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Operator: Good day, and welcome to the Horace Mann Educators Fourth Quarter and Full Year 2025 Investors Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rachael Luber, Vice President, Investor Relations. Please go ahead. Rachael Luber: Thank you. Welcome to Horace Mann's discussion of our fourth quarter and full year 2025 results. Yesterday, we issued our earnings release, investor supplement and investor presentation. Copies are available on the Investors page of our website. Our speakers today are Marita Zuraitis, President and Chief Executive Officer; and Ryan Greenier, Executive Vice President and Chief Financial Officer. Before turning it over to Marita, I want to note that our presentation today includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The company cautions investors that any forward-looking statements include risks and uncertainties and are not guarantees of future performance. These forward-looking statements are based on management's current expectations, and we assume no obligation to update them. Actual results may differ materially due to a variety of factors, which are described in our news release and SEC filings. In our prepared remarks, we use some non-GAAP measures. Reconciliations of these measures to the most comparable GAAP measures are available in our investor supplement. I'll now turn the call over to Marita. Marita Zuraitis: Thanks, Rachael and hello, everyone. Yesterday, Horace Mann reported record 2025 full year core earnings per share of $4.71 and shareholder return on equity of 12.4%. These are the highest earnings. Horace Mann has ever reported and a powerful confirmation of the strength of our business strategy and execution. All segments are in line with or exceeding our profitability targets and top line momentum continues across the board. Total revenues were up 7% over prior year with net premiums and contract deposits earned up more than 7%. Individual supplemental sales increased nearly 40% over prior year, while Group Benefits recorded a 33% increase. I'm proud of all of our Horace Mann's team members for their contributions in exceeding our 2025 goals. We delivered record core earnings while providing our deserving educator customers with distinctive service. Today, I want to review the highlights of our 2025 performance as well as add some detail to our financial targets for the next 3 years. We delivered record earnings in 2025 on the strength of solid underlying business performance and continued growth momentum. Results also reflected unusually light severe weather activity with pretax catastrophe losses of $62 million, contributing approximately $28 million or about $0.55 per share to core earnings relative to our original assumptions. Let me walk through performance by segment. In Property and Casualty, the underlying combined ratio was 84.3%, a 5-point improvement year-over-year reflecting rate and non-rate actions we've taken to reduce segment earnings volatility. P&C sales increased 6% year-over-year policyholder retention in both auto and property remains stable and continues to compare favorably with industry peers. In auto, the reported combined ratio of 96.5% and improved nearly 2 points over prior year. Given we are in line with our mid-90s profitability target with solid retention, we are well positioned to navigate a competitive auto environment in 2026. In Life and Retirement, top line momentum continued with record life sales in the fourth quarter, up 21% over prior year. These results build on the success we saw last quarter and reflect the continued improvement in our marketing campaigns, growing brand awareness, higher agent productivity and stronger engagement with educators. Retirement deposits increased 4% in the quarter and for the full year, net written premiums and contract deposits for the segment rose 7%. Supplemental and Group Benefits delivered record sales results in 2025, this high-margin, capital-efficient business generated 25% of core earnings, playing an important role in diversifying our earnings and reducing volatility. Overall, this segment's benefit ratio of 37% continues to move toward our long-term expectation. Individual supplemental delivered record results with sales up nearly 40% year-over-year, reflecting strong demand, improved distribution reach and deeper customer engagement. Group Benefits also posted record sales up 33% over the prior year, supported by expanding distribution. Over the past year, we have meaningfully expanded our distribution organization and strengthen our marketing capabilities to support sustained profitable growth. A few highlights. Through disciplined increases in marketing investment, and thoughtful execution of strategic partnerships, we have significantly strengthened Horace Mann's brand awareness in our target market. Unaided brand awareness reached 35% in 2025, up from less than 10% a year ago. We are increasing recognition within the educator market through partnerships with trusted brands like Crayola. Recently, we partnered with Get Your Teach On, an organization that provides top professional development for teachers and school leaders. Through this partnership, we will reach a highly engaged audience of more than 800,000 educators through e-mail, social, live events and other channels. We continue to optimize our marketing programs to be more efficient and effective. New business customer interactions are up 37% in the fourth quarter, and we are realizing productivity gains from our spend. We continue to enhance our distribution channels to ensure educators can research, shop and purchase with us when, where and how they choose. We increased points of distribution by 15% across all channels. Upgrades to our website and an improved digital customer experience led to website traffic and online originated quotes more than doubling over the course of the year. We have also expanded our commitment to supporting the educational community. This week, we introduced the Horace Mann Club, a new platform that lets educators access financial wellness tools, classroom resources and educator-specific perks in 1 place. The club creates a strong foundation for delivering resources, services and programs that reward, celebrate and give back to educators. We will continue to expand the club over time, ensuring it meets the changing needs of educators and provides unique benefits to support them in and out of the classroom. In the fourth quarter, we donated $5 million to the Horace Mann Educators Foundation. Created in 2020, this charitable organization provides funding to support students and educators success. This includes grants to fund food and security programs, essential classroom supplies and educator professional development. Looking ahead to provide a clearer baseline to evaluate Horace Mann's strategic progress, we have included a normalized 2025 core earnings per share exhibit in our investor presentation. This excludes the earnings benefit from catastrophe losses that came in below our original guidance assumptions as well as other items not included in management guidance. This normalized view aligns with how management internally evaluates performance and represents the appropriate baseline to compare our 2026 guidance. While 2025 catastrophe losses were unusually favorable, driven by fewer catastrophe events and lower overall activity, we do not expect a similarly low level in 2026 or subsequent years. Against that normalized 2025 baseline, our 2026 core earnings per share guidance range of $4.20 to $4.50 represents progress consistent with the financial goals outlined at Investor Day. As a reminder, those goals include delivering a 10% average compound annual growth rate in core EPS and a sustainable 12% to 13% shareholder return on equity. To achieve these goals, we will continuously evaluate and balance growth initiatives and expense optimization. In times of outperformance, such as the record year we had in 2025, we may choose to accelerate investments in growth initiatives. Last year, we accelerated investments in marketing, infrastructure improvements for distribution force and product and distribution expansion in supplemental and Group Benefits. We will continue to thoughtfully invest in initiatives that expand our capabilities and support long-term growth. And we are confident that these