down sequentially and Q1 twenty twenty six non GAAP operating margin to be approximately 19.5%, consistent with Q1 seasonality. For fiscal twenty twenty six, we expect 2026 worldwide revenue growth to be up 3% to 4% year over year, We expect 2026 clear aligner volume growth to be up mid single digits year over year. We expect the 2026 GAAP operating margin to be slightly below 18% approximately 400 basis points improvement over 2025 and non GAAP operating margin to be approximately 23.7%, 100 basis point improvement year over year as communicated during our third quarter earnings call. We expect our investments in capital expenditures for fiscal twenty twenty six to be $125,000,000 to $150,000,000 Capital expenditures primarily relate to technology upgrades additional manufacturing capacity, as well as maintenance. Q4 was a good finish to the year. With results that came in better than expected and reflect the continued strength of our business fundamentals. As we enter 2026, we are executing with focus and discipline, and we're encouraged by the progress we're seeing across the regions and key customer segments. Our confidence is grounded in the actions we're taking to actively manage the business, and drive growth through our core strategic priorities. Expanding international adoption, increasing orthodontic utilization part particularly among teens and kids, accelerating GP engagement, including restorative dentistry, and strengthening consumer demand conversion with greater emphasis on local last mile marketing. While the macro environment remains dynamic, we are cautiously cautiously optimistic. With a strong innovation road map, disciplined operational execution, and a global team committed to delivering for doctors and their patients we believe we are well positioned to deliver growth and value in 2026 and beyond. With that, I'll turn it back over to Joe for final comments. Joe Hogan: Thanks, John. In summary, I'm pleased with the fourth quarter results and strong finish to 2025. We delivered sequential and year over year growth in clear aligners, saw improved stability in North America, and delivered solid performance in imaging systems and services, International markets and our DSO partners continue to show encouraging momentum. And we're tailoring region regional specific strategies supported by local manufacturing and product offerings to unlock meaningful, still untapped demand. Across DSOs and GP dentists, we strengthen clinical training, expanded AI enabled tools, and broadened financial partnerships support utilization and improve access to Invisalign treatment. Our localized data driven marketing programs are beginning to improve retail conversion in targeted markets, and our evolving product portfolio designed around affordability, flexibility, and predictive is resonating with doctors. The teens and growing kids category remain a major long term opportunity. Supported by unique solutions like Invisalign First, Invisalign pallet expander system, and MAOB. We continue to invest in innovation across AI driven treatment planning, integrated digital workflows, and direct fabrication capabilities. Key areas highlighted in investor day that improve predictability, increase speed, strengthen our cost structure, and enhance margins over time. These investments support our broader priorities consistent execution, improved operating leverage, stronger conversion, and disciplined capital allocation. At the same time, remain grounded in the realities of the current environment. Our opportunities are significant, but sustained momentum in 2026 will require disciplined execution across regions, channels, and product lines, particularly strengthening North America, improving conversion throughout the funnel, and scaling internationally. Looking ahead, we're cautiously optimistic. Our strategy is clear. Our competitive advantages are strong, and our innovation road map is aligned to the needs of doctors, patients, and our partners globally. Realizing the full value of these assets will require continued focus and consistent performance. We remain committed to expanding access to Invisalign treatment, accelerating conversion, and advancing the next generation of digital orthodontics. Powered by the world's largest orthodontic data asset, real time ClinCheck planning, and the only fully integrated digital ecosystem spanning Invisalign iTero, and Exocad. Together, these capabilities position us to broaden adoption, strengthen utilization, improve efficiency, and drive long term value for customers, patients, and shareholders. As we move into 2026. With that, thank you for the time. I'll turn the call over to the operator. Operator: Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press 11. On your telephone keypad. You will then hear an automated message advising your hand has been raised. You may press 11 again if you would like to remove your question from the queue. It may be necessary to pick up your handset. Before pressing the keys. One moment, please. Our first question comes from the line of Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: Hey guys, good afternoon. Congrats on a nice quarter and outlook and thanks for the question. I was wondering, Joe, if you could maybe parse apart and maybe conceptually, if you can't do it numerically, of how we think about this improved volume performance. Do you think it's sort of underlying market trends accelerating? I noticed you're also there's a big emphasis seems like, the sales force towards higher growth channels. So I'm just trying to understand how much of it you think is market driven and how much you think is perhaps a different sales strategy or marketing strategy that you guys are adopting? Thanks so much. Joe Hogan: You know, I'd know, I'd say stability when you look at the markets and what we've really worked through. Elizabeth, recently, I'd say on top of that stability, you see us executing well in this of, you know, we talked about the DSOs all around the world, and and really, honestly, incredible growth they've been able to drive over the last, really, several quarters for the business. I think our portfolio, like we talked about with young patients, you know, again, you think about the pallet expander, MAOB, those those things, Invisalign First are are great products. There's also a strong attachment rate we're seeing with when you have IPE along with Invisalign First. Those things 40% of the time will evolve into Invisalign First case. So that's a nice part of that early teens marketplace that we're helping to grow that marketplace overall. So then DSP and touch up cases and all are really a big growth area for us too. Elizabeth Anderson: Got it. No. Thank you for that additional color. And then maybe, John, one for you. As you talk about sort of the positive ASE perhaps in the first quarter. Anything you can do to help us put a little bit more of a parameter around what you would consider sort of that positive growth? John Morici: Yeah. I think when you look at the the mix that we have, as we've in certain countries, and we've we've talked about this, you know, certain countries give us more of a favorable ASP mix, and we expect that as as we grow in some of these these regions that have a higher list price, and that that will help us. And then also balancing the product portfolio. You know, where we have, you know, some of those products that are more comprehensive, and and we see some of that growth coming through. So there's a there's a multitude of of of things that we see from an ASP, standpoint, but manage it closely, understand what it means from an ASP all the way to gross margin, and you know, we see a good combination there. Elizabeth Anderson: Great. Thanks so much. Operator: Alright. Thank you. And our next question comes from the line of Brandon Baskas, with William Blair. Hey, everyone. Thanks. Brandon Baskas: Thanks for taking the questions. Maybe first, Joe, can we spend a minute another minute you know, sounds like things are stable in end markets. Just to us a little bit about what that means. And in part, I'm asking because think the next question then becomes, like, what is the assumption as you think about the 2026 guidance What are you guys kind of assuming both on the international side and the North or the Americas side for end markets? Joe Hogan: Brandon, it's Joe. I I you know, open up with this and let John jump in is I'd say we're projecting, you know, what we experienced in the second half of the year. The execution we've had, obviously, from a global standpoint, the good penetration and growth that we've seen there, Again, leveraging the early teens like I talked about before with Elizabeth in those areas. And so we continue to run the plays we've been running from an execution standpoint and a product standpoint. Not just globally, but in Americas and North America too. Challenge. And so John Morici: just on that, Brandon, we're not expecting our forecast is is saying, look. We we expect the markets to to behave like they are. No no change in terms of what we've seen. It's about us driving that that active conversion approach that we have. Some of it on on the products, and the portfolio that we have. Some of it is in terms of how we go to market. Some of the last minute or last mile efforts that we have to be able to help those those customers drive that conversion. So it's just it's just taking that mindset and and building that forward. But really not expecting the markets to be anything different, and that's what's included in the forecast. Brandon Baskas: Got it. And then, that that's helpful. Joe, you the comments you were making around DSOs are are really interesting. I know this has been a a strong point for you guys for a while, I think this is the first time I've heard you say some of the DSOs grew triple digits. And I I guess the question is, can you just talk to us a little bit, like, how early you are in this adoption curve in the DSOs I'm trying to get a sense of how many of these can continue to grow in the double digit or even some of them in the triple digits as you go through 2026. Thanks for the questions, guys. Joe Hogan: Yeah. I think there's two parts to that. The answer to that question, Brandon. One is the continued DSO penetration. As they move to a larger percentage of the markets that they participate in. And now behind that, we've, you know, recruited and, you know, been recruited by other DSOs help to join that. So our penetration in DSOs around the world has increased too. You know, as I said in my script too, we are a natural partner because we do we can scale on so many dimensions with them. And it's it's you know, some of these DSOs had worked with some competitive suppliers of when they look at us, they understand that we can we can scale treatment planning. We have local kind of distribution. There's just so many areas that we can help them with a broader product portfolio, all those things. So I would say you know, we're still, you know, good growth parameters in that business, and I'd say also, you're gonna see DSOs continue to expand around around the globe, and we'll continue to take advantage of that too. Brandon Baskas: Thank you. Thanks for Operator: And our next question comes from the line of Jeff Johnson with Baird. Yes. Thanks. Good evening, guys. Hey, Jeff. Jeff Johnson: Hey. Wanted to start maybe on your adult business. That 8% number really stands out to me. Not only is it your best number since 2021, I think you said that on the call, but you guys haven't even sniffed a 5% number in the last three or four years. So that's, you know, materially higher and especially came against a generally tough comp of 4% last year in the fourth quarter. So is that early traction with NOAA? Is it some HFD tailwinds? Is it ClinCheck Live early traction? Just what's really driving that improvement on the side, especially given that macro doesn't seem like it's really supporting an improvement in, you know, adult spending on on discretionary items? I think you named three really good variables, Jeff, that's helping to drive that. Joe Hogan: You know, I mean, you know, honestly, a lot of it comes through DSOs too, which really helps. Particularly on the, you know, on the GP side we see, but the the, you know, the OSOs grow well in that area too. So it's those variables you just talked about, you know, ending with financial credit. That really helps in these times, particularly in North America where we know patients are challenged that way too. So you know, broad portfolio, scanning every patient that walks in the door. And we talk more and more about that's the key. If you wanna go digital, wanna convert patients you normally wouldn't convert, is get this thing into a digital format in a pictorial format. You can show before and after results while that patient in that chair. That's what the DSOs do so well in the retail you know, accounts we work with do that well too. John, anything you'd add to that? Jeff Johnson: Sorry. Yeah. Maybe one follow-up then. Yeah. Yeah. Joe, Just one follow-up. It might be a similar topic or or answer from you. But, you know, I think last quarter when we kinda backed out, it looked like your North American retail business or your your non DSO business I guess, how we think about it, was probably down know, maybe pushing double digits, year over year. I I know you guys told me that was a little aggressive, but somewhere in that ballpark. You mentioned, I think, at your very end, comments there of the call of the prepared remarks that, the retail business got a little better. Just any kind of commentary or any kind of color you can provide to flesh that U. S. Retail business or North American retail business out in the period? Joe Hogan: Hey, Jeff. The word I'd use is is more stability there. We're standing, I think, on a better platform in that sense. The team's been executing better around there. I wouldn't call the economic situation in The United States better in any way in a sense of driving volume in that way. I just say the team's more focused. Our portfolio is a little broader as we talked about. And and, obviously, the DSOs are helping a lot in that sense too. John Morici: North America was we got better. Due to some of the retail wasn't as negative, and and the DSOs growth. That combination brought North America to be better a year over year basis than it was in in Q3. And when we talked about it on the overall Americas, when you add in Latin America, grew at the fastest rate or one of the fastest rates since 2021. So we're encouraged by that. And it's all the things Joe talked about to help drive that conversion. Jeff Johnson: Thanks, Joe. Helpful. Thanks, Joe Hogan: Thanks, Jeff. Operator: Thank you. And our next question comes from the line of Jon Block with Stifel. Jon Block: Hey. Hey, guys. Good afternoon. John, I you know, I'm gonna get try to get pretty granular I know you gave some color on twenty twenty six clear aligner volumes and overall worldwide revenues for the year But I just wanna try to drill down on, you know, price or ASP. So should we think about Invisalign ASPs down you know, call it 2% year on year. I'm thinking FX is probably a plus and that full year is probably a plus. But maybe John Morici: any detail you can give us there. And the follow on would just be you know, I think ASPs were supposed to be up a little bit three q to four q. They were down a little. Maybe just talk to Was it intra quarter FX? Was that just geo mix? Any color there? Thanks. John Morici: Yep. No. Two good questions. So overall, your first question, John, yeah, expect ASPs to work, you know, kind of model maybe one to 2% down. Overall. So it's kind of in that range that you talked about on a year over year basis. 2026 for all the things that we talked about country mix, as well as product mix, the kind of the noncomprehensive versus, comprehensive. And when you look at it on a quarter over quarter basis, when you look at the our fourth quarter, they would have been flat had we not had, you know, FX change slightly. You know, we got a little bit worse from a quarter over quarter in in FX, and then you also had some of the country mix. We had really, really good growth in some of the countries, you know, that are in Latin America and Turkey and India and so on that have a lower lower, list price. So the the combination of that country growth on a quarter over quarter basis, plus, you know, slight impact on the f FX side of things. From a currency standpoint caused us to be down slightly. Jon Block: Got it. Great color. And then just a follow-up. John Morici: Joe, I'm just curious, like, what you're hearing, if anything, regarding you know, these tax receipts or stimulus. Did you build anything into one q? Just how you think that may or may not play out. And then the tack on of that admittedly sort of different question is we're sitting here in February, you know, is is no AA officially out there? You gonna sorta hit the go button all at once? I know it's been with the DSOs for a while, or is this gonna be more drip drip by geography? Just really how you refine the rollout of NOAA and your thoughts there in '26. Thank you. Joe Hogan: Yeah, John. On the on the taxes, you know, again, I'll describe it as I did before. We just looked at North America as stable as we go into the first quarter. We understand some of the projections on taxes and what, you know, consumers look at that as possible upside, obviously, but we didn't plan necessarily around that. Just plan on, you know, how we have to execute and the way we did in the fourth quarter and carry that over. As far as the zero AA products, you know, they mix and match all over the world, John. Kind of a different kind of a profile what we have in The United States versus what we have in Europe and what we're doing in APAC. In general. But, you know, as John said in his comments, know, the customers out there like this options, especially ones that have a lot of confidence in our product line. Know how to use the product, understand, you know, that that you the perfection aspect of five by five that they think I worried about before. Over the years, I think they've gained more confidence in themselves through our product line and what it can do. So that I it's not like it's all starts right now. We have some of these things we'll roll out in APAC. Some different variations will roll out, and in the in Europe. But I'd say, you know, by the end of the first quarter, into the second quarter, of, of this year, we'll have that pretty much lined out by geography. Jon Block: Great. Thanks for the color, guys. Joe Hogan: Yeah, John. Thanks. Operator: Thank you. And our next question comes from the line of Michael Cherny with Leerink Partners. Michael Cherny: Hi, Mike. Good evening. John Morici: Yes. Hey. How's it going? Thanks for the question. Congrats on a nice quarter. Maybe just on the margin side, great to see the talk about the 100 basis points of opportunity. As you think about where you were in 3Q versus the guidance now, any changes in terms of how you think about getting to that margin Any positive surprises? Anything relative to the revenue drop down on the better case starts? Talk to me about the dynamics, especially the strategic nature of the dynamics. In terms of the potential for growth. Yeah. I I Michael, this is John. So when you think about the product portfolio we have, we have the mix shift that we've been talking about. It it gets noted in ASP, but what that means is when we don't have refinements and we have some of this lower stage product, it's it's more profitable. The the margin rate is higher. And so you see some of that from a mix standpoint. It's shows up in our in our gross margin. You're also seeing the, many of the effects of some of the productivity improvements that we have. We talked about some of the equipment that we had and maybe upgrading some of the equipment and seeing some of this. We're starting to see early stages of of that benefit as well. So you know, it's our it's our products that we have and and how we're going to market with those. And then it's also just driving productivity. We wanna be, mindful of of getting that adoption, growing our our business, and and that volume helps. DSP and others that don't have refinement, but then driving productivity and we saw good results from a gross margin standpoint, like saw in in Q4 that we haven't seen we haven't seen since close to 2021. So that's good to see. We wanna continue that as we go into, 2026. And just one follow-up, and I apologize if I missed the nuance relative to the DSO commentary. This is more tied back to the pull through on Lumina. You're obviously now a year plus past the launch. Michael Cherny: How is it John Morici: behaving, acting in terms of your conversion opportunities relative to the placements and what that's doing in terms of some of the volume dynamics? Is it hitting the targets that you want? Is it outperforming? Anything more you give us on the experience there would be great. Joe Hogan: We feel really good about that platform. Overall, Michael. It's been well accepted in the marketplace, both from a GP standpoint who do a lot of restorative procedures as well as the orthos, obviously, that are you know, dedicated to orthodontics in that way. We know that know, having Lumina at those accounts, and the more Luminas you have in those accounts, the better off you do. And continue to emphasize that at accounts, and the uptake seems to be good. I think to answer your question, you have to kinda go all over the world. But in general, I think the foundation of your question is, can you keep growing Lumina? Will keep growing that platform? We feel good about that platform. It's a multistructured light. We'll obviously have iterations on that platform as we go forward. So feel really good about not just the market performance of Lumin over last year, but what we're positioned to do in the future with the technology too. Michael Cherny: Thank you. Thanks, Michael. Shirley Stacy: Next question? And our next question comes from the line of Vic Chopra with Wells Fargo. Vikramjeet Chopra: Hey, good afternoon and congrats on a nice quarter. John Morici: Maybe a couple for me here. Vikramjeet Chopra: You know, on the guidance range, said 3% to 4% revenue growth for 2026. Maybe talk about some of the other variables behind that guidance range. And do you think that 3% to 4% range is conservative? Or do you think you can deliver above that level of growth in '26? Yeah, Vic. This is this is John. So, look, we we guide as as we always do. You know, we look at, you know, kinda how how we see the numbers, the actions that we're taking to be able to help drive performance. With new products and go to market activities and so on. So that's that's the range that we give, at this point, to be able to grow off of you know, 2025 at the three to 4%. John Morici: You know, it it goes back to things that I've talked about that John Morici: are really strategic for us. We wanna grow internationally. We're seeing good growth. We wanna continue that. Wanna continue to drive orthodontic you know, utilization. So that's products that that no AA product, the the comprehensive helps there. Some of the new products that we have with with Invisalign First and MAOB and others, those will will help us grow that utilization for those doctors. And we're really excited about, how GPs fit into this. They're doing a lot more of scanning every patient, visualizing, really tying in financing and other things to get that sometimes reluctant patient to decide to go into treatment. And then, of course, we wanna leverage our brand to be able to make sure everybody's aware of our product and how we can differentiate and so on. So it's really a continuation of our strategies around those those major aspects that give us the the confidence to be able to guide in in the way we have. And, you know, as as we go quarter by quarter, we'll we'll update as needed. Got it. And just a quick follow-up for me. You know, given the strong growth you called out among the DSOs, maybe just remind us what percent of your sales are coming from the DSO channel and how you plan to further expand these partnerships Thank you. Yeah. DSOs for us, Vic, are about 25% of our of our business on a volume basis, and we wanna continue to expand. They share many of these DSOs are are becoming more of a a digital orthodontic mindset. We share that digital orthodontic mindset with them. And they wanna you know, they want the the scanners. So they have lumina's. They're scanning every patient. They're providing a lot of visualization and and growing, and we think that's a that's a natural benefit when a DSO is looking to scale, we can help provide that scale through our technology and our operations, sharing, you know, and leveraging the brand as well. So it's a great partnership. We wanna continue on that. But also make sure that we're we're also helping our retail doctors grow as well. So we're not forgetting because it there's a large amount of retail doctors as well but we're very pleased to what we see in DSOs. Joe Hogan: Thanks, Vic. Thank you. Operator: And our next question comes from the line of Jason Bednar with Piper Sandler. Jason Bednar: Hi, Jason. Hey. Hey, guys. Good afternoon. Congrats on the results here today. Jason Bednar: I'm going to follow-up on Mike Cherny's operating margin question, tug on that thread to start. And the focus of the question is, are there things that need to happen or fall into place in order to hit that 100 basis point margin expansion target. You got a variety of scenarios that can obviously play out with product mix, geographic mix, channel mix. I I get all that, but Jason Bednar: are there scenarios where you see that 100 basis points at risk Jason Bednar: Or is that piece of your guidance you feel fully within your control? John Morici: Yeah, Jason. When we think about that, we look. We have to execute. We have to better help grow the business. So much of what we see, especially on that the productivity that we have is is based on volume. We have to on our our volume and and get that to come through our our manufacturing We see volume benefits, volume leverage when we have that. But we've made a lot of changes, kinda exiting kind of in the 100 basis point improvement. And as we execute just like our overall revenue guidance, we'll update as we go forward. Jason Bednar: Okay. Alright. Fair enough. Jason Bednar: Wanna move over to China VBP real quick and Jason Bednar: I appreciate all the comments you made and your exposure more on the private side of the market. But I guess, you help us a bit Jason Bednar: more with what you're seeing competitively in advance of that VDP rollout, understanding it's delayed. But what kind of pricing assumptions are you making in that down 1% to two guide for your global ASPs for the year? How much is China impacting that? And then are you similarly making assumptions around the volume up uptick post to VBP implementation? Just any help there on those factors would be great. Joe Hogan: Hey, Jason. It's Joe. I know, first of all, I'd say there's an uncertainty around bad implementation next year. You know, secondly, you have to think three and four area hospitals are the biggest focus in that area. We don't really participate in that to any any broad extent, and that's where it would be hit first. And kinda what I covered in my comments. You know, if we're 85% private, We're primarily in one or two cities. Now we know from the medical device industry and, you know, and other parts of the orthodontic industry and the dental industry that, you know, that might change in the sense of how VBP affects it. But we've pretty much taken a status quo look at our business in China as we go into as we go into the year. Like I mentioned, I feel we're well positioned in the sense of the products that we would position there if that does go through. And so right now, we're not expecting any major disruption for China. On year to year based on BVP. So our guidance, John Morici: to be clear, Jason, is does not include any VBP impact, whether it's on the volume side or ASP side given, how Joe positioned. Shirley Stacy: Thanks, Jason. Next question, please. Operator: Sure. Our next question comes from the line of Michael Sarcone with Jefferies. Michael Sarcone: Hi, Michael. Afternoon, and thanks for hey. Good afternoon, and thanks for taking the question. Michael Sarcone: Just first one on the system sales. John Morici: I think you had talked about previously you were going to end of life some of the older iOS systems. Maybe, you know, with that in mind, can you talk about how you're thinking about growth in '26 between kind of replacement cycle versus de novo placements? Joe Hogan: Hey, Michael. I mean, we there are some, you know, old Element iTero scanners that we have. You know, a a clause on right now in the sense of what we'll service what we weren't servicing. We're doing our best to work with doctors to get them, you know, over the line and into a a new product like Lumina overall. I can't give you the specifics in the sense of, you know, how we look at our our, you know, our overall services business next year. And know, and scanner business and tell you specifically what that is. But I don't feel that transition's a major variable in the equation of our success year. And we're always looking to to have those scanners, especially the older ones like John Morici: we've seen, element ones and twos, to position those out of the market. Offer a trade in allowance, and then get that that doctor to the newest scanner, Lumina. And once they see the difference, it usually, you know, kinda goes, and it's a it's an easy transition. But it's more efficient, for them to to use Lumina, and it's better for us. It captures more images better and so on. So we want that transition So like everything else, we wanna we wanna work with them to make that happen. Thanks, Michael. Next question, please. Operator: Our next question comes from the line of Steven Valiquette with Mizuho Securities. Steven Valiquette: Hi, Steve. Thanks. Good afternoon. Yeah. Thanks for taking the question. Yeah. I guess just separate from the discussion on your own ASPs and your own pricing, just curious to maybe get a little Steven Valiquette: more color on your thoughts on just overall clear aligner pricing trends across the broader global marketplace. There's seemingly some positive news in relation to price increases on a few key competitors. I'm wondering maybe just tariffs or other factors are maybe just driving higher prices across competitive landscape in a way that might help you And is that material enough to where that was, a factor in your guidance, or do think would have guided for like your volume trends kind of regardless of what's going on and competitor pricing front? Thanks. John Morici: Yeah. Steve, this is John. I, you know, I don't think that specific what they're doing is is is factored into our our guidance. You know, our guidance is based on what we can do to better help drive the business and drive adoption and take this active conversion approach. But it is noted. I mean, we watch things closely to see what competition does. We hear it in the field and so on. And and you're right. Many competitors for various reasons, I think know, in terms of tariffs or maybe it's profitability or other reasons that they look at changing their pricing and and I think it it stands to reason that some of the pricing that initially offered, they've had to increase. And it's probably a good thing in the in the long run to do. It certainly helps us, I think, going forward. But it's not contemplated in our guidance. But I think it's the evolution of the business. It goes forward. Shirley Stacy: Thanks, Michael. Next question, please. Operator: Our next question comes from the line of David Saxon with Needham and Company. David Saxon: Great. Thanks. David Saxon: For taking my questions. Good afternoon. I'll just keep it at one. So just on the direct David Saxon: fab, as you roll more products through direct fab, how are we how should we think about the magnitude of that impact on gross margins kind of the cadence of that of how that hits the P and L? Thanks so much. Joe Hogan: Yeah, David. It's Joe. Let me think we've been pretty clear that you know, that'll be somewhat margin dilutive in the sense as it begins to roll out in 2026. You know, we'll scale that. We have to scale to the millions. And so know, as we get into 2027, you'll see us really being able to scale out. And I think you know, as you as you enter the second half of 2027, you get into 2028, we expect we should move into margin accretion in the in that period of time. David Saxon: Okay. But for '26, though, do you expect David Saxon: gross margin to be down? Or I mean No. I mean, with with the margins, we you know? Joe Hogan: We're pretty much projecting the margins that we have. Yeah. So we've got, you know, on these specific direct John Morici: fab, direct fab that that is margin dilutive. But when we talk about the 100 basis point improvement, on op margin, that includes whatever impact that we might have from the direct fab. So we're contemplating that in terms of our overall guidance. But on direct fab itself, like Joe said, you you need to scale that resin and and drive utilization on the actual manufacturing. And until you do so, it's it's margin dilutive. David Saxon: Okay. Great. Thanks. Operator: Thank you. Our next question comes from the line of Michael Reiskin with Bank of America. Michael Reiskin: Great. Thanks. I'll keep it to one as well, just a follow-up. On the scanners and and services segment for for '26. You know, you gave us a of the moving pieces between volumes, and you talked about ASPs earlier. It just sounds like you're you're guiding to scanners and services being roughly in line with total company revenue growth. Give or take a couple points. I was thinking that in '25, you know, you guys had a really tough comp. From prior year of 16%. So that was, you know, it it did a little bit slower. But since you're still on the Lumina ramp, I'm just curious why you wouldn't see some upside there and sort of what's holding you back from giving them more aggressive outcome scanners. Operator: Thanks. John Morici: Yep. Yeah. Michael, this is John. So on in total, you're right. Systems and services, when we think about kind of the company average in terms of you know, the the guidance that we gave, the three to 4%. Systems and services kinda falls into that on a year over year basis. So a lot of new things that we still have, to be able to grow with our and services business, some of the upgrades that we talk about, some of the trade ins, other ways to be able to grow, but we think broadly it grows equal to or about at, what clear aligners grow. Shirley Stacy: Thank you, Michael. Two more questions, please, operator. Operator: Our next question comes from the line of Kevin Caliendo with UBS. Kevin Caliendo: Thank you. This is Dylan Finley on for Kevin. I'll keep it to one. Okay. Going back to John's commentary on the, question on the no AA and and of where that stands today, how was that contemplated into the one to 2% ASP decline that you're forecasting for the year? And, I mean, is that product going to be rolled in a meaningful way? And any additional aligners, whatever, would those be incremental to what you've guided for, or are there assumptions in place for what to get in in additional aligners? John Morici: Yeah, Dylan. I could take that. So we expect to to in success, as we pilot things, we expect to to roll things out from a a no refinement type product, the no AA product. So we're seeing good uptake on the comprehensive with no AAs. We're seeing this and and have tested in in various markets, and we're seeing success. So that Continues to roll out in in in Q1. And like Joe said, it'd be mostly full fully rolled out into q into '2 Our guidance reflects that. So we have that. Don't think of an ASP impact with that type of product either, though, because remember, we don't have to defer revenue on a no refinement type of product. So we could recognize all the revenue upfront. The refinements will come over time. As doctors need to provide to need those refinements, and we just get that over time. And but it's not an initial ASP impact when we have that. And that's what's been contemplated in in the volume that we gave as well as the ASP. Shirley Stacy: Thanks, Dylan. Last question, operator, please. Operator: Final question comes from the line of Erin Wright with Morgan Stanley. Erin Wright: Great. Thanks for squeezing me in. So in the ortho segment, Erin Wright: how is broader clear aligner growth across the industry, particularly in the North American market? Comparing to brackets and wires? And just based on some of the gauge data that you track on that front. And then across kinda the team segment, any metrics on conversion rates or anything like that from a Invisalign First or pallet expansion standpoint? And and how that's tracking? Is that is that moving the needle? Thanks. Joe Hogan: Erin, it's Joe. On the ortho segment wires and brackets and liners, I would say there's between the fourth quarter and what we saw the rest of the year. I I don't think there's a big difference in the sense of the conversion we've seen on, you know, particularly teens with wires and brackets and in our product line overall. Now where we have seen a difference, obviously, in the younger patients, and and that's not really a wires and brackets competition. Those are different devices that we're going about, and we saw, you know, great growth in that area. Conversion rates, again, I think conversion rates if I hit this right on your questionnaire, it has a lot to do with how these doctors convert. Do they scan up front first? Do they show, you know, visualization, you know, like, you know, our smile? Our smile products and different things like that. And workflow becomes extremely important in the sense of what those conversion rates are. But I haven't when you think holistically or generically in the industry, don't think the conversion rates in the orthodontic community have changed dramatically at all during the year. Shirley Stacy: Thanks, Erin. Okay. Thanks. Operator: Thank you. And we have reached the end of our question and answer session. I will now turn the call back over to Shirley Stacy for closing remarks. Shirley Stacy: Thanks everyone for joining us today. Look forward to meeting you with you at upcoming investor conferences at industry events, and Chicago Midwinter in the next couple of weeks. If you have any follow-up questions, please contact Investor Relations, and have a great day. Operator: Thank you. This concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation.
Operator: Afternoon, and welcome to SiTime Corporation's Fourth Quarter 2025 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you would need to press star 11 on your telephone. You would then hear an automatic message advising your hand is raised. To withdraw your question, please press star 11 again. We ask that you limit yourself to one question and one follow-up. As a reminder, this conference call is being recorded today, February 4, 2026. I would now like to turn the conference over to Brett Perry of Shelton Group Investor Relations. Brett, please go ahead. Brett Perry: Thank you, Towanda. Good afternoon, and welcome to today's conference call to discuss SiTime Corporation's Fourth Quarter and Full Year 2025 financial results, as well as SiTime Corporation's proposed acquisition of Renesas' timing business. Joining us on today's call from SiTime Corporation are Rajesh Vashist, Chief Executive Officer, and Beth Howe, Chief Financial Officer. Please note, in addition to the respective press releases issued this afternoon, a supplemental slide deck related to the proposed acquisition is available on the Investor Relations section of the company's website at investors.sitime.com. Before we begin, I'd like to point out during the course of this call, the company may make forward-looking statements regarding expected future results including financial position, strategy and plans, future operations, the timing, market and other areas of discussion. It's not possible for the company's management to predict all risks nor can the company assess the impact of all factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. In light of these risks, uncertainties and assumptions, the forward-looking events discussed during this call may not occur. Actual results could differ materially and adversely from those anticipated or implied. Neither the company nor any person assumes responsibility for the accuracy and completeness of the forward-looking statements. The company undertakes no obligation to publicly update forward-looking statements for any reason after the date of today's call to conform statements to actual results or to changes in the company's expectations. For more detailed information on risks associated with the business, we refer you to the risk factors described in the company's annual report on Form 10-Ks for the year ended 12/31/2024, as well as the company's subsequent filings with the SEC, including the company's quarterly report on Form 10-Q for the quarter ended 09/30/2025. During the call, management will refer to non-GAAP financial measures which are considered to be an important measure of company performance. These non-GAAP financial measures are provided in addition to and not as a substitute for nor superior to measures of financial performance prepared in accordance with US GAAP. The GAAP to non-GAAP reconciliation includes stock-based compensation, expense, amortization of acquired intangibles and acquisition-related expenses. Which include transaction and certain other cash costs associated with business acquisition as well as changes in the estimated fair value of earn-out liabilities and accretion of acquisition consideration payable. Please refer to the company's press release issued earlier today for a detailed reconciliation between GAAP and non-GAAP financial results. With that, it's now my pleasure to turn the call over to SiTime Corporation's CEO, Rajesh Vashist. Please go ahead. Rajesh Vashist: Thank you, Brett. Good afternoon, everyone. Thank you for joining us today. We have a lot to talk about. We announced exceptional results for 2025, and we also announced a transformational acquisition. I'll begin with our business and our performance, and then I'll turn to the transaction. Q4 2025 was another exceptional quarter for SiTime Corporation. We delivered $113.3 million in Q4, up 66% year over year and earnings per share tripled from $0.48 to $1.53. In Q4, every end customer segment grew year on year, as did every region. Gross margins in the quarter grew significantly up 61.2%. I'm particularly pleased about this achievement. In the beginning of 2025, we said we would exit the year at greater than 60% gross margins and we achieved it. We predicted this expansion of gross margins because we anticipated mix changes to higher value products, and we reduced new product costs as they moved into volume production. For all of 2025, we delivered $326.7 million, up 61% year over year. Every end customer segment and region showed growth. Earnings per share more than tripled from $0.93 to $3.20. Demand remained very strong exiting the year, which is an indication of significant future growth in 2026. While we don't usually discuss our book to bill, we wanted to give you a metric of the demand strength across a customer base as we go into a strong year. So our book to bill was over 1.5 at the end of Q4, and we have excellent visibility for the year. Channel health remains solid exiting 2025. Distributor and contract manufacturer inventory levels were in line with our target reflecting strong sell-through and disciplined supply management. Design win momentum remains solid across all end customer segments and regions, another indication of growth in 2026 and beyond. Q4 growth was again led by Comms Enterprise Data Center, CED, business, which grew 160% year over year. This marks the seventh consecutive quarter of over 100% year over year growth. Additionally, our 2026 CED forecast has grown since our last earnings call driven by increases in AI CapEx spending. The two to four times increase in computing power of the new XPUs, GPUs, CPUs, is driving the need for faster networking infrastructure and accelerating the adoption of 1.6 terabit optical modules. Our customers have recently increased the 2026 forecast for our oscillators used in 1.6 terabit optical modules by 50%, which is over and above the increase that we reported in November. This move to 1.6 terabit drives the need for higher clocking frequencies from our oscillators for which we get higher ASPs or average selling prices. The increase in 1.6 terabit modules notwithstanding, demand for oscillators used in 800 gigabit optical modules continues to remain strong. In parallel to the increase in bandwidth of networking infrastructure, the hyperscalers are deploying more XPUs for training, as well as getting ready for inference. Beth Howe: Since November, this trend has driven a 50% increase in 2026 forecast of our Super TCXOs which are used in both computing infrastructure and the supporting smart NICS or network interface cards. SiTime Corporation's goal has always been to deliver predictable revenue growth. At IPO, CED was just 12% of our revenue, and then we created a strategic plan to expand it to 40 to 50%. Since then, our focused investments in product development, as well as customer acquisition have paid off handsomely. CED today makes up 53% of our revenue, and that is exactly where we want to be. I'm also very pleased that a large portion of this revenue comes from high value products reflecting the sustained benefit that we bring to our customers. Our CED strategy laid the foundation of our success today and we're using this as a blueprint for rapid growth in our other businesses. We continue to grow across all other end segments, aerospace defense, automotive, and industrial, are all benefiting from increased adoption of autonomous systems and physical AI where systems perceive, reason, and interact in the physical world in real time. These systems need accurate positioning sensor fusion, motor control, and precise synchronization. Where precision timing is essential. Example, in humanoid robots, we see up to $20 of a precision timing product. And robotaxis in level four ADAS or self-driving cars require up to $15 of precision timing content. In defense, where worldwide spending is accelerating, our product resilience is driving adoption in a variety of applications. In the next few years, we expect that each of our automotive, defense, and industrial businesses to exceed $100 million annually. Entering 2026, demand drivers remain firmly in place. Our strategy remains unchanged, to lead in high value precision timing applications deliver differentiated system level solutions, and scale our operating model to drive long-term value creation. The combination of deep engagement in AI infrastructure, and broad participation across diverse segments positions us exceptionally well for continued growth. I'm confident in our trajectory and excited about the opportunities ahead. With that, I'll now turn the call over to Beth Howe, our CFO, to review the financial details, after which we'll be happy to take your questions. Beth Howe: Thanks, Rajesh. Today, I'll walk through our fourth quarter and full year 2025 results and then I'll provide our outlook for 2026. As a reminder, my remarks focus on non-GAAP financial results which are reconciled to GAAP in our press release. Fiscal 2025 has been a pivotal year for the company. In which we delivered exceptional revenue growth, expanded gross margins, and demonstrated meaningful operating leverage. Our results reflect the scalability of our operating model, the strength of demand across our target customer segments and the growing strategic value of our products and solutions. For the full year, revenue reached $326.7 million, an increase of 61% from the prior year. Gross margins for the year were 59.3% and operating expenses were $135 million. Non-GAAP operating profit was $58.6 million, an increase of $58 million year on year or 18% of revenue. For fiscal 2025, our non-GAAP earnings per share more than tripled to $3.20. Cash flow from operations was $87.2 million for the year. A strong improvement compared to $23.2 million in 2024. Reflecting the combined benefit of higher revenue, richer mix, and disciplined expense management. Overall, our momentum reflects a company operating with focused efficiency and increasing strategic impact. Turning to our fourth quarter results. Q4 was a milestone quarter for the company. As we surpassed $100 million in quarterly revenue for the first time, and generated operating margins of 30%. Revenue in Q4 was $113.3 million, up 66% year over year and 36% sequentially. Revenue was significantly higher than expected as customer demand continued to strengthen in the quarter. Communications, enterprise and data center continued to be the primary growth engine contributing $64.6 million or 57% of total revenue. And rising 160% year over year. Growth in this segment was broad-based and driven by multiple customers across AI and data centers. Automotive, industrial, and aerospace delivered $24.5 million or 22% of revenue, increasing 19% year over year. And consumer, IoT and mobile revenue was $24.2 million or 21% of total revenue, up 7% year on year. With our largest consumer customer contributing $17 million for the quarter. Gross margins in Q4 were 61.2% representing a 240 basis point improvement year over year and ending the year above 60% as we had at the 2025. The increase was primarily driven by continued mix shift toward higher margin products. Improving manufacturing overhead absorption also contributed meaningfully to the margin expansion. Operating expenses for the quarter were $35.5 million consisting of $19 million in R&D, and $16.5 million in SG&A. This was in line with expectations and driven by higher headcount variable compensation tied to revenue performance, and continued investments to support our long-term road map. Operating income for the quarter was $34 million, an increase of $26 million year over year. Demonstrating strong leverage and discipline in our cost structure as revenue scales. Interest and other income and expense was $7.4 million. Non-GAAP net income was $41.3 million or $1.53 per share, more than triple the $0.48 reported a year ago. Now let me turn to the balance sheet. Accounts receivables ended the quarter at $45 million with days sales outstanding at thirty-six days. Up from twenty-four days in Q3 as linearity returned to more normal. Inventory declined to $81.7 million from $86.7 million in Q3 driven by customer shipments during the quarter and continued focus on inventory management. During the quarter, we generated $25.4 million in cash from operations. We also invested $12.6 million in capital expenditures. Finally, we paid $42.2 million to Aura including the final payment for dye deliveries. Ended the quarter with a strong liquidity position of $88 million in cash and short-term investments. Now let me move to our outlook for March. Because of the acquisition of Renesas' timing business is not expected to close in Q1, it has no impact on our guidance. Looking ahead to Q1, we expect first quarter seasonality to be less than our historical average and that our Comms Enterprise Data Center, or CED, business will grow sequentially. Since consumer is typically down seasonally sequentially in the first quarter, the higher mix of CED and the lower mix of consumer is also expected to contribute to stronger gross margins in Q1. Thus, we project revenue in the range of $101 to $104 million, up roughly 70% year over year at the midpoint. Gross margin to be approximately 62% plus minus half a point given our expected product mix for Q1, operating expenses in the range of $39 million to $40 million, interest income of approximately $7 million and a share count of 27 million to 27.5 million shares. As a result, we expect Q1 non-GAAP earnings per share to be in the range of $1.10 to $1.17. With that, I'll hand the call back to Rajesh Vashist to discuss our intent to acquire Renesas' timing business. Rajesh? Rajesh Vashist: Thanks, Beth. To reflect a little bit, over the past two decades, SiTime Corporation created the precision timing category and fundamentally transformed the timing market by delivering highly differentiated products that solve customers' tough timing problems. Along the journey, there were a handful of defining inflection points. Acquiring Renesas' timing business is perhaps the largest, and one of the most exciting. This business similar to SiTime Corporation, has a differentiated broad product portfolio except that's in clocks. Where we have a small footprint. Additionally, they have an enviable financial profile, a respected team, and a thirty-year heritage that started as ICS, then IDT, and finally, Renesas. We are really glad to have this business as part of SiTime Corporation. We've always said that customers need complete timing solutions, which include oscillators, resonators, and clocks. Our oscillators and resonators are semiconductors, MEMS based, and we have been investing in this technology for the past twenty years. To grow SiTime Corporation's clock business we invested in our own development. In parallel in 2023, we acquired Aura's clock products which had leadership IP and 50 clock products. Now Renesas' timing business takes us to scale in clocking. They are the preeminent brand with 500 highly differentiated clock products. Because they're focused on clocking in CED, industrial, and automotive, they complement our high-performance oscillator revenue. This 160 engineers that come over to SiTime Corporation at close gives us an opportunity to build an exciting road map of products that would not have been previously possible. With this acquisition, our revenue mix continues its transformation and increases scale in CED. On a pro forma basis, our 2025 CED revenue will almost double with Renesas' 2025 AI data center comms revenue. To this, we'll add our rapid organic growth in 2026, and combine it with their growth. The breadth and diversity of our customers will grow significantly with this along with faster access to customers that we would have secured only several years in the future. This acceleration of customers will include 10 hyperscalers, seven AI server leaders, 10 networking and communication vendors, and leading automotive OEMs and tier ones, and leaders in mobile, IoT, and consumer. On Renesas and SiTime Corporation's common customers, there is minimal product overlap. And we have an opportunity to generate new revenue by selling our differentiated oscillators to them. It's an unprecedented opportunity for both SiTime Corporation and our customers to collaborate and build on our twenty and thirty-year heritage to reach an extraordinary level of success in precision timing. This is also an exceptional business with great financials. It's expected to add $300 million in the twelve months after close with approximately 70% in gross margins. 75% of the revenue comes from the fast-growing CED segment which is strategically important to us. It also maintains SiTime Corporation's long-term growth rate of 25 to 30%. This acquisition is a monumental milestone towards fulfilling our vision to transform the timing market, solve our customers' toughest timing challenges, and accelerate our path to $1 billion in revenue. We see remarkable opportunities ahead and we are more excited than ever about the future of SiTime Corporation. I'll turn the call over to Beth to provide more details. Beth? Beth Howe: Thanks, Rajesh. Building on Rajesh's overview of the strategic rationale, I'll walk through how this acquisition strengthens our financial profile and accelerates our long-term growth trajectory. What is most compelling is the alignment between the strategic value of this business and its financial contribution, both of which meaningfully enhance SiTime Corporation's scale, profitability, and cash generation capacity. Financially, this acquisition significantly elevates SiTime Corporation's revenue profile, margin structure and cash flow potential. Approximately 75% of the acquired revenue comes from our comms enterprise data center sector. A fast-growing and strategically important segment for our long-term success. The remainder is diversified across automotive and industrial, further expanding our reach into durable, attractive applications across timing. As we integrate the business, we intend to invest in go-to-market capabilities to fully capture these opportunities. Importantly, as Rajesh mentioned, our long-term annual revenue growth target of 25% to 30% remains firmly intact. The acquired portfolio operates with approximately 70% gross margins, reflecting the value and differentiation of the products. This positions SiTime Corporation to reach the upper end of our 60% to 65% long-term gross margin target more quickly while expanding operating margins to above 30% as we scale and benefit from increased operating leverage. The transaction is also expected to be accretive to SiTime Corporation's non-GAAP EPS in the first full year post-close. And finally, with the combination of our organic growth and the attractive profitability of the acquired business, we expect to generate meaningful cash flow. We have structured this transaction to maintain financial strength and flexibility. Under the terms of the agreement, SiTime Corporation will acquire certain assets related to the Renesas timing business, for $1.5 billion in cash and approximately 4.13 million newly issued SiTime Corporation shares, subject to potential adjustments and a 15% symmetrical collar determined by the ten-day volume adjusted weighted average share price as of the three days prior to the execution of the agreement. We plan to finance the cash portion using a combination of cash on hand and approximately $900 million of committed debt financing from Wells Fargo. Given the strong free cash flow generation of the combined business, we have a clear path to reducing leverage to under two times within twenty-four months following the closing. The transaction is expected to close by the end of 2026 subject to the satisfaction of customary closing conditions including applicable regulatory approvals. We are thrilled to announce the intent to acquire this highly complementary preeminent clocking business as we enter the next phase of our transformation. The combination strengthens our strategic position, accelerates our financial performance, and enhances our long-term value creation potential. With that, I'll open the call for questions. Operator? Operator: To ask a question, please press 11 on your telephone, then wait for your name to be announced. To withdraw your question, please press 11 again. We ask that you limit yourself to one question and one follow-up and then return to the queue for additional questions. Please stand by while we compile the Q&A roster. Our first question comes from the line of Tore Svanberg with Stifel. Your line is open. Tore Svanberg: Yes. Thank you very much, Rajesh and Beth. Congratulations on the strong results and especially on this highly strategic acquisition. I guess my first question on the core business. So you talked about a book to bill of 1.5. I know you're not gonna give us guidance sort of by segment, but you know, could you give us a sense for, you know, where the most of those bookings are coming from you know, as those bookings obviously are generalized generate revenues for the year. Thank you. Rajesh Vashist: Well, it's no surprise that most of these bookings will come from CED. Because of the tremendous growth in CED. And I think that our customers are seeing the growth going out through the year, through 2026. And many of them are booking in advance of real demand. I don't mean they're ahead of it. I mean, they're on top of it. And I think but the others are not lagging. We still continue to see our diversified growth in all the other BUs as well. But it just happens to be that just because of its scale, the CED is a bigger portion. Tore Svanberg: Very good. And as a I had a question on the acquisition and how this is gonna play out. So again, it sounds 75% of the revenue is aligned with your CED mix which is great. I guess that that means that, you know, there's you know, end markets or applications that Renesas is targeting that did not come with the acquisition. But you also mentioned that, you know, you might be able to in some of those with your resonated products. So just hoping if you could elaborate a little bit on that, especially on the timing of that potential additional growth engine? Thank you. Rajesh Vashist: So just to be clear, we're getting 100% of the timing business. Whatever is in the timing business, that's called TPD, timing products division, is coming over to SiTime Corporation. There isn't any business which is being left behind. The integration possibility that we are exploring through the MOU is a completely different one than timing. As you may know, Renesas is a prominent player in the MCU business, in the microcontroller business. And there's an opportunity for SiTime Corporation's resonators, the Titan family of product, to be integrated in their microcontrollers. And that's the one we're exploring. There's a several billion dollar revenue that they get from their MCUs and we are exploring that and being a timing partner to Renesas. Another way of thinking about this, Tore, is that given the fact that the CEO is joining SiTime Corporation's board at the closing, this becomes really quite a partnership. This makes sure that not only are we a supplier to them, but we are also a partner to them as we go through the integration process and the TSAs and so on. So that's what gives me a lot of confidence in the success and the integration of this business. Tore Svanberg: Makes a lot of sense. Thank you, and congrats again. Rajesh Vashist: Thank you. Operator: Please stand by for our next question. Our next question comes from the line of Quinn Bolton with Needham and Company. Quinn Bolton: Hi, Rajesh and Beth. Offer my congratulations both on the strong results as well as the acquisition. I guess, like, wanted to start with a question on the core business. You talked about demand strengthening through the fourth quarter, the book to bill of 1.5. You guys have been growing the comms business at, you know, over 100% for seven consecutive quarters. And so I guess, Rajesh, I know you're not guiding to 2026, but certainly feels like the growth engines are there to drive better than your long-term average 25 to 30% growth rate in the core business in 2026. And so just wondering as you think about, you know, what the core business can do in 2026, is there any framework you might be able to provide you know, for sort of that overall growth rate in 2026. Rajesh Vashist: Well, qualitatively, and I'll have Beth jump in to give you the level of specificity that she wants to give you. Qualitatively, that's absolutely true. We've been growing. We grew in 2024 at 40%. We grew in 2025 at north of 60%. The business continues. You see Google spending. You see Meta spending. There is no stopping in the AI data center world. And then there is the inference part of it or the LLMs come to physical reality, whether it's humanoid robots, or other kinds of ideas around that. So I expect that this is a series of growth years coming from the AI business even beyond data centers. But I'll let Beth add what she thinks. Beth Howe: Sure. Thanks, Rajesh. No. I think you know, we do expect it to continue to be led by our comms enterprise data center as Rajesh talked about. As he also alluded, I think we do see opportunities across automotive, industrial, and aerospace. And some specific opportunities, especially within aerospace off a small base. But given the increase in drones and other kinds of defense applications. We see a lot of opportunity there. And then finally, in the consumer space, we do expect to see continued growth there as some of our design wins ramp in 2026. And so those are all some of the opportunities and tailwinds we see for the year. And so we're really excited about 2026. And where we can go from here. And in terms of the opportunities. Quinn Bolton: Excellent. The question I had on acquisition. Obviously, Renesas is one of the preeminent players in the clocking business. I'm wondering on a lot of the boards or sockets where Renesas plays, are they typically, you know, paired up with quartz oscillators representing an opportunity for you to cross sell or do you feel like the SiTime Corporation MEMS oscillators are already pretty well placed on, you know, a lot of the boards where Renesas timing or clock products are currently used. I'm just trying to get a better sense for know, how much cross selling opportunity do you see bringing these two businesses under one roof? Rajesh Vashist: Yeah. You exactly put your finger on it, Quinn. We have very little we have some reasonably solid overlap on customers. But, typically, on products, there's very little. So to your point, they are designed in clocking where the solution is quartz crystal. And this gives us tremendous opportunity to expose the values of our semiconductor differentiated MEMS based solutions to the customers and see how we can get design wins for the future. So this is the cross selling opportunity one way. But there's also a cross selling opportunity another way because we have design wins in AI, in GPUs, in accelerator cards, in switches, where it's not our clock that's in there, the SiTime Corporation native clocks. It is either their clock or the clock of somebody of another competitor. So that gives us in the next iteration, it gives us another opportunity to present the customer with a value proposition of an integrated solution. It's, of course, not physically integrated. It is notionally integrated or put together as making it easy for the customer to use it, as well as to get the performance they need and, of course, the source of supply which is critical in all of these situations where they need to have one source of supply so some things are not out of whack in that. So yeah, clearly, that is the case. Quinn Bolton: Thank you, Rajesh. And one last quick one for Beth. On the regulatory front, would you expect to require China SAMR approval to close or do you think, you do not need China SAMR to close the transaction? Beth Howe: Thanks for the question. So we are going through the required regulatory processes in the countries that have jurisdiction. At this point in time, we do not expect to need SAMR as part of those regulatory approvals. Quinn Bolton: Perfect. Thank you very much. Beth Howe: Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Jim Schneider with Goldman Sachs. Your line is open. Jim Schneider: First of all, on the synergies with Renesas, can you maybe talk a little bit more about within the data center the specific synergies between your products on the oscillator side and what Renesas is doing perhaps on the memory side or otherwise? And beyond the cross sell, you expect there could be some consolidation of overall board timing content away from other suppliers toward a more holistic solution. In other words, is there a way that you could provide a more holistic solution between the two of you that would maybe would, would be disadvantageous using another supplier. Rajesh Vashist: Right. To be very clear, there is no product other than timing that we are going to be bringing into this. So you mentioned memory somewhat. You know, onto the side. We have no influence on that. We have no connection with that. Only working on one thing and one thing only, which is a timing product division, which used to belong to IDT before that to ICS. So it's a timing business that we are acquiring and our influence is in timing. But the point that you made, Jim, is a very good one, which is that today, we have products that are oscillators and resonators on one side, and clocks on the other. With their 160 engineers, with our almost double that number of engineers, I think we would be able to address you know, the issues of density, power, resilience, higher throughput, by delivering solutions, by delivering products that are somehow integrated not just physically integrated, but somehow integrated to deliver vastly superior solutions because the need for performance, for jitter, for high speed, for throughput, for lower latencies, for lower power, those remain undiminished not just in AI and data centers where they're extreme, but in all other areas including consumer, including military, aerospace, defense. In terms of the one part of AI where clock is not being used right now, and we'll have to see whether the place for it is in the whole optical networking in the cabling, in the smart cables, in the retimers. Typically, those are not using clocks. Those are oscillators. But either way, there's enormous opportunity because, as you know, the market is $11 billion for all timing. And SiTime Corporation's only a very small portion of it. And Renesas, large as it is, the timing business, it's still also a very small portion of it. There's a significant amount of competitors out there, and it gives us an ability to influence at the highest level the highest differentiated, most performance-centric customers. Allows us to influence that. Jim Schneider: That's helpful. Thank you. And then relative to the model for 2026, maybe give us a little bit of help on two vectors. One, on the 1.5 times book to bill, can you give us a sense about the duration of that backlog? Is that six, twelve, eighteen months or longer? And then separately, talk about what the relative expected growth rate will be in the mobile and consumer business, do you think you can sort of match the growth rate you put up in 2025? Thank you. Beth Howe: Maybe I'll start with that one, Jim. So in terms of the book to bill, I think Rajesh talked about the fact that we are seeing customers maybe book out a little longer, but it typically, that's well within twelve months. You know, we see a lot of ordering in over the next couple of quarters, but we are seeing some customers book meaningfully in the second half in terms of that already as well. But I would say, definitely weighted to Q1 and Q2. As far as our consumer business, you know, again, there's a lot of activity there, and we've got a design win that we do expect to ramp meaningfully as we go through the year. And so I think that will drive a lot of performance of that sector. Jim Schneider: Thank you. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Thomas James O'Malley with Barclays. Your line is open. Thomas James O'Malley: Looking at your long-term gross margin model, 60 to 65, you're saying the acquisition adds potential to the high end of that. If I look at your business stand alone, over the last year, you've had two quarters where your incremental growth margins are dropping through at 68-70%. You obviously have a mix factor that's helping the gross margins in the March, but as we look at 2026, should we be thinking about something a little bit ahead of that original target just because of the mix of business moving more towards AI? Anything you can help us with on the margin side as we look through '26. Beth Howe: So as we think about our I'll start with the gross margin. So mix will be the biggest driver of gross margins in the year. And so I think there's a couple of factors that are contributing to that. The CED growth and mix clearly is a very favorable component of that mix. And then the other is the consumer business. So in quarters where the consumer business is a lower percentage of the total, that is a tailwind to gross margins. In quarters where you see a stronger mix of consumer, that can be a bit of an offset to those strong CED gross margins. So that'll as we go through the year, I do expect you know, that mix between those two to be the biggest driver of the gross margin in the quarter. And then as I think about operating margin, I do expect to continue to see favorable operating leverage in the model. So I do expect to continue to grow revenue faster than operating expenses. We do want to continue to invest in the business in a disciplined way to really be able to capture all the growth that we've been talking about. And so we do want to make investments both in our go-to-market as well as R&D to continue to have these world-class platforms in order to be able to deliver value to customers. But, there is still meaningful operating leverage in the business. Thomas James O'Malley: Helpful. And then on the acquisition, I just wanted to understand the OpEx side. Could you maybe give us the split of OpEx between R&D and SG&A of the acquired asset? And then when you look at areas where you can see synergies, could you maybe give us some feel for COGS or OpEx where you could see some of the cost coming out. Thank you. Beth Howe: Mhmm. So in terms of the transaction that we announced today, we are acquiring the assets from Renesas of their timing division, as Rajesh talked about. So this is a carve-out, and we are acquiring just those specific assets, and we will be once we close the acquisition, we will be integrating that into our own business and our manufacturing operations and taking those over. They have a similar kind of OSAP model as we do. And so that will be really the focus for us. We'll talk more about the specifics of the model and the cost structure. We get to close. Thomas James O'Malley: Thank you. Operator: Please stand by for our next question. Next question comes from the line of Christopher Caso with Research. Your line is open. Christopher Caso: Yes. Thank you. First question is on the business as you go into 2026. With regard to content. And can you speak to the content gains that you realize on the 1.6 terabit platforms and then what do you think will be the growth rate of those 1.6 terabit platforms? You know, how meaningful is that, as a part of your business as you go through '26, given those content gains? Rajesh Vashist: Yeah. Chris, the content gains on the 1.6, I think, is going to be pretty good. It may not be you know, we mentioned it's in the tens of percent up in ASP. And there is an increased number of units being deployed on that far more than we had thought on our last call in November. So we have we're very optimistic about that business. But at the same time, our business in other, in other optical modules like 800, we called out, continues as well as in some of the lower ones. So I think this is a very healthy business. We are designed in to a large number of suppliers in the optical module, but also in the AEC, the active cables. As well as in the retimer business. So the whole networking part of this business of SiTime Corporation is very strong. Christopher Caso: Thank you. As a follow-up, just a question on the transaction. And you speak about the combined business staying on your 25 to 30% growth targets for the existing business. Obviously, you've been growing at a faster rate than that now. So as you go forward, within that 25 to 30% are you expecting is basically each business growing at that 25 to 30% going forward? And maybe you could talk about the growth rate of that business that had been within Renesas in the past. You know, had that been you know, steadily growing at that 25 to 30% rate? Rajesh Vashist: Yeah. We've always maintained that resonators I mean, sorry, oscillators are a system business. It has a resonator, and it has a clock. So it's a system business. And in this in resonators, excuse me again. Oscillators are being used in some places where clocks are not. So for example, in military aerospace defense, oscillators tend to be used over that. Earlier, I just mentioned certain use cases. In networking, in AI, the optical modules and such. Where there isn't there isn't a use case yet for clocks. But in general, I think, therefore, clocking is a slower growth business than oscillators are. So I think we will get a very good growth rate for the combined business because, as you mentioned, we are indeed in our oscillator-based business, which is most of our business today. Is quite a high growth business since 2024. But we think that adding the clocking business even though it grows at a somewhat slower rate, still keeps growing at such a healthy rate that we are 25 to 30%. We're very confident on that. For the combined business, that is. Christopher Caso: Right. Thank you. Rajesh Vashist: Thank you. Operator: Please stand by for our next question. Our next question comes from the line of Suji Desilva with Roth Capital. Suji Desilva: Hi, Rajesh. Hi, Beth. Congratulations on this transaction. Great news. Thank you. I was curious. Yeah. And I read the MOU with Renesas as part of the transaction and the integration of the resonator into the microcontroller SoC products of Renesas. I'm curious, is that ahead of the rest of the industry or other folks? Are you working with other folks on similar efforts? Just curious, you know, how that is positioned. Competitively? Rajesh Vashist: Yeah. That combined. So as you know, thank you. As you know, the Titan family of products is a breakthrough family. There isn't any other resonator in any technology at that level of quality, reliability, size, power, and use case. So many customers, many semiconductor customers and many system customers are looking at designing it in. And as we have mentioned in the past, it's a somewhat slower design win particularly when it goes in into somebody else's chips. Right? So I think it takes a little bit longer to get the design win. Certainly, there's nothing exclusive about this. But and we're talking to them but I think that they are ahead of making this commitment. And I think this is as you see in the remarks by their CEO, Shibata, that they are using this as a way to pivot this the sale to SiTime Corporation of the timing business and the MOU as a way to pivot deeper into their what they are calling their core business in embedded compute. So I think it's a win-win for both of us. And certainly, as a potential customer of SiTime Corporation, that becomes a bit of a flagship design win. If and when it happens. Suji Desilva: Helpful color, Rajesh. And then in CED, you've talked about it a lot. Know, the usual suspects growing here, pluggables, AACs, retimers. I'm wondering if there's other applications which are emerging in growth above and beyond those. That you'd call out with the strong growth there or whether it remains those kind of the ones we kind of already know roughly. Rajesh Vashist: Yeah. So once we know, there are no new categories, but they're new design ins, and the density you know, we always maintained our growth story comes from three legs. One is whatever design wins we have, the end product sells more units. Right? So that's one. The second is there's an upgrade in functionality from win to win. And there's an upgrade in density of chips used in a particular functionality. So what we are experiencing now in some of these with our native plot products is that they were design wins along with oscillators. And there were more of clocks. And then there were more clocks being used in a design win. So I think that trend continues. And finally, there's a new use case for our products that didn't exist. An example would be an L4 ADAS, or indeed even the retimers, which didn't meet our level of performance sometime back. Suji Desilva: Okay. Great. Thanks, Rajesh. Rajesh Vashist: Yep. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Gary Mobley with Loop Capital. Gary Mobley: Everybody, let me extend my congratulations as well. I want to ask about the strong growth that you're seeing in the ability to support that growth from a supply chain perspective. Are there any capacity constraints that you see now or on the horizon that are causing your ordered lead times to extend? And I guess, conversely, you know, do you see a situation where some of your crystal-based competitors are struggling to fill, you know, surging demand with seems to be industry-wide. And are you able to take advantage of that with your quick turns you know, I guess, supply chain? Rajesh Vashist: We know of no data that shows that crystal suppliers are struggling. It may be, but we don't know that. But what I can say is that just on the merits of the SiTime Corporation programmability, SiTime Corporation supply chain, the integrity of that given semiconductors, and specifically the quality and reliability of our products, SiTime Corporation is the preferred solution even when there isn't a performance requirement. In fact, we get to charge a premium on our products even when there's no performance simply based on our quality, reliability, support, programmability. We think that we don't have to rely upon anybody's struggle or weakness. We think we rely on our strength, our value proposition, is strong, and sustainable and customers are recognizing that with every passing quarter, if you will. And we keep on adding to our customer base. Both in existing customers and existing applications, but also new applications. So we feel generally very confident in our supply chain. We had some challenges in the beginning of last year. When we were trying to launch new products at the same time when demand was surging. But we more than caught up in Q3, Q4 and we look forward with a lot of confidence to this year. In terms of supply chain. Beth Howe: And I think the other thing, we continue to work very closely with our supply chain partners as we see kind of the industry evolving and are mindful of our costs and working very closely with them. To ensure that we can continue to secure the supply that we need and the lines that we need. And, again, watch the cost as well as we see the tightening that I think everybody is seeing. Gary Mobley: Thanks. As follow-up, I wanted to ask about a few details on the acquisition or the asset carve-out. Just to confirm, this is a fabless business model. And related, is there any foundry crossover? And I just want to confirm that, you know, most of the engineering team, I presume, was down the street from SiTime Corporation's headquarters. Correct? Rajesh Vashist: Well, starting with the engineering team, it is located mostly in North America. There is a large group in Ottawa, which is the IDT group. Ottawa seems to have a long time ago, ZARLINK also. So there's a nice pool of people that we could hire from in analog design. The next one, as you rightly point out, is right here in South San Jose. And available. And the third one, which is rather large as well, is in Tempe, Arizona and we're looking forward to that as a new location for us. They also have some people in Shanghai, which is new. And then there's people, across some parts of Asia and smaller numbers. In terms of the other question, which was around Fabless, actually, it's a really very good match. They are mostly they are all IDT. And therefore, they are TSMC point one eight micron, which is fantastic. Since TSMC is already a great supplier to SiTime Corporation. And, also, they are with GlobalFoundries in the 55 nanometer, which is great. On the back end, there's almost complete great connection with ASC and CARSM. And some of the others in Asia. So we are very confident that we can make this the back end of the supply chain work really well. Gary Mobley: Thanks again. Rajesh Vashist: Yep. Operator: Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Rajesh Vashist for closing remarks. Rajesh Vashist: Look. This has been a long time coming. And we've been on this spot. When we raised money, many of you asked us what it's for. And we've always been very clear that our next M&A would be in timing. It would be at scale. It would be equal to or better than our gross margins. It would be equal to or better than our net profit margins, and it would not take down the growth rate of 25% to 30% that SiTime Corporation's long-term growth model. I think we have fulfilled that on every count. And not only have we been able to get a clocking business, there couldn't be. There isn't one. There isn't a better clocking business, and this in the world. The coming together of all of this by our standards, makes us a big company, but we'd still be a pretty small company in the large timing business. The timing business is $10 billion to $11 billion and it grows at 5% to 6% year on year. At the end of these ten years, we'll probably be $17 billion to $18 billion in size. And SiTime Corporation has a long way to go to get to be a large player. Coincidentally, or by design, we don't intend to be a large player. We're not a market share game. We're a value differentiation high growth game. And so I really look forward given our spectacular results, and our outlook for 2026, plus this new acquisition whenever it closes, to create a billion-dollar company that is solely dedicated to solving tough timing problems of our customers. Timing, as we know, is the heartbeat of all electronics, and SiTime Corporation is dedicated to it. Thank you. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect. Tore Svanberg: Thank you.