actions, combined with ongoing operational efficiencies position us to achieve our targeted 100 to 150 basis point reduction in the expense ratio. While more of that improvement is expected to be realized towards the back half of our 3-year plan, we have a clear line of sight to the actions and execution required to deliver on that goal. Our balance sheet remains strong and well positioned to support strategic growth and shareholder returns. We continue to take a disciplined approach to capital allocation, balancing reinvestment in the business with returning capital to shareholders. In 2025, we deployed $21 million of capital to share repurchases, the highest annual level since 2022, and the Board's additional $50 million authorization in May underscores our commitment to using share repurchases as a meaningful lever for shareholder value creation. In closing, 2025 was a record year that underscores the strength of Horace Mann's value proposition for the educator market. By maintaining business profitability, delivering sustained profitable growth optimizing our enterprise spend and strategically investing in growth enablers, we will achieve our 3-year goals. We are operating from a position of strength. We have a strong competitive advantage and we have the confidence that we will deliver sustained market-leading growth and accelerate shareholder value creation. Thank you. And now I'll turn the call over to Ryan. Ryan Greenier: Thanks, Marita. I'll walk through how we think about normalized 2025 earnings, outline our 2026 outlook in key assumptions and then review full year 2025 performance by segment. 2025 was a record year for Horace Mann with core earnings of $196 million or $4.71 per share, an increase of 39% over the prior year. Trailing 12-month core return on equity increased to 12.4%, reflecting continued strong underlying profitability across the business. Total net premiums and contract charges earned increased 7% and with total revenues also up 7% year-over-year. As Marita discussed, 2025 benefited from a few favorable items that are not assumed in our planning framework, when we normalize for catastrophe losses that were more than one standard deviation below historic averages in 2025 as well as favorable prior year reserve development, opportunistic share repurchases and incremental strategic spend. normalized core earnings per share were approximately $3.95. This is in line with our original 2025 guidance range of $3.85 to $4.15 and represents the appropriate baseline to compare 2026. Importantly, even on a normalized basis, our businesses delivered strong underlying profitability with all segments in line or exceeding profitability targets and top line momentum continued across the board. Against that normalized baseline, we expect 2026 core earnings per share to be in the range of $4.20 to $4.50 and a nearly 10% increase consistent with the 3-year financial goals we outlined at Investor Day. Guidance includes total net investment income in the range of $485 million to $495 million. In our managed portfolio, we expect net investment income between $385 million to $395 million, which reflects the continued benefit of higher new money yields in our core fixed income portfolio. Commercial mortgage loan fund returns of 6.5% and limited partnership returns of 8%. Looking specifically at commercial mortgage loan funds, one fund, Sound Mark Partners is in runoff. And as I've mentioned before, we expect continued underperformance from this one fund, which will modestly pressure reported commercial mortgage loan fund yields. This impact is idiosyncratic, well understood and already reflected in our planning assumptions. Turning to catastrophe losses. Our full year assumption of approximately $90 million reflects our established planning framework which uses a blend of industry standard catastrophe model losses and our own historic experience. Our approach to setting guidance has not changed and continues to provide a consistent basis for managing variability across cycles. Now I'll turn to full year 2025 results by segment. In Property and Casualty, core earnings were $112 million, more than double the prior year. Net written premiums increased 7% to $830 million, driven by higher average premium. The reported combined ratio of 89.7% improved more than 8 points year-over-year, reflecting strong underlying results, lower catastrophe losses and favorable prior year development. The $19 million in favorable prior year development was driven primarily by lower-than-expected claim severity and continued improvements in claims handling across shorter tail property and auto coverages. As we've stated, prior year reserve development is not assumed in our guidance, and we continue to approach reserving with a prudent long-term view. Auto net written premiums increased to $502 million, the combined ratio improved nearly 2 points to 96.5% in line with our mid-90s profitability target. Household retention remains near 84% and continues to rank in the top quartile relative to industry benchmarks. Property net written premiums increased 14% to $328 million, reflecting rate actions and solid sales momentum. The combined ratio of 78.3% improved significantly primarily due to lower catastrophe losses, while retention remained strong, above 88%. We completed our 2026 reinsurance renewal in January with very favorable results, including a nearly 15% reduction in rate online, we use that improvement to increase the size of our property catastrophe tower. Purchasing $240 million of coverage while maintaining a $35 million attachment point consistent with the prior year. We purchased additional coverage to maintain our disciplined approach to risk and capital management which includes the recent update to air catastrophe models. Coverage at the top of the tower was attractively priced, and it was a prudent risk management decision. Importantly, even including the additional coverage, our total annual reinsurance spend remains flat year-over-year. In Life and Retirement, core earnings increased 13% to $61 million and net premiums written and contract deposits grew to $612 million, up 7% year-over-year. In the Life business, mortality experience for the year was modestly favorable relative to expectations. Life persistency remained strong, near 96%. In the retirement business, net annuity contract deposits increased by nearly 7% and persistency rose to 92%. Moving to supplemental Group Benefits. The segment contributed $59 million of core earnings and net written premiums rose to $267 million. Individual supplemental net written premiums increased 4% to $126 million. The benefit ratio of 26.8% reflects favorable policyholder utilization trends. Persistency remained steady over 89%. Group Benefits net written premiums increased 6% to $142 million. The benefits ratio of 45.8% moved closer to our longer-term expectations. Total net investment income on the managed portfolio increased more than 6% year-over-year, primarily driven by strong limited partnership returns and improved commercial mortgage loan fund results. Core fixed income performance remained strong with a full year new money yields of 5.51%. Sales performance was strong across the business with record results in both individual supplemental and group benefits. Individual supplemental sales increased 39% to $24 million and Group Benefits delivered record sales of more than $12 million, up 33% year-over-year. As Marita mentioned, 2025 was a year in which we deliberately reinvested to position Horace Mann for sustained profitable growth. At the same time, we took several targeted actions to optimize our cost structure and improve long-term efficiency. These included the termination of a legacy pension plan, the continued rollout of straight-through processing and automation initiatives and early productivity gains from technology investments. While some of these actions resulted in onetime costs in 2025, they are expected to generate meaningful ongoing run rate savings as we move forward. In addition, late in 2025, we introduced an early retirement offering as part of a broader proactive workforce planning effort. As we continue to invest in new technologies, automation and advanced capabilities, this program allows us to thoughtfully align our workforce with the skills and roles needed to support our long-term business strategy. The early