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet Company's Fiscal 2026 First Quarter Earnings Call. My name is Vaughn. I will be your conference operator for today. At this time, all participants are in a listen-only mode. We will hold a question and answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Friederike Edelmann, Vice President of Investor Relations. Please go ahead. Friederike Edelmann: Good afternoon, everyone, and thank you for joining Central's First Quarter Fiscal 2026 Earnings Call. Joining me today are Nicholas Lahanas, Chief Executive Officer; Bradley G. Smith, Chief Financial Officer; John Edward Hanson, President of Pet Consumer Products; and John D. Walker, President of Garden Consumer Products. Nicholas will start by sharing today's key takeaways, followed by Bradley, who will provide a more in-depth discussion of our results. After their prepared remarks, John D. Walker and John Edward Hanson will join us for the Q&A session. Before they begin, I would like to remind everyone that all forward-looking statements made during this call are subject to risks and uncertainties that could cause our actual results to differ materially from what those forward-looking statements express or imply today. A detailed description of Central Garden & Pet Company's risk factors can be found in our annual report filed with the SEC. Please note that Central Garden & Pet Company undertakes no obligation to publicly update forward-looking statements to reflect new information, future events, or other developments. Our press release and related materials, including GAAP reconciliation for the non-GAAP measures discussed on this call, are available at ircentral.com. Last but not least, unless otherwise specified, all comparisons discussed during this call are made against the same period in the prior year. If you have any questions after the call or at any time during the quarter, please do not hesitate to contact me directly. And with that, let's get started. Nicholas Lahanas: Thank you, Friederike. Good afternoon, everyone. We ended the year with strong momentum. I'll begin with a few highlights from the first quarter before stepping back to talk about how our priorities are evolving and how we see the year ahead. We closed the quarter with improved gross margins and solid earnings per share, especially when compared to a strong prior year first quarter that benefited from favorable shipment timing, promotional activity, and weather. These results reflect the strength of our operating model and the commitment and disciplined execution of our teams. Over the past several years, we focused on simplifying the business, improving efficiency, and maintaining profitability across both segments. And that work continues to show up in our results. At the same time, we're increasingly focused on positioning Central Garden & Pet Company for sustainable long-term growth. Supported by a strong balance sheet and deep customer relationships, we're sharpening our strategic priorities and advancing them with speed and agility. Over the past three years, our cost and simplicity agenda has strengthened the foundation of the company, creating leaner processes, a more streamlined footprint, and a more resilient operating model. While this work continues, much of the foundational transformation is now behind us, and the pace of incremental benefits is naturally becoming more measured over time. A key part of these efforts has been our multiyear supply chain network design program, which has improved customer alignment, service levels, and cost efficiency. During the quarter, we completed several important actions that further modernized our network and reinforced these benefits, including integrating two Garden distribution facilities in Lawrenceville, Georgia, and Ontario, California, into our modern fulfillment centers in Covington, Georgia, and Salt Lake City, Utah. We also consolidated a fertilizer manufacturing facility into our Greenfield, Missouri location. What's most important is that the discipline around managing costs and operational simplicity is now firmly embedded in our culture. With that foundation in place, we're applying the same clarity, focus, and consistency to fostering a growth mindset and embedding innovation more deeply across the organization. We view innovation much like cost and simplicity, as a multiyear journey rather than a near-term event. Our focus is on building repeatable ways to identify opportunities, develop products, and bring them to market. That said, we're already seeing encouraging signs. Recent examples include a new product innovation at Nylabone, expanded digital engagement through KT's new Burger Hub, and strong early consumer response to several new garden and household solutions. We're also seeing good momentum in private label programs developed closely with our garden retail partners. Alongside organic growth and innovation, we continue to be thoughtful and selective in how we use M&A to refine our portfolio. After quarter end, we completed the acquisition of Champion USA, a small tuck-in business serving the livestock industry with EPA-approved Feed Through Fly Control solutions. This adds a complementary capability to our professional portfolio, supports cattle health solutions, and fits well with our focus on consumables and environmentally responsible practices. Looking ahead, with the first quarter behind us, we're operating with strong momentum, clear priorities, and a steady focus on delivering results. As we build on the foundation already put in place, innovation will play a progressively larger role in driving growth across the business. Our diversified portfolio, operational flexibility, and a disciplined approach to cost management give us confidence in our ability to deliver profitable growth even as we navigate an evolving global macroeconomic and policy environment. As we look to the rest of the year, we'll continue to balance prudent cost and cash management with targeted investments that support organic growth, especially innovation, digital capabilities, and e-commerce. As these investments scale, we expect results to build over time. M&A remains an important component of our growth strategy. We continue to focus on margin-accretive consumable businesses that complement our portfolio and expand our presence in attractive categories, and we expect our activity to increase as market conditions continue to normalize. We also expect consumers to stay focused on value and product performance in a promotionally active but generally stable retail environment, alongside continued channel shifts for e-commerce. These factors reinforce the importance of sustained investment in innovation, consumer insights, and digital capabilities. Based on these factors and our current operating plans, we are reaffirming our expectation for fiscal 2026 non-GAAP diluted EPS of $2.70 or better. As always, our outlook excludes potential impacts from future acquisitions, divestitures, or restructuring actions, including those related to our cost and simplicity agenda. Before I hand it over to Bradley, I want to thank our teams across Central Garden & Pet Company for their continued commitment and strong performance following a year of meaningful progress. The work we've done has positioned the company well, and as we move into the next phase, we're doing so from a position of strength, with a clear shift toward greater emphasis on growth and innovation while maintaining operational rigor. And with that, I'll hand it over to Bradley. Bradley G. Smith: Thank you, Nicholas. Building on Nicholas's remarks, I will begin with our first quarter performance. Net sales were $617 million, a 6% year-over-year decline, with two primary factors that accounted for substantially all of the change. First, the timing of retailer spring inventory shipments in the Garden segment and, to a lesser extent, in the Pet segment. As discussed in last year's first and second quarter earnings calls, seasonal load-ins in fiscal 2025 were unusually concentrated in the first quarter. This year, a larger portion of those shipments shifted into the second quarter. Second, our continued portfolio optimization efforts continued to enhance margins and support sustainable, profitable growth. These include rationalizing lower-margin categories such as pet durables and select live plants categories, as well as the recent closure of our UK operation and transitioning of our European business to a more profitable direct export model. In addition, first-quarter results reflected two factors we had previously discussed on our fourth-quarter call: the ongoing transition of two third-party product lines in our Garden Distribution business to a direct-to-retail model, which began last year and is expected to be completed this Q4, and a temporary shipment hold with a large pet customer, which began in Q4 and was resolved late in the first quarter. Importantly, these two factors were balanced by solid growth across several key businesses, including rawhide, wild bird, and animal health, underscoring the resilience of our consumables portfolio and progress against our strategic priorities. On a non-GAAP basis, gross profit was $190 million compared with $196 million, while non-GAAP gross margin expanded 100 basis points to 30.8%, driven by productivity gains and improved mix. Non-GAAP SG&A expense was $166 million, down 1% versus the prior year. As a percentage of sales, non-GAAP SG&A was 26.8%, compared with 25.5%. Non-GAAP operating income was $24 million compared with $28 million, and non-GAAP operating margin was 3.9% with 4.3%. Non-GAAP adjustments related to our cost and simplicity agenda totaled $7 million in the first quarter. The majority of these costs were within the Garden segment and largely reflected facility consolidation activities. Below the line, net interest expense of $8 million was consistent with the prior year. Other income was $200,000 compared with an expense of $2 million. Non-GAAP net income totaled $13 million compared with $14 million in the prior year. We delivered GAAP diluted earnings per share of $0.11 and non-GAAP diluted earnings per share of $0.21, consistent with the prior year and above our expectations for the quarter. Adjusted EBITDA for the quarter was $50 million compared to $55 million. Our effective tax rate for the quarter was 23.3% compared with 23.5%. Let me now provide highlights from the first quarter across our two segments. Beginning with Pet, net sales for the Pet segment were $416 million, a 3% year-over-year decline reflecting the portfolio optimization efforts, shipments shifting into the second quarter, and temporary shipment hold, which I noted earlier. These factors were partially balanced by continued growth in our Rawhide business and our Animal Health business, especially within Professional and Equine. Consumables overall grew at a low single-digit rate, supported by favorable point-of-sales trends. Across the Pet segment, we held share overall, with gains in several key categories, including dog treats, flea and tick, pet bird, and our professional portfolio, reflecting consistent execution across our core categories. Non-GAAP operating income for the segment was $50 million compared with $51 million. Non-GAAP operating margin improved to 12.1% from 12%. Adjusted EBITDA for the segment was $60 million compared with $60 million. Now moving to Garden, net sales for the Garden segment were $202 million, a 12% decline reflecting shipment timing, the continued transition of two third-party distribution product lines, and further rationalization of our live plants categories, partially balanced by continued growth in our wild bird business. Overall, we gained market share in Garden, with gains in several key categories, including wild bird, fertilizer, and packet seeds. As expected, the first quarter is seasonally smaller for Garden, with the core selling season still ahead, and it would be premature to draw conclusions about the full fiscal year. Non-GAAP operating loss for the Garden segment was $2 million compared with income of $2 million, as shipment timing more than offset productivity gains and disciplined cost management. Non-GAAP operating margin was negative 1.2%, compared to positive 1.1% a year ago. Adjusted EBITDA totaled $8 million compared with $14 million. Moving on to the balance sheet and cash flows, cash used by operations was $70 million for the quarter compared with $69 million a year ago. Our teams continue to demonstrate strong working capital management, building on the significant inventory reductions achieved following the pandemic-related build. During the quarter, inventories increased by $20 million versus the prior year, primarily reflecting the timing of shipments. CapEx for the quarter was $11 million compared to $6 million, consistent with a focused investment approach centered on productivity initiatives and essential maintenance. Depreciation and amortization totaled $21 million compared to $22 million. During the quarter, we repurchased approximately 660,000 shares for $18.5 million, with $28 million remaining under the share repurchase authorization as of quarter end. At quarter end, cash and cash equivalents and short-term investments totaled $721 million, up $103 million after our usual Q1 working capital build and the acquisition of Champion USA, underscoring our strong liquidity position and cash generation profile. Total debt was $1.2 billion, unchanged from the prior year. Gross leverage ended the quarter at 2.9 times, consistent with the prior year and below our target range of 3 to 3.5 times. Net leverage was approximately 1.2x, supported by our solid cash position, and we had no borrowings outstanding under our credit facility at year end. This balance sheet strength provides the flexibility to invest in acquisitions and organic growth, maintain financial resilience, and return value to shareholders. As Nicholas mentioned, we are reaffirming our non-GAAP diluted EPS guidance of $2.70 or better. We continue to expect CapEx of approximately $50 million to $60 million, largely focused on maintenance and productivity initiatives across both segments, reflecting our focus on high-return investments that enhance efficiency and profitability. Unchanged from the first quarter, we currently estimate incremental year-over-year gross tariff exposure of roughly $20 million for the fiscal year, concentrated in the Pet segment. We expect to mitigate the impact through pricing actions, portfolio management, and supply chain initiatives. As always, our outlook excludes the potential impact of future acquisitions, divestitures, or restructuring activities during fiscal 2026, including any actions associated with our cost and simplicity agenda. That concludes our prepared remarks. Operator, please open the line for questions. Operator: Thank you. We will now be conducting a question and answer session. Our first question comes from Bradley Bingham Thomas with KeyBanc Capital Markets. You may proceed with your question. Bradley Bingham Thomas: Good afternoon and thank you for taking my question. With freezing temperatures across the country, I think it's probably a little premature to ask how the garden season is kicking off. But John D. Walker, I was hoping you could speak a little bit more about the placements that you're seeing in terms of the garden season and if whether we're just normal with last year, how you feel like the opportunity is to gain some share and get some growth in the category? John D. Walker: Sure, Bradley. Thanks for the question first of all and thanks for not reading into too much into the Q1 results because Q1 will not dictate what our garden season looks like. That season is still in front of us as you noted. And we feel really optimistic about the upcoming year. I think I mentioned on our prior call that the total distribution points of products that we manufacture is up 14% year over year. And we feel great about that. For a mature business like ours, that's significant improvement year over year. So we feel great about it. We feel great about our relationships with our customers and they're supporting us with promotions and off-shelf activity for the upcoming season. And while much of the country is frozen right now, as you noted, we do feel great about the level of support that we're gonna have for the upcoming year. So I say that, you know, from a share standpoint, we had a good share year last year as we noted in the script just now we gained share in fertilizers and in packet seeds and in wild bird feed. Expect that to continue this coming year and adding grass seed to that as well. So we feel great about the level of support, about the distribution gains that we've gotten, and about our prospects for the year. And I'd say our retailers are optimistic about the upcoming year as well and they're supporting us well. Bradley Bingham Thomas: That's very helpful, John D. Walker. Thank you. Yes. Obviously, big quarter ahead of you here in the all-important garden season. I wanted to ask a follow-up to Nicholas just about the momentum in cost and simplicity and all the success you all have had in driving improved profitability. I guess, Nicholas, the question is, as we think about that balancing act of improving profitability versus investing in the business to grow, you alluded to that in your prepared remarks. Can you speak to maybe where you're most putting investments in place to try to drive the business? And perhaps are we getting to closer to a spot where you may play offense even more in terms of spending to try and drive growth? Nicholas Lahanas: Thank you. Yes. Great question, Bradley. As we mentioned in the prepared remarks, we've been at cost and simplicity for quite a while. Our project horizon is now complete where we have these four large, very modern distribution centers across the country. The efforts are going to continue. We want to maintain these pipelines with cost savings initiatives across the company. We feel like that skill is really embedded into the culture. It's taken a number of years, but we feel like we've got a great foundation. Obviously, a lot of the savings and a lot of those are reflected in the margins that have expanded. But also what's expanded margins is really along with cost and simplicity, has been our portfolio optimization. So that's another area that, you know, we're taking out what we call empty calories. So it's SKUs in businesses that have revenue but don't bring a lot to the bottom line. And we don't see really a path forward to improve those margins and bring more to the bottom line. And so sometimes you gotta get a little smaller to get better, and I think that's what you're seeing sort of real-time. So we're doing all this foundational work. Today. We feel great about it. It's gonna continue. We feel like it's very embedded in the culture. But now we really recognize that it's time to pivot and focus really on a growth mindset, what we call a growth mindset. And what we mean by growth, it's M&A, not just innovation. It's picking up private label. It's driving market share in our categories. It's investing in digital. You're starting to see pockets of that across the business. So you saw the small tuck-in M&A deal we did a couple of months ago. You're seeing us push harder into digital. If you look at Feeding Frenzy, it's been an incredibly successful initiative for us in Q1. And we're starting to see a little more innovation across the businesses. We want to embed that in our culture. Just like we have cost of simplicity. It's gonna be a multiyear program. But one thing Central Garden & Pet Company does extremely well, when we focus on things, and really drive it home and we focus on a few things with excellence, we normally succeed just like in cost of simplicity. The innovation push is going to take some time, but with the proper amount of focus and constancy of purpose, we feel really great about the future in terms of driving growth. So that's going to be a real push and it's sort of the next phase of our evolution is what I call it. Bradley Bingham Thomas: That's great. Thank you, Nicholas. Our next question comes from the line of James Andrew Chartier with Monness, Crespi, Hardt. You may proceed with your question. James Andrew Chartier: Good afternoon. Thanks for taking my questions. Could you help kind of quantify the impact of some of these headwinds to sales, the timing of garden shipments, the pause in shipments to the large e-commerce player, and then kind of the business rationalization efforts? Bradley G. Smith: Yes. I would say this is Bradley. Thanks for the question. I would say at a total company level, you look at the timing impact, it was more than half of the overall net sales decline. So it was by far the biggest. And number two would be the portfolio optimization efforts. And if you put those together, that was essentially almost 100% of the net decline. If you then look at the product line wind down in garden that we're talking about, and then the stop shipment we had with the customer on the pet side, those impacts were relatively smaller and they were fully offset by the gains that we talked about in our prepared remarks around rawhide, animal health, and wild bird. James Andrew Chartier: Great. That's really helpful. And then last quarter, you talked about some kind of green shoots and kind of pet adoption trends. Just curious, any update there? John Edward Hanson: Yes. On the Pet side, this is John. Everything we see is really the category is stabilizing. If we look at household penetration by rate, Nielsen tracked channels, you know, everything's indicating stabilization. We have a live animal business that in Q4 posted positive growth, so it's low single digits. It posted positive growth again in Q1. So we think we definitely hit the bottom and we're tilted towards coming back up. You know, the magic question, you know, is what's the timing of that? Could we see some modest growth in the back half? Possibly. James Andrew Chartier: Great. And then lastly, you mentioned that EPS was better than expected in the quarter. Could you help us understand what drove the upside relative to your expectation? Bradley G. Smith: Yes. As Bradley mentioned, we had some offsets. So the offsets were all higher margin businesses. We got some orders in that were in our higher profit business. So a lot of that dropped to the bottom line and was great for us. We were very pleased to get those. So that was really the main driver. James Andrew Chartier: Great. Thanks. I drill it down, it's really mix. Bradley G. Smith: Got it. Thank you. Our next question comes from the line of Brian McNamara with Canaccord Genuity. You may proceed with your question. Brian McNamara: Hey, good afternoon, guys. Thanks for taking the question. I don't know if you quantified the durables performance in the quarter or the current mix. Just that would be helpful. Bradley G. Smith: How are you doing? It's Bradley again. Durables, we're talking about it quarter these days. It was about 16% of sales in pet in Q1. So it was consistent with Q4. The decline was, I would say, north of 20%, but it was fairly steep. I would call out that about two-thirds of that was the timing shift that we saw in our cushions business from Q1 to Q2, plus the exit of the tank business that we are kind of in the late stages of. So two-thirds of that kind of north of 20% decline was related to those two factors in combination. And I think the important thing to call out is that once we get beyond Q2, we should have effectively lapped that timing impact on cushions as well as all the exiting of tanks. And so when you get into the back half, we should be down to, if we've got differences year over year in durables, it should be in the single digits. John Edward Hanson: And this is John. Just to build on that, the exiting of tanks was part of the portfolio optimization, so it was SKU rationalization of low-margin SKUs. So a lot of it we proactively, you know, did to ourselves. But it's the right decision long term. Bradley G. Smith: Yeah. And the only other thing I would add, we're talking a lot about timing and it was the number one driver in terms of Q1 top line. Early indications here in January are we had very good shipments and we saw a lot of that come back to us already in January. We still have two more months left in Q2. So it's sort of playing out the way we expected. Brian McNamara: Great. That's helpful. Curious your thoughts on retailers' commitments to the Garden category. I know one of my peers just mentioned that this weather is probably the last thing you're thinking about is gardening right now. But how do you guys feel you're positioned if we actually get some good spring weather for a change? John D. Walker: Hi, Brian. It's John D. Walker. I'll take that question. I think we're positioned well. I mentioned that earlier when Bradley asked about it. I think from a retailer support standpoint, I think we've secured the support that we need to succeed. Retailers are still optimistic about the upcoming season. I mean, spring will come at some point in time. We did not build in any upside for favorable weather this year. We planned on pretty much weather consistent year over year. Last year wasn't stellar. So hopefully that could be a tailwind for the upcoming year. I think we're well positioned and I think retailers are very engaged. Lawn and Garden drives a lot of footsteps into their store. So they're still approaching it as such, very optimistic about the year and really dependent upon a good lawn and garden season. So we've gotten their support and their level of engagement. Brian McNamara: Great. And then just finally, I'm curious your thoughts on the M&A environment. Obviously, tariffs and policy uncertainty made it a pretty quiet year last year, but you acquired Champion or announced in December. Curious how that's looking across both businesses right now? Thank you. Nicholas Lahanas: Yeah. I mean, we're encouraged. We're seeing more activity, I would say. We're involved in several discussions right now. So we feel quite good. We're actually seeing more pet activity, which is quite nice. So yeah, we're feeling quite good about things, and we think it's gonna continue to pick up. At least that's what all the indications are right now. Brian McNamara: Great. I'll pass it on. Thank you, guys. Operator: Our next question comes from the line of Robert James Labick with CJS Securities. Looks like Robert has dropped off the line. Our next question comes from Hale Holden with Barclays. You may proceed with your question. Hale Holden: I got two questions. I want to be more bullish on the cold winter weather. So in the event that we have actually a really good spring weather set for you, how do your inventory stocks look or how would your ability be to fulfill chase orders? John D. Walker: Hale, this is John D. Walker again. We go into the season with really reasonable in-store inventories. So year over year in dollars, it's up low single digits. In units, it's flat year over year. So we'll be shipping into that. So if there is a push on inventory, or on demand, I think we're in great shape. We did a fall prebuild. Our inventories and our barns are in great shape. So we're ready for ready to be pressure tested. Let's put it that way. And we would enjoy that after the last couple of years with the weather that we've had. But, you know, we're in good shape. By the way, you know, we've talked a lot about the cold weather. We do have a portfolio that, you know, due to our wild bird business, it does quite well in the cold weather. So our consumption right now for our wild bird business is fantastic thanks to all the snow cover. And I think that that's one of the benefits of having a more diverse portfolio. Bradley G. Smith: And I would add too as far as chasing season, all the network design work we've done enables us to really move with a lot more agility and get orders out. We have more doors, we can handle more trucks. So in case there is a surge, we are much better positioned to basically handle that. Hale Holden: I'm sitting in day 30 here of under 32-degree weather in New York. So I'm thinking... John D. Walker: Yeah. Sorry. Yeah. Hale Holden: Yes. My second question is, I was, like, trying to read between the lines on your commentary on the consumer on both pet and, you know, where we could go and garden, and it sounded like it was tepid or no change from kinda where you've been for the last six months. I was wondering if I have the right read. John Edward Hanson: I would say on the pet side, we probably feel a little more bullish. We have seen the bottom. We have a live animal business now that is growing in Q4 and again in Q1. Certainly from household penetration buy rate, all the everything that we can see, the category stabilized. And six months ago, nine months ago, it was declining still. So I think we definitely have seen the bottom. And the question is, how quickly does it return to growth? And we're very hopeful that could happen in the back half. John D. Walker: And on the Garden side, I think we feel optimistic as well. You know, we're seeing some shift from do it for me to do it yourself. I think that bodes well for our products and our categories. And then historically, our categories have done well in a difficult environment. And that's because consumers may pass on large capital outlays for they may not remodel a kitchen right now. Due to the cash outlay. They're gonna take on small maintenance projects and that includes beautifying the yard and things like that. That's a couple $100 capital outlay as opposed to several thousand. Bradley G. Smith: Yeah. And I would think I would just add overarching, the consumer is still very hardwired towards value. And that's something that is really up to us to deliver. And you're seeing a lot of that with us getting into private label. We've also innovated around more what I would say, cost-friendly products in dog and cat. And those have done extremely well. So it's really meeting the consumer where they are, and what they're looking for relative to their pocketbook. Hale Holden: Thank you, fellows. I appreciate it. Operator: We have Robert James Labick rejoining for a question with CJS Securities. You may proceed. Robert James Labick: Hi, Keith. This is one for Robert. Can you hear me? Bradley G. Smith: Yes. Robert James Labick: Great. Looking to the return of top-line growth and knowing weather is the biggest factor in any one year, so excluding weather, are you positioned to lap SKU rationalizations in the second half? And therefore poised for growth or have there been other changes that would keep a lid on the top line in the near term? Nicholas Lahanas: Well, we're optimistic towards the end of the second half. I think we're still gonna be lapping a lot of the what I would call the headwinds in terms of the top line with our SKU wrap program. But we feel the we're a lot more optimistic. And I think as we get into Q4, we should be in a position to start really growing top line. But we still have a couple of quarters to go as far as the headwinds on what we call our portfolio optimization. Robert James Labick: That's very helpful. Thank you. And then just one more balance sheet remains extremely strong. Can you discuss your capacity for M&A versus share repurchases and if you can do both? Nicholas Lahanas: Yes. We absolutely can do both and we, you know, we've kind of been doing both. And we just plan on picking up M&A activity a lot more. We're carrying obviously a lot of cash on the balance sheet and really that's designed to go towards M&A. We've just been waiting for the deal environment to pick up. We're pretty optimistic there. But if you look at last year, we bought back almost 10% of the market cap. We did about $18.5 million this last quarter. We're going to continue to be optimistic or opportunistic, I should say, in the market when we feel like our shares are a great value. We're gonna be there to support it. And it's a great way for us to return money to our shareholders. So we absolutely will do both. Robert James Labick: Thank you. Friederike Edelmann: Thank you, everyone. This was our last question. Thanks for joining our call today and have a great rest of the week. We have the IR team available for any questions you may have after this call. Thank you.
Operator: Hello, and welcome to the Allegiant Travel Company Fourth Quarter and Full Year 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the conference over to Sherry Wilson, Managing Director of Investor Relations. You may begin. Sherry Wilson: Thank you, and welcome to Allegiant Travel Company's Fourth Quarter and Full Year 2025 Earnings Call. We will begin today's call with Greg Anderson, CEO, providing a high-level overview of the quarter along with an update on our business. Drew Wells, Chief Commercial Officer, will walk through demand commentary and revenue performance. And finally, Robert Neal, President and Chief Financial Officer, will speak to our financial results and outlook. Following commentary, we will open it up to questions and one follow-up if needed. We ask that you please limit yourself to one question. The company's comments today will contain forward-looking statements concerning our future performance and strategic plan. Various risk factors could cause the underlying assumptions of these statements and our actual results to differ materially from those expressed or implied by our forward-looking statements. These risk factors and others are more fully disclosed in our filings with the SEC. Any forward-looking statements are based on information available to us today. We undertake no obligation to update publicly any forward-looking statements whether as a result of future events, new information, or otherwise. The company cautions investors not to place undue reliance on forward-looking statements which may be based on assumptions and events that do not materialize. To view this earnings release as well as the rebroadcast of the call, feel free to visit the company's Investor Relations site at ir.allegiantair.com. And with that, I'll turn it to Grace. Operator: Sherry, thank you, and thanks to everyone for joining us today. We closed 2025 with strong momentum, capping a year of meaningful progress that strengthened our foundation and showcased the durability of our model. Let me briefly review our performance in the fourth quarter, reflect on key achievements from last year, and then frame our strategic focus for 2026. Our financial results for the fourth quarter exceeded our original expectations. We saw strong leisure demand throughout the quarter as TRASM declined just 2.6% on 10.5% capacity growth. Fuel ran slightly higher than expected, but disciplined cost execution helped us deliver a 12.9% adjusted operating margin, among the best in the industry. These results demonstrate the effectiveness of our low utilization flexible capacity model. Operationally, 2025 was an outstanding year. Controllable completion was an impressive 99.9% even as we increased peak flying. That consistency was recognized externally as well. The Wall Street Journal ranked Allegiant the second-best US airline overall and number one in lowest cancellation rate, the least number of mishandled bags, and the fewest instances of involuntarily bumping passengers. This reflects the daily professionalism and execution of Team Allegiant. We also successfully integrated the MAX aircraft into our fleet. After receiving our first MAX in late 2024, we prioritized investing in pilot training and revamping our maintenance operations to ensure a seamless transition. These aircraft are performing very well, delivering roughly a 20% fuel burn advantage compared to the A320. We are continuing to optimize schedules to allow us to realize the efficiency and reliability benefits from our MAX fleet. As they continue to increase their share of flying for us, they should become a meaningful tailwind for margins. Technology modernization was another important milestone. Transitioning away from our proprietary systems in favor of modern, flexible platforms was a major undertaking, but it was essential for achieving our future goals. We are now turning our focus to leveraging the state-of-the-art technology stack that allows us to introduce new tools and capabilities across the business. Our commercial initiatives are also gaining traction. Allegiant Extra continues to perform well, loyalty engagement is rising, and our improving digital capabilities are helping to make travel easier and even more enjoyable. With flash capacity growth in 2026, these commercial levers should boost earnings as their early results remain encouraging. Importantly, we strengthened our financial position while advancing all these initiatives. Unit costs fell more than 6% for the year, an industry-leading performance. With the sale of Sunseeker, debt repayments, and improved EBITDA, net leverage was reduced to 2.3 turns, nearing our lowest level since pre-COVID. Turning briefly to demand, we saw a meaningful improvement over the holiday period, and that momentum continued into January. Current leisure demand is strong, and our customers continue to value convenience and affordability, areas where Allegiant is uniquely positioned. Looking ahead to 2026, we do not plan to grow the fleet this year as a standalone. We expect to lean into our existing infrastructure and commercial initiatives to drive traffic improvement and margin expansion. Importantly, we remain committed to balancing growth with profitability, which we refer to as earning the right to grow. We expect a 13.5% adjusted operating margin in the first quarter, which should be our second straight quarter at or near the industry lead, setting the stage for a strong 2026. For the full year, we're guiding to adjusted EPS of more than $8 per share, an increase of approximately 60% year over year, reflecting the structural improvements we've made across the business. Strategically, our agreement to acquire Sun Country is an important step forward as the combination is expected to accelerate our ability to build the leading leisure airline in the US. Given the execution over the past year and the strengthening of our foundation, the organization is well-positioned to take on this significant undertaking. The two airlines share strong cultural alignment, similar fleet types, minimal network overlap, and complementary technology platforms, including Navitaire, all of which help reduce integration risk. A thoughtful integration plan is underway, focusing on capturing synergies efficiently while protecting operational excellence and the respective strengths of both airlines. When you step back and look at the broader landscape, it's clear that Allegiant continues to separate itself within our segment of the industry. Our low utilization flexible capacity model has worked for more than twenty years because it is purpose-built for leisure flying. We take great pride in being the leisure carrier of choice in nearly all of the 126 communities we serve, delivering convenience and reliability that travelers can count on. None of this is possible without the consistency and dedication of Team Allegiant. Their passion shows up every single day, and I'm honored to work alongside them. And with that, let me turn it over to Drew to walk through our commercial performance. Drew Wells: Thank you, Greg, and thanks, everyone, for joining us this afternoon. We finished 2025 with more than $2.5 billion in total airline revenue, up approximately 4.3% versus full year 2024, and a record high for Allegiant. I'd be remiss not to celebrate the success of the growth strategy even in the face of macroeconomic pressures through the year. On the back of that growth, we believe our year-over-year travel change relative to our CASM ex performance will be the best in the industry for the full year. The fourth quarter ended with approximately $656 million in total airline revenue, up approximately 7.6% versus Q4 2024, and a fourth-quarter record. Finally, the fixed fee revenue contribution of $25.5 million in the fourth quarter, despite the increase of scheduled service utilization, was another quarterly record. Our unit revenue metrics performed quite well in the fourth quarter, particularly when considering the growth profile. Our scheduled service ASMs grew 10.5% year over year in the fourth quarter, while TRASM decreased 2.6% to 12.67¢. As we've discussed over the last couple of quarters, the change in load factor trajectory is helping support the improvement of the growth-adjusted trend and unit revenue metrics. We gained a full point of load factor in Q4 2025 compared to the prior year. The winter holiday performance was certainly the most striking. Revenues over the Thanksgiving travel window were slightly higher on a year-over-year basis, and unit revenues across the Christmas and New Year's travel period were modestly higher on a year-over-year basis, but also notably shifted into January, providing some tailwind into 2026. Remember, the holiday period in 2024 also marks the start of our utilization normalization and continues into 2026. We expect the next year to represent additional sculpting of the significant utilization lift of the last year. For many markets, that represents capacity somewhere between 2024 and 2025 levels. Peak days will increase utilization just slightly through the first half of the year, while off-peak days will regress slightly more. We'll maintain some slack in the approach, but as usual, we'll feature more ability to add off-peak day capacity as the environment dictates. Additionally, as Greg alluded to, the proliferation of MAX flying in our network. We're thrilled with the performance of the new aircraft in our system thus far. In fact, cherry-picking the top A320 lines throughout the entire system against all MAX flyers are producing approximately 20% better economics simply measured as revenue per hour less fuel expense per hour on peak days with similar utilization. Further, through the same comparison on off-peak days, we produce nearly 10% better per hour economics while also flying the MAX aircraft 30% more than the same top Airbus tails in the fourth quarter. We continue to be incredibly excited for the increased potential that lies ahead with this aircraft. The fleet cadence through 2026, of course, correlates neatly with our overall ASM growth expectation. First-quarter ASMs are expected to be down approximately 5.7%, and the second quarter slightly more due both to fleet schedule and the Easter holiday pulling forward. Growth is expected to ramp up in the third and then further in the fourth quarter to achieve a full-year expectation of down 0.5% versus full year 2025. 2026 will also mark a return of robust levels of new market ASMs, while Q1 remains in the mid-single percent of ASMs flown. Approximately 10% of both the second and third quarters will be in their first twelve months of operation. 