retirement offering provides flexibility for eligible employees who may already be considering retirement or another life transition while allowing the company to manage workforce planning in a proactive and respectful way. Expenses associated with the early retirement offering will be treated as noncore and excluded from core earnings. This program is expected to generate run rate expense savings that will more meaningfully impact 2027. Stepping back, the combination of all of these expense optimization initiatives have resulted in more than $10 million of annualized savings, which we can both reinvest in the business and use to improve our expense ratio over time. Consistent with our Investor Day commentary, we expect the majority of our targeted 100 to 150 basis point expense ratio improvement to be realized in the later years of our 3-year plan as scale builds and these actions fully earn in. Roughly, that means a 25 basis point improvement in 2026. An additional 25 to 50 basis point improvement in 2027 and another 50 to 75 basis point improvement in 2028. Our balance sheet remains strong. and capital generation continues to support both strategic growth initiatives and consistent shareholder returns. In 2025, we repurchased nearly 0.5 million shares at a total cost of $21 million at an average price of $41.83. In 2026, we continue to buy back shares. And through January 30, we have repurchased approximately 140,000 shares at a total cost of $6 million at an average price of $43.36. We have about $49 million remaining on our current share repurchase authorization. Tangible book value per share increased more than 9% year-over-year, reflecting strong underlying earnings, disciplined capital management and the value of our diversified business model. In closing, our record 2025 results reflect the strength and stability of Horace Mann's earnings profile. We are entering 2026 from a position of strength with a clear growth strategy and strong momentum. We are confident in our ability to achieve our long-term financial targets, a 10% average compound annual growth rate in core earnings per share and a sustainable 12% to 13% core return on equity all while delivering sustained market-leading growth and accelerating shareholder value creation. Thank you. Operator, we are ready for questions. Operator: [Operator Instructions] First question comes from Jack Matten with BMO Capital Markets. Francis Matten: Question just on the distribution initiatives and the shift to more of a specialist model that you discussed in detail in the Investor Day last year. Just any perspective that you can share on how those initiatives are going so far, including the implementation? And then regarding the outlook for policy count growth, especially in the P&C business. I'm wondering if you think that trend line will start to improve more meaningfully as we head into 2026. Marita Zuraitis: Yes. Thanks for the question. From a distribution perspective, I think 2025 will probably go down as our strongest year. We have strong sales momentum across all the businesses, and that is really coming from the distribution efforts that I think we laid out pretty clearly at Investor Day. From a distribution perspective, our brand awareness up over 35%. Our website traffic up significantly with the increase in digital experience that we provided to our customers. Our quoting from that website traffic is more than double what it was last year. Significant partnership with companies like Crayola and other similar-minded companies in the educator space. Just a real concentrated effort, we are at record numbers in our agency force, up over 15% where we were last year across the board. Our traditional EAs selling our traditional products and then benefit specialists in the supplemental and group benefits space up record numbers as well. So more people selling the product, better support from a marketing and distribution perspective. And on all 3 of those growth levers that we outlined at Investor Day, we are really, I'd say, probably ahead of where we expected to be at this point, and you're seeing it come through in strong production momentum that we have across the board. Francis Matten: That's helpful. And maybe one just on the moving pieces regarding the EPS outlook for '26, which I know it implies double-digit growth on a normalized basis. And it sounds like you might expect that to then maybe accelerate into 2027 and beyond if you see CML returns closer to your long-term trend. And then you also mentioned some of the expense actions that you're taking to have more of an impact on 2027. I guess given those is it fair to expect kind of an accelerating growth trend over time, or are there other offsets that we should be thinking about? . Ryan Greenier: Jack, this is Ryan. Thank you for the question. Directionally, you're thinking about it the right way. When we laid out our financial targets at Investor Day, we said we would achieve a 10% annual earnings per share growth rate. And on a normalized basis, we're on track to do that this year. With that, we also said that we would expect accelerating top line growth as the investments we're making to generate increased sales and revenue growth come to fruition. And that revenue growth, we would expect to pick up over that 3-year period. And finally, we were -- I was pretty specific because we get a fair amount of questions around the timing of the expense initiatives earning in. And right now, we are using a lot of that savings to invest back in the business. We were very intentional about accelerating certain initiatives in 2025 to drive growth in all of our channels, and you're seeing signs of success there. And those savings I outlined for you kind of how to think about that in '27. Francis Matten: Great. If I could squeeze one more in, just on the catastrophe loss assumption in your guide, I think it implies to get a lower ratio as a percent of premiums than your prior expectation. Is that mostly reflecting the improvements to the reinsurance program that you've talked about? Or is there a meaningful kind of benefit from the kind of the terms and conditions changes that you've implemented in the property business as well? . Marita Zuraitis: Yes. I think it's before I turn it over to Ryan for a little more of the detailed color there. I think it's important for us to just reflect a little bit on the 2026 guidance that I think we were pretty clear in our scripted comments, but it was very important for us to normalize 2025 earnings, especially as you pointed out, the unusual level of low cap as well as prior year development, which management does not include in its guidance and why we wanted to add a new exhibit to our investor presentation to make that very clear. And on a normalized basis, it is a 10% increase over a pretty strong number that we had even last year. So I'll turn it over to Ryan to see if there's anything more specific to your question . Ryan Greenier: Sure. Let me dive into both of those, Jack. On the cat, our approach to setting a cat target, it's kind of like predicting the weather literally. You're probably going to be wrong. But you -- we take a consistent year-over-year approach. We look at industry modeling. We look at our current footprint from a property perspective. We look at our historical loss experience. But we don't assume or under or outperformance based on 1 year's individual results. So said another way, we are expecting kind of a consistent approach with the $90 million of cat guide for next year. . On prior year development, I just wanted to comment and be crystal clear, we do not include any prior year development favorable or adverse in our planning assumptions. We have a prudent quarterly approach. We call it like we see it. And while we understand that from a reserve perspective, the industry and us coming out of COVID had very unusual loss patterns to react to. And you saw the industry as a whole, increased reserves and over the last couple of years, you've seen us and the broader industry release. These large swings in reserves will normalize as we go back to a more normal loss trend, which is what we're seeing, we're confident that the reserve this outsized prior year reserve releases will begin to temper. I will say, when I look at the macro backdrop, there's a fair amount of uncertainty in terms of inflation trends, impact potentially