19 markets begin service in the first quarter, 17 of those this month, and 20 more in the second quarter. New markets lend themselves to strong lift in new card acquisition trends. Four of the last five months have been double-digit percent higher on a year-over-year basis, and spend remains strong on the card. We received approximately $140 million in remuneration, which represented a modest year-over-year increase. As we continue to build on this momentum, we are committed to working closely with Bank of America on the evolution of the co-brand. We are engaged in constructive discussions to ensure long-term alignment and a continued strong partnership that supports the next phase of our current program. The modest decline in ASM, holiday shifts pulling noticeable traffic into the quarter, and most importantly, the exceptional demand throughout the month of January sets us up for an incredible Q1 revenue performance. I noted the New Year shift of traveling to Q1, but the early Easter will have some positive impact on March as well. Even while winter storm impacts were worth approximately $2 million in absolute revenue headwinds, the TRASM effect is a slight positive due to the timing within the quarter. We were much better positioned within our Navitaire ecosystem to provide options and reaccommodate our passengers. Most of all, a huge thank you to all of our team members that showed up in adverse conditions and safely made a huge difference in the lives of our travelers. With that, I'd like to hand it over to Robert. Robert Neal: Thank you, Drew, and good afternoon, everyone. I'd like to start by just recognizing the team for their incredible work throughout 2025. We grew capacity by 12.6% in the year on flat fleet count and flat staffing levels. Despite a 14% increase in fleet utilization and nearly 17% reduction in employees per departure, our team members delivered an industry-leading controllable completion of 99.9%. Now I'll walk through the fourth quarter and full-year results and then provide an update on our outlook and financial position. As with prior calls, my comments today will reference results on an adjusted basis, excluding special items unless otherwise noted. Our outlook today will exclude any impact from our proposed acquisition of SunTrust Airlines, which we expect to close in 2026. For the fourth quarter, the airline segment produced net income of $50.1 million, resulting in airline-only earnings of $2.72 per share, coming in ahead of our guided range, which was $2 per share at the midpoint. Outperformance was driven by lower-than-expected salaries and benefits, timing of certain maintenance expenses, and a stronger-than-expected revenue environment following the government shutdown. Full-year 2025 consolidated net income was $70.3 million or $3.80 per share. The airline earned $93.8 million, yielding full-year airline-only earnings of $5.07 per share. The airline generated just over $143 million of EBITDA during the fourth quarter, producing an EBITDA margin of nearly 22%, underscoring the earnings power of the model in a favorable leisure demand environment. Turning to costs, fuel averaged $2.61 per gallon during the fourth quarter, slightly above our expectations. Notably, ASMs per gallon were up 2.6% over the prior year quarter, highlighting initial efficiencies from investments in the MAX aircraft and LEAP engines. As the MAX aircraft comprises a larger percentage of the fleet, we expect to see continued improvements here, yielding significant savings in annual fuel consumption. Fourth-quarter adjusted nonfuel unit costs were 8.01¢, representing a 3.4% year-over-year improvement on 10.2% higher capacity. For the full year, cost performance came in consistent with our down mid-single-digit expectation, with nonfuel unit costs down 6.1% despite the removal of 4.5 points of planned capacity growth, demonstrating the strength and agility of our flexible utilization model and the cost discipline of our team. We continue to grow into our infrastructure throughout 2025, and I'm really pleased with how the team has delivered on the cost front. As we look ahead to 2026, while we expect capacity to be down slightly year over year, which will place modest pressure on CASM ex, I remain confident that the cost initiatives implemented in 2025 will help mitigate these pressures. Importantly, we continue to expect full-year unit revenue increases to exceed CASM ex fuel increases, as evidenced by our full-year outlook, which I'll discuss in a moment. Moving to the balance sheet, we ended the quarter with total available liquidity of $1.1 billion, inclusive of $250 million of undrawn revolving credit facilities. Cash and investments declined by approximately $150 million from the end of the prior quarter, reflecting proactive debt prepayments following the sale of Sunseeker, which had closed late in the third quarter. During the quarter, we repaid $259 million of debt, including $224 million in voluntary prepayments. At year-end, cash and investments started at 32% of full-year revenues. We also increased our revolver capacity to $250 million, up from $175 million, providing efficient available liquidity while allowing for a reduction in debt balances. Notably, we continue to maintain an uncovered pool of aircraft and engines valued at well over $1 billion, providing substantial financial flexibility. Total debt at year-end was just under $1.8 billion, down from $2.1 billion at the end of the third quarter, and net leverage improved to 2.3 times, down nearly a full turn from 2024. Capital expenditures during the fourth quarter were $56.7 million, including $35.9 million of aircraft-related spend and $20.8 million in other expenditures. While deferred heavy maintenance spend during the quarter was $11.5 million. For the full year, we invested $453 million into the airline, inclusive of heavy maintenance expenditures and within our previously guided range. We ended the year with 123 aircraft in the fleet, including sixteen 737 MAX and 107 A320 family aircraft. Looking ahead to 2026, we expect to take delivery of eleven 737 MAX aircraft, with nine placed into service by year-end, while retiring nine A320 family aircraft throughout the year, resulting in a flat year-over-year fleet count. Based on these delivery expectations, we estimate full-year 2026 capital expenditures of approximately $750 million, including $85 million in deferred heavy maintenance and $580 million of aircraft-related CapEx. Turning to our outlook, as Drew noted, we now expect full-year capacity to be down slightly year over year, largely due to the timing of aircraft deliveries, which are back-half weighted. This includes a modest delay of three aircraft, pushing their entry into service just after the start of our summer peak. The healthy demand environment we observed during 2025 extended into early January. While winter storms, Fern, and Gianna did impact bookings, we're beginning to see a recovery, and today's guidance reflects the impact from the storms. As a reminder, our outlook is based on Allegiant's standalone forecast. For the first quarter, we expect earnings per share of approximately $3 at the midpoint of our guided range, implying an operating margin of 13.5% based on an assumed fuel cost of $2.60 per gallon. For the full year, given continued macro uncertainty across the industry, we believe it is appropriate to guide more conservatively. At this point, we expect to deliver earnings per share of at least $8, with the potential for upside as demand trends, cost initiatives, and operating performance evolve over the course of the year. As I wrap up, 2025 was a foundational year for Allegiant. We brought the level of operations back in line with our fleet infrastructure, providing operating cost economics constructive to our leisure-focused flexible capacity model. We largely restored peak day aircraft utilization, making more of our product available on the days our customers want to travel. We aligned management headcount to the level of operations and introduced performance-based pay programs for leaders across the business. We integrated one-third of our firm order book from Boeing, improving team member productivity and delivering initial fuel efficiency targets. We divested the Sunseeker business and refocused management efforts on the airline. We paid down debt and positioned our balance sheet for healthy investment in our future. With more than 100 new technology aircraft available in our order book, a healthy financial position to access the used aircraft market opportunistically, and a technology suite suitable for serving a larger customer base, I remain highly confident in the foundation we have here. Whether that be for navigating through various demand environments, expanding our leisure offering with more community, or enhancing our customer and team member experience. And with that, operator, this concludes our prepared remarks. We can now move to analyst questions. Operator: Thank you. If you would like to ask a question, please press 1 on your telephone keypad. If you would like to withdraw your question, simply press 1 again. We ask that you please limit yourself to one question and one follow-up if needed. Thank you. Your first question comes from Scott Group with Wolfe Research. Your line is open. Scott Group: Hey. Thanks. Afternoon. So I think the term you used was January was exceptional from a demand standpoint. Maybe just, like, some color on what you think is driving that. And I know it's early, but when you look at the rest of the quarter, how does it look? Are you seeing that same trend continue? Any degree of moderation? Just any thoughts there. Drew Wells: Yeah. Thanks, Scott. You know, it helps that we have seats pulling back a little bit when it comes to demand, but I don't think what we're talking about is much different than what we've heard from a number of carriers through this cycle. The user, the visitation coming through the front door is better than we've seen in several of the prior years, able to manifest both in terms of bookings and through some pricing capabilities and yield, which is a nice change of pace for us over the last couple of years. So I think that's going to be really pronounced going through the spring break and Easter period. And then, you know, we'll kind of see what happens as bookings and demand start to turn a corner toward post-Easter into the summer time frame, which is still a bit too far out for the current booking curve. So, you know, I think we're hopeful as we get into the second and third quarters that there remains upside similar to what we've seen in January. But, you know, not something that I'm willing to bank on quite yet. Bear bars on what we've seen for the summer period over the last several years are just so much wider. That it's hard to have a great deal of conviction that this will definitively continue through that time frame. Scott Group: And then if I heard correctly, I think you have a view that you guys are going to have the best RASM, CASM spread in the industry this year. Maybe just some a little bit more color on how you are thinking about both RASM and CASM this year would be helpful. Drew Wells: Hey, Scott. I think in Drew's comments, he was referring to, in 2025, the best spread between TRASM and CASM ex. But I will say as we look to 2026, we expect TRASM to improve more than CASM ex this year as well, which reinforces the margin expansion that we're looking at. Scott Group: Okay. That was backward-looking. Okay. I apologize. But how are what what are how are we thinking about in a in a flattish capacity environment, how are you thinking about CASM this year? Robert Neal: Sure, Scott. Hey. It's BJ. On a full-year basis, you know, as you would expect, we would expect CASM to be up for the most part across all lines in the P&L except maybe aircraft rent, which we've talked about the last couple of calls. And then if you just think about the shape of capacity, you would expect CASM ex to be up more in the first half of the year than it would be in the back half. Expect the second quarter to be the high point of the year. And I would just share I would on a year-over-year comp basis. And then maybe just worth noting, we do expect CASM ex on a full-year basis to be down versus 2024. Scott Group: That's helpful. Thank you, guys. Operator: The next question comes from Atul Maheswari with UBS. Your line is open. Atul Maheswari: Good evening. Thanks a lot for taking my question. Vijay, you mentioned your prepared remarks that you were being conservative with the full-year guidance given, you know, how some of the macro issues hit the region and the industry last year. So just to be clear on what's assumed for the full-year guidance, you're not really assuming the current from January trends to continue and it's what gets you to the $8 versus that the right way to think about, you know, like, in January trends, you want to continue to get a number higher than that. Is that the right way to think about it? Robert Neal: Yeah. Cool. I think that's right. Can just kind of think about, Drew's answer there to Scott's question. That would line up. Atul Maheswari: Okay. Thank you. And then on the first quarter, I want to better understand what's assumed at the low end and at the high end. So if current booking trends were to continue, does that take you to the midpoint of the first quarter range or, which is the $3, or does that take you to the high end of the range? And then what's assumed at the low end? Drew Wells: A lot there. I you know, like, what we're putting out for the midpoint is kind of where we see demand. We know it will taper a little bit through the quarter for in-quarter bookings. That's, you know, just the nature of things. The peak is certainly the weeks immediately after the New Year. So, you know, we won't persist at exactly the same level, but we wouldn't expect that either. And then, you know, variance from that on the rep side will take us one way or the other. Operator: The next question comes from Mike Linenberg with Deutsche Bank. Your line is open. Mike Linenberg: Hey, good afternoon. Two questions here. You talk about demand and the strength that you're seeing, how much of that is just a function of the fact that you're coming into the year with a very favorable supply backdrop. I mean, you indicated, Drew, that you're going to be down March and June and then it picks up. And, you know, maybe more specifically, you know, where is the demand across the network? You know, is it stronger in some regions versus others? Like, we know that Vegas has been struggling, but we've also seen a lot of capacity come out of Vegas. So I you know, I realized the headline number may be somewhat deceiving, and some just curious if you could drill down and give us a little more color. Drew Wells: Yeah. Perhaps a little more color, but you know, I'll probably stop short of great detail. Geographically, it all looks pretty strong. I mean, to your point, it's not a new story that Vegas has struggled. I think LBCBA's numbers had it down about seven and a half percent or so in visitation year over year, but convention attendees were flat. Right? It's becoming a very events-driven and holiday-driven destination, which is very similar to the rest of our network, but a bit unfortunate to lose kind of that year-round rock star reliable that it once was. So, yeah, certainly having seats down helps, but it's, you know, I alluded to the visitation to the website. I mean, what's coming through the front door, you know, we would have loved to have in '25 too. When we were talking about, you know, how strong it was to start the year, and we're beating that. So I feel really good about where we sit. I feel good about it in elevated capacity. I feel really good about it with those seats coming down a little bit. Greg Anderson: Okay. Great. In my case, Greg. I would what Drew and team did in the plan this year as well is they concentrated more flying in the peaks and removed some in the off-peak as well. So I know Drew mentioned that in his opening remarks, but that too, you know, that's a helpful backdrop for the strength we're seeing in demand. Mike Linenberg: Great. And then just my second question, really turning to the merger and maybe just some of the mechanics. Not that you put out a filing, but just curious what went you know, at what day or what time frame you did actually file Hart-Scott-Rodino? I know it's a thirty-day waiting period. The deal was announced early January, so if it was right around that time, we'd be coming up to at least the first thirty-day period. And sort of tied to the merger, as we think about the cash component, the $4 plus per Sun Country share, I think that's about $200 million. Is that is the plan to finance that out of cash or you know, would you finance that? Or, you know, is it out of cash, or would you actually finance it? Thanks for taking my questions on that. Greg Anderson: No. Thanks for the question, Mike. I'll kick it off. Vijay will follow up on that second part around cash. As we put out, we expect the merger to close in 2026. And to your point, there's conditions necessary to achieve that. Shareholder vote, regulatory approval, and then some other customary closing conditions. For the shareholder vote and the regulatory approval or the HSR filing, we expect Mike to file both of those within the coming weeks. And then that'll post those filings and review. That'll trigger the timeline as well. And then, BJ, do you want to jump in on the question? Robert Neal: Sure. Hey, Mike. On the cash consideration for the merger closing, you know, it's certainly going to depend on when in the year the closing would take place. I would just note we have a bond out there that matures in 2027. So we've had an eye on the market to refinance that at some point. And so, ideally, we would refinance that and take a little bit more out. And have some extra cash to pay the cash consideration of the merger closing. But if the timing doesn't work out, there's, you know, more than $1 billion in unencumbered aircraft and engines. Candidly, balances for the first quarter are ahead of schedule. We could start by just using cash balances if we need to. Mike Linenberg: Great. Great. Thanks, everyone. Operator: The next question comes from Duane Pfennigwerth with Evercore ISI. Your line is open. Duane Pfennigwerth: Thank you. I just wonder if you could speak to how you were deploying the MAX aircraft. Any more flexibility that you have currently versus maybe how you were using them with just a few on the property. And as you begin to consider the combination with Sun Country's fleet and your own fleet, do you see the biggest opportunities? Drew Wells: Yeah. So I think we talked about this in previous quarters. Starting around mid-November, we pivoted a little bit on MAX from flying a lot of cycles and getting up and down for pilot transition training. And something that supported a bit of longer-haul flying, something that's a bit more commercially driven. So that, yeah, that started what, two and a half months ago or so. And, you know, contributing to the numbers I quoted in the remarks. Feeling great about that. You know, we'll get into additional basing on that in the back half of this year as delivery resumes. Robert Neal: Back on the second part. Yeah. And then just on the potential transaction, Duane, with Fleet and how we would be flexible in that regard. I think we're really excited. We think there's some upside in the deal to ensure that we can have the right aircraft at the right gauge in the right markets. Both Sun Country and Allegiant, we own a great deal of flexibility with our aircraft. It'd be too early to say what we're planning at this point, but we do think that provides some potential additional upside as part of the transaction as well. Duane Pfennigwerth: Thanks for that. And then maybe just from an earnings power, earnings seasonality perspective, as you think about the quarterly baseline, maybe for 2025, which quarter do you think has the most upside from your perspective? And that's not necessarily a 2026 comment, but just to get to like that normalized earnings power on an Allegiant standalone basis. As you look back on the April 2025, which quarter do you think has the most upside? Greg Anderson: Duane, let me kick it off, and I'll I don't want to say that the third quarter, I believe, has the most upside, but what we're focused on is as you recall, in 2025, we had a negative margin in the third quarter. We're focused on turning that to a positive margin as well. But in terms of the most upside, Drew, I mean, do you say it's kind of bookended on the first and the fourth quarter right now? Drew Wells: Yeah. They remain incredibly resilient first and fourth quarter. You know, just thinking about the same store flat capacity backdrop, we were down about 6% in the second quarter and 5% in the third. Yeah. I don't know, and I'm not willing to guide for you today what recovers from that, but those certainly took the largest kind of core demand impact through '25 and that perspective would pose the biggest upside capability this year. Duane Pfennigwerth: Okay. Very helpful. Thank you. Operator: The next question comes from Andrew Didora with Bank of America. Your line is open. Andrew Didora: Hi. Good afternoon, everyone. I guess, first question for Greg. I guess, now that you're back on track with your MAX order book here, like, you used to generate roughly $6 million in EBITDA per aircraft back in 2019. With this new fleet, you know, any way any chance you can maybe give us an update on where you think that can go in today's environment with the new MAX fleet that you're going to have? Greg Anderson: Yeah. On the MAX aircraft, Andrew, they're definitely the larger share of ASMs that they're producing in the company. You know, we think that becomes a meaningful structural tailwind. Overall, though, and I appreciate the comment about the improvements you've seen, we've really been focused on these initiatives that we've talked about to strengthen our business, kind of get back to what the Allegiant of old. And, you know, for many years, we have led the industry and we're pleased with the progress we're making. Our first step is getting back to double-digit margins. And I think this year, you're seeing in our guide that we're taking, you know, a meaningful move in that direction. We expect still later this year, we talked about it on a previous earnings call, to have an Investor Day. I think the transaction announcement may push that back a little bit later than what we initially anticipated. But that would be, you know, I think, a helpful setting for us to talk about the long-term earnings potential, and we could, you know, drive it in margins or in terms of EBITDA per aircraft as well. Andrew Didora: Got it. Fair enough. Just my second question, you know, I know there's obviously a lot of utilization to flex capacity over the year. I guess, you know, if you see demand get materially better, do you have much capacity that you could potentially flex and add in given your flat fleet growth? Thanks. Drew Wells: Yeah. I've mentioned a little bit in the remarks that we have some slack on peak days, you know, kind of to go through the summer. But, certainly, you know, off-peak has a ton of runway if the demand and fuel environments dictate that we add that in there. You know, I think we'd be making those calls, you know, time frame. More or less, but certainly some slack that still exists there. Andrew Didora: Thank you very much. Operator: The next question comes from Jad Gaudin with Citigroup. Your line is open. Jad Gaudin: Hey, guys. Thanks for taking my question. Obviously, great quarter, great guidance. I wanted to just think about Q1 guidance versus the full year a little bit in a little bit more detail. Last year, if we think about the seasonality of margins, we saw Q2 margins just a little bit lower than Q1 margin. Obviously, Q3 is very different. And then Q4 margin above significantly the Q1 level. Is that the right general seasonality that we should be thinking for 2026 off of this 13.5% margin at the midpoint? It seems like the full-year guidance at least at the $8 level really doesn't contemplate that kind of seasonality, but maybe I'm wrong. Maybe you could just kind of offer some thoughts there. Drew Wells: Sure. I mean, maybe just, you know, thinking of the rep side in particular and going back to some of the early comments, you know, a lot of this will depend on your view on what happens with core demand as we go through the summer. I think the industry as a whole, and we're no different, is taking a slightly more conservative view on how that will roll out. Again, we've just seen so much variability in those actual results as we go back through the last several years. So, you know, depending on your level of bullishness on summer demand will probably dictate how you think that margin cadence looks through 2026. Robert Neal: Hey, John. It's BJ. The only thing I'd add to that is just keep in mind Drew hinted at the top of the call that, you know, he's constrained on fleet heading into the summer. We had some very modest delays on some MAX deliveries that are impacting the early part of summer capacity. And so that'll put a limit on what we can do. Jad Gaudin: Okay. Guess what I was getting at is, you know, some of this is in your control with the s kind of rolling on throughout the year. It does seem very reasonable even in a wide range of demand scenarios that Q4 '26 margins are going to be considerably higher than your Q1 range. I mean, unless something really changed in the demand environment, is that logic wrong? Greg Anderson: Hey. Hey, John. It's Greg. I could step in maybe. Like, for the first quarter, I think we have about 28% remaining to book. We're still early in the full year. And so we feel we put a guide out there for the full year that we're confident that we can deliver on. Currently, demand is strong, and the economy, backdrop, you know, it seems good. But to Drew's point, we just don't want to get ahead of ourselves. And so we want to take a more measured approach and then update throughout the year each quarter. Jad Gaudin: Okay. Fair enough. I mean, I think we I think we can tell what you're getting at. Can I just ask a completely different question? There's a view out there that there could be a carrier liquidating relatively soon. I'm not sure if that's true or not. I'm just curious if you guys have a playbook for an event like that. Does that influence anything that you would do? Is there kind of a second step to that if we see an event like that occur in the industry? Greg Anderson: I'll start, and Drew may want to add. But we don't view our success here at Allegiant as being kind of dependent on what other carriers in our sector may or may not do. We believe we're just uniquely positioned here at Allegiant just because of our differentiated model and, candidly, we have limited overlap. But what Drew and his team always do is they keep a close eye on capacity, industry capacity, and they'll continue to evaluate that. As they would. Normally. Right? Drew Wells: Yes. That's right. And, you know, we recently secured a little bit more space in Fort Lauderdale as it is. I've been looking to grow in there for a while, and, you know, it can be a bit of an owner at the airport to be able to grow into, and we've been great partners with them. They've been great partners to us. Helping to work to secure them. We're going to keep trying to grow where we see demand and success, and, you know, that's one of the places where we've been successful in doing so. Jad Gaudin: And if that happened in the near term, would you have the ability to lean into that to flex capacity into that? It sounds like there are some aircraft constraints, which well? Or do you think you'd just be a beneficiary more on the yield side or something like that? Drew Wells: I mean, to be determined. I mean, it's a lot of in there. Like we mentioned earlier, we do have some slack left in our schedule that will deploy as we see fit. Kind of as, you know, as we see what shakes out. So whether that comes through capacity, whether that comes through, you know, just a few less seats in the market benefiting pricing for the short term. I guess we'll see. It's hard to speculate at this point, I think. Jad Gaudin: Alright. Fair enough. Thank you for all the answers. Operator: The next question comes from Savi Syth with Raymond James. Your line is open. Savi Syth: Hey. Good afternoon. Just maybe a little expanding a little bit on Mike's earlier question. I was kind of curious how you're thinking about balance sheet this year and targets. And, you know, you do have a big CapEx plan this year, and this merger. So curious how you're kind of thinking about where you'd like to kind of keep the balance sheet. Robert Neal: Sure. Thanks, Savi. You know, I've spoken on these calls for a while about trying to keep net leverage in the two to two and a half turns. We don't have a specific mandate from Greg or our board on that, but we update on it every quarter, and I think that's a healthy place to be. I'd like to see that number closer to two versus two and a half, but as we've kind of alluded to on the call, there's been a lot of opportunity out in the industry, and there are certain times where we should move within that range. As I think about 2026, the things that we need to consider are refinancing our bond, that's maturing in 2027. We don't need to do that in 2026, but the markets are quite constructive at the moment. It could be a good opportunity to build up some cash balances at attractive economics. And then there's the consideration, the cash consideration due to Sun Country in the back of the year. And then we've been trying to keep cash balances elevated a little bit, toward the higher end of our targets, and that's because we'd like to envision a world where we're paying out our pilot retention bonus at some point soon as well. And so we want to be ready to do that when we have an opportunity. So those are the big things. And then we have a big CapEx here, as you mentioned. Now most of most of the all of that could be financed at delivery. We'll probably pay cash for airplanes in the first half of the year and then think about aircraft financing in the back half of the year. Greg Anderson: Savi, it's Greg. I just wanted to add a couple of comments on BJ's points there. And maybe a little bit more high level, and that's the, you know, owning our fleet and opportunistically buying aircraft is a differentiator for us at Allegiant. We think it sets us apart, particularly in our segment of the industry. And it's a major driver behind our durability, our low ownership cost, and our flexibility in that regard. And with the Sun Country acquisition, just the work that BJ and the team have done to strengthen the balance sheet over the years and the way we structured the deal, this isn't going to the acquisition isn't going to stretch us by any means. In fact, post-close and integration, it's going to strengthen the balance sheet. We have, you know, a favorable well-timed MAX order, and you combine that with the free cash flow that Sun Country is currently producing, that's going to help us not only maintain low leverage but continue to delever post-combination. Robert Neal: That's well said, Greg. Thank you for adding that. And I think, you know, inside of Greg's comments there, Savi, the question is, if we wanted to raise the financing, do we do it ahead of having clarity on all of the approval dates and the close date knowing the close date definitively because we may raise a little bit of additional capital today to be ready to close, but immediately on closing, we'll benefit, like Greg mentioned, from the cash flow that that business produces. Savi Syth: Great. Good point. And this is our answer. I'll leave it at that. Thank you. Operator: The next question comes from Connor Cunningham with Melius Research. Your line is open. Connor Cunningham: Everyone, thank you. We could just start on the new development or new market development. It's been a bit since we've started to add back new cities and whatnot. You highlighted the 10% of your capacity in Q2 and Q3. Just curious if you could provide some maybe some historical context to what a unit revenue drag would normally be on new markets just as we start to think about past Q1 in general. Thank you. Drew Wells: Yeah. I think in the past, what we've talked about is something in the 10 to 15% range relative to the rest of the system. And no reason to expect it to be different through the cycle. Connor Cunningham: Okay. Helpful. And then just in terms of so, yeah, your well-timed MAX order, you've sounded very, very bullish on the MAX deliver on MAXes in general. I believe you have 80 on options that are still waiting to be converted or potentially converted. Like, do you need to wait are you can you just talk about how you would approach the options side of the business or the options for the MAXs in general? Are you going to wait for Sun Country to close? Like, is there just trying to understand the dynamic of where we could be in a couple of years from now in terms of just the overall maybe a decade from now, where we could be in terms of just MAX contribution in general for the company? Thank you. Robert Neal: Connor, yes. Thanks for the question. As you can tell, we're really excited about the opportunity and excited about what we're seeing in the firm portion of the MAX order. And there are options I think we would need to start talking about exercising those options if that's the decision in the back half of this year. And that would be for deliveries beginning in 2028. And I don't think that we have to wait for a Sun Country close to make that decision because we know or I'll say, I believe that exercising some of those options at least is accretive to our standalone business. But I think it becomes much, much more powerful when you think about the combined fleet. You know, when we had the call on the merger, we talked a lot about synergies, but it was really difficult to quantify fleet synergies, in particular, around the P&L because there's just a lot of trading between the two airlines that own their entire fleet. And we just have such a better opportunity to take advantage of the auction order book. Connor Cunningham: Can I just ask one more on top of that? Like, is the A320 like, do you envision the A320 to be part of the fleet like, you know, further down the line? It just seems like the MAX has done wonders for your business in general. And, you know, obviously, Sun Country is a 737 operation. Just like any thoughts on single fleet in general? Thank you. Robert Neal: Sure, Connor. I think I got a little I'm loaded. I know. Your question and probably forgot to maybe give you a responsible CFO comment and say, the number one thing to guide that decision is probably the shape of our balance sheet. And so, the A320 has been a fantastic machine, a fantastic producer for the Allegiant business for a long time. We announced the MAX order, I think we talked about the combined fleet being about 50% Airbus, 50% Boeing. At the end of the order. Candidly, we haven't sat around internally and discussed that changing significantly. Like I said, there's probably a little bit more opportunity on the MAX side now that we on the assumption that we would close the Sun Country transaction. But I think owning aircraft is more important than which of the two aircraft right now. And in order to own the aircraft, we need to maintain a healthy balance sheet. Connor Cunningham: Okay. Thank you. Operator: The next question comes from the line of Ravi Shanker with Morgan Stanley. Your line is open. Ravi Shanker: Great. Thanks. Good evening, everyone. I think on the top of the call, you mentioned a tech stack opportunity and kind of how you're excited about what's coming. Can you just elaborate on that a little bit? And kind of is that something that you are putting in place now? Or do you think that needs to be made until after the merger? Greg Anderson: Well, thanks, Ravi, for the question. It's a really important one. And we've been, you know, through a technology transformation here for a number of years. And I'd like to think where we're at today is that our technology investments are much more focused, and they're very practical. And as we've modernized our IT stack, it's unlocking a lot of value for us. And so these platforms, particularly on the commercial side, they're allowing us to move much more quickly. What we also were able to accomplish as part of this is bringing our data together and having better data and the ability to use that data to make better decisions. But we're going to continue to be more nimble, continue in terms of technology, continue to find ways to improve particularly on the commercial side, but throughout the business. For example, we were seeing just for the winter storms that we just recently had, the new technology stack allowed us to communicate better with our customers. And that's what we're ultimately trying to drive. And it's still early, but we're pretty encouraged by what we're seeing the changes we've made in this area of the business. Ravi Shanker: Understood. That's helpful. And maybe as a follow-up, you the investor rate that you mentioned earlier for this year. Do you think that's still a 2026 event, or do you think it gets pushed out of '27? Greg Anderson: I think it will pace with the close of the transaction that we're talking about, but we would expect if it closed during the timeline which we put out there the second half of this year, we still think there's going to be room to have an investor day this year in 2026. Ravi Shanker: Great. I think that's going to be a pretty important catalyst for the stock and current figuring out normalized EPS. So, would strongly encourage that. Thank you. Greg Anderson: Thanks, Ravi. Operator: The next question comes from Dan McKenzie with Seaport Global. Your line is open. Dan McKenzie: Hey, good afternoon. Thanks for the time you guys. Couple questions here. And, you know, I guess, just you know, I hope you don't cringe too much at this question. You know, leave it to me to kick a dead horse here. But going back to the guide, does the, you know, the and does the $8 embed a full or partial recovery of the five percentage points of RASM that was lost in 2025. And I guess you know, just beyond 2026, more broadly, you know, just given the k-shaped economic recovery that we've experienced are, Drew, are some of the lowest leisure demand buckets still missing here as you kind of give us this revenue outlook? And, you know, I guess related to that, if that demand segment doesn't come back, you know, can you still manage the airline to a mid-teens operating margin, you know, throughout the cycle? Drew Wells: Yeah. Thanks, Dan. I'll try to try to unpack some of this here. Yeah. I'd be remiss not to, you know, give another shout-out for our customer mix. You know, it does tend to be on the top part of that k shape. Right? And their median income over $100k. Generally, originating from lower cost of living, you know, DMAs, we do have a really healthy customer that flies on us. So I don't think that the k-shaped economy by any means is any more headwind or worrisome for me, I guess, as we look forward. You know, what we provide is truly valuable in the communities we serve. And we can still stimulate with price. We can still play with our schedule in a way that is going to produce the right outcome for what we're looking for. So that is not something that I will lose sleep over at this point. Greg Anderson: Yeah. And I would just add to that, Dan, that I mean, just to echo what Drew said that our business and model is designed to protect margins. The flexibility that we've built into it. And what you what we've talked a lot to the street about over the past year or so, the initiatives and the execution of the team to really re-strengthen that foundation. And so just to Drew's point, we feel really good where we're at and the flexibility we have and our ability just to serve the leisure customer. Drew Wells: Yeah. And maybe sorry. I remember the first part of the question. Now if you think about the middle part of the year and recovering that kind of that same store deficiency we saw last year, you know, we're not plugging a full recovery into that number. So the I mean, that's kind of, you know, where you would see a clear upside story if the economy does get there. We're above zero on it. But not all the way back. Dan McKenzie: Very helpful. Then, you know, second question here. Going back to the script, and the reference to the next phase of the credit card program, I'm just wondering what are the benchmarks that you'd like that credit card program to hit I guess, first? And then second of all, you know, are there steps that you can take to get your credit card holders to spend more, or do you just think as you think about that next phase and where the revenue upside is, you know, what are the areas of focus that you know, that really makes sense. Drew Wells: Yeah. I mean, there are definitively steps that we can take, and we know that because we've seen it in action, you know, over the last five months. Yeah. I mentioned at the top, you know, for the last five months being up double-digit percentage in new card acquisition, spend continues to look really strong. I think we just surpassed 600,000 cardholders. It's a really great story as we applied some, you know, kind of some new tactics and new thoughts even within the existing program and then as you refresh it and bring it to something a little bit more modern, I think there's a meaningful amount of runway that exists there. And as we think about how it's been communicated elsewhere, and you see 10% or more remuneration as a percent of revenue. I don't know that we get all the way to 10, but I think we get above the 5% or so that we did in 2025. So you think about another two to three points on that, it's a pretty compelling case right there. Dan McKenzie: Yeah. Absolutely. Thanks for the time, you guys. Operator: The next question comes from Christopher Stathoulopoulos with SIG. Your line is open. Christopher Stathoulopoulos: Good afternoon. Wanna dig into the capacity outlook for '26. So the 10 to fifteen the new routes, it's consistent with your historical profile. If you could speak to the composition, so departure stage engage, and then on utilization, hours per day, year on year, and then the mix peak versus off-peak year on year. And then, also, on the allocations of just look at first Q1, excuse me, you know, inventory is down solidly across most of your key markets, obviously, with the exception of FLL and how you're thinking about inventory, I guess, distribution against that full-year guide. Thanks. Bye, Mark. Drew Wells: I, yeah. Hi, Mark. Yeah. You got it. How about day two? We'll kind of go through all of it. I'll do my best to unpack everything we talked through here. You know, age and engage are a little bit offsetting through the year. So those are somewhat of a neutral for us. Yeah. We talked about Lauderdale and some of the other growth spots that, you know, kind of come from the new market announcements. We filled out SNA a little bit, filled out a little more in Gulf Shores. Lauderdale, we talked about. You know, in the spring, it's come a little bit at the expense of Provo capacity. That's gone elsewhere, but by and large, we backed by summer. So some of it has really just been kind of a seasonal kind of sculpting having to make some tough choices through the spring. But, really, a lot of that capacity that is coming out is off-peak day. We're able to hold our peak days pretty close to flat in terms of actual flying, which to Greg's earlier point, will be, you know, a bit of a tailwind to our unit revenue outlook, you know, and better overall patterns for customers on that perspective. So, I can promise you I didn't hit all of your topics there. Is there anything else you wanted me to dive into? Christopher Stathoulopoulos: Aircraft utilization. Drew Wells: Where we meaningfully 25 versus 24. I want to say live as low sixes hours per aircraft per day in 24. Up to seven over seven in 25. I think it's flat, maybe slightly up a little bit in 26, for overall aircraft utilization. Christopher Stathoulopoulos: Great. Okay. I'll keep it to that. Thank you. Operator: The next question comes from Catherine O'Brien with Goldman Sachs. Your line is open. Catherine O'Brien: Hey. Good afternoon, everyone. Thanks for the time. So I just want to bring back to the fourth quarter beat for a minute. You know, you came ahead in ahead despite the government shutdown. We don't know what your RASM or CASM expectations were going into the quarter. You just walk us through what went better and maybe just put some numbers around maybe how much better roughly, if not exactly. I'm really just trying to get a sense of, you know, where there might be continued momentum into the first quarter. Thanks. Drew Wells: Yes. I'm happy to start. Mean the rev outlook, you know, outperformed a little bit. And in particular, you know, we certainly I think we had communicated we did see a bit of a slowdown during the government shutdown as flights were being pulled back. But that recovered so well in the weeks following. And yeah, I talked a little bit about the holiday period, but, you know, that three-week stretch with some of which does spill into January being a positive on a year-over-year, certainly a bigger catalyst than I had anticipated at the beginning of the quarter. So, you know, kind of that late demand spike was a good guy. Robert Neal: Sure, Katie. I'll just add in. Yeah. We did have a handful of beats on the cost side as well. There were a few areas. Salaries and wages came in a little bit lower than we had expected. And then I think the point of your question, there are a few items, maybe one, that I'll call out, which is in the maintenance line. We had a meaningful beat there, which I would expect to be a bit of a shift into the '26. Catherine O'Brien: Okay. Great. Thanks. And then maybe, Vijay, just sticking with you. On the potential for refinancing and perhaps looking to raise debt against your unencumbered assets, you mentioned that the markets look constructive right now. Is there any structure or market that looks particularly attractive, capital markets bank debt, finance lease, whatever it may be? Robert Neal: We like all of those products. I think for me, and certainly others can weigh in here. For me, I just think it's important that we have a piece of the capital stack on the debt side that is not aircraft funded because the aircraft have proven to be resilient throughout cycles, including through a pandemic, and I just really like the ability to tap into aircraft to raise capital whether that's opportunistically for a large acquisition or whether that's out of defense because we see fluctuation in the demand environment. And so I just like the idea of keeping something of similar size to our existing bond at the time of its original issuance, was around $500 million. I like keeping something like that out there, which is secured by corporate collateral or the loyalty program. Catherine O'Brien: K. Great. Thanks for the color. Robert Neal: Thanks, Katie. Operator: This concludes the question and answer session. I'll turn the call to Sherry Wilson for closing remarks. Sherry Wilson: Thank you all for joining us today. We'll see you next quarter. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. At this time, if you have a question, you will need to press star one on your push-button phone. I would now like to turn the conference over to Erik Bylin. Please go ahead, sir. Erik Bylin: Thank you, Operator. Good afternoon, and welcome to NETGEAR's Fourth Quarter and Full Year 2025 Financial Results Conference Call. Joining us from the company are Mr. C.J. Prober, CEO, and Mr. Bryan D. Murray, CFO. The format of the call will start with commentary on the business provided by C.J., followed by a review of the financials for the fourth quarter and full year and guidance for 2026 provided by Bryan. We'll then have time for any questions. If you have not received a copy of today's release, please visit NETGEAR's investor relations website at www.netgear.com. Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding expected revenue, gross and operating margins, expenses, tax expense, and future business outlook. Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risks discussed in NETGEAR's periodic filings with the SEC, including the most recent Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and NETGEAR undertakes no obligation to update these statements as a result of new information or future events, except as required by law. In addition, several non-GAAP financial measures will be mentioned on this call. A reconciliation of the non-GAAP to GAAP measures can be found in today's press release on our Investor Relations website. At this time, I would now like to turn the call over to C.J. C.J. Prober: Thanks, Erik. And thank you all for joining us today. I have just completed my second year with NETGEAR, and I am exceedingly proud of the team and the results that we've delivered. After years of declining revenue, NETGEAR turned the corner in 2025 and delivered the first year of revenue growth since 2020, and record gross margins on top of that, leading to full-year non-GAAP profitability. This turnaround comes at a time when NETGEAR is celebrating its 30-year anniversary with much promise for the years ahead given our core strengths and the macro tailwinds we outlined during our Investor Day in November. Today, I'll cover a review of our 2025 accomplishments and give some color on our expectations for the year ahead. I am extremely pleased with what we accomplished last year and want to remind everyone that the groundwork for our 2025 performance began in 2024. Our objective during my first year was to correct foundational, operational challenges that NETGEAR faced, and we dug deep into the blocking and tackling of the organization to align a team that could deliver on the revenue opportunities while heeding the cost constraints required to turn NETGEAR's trajectory. As we moved into 2025, the emphasis turned back to the transition to growth as we worked to improve the margin profile of each business and translate that to improved profitability. Nowhere is our success and progress clearer than in our full-year financial performance. The momentum building behind NETGEAR's transformation clearly took off in 2025. Given our goal of entering the year, the results we're sharing today, I'm proud to say that 2025 was a financial and operational success. I want to wholeheartedly thank the team here for their dedication and diligence that's been the engine of this achievement. We began in 2025 with the restructuring that honed investments in the business to ensure the spend was properly aligned with the greatest opportunities for growth and profitability. This included the strategic investment in our highest growth opportunities and defined a framework to build our organization throughout the year that not only fills out our ability to capitalize on our opportunities but also improved our execution. As we began the year, our initial goal was to reverse the trajectory of our financials. We came into 2025 committing to investors that we would grow revenue, gross margins, and reduce our loss position while not quite expecting to be profitable. With the diligent effort of the team throughout the year, we were able to dramatically outperform our goals while navigating supply constraints and a substantially leaner channel. Full-year revenue grew by more than $25 million, and we also expanded our non-GAAP gross margin significantly across each part of the business, resulting in a 920 basis point improvement for the year. These gains in our top line and operating leverage translated to an improvement of $1.35 in non-GAAP EPS, including delivering non-GAAP net profit in each quarter. Importantly, this performance proves that we placed our bets in the right places and are firmly on the right path. While delivering stellar financial performance, we were able to drive forward many growth and operational initiatives to improve our outlook for the years to come. I'll now cover a couple of our most important achievements for each business segment in the last year. A big part of why I joined NETGEAR is that I see an incredible opportunity to differentiate our traditional hardware products by adding substantial value through software. To accelerate this effort in our enterprise business, we successfully acquired two software teams, Bog and Acxiom, which are now the foundation of our in-house software capabilities for enterprise. With these acquisitions, we accelerated insourcing of our software and have made great strides in leveraging AI to fast-track our roadmap execution. We also acquired the software stack that powers our ProAV solutions, and we're building an internal team that can drive faster innovation and more customer value than our prior partner-dependent development model. The second big opportunity for NETGEAR is to leverage these software investments to expand our subscription and services revenue. To further this, we launched our ProAV health services team last year. Our new team is helping our customers drive speed to value, providing dedicated, best-in-class support to ensure seamless AV solution deployments. This is just the beginning of our efforts to expand our value proposition, improve customer experiences, and drive higher-margin revenue streams. We also made significant strides in making NETGEAR the preferred vendor to work with across our enterprise AV partner ecosystem. A key point of emphasis for the team was to add AV ecosystem partners throughout the year, and I'm thrilled to share we grew our partner total to 524 by year-end, an increase of more than 150 partners in the year. In addition to the software-led product innovation and non-device revenue initiatives, our enterprise go-to-market transformation made incredible strides in 2025. We evolved our leadership, organization structure, and incentive plans, launched our partner program, revamped our website and partner portal, and changed our pricing, all with the goal of delivering on our promise to customers of being a partner that's easy to do business with. For consumer, in 2025, we again proved NETGEAR's technical leadership by delivering a slate of innovative, highly lauded new products during the year. While largely a strategic course correction to fill out our offerings in routers and mesh systems, these new products were met with strong market adoption and, importantly, stand as a cornerstone to help us expand our share position across the low and medium tiers of the market while further opening the funnel to our subscription services. And NETGEAR's offerings continue to stand out to consumers and professional reviewers alike, collecting a number of awards and accolades throughout the year. Given all the progress, we remain extremely well-positioned to capitalize on potential federal and state actions that could materially change the market dynamics in this space. We also made great strides in sourcing our software development capabilities on the consumer side of the business. Our newly formed software teams delivered a great new mobile app that launched with our new M7 mobile hotspot. This software platform is the go-forward foundation of our customer experience for our consumer products. We also capped off the year by growing our ARR in Q4 by 18% as compared to the prior year period, allowing us to end the year with over $40 million in ARR. And with the launch of our new M7 mobile hotspot, we have added eSIM monetization to the mix of our subscription and services revenue. From a financial results perspective, I'm thrilled to share that we capped off 2025 on a high note, delivering a fourth quarter that marked another tremendous proof point of the momentum we are building. With enterprise demand again growing double digits year over year, and strong work by the supply chain team navigating ProAV supply challenges, we were able to come in near the high end of our revenue guidance and exceed the high end of our non-GAAP operating margin for the seventh quarter in a row. Non-GAAP gross margin grew 750 basis points year over year in both enterprise and consumer, resulting in record quarterly non-GAAP gross margin of 41.2%. This flowed through the bottom line, translating to non-GAAP EPS of $0.26, up 117% sequentially. For the year, we improved our non-GAAP EPS by $1.35, an incredible validation of how the operational changes in 2024 flowed through to improved results in 2025. We also bought back roughly $50 million in shares in the fourth quarter, with total repurchases in 2025 of approximately $50 million. With all we accomplished in 2025, we're entering into 2026 with great momentum. Our philosophy continues to be to aggressively drive our transformation and embrace the inevitable changes that come with this. As such, this week, we executed a small restructuring impacting approximately 5% of our employees, including several senior leaders. Unlike in 2025, where we were looking to shift investments to our highest growth opportunities, this restructuring is driven by the opportunity to enable improved business unit incumbency, streamline execution, and ensure we have the capacity to onboard the capabilities needed to drive our growth in the years to come. We remain committed to investing in our transformational initiatives, and these changes have the added benefit of making additional room for those investments. One macro factor impacting our industry is the memory shortage caused by the unprecedented AI data center buildup. We've had success mitigating the situation to date and expect to have a limited gross margin impact in the first half of this year. That said, the memory challenges are escalating quickly, and the impact of the second half of the year is uncertain, but rest assured, we're continuing to do everything we can to mitigate these challenges. For the enterprise business, the situation is manageable. Memory is a small percentage of our bill of materials, and we have products that are more expensive with better margins. Also, we've seen and expect to see further industry-wide price increases by many of our competitors. We will follow suit while remaining extremely competitive from a value and price perspective. For consumer, the situation is more challenging given memory represents a higher percentage of the bill of materials, and the products have lower gross margins. We have multiple streams of mitigation efforts underway, which include negotiating ongoing cost sharing with our supply chain and channel partners, adjusting our procurement strategy, reducing promotions, and constraining OpEx for this business. We remain committed to minimizing the financial impact on operating income for our consumer business. While our efforts have successfully minimized impact to the first half, our ability to navigate the second half is uncertain at this point, and therefore, we may be challenged in delivering our own 2026 goals of growing revenue, margin, and profitability despite our best efforts to mitigate the memory situation. That said, our objective remains to hold the line on these high-level goals for this year. In closing, NETGEAR remains on a great trajectory as we delivered revenue growth, record gross margins, and profitability in 2025. We remain committed to our transformation and the mid and long-term targets we shared at Investor Day, and we will continue to make decisions aligned with our philosophy of driving long-term value for shareholders. With that, I'll now turn it over to Bryan. Bryan D. Murray: Thank you, C.J., and thank you everyone for joining today's call. We closed out 2025 with a strong finish, building momentum throughout the year. Propelled by continued strength in our enterprise business, we delivered revenue at the high end of our guidance range. Coupled with disciplined operational execution, we delivered non-GAAP gross margin of 41.2%, yet another all-time high for NETGEAR. I'm pleased to share that this marks the seventh consecutive quarter where non-GAAP operating margin exceeds the high end of our guidance range. These impressive results serve as further proof of our progress as NETGEAR continues to drive towards expanding long-term growth and profitability. We exited the year with DSOs at 73 days, a ten-year low and another testament to the operational efficiency and agility of our new restructured organization. For the quarter ended 12/31/2025, revenue was near the high end of our guidance range, coming in at $182.5 million, down 1.1% on a sequential basis, and flat year over year. The fourth quarter's performance was driven by continued strength in enterprise, where ASP and unit each grew year over year in our ProAV managed switch products. Impressively, we again saw double-digit growth year over year in end-user demand to reach a record high level for this category. We also saw both of our businesses deliver strong year-over-year contribution margin expansion of at least 120 basis points. In Q4, we repurchased $15 million of our shares and ended the quarter with $323 million in cash and short-term investments. Our balance sheet remains strong, and our capital allocation strategy is working. We delivered $89.4 million of revenue in the enterprise segment for the fourth quarter, down 1.6% sequentially and up 10.6% year over year. We made further progress in the quarter on mitigating the supply constraints around certain managed switch products, working with key supply chain partners, thanks to the excellent execution of our team. Consequently, the revenue mix of our products from the higher-margin enterprise segment remained strong, coming in at 49%, an improvement of 470 basis points year over year. Taken in conjunction with the significant reduction in cost across our supply chain, this led to the record consolidated gross margin in the quarter and helped drive our operating margin outperformance. While we experienced supply constraints of certain of our managed switch products, the situation is dramatically improving, and we are slightly ahead of schedule. To fully capitalize on the substantial and growing demand, our team is rigorously working to increase our supply chain agility, and we continue to expect to be back into a healthy supply position this quarter. As a reminder, beginning in Q4, we are reporting two business segments, with the reporting of our current mobile products being included in our consumer business. We will continue to supplement reporting revenue for sold-to-service providers and plan to add our cable modem and gateway business sold in retail, which enable services offered by cable operators. This revenue call-out will allow investors to isolate these declining businesses in their assessment of NETGEAR and our transformation. In Q4, the consumer business delivered net revenue of $93.1 million, down 8.4% on a year-over-year basis and down 0.7% sequentially. Domestically, we saw sequential growth in Wi-Fi systems and were able to modestly gain share sequentially in the U.S. retail market. We're currently operating with lower-cost inventory and continue to benefit from an improved product mix of Wi-Fi 7 offerings. Coupled with streamlined channel execution, which is driving our strong margin expansion, leading to our highest gross margin performance for this business since 2021. Sales to service providers and associated products were down approximately 30% as compared to the prior year, while the core consumer business increased 1.6% as compared to the prior year period. Now moving on to an update on our recurring subscriber base. The team has made progress with our initiative to transform these offerings, and we have additional improvements slated for the coming year. We continue to believe that focusing on increasing our recurring subscriber base is the optimal strategy to add high-margin revenue to our router business while differentiating our offerings. In fact, we have been successful in incrementally improving our conversion rate, and our push to move customers to our higher ASP Armor Plus offering was once again a strong contributor to growing our ARR at 18% year over year, reaching $40.4 million in the quarter. We remain confident we can grow our highly profitable ARR over time, and I'm pleased to share that we exited Q4 with 558,000 recurring subscribers. For the full year 2025, NETGEAR net revenues were $699.6 million, up 3.8% compared to the prior year ending 12/31/2024. This was led by an impressive 18.8% growth in our enterprise business top line. This was partially offset by a decline in our consumer business revenues of 7.3% due to a 23.3% decline in sales to service providers and associated products, which was partially offset by an increase of 1.7% in the core consumer business. The proactive actions we took at the beginning of 2025 set the foundation for our success in the year, enabling us to make important investments for long-term growth, mostly within our enterprise business. As a result, we had a full-year non-GAAP operating profit of $5.9 million, resulting in a non-GAAP operating margin of 0.8%, marking a return to non-GAAP operating profit on a whole-year basis for the first time since 2021. From this point on, my discussion points will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP is detailed in the earnings release distributed earlier today. Gross margin came in at 41.2% for 2025, once again an all-time high and the sixth consecutive quarter of sequential gross margin expansion. This marked an 840 basis point increase compared to 32.8% in the prior year comparable period and a 160 basis point increase compared to 39.6% in 2025. Our gross margin in the current period benefited from an improved mix of our higher-margin enterprise business and Wi-Fi 7 products within the consumer business, and improvements from a license acquisition relative to the year-ago period. In the fourth quarter, we entered into a strategic agreement to acquire a perpetual license for the operating system that powers our AV line and managed switches. Acquiring this technology improved our overall gross margins by roughly 100 basis points in the quarter. More importantly, it will unlock our ability to bring greater value to the AV ecosystem faster than we could otherwise. Drilling down to the profitability of our two business segments, both segments were profitable on a contribution margin basis for the third quarter in a row. Additionally, each grew their contribution margin by at least 320 basis points year over year, enabled by the operational discipline we've instilled across both business segments. Enterprise gross margin was 51.4%, a record for this business, and up 750 basis points year over year, driven again by strong demand for our ProAV managed switches and aided by the aforementioned license acquisition. The consumer segment was once again aided by our improved mix of Wi-Fi 7 products and strength in our higher-margin direct-to-consumer channel, which came in at approximately 15% of retail sales, improving our gross margin for this business by 750 basis points year over year to 31.4%. Total Q4 non-GAAP operating expenses came in at $69.2 million, up 8.3% year over year and flat sequentially. Our headcount was 784 at the end of the quarter, as we continue to reinvest the savings from our January 2025 reorganization, from 753 in Q3, in the areas of the business that we expect will deliver the best growth and profitability. This is reflected in the sequential headcount increase as we develop and expand NETGEAR talent, with a focus on insourcing software development capabilities and enhancing the go-to-market capabilities supporting our enterprise business. Our non-GAAP R&D expense for the fourth quarter was 11.9% of net revenue, as compared to 10.5% of net revenue in the prior year comparable period and 11.7% of net revenue in 2025. To continue our technology and product leadership, we are committed to significant but cost-effective investment in R&D. I'm pleased that we delivered non-GAAP profitability above the high end of our guidance range, enabled by our strong gross margin performance. Our Q4 non-GAAP operating income was $5.9 million, resulting in a non-GAAP operating margin of 3.3%, or an improvement of 560 basis points compared to the year-ago period, and an improvement of 120 basis points compared to the prior quarter. Our non-GAAP tax expense was approximately $3,000 in 2025. Looking at the bottom line for Q4, we reported a non-GAAP net income of approximately $7.7 million, resulting in a non-GAAP income of $0.26 per share. For the full year 2025, we delivered non-GAAP net income of $13.3 million or $0.44 per share. Bryan D. Murray: Turning to the balance sheet, we ended 2025 with $323 million in cash and short-term investments, down $3.3 million from the prior quarter, with strong free cash flow largely offsetting $15 million in stock repurchases. During the quarter, $19.5 million of cash was provided by operations, which brings our total cash provided by operations over the trailing twelve months to $106 million. We used $5.9 million in the purchase of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing twelve months to $20.5 million. In Q4, we spent $15 million to repurchase approximately 539,000 shares of NETGEAR common stock. We have approximately 1.5 million shares reserved in our current authorization, and our fully diluted share count is approximately 29.5 million shares as of the end of the fourth quarter. We're committed to returning capital to our shareholders and plan to continue to opportunistically repurchase shares in future periods. Before I get into our Q1 outlook, I would like to take a moment to touch on the memory situation and how it may affect us in the year ahead. To date, for 2026, we have been able to and expect to largely mitigate the impact of the increasing supply constraints of DDR4 memory and the resulting increase in memory pricing. However, as we plan out the rest of 2026 with our suppliers, we believe we may see an escalating impact on the cost to produce certain products through the coming quarters, with potentially an outsized effect on our consumer business in the second half. We are undertaking a number of mitigation strategies, many of which look promising, but one is to bring this issue to light as it could have a meaningful impact on our consumer business starting in the back half of the year if our mitigation efforts do not substantially counteract the headwind. I'll now cover our outlook for 2026. Within enterprise, end-user demand for our ProAV line of managed switches is expected to remain strong, and we have made progress on improving our supply position for these products. On the consumer side, we'll have a broader product portfolio to address the market, but we are seeing softening market demand to start the quarter, which could be attributable to broader pricing pressures from electronic makers dealing with the cost of memory. For service provider and related products, we expect revenue to be around $20 million, in part tied to the latest government shutdown, which would be a decline of approximately 35% as compared to 2025. Accordingly, we expect first-quarter net revenue to be in the range of $145 million to $160 million. In the first quarter, we expect our operating expenses to be slightly reduced from the prior quarter, aided by a small transformation-driven restructuring, with the savings being redeployed to further accelerate our transformation later in the year. Additionally, we expect a slight headwind to our gross margin of around 100 basis points, mainly relating to the rising cost of memory. Accordingly, we expect our first-quarter GAAP operating margin to be in the range of negative 16.3% to negative 13.3%, and non-GAAP operating margin to be in the range of negative 6% to negative 3%. Our GAAP tax expense is expected to be in the range of $1 million to $2 million, and our non-GAAP tax expense is expected to be in the range of $300,000 to $1.3 million for 2026. And with that, we can now open it up for questions. Operator: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Adam Tindle with Raymond James. Adam Tindle: Okay. Thanks. Good afternoon, and congrats on a strong finish to 2025 on profitability. I just wanted to obviously, you've been very clear on the memory situation, which I understand is out of your control, mainly affecting the consumer side of the business, which is a helpful distinction. But I wonder if you might just put a little bit more of a fine point on the potential scenarios here. So, you know, for example, if we were to hold memory prices constant from here, you know, and we look at the back half of the year, is there a way to maybe just ballpark the potential impact so investors can set proper expectations on that? Understand there's gonna be changes in the pricing from here, and we don't know what's gonna happen in the back half. But just so we can run sort of a baseline analysis, we hold things constant. We enter the back half. What does that do to the business? C.J. Prober: Hey, Adam. It's C.J. Good question. I'll start, and then Bryan can maybe fill in. A lot of our mitigation efforts make it hard to answer that question because they range from designing in new memory sources, despeccing memory where it doesn't impact performance, cost sharing with our supply chain and channel partners. And so, you know, but to paint this scenario, that's possible on consumer, is we could look to, you know, pull back on promotions, promote performance media, so that we can, you know, maintain a higher level of gross profit at a lower unit volume. Because that helps mitigate the memory impact. And on the enterprise side of things, right, as we mentioned on the call, full steam ahead. Like, we're driving the transformation. Nothing's really changed from our plans before this escalation. We are gonna do a price increase to help mitigate it. We've got air cover on that because a lot of our competition is doing the same. But you should think about enterprise as, like, full steam ahead. And we're gonna, you know, fairly easily manage through the memory situation there. But to put it because I think we talked about this super candidly, gonna ask that exact question, and you have a model to update after the call. So we took a look at consensus, we said, okay. If we're looking at consensus with the results we delivered in 2025, obviously, there's a lot of upside there. Right? If you look at the gross margin impact that we've delivered, profitability shift that we've made. Then you factor in the potential risk around memory in the back half, or, like, oh, maybe consensus, you know, with that, they'll take this as guidance. It's based on what we know today. It's like, maybe consensus is actually not too unreasonable. And so that's, you know, just to give you some framing because we did look at, you know, the numbers of your model, and we did want to be responsive to that question. It's just very unpredictable. We have a lot of really good, like I said, on the consumer side, mitigation efforts. We've done great to date. Our partners are being supportive. So that's kind of like, you know, the high-level framing we would give you on kind of the, you know, the full-year consensus when we the puts and takes do have anything to add to that? Bryan D. Murray: No. I think you've covered most of it. Yeah. You've covered most of it. Just would stress that the first half, feel pretty solid about how visibility we have, you know, roughly four and a half months of inventory, which gives us that level of confidence. But I think the way you framed it is appropriate. Adam Tindle: Got it. Okay. That's helpful. And I wanted to ask on sort of pricing and competitive environment. It kinda ties into this thought. But you know, it sounds like kind of really two different stories here. In enterprise, as you mentioned, competitors are raising prices, which is understandable and certainly rational. Given the input costs are rising here. It doesn't sound like that's happening as much in the consumer side, if at all. So I wonder if you might just kinda, you know, talk about the competitive dynamics and pricing in consumer. Is there potential for that to follow enterprise? Is it just a couple of bad actors? Right? And this will be, you know, the second part of the question. I assume, you know, some of those bad actors may ultimately potentially exit the market whether willingly or unwillingly. Any update on sort of the competitive environment and the potential for some of those competitors to be forced to exit? Thanks. C.J. Prober: Yeah. Good question. I'll start, and then Bryan can fill in if I miss anything. You hit the nail on the head. So the way you described it, right, enterprise, across the board, we're seeing price increases. We haven't, you know, in our checks, we haven't seen any kind of macro impact to demand on that side of the business. The market dynamics in consumer are trickier. We have seen some behavior change from some players in the space and not others. And so, you know, it's not all competition is created equal. I will say, I think you were basically asking, like, what's the latest update on the regulatory front. And as we've been consistent in saying, you know, throughout these calls, like, we're just kind of reading the same stuff that you are. But of course, we're prepared to talk about some of the latest developments we've read in the news. So basically, since our last discussion at your conference in early December, December 4, there's a Bloomberg report that the FTC is examining whether TP-Link deceived customers by allegedly concealing its connections to China. Some of these are connected, as you'll see. On January 26, so just recently, the governor of Texas announced it was banning TP-Link along with a bunch of other companies from use by Texas State employees, and they cited there's some cybersecurity risks. And then I think the most important update, and it's a little bit nuanced, but I'll try to explain it as simply as I can, is the FCC passed a rule that requires companies that have FCC licenses in our space to certify whether they're owned by, controlled by, or subject to the jurisdiction of a foreign adversary that, of course, includes China. And those who say yes will be subject to a national security review. Those that say no or don't respond can have their license revoked. And it was interesting to think in the actual rulemaking, it was noted that TP-Link objected publicly to this specific rule. So obviously, even putting TP-Link aside, with a lot of competition in the long tail from foreign adversaries, this is a welcome rule. It hasn't been implemented yet. I don't have the timing on that. But, you know, the momentum here continues to build, and so we remain confident as ever that there's gonna be more to come. Bryan D. Murray: And maybe I'll go back to the first part of your question just in terms of the consumer market and trends and maybe trying to relate it to the guidance that we provided, make sure it's clear. You know, we have seen a softer start to the year on the consumer side. Typically, the market would be down off this holiday period about 15%. What we're seeing is probably more around 20, low 20-ish percent range. You know, there's plenty of market data out there talking about consumer sentiment. I think we have heard of other consumer products where prices are on the rise. We've not seen that in our space. And maybe just kind of touching on the other piece of Q1 guidance, just reminding folks that we're calling out the service provider revenue, which now includes the cable products that enable cable operator services, and the guidance we provided there is projecting out what would be about a 35% decline compared to the Q1 2025 period. This portion of the business is in harvest mode, which we talked about at Investor Day. Probably less obvious is that Q1 is a relatively shorter quarter for us, just the way our fiscal calendar operates coming off Q4. It's down about 7.5%, which is pretty impactful on the enterprise side of the business where now that we've gotten to a healthier place on supply amid a switch, POS is really driving the replenishment back into the channel. It's pretty well matched. So that would have an impact on that business. And maybe just to give a little bit of context of Q2, what I was just saying with regards to the duration of Q1, Q2 returns to a normal order, which will certainly benefit the enterprise business. C.J. touched on earlier, and to that would be up about 4.5% off of Q1. Anticipated price increases on our enterprise products would start to kick in during that period. And then the consumer market's typically flat in Q2 off of Q1. So if you put all that together, like, our best guess would be Q2 would probably be about a sequential increase in the 5% range, which would help on the operating margin too going into Q2. Just from the incremental gross profit from the extra top line, that's probably net-net of everything, maybe a couple of 100 basis point improvement from an op margin standpoint. So just wanted to bridge all that because there is a lot of stuff going on in calling out specifically Q1 is a shorter period for us. C.J. Prober: Yeah. And, Adam, just to make sure you're that that 7.5%, that basically means that Q4 is a week shorter than I'm sorry. Q1 is a week shorter than Q4 and even a couple of days shorter than the same quarter last year. Adam Tindle: Got it. Really helpful, Dylan. Thanks, guys. Operator: Your next question comes from the line of Tore Svanberg with Stifel. Your line is open. Tore Svanberg: Yes. Thanks for taking my questions and congratulations on a solid quarter, guys. And so just any color on is there on the current health of channel inventory, are you seeing retail partners holding lean inventory levels in anticipation of a broader Wi-Fi 7 rollout, or is there still some legacy Wi-Fi 6 inventory to be cleared? Thanks. Bryan D. Murray: Yeah. I would say it's not uncommon on the retail side going into Q1 coming off the holidays where you'll see them tighten up inventory. In the middle of the quarter. Many of them have January 31 year-ends. And so I'd say that activity is pretty in line with what we would expect. Obviously, with the softer sell-through, that will dictate, but I wouldn't say we've heard or seen any wholesale resets of optimal weeks of supply that retailers would carry. It will just map back into the velocity of POS that they're seeing today. Tore Svanberg: Okay. Great. And kind of on a follow-up, last quarter, kind of previously mentioned establishing more of a safety stock and reaching an optimal inventory level position for ProAV managed switches by January 2026. So any color you can provide on whether there has been any successful clearing up of a sales backlog, and are you now in a position to ship more of an unconstrained end market demand for 2026? C.J. Prober: I can start with that one, Tore. Bryan can weigh in as well. So, actually, right where we said we would be, great execution by the team. We've burned down most of our buffer stock. And so by the end of this quarter, we should be in a safety stock position. And, you know, just as a reminder, to tie this into kind of just the health of the enterprise business, if you look at Q1 and Q2 last year, managed switch revenue would be constrained because, you know, we didn't have stock to sell. We burned down the backlog. That increases revenue. And then if you look at it on a year-over-year basis, we had the big channel reset the prior year, so it's a bit noisy. But just to put it into context, like, the sell-through of our ProAV solutions last year was over we're not gonna give a specific growth number, but it was over 25%. So very healthy sell-through growth that we will now be matching sell-in and sell-through since we caught up on supply. Bryan D. Murray: And I would just add, as I said earlier on the call, that, you know, the managed switch portion of our portfolio reached an all-time high in terms of end-user sales. So we're happy to see the trajectory it's on, and in terms of our inventory position, you would have seen us increase inventory quarter on quarter by $10 million, and that is largely attributable to getting into a better place on the managed switch. C.J. Prober: Yeah. Not to overly pile on, but we were talking about some customer wins on the ProAV side with our team yesterday. And, you know, Topgolf, Bryan and I are both golfers, so it was a fun one to talk about. Topgolf is actually across the board, all of their locations powered by ProAV. So, like, the core of their product experience, which obviously has zero room for any type of performance issues. So it's kind of really strong validation. Another point of validation. And then in terms of, like, the trusted nature of our brand, we've deployed last quarter in the International Criminal Court in Benelux. We've deployed with NATO. And so, you know, we love sharing kind of the customer wins on this side of the business because they're big, high visibility, high-performance requirements kind of deployments. Tore Svanberg: Got it. Very helpful. Thank you. Operator: Your next question comes from the line of Jay Goldberg with Seaport Research. Your line is open. Jay Goldberg: Hi. Thanks for taking my question. First off, I want to just look at sort of the structural change in the business. Looking at my numbers relative to what you guys delivered, revenue was a small beat, but EPS was a pretty big beat. That seems to imply a fairly high degree of operating leverage built into the model. And I know in the near term, we have all these memory problems sort of weighing things down. But I was hoping you could speak to how you're gonna build that operating leverage over what trajectory. Like, how does that look going forward? And are you gonna get the business to that more by our operating margin level? Bryan D. Murray: Yeah. I mean, maybe I'll just I'll start off here. I mean, as we talked about at Investor Day, you know, we are still investing in the business that's largely going into the enterprise side. We did say that we would outpace revenue or sorry, OpEx growth ahead of revenue growth in '26 to really fund those long-term benefits that we see. We did say that would subside in '27. It would get back in line with revenue trajectory. You know, in reference to kind of what you were expecting for Q4. Obviously, the record high gross margin over 41% was the major driver there. One of the driving forces there. And we did mention this at Investor Day. But it was not necessarily factored into our guidance that we provided earlier than that. Was this acquisition of the perpetual license that is the operating system that powers our AV product portfolio, which is a huge benefit on a full-quarter basis that will yield about 150 basis points of gross margin expansion. We did get a portion of that in Q4, which is about 100 basis points that I mentioned. So those things are what's gonna really drive leverage in our model. And again, another point we touched on at Investor Day, we are expecting over the long term to get the enterprise portion of the business up to about 65% of our overall business based on what we see today, and that certainly will bode well in terms of margin expansion. C.J. Prober: Yeah, Jay. The two things I would add are right. If you take that ProAV sell-through growth, it wasn't a growth number. I said it was bigger than 25%. And you apply that to the enterprise business, we've been clear about this. That means the rest of the business is declining, and that's because it's been in transformation mode. And so a lot of the we have high conviction in the potential of our enterprise networking and security business. We're making the investments needed to get that business on the right trajectory. We've got validation from customers and channel partners that we are addressing a significant gap in the market. So we're excited about that. And we're excited to in planning for building momentum in that business this year. So that's one point. The second point is as we transform our go-to-market side team on the enterprise side, and this benefits both ProAV and the enterprise network gaming security business, those upfront investments take time to pay back. Right? It takes time for sales to build their partner portfolio. We've even changed incentive structures to ensure that that's happening this year. And so that's part of the equation around the operating leverage on the enterprise side of the business. Jay Goldberg: So it sounds like a lot of those drivers are still intact, and so maybe they get disrupted later in this year a bit by gross margins in memory. But that shouldn't change the underlying trajectory. Is that safe to say? C.J. Prober: Yeah. On enterprise, that's correct. Consumer, we've got like I was saying, we've got the incremental cost, and it has a bigger impact there. And then some of the mitigation stuff we might do. But we also have, you know, an OpEx lever to pull there. And we remain committed to, like, one, we're very optimistic and bullish about the long-term opportunity in consumer. So Jonathan's strategy, he shared at Investor Day. Every day that passes, we feel stronger and stronger that we're heading down the right path with our Google partnership, with what we're doing in Wi-Fi 8. We're really excited about that, not just in terms of the new technology that that brings to market, but also that's the opportunity for us to reset our portfolio. So I don't want to sound like this memory thing is transitory and that, you know, it's not a transitory in, like, a one or two-quarter as you know very well. We're gonna have to work our way through 2026 at the end of the day, we remain very bullish. But we do have the lever to slow our OpEx investment on that side of the business, and we really do want to stand by our commitment of limiting the dilution to operating income from consumer while we go through that transformation. So that's the exercise that we're going to go through this year as we mitigate memory. But super excited about a long-term vision that we shared at Investor Day. Jay Goldberg: Great. That's very helpful. Thank you. And just a quick housekeeping question. Bryan, could you repeat the numbers for ARR and users? Bryan D. Murray: The subscribers? Yeah. In Q4, ARR was just over $40 million, and the recurring subscribers were 558,000. Jay Goldberg: Great. Thank you. Bryan D. Murray: You're welcome. Operator: There are no further questions at this time. Mr. C.J., I turn the call back over to you. C.J. Prober: Yeah. I'd like to just close by making a couple of points that may come up in our callback, so I want to share them here. That we have the ability to talk about them candidly. One is around buybacks. So we announced or we disclosed that we repurchased in Q4 $15 million of shares. That's one five, which equates to $55 million for the year. $84 million in the last seven quarters or so. And if you look at the if you do the math on what we spent and the number of shares we got, it becomes clear that we've been out of the market for several weeks. And we've been restricted from purchasing for the last several weeks. So is it a couple of days from now, now we have earnings behind us, we expect to be unrestricted for the purpose of implementing a plan or resuming buybacks. And so I just wanted to share that. We view the current price as attractive. And wanted to just be able to share here that returning capital to shareholders remains a priority. And then the last point I want to make is around AI because there's just obviously, everybody is following the market. Small developments from some of the AI leaders are leading to a lot of FUD for software companies and other companies. And I wanted to make very clear don't think you've been impacted by that, but I wanted to make very clear that we view AI as a long-term tailwind. And the fact that we have a device capability is a huge competitive advantage, and we're insourcing software at a time when we can leverage AI to do that very efficiently and very quickly. And furthermore, we envision a number of different ways to integrate AI into our products, not just for enabling better performance, but enabling new use cases. And so overall, we're quite excited about what's happening and taking advantage of that to the max in all of those areas, not to mention driving operational efficiency at NETGEAR. So with that, just want to reiterate my thanks to the NETGEAR team for delivering an incredible Q4 2025. And thank you all again for joining. Operator: This concludes today's conference call. You may now disconnect. Goodbye.