from tariff and like other auto insurers, we do see the impact of social inflation in our numbers. We're insulated but not immune. Think about our policyholders, not super high limits compared to commercial auto or high net worth type of books. But we do see that impact. So we're being very prudent, particularly on the liability coverages. And I'll highlight that the majority of our release in '25 was related to shorter tail or physical damage type of coverages. So I hope that helps. The last thing I would say is if you look at where the Street is sitting from a consensus estimate for prior year development, if you back that out, you are right within the midpoint of our guidance range for this year. Operator: The next question comes from Matt Carletti with Citizens. Matthew Carletti: Marita, a question for you. I'm looking at your slides, Slide 13. It's where you kind of dice up the 8 million or so K-12 households into kind of where you are today, those you can currently access for those who don't have access to. And if I'm looking at kind of last quarter, right, there was a pretty big shift, almost 1 million households that kind of went from, you don't access to you currently access, kind of change that bucket. Can you talk a little bit about kind of what drove that? . Marita Zuraitis: Yes. Thanks for the question, Matt. It's really been multidimensional and across the board. We started last year, as you pointed out and the slide pointed out at about 1 million or so predominantly educator households and ended the year close to 1.1 million households. That's 100,000 household increase, if you will. And that's kind of how we think of the world. We're not a monoline auto provider. We're a niche marketer to a homogeneous set of customers. We understand the market dynamics of the auto line, and we posted our best P&C combined ratio at a very long time. For us, a lot of folks ask the auto-specific question. We do expect our risks in force to turn positive in the second half of this year. A little bit longer due to the competitive dynamics. Many of those auto customers we keep, we just placed them through the Horace Mann General Agency if we're not willing to go to the auto price that may be another competitor would set. So in 2025, we had strong sales momentum across the board in all businesses. We increased individual supplemental by 40%, Group by 33%. Life was, what, 8% and 21% in the fourth quarter. P&C was up 6% with auto being 5.5% of that. And that auto growth didn't come from customers where we reduced the auto rate to buy the business, if you will. Retirement deposits were up 7%. These are all new customers that have at least one product with Horace Mann that we can eventually cross-sell. So for us, it's really about the investments that we're making in marketing and distribution, which I've already talked about that have driven some of the numbers that I just answered and are included in the script. So we feel really, really good about the momentum. The strategic partnerships that we're pushing, the amount of brand awareness that we've gotten by joining forces with companies like Crayola. The foundation donation that we've put out there to help with professional development for educators, classroom supplies and other things have really helped that reputational brand awareness and the fact that 1 in 3 educators on an unaided basis know who we are and are beginning to engage with us is pretty powerful. The 3 levers that we outlined at Investor Day that are on that slide are the levers that our strategic priorities and the initiatives that support them are aligned to. We're getting better in the game that we're playing today, and you see that in the amount of agents that we have selling the product, the productivity of those agents, how quickly they get up to speed in that first layer in that second layer, entering new school districts where we've never been before by warming up that territory and using the things I talked about, so that when we put an agent in place, they know who Horace Mann is as opposed to that agent spending the first year building that brand awareness independently. It's really quite powerful. There may be sets of educators that are already engaging with Horace Mann electronically that now that agent can begin to wrap their coverages and build that relationship with Horace Mann around. And then that third lever, we haven't really talked a lot about but the work that we're doing with homeschoolers and seeing home school employees, not big numbers yet, but really like the early signs there. The work that we're doing with alumni and these are universities that are spitting out educators and have large colleges of education. Those numbers, they're not in the tens of thousands yet. But they're in the thousands and really good start of momentum in that area. All that is driving that increase in educator household count that's driving this kind of momentum across the board. And I appreciate the question because I think that's what it's all about. And I feel really good about the strong momentum that we're seeing. Matthew Carletti: Maybe a question for Ryan just a numbers question. I could be wrong here, but I kind of recall when thinking about retirement, kind of a long-term target of like net interest spread of kind of 220 to 230 basis points. Is that still the case? Or I guess, said another way, what is the long-term target for kind of net interest spread in retirement? . Ryan Greenier: Matt, yes, that's a good question. The target you're referring to is one that we've historically put out there, and it's for our fixed annuity block. So the fixed annuity block is the preponderance of our retirement assets. And we do target a 200 basis point spread on that block. What I will say is we are -- we were running behind that in 2025. A lot of that was driven by the commercial mortgage loan underperformance. The majority of our commercial mortgage loan investments are in the retirement block. In addition to that, when I think about limited partnerships, we had a very strong year, we had over 9% return on our LP strategies. The strategies that outperformed were private equity, in particular, and that is skewed more towards the P&C business. So P&C benefited from a very strong LP type of return. Longer term, we continue to target that 200 basis point for fixed. The overall profitability of the retirement business, we do have variable annuity as well as some fee-based retirement advantage products as well. And so those -- when I look totality of the product mix, we're comfortable in our at target profitability overall for that mix of business. And when I say target profitability, that's implying that we have returns in line or above our ROE targets. Operator: The next question comes from John Barnidge with Piper Sandler. John Barnidge: My question is focused on the first one on the early retirement offering to align the workforce how many -- as a percent of the employee base, how many employees took that opportunity. Marita Zuraitis: Yes. John, I think it's important first to mention the fact that it was only about 8% of our employees that would have been eligible for early retirement in the first place. We used a combination of tenure and age. So these were employees that would have naturally been considering retirement in the foreseeable future. So I think it's important to start with the purpose. The purpose of this was really to allow us to accelerate some workforce planning. As you know, when you think about the future, where we're going, what we've built. I think what we've laid out very strategically as far as our potential and you're seeing that in the momentum, the skills required the future ability of the place is going to require us to hire some of those more future skills, if you will, as we look forward. And this offering allowed us to accelerate some of the retirement plans of our more tenured individuals. We got a pretty nice participation rate. We're very pleased with the numbers that we're seeing from this, and we feel like the right people chose to opt in to that ERO program. I don't know if you have anything to add to that, Ryan. Ryan Greenier: No, I think Marita summed it up well, John. And as a reminder, any costs associated with it because it was onetime nonrecurring will be in non-core so below the line. Marita Zuraitis: And we're also excited by the fact