Operator: Thank you for standing by. Welcome to the Symbotic first quarter 2026 Financial Results Conference Call. At this question and answer session, if your question has been answered and you would like to remove yourself from the queue, please press the star key followed by the digit two. As a reminder, today's program is being recorded. And now I would like to introduce your host for today's program, Charlie Anderson, Vice President of Investor Relations. Please go ahead, sir. Charlie Anderson: Yes. Hello. Welcome to Symbotic's 2026 financial results webcast. I'm Charlie Anderson, Symbotic's Vice President of Investor Relations. Some of the statements that we make today regarding our business operations and financial performance may be considered forward-looking statements. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our Form 10-K, including the risk factors. We undertake no obligation to update any forward-looking statements. In addition, during this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at ir.symbotic.com. On today's call, we're joined by Rick Cohen, Symbotic's founder, chairman, and chief executive officer, and Izzy Martins, Symbotic's chief financial officer. These executives will discuss our 2026 results and our outlook, followed by Q&A. With that, I'll turn it over to Rick to begin. Rick? Rick Cohen: Thank you, Charlie. Good afternoon, and thank you for joining us to review our most recent results. We are off to a great start this year as our operational execution, product innovation, and financial discipline are translating into improved results. Notably, in the first quarter, we grew revenue by 29% and significantly expanded margins year over year, paving the way for our transition to GAAP profitability. On our last call, I highlighted that one of our key objectives this fiscal year was to unlock higher margins by providing additional value for our customers. You can see from our results, we are on a solid trajectory. We also have increased line of sight that our product innovation, notably with our next-generation storage solution, will yield tangible economic benefits for our customers while benefiting our margins on an ongoing basis. Another objective is to broaden our opportunities with customers, particularly in e-commerce. On this front, we're seeing strong execution on the program launched a year ago with Walmart for their accelerated online pickup and delivery centers at stores. First, we made technical and operational improvements to the first-generation automation system we inherited at 19 Walmart stores. This helped drive record holiday volumes and improved performance metrics from those systems. This is important because we can take those improvements and incorporate them into our enhanced second-generation design, which we're being paid to develop. Second, we delivered record financial results from that paid development program during the quarter as we advanced toward installation of the initial prototypes. We see our offerings as the future of e-commerce. As retailers are increasingly seeking to take advantage of their store footprints and localized presence to offer customers unparalleled availability in order fulfillment speed through automation. We are also meeting our key objective to invest in our innovation engine to expand our capabilities. On that note, we recently closed the acquisition of Fox Robotics, a leader in autonomous forklift solutions. This acquisition further enhances our strategy of utilizing our software to orchestrate robots that move goods through the supply chain from the dock door at the warehouse to the individual customer order from the store. We are also investing in internal R&D intended to drive higher levels of performance across our operational systems. Here, we are also making great progress. Specifically, for our SIM bots that move goods in customer distribution centers, we have seen an over 25% increase in both the number of miles driven and the number of transactions per bot daily versus one year ago. We have also seen meaningful per site volume increases from our floor-loaded inbound cells that ingest unpalletized cases compared to a year ago. The fact that our platform improves over time speaks to our leadership in the emerging category of what some call physical AI. We are doing this on a massive scale. To put it in perspective, Symbotic operational systems processed over 2 billion cases for customers in calendar year 2025 inbound and outbound. And our Symbots logged nearly 200 million miles alone in calendar year 2025. As best we can tell, this may be the most traveled fully autonomous vehicle fleet in the world. In summary, we're meeting our objectives, which in turn are delivering happy customers, sustainable growth, and expanded profitability. As always, I want to thank our team for all their hard work along with our customers and our investors for their continued support. I'll now turn it over to Izzy, who will discuss our financial results and outlook. Izzy? Izilda Martins: Thanks, Rick. Fiscal first quarter revenue reached $630 million, meeting the top end of our forecasted range. We achieved GAAP profitability with $13 million in net income, while our adjusted EBITDA of $67 million was well above the top end of our forecasted range due to stronger margins and continued cost discipline. As a result, we delivered a double-digit EBITDA margin for the first time. Importantly, first-quarter revenue surpassed fourth-quarter levels, driven by the continued expansion of systems and deployment, the transition of systems from deployment to operational status, and ongoing progress in our paid development of a micro-fulfillment solution for e-commerce. We also delivered another strong quarter for new deployments with 10 systems added. This included several phase one deployments for our largest customer, that will do twice the work of our historical phase one deployments and possibility unlocked by the density of our next-gen storage solution. The quarter also included a new deployment in the Northeast for GreenBox, which, as a reminder, is now branded as Exol. Strong start activity, disciplined project execution, and continued progress with our paid development program drove systems revenue growth of 27% year over year to $590 million. We now have 57 systems in deployment. As three deployments transitioned to operational status during the quarter. Installation timelines have continued to improve relative to averages, reflecting ongoing process improvements across our supply chain and implementation teams. As our base of operational systems continues to expand, software revenue grew 97% year over year to $10.9 million in the fiscal first quarter. And operation services revenue grew 68% year over year to $28.8 million. Now turning to margins in the fiscal first quarter. Gross margin expanded both sequentially and year over year, underscoring the accelerating strength of our operating model and the leverage we are beginning to realize at scale. Systems gross margin continued its trend of significant year-over-year improvement driven by structural operational enhancements, disciplined cost management, and the addition of our paid development program. Software maintenance and support delivered further year-over-year gross margin expansion benefiting from scale. We expect this trend to strengthen as our installed base of operational systems grows. In operation services, we generated an improved gross profit with continued process optimization. Operating expenses on a GAAP basis were $127 million in the fiscal first quarter. Adjusted operating expenses totaled $80 million down sequentially as we maintained strong cost discipline and increasingly aligned our R&D investment with revenue-generating activity. Notably, a portion of R&D headcount shifted to supporting paid development where that work is reflected in revenue with the associated costs recorded in cost of revenue. This evolution underscores how our core R&D capabilities are increasingly being monetized as the business scales. Before I discuss profitability, I want to highlight that our results this quarter reflect an accounting change in how we recognize stock-based compensation expenses. We have moved from a graded vesting approach to a straight-line pro-rata method under which expenses are recognized evenly over the service period consistent with how the awards vest. This change follows the completion of the accelerated vesting associated with our becoming a publicly traded company, which required higher expense recognition in earlier periods. With the final grants from the transition to a public company, now fully vested, the more common straight-line method more accurately matches the ongoing timing and financial impact of our stock-based awards. As a result, we recast retrospective periods in fiscal years 2024 and 2025. And those updates are reflected in the earnings tables in the press release. We have also posted a supplemental presentation on our Investor website with the recast quarterly results to assist with model updates. As you will see from the recast results, GAAP results improved modestly due to lower stock-based compensation expense, but there is no change to any prior period adjusted EBITDA results. Our net income for the first quarter was $13 million, a significant improvement from a net loss of $17 million in 2025, reflecting the continued strengthening of our financial performance. Adjusted EBITDA of $67 million was above the high end of our forecast and increased significantly from $18 million in 2025. These results demonstrate the operating leverage available to us and reinforce our confidence in our ability to continue expanding our EBITDA margins and delivering sustained GAAP profitability. Our backlog of $22.3 billion continued to remain strong. The modest change from $22.5 billion last quarter primarily reflects revenue recognized during the quarter largely offset by final pricing adjustments on projects started in the quarter. We finished the quarter with cash and cash equivalents of $1.8 billion up from $1.2 billion in the fiscal fourth quarter driven by the timing of cash receipts tied to project milestones the signing of new projects, $424 million in net proceeds generated from our successful follow-on offering completed in December. Now turning to the outlook. For 2026, we expect revenue between $650 million and $670 million and adjusted EBITDA between $70 million and $75 million reflecting continued strong top-line growth and margin expansion. Looking ahead, we expect our third-quarter sequential growth to be similar to what we anticipate in the second quarter with more pronounced growth in the fourth quarter. With that, we now welcome your questions. Operator, please begin the Q&A. Operator: Certainly. And ladies and gentlemen, we ask that you please limit yourself to one question and follow-up. You may get back in the queue as time allows. Our first question comes from the line of Nicole DeBlase from Deutsche Bank. Your question, please. Nicole DeBlase: Could we just start, I think, a few times Izzy in the script, and Rick kinda comments on this too. You talked about how the paid development impact to revenue and maybe EBITDA was stronger than you expected and a factor in the 1Q beat? Can you just maybe elaborate on the impact a bit? And how that kind of moves throughout the rest of the year if the impact grows? Izilda Martins: Hi, Nicole. Thank you for the question. Here's how I would explain it. If you recall, in the last quarter, we talked about that representing about high single digits of our total revenue. It's not all that significant of a change, but we've now reached, call it, double digits. The way I would think about it going forward, we want to maintain flexibility in how we deploy our resources. So albeit, yes, it reached double digits in the first quarter, it's probably not going to be at that level in the second based on what we're already seeing and how we're redeploying. So it will be lumpy. But I did want to call out that it was higher than the fourth quarter. Nicole DeBlase: Okay. Got it. Thanks, Izzy. And then you also mentioned in your prepared remarks that you guys have continued to improve deployment time. Can we just get an update on what that timeline looks like today? Thank you. Izilda Martins: Sure. I would say as you take, call it, from when we announce a deployment to the end, we're still staying within that two-year period. I think what's important to note is we're focusing on how we shrink the time from installation to, call it, acceptance. To moving it to operational. We have seen improvements in that most recently in our averages. We're now probably on that side of it. Going to ten months, and that's what we want to continually improve. But overall, I would still say two years from the day we announce a deployment is a good proxy as we continue to improve on that end. Nicole DeBlase: Thank you so much. I'll pass it on. Operator: Thank you. And our next question comes from the line of Joe Giordano from TD Cowen. Joe Giordano: Hey, guys. Thank you. On the R&D spend, I hear that some of it was moved into COGS, like, based on where these people are what they're working on. But is the level here, like, is this, like, the run rate that we should be thinking of? And how much should we think of, like, implications on systems gross margins as that cost is flowing in there? Izilda Martins: Hi, Joe. Thank you for the question. Here's how I would think about it. You did see, call it, a decline in the first quarter in total R&D compared to the fourth quarter. And as I mentioned, because we had a little bit more going into that paid development. To answer your question, it's no different than how I just answered the paid development. It's not going to be a, you know, a straight line. It will be a bit lumpy. So the expectation would be if there's how we're allocating our resources in the second quarter. If there'll be less on the top, we're keeping the same resources. They'll be focusing on other priorities. So what I can tell you is in the second quarter, I would expect a higher number in R&D in our OpEx expense versus what you're seeing. So I wouldn't take the first quarter exit trend and model that completely out and more look at it as our annual spend in R&D should stay about relatively the same. Joe Giordano: The same as, like, what it was prior. Like, the same assumptions that you had prior. Izilda Martins: Exactly. Joe Giordano: Okay. And then on the 10 starts in the quarter, like, how do we how should we think of the makeup of those? Like, you know, traditional systems, like, you would have for your large customer versus break packs versus you know, micro fulfillment stuff. So how should we think about the as we think of, like, almost the, you know, the size per start? Izilda Martins: Okay. So I'll start backwards. There are no micro fulfillment in the 10 deployments that we mentioned. We don't give specifics as to what that represents. As I said, one is for Exol, and the remainder, it's a mix. Between, you know, different types. You can't treat every deployment the same, so it's a bit of a mix. But I think the highlight, though, is as we transition to the next-gen structure, you'll know that the you know, now you could fit more because of the density of that NextGen structure. So the call it, the size, you kinda get a two for one. And there's a little bit of that in the 10 deployments that we have that we have in the quarter. Similar to what we had last quarter, but I'm not gonna give specifics between, you know, the types of deployments. Joe Giordano: Fair enough. Thanks, Izzy. Izilda Martins: Thanks, Joe. Operator: Thank you. And our next question comes from the line of Mark Delaney from Goldman Sachs. Your question, please. Mark Delaney: Yes. Good afternoon. Thank you very much for taking the questions and congratulations on the good results. I was hoping to start with the shipment trajectory on the last earnings call, Izzy, you talked about a more muted first half based on your expectation for the deployment timing with the new storage structure and then an acceleration in two h. You actually started two systems in the first quarter, which was more than I was expecting. And you talked about 3Q being similar growth to 2Q and then a pickup in 4Q. So it seems like maybe there's been some movements in how you're seeing the year shape up. I was hoping you could help us better understand what's driving Izilda Martins: Hi, Mark. I remember, you know, when we talked about this. So this is really what's going on. It's really not any different. So when we talked about being a less pronounced, call it, sequential improvement, in the 2026. That was on the heels of a big improvement call it, sequential improvement quarter over quarter last year. So if you look at where we're standing right now, we ended up at a little bit over $618 million in revenue in the fourth quarter, and we're at $630 million. So not that same sequential improvement that you saw in the tail end last year. So that's coming to fruition. And if you take you know, take into account what we guided to or what our outlook is, in the second quarter, we end up pretty much in the same place, maybe a little bit better. And now what I would say is the second and third quarter are a little bit more aligned than what we originally saw. But it still falls within what we what we were talking about, you know, a couple of quarters ago and last quarter. Mark Delaney: Got it. And my other question was on the announcement of the Fox acquisition. Maybe if you could please help us understand what the implications are from that acquisition for revenue margins in the near term and then what it might mean for your business in the longer term as you can bring that capability to your customer set. Thank you. Rick Cohen: Yeah. Can't really say what the revenue implications are. Right now. I think we'll develop that over time. What we liked about Fox is that a number they have 25 different customers. A number of those customers are not Symbotic customers today. So it gives us an opportunity to enter a new customer base and what we liked about Fox is that they're essentially using a fork truck on the dock to do the same thing we do with our transfer deck in our structure. Matter of fact, what we do in the transfer deck in the structure is we might have 100 bots in a 400 by 24-foot wide. So a 10,000 square foot area. And the dock may only have like, 20 or 34 trucks. They're bigger. They're heavier. But the software that we're using and the evolution of what we're doing where they have vision, they have LIDAR, and they can avoid collision. This is, we think, this is a market where we could sell people dock automation separate from even warehouse automation. So we think this is a very big market. A lot of people are looking at this market. We have some very big customers who have been experimenting with Fox. So can't say exactly how it's gonna go. It's very early stage. But we like the customer base, and we like the potential. Mark Delaney: Thanks. I'll pass it on. Operator: And our next question comes from the line of Piyush Avasti from Citi. Your question, please. Piyush Avasti: One on fulfillment system. Like, I think you guys have mentioned the $5 billion with Walmart. But the total addressable market is more like $300 billion plus. Rick, you kinda mentioned on the second generation. Maybe talk about the timeline on when you can market this offering to incremental customers outside Walmart. And if you could refresh us on the timeline for the $5 billion opportunity with Walmart, that would be Rick Cohen: Yeah. So we have a couple of prototypes that will be the next generation. This is what we've learned from the initial 19 installs that we bought. And Walmart asked us to improve that. So we have two installs that'll happen in the next year. Not exactly sure how exactly what month, but it'll be within the next twelve months. Maybe sooner. And then that addressable market it's a little hard for us to figure out because there's everybody that we've talked to with a traditional system has asked us about we call it SIM micro is the way we call these systems. But it's not just these systems are not just food systems. They're not just back of store. They could actually be e-commerce for let's say, somebody like a Medline, which is doing very specific small deliveries to let's say, a surgical room. So I think this is I don't know. Izzy or the financial people put a number to it. It's a very, very big market. And it's a worldwide market. And these systems are smaller, so people are more interested in they're cheaper. So people are more interested in saying, yeah. I could experiment with one of those versus going into a warehouse and saying, I'm 100% committed on a 50 or $70 million system. So not sure I'm exactly answering your question, but this is we are every customer we talk to about a warehouse now talks to us about SimMicro. Piyush Avasti: Helpful. This was helpful. Go ahead. Izilda Martins: I was gonna say, and on the backlog, the way to think about it is exactly how Rick mentioned that within this calendar year, maybe sooner, we'll get past those prototypes, then that backlog would be triggered after that. And, also, just as a reminder, that backlog only represents 400 stores. So as we continue to do more, obviously, as you can tell as you answered asked your question, the backlog is really small compared to the addressable market. Piyush Avasti: Got it. Helpful. And, can you also update us on the interest trends for Greenbox? I think you guys have a site coming live. If you can update on any timeline for this site and other sites, and how close are you to convert potential customers? Like, any kind incremental color would be helpful. Rick Cohen: Yeah. I mean, my answer is we're close. We have a couple of customers that we're actually beginning to talk contracts with. But the site is still not ready to go live, so it'll be it'll be in the next nine months, nine to ten months before we're really ready to start shipping customers. Maybe sooner, but that's what we would expect. It's gonna take time to get contracts done, customers signed, and but a lot of interest now because people can now go visit the sites starting to give tours. And so it's real to people now versus just the concept. Piyush Avasti: I appreciate all the color, guys. Thank you. Operator: Thank you. And our next question comes from the line of Colin Rusch from Oppenheimer. Your question, please. Colin Rusch: Thanks so much. If you move into multiple form factors here with the BOBS and start working through, you know, different generations of these bots. Can you talk a little bit about the potential for designing modular components and things that are common across these form factors to help optimize some of the cost structure? Rick Cohen: Yeah. So that's exactly what we're planning on doing. So today, we have the original SIM bot. But we also have a new bot, which we haven't really talked about. We call it a stretch bot. So the SIM bot can handle a 24-inch box, a stretch bot, handles a 36-inch bot. And that's that so it's kind of like a minivan and then a suburban. So bigger capacities, and different customer bases. And then we also have our brake pack system, which we have a second-generation prototype in Brooksville, that site, and then we're starting to roll those out to many more sites. That is a second generation, what we call a minibot. And then we have a third generation which will become the dock handling. I mean, a fork truck for us is just another bot. And so what we're using is it's really years and years of developing figuring out the technology, but these bots now have will continue to upgrade the chips so they'll have more processing power. But the bots now have eight cameras, and the bots will also have LiDAR on them, which is the newest thing we're installing. And so that allows us to use bots for our structure, but we'll be able to use bots for any part of the warehouse. So we're expanding the warehouse capability. And that same software can control lots of different machines. So it's what we've always said. We want to create a software platform and then we want to have for me, they're just different apps. The bots are just different pieces of technology. Colin Rusch: That's super helpful. And then thinking about the opportunity set for you guys downstream in the logistics space, you know, given, you know, your entrance and kind of engagement in, you know, outside the warehouse or the distribution center. And some of the shipping lines. Could you talk about how quickly you might be able to, you know, potentially serve customers just on that space, if that's of interest? Or does everyone wanna work with you from the warehouse all the way through the final delivery? Rick Cohen: Yeah. So we're pretty busy right now with the customers we have, but we're developing technology to both to be able to unload containers. And some people are now asking us, can we load containers in different ways? And one of the things that we're doing is that we're finding that there's a series of customers that order a full trailer to a store. There's another series of customers. For example, the wine and spirits guys, actually have routes which have very small deliveries, but they're routing. They're very important for the routing of the trailers. And so and for instance, food service might be interested in the same thing where their orders are smaller. So the ability that we have to sequence and sort and stack products we don't think anybody else has the capability to do that in the whole world that we can do. And so what we're spending a lot of time with customers is looking at different verticals. For instance, a lot of people think we're doing food, but, actually, doing food. We're doing general merchandise. We'll be doing route drivers. We'll be doing hospitals. So the technology will be we will continue to invent machines. We will continue to look for acquisitions. And we will continue to refine the software to be able to solve the customer problems. So we look at ourselves really as a solution provider. And many of the automation people look at themselves as hardware suppliers. So sell the software. We integrate the software. We make the machine. And then we're working with customers now where we actually have to invent new machines. We've gotten very good at that lately, and we'll continue to look at acquisitions. And we'll continue to refine the software, and that brings the whole process together. Colin Rusch: Excellent. Thanks so much, guys. Operator: Thank you. And our next question comes from the line of Ken Newman from KeyBanc Capital Markets. Your question, please. Ken Newman: Congrats on a great quarter. First, Izzy, thanks for the color that you gave on the sequential revenue growth expectations for third quarter and fourth quarter. I think if I heard you right, you mentioned a more pronounced sequential growth in 4Q from 3Q. First, I'm just curious, is that truly just the timing of the deployments that were, you know, from new initiations from a year ago? Is there anything else to that that we kinda be aware of in terms of that stronger sequential growth? Izilda Martins: It really relates to, if you recall, in the third quarter of last year, we unveiled the NextGen structure. Right? So if you think about how our percentage of completion revenue comes in, that really and as you we said then, you know, people were kinda wait the customers were waiting for that. So given that, you know, that started as part of the deployments in the fourth quarter, that's why what I see right now is that I would expect more revenue in the fourth quarter this year. So that's the reason for my comments and the driver of it. Ken Newman: Okay. That's helpful. And then for the follow-up, Rick, I think we talked a little last quarter about chip availability, think the takeaway there was that you don't really have that much exposure to the higher inflation memory impact. But when I listened to you all these new exciting developments that you've got, on the new generation of bots that you're developing, it sounds like those are gonna be requiring updated chipsets. So just talk a little bit about your ability to source those updated chips and if you think there's a way to price for those chips in a price cost positive way. Rick Cohen: Yeah. So we'll probably upgrade to, at some point, to the next generation of NVIDIA chip or something like that. But these are not the big $25,000 chips. These chips are plenty available. I mean, we're still at our bots are still at a fairly at let's say the medium end of technology. These are not super expensive chips. I think they're readily available. We're not fighting for with Google and ChatGPT for those chips. So we don't expect that kind of problem and we'll be able to upgrade when we're ready to upgrade. Right now, we can handle what we're doing with the chips that we have, but we actually think the new chips will be the new chips that we're looking at will be more powerful and either the same price or less expensive. So within what you're looking at in the battle going on with the big guys in AI, that's not the space that we're playing in. What we can do is much more moderate control on the bots. And then eventually, the bots will get smarter, but we're not building huge data centers here. Ken Newman: Got it. Very helpful. Thanks. Operator: Yep. Thank you. And our next question comes from the line of Jim Ricchiuti from Needham and Company. Jim Ricchiuti: Thanks. Good afternoon. I apologize. You may have talked about this. I joined a few minutes late. I was wondering if there's any update been given on how the Mexico site is progressing and, you know, how you might characterize the pipeline for securing additional locations there. Rick Cohen: Yeah. So Mexico is progressing well. The timeline I think, is within the next year, next twelve months, maybe sooner. The building's built. We're getting ready to install. I've spent a week down there a month ago. I think there's a lot of opportunities. It's a big country. We're also looking at other places in Central and South America. So our customer in Mexico is very happy with us. They like what we're doing. They can justify it based on more of efficient deliveries to some of the big stores, but also some of small stores in inventory. So we think we have a we without getting very specific, we'll do a number of sites in Mexico, far more than we thought initially. Jim Ricchiuti: Thank you for that, Rick. Just I have a follow-up question. Just with respect to FOXROBOXY, if I heard you correctly, I think you said they had 25 customers and I thought you said a number are not Symbotic customers. So does that mean that they're selling to a couple of your customers? And is one of them your large customer? And I assume these are pilots. Is that a fair way to think about this? Rick Cohen: Yeah. Mostly what they're doing is pilots. They are selling to our large customer. Every time I go in a warehouse, I look at their robots and I look at how we could help them do better. But they also have I mean, the interesting thing with Fox is our large customer has thousands of fork trucks. But there are lots of other customers. The CPG manufacturers, their facilities, where they actually don't do as much manual selection, but they still move pallets from the warehouse to the trucks. They unload goods to their warehouses. So what I'm excited about is that we're looking for more opportunities to interact with customers and acquisitions is a nice way to do it to introduce them as we talk to the supply chain people and we make these robots more successful, they build credibility and trust in Symbotic as a solution provider. So, yeah, some of their biggest customers are not Symbotic customers. Now. Hope they will be in the future. Jim Ricchiuti: Got it. Thank you. Operator: Yep. Thank you. And our next question comes from the line of Guy Hardwick from Barclays. Your question, please. Guy Hardwick: I just wondering, Rick, if you look at the core offering of Symbotic, how progress is being made in offerings of chilled or frozen offering? Which some of your competitors can do. And then I had a follow-up question. Rick Cohen: Yeah. We are working with several customers right now on designs for perishables. I can't tell you we have a contract yet, but the new structure has allowed us to offer to if a customer was building a greenfield, and it was 500,000 square feet, at $500 a foot. Now we're gonna spend $250,000,000 for a building. And we can do that in 60% of the space. So instead of 500,000 square feet, it's 300,000 square feet. They can save $100,000,000 on construction before they even put the system in. That's what we're talking to people about. And so there's obviously, are concerned and tentative because of how sensitive these structures are. But our arguments are much more compelling and we will be spending a bunch of money on R&D to build prototypes internally so we would expect fairly soon. I can't tell you whether it's a year or could be longer, but we would expect fairly soon to announce some perishable sites. But this has gone from theoretical to the new structure and the density. Especially in perishables because the construction costs are so expensive. It's been a real opportunity for us. Guy Hardwick: And just a follow-up for Izzy. I'm just wondering how much of development revenue is still available to be recognized over the next few quarters or next year? Izilda Martins: There's still quite a bit left. I'm not gonna give you specific numbers, but I think the way to think about it is focus on what Rick's answer was. Which was within this calendar year, we expect to have the prototypes. So obviously, after the prototypes, we wouldn't have any more development going on, and we'd be in installing. Guy Hardwick: Thank you. Rick Cohen: One of the things I should have added is that the SIM Microsystems they will have perishables. They will have a perishable aisle, and they will have a frozen aisle. So we're already comfortable that the bots can handle it. There's other technology we need to develop, but this is not a what if anymore. This is, like, this is happening. Operator: And our next question comes from the line of Mike Latimore from Northland Capital Markets. Your question, please. Mike Latimore: Yeah. On the operational services gross margin, it's pretty healthy relative to the fourth quarter. Should we think about the gross margin here as remaining positive going forth? Izilda Martins: Yes. So as we discussed it last time, we said it was a bit of anomaly of what we saw in the fourth quarter. And given, call it, what we should be expecting, is that it should be continuing to improve. I think that improvement occurred a little bit more call it, sooner than what we expected. I think where we're at right now is a good exit trend for what you should see in the coming quarters. Mike Latimore: Great. Sounds good. And then on the kind of sequential growth forecast for the year, does that kind of imply that new starts should improve every quarter as well? Izilda Martins: We don't guide to the amount of new starts. I think as you think about, we had 10 in the fourth. We have 10 in the first. I think what you know, we see that in the coming quarters as it being healthy, but there's a potential for it to drop off at the tail end of the year. So I would say I wouldn't take that as a trend, but at least something that we could count on in the, call it, this quarter and next quarter. Mike Latimore: Alright. Great. Thank you. Operator: And our next question comes from the line of Derek Soderberg from Cantor Fitzgerald. Your question, please. Derek Soderberg: Yes. Hey, everyone. Thanks for taking the questions. Rick, in the prepared remarks, you mentioned broadening within e-commerce. You're now working on in-store automation for buy online, pick up in store. Do any of your customers want to leverage your technology for the direct to consumer distribution centers? And is that even an area that you guys would wanna play in? Rick Cohen: Yep. The answer is yes. Derek Soderberg: Got it. That's interesting. And then as my follow-up, Rick, with the forklift automation, seems like the case handling aspect of your distribution centers are pretty much fully automated. On the break pack side, sort of left to automate there? What's potentially possible to automate over the next coming quarters? Maybe if you could just talk about how that technology has sort of evolved to the point where now rolling out that pilot to multiple facilities. Rick Cohen: Yeah. So we started out with a prototype minibot, we call it, and now it's our fully designed our own SIM bot. The new bots have LiDAR on them. They can handle more units per trip. They're faster. They're safer. So that allows us to do the brake pack, which is basically cutting open up a case and putting something on a minibot, and then we put it into a tote. That process has applications. So the logical thing where you might see that is in a Walmart Supercenter, there's every Supercenter has a huge drugstore in it. So those kind of smaller applications within a store within a store are basically they carry 30,000 items in, let's say, in a drugstore, but they only have one facing, not a whole case. So those applications actually there's a lot of applications. There's convenience stores have applications. There's the auto parts stores have applications where they have a lot of items, but they only want one or two of each one of those. So that would be direct to store. But we can also see that kind of application where people want to use our technology to sort. And so somebody like a Medline is really interested in could we deliver 20 different items? Not cases, 20 different items, in a tote to a surgical delivery room. And nobody else in the world can do that. Nobody else can say, well, if you want a case, we'll deliver a case. If you want an each, we'll deliver an each. In a systematic way. There are other people deal with each's, but nobody can do it with the level of sophistication or the speed with which we can do it. So those are what I would call again, software apps combined with hardware, so that's a particular problem that we're solving. Just happens to be a lot of customers have that problem. And then the third thing as we and so what happens in our system for those of you who have been to a site, is you know that the bots mostly run on rails, and then on the transfer deck, they're kind of free floating. In the brake pack, they're much more free floating. And so that takes a lot of software to stop them from crashing into each other at high speed with LiDAR. That same technology is what got us excited about using fork trucks on a dock, which is, you know, the most congested and dangerous part of a warehouse. And being able to do that so what it allows us to do is when we finish when we finish an order for a customer, and an order could be a pallet, 20 pallets going on a truck, or it could be one, we can now take a fork truck and sequence that onto the truck. And that is typically done by humans. And this is a very good way because we control the whole system. We know exactly when the pallet's gonna be done. We know exactly where it goes on the truck. And so that actually makes a whole new part of the warehouse open to our automation. That's what we're gonna continue to march down that journey. Derek Soderberg: Very helpful. Thanks. Operator: Thank you. And our next question comes from the line of Greg Palm from Craig Hallum. Your question, please. Gregory Palm: Yes, thanks. I wanted to just go back to the systems gross margin for a second and just make sure I understand it right. So there was sort of a reallocation of costs from R&D to cost of goods sold that impacted the system's gross margin. Can you quantify exactly how much that was? And I guess kinda where I'm going with this or what I'm getting at was was systems gross margin stepped down sequentially. So without this sort of reallocation, if you wanna call it that, would systems gross margin been, you know, up sequentially from Q4? Izilda Martins: Yes. Great question, Greg. Thank you. Here's how I would think about it is, like I said, the relative proportion of how much was paid development didn't grow significantly. Like I said last time, it was high single digits. Now it hit double digits. I think how to think about it is and how I how we measure success by the team. As you may know, we have pass-through expenses, and those pass-throughs come in on the top line and the bottom line. They were just a little tad bit higher than what they were in the fourth quarter. And so how I measure or how we measure, call it, systems gross margin, you know, quarter out over quarter, we actually did have a slight sequential improvement. But overall, what I would focus on is at times, those things will be lumpy, and I would focus on the bottom line gross margin where you see that significant improvement from the fourth quarter. Gregory Palm: Got it. Understood. Okay. And then I just wanted to follow-up on the Fox acquisition. I thought that was pretty interesting as well. And, Rick, you talked a little bit about sorta, you know, different kind of applications or use cases. But how do you think about the portfolio expanding longer term? I mean, I'm not trying to get you to give up any sort of secret information. But, you know, in terms of other types of technologies and applications, you talked about trailer unload. But you know, what else might be an attractive fit or a bolt on for Symbotic? Rick Cohen: Yeah. So we're actually we're I mean, you know, we've got this big war chest and we're we did it very purposely. We're looking at a common and we're actually doing a lot of work with some people that specialize in this field. It's like how should we think about M&A? Some M&A could be a way of acquiring customers and getting much more interaction with the customers. In the Fox acquisition, we can sell guided fork trucks to a lot more people than we can sell a Symbotic system to. I mean, we could sell two guided fork trucks to Joe's, you know, pizza warehouse. But there's people like DHL and other people that are very interested in space that are that they're running tests on, a lot of the big CPG companies. So what we're trying to what we're so we're looking at