that when we look at this, the result was twofold. We will be able to reinvest some of that spend in skills necessary for the next leg of the journey, if you will, but we'll also be able to use some of the savings to drop to the bottom line. We made a very clear commitment to improve that expense ratio. I think Ryan laid it out very specifically and clearly in the script and this, along with other, I think, very thoughtful strategic plans like the retirement of our legacy pension program and other larger things that we have underway help us meet the commitment that we laid out at Investor Day. And obviously, we knew about these plans when we laid that out, and some of the savings will drop right to the bottom line. John Barnidge: My second question seems like share repurchase, is there another lever to be opportunistic, not embedded in guidance. How should we be thinking about a run rate level of free cash flow conversion of operating earnings targeted in your Investor Day goals . Ryan Greenier: John, that's a great question. Thank you for that. For 2025, we achieved -- we exceeded our free cash flow targets. We came in about 80% on a free cash flow conversion perspective for 2025, we're targeting north of 75% for that. And if you think about the mix of businesses that we have and with the acceleration in sales for our more capital-efficient businesses, individual supplemental and group. That bodes very well for continued strong free cash flow conversion. And then if I sit back and think about uses of capital, you saw we've been quite active in the share buyback front. We've put $6 million of work in the month of January alone. And we do believe that is an attractive lever for us to continue to pull as we move through 2026, especially at current multiples given our confidence in our growth outlook. . Operator: Our next question comes from Wilma Burdis with Raymond James. Wilma Jackson Burdis: Could you talk about the investment in sub and Group segment and how Horace Mann see sales and margins playing out, especially after the favorable benefits year with respect to the 39% blended benefit ratio guidance. Does the benefit ratio continue to rise -- sorry, after a favorable year. I was asking if the benefit ratio has continued to rise. Yes, you got it. Marita Zuraitis: Thanks for that. I can start on the investment and growth side, and then I'll turn it over to Ryan to talk about the benefit ratio. I mean I got to tell you, we are very pleased with the progress that we're making in both individual supplemental and group benefits and the momentum is excellent. It is a smaller business for us, as you know. But excellent earnings diversification just as we had planned and a really good source of new educator households for eventual cross-sell like I said when I was addressing Matt's question. With individual supplemental sales up 40%, a record number of agents selling group momentum up 33%. On the group side, it is smaller for us. It is newer. It is lumpy. That's the nature of the longer sales cycle. And it is an even smaller business than the individual supplemental side for us, but it's building. And I think that the way to think about it is the way we thought about Horace Mann all along, go back to that PDI strategy. It's about building the product, making sure the products are relevant, including what we've done by adding the paid family medical leave portion to the product in states like Minnesota, it's -- we have all the products we need, both on the individual side and the group side and we evolve those products to make sure it's relevant to our market niche. And I feel good about the product development work we did and the fact that we built products that fit our niche, which are part of the -- why we feel strongly about these segments. From a distribution side, the amount of benefit specialists that are facing off with these products in the schools, the amount of districts that we're touching, those numbers are all going in the right direction, and we feel really good about our distribution efforts. I'd also say that the corporate branding, marketing, distribution work that we're doing also benefits this space as well. educators know who we are when we enter these schools, and that's very helpful in this space as well. And then lastly, on the infrastructure side, we are modernizing this space and improving the infrastructure and how we face off with these schools. Very early thought. We have now the ability to do straight-through processing on individual supplemental. We haven't done a lot yet. It's, like I said, in very small numbers. but we are starting to significantly modernize this space as well. So I think we took a very strategic approach to building the products that are relevant in our space, improving and expanding our distribution and improving our infrastructure. And I think that's why you see the early signs of success in this business. And as I said, the earnings diversification that we planned with these acquisitions. I don't know if you want to add anything to the benefits ratio . Ryan Greenier: Sure. I'll take the nuts and bolts, the numbers, Wilma. So on a blended basis, we target a benefit ratio for both businesses at about 39%. And individual supplemental runs lower than that and group runs higher than that. Both segments, if you look at the full year benefit ratio for 2025, the benefit ratio on the individual supplemental was in the high 20s. That's better than what we would expect on a long-term average that reflected favorable morbidity experience throughout the year. On the group side, we were in the mid-40s. Again, a little bit of favorability, but closer to what we would expect there. One thing I will comment on as I think about the longer-term target, on the individual supplemental product, in particular, utilization in early policy years typically is higher. And so if you think about that, during a period of high sales, which we're clearly seeing, you're going to see a little bit of an uptick, and we've factored that into the pullback towards the historic experience. We did see a decline in utilization post COVID that is beginning to normalize. So that kind of combo of more typical utilization combined with a return or an acceleration, I should say, of sales is going to move the individual supplemental product closer to those longer-term averages? I hope that's helpful. Wilma Jackson Burdis: That was very helpful. Second question, does softening of reinsurance pricing factor into the '26 margin outlook? And if so, give us some color there. Ryan Greenier: Sure. So Wilma, this is Ryan again. So in my script, I talked about some of the decisions that we made from a risk management perspective around the reinsurance tower. We did use the favorable reinsurance rate environment to add additional coverage at the top of our tower. There were some modeling updates from one of the P&C model tools. And as a result of that, we looked at that. We looked at the mix of all tools and decided it was prudent to increase the top of the tower. So our total spend was flat. So from a guidance perspective, we're spending dollar for dollar the same amount as last year. So it's incorporated, obviously, in our outlook. But we used some of that savings to buy a fair amount of cover at the top end. . Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Rachael Luber for any closing remarks. Please go ahead. Rachael Luber: Thanks for joining us on the call today. If you have any follow-up questions or would like to schedule a meeting, please reach out. We will be at AIFA in March, and we'll be happy to look at schedules to find time. So thanks again. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Powell Industries Fiscal First Quarter 2026 Earnings Conference Call. [Operator Instructions] This event is being recorded. I would now like to turn the conference over to Ryan Coleman of Investor Relations. Please go ahead. Ryan Coleman: Thank you, operator, and good morning, everyone. Thank you for joining us for Powell Industries conference call today to review fiscal year 2026 1st quarter results. With me on the call are Brett Cope, Powell's Chairman and CEO; and Mike Metcalf, Powell's CFO. There will be a replay of today's call, and it will be available via webcast by going to the company's website, powellind.com, or a telephonic replay will be available until February 11. The information on how to access the replay was provided in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, February 4, 2026, and therefore, you are advised that any time-sensitive information may no longer be accurate at the time of replay listening or transcript reading. This conference call includes certain statements, including statements related to the company's expectations of its future operating results that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties and that actual results may differ materially from those projected in these forward-looking statements. These risks and uncertainties include, but are not limited to, competition and competitive pressures, sensitivity to general economic and industry conditions, international, political and economic risks, availability and price of raw materials and execution of business strategies. For more information, please refer to the company's filings with the Securities and Exchange Commission. With that, I'll now turn the call over to Brett. Brett Cope: Thank you, Ryan. Good morning. Thank you for joining us today to review Powell's fiscal 2026 1st quarter results. I will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. Our fiscal year is off to a strong start. As our first quarter results continue to demonstrate Powell's unique and advantaged position against a backdrop of what are secular and increasingly durable growth trends, the growing and broad investment in power generation and grid modernization to support data center and AI capacity growth, domestic manufacturing, electrification and the nationally important export of energy resources like LNG, are validating our now nearly decade-long strategic effort to transform Powell into a more diversified manufacturer of electrical distribution products and systems. During the first quarter, we saw revenue grow 4% compared to the prior year. And as a reminder, our first fiscal quarter typically exhibits some level of seasonal disruptions associated with fewer working days. While ongoing high levels of project execution drove improved profitability compared to the prior year. Gross profit expanded 20% to drive a gross margin of 28.4%, an improvement of 380 basis points year-over-year. We recorded $439 million of new orders, the highest quarterly total in over 2 years, as activity was widespread across oil and gas, specifically LNG, data centers and the electric utilities markets. Within our total bookings number, we were awarded a contract for a large LNG project that exceeds $100 million to support gas liquefaction and export along the U.S. Gulf Coast. As the permitting process for LNG restarted a year ago, activity in support of new greenfield and brownfield trains resumed and Powell has and continues to support this strategic market. We anticipate activity within the LNG market to continue in 2026 relative to the more modest activity levels throughout 2024 and most of 2025. Commercial dynamics within our commercial and other industrial markets have accelerated in recent quarters as we continue to see increased demand within the data center market. During the first quarter, our commercial and other industrial market accounted for nearly 1/2 of the order total and included our first mega project order for a single data center, which totaled roughly $75 million. Our commercial and other industrial market now comprises 22% of our backlog as of quarter end, with data centers accounting for roughly 15% of our total backlog, both of which are record levels for Powell. Over the past few quarters, we have continued to experience increasing levels of interest among a growing list of data center customers. The increasing power demand driving greater compute power and the desire to expedite construction time lines creates a value proposition that is well aligned to an increasing portfolio of Powell's electrical distribution products and automation solutions, including our first orders in the United States for our newest team members at Remsdaq Limited in the U.K. In response to the growing market demand, we continue to take measures to expand productive capacity, including adding additional leased facilities to support the expansion of production lines, increased inventory needs, broader collaboration with our supply base to ramp supply and improve cycle times as well as rebalancing and reallocating the manufacture of select products across our facilities in North America to further optimize capacity. Meanwhile, order trends in our Electric Utilities segment remained very encouraging as we experienced another solid quarter of award activity from this end market. Overall, the oil and gas and petrochemical business remains healthy. We are experiencing some degree of divergence across markets and geographies that we compete with some performing very well and others exhibiting softer activity levels in areas such as refineries and polyethylene and polypropylene facilities. We finished the quarter with a backlog of $1.6 billion which was sequential growth of 14% compared to the September quarter and is the highest in Powell's history. The growth in our backlog over the past year has been primarily driven by booking trends in the electric utility and commercial and other industrial markets as these 2 markets now account for the majority of our backlog for the first time ever. Overall, our backlog is well balanced across the markets we serve, and we continue to benefit from a healthy mix of large projects as well as small and medium-sized core projects that help maximize productivity across our manufacturing plants. We also benefit from project visibility that now extends into our fiscal 2028. The expansion of our Jacintoport facility is progressing on schedule and remains on track to be completed during the second half of our fiscal 2026. This incremental capacity will be critical to ensuring our ability to support all of our end markets, but specifically, our oil and gas customers as we anticipate the wave of LNG project development work that is projected to come to market over the next 3 to 5 years, and this investment ensures that we continue to advance our industry-leading role in the fabrication of engineered to order power distribution solutions for critical applications. We continue to actively review and evaluate our total manufacturing capacity to ensure the delivery and execution of our project backlog. This includes the potential for future investments in plant and equipment, along with actions noted earlier in my comments, where we are now adding lease properties to support near and midterm growth in our medium voltage distribution products. As we look ahead through the remainder of 2026, the commercial environment for each of our major end markets remains positive. We continue to have robust activity in support of the North American gas market. The fundamentals of the U.S. natural gas market continue to support investments in LNG and the funnel of projects that we are tracking compares favorably to past cycles in terms of the total number of projects moving forward. The outlook for our electric utility market remains robust and balanced across the customers and geographies that we serve. The growing wave of investment in electrical infrastructure to meet growing demand levels is broad and durable and we expect another strong year of activity in 2026. Lastly, we are increasingly encouraged by order trends and demand levels within our commercial and other industrial markets. The acceleration of order activity driven by data centers leaves us confident in our ability to continue to grow our presence in this dynamic market. Overall, we are very pleased with our first quarter performance and our outlook for fiscal 2026. Demand trends remain robust, and we are well positioned to execute our backlog and grow within our targeted markets. With that, I'd like to turn the call over to Mike to walk us through our financial results in greater detail. Michael Metcalf: Thank you, Brett, and good morning, everyone. In the first quarter of fiscal 2026, we reported net revenue of $251 million compared to $241 million or 4% higher versus the same period in fiscal 2025. New orders booked in the first fiscal quarter of 2026 were $439 million, which was 63% higher than the same period 1 year ago and included 2 mega orders. The first mega orders for a large domestic liquefied natural gas project valued at greater than $100 million, which is being constructed on the Gulf Coast. In addition to this LNG mega order, the business also secured a number of orders during the quarter, supporting the electrical infrastructure for various data center projects. Collectively, these data center orders totaled more than $100 million in the first quarter of fiscal 2026. These data center orders booked in our commercial and other industrial sector included a notable mega order for electrical distribution equipment and was valued at approximately $75 million that will be deployed at a single data center. Notwithstanding these significant wins, the orders cadence across most of our reported market sectors continues to be active, particularly across our domestic end markets. As a result of this commercial activity, the book-to-bill ratio in the period was 1.7x. Reported backlog at the end of the first quarter of fiscal 2026 was $1.6 billion, $219 million higher than 1 year ago and $191 million higher sequentially and continued strength across the oil and gas, utility and commercial and other industrial sectors. As we exited the first fiscal quarter, backlog across our oil and gas and utility sectors, each represent roughly 30% of the total backlog while the commercial and other industrial sector has grown to 22% of the backlog, increasing substantially on both a sequential and year-over-year basis. Compared to the first quarter of fiscal 2025, domestic revenues were slightly lower by 1% or $3 million to $195 million while international revenues were up 29% or $13 million to $44 million in the current fiscal quarter. The increase in our international revenues during the quarter was driven in large part through the projects that we're currently executing in the Middle East and Africa, Asia Pacific and Europe regions. From a market sector perspective, revenues across our utility sector marked the most substantial increase during the quarter, higher by 35% compared to the same period 1 year ago, while revenues from the oil and gas sector increased by 2%, offset to some degree by the petrochemical sector, lower by 31% versus the first quarter of fiscal 2025. Lower revenue in the petrochemical sector was mainly driven by the completion of a large project booked in fiscal 2023, coupled with softer commercial activity in this market. In addition, the commercial and other industrial sector was 8% lower on project timing, while the light rail traction power sector was 5% higher on a relatively small revenue base. Gross profit in the current period increased by $12 million to $71 million in the first fiscal quarter versus the same period 1 year ago. Gross profit as a percentage of revenue was higher by 380 basis points versus the same period 1 year ago at 28.4% of revenues primarily driven by strong project execution, generating a higher level of project closeouts versus the prior year. Sequentially, gross profit was lower by 300 basis points on the predicted seasonal softness. As we noted in our fourth quarter release, we anticipated a challenging sequential comparison considering that our first fiscal quarter is historically the softest quarter across our fiscal year due to the holiday period. Selling, general and administrative expenses were $25.2 million in the current period and were higher by $3.7 million on increased compensation expenses across the business versus the same period a year ago. SG&A as a percentage of revenue increased 110 basis points to 10% in the current fiscal quarter. In the first quarter of fiscal 2026, we reported net income of $41.4 million, generating $3.40 per diluted share which is a 19% increase compared to a net income of $34.8 million or $2.86 per diluted share in the same period of fiscal 2025. During the first quarter of fiscal 2026, we generated $43.6 million of operating cash flow on favorable income generation through the period. Investments in property, plant and equipment totaled $2 million in the quarter, with the capital deployed primarily to address capacity and productivity initiatives. At December 31, 2025, we had cash and short-term investments of $501 million compared to $476 million at September 30, 2025, and the company does not hold any debt. As we look ahead to the remainder of fiscal 2026, we remain encouraged by the commercial tailwinds across all of our end markets. Given the current market conditions, coupled with a stable pricing environment, we are optimistic that we can sustain the quantity and the quality of our backlog throughout fiscal 2026. Combined with our ongoing focus on optimizing margin levels, increasing product throughput and the overall strength of our balance sheet, Powell is well positioned to deliver strong revenue and earnings throughout the rest of fiscal 2026. At this point, we'll be happy to answer your questions. Operator: [Operator Instructions]. Our first question comes from John Franzreb with Sidoti & Company. John Franzreb: Congratulations on another great quarter. I'd like to start with the comments on the gross margin that you can -- that based on what your current backlog looks like that you can sustain the 2025 gross margin profile. I wonder, does that consider potential change orders or short-cycle business? Or is that just based on the backlog configuration? Michael Metcalf: John, this is Mike. I'll address that question. So we had a very strong quarter with respect to project closeouts as I noted in my prepared comments, 380 basis points overall on reported margin versus prior year. Of that $300 million was attributable to project closeouts, which was favorable to last year and that was really driven by strong execution and risk management and our ability to recover costs via change orders, et cetera, in the project environment. The remainder of that upside was just playing productivity and operating leverage across the business. As a barometer of level of margin levels over time, I would point to the trailing 12-month performance. If you took a look at the trailing 12 months in the business, our reported margins are running about 30% and of this, there's approximately 175 basis points of project closeout gains, again, which includes change orders and the like changes in estimates. So maintaining a base level margin in the upper 20s while continuing to drive for 150 to 200 basis point upside resulting from favorable closeouts is a reasonable assumption. And that reflects what we see that base assumption is what we see in our backlog. John Franzreb: Got it. Got it. That's very helpful, Mike. And I'm actually kind of curious about the record backlog, it's great to have. It's wonderful to see. But I'm wondering if there's any concerns that customers are just buying to get in line and that the backlog might not be firm in use past given maybe the new customer shift. And just any thoughts about that? Brett Cope: John, it's Brett. It's a good question. We've talked about that in the past, and we -- are we open to cancellations, what would that potentially do? I don't think -- yes, I think the 1.6% is very durable. Some of the new market growth in the commercial and other is, if you look at the timing and our understanding of the project, I feel very good about it. I think as we look out what's going on in that space, are people talking to us and others about reservations and locking capacity, yes, those conversations are happening. And Mike and I and the management team are discussing what that might look like in the next couple of quarters, the next couple of fiscal years as the demand looks like it continues how to best handle that risk potential. So that -- I think that's a future concern that's on our radar, and we're taking it quarter by quarter, but not currently in the backlog. I feel pretty good with what we've got here today. Operator: Our next question comes from Chip Moore with ROTH MKM. Alfred Moore: I wanted to ask drilling on data center, maybe a little bit more. I think you're talking about larger and more numerous opportunities and obviously, that megaproject great to see. Maybe just -- can you expand, Brett, maybe on cadence of deliveries in data center? And then I believe many of these facilities are being built in phases, just potential for follow-on orders at some of these sites. And capacity questions. You mentioned adding some leased facilities, just how quickly you can ramp and get the switchgear supply