those kind of acquisitions. So we looked at Fox and say, this is a very, very large potential customer base. Smaller sales per transaction but beginning to show customers how they can think about reorienting their warehouse. So you've got we don't do a lot with pallet storage. We're kind of an unpallet storage company. But there are still pallet storage companies. There are automated guided fork trucks. Fox is pretty much dock fork trucks, but there are other types of fork trucks. I think we'll look at that. We'll look at the import DCs and look at what they need there. We'll look at different types of technology. So one of the things that we're probably spending more money on R&D than any other automation company I'm pretty sure by a lot last year, and we'll spend even more this year. And so we're looking at beginning the process of how we can invent stuff. Think about different parts of the warehouse. So there's we don't do a lot with clothing right now. We're interested in clothing. We're interested in fashion. We're interested in automation, auto parts. And so with that, the way I look at the business is we understand if we can understand the customer's problem, I don't wanna go to the customer and say, here's what I got. That's what I got. You need to make your problem fit into my solution. We may only have 75% of the customer's problem solved, and then we would say either we can invent it or we can buy it. So we're very much interested in lots of different startups. A lot of those guys are struggling right now. The VC guys are cutting back on some of the start-ups, so good opportunity for us. But we also could look at a fairly sizable acquisition. And so the money is not burning a hole in our pocket, but we're certainly on the prowl looking for various acquisitions. Gregory Palm: Yeah. Makes sense. Alright. Appreciate the color. Operator: Thank you. And our next question comes from the line of Keith Housum from Northcoast Research. Your question, please. Keith Housum: Thanks. Good afternoon, guys. So over the past year, you guys have expanded your Salesforce. You know, you guys added Medline last quarter. Can you perhaps give us an update on some of the, I guess, the efforts that you have in terms of focusing on places outside of The US and perhaps success you guys are having and confidence in your ability to add customers to your backlog? Rick Cohen: Yeah. So we're spending a lot of time in Europe now. We've got three or four people in Europe. They have very interesting problems because real estate is so scarce and so expensive there. And so it's very expensive for them to either put up a greenfield. So we're looking at Europe. We're talking to all the usual suspects in Europe. We're new there. And but we're now able to and we're able to sell in Europe because we have European suppliers. We have some German suppliers. We have some Italian suppliers. We have some English suppliers. So Europe is something that we're very much focused on and probably spent, don't know, a 100 times more hours there. In the last six months than we did in the prior five years. So that's of interest. I go to Europe three or four times a year now, maybe more. One, to see suppliers, and two, to actually meet with customers, potential customers. So we're still new in Europe, and you know, the Europeans there's a lot of German companies that make stuff, but I think people are now beginning to understand how different our technology is. There's packaging issues in Europe that are different in The US. So we're working on experimenting with those. But I think Europe and Canada, Central and South America, Mexico, those are all markets for us now. Keith Housum: Great. Thank you. Bye bye. Operator: Certainly. And our final question for today comes from the line of Robert Mason from Baird. Your question, please. Robert Mason: Yes. Thanks for taking the question. Izzy, would you be able to provide a little color on free cash flow how that may play out this year, particularly if you cross the line in the gap profitability and maybe grow from here, what kind of implications that has on cash flow, if any? From a tax standpoint? Izilda Martins: I think if you the way I would think about free cash flow, if you see the amount we've reported in this quarter, that is how you would think we should be landing. If you take where we landed in the fourth quarter and the third quarter of last year and you average those out, those just had some timing differences. So I think where we landed in the first quarter, that's a good starting point. And, obviously, as EBITDA improves, I think my guidance was significantly higher than where we are this month or this quarter. That's how I would think about it rolling out. And as quarter progress, I'll give you more insights as we move along. Robert Mason: Okay. Just as a follow-up, Rick, I think in your monologue, you made note of again, improvements in floor loading. Maybe for one of your customers. I'd just could you elaborate on that, and whether that is automation technology that you've developed? I didn't recall necessarily having seen that in your facilities, but if that's new or if that's something you're partnering on or what your implications were. Rick Cohen: So we're having a number of discussions with people that like, if you're a liquor distributor, you might deliver to Costco and you might deliver full pallets. But if you're going to restaurants and bars, you basically have to sequence those orders to help the driver speed up. That technology is something that we're working to develop. And we can pre-sequence not just can pre-sequence a whole trailer. And so today, if a trailer has 2,600 cases, we might and there was 125 cases on a pallet, we might put 22 pallets on a truck. But we could actually sequence every one of those 2,600 cases. That to a lot of people who are delivering small orders, is really interesting. And that kind of sequencing is essentially what we will do for and we're working with people explaining how that type of sequencing is something you can actually do for e-commerce you're gonna do customer delivery or customer pickup. It may be 20 eaches, but it's sequencing totes instead of cases. But if you're a restaurant supplier or a liquor distributor or any other kind of supplier that's doing routes, including beverage suppliers, the ability to sequence that stuff is something that doesn't really exist today. Robert Mason: Very good. That's helpful. Thank you. Operator: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Charlie Anderson for any further remarks. Charlie Anderson: Yes. Thanks, everybody, for joining our call tonight. We really appreciate your interest in Symbotic, and look forward to seeing some of you on the road in the coming weeks at the investor conferences at Wolffen. And good night. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good evening, ladies and gentlemen. Thank you for standing by. And welcome to PTC Inc.'s 2026 First Quarter Conference Call. Following the presentation, the conference will be open for questions. I would now like to turn the call over to Matthew Shimao, PTC Inc.'s head of investor relations. Please go ahead. Matthew Shimao: Thank you, operator, and welcome to PTC Inc.'s first quarter 2026 conference call. On the call today are Neil Barua, Chief Executive Officer; Jen DeRico, Chief Financial Officer; and Robert Dahdah, Chief Revenue Officer. Today's conference call is being broadcast live through an audio webcast and a replay of the call will be available later today at www.ptc.com. During this call, PTC Inc. will make forward-looking statements, including guidance as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in PTC Inc.'s annual report on Form 10-K, Form 10-Q, and other filings with the US Securities and Exchange Commission as well as in today's press release. The forward-looking statements, including guidance provided during this call, are valid only as of today's date, 02/04/2026, and PTC Inc. assumes no obligation to update these forward-looking statements. During the call, PTC Inc. will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website. With that, I'd like to turn the call over to PTC Inc.'s Chief Executive Officer, Neil Barua. Neil Barua: Thank you, Matthew, and good afternoon, everyone. I'll begin today by welcoming Jen DeRico to her first PTC Inc. earnings call as our new CFO. I'm confident she'll be a great CFO for PTC Inc. and a strong partner to our investor community. Turning to our results, we delivered a solid 2026. We grew constant currency ARR 9% excluding Kepware and ThingWorx, and 8.4% including them. And we grew free cash flow 13% year over year. These results reinforce our confidence in the transformation we are driving and the demand we are capturing. Our divestiture of Kepware and ThingWorx is progressing, and we are on track to close on or before April 1. Before discussing execution in the quarter, I want to take a step back and talk about our transformation and my optimism for the road ahead. Every transformation has an important turning the corner phase. The end goal is still ahead, but you start to see collective forward momentum across the most important elements of the transformation. This is where PTC Inc. sits today. We see it clearly in the following ways: Number one, accelerating product roadmap releases; two, record deferred ARR under contract; three, higher seller productivity; four, customer commitments that are strategic and increasingly span the full life cycle; and five, consistent customer feedback that our intelligent product life cycle vision resonates with what they need. To that end, how our customers develop products is changing significantly. Products are becoming more complex, more software-driven, and more regulated. At the same time, development cycles are compressing, competition is increasing, supply chains are fragmenting, and the workforce is evolving to favor modern digital-first systems and processes. The traditional product life cycle built on disconnected tools, siloed data, and manual processes simply can't keep up. That is why the intelligent product life cycle is essential for staying competitive. It is based on three core elements: connected systems of record across the life cycle, enterprise-wide cloud access to product data, and AI embedded directly into enterprise workflows. Together, these elements turn product data from something that's simply stored and audited into something that actually drives better decisions across engineering, manufacturing, service, and the rest of the enterprise. The companies that will win are the ones that successfully leverage product data in this way and use it as a foundation of AI-driven intelligence and transformation. We believe PTC Inc. is uniquely positioned to enable this. Our core products, CAD, PLM, ALM, and SLM, are the systems of record across the life cycle, defining how product data is created, governed, and used across the enterprise. And we support an open ecosystem where this data can be exchanged with other trusted enterprise systems. Our product and AI roadmaps are focused on making the intelligent product life cycle real for our customers. Deeper product integrations are a high priority. The connection between Creo and Windchill is the gold standard. We're making good progress with our Windchill connections to CodeBeamer, ServiceMax, and Onshape. In December, we released CodeBeamer 3.2, which deepens the connection between CodeBeamer and Windchill and improves how customers manage complex cross-domain development. In October, we released a new version of Windchill that includes the new Windchill UI for a more modern user experience and new change management capabilities that make it easier for customers to share relevant product data with suppliers. Our AI roadmaps are progressing well, and we are encouraged by customer feedback. Entering 2026, it became clear that customers don't want AI as another standalone system or workflow. They want AI embedded directly into the systems of record they already trust for their enterprise workflow. That's exactly where PTC Inc. is focused, and customers are increasingly recognizing this as a point of differentiation. In Q1, we continued embedding AI across our portfolio to address our customers' high-value use cases and workflows. In December, we introduced CodeBeamer AI, focused on improving requirements quality, accelerating test case development, and supporting compliance before products move into production. In January, we released Windchill AI parts rationalization, new AI functionality embedded in Windchill to help customers accelerate development and manage costs by identifying duplicate parts, making part data more consistent and reliable, and accelerating part searches. Next month, we will launch a video series called AI in Focus, where we will share our AI strategy in more depth, preview product-specific roadmaps, and show continued acceleration releases. We encourage you to tune in. We are confident in our AI position because our customers tell us universally that structured contextual product data is their top priority. In addition to embedding AI in our products, we are building a common AI infrastructure across our product portfolio. This will enable our users and AI agents to understand and use product data from CAD, PLM, ALM, SLM, and third-party systems in the same way, all backed by data governance and security standards. Our vision keeps our products and AI closely coupled together, thereby encouraging broader adoption of PTC Inc. solutions over time. Turning to go-to-market execution, our transformation is progressing well. In Q1, we increased seller capacity, improved quota attainment, and saw ramping reps more than double productivity year over year. This reflects territory rebalancing, improved enablement, and greater vertical focus. Most importantly, we are expanding the scope of our customer and partner engagements from focusing on one stage of the lifecycle to discussing the intelligent product life cycle holistically, centered on product data and AI. As a result, we are achieving stronger and more strategic demand capture. As previously discussed, we exited 2025 with record deferred ARR under contract. We continued this momentum with a record-setting Q1 of large deal volume and strong competitive displacements and deferred ARR. Some of these deals will begin converting to ARR in 2026, and most will ramp in fiscal 2027 and fiscal 2028. Jen will talk more about the positive impact of deferred ARR on our outlook for the remainder of fiscal 2026. We are confident our transformation is helping us build a more durable multiyear growth engine. An example of our momentum is the expansion deal we struck with Garrett Motion, a leading automotive supplier. We won this on the strength of our intelligent product life cycle vision, how it resonated with their leadership and across the company. Garrett is modernizing its product development environment on a cloud-first, AI-ready architecture. They were already using Onshape and selected Windchill Plus for PLM, displacing a PLM competitor, and CodeBeamer Plus for ALM, displacing an ALM competitor. Garrett's goal is to unify product development with our connected systems, broaden access to product data beyond engineering, and establish a foundation for AI. This is increasingly representative of how large product companies are engaging with PTC Inc. Overall, Q1 demonstrated PTC Inc.'s momentum with the intelligent product life cycle. I credit team PTC Inc. for driving forward with focused execution and purposeful innovation. I'm energized by our progress and optimistic about where we are headed. With that, I'll turn the call over to Jen. Jen DeRico: Thanks, Neil, and hello, everyone. I'm excited and honored to join the PTC Inc. team at this significant time in the company's transformation. Before turning to our Q1 results, I thought I'd share my initial observations and key priorities. I'm impressed by the PTC Inc. team and how our intelligent product lifecycle vision is taking hold with customers. As Neil highlighted, product companies want to leverage AI for their high-value use cases and workflows. The companies that succeed will be the ones that connect product data across the entire life cycle and then leverage that foundation to push AI-driven intelligence. It's an exciting time because PTC Inc. is well-positioned to help our customers address this challenge. In terms of my key priorities, I look forward to partnering with Neil and the leadership team to help PTC Inc. capture its growth opportunity, maintain strong financial discipline, and create meaningful value for our stakeholders. I'm committed to helping the investor community understand and value our business, and I'm looking forward to engaging with you. Now let's turn to our fiscal Q1 2026 financial results. At the end of Q1, our constant currency ARR excluding Kepware and ThingWorx was $2.341 billion, up 9% year over year. Including Kepware and ThingWorx, our constant currency ARR was $2.5 billion, up 8.4% year over year. Our Q1 operating cash flow and free cash flow both grew 13% year over year. Q1 free cash flow of $267 million included $10 million of Kepware and ThingWorx divestiture costs. Finally, on the divestiture, we are still targeting a close on or before April 1, and there are no material changes to the figures we provided last quarter. Turning to share repurchases, as previously guided, we repurchased $200 million of common stock in Q1 under our $2 billion share repurchase authorization. In Q2 2026, we intend to repurchase approximately $250 million of common stock. Based on this, we expect a decrease in our fully diluted share count to approximately 119 million shares, compared to 121 million shares one year ago. In Q3 and Q4 this year, we intend to repurchase $150 million to $250 million of common stock per quarter. On top of this, given current valuations, we now intend to return additional capital to shareholders following the close of the Kepware and ThingWorx divestiture. We continue to expect net after-tax proceeds from the transaction of approximately $365 million. Adding this to our original fiscal 2026 plan means that we will buy back approximately $1.1 billion to $1.3 billion of our common stock this year. With that, I'll take you through our guidance. In fiscal 2026, for constant currency ARR, excluding Kepware and ThingWorx, we continue to expect growth of approximately 7.5% to 9.5%. Including Kepware and ThingWorx, we still expect growth of approximately 7% to 9% in fiscal 2026. In the appendix to our earnings deck, we provide an illustrative ARR model for 2026, and you can see that our fiscal 2026 ARR guidance midpoint for $195 million of annual net new ARR in both scenarios. In Q2, for constant currency ARR excluding Kepware and ThingWorx, we expect growth of approximately 8% to 8.5%. Including Kepware and ThingWorx, we expect growth of approximately 7.5% to 8%. In the appendix to our earnings deck, we also provide an illustrative ARR model for Q2 2026, and you can see that our Q2 2026 ARR guidance is for $35 million to $50 million of sequential net new ARR in both scenarios. Looking at the second half of the year, our intent is to grow net new ARR in Q3 2026 on a year-over-year basis and then deliver a step up in Q4. We are comfortable with that because starting in Q4 2026, the demand capture we've been highlighting will have a positive impact on our ARR growth. We have visibility to a large increase in the amount of deferred ARR that will start in Q4 2026 compared to previous Q4s. And for clarity, the higher level of deferred ARR that is contracted to start in Q4 this year is attributable to the solid progress we've made with our go-to-market initiatives, as well as our commercial initiatives. Both drivers are contributing. Moving to cash flow, revenue, and EPS, our guidance for these does not take into account the Kepware and ThingWorx divestiture, except for the divestiture costs already recognized in Q1 2026 and expected in Q2 2026. For Q2 2026, we are guiding free cash flow of $310 million to $315 million, including Kepware and ThingWorx for the full quarter, which absorbs approximately $5 million of divestiture costs. Our business as currently constituted remains on track to deliver approximately $1 billion of free cash flow in fiscal 2026. Related to the Kepware and ThingWorx transaction, we still expect approximately $160 million of total cash outflows this year, which are not expected to recur in future years. And we'll continue to provide visibility to these outflows in our reporting and guidance. When the transaction closes, we will update our guidance, and I'll host a call to take you through the changes. In recent years, we've developed a high degree of confidence in our guidance for free cash flow based on the predictability of our cash collections and the disciplined budgeting structure we've established. Continuing to deliver the strong financial discipline you've come to expect from PTC Inc. remains a priority. While our focus is on ARR and free cash flow, we're also providing revenue and EPS guidance to help you with your models. We are raising our fiscal 2026 guidance range for revenue to $2.675 billion to $2.94 billion and raising our non-GAAP EPS guidance range to $6.69 to $9.15 in alignment with our Q1 2026 results coming in above the high end of our guidance range. A key driver of our strong Q1 2026 revenue and EPS was similar to last quarter. We did a great job contracting customer commitments. As a result, our revenue growth significantly outpaced our ARR growth for a second consecutive quarter. In Q1 2026, demand capture continued to outpace ARR growth, resulting in additional deferred ARR that will support durable growth in future periods. Importantly, this dynamic reflects the quality, duration, and the structure of customer commitments we contracted, not a change in revenue recognition practices. All in all, our results and guidance show that our focus on the intelligent product lifecycle is resonating with customers. We are on the right strategic path with a compelling set of product initiatives, go-to-market initiatives, and commercial initiatives. I want to thank the extended PTC Inc. team for their continued efforts and energy. Our people are our driving force, and what I've seen thus far gives me confidence that we will deliver on our opportunity. With that, I'd like to turn the call back to the operator for the Q&A session. Operator: At this time, if you would like to ask a question, press star then the number one on your telephone keypad. To withdraw your question, simply press 1 again. Please limit yourself to one question only. If you have additional questions, please return to the queue. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Yun Kim with Loop Capital Market. Please go ahead. Yun Kim: Alright. Great. Thank you. Congrats on a solid quarter, Neil, and welcome aboard, Jen. Since this is your first time, I'll ask a question to Jen first. So Q4 is the first quarter when we can see ARR from those deferred ARR deals. What level of visibility do you have on that, if you can quantify that if you can? What are, for instance, what are some of the variables behind those ramp or deferred ARR deals getting recognized in Q4? And is the timing of that ramp related to billing, then would it affect cash flow? Thanks. Neil Barua: Yun, thanks for the question. And Jen will add to my upfront. But since she's four weeks in, let me take the upfront on the dynamics of the demand capture, and then she could talk about some of the technicalities if I don't cover it. So, you know, again, I think you heard, and thank you for the acknowledgment. We feel really good about the progress of our go-to-market transformation, and it's showing up now in two quarters of demand capture that is now relating to, you know, the amount of deferred revenue deferred ARR that you spoke about in Q4. That's about triple what we had last Q4 entering. And double the deferred ARR that we're building starting in 2027 that we had coming into this year. So Rob and the go-to-market team are really doing a lot of great work on the demand capture. And the crux of the deferred ARR is due to the fact that we're winning strategic cross-product and in some cases, and in many cases, on some product lines, competitive displacements. And so, you know, we're taking the commitment, which is committed dollars from the customer. I'm cognizant that it's not showing up right now in the in-quarter, but we're very positive about how it's starting to build ARR in Q1 and as we guide around Q2, how it'll impact Q4 in a more meaningful way than it did last year and also into the following year. And it's all to do with the implementation cycles of our customers. And we feel good about it because the commitment's there, it's contracted. And it's set to come. Jen, anything to add? Jen DeRico: I think you hit it, Neil. Thanks. Yun Kim: Alright. Thank you so much. Operator: Your next question comes from the line of Joseph D. Vruwink with Baird. Please go ahead. Joseph D. Vruwink: Great. Thanks for my question. And, Jen, welcome. At the big event hosted by PTC Inc.'s user community about this time last year, there was some, I think, foreshadowing by PTC Inc. about AI capabilities that would get added to Windchill and the parts management areas. And at the time, customers were really excited about this. I think that idea as a product is what PTC Inc. is now starting to come out with. I think it was released last week. I guess my question related to this, there's obviously been a lot of AI releases from PTC Inc. across all the core products over the past year, and not diminishing any of those. But are we maybe starting to see some that could prove more material in nature and this is gonna start to register in a more noticeable way on demand decisions over the next year? Neil Barua: So thanks for the question, Joseph, and thanks for acknowledging the really good progress that we're making around our AI strategy. In concert with what customers really need. And as you noted here, you know, our products are mission-critical enterprise systems of records across the life cycle. And as you heard last year at the PTC Inc. user group, the preponderance of our customers are now really wanting us to embed these AI releases as you noted. The Windchill AI parts rationalization, we also did a CodeBeamer AI release as well, and many others that are accelerating over the course of this year, which is really embedding AI capabilities to advise and assist and over time automate workflows within these systems of records that we are very well attuned to understand and train the models around it. So we're thrilled about the progress. Our customers are even more thrilled that we have built these and now there's a rapid iteration of releases to even make these more consumable over time. So we feel good about where we are around our strategy. We feel very excited about the criticality of PTC Inc. to deliver AI to our customers given the strength and the complexity of our system of records within our customer environment. In terms of the impact of when, you know, Jen could start talking about the P&L impact in terms of when we'll see a lift. I'd say right now it's immaterial in terms of how we think about the economic till coming into the company. But as these releases start taking hold and they move from POCs to scale deployments, over the course of the next few years, this should be something we'll be talking to you about and others around a real economic driver of the business. Thank you. Operator: Your next question comes from the line of Adam Charles Borg with Stifel. Please go ahead. Adam Charles Borg: Awesome. And thanks for taking the question. Maybe just on Creo and Windchill. And as we think about those growth rates, any way to parse out the mix of growth coming from expansion versus competitive displacement? And given the new go-to-market promotions that seem to be having some success, what's the opportunity to drive more competitive displacement front? Thanks so much. Neil Barua: Yeah. Let me start this, and Rob could add. Given he's really driving the team in a really disciplined manner the way he said he was going to when he started about twelve months ago. And we're very proud of the progress that team has made. What I'll say is around Windchill, which we don't break out the exact growth rate of Windchill. It's an aggregated PLM number as you might know, Adam. We're very enthused about the Windchill capabilities and the acceptance and the growth rates around Windchill as a standalone product in addition to, by the way, Windchill Plus, where we're seeing really strong traction. Creo, as you noted, continues to be a strong grower, a steady grower, and we feel good about its competitive dynamic in the CAD market. In addition to the fact that we have an amazing Onshape capability that is also starting to be a very strong competitive takeaway off of some of the competitors on their estate. So we feel good about CAD. In terms of PLM, in terms of the mix around expansion versus competitive displacement, I'd still say, Adam, that the significance is still around expansion. And even in expansion, there's competitive displacements that's happening where customers are giving us their entire estate now of take all the disparate PLM systems and put it on Windchill. So you saw some of the appendix slides you're starting to see and we're starting to see that being more of the types of deals we're seeing. Part of it is because the customers are understanding to get the benefit of AI, you need contextual product data that's put in one place in a system of record like Windchill so this advantages customers to expand with Windchill and then build in parallel with us some of the AI capabilities. But we are also lastly seeing competitive displacements, as I mentioned. And we're continuing to see more of that happen over the course of this year as we look at the pipeline. Rob? Robert Dahdah: Yeah. The split's correct that we get the majority from expansion, but there is actual growth and accelerated growth in competitive displacement. And so we feel really good about that as a kind of a next step grower for us. Adam Charles Borg: Great. Thanks again. Operator: Your next question comes from the line of Ken Wong with Oppenheimer. Please go ahead. Ken Wong: Jen? Operator: One moment for Ken. Ken Wong, your line is open. Ken Wong: Hey, Ken. Neil Barua: Operator, let's go to the next. I'm back to Ken. Operator: Your next question comes from the line of Matthew Hedberg with RBC Capital Markets. Please go ahead. Matthew Hedberg: Congrats. I know the software environment seems a bit dicey these days, but it's great to see the consistent results out of PTC Inc. I guess, Neil, I wanted to ask you you just you just talked about Windchill a second I guess I was curious if if you could talk a little bit more specifically on Windchill Plus. Creo Plus, just kind of the broad SaaS portfolio. You know, are you are you starting to see increased customer demand for SaaS? And and, you know, in those instances, are you seeing, you know, customers spend spend go even higher in in in those situations? Neil Barua: Yes. So thanks for the question. And we've been very we've been very practical and also transparent with all of you around our journey around building our SaaS momentum. And I'll take first the board in the cloud solutions that we've got, and in particular, Onshape Arena, ServiceMax. And we feel good about to in some cases, great about the momentum and the adoption of those capabilities in several competitive that are happening across the three of those strong portfolios in addition to the AI capabilities we're building on top of it. Terms of your question on Windchill Plus and Creo Plus, we're having a bang up and we did have a bang up last year in terms of the momentum building for Windchill Plus. We had another strong demand capture quarter for Windchill Plus. If not record-breaking, we have plenty more to go, and I wanna make sure I think Rob and I are measured about that we've been saying for a while that the dam has not broken where the entire market is flipping to our plus platform overnight. But we have been building momentum. We are working towards making sure we meet the customers where they are. The good news story is the following, and I've been saying this for two years consistently. SaaS starts working for Windchill Plus and Creo Plus when they're scaled implementations with a great experience with a back-end experience that's good, and the customers are happy. We're starting to see that. And we're gonna leverage that. We're gonna continue to build on the momentum. And so we feel really strongly about our position on SaaS. We feel like that will continue to be a growth driver. And to your last question around Lyft on pricing, yes, we are seeing the similar sort of Lyft that we've been saying around the one and a half to two and a half times kinda lift in terms of on-prem to SaaS lift on on ARR. Matthew Hedberg: Thanks, Neil. Operator: Your next question comes from the line of Joshua Tilton with Wolfe Research. Please go ahead. Joshua Tilton: Hey, guys. Can you hear me? Neil Barua: Yep. Joshua Tilton: Great. Thanks for sneaking me in here. I appreciate all the commentary on the improvement in sales productivity. But when we kinda, like, dig a little bit deeper in the numbers, it looks like the channel drove over 80% of net new ARR in the quarter. So I'm just trying to understand, like, are there any one-offs in the direct business that we need to understand? Is this tied to the deferred ARR dynamic? And maybe, you know, when can we start to see the direct business maybe contribute at a similar level to the channel? Going forward. Thanks. Jen DeRico: So I think what we're seeing right now is good momentum in both the channel and the direct. What you're seeing actually in the numbers, in particular this past quarter, one large deal does have an ability to influence this. And oftentimes, with a large deal, you have both the channel and the direct. And ultimately, it's about customer preference and how they want that fulfilled. Ultimately, that's all that's happening in those numbers right now. You can add Rob. Robert Dahdah: Yeah, I mean, as we've mentioned, you know, in prior conversations, we're working very hard to more deeply engage with partners on this. So to create an environment where we can allow that flexibility at the customer and not have a battle that's direct against the channel but working together to fulfill at the customer's request. So we think you might see that from time to time. We did have a larger deal this quarter that fit that picture. But you might see it again in the future, but it's not in any way some kind of visibility into weakness in DIRECT. We work very closely together. Neil Barua: And lastly, I want to make sure we're very clear about this. The energy and enthusiasm that turning the corner is around the actual indication and the contracted commitments that are building predominantly deferred ARR. So we feel really strongly about the go-to-market transfer. It's actually doing the thing that we need to do, which is capture customer demand. How it's showing up in Q1 in our guidance for Q2 has only got to do with timing. And the good news is this is committed capture. By the way, this is gonna show up all in another metric that you could look at. Not completely indicative of it is RPO and CRPO. You'll see in the queue but all of these metrics are leading us to make sure we all articulate that demand capture is strong. We gotta continue that. And as that happens, ARR over time becomes durable and multiyear in terms of the sustainability. Joshua Tilton: Makes sense. Maybe just to clarify one thing around that. Was there more deferred ARR added to the balance in 1Q than when you exited Q4? Jen DeRico: Yes. There was. And just to reiterate what Neil said before, as we think about where we are, where we sit today versus one year ago, for Q4 2026, there's triple the amount of deferred ARR on the books for Q4 2026. And then in the same view, for 2027 is double for 2027 versus where there was last year for 2026. Joshua Tilton: Super helpful. Appreciate the clarity. Thanks so much. Operator: Your next question comes from the line of Blair Harold Abernethy with Rosenblatt Securities. Please go ahead. Blair Harold Abernethy: Thanks very much, guys, and welcome, Jen. Just on the go-to-market side again, I just wonder maybe Rob can shed some color on this. But, you know, in terms of new customer ads, what are you seeing out there in terms of interest in your portfolio? Is it skewed at all more towards the SaaS side? The SaaS products? And, also, maybe you could provide a little more color on this the startup aerospace and defense program. It looks like you've been winning some business there. Robert Dahdah: Yeah. So for a couple of the two questions. As it relates to the new business and new logos, we definitely as mentioned earlier, have had a nice run and an increase in our competitive displacement. So we're picking up what we would consider to be new logos in kind of the upmarket. As we bring on new customers, we default to cloud. So they're coming in in a cloud environment and it typically, you know, that's been working very well for us and for the customer who want to enter that way. As they reduce their customizations and the complexity in their own environment. And obviously, try to capture some of the benefits of being in cloud. Some of which are pretty obvious, others which will start to manifest in how AI is deployed. So yes, we're seeing good traction with customers coming in new. That is our default setting as we bring on new logos into the cloud. In defense, it's great that you notice that. You picked up on that. We have an opportunity there. We believe as we serve of the largest customers in the world, at the top of that stack we have an opportunity now to incubate at the lower. And we've seen great reception there. Certainly we always learn and get better every month, every quarter. But the initial response has been really positive there. And we have a number of ways to service that market as well. So feel like we're well positioned at both the top and the bottom. And hopefully we'll be able to report some great success stories that grew through there. Blair Harold Abernethy: Great. Thanks very much. Operator: Your next question comes from the line of Ken Wong with Oppenheimer. Please go ahead. Ken Wong: Hey. Can can you guys hear me? Neil Barua: Yeah. Ken Wong: Okay. Perfect. Appreciate, the the context around deferred ARR and and when some of that timing could pop up. When thinking through the unchanged fiscal year ARR guide and coupled with that commentary that it sounds like more is coming in Q4. Help us think through the seasonality if you could. I mean, is it is it basically gonna be even more back-end loaded than you guys were perhaps three months ago? Jen DeRico: So I think right now, the way we think about it, as you heard me say in my prepared remarks, that we'll have a step up in Q3 and a larger step up in Q4. I would say it's similar to how we've been thinking about the business. Neil, you can correct me if I'm wrong prior. But overall, the shape of the curve is very similar to what we thought about when we guided for the full year. Ken Wong: Okay. Perfect. Thanks a lot, Jen. Operator: Your next question comes from the line of Daniel Jester with BMO Capital Markets. Please go ahead. Daniel Jester: Hey. Great. Good evening. Thank you for taking my question. Maybe you know, in the slide deck, there was a a good story about ServiceMax and an expansion there. You know, last year was maybe a little bit of a tougher year for ServiceMax. And so maybe just an update about what we're what we're seeing there and in terms of the cross-sell opportunity. For fiscal 2026. Thank you so much. Neil Barua: Yeah. Let me start, and Rob could add if if I miss anything. Look. As as we've mentioned a few times starting last year, we've been working through very specific churn events in ServiceMax for a number of quarters now. As I mentioned, I think last call that we've got some still residual churn that kind of hit us in Q1. And most of it, we're trying to work through the system by the end of this quarter. That being said, a ray of sunshine in terms of some green shoots, we've been talking about, like, the cross-sell opportunity you saw you noted the one in the appendix. We've had some good strong demand capture, as we're calling it, i.e., contractual commitments of ServiceMax that was very encouraging as we saw. We need that replicated over the next number of quarters. The end of Q4 and throughout the entirety of Q1. We obviously wanna ensure that churn is mitigated versus what we've seen in prior quarters. And lastly, the integration of ServiceMax into the intelligent product life cycle and in particular, how our AI strategy allows for agents to work across our systems of record where we have a very offer in ServiceMax, we believe is a competitive differentiation, in particular with some of these competitive displacements when customers are giving us PLM. Part of it is to do with the fact that we actually do have such a strong customer record at ServiceMax and ultimately in that AI world where it advantage. So not out of the woods, but making progress and, you know, we're staying in in real focus to make sure we continue on some of the buildup of some of those green shoots that we're seeing. Robert Dahdah: Yeah. And as part of the alignment, we go vertical and start to look at how we rebalance just the go-to-market teams, we've made this a very important part of our elevated messaging. And so it's being brought to market more widely. In addition, we attacked the level of really instituted as part of the comp plans in a way make sure that everybody's got some incentive to bring this in front of the customers. So in addition to the benefit of the customer, there's internal benefits also. So we're trying to make sure the whole company is aligned to get the message out. Daniel Jester: That's great. Thank you so much. Operator: Your next question comes from the line of Jason Vincent Celino with KeyBanc Capital Markets. Please go ahead. Jason Vincent Celino: Hi. Thanks for taking my question. Sorry to belabor. Another ARR question, but this actually relates to the Q2 ARR guide. Know there's an implied decline in net new dollars added for Q2. Did you see any deals, you know, from the Q2 pipeline closed earlier in Q1? Or are you expecting more of the deals in Q2 to also have this bigger deferred component? Thanks. Neil Barua: It's a great question, Jason. This is all to do with our assumption as we sit here today around how these deals will come into the in-quarter start affecting ARR for that. This has nothing to do with demand being lesser than the momentum that we're talking about. It has simply to do with the structuring and our assumption of that being the case. Quite frankly, it is another quarter where we believe we will continue to build on the deferred ARR to make this a durable multiyear sustainable growth engine going forward. Jason Vincent Celino: Perfect. Thanks. Operator: Your next question comes from the line of Sitikantha Panigrahi with Mizuho. Please go ahead. Sitikantha Panigrahi: Thanks for taking my question. Congrats, Jen, and look forward to working with you. So it's good to see some of the initiative on AI side you are doing and and also buyback. But, Neil, I I wanna ask about the macro that you talked about earlier. A little bit. You're conservative there. What kind of trend are you seeing in Q1, and what's assumed in your guidance? And and specifically, if you could give some color in terms of vertical, if you are seeing anywhere strength or weakness there. Neil Barua: Yeah. You you know, Rob could add about the vertical piece but just broadly, we've been in a very difficult macro. We've talked about this for many years now for a long time. And we are still delivering and capturing the types of results that we're talking about, particularly on the demand cap commentary that we gave. That is across regions, across verticals. We're seeing that strength. And the reason for it, despite the macro having so much uncertainty and volatility, despite policies being uncertain. Is because as an example, today, we had one of the larger industrial manufacturers in all of Europe join us at the CXC. And while they are dealing with so much change, they need to modernize. And they need to make sure prioritization of modernizing and creating a strong product data foundation, in this case, Windchill and the expanse of Windchill is what they're looking at with the additional CodeBeamer. To make sure they take advantage of AI as they think about their multiyear journey and competitiveness. So we feel good that even in this environment, our end customers, as you know, Sitikantha has not modernized as fast as almost every other end market. Of companies, they are getting the urgency to move. And now with this intelligent product life cycle, it's a comprehensive holistic story for them to actually be competitive with technology provided by PTC Inc. Robert Dahdah: Yeah. Just in terms of the actual strength within the verticals of the geographies, there's while there may be in a particular vertical a geography that has performed, some other geography has stepped up to outperform. And so if you look across the verticals, they're all our big five are all performing fairly well. And then if you look at any geography, there's no geography that has just been depressed. If they're down in one industry, they pick up in another. And so across our three or four biggest geographies, and across the five verticals, we have some pretty good numbers. We feel like every one of those is a place that has some upside. Sitikantha Panigrahi: Great. Thank you both. Operator: Your next question comes from the line of Nay Soe Naing with Berenberg. Please go ahead. Nay Soe Naing: Hello. Hi. Thank you for taking my question. I'm, again, looking forward to working with you. My question is on the deferred ARR. I think, Neil, you you you attributed to the fact that the booking to ARR conversion will, you know, begin Q4 as a result of implementation of customers. I was wondering if you could share with us how much visibility of control you have over that implementation timeline of the customer? Is there any potential risk that the implementation process might take longer or on the on the on the other on the flip side, it could it could be shorter than the Q4 that's coming up. Thank you. Robert Dahdah: Yeah. So I I was sorry. I was a little unclear, but I wanna make sure I mean, your question was clear. The audio was a little low. But just in terms of the deferred ARR, this is Rob. These are this is contractual commitment. So when we engage and sign these contracts, these are contractually committed amounts of ARR. That's what we hear Neil talk about, the durability and the predictability of the business. So they have a great incentive to be on time in their implementation. But if if they're not, that ARR comes. So we believe that in addition to obviously the predictability, the benefit to the customer and the way we've contracted is that it's allowing them time to ensure that they are aligned to the cycle of the contract. And so why we're also excited about how we've had these quarters and what we call demand capture is because in addition to timing them appropriately, we've done them on the proper commercial conditions, not in any way try to strain the deal by pulling it forward just to hit a current quarter. It doesn't match the implementation cycle or market conditions in those out years. And so these are contractually obligated they'll hit in these quarters. We are hoping and we're planning to be fully aligned with their implementations. And in addition to that, hopefully as we get to those those out cycles, there's actually upside even in those. Nay Soe Naing: Okay. That's super helpful. Operator: Your next question comes from the line of Tyler Maverick Radke with Citi. Please go ahead. Tyler Maverick Radke: Hi. Thanks for taking the question. So I know you've you've been asked you know, almost every question on deferred ARR, but I I guess I was just wondering if if you could help us understand you know, I guess, the magnitude in which that surprised you in in the quarter and then how that changes for the year. Because because clearly, you're you're you're seeing some good things on the rep productivity side. But you know, you came in a little bit below the high end of the guidance. And then that something you're just contemplating or risk adjusting more, in the outlook? It looked like there was on the the net new ARR. For Q2. And and then, sorry, just to clarify, if you think about the the stacking of these ramped ARR deals, I think it implies that your overall ARR growth should reaccelerate in Q4, and if that's the case, would would you expect that to to be durable just given the the visibility you have? Thank you. Neil Barua: Yes, Tyler. Thanks for the question. I just want to take one step back. The work that we're we've done and undertaken around go-to-market transformation, the hard work that we did upfront, and the the the precision and process that we've undertaken for the last twelve months and we're continuing on going forward this year and into next. In addition to product innovation that we're talking about AI, is around bringing PTC Inc. back to a consistent demand capture environment by which we're winning and engaging in strategic cross-product deals across the core priorities that actually build towards this intelligent product life cycle and so fundamental to our customers. And so that process that Rob and CK and the go-to-market team started off twelve months ago, is showing the fruits of all that process in demand capture that happened in Q4 and in Q1. And as we alluded to, we intend to continue that momentum into Q2. That is not showing up yet in net new ARR. And the way we showed you the guidance for Q1, was clearly not a surprise in which we gave you the range because we know that the whole game is build a durable, accelerating growth company. And the way you do that is by capturing great demand in a quality deal that fills deferred ARR and allows churn to continue to stay low keeps building new ACV into the quarter that we're playing in. And we believe in summary, that that inflection the turning the corner, and the turn the corner starts becoming more apparent in Q4 of this year. And substantially into 2027 and 2028. And that's what we're playing for Tyler, and that's the results and the work that we're doing at this current time just so we're being transparent with all of you. Thank you. Operator: Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Please go ahead. Jay Vleeschhouwer: Thank you. Good evening. Neil, your references this evening to large transactions coming on top of similar comments back in Q4 when you clearly had a large number of large transactions leaves you to ask the following. And there's quite a bit of deja vu here for me, which is if you think about ANSYS, you know, six, seven, eight years ago, they too had gone through a significant go-to-market change. They too had evolved and broadened their portfolio. So there's some similarities here. That lead me to ask if you are anticipating a fundamental change in your deal profile or propensity that you will start seeing more frequently the number of 8-figure transactions as as you did in Q4 and as they did over a number of years. Then secondly, I can't help asking about your presence of CES last month, which was quite significant. I think the almost the entire c-level team seemed to be there. There was a significant automotive flavor to your presence there, particularly around ALM and and Windchill. The question is, do you think that you can broaden your momentum in auto beyond the, the tip of the spear that ALM has been giving you plus some so plus some Windchill so that you can, in fact, start seeing a broader, more impactful growth or share contribution in auto. Know, as you've done, for example, at Toyota, Ford, VW, etcetera, etcetera? Neil Barua: Yeah, Jay. Thanks for the question. And and let me start with CES. So we were more than proud, but more than proud we were very enthused by the reception we got at the first ever CES that PTC Inc. has been involved in. And not only from automotive, but Jay, you were there, you know, you saw all around our booth was industrial manufacturers around the world that actually came to our booth as executives asking of us how can we deploy more of Windchill with? Most of them being our customers already Jay, which you're probably familiar with, but really trying to understand, wait a second. Now you have something called CodeBeamer. Now what are you doing with AI? How can we supercharge our Windchill base or our Creo base? ServiceMax in some cases? What can we do? And and that was just a really great pump your chest moment for PTC Inc. around, we're in the big stage now. We deserve it. And we're at the fundamental level of transforming these really amazing companies around the world. Including automotive, a lot of industrial manufacturers as well. On automotive, I will say, right now, CodeBeamer is the tip of the spear. That tip of the spear is very substantial for us. And there's plenty more to go in terms of CodeBeamer displacements, not only manual processes, but also competitive solutions. As you see that product is really gaining scale or adding CodeBeamer AI functionality, which the market is really energized by. So, you know, we're we're happy to get all of automotive onto CodeBeamer and that that's we're marching towards that end for what it's worth. Same on Windchill with automotive. We are continuing to see an ability for Windchill while in some accounts in automotive, it is there as you know, Jay, we're seeing this theme of, like, let's consolidate on Windchill. Let's take all the disparate PLM system and put it all onto Windchill, and we're gonna continue to go down that path. Lastly, ServiceMax. So Lamborghini was a marquee customer at our booth. They're deploying ServiceMax now that's tied back into their Windchill and so that they could deploy the right parts and services to their end customers faster. We're gonna go down that path as well. Ultimately, one day, we're gonna talk about CAD, but right now, we feel really good about in automotive. ALM, PLM, over time as we're seeing server logistics our ServiceMax product and SOM suite of products there. Bob, anything to add? Robert Dahdah: Only thing I'd say is in addition, of course, we we have take down the rest of the automotive industry when it comes to our ALM. We are seeing it start to go into other industries. It's not we have not made any kind of deliberate decision to knock off that. We actually have customers now exploring it and actually in places that you wouldn't even imagine. So we're pretty excited about the possibilities there. And there's obviously a huge white space outside. And your first question, Jay, around are you seeing this dynamic of cross-product larger scale deals? And you know, these large scale deals, they take a lot of effort, timing, you know, is always an art, and we have one of the best artists in the world and Rob kinda with his team landing those. So but but a big part of what has been the up-level messaging that we've been talking about the going to partners, getting to the GSIs, revealing what you know, Joe Jay, I think is, like, the greatness of PTC Inc., the importance of PTC Inc. to be at the same system of record as the big players you know, worldwide in software that's beginning to happen. And the more we get there, the more we're starting to construct these larger deals. When they come in, it's gonna be on Rob, but we're enthused about the fact that they're starting to actually build into the pipeline and we're looking at very optimistic ways in which how we could close that over the next number of years. Jay Vleeschhouwer: Thank you very much. Operator: Your next question comes from the line of Joshua Tilton with Wolfe Research. Please go ahead. Joshua Tilton: Hey, guys. Thanks for thanks for sneaking me in again. And I I I hate to I hate to ask one more on deferred ARR, but if I kinda you know, sum up all the takes of the questions that we're getting sent on the call, I think some of us have, you know, remembering or PTSD whatever you wanna call it from prior communication around deferred ARR that kinda didn't pan out. As we were all hoping for in the year. And I and I'm just I'm I guess what I'm asking, is there anything that you can tell us or give us to instill confidence that this deferred ARR balance will come through in the fourth quarter? And then on top of that, is there a way to think about how much of that balance is currently baked into the guidance? Thanks, guys. Neil Barua: Yeah. So so let me just on the confidence level, and again, can only speak about what we've been doing, since we've been transforming the business across all fronts. And I I wanna make one reference back to twelve months ago when we talked about all the levels of what we're doing in go-to-market transition. One of it was far tighter linkage between sales and customer success. And Rob made plenty of organizational decisions process decisions to align the two. And the reason why that's important answering your question is, customer success i.e., the cut the and that team has the implementation expertise when a deal is underway, they're the ones that actually advise the customer around here's what we see as the way in which the technology can actually be implemented. In addition to a third party. That linkage is tighter. And because it's tighter, we believe that in the contracting process, it's eyes wide open around when the implementation should occur when the customer should pay for it, and what's the right thing to do for the process of the actual project itself. And so we feel confident that we put the right diligence number one. And as far tighter linkages now than there was twelve months ago. Number two is know, I think Rob alluded to this. I wanna just punctuate it. Is we're doing deals to build a durable multiyear growth sustainable business, not telling the customer, if you let us maximize ARR for this quarter, you know, you'll get these certain attributes. We're doing the deals the way they should be the deal do the deals. And so the risk profile of a customer coming back and saying, the implementation schedule is different than what you said is low. Lower than I've seen. And at the end of the day, Rob's got a discipline that says, since we were transparent with you, it's in contract. You're gonna pay for it. So summary of all that long diatribe is that we feel little risk in that deferred ARR for you to have that PTSD of saying, that disappeared or moved out. Joshua Tilton: Love it. Thanks for the clarity. Really appreciate it. Operator: That concludes our question and answer session. I will now turn the call back over to Neil Barua for closing remarks. Neil Barua: Thank you all for joining. We really appreciate the questions and the attention. We're gonna be on the road the next number of weeks, meeting in conferences and investors and we look forward to seeing you. And, again, thank you for joining the call. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good day, and welcome to the TTM Technologies, Inc. Q4 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Sean Hannan, Vice President of Investor Relations. Please go ahead. Sean Hannan: Greetings, everyone. Welcome, and thank you for joining us today. I'm Sean Hannan, Vice President of Investor Relations for TTM Technologies, Inc. With me on the call are Edwin Roks, our President and Chief Executive Officer, and Dan Bailey, our Executive Vice President and Chief Financial Officer. Before we get started, I'd like to remind everybody that today's call contains forward-looking statements, including statements related to TTM Technologies, Inc.'s future business outlook. Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including the risk factors we provide in our filings with the Securities and Exchange Commission, which we encourage you to review. These forward-looking statements represent management's expectations and are based on currently available information. TTM Technologies, Inc. does not undertake any obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events, or other circumstances, as required by law. We will also discuss on this call certain non-GAAP financial measures, such as adjusted EBITDA. Such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP. We direct you to the reconciliations between GAAP and non-GAAP measures included in your company's earnings release, which is available on the Investor Relations section of TTM Technologies, Inc.'s website at investors.ttm.com. We have also posted on the website an earnings presentation that we will refer to during our call. Here is Edwin. Thank you, Sean. Good afternoon, everyone. Edwin Roks: And thank you for joining us for our fourth quarter and fiscal 2025 conference call. At TTM Technologies, Inc., we are focused on designing and manufacturing complex products and solutions in two strategic directions. The first is advanced interconnect, which includes highly complex printed circuit boards, substrates, and advanced packaging. The second strategic direction is built on our advanced interconnect technology to design and manufacture sophisticated modules, subsystems, and systems. Examples of this include our in-house developed RF modules, thermal and power management systems, edge and AI processing products, as well as complex subsystems and fully integrated mission systems. We believe the future of electronics lies in speed to market, high reliability, and efficient technology integration. The markets in which we do business continue to advance highly complex technology solutions in increasingly compact size and footprint. Our strategy is to stay at the cutting edge of advanced interconnect technologies through innovation and continue to move up the value chain into complex modules and subsystems that combine sensors, actuators, RF, and photonics. We engage early with our customers to ensure alignment with product development, which helps optimize their sourcing of leading technologies and streamlines their supply chain. From a demand standpoint, we expect healthy tailwinds due to our participation in two key megatrends currently driving economic growth: artificial intelligence and defense. As stated previously, approximately 80% of our net sales are related to these two megatrends. Our ability to seize these organic growth opportunities requires our continued focus on technological innovation, as well as expanding our capacity across our strategic footprint. We are further investing capital and resources to take full advantage of these opportunities today and in the future through our global footprint, which offers our customers manufacturing options across 24 sites located in China, Malaysia, Canada, and the United States. We stand well-positioned to support this growth across our end markets and are on track towards our ambition to grow revenues 15% to 20% per year for the next three years and to double our earnings from 2025 to 2027, which were goals previously shared on January 13. In our commercial segment, we are highly focused on supporting the demand wave of artificial intelligence in the data center computing and networking end markets. In our aerospace and defense end markets, we continue to excel with our leading position in advanced interconnect products as we work to expand our product offerings in integrated electronics, including modules, subsystems, and information systems. We are also focused on technological opportunities arising through increased use of automation and AI applications in our medical, industrial instrumentation end markets, while we remain strategically positioned in high-value automotive solutions. Now, I will begin with an overview of our business highlights from the quarter, then we'll follow with a summary of our Q4 and fiscal 2025 financial performance, and our Q1 fiscal 2026 sales guidance. We will then open the call for your questions. We delivered an excellent 2025, and I would like to thank our employees for delivering these results. We achieved sales of $774.3 million, above the high end of our guided range, and non-GAAP EPS of $0.70 per diluted share met the high end of our guided range. Sales grew 19% year-on-year, reflecting continued demand strength in our data center computing and networking end markets, driven by the requirements of generative AI, while our medical, industrial, and instrumentation, and aerospace and defense end markets also experienced solid to strong growth. The company's adjusted EBITDA margin was 16.3% in 2025, a strong result compared to the 14.7% in the prior year, reflecting continued improvement in execution. Non-GAAP EPS of $0.70 per diluted share was an all-time quarterly record high for TTM Technologies, Inc. Cash flow from operations was $63 million or 8.1% of sales, which brings fiscal 2025 cash flow from operations to $292 million or 10% of sales. The aerospace and defense end market represented 41% of fourth quarter 2025 sales. Sales in the aerospace and defense markets grew 5% year-on-year for the fourth quarter and 13% year-on-year for the full year of 2025. The sales growth in the defense market was a result of positive tailwinds in defense budgets, our strong strategic program alignment, and the key bookings for ongoing programs. During 2025, we saw significant A&D bookings related to the APS-153 airborne surveillance radar, LTAMDS air defense radar, MRAM, air dominance missile, and Javelin anti-armor missile system. In addition, we continue to see an increase in bookings for restricted programs. A&D book-to-bill was 1.46 for the quarter and 1.04 for the full year of 2025, which increased program backlog to $1.6 billion compared to $1.56 billion a year ago. We expect sales in Q1 2026 from this end market to represent 42% of our total sales. Sales in the data center computing end market represented 20% of fourth quarter 2025 sales. This end market experienced 57% year-on-year growth in the fourth quarter and 36% year-on-year growth for the full year of 2025, which reflects continued demand strength from our data center customers building products for AI applications. The networking end market represented 8% of 2025 sales. Year-on-year growth was 23% for the fourth quarter and 43% for the full year of 2025, as this market continues to become more correlated with the AI-related demand for more complex switching technology. Due to the AI-related correlation between data center computing and networking end markets, we will begin reporting them as a single combined end market in 2026. Consequently, we will be reporting on four end markets going forward. For 2025, combined sales for data center and networking would have represented 36% of total sales, and we expect the first quarter of 2026 to represent 37% of total sales. The medical, industrial, and instrumentation end market represented 14% of fourth quarter 2025 sales. This end market saw year-on-year growth of 28% during the fourth quarter and 22% for the full year of 2025, as medical and industrial areas saw increased demand for AI-enabled robotics and more complex sensing applications. The instrumentation area saw increased demand for automated testing equipment and AI applications. For 2026, we expect the medical, industrial, and instrumentation end market to represent 14% of total sales. Automotive sales represented 9% of fourth quarter 2025 sales. We will be increasingly selective in this market to focus on higher value-add products that carry a margin profile consistent with our financial growth. We expect the automotive end market to represent about 8% of total sales in 2026. Overall book-to-bill ratio was 1.35 for 2025, with the A&D reporting segment at 1.46, and the RF&S reporting segment at 0.94. At the end of 2025, the ninety-day backlog, subject to cancellations, was $654.9 million compared to $502.1 million at the end of last year. Now, Dan Bailey will summarize our financial performance for the fourth quarter and full year. Dan? Dan Bailey: Thanks, Edwin, and good afternoon, everyone. I will review our financial results for the fourth quarter and full year 2025, which were included in the press release distributed today. Key financial highlights are also summarized in the earnings presentation posted on our website. For the fourth quarter, net sales were $774.3 million compared to $651 million in 2024. The 19% year-over-year increase was due to continued strong growth in our data center computing, networking, medical, industrial instrumentation, and aerospace and defense end markets, partially offset by a decline in our automotive end market. For the full year, net sales were $2.9 billion compared to $2.4 billion in 2024. The 19% increase for fiscal 2025 was driven by the same end market dynamics that drove growth in Q4. GAAP operating income for 2025 was $80.7 million compared to GAAP operating income for 2024 of $9 million, inclusive of a $32.6 million goodwill impairment charge related to the RF&S component segment. For the full year of 2025, GAAP operating income was $264.7 million compared to $116 million in 2024, inclusive of the $32.6 million goodwill impairment charge related to the RF&S component segment. On a GAAP basis, net income for 2025 was $50.7 million or $0.48 per diluted share. This compares to GAAP net income for 2024 of $5.2 million or $0.05 per diluted share, inclusive of a $32.6 million goodwill impairment charge related to the RF&S component segment. For the full year of 2025, net income was $177.4 million or $1.68 per diluted share. This compares to $56.3 million or $0.54 per diluted share in 2024, inclusive of the $32.6 million goodwill impairment charge related to the RF&S component segment. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes M&A-related costs, restructuring costs, certain non-cash expense items such as amortization of intangibles, impairment of goodwill, stock compensation, gains on the sale of property, unrealized gains or losses on foreign exchange, and other unusual or infrequent items. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate comparisons with expectations and prior periods. Gross margin in 2025 was 21.7% and compares to 20.5% in 2024. For the full year of 2025, gross margin was 21.3% and compares to 20.4% in 2024. The year-on-year improvement in both periods was due primarily to higher sales volume and favorable product mix, particularly in the data center computing, networking, and aerospace and defense end markets, as well as improved operational execution. Selling and marketing expense was $19.8 million in the fourth quarter, or 2.6% of net sales, versus $18.9 million or 2.9% of net sales a year ago. For the full year of 2025, selling and marketing expense was $80.8 million or 2.8% of net sales, compared to $76.2 million or 3.1% of net sales in 2024. Fourth quarter general and administrative expenses were $43.1 million or 5.6% of net sales, compared to $40.9 million or 6.3% of net sales in the same quarter a year ago. For the full year of 2025, general and administrative expense was $168.3 million or 5.8% of net sales, compared to $156.6 million or 6.4% of net sales in 2024. Our operating margin in 2025 was 12.7%, a 260 basis points improvement from 10.1% in the same quarter last year. For the full year of 2025, operating margin was 11.7% as compared to 9.6% in 2024. The increase in both periods was due to the improvement in gross margin as well as continued spending discipline in selling, general, and administrative expenses. Interest expense was $11.8 million in 2025, compared to $10.7 million in the same quarter last year. For the full year of 2025, interest expense was $43.2 million compared to $45.5 million in 2024. Interest income was $2.8 million in 2025, compared to $2.1 million in the same quarter last year. For the full year of 2025, interest income was $10.4 million compared to $10.9 million in 2024. Other non-operating income and expenses in 2025 totaled a net interest expense of $3 million, as compared to net income of $1.4 million in the same quarter last year. For the full year of 2025, other non-operating income and expenses totaled a net expense of $4.8 million compared to net income of $3.5 million in 2024. Our effective tax rate was 13.2% in 2025, resulting in tax expense of $11.4 million. This compares to an effective tax rate of 12.2% or a tax expense of $7.2 million in the same quarter last year. For the full year of 2025, the effective tax rate was 14.5%, resulting in tax expense of $43.9 million compared to an effective tax rate of 12.4% and tax expense of $25.2 million in 2024. Fourth quarter 2025 net income was $74.8 million or $0.70 per diluted share. This compares to fourth quarter 2024 net income of $51.4 million or $0.49 per diluted share. For the full year of 2025, net income was $259 million or $2.46 per diluted share, compared to $177.5 million or $1.70 per diluted share in 2024. Adjusted EBITDA for 2025 was $126.2 million or 16.3% of net sales, compared with fourth quarter 2024 adjusted EBITDA of $95.7 million or 14.7% of net sales. For the full year of 2025, adjusted EBITDA was $456.3 million or 15.7% of net sales, compared to $351.5 million or 14.4% of net sales in 2024. I will now turn to our guidance for 2026. We project net sales for 2026 to be in the range of $770 million to $810 million and non-GAAP earnings to be in the range of $0.64 to $0.70 per diluted share. As a reminder, we expect first quarter profitability to be typically impacted by increased operating costs, particularly labor costs resulting from the Chinese New Year holiday. In addition, we expect our full year 2026 total net sales to increase in the range of 15% to 20% over 2025 total net sales. The first quarter 2026 EPS forecast is based on a diluted share count of approximately 106.7 million shares, which includes the dilutive effect of outstanding stock options and other stock awards. We expect SG&A expense to be about 8.5% of net sales in the first quarter, and R&D expenditures to be about 1% of net sales. We expect interest expense of approximately $10.6 million, interest income of approximately $2.2 million, and other non-operating expense of approximately $2.7 million. We estimate our effective tax rate to be between 12% and 17%. Further, we expect to record depreciation of approximately $29.8 million, amortization of intangibles of approximately $9.2 million, stock-based compensation expense of approximately $11.5 million, and non-cash interest expense of approximately $500,000. And finally, I'd like to announce that we will be participating in the Citi Industrial Tech and Mobility Conference in Miami, Florida on February 19 and the JPMorgan Leverage Finance Conference in Miami, Florida on March 3. That concludes our prepared remarks. Now I'll turn it over for questions. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone, and wait for your name to be announced. To withdraw your question, press 11 again. Due to time restraints, we ask you please limit yourself to one question and one follow-up question. And our first question will come from the line of James Ricchiuti with Needham and Co. Your line is open. James Ricchiuti: Thank you. Good afternoon. Congrats on the quarter. First question is regarding capacity. And I wonder if you could talk about where you stand with respect to adding additional data center capacity in China. As needed? And second question is just where you stand with Syracuse in terms of the ramp with the new capacity there. And then I have a follow-up question on margins. Edwin Roks: Yes. Thank you very much, James, and good afternoon. To answer your first question, we are making very good progress both in China and the US on expanding our capacity. And remember that we guide, let's say, our growth 15% to 20% over the coming three years. That capacity will do the job, let's say. And we have even more capacity to do even more depending on the demand. So capacity is not the issue. Also, the supply chain is not the issue. The equipment is not the issue. So we are well on track. We were there last week in China. Things are going very, very smooth. To answer your second question on Syracuse, same thing. We have our lead customers there. The building is up, as you know. The equipment is in. We are basically doing the tile and snow. And as we said three months ago, we are exactly on track just for the second half of this year. We will see first revenues coming from Syracuse Diamond, which is a really, really nice milestone. James Ricchiuti: And the question just follow final question from me is just on growth margins. The improvement you saw you highlighted that it was volume driven and mix. I wonder if you could also give us a sense of what the headwind was from Penang? And was it more mix related or volume related in terms of A&D and data center? Dan Bailey: James, hi, this is Dan. I'll take that one. So Q4, first, to address your Penang question, Q4 at the gross profit level still had a headwind of about 180 basis points. And we had guided 160, so a little bit worse than expected there on Q4, but still, as you noted, improved gross margins. So that gross margin improvement was primarily mixed data center and networking, as well as we did have improved margins in A&D. Those two in that order. So you're right on with that. But about 180 basis points on Penang, that will improve throughout this year. And as we guided before, it'll be about half of that by the end of the year. Edwin Roks: Yeah. But maybe some additional color on Penang. We basically doubled the revenues versus last quarter. So that's going in the right direction. Also, I look at the yield numbers, and we look at these yield numbers every week. On the lead vehicles, we see that that is going in the right direction. I will be there in one week from now. It is going really, really smooth in Penang. So I really hope we do better than 160 basis points that cut it in half for the end of the year, what we've said before. We are making good progress. So I really hope we do a lot better. James Ricchiuti: Very much for that additional color. Operator: One moment for our next question. And that will come from the line of William Stein with Truist Securities. Your line is open. William Stein: Great. Thanks for taking my question. Congratulations on the strong results and outlook. Edwin, a moment ago, you referred to capacity in the United States. I suspect you're talking about Eau Claire. Could you give us any update as to what the plans are to equip that facility and when we might see any revenue from it, any longer-term plans you can tell us about Eau Claire? Edwin Roks: Yeah. Absolutely. Absolutely. Give me a while to do that. First of all, I was referring to China and the existing facilities in the US. But I'm happy to talk about Eau Claire. Eau Claire is an amazing site. It's the largest site if I exclude some of the in-house activities of some of our customers. But if I look at the biggest scheme, it's the largest PCB site in the US. It's 750,000 square feet, and it's based on three different modules. I was there two weeks ago, and it is really, really big. Well maintained. The previous owner, TDK, did a really good job as well maintained. So what we are going to do is, in the coming eighteen months to two years, we are going to tool up that facility. We are discussing right now, and this is a work in progress right now, with our lead customers, both on the commercial side and the defense side. So that's still a mix. They need the capacity. So I think we are in a good position there. But, again, this is going hand in hand. The thing is the facility is there. It will take us, let's say, eighteen to twenty-four months to get first revenues, but it's going really, really short. And by the way, Eau Claire is not building the capacity plans we described. William Stein: Okay. So that sounds like that's eighteen to twenty-four months out. So okay. Yeah. Okay. We'll be on top of it. Edwin Roks: Yeah. William Stein: Got it. Thank you. Maybe one other. The very large book-to-bill you had this quarter, it's clearly there's a lot in defense. But even in the commercial part of the business, it was strong. And yet you also disclosed the ninety-day book-to-bill. So it sounds like this is not so much sort of rush orders for the next quarter, but it's providing you greater visibility. Any color on the orders by end market? Or sort of what's driving that? I guess I'm trying to ask whether that's driven by just trying to lock in capacity or if it's a matter of providing a commitment to TTM Technologies, Inc. so that you can then commit to add capacity. Edwin Roks: Yeah. Happy to do that. So if you look at our visibility, that didn't change for the ongoing business. You know, the commercial side, mostly data centers and networking. So it's still about six to nine months. That's our outlook, which is a normal number. Over time, we will get, let's say, on some more strategic elements of the same customers, get some more visibility. But on the running business, it is about six to nine months. And that was the case, and that's still the case. On the defense side, there's, of course, a different story. The backlog we have, the $1.6 billion, is a big number. The pipeline is even bigger. And as you know, this is going over multiple years. So generally, let's say, two years or even two and a half years. That's where we use these $1.6 billion for. So it's still in that same order for this case. William Stein: Great. Thank you. Operator: And one moment for our next question. And that will come from the line of Ruben Roy with Stifel. Your line is open. Sahaj: Hi. This is Sahaj on for Ruben. Congrats on the quarter. I guess I want to ask about the CapEx and how fungible that is relative to aerospace and defense and data center and how you're thinking about that growth relative to the sort of updated long-term '27 targets you provided earlier? Dan Bailey: Yeah. So we had also given some guidance before that for the data center and compute capacity that we're putting on in China, that'll be an additional incremental capital expenditure of about $200 to $300 million over the next two to three years. So that's above the 4% to 5% normal capital expenditures that we have. So, frankly, going in from this year to next year, we'll probably see about, you know, almost the same level of CapEx. We'll disclose in our 10-K, you know, the expected CapEx for 2026, which is in the range of $240 to $260 million. And then that'll grow into the following year as well. Sahaj: Okay. And in terms of the doubling in earnings, are you thinking of that purely organically or inorganically? Like, how are you thinking about M&A in this scenario? Edwin Roks: Yeah. Happy to answer that question. This is all organic growth. Because there is so much demand, and we are investing in our capacity. So based on that, and based on the traction we make on yield, and all the other operational elements, we think we can double the earnings in two years. Sahaj: Understood. Thank you. Operator: And one moment for our next question. And that will come from the line of Mike Crawford with B. Riley Securities. Your line is open. Mike Crawford: Thank you. Just digging in deeper into the additional data center capacity you're putting in place in China. I believe the most advanced printed circuit boards you're making now are done with maybe 87 layers. Asymmetric designs. And is that are those processes being ported to these other facilities in China as well? And how long does that take? Edwin Roks: Yeah. That's a good question. Indeed. Everything beyond the 60 layers, yeah. So we hear numbers. We hear different numbers. The 78, not the 87. The 78 layers is one of the boards we are working on, and that's going very smooth. But I can tell you that numbers go up. If we speak with the brand, we speak with our customers on a daily basis. The demand is high. But the number of layers is going up. There are numbers beyond the 100 layers already, which are required. Of course, these systems become more and more compact, which requires more layers and more complexity. And we are well-positioned there. We're happy to see that because we are well-positioned to do these multiple layers. Dan Bailey: And, Mike, I'll just add that you mentioned the site. So Dongguan and Guangzhou, those two sites both are where we do the artificial intelligence boards now. And the capital expenditures that we are doing out there are additional equipment and facilitation and optimization of those lines in those same factories. So it's not new factories. And so to your question, it will very easily and efficiently be able to get that new capacity up and running. Mike Crawford: Okay. Thanks for that clarification. And then a follow-up is regarding space. So historically, I think defense has been maybe 90% of your aerospace and defense business with maybe 5% space. But now there's talks of putting as many as a million data center satellites in low Earth orbit. And so I would imagine those might have different properties required of the printed circuit boards going into such equipment. And is that something that you're working on now, or is that another future opportunity? Edwin Roks: Both, Mike. It is something we're working on right now. We have the technologies, but space is absolutely one of our strategic directions. And requiring more PCBs. But not only PCBs, also integrated modules, radiation hard, and so on and so forth. So that's absolutely on our radar and absolutely in our strategic plan. Mike Crawford: Great. Thank you very much. Operator: Thank you. And we do have a follow-up question. And that will come from the line of William Stein with Truist Securities. Your line is open. William Stein: Follow-up is a cost question on copper. Copper has traditionally been a significant expense for TTM Technologies, Inc. I think the price has been quite volatile and rising. I believe you hedge it, but can you just sensitize us what should we expect the impact of volatile copper prices to be on the P&L over the next few quarters? Dan Bailey: Sure. Thanks for your question, William. We don't expect any significant impacts from it. Generally, we build the volatility into our pricing. So if we see it going up, we're going to add that into our price. We're able to pass that through to our customers. So we're quickly able to update our pricing models. And then to your point, we do hedge it. So that offsets and mitigates some of the risk as well. But the biggest mitigation is that we're able to price it in. William Stein: Great. Thank you. Operator: Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call over to management for any closing remarks. Edwin Roks: Okay. Thank you, Sherry. So I'd like to close by summarizing three items. First of all, we are growing. We delivered strong sales growth in Q4 of 19% year-on-year, driven by increases in our data center computing, networking, medical, industrial, and instrumentation in aerospace and defense markets. Second, our adjusted EBITDA for the fourth quarter of 16.3% reflected strong operating performance, leading to an all-time high record quarterly non-GAAP EPS of $0.70 per diluted share. And third, we continue to generate solid cash flow from operations, which enables us to invest in our projected continued growth. In closing, I would like to thank all employees of TTM Technologies, Inc., our customers, our suppliers, and our shareholders for their continued support. So thank you very much, and goodbye. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.