going up. Brett Cope: Yes, I could have probably done a whole script on the data centers when you look at us in the broader market out there that's involved in the space because we are admittedly learning a lot as it's growing quickly in Powell. First of all, on the cadence of the activity that's ongoing. There is an interesting dynamic. It is project work, but still, a lot of our backlog that we just shared in the prepared comments is still outside the data center, even this large mega project. It is a large amount of work for a project to handle a lot of the outside of the work. And it's a lot of design one, build many. So it is supporting more of a product strategy. It's a project as we look at it as Powell. And so -- but it's going to create a lot of -- a lot more flow down production lines. We think there is a lot of opportunity there that we're working through over the -- and we will be working through in the next couple of quarters about efficiency, productivity and delivery. So we spent a lot of time last quarter, quarter before, working on supply chain, doing the blocking and tackling on the production line. The prepared comment, we added a 50,000 lease square foot lease facility, which we're just taking ownership now. During the quarter to support this product line flow to store the inventory that needs to ramp to match. But it's going to be a lot of that repetitive product build down the line, and we anticipate more of that in the next quarter or 2. We're evaluating -- we're under evaluation right now, some additional facilities. We're challenging whether or not we should go larger and along with even investment in our model. We like to own our PPE. But right now, the lease makes sense. As we better understand and become more confident, we'll build out more permanent investments, I think, to match, not just this, but of course, the things we've been doing organically to drive growth in all of our 3 verticals. Alfred Moore: Very helpful. I appreciate the color there, Brett. And if I could ask one more. Supply-demand environment, I guess, more broadly to the point on margins, a lot of announcements around capacity expansion from a number of equipment suppliers floating out there? Just maybe it sounds like things are quite stable right now, but just how you think about the future several years out, what might take place? Brett Cope: Every quarter, I'm getting more confident. The -- notwithstanding John Franzreb's question about the concern on this massive demand environment. I mean the number of customers were having more thoughtful strategic discussions with is increasing, and they're engaging Powell in a way that fits us well. And so I talked early on, maybe a year ago about finding alignment with clients that meet well with what we do culturally and how we do it, we'll learn from that and we'll grow. So we're not going to stay static as to who we were. We want to build a part of the company that is quicker on the cycle, can meet the need. There is a lot of demand. We understand the urgency and the return on their capital. But at the same time, we want to make sure we're hitting the dates for all 3 verticals that we're serving. So the number of customers is increasing. It is going out further in time and the programmatic approach about your comment about phasing, yes, we see the initial on the initial design and the potential train -- I'll call it, train expansion, but the size of the data center potential that could be added on to it is definitely part of the conversation. So that fits our model, right? If we execute and deliver for our client. We absolutely want these relationships to be sticky, just like there are other verticals, and we're very open with them in that approach. And so we use that as a an early-on engagement sort of screening discussion of, hey, we'd like to help all of you, but we want to align with those that really match us well. Operator: Next question comes from Manish Somaiya with Cantor. Manish Somaiya: Michael and Brett, it's Manish Somaiya. Just a couple of questions. One is on pricing. Perhaps if you can just give us some comment on what you're seeing as far as pricing in your end markets, the intensity of competition pertaining to that? And then related, how should we think about raw material prices and how they get passed along and what you absorbed? Perhaps if you can just give us a sense as to how you protect yourself in this ad of rising commodity prices. Brett Cope: Manish, thank you for joining today. I'll take the first part of that. Mike can add some color and jump into the input cost side. On the pricing environment, we've been asked that last couple of quarters. No real change. I think everything is holding pretty steady in all our verticals in terms of the competitive status of the market, if you will. The one dynamic that I would point to that we are learning, and I touched on this with Chip in the last call -- last question a little bit, is that on these data center jobs, they are with how we price in the market. I would say, that said, the way we're going to build these lines, I anticipate we have some potential upside because in the long cycle project -- when we build a project and they're large full of products and integrated scope in their year, 2 years, 3 years, these have a much quicker cycle on average compared to some of those on their demand curve to meet the need. And so when we get up to speed and build these products over and over and over, I think that the efficiency factor, something that we don't largely do as Powell today, and we're building out that product side of the company. I think there's -- I think we'll see some potential upside in there. I don't know how much yet. But I do think that we see the potential for it. So that in a sense would be price. If you back calculate it in the next couple of quarters, I think that will become more apparent to our to our understanding. Michael Metcalf: And following on that, Manish, this is Mike. Regarding the input costs, clearly, we watch this very closely. We kind of bifurcate it into 2 buckets. The raw materials, as you noted, copper, steel, very volatile. The metals market is very, very volatile today. We do hedge our copper to some extent and any drastic increases that we see, we roll those into our pricing models internally. The second bucket, I would note, are we buy a lot of engineered components, things that we don't make, HVAC, fire systems, things of that nature. And as you know, our projects could range from 1 year to 3 years. So we lock those not those commodities, those engineered components, in when we signed the contract. So we're locked into the engineered components and we watch the commodities very closely and roll those into the pricing model. So that's how we manage those businesses -- those elements of the business to mitigate the risk. Manish Somaiya: And then just as a follow-up, how should we think about the lead times on specific components like switchgear, for example, obviously, you have a significant backlog at this moment. What are sort of the potential constraints on the component side that could impact revenues? Brett Cope: That's a discussion we have every day and along with per couple of comments on the capacity additions that we're working through. I think we're in a good spot. If you look at the mix of products that we make and if you just kind of go back to data centers, Manish, the power levels have increased coming off utility or if they're doing GTG, self-generation on site or any kind of multifuel, there's a lot going into the 38 kV line, and that is ramping quickly. That's a product that we're rarely adept at. It actually fits Powell really well. But when you look at the 5 and 15 different product levels, they're not as robust. We actually have capacity. And so some designs of data centers out there, if you look at how they're doing their data halls, not all of them are just massive 1 gigawatt or 3x 300 gigawatts. There's new designs coming out that are 90 or 100 or 150-megawatt data halls that we still have really good capacity running 35 to 40 weeks on gear, which is very competitive in the market for 15 kb. So when you get into the mix of how they're doing their power design, we are driving future capacity for those higher levels that are really under demand, but then there are other designs that we still have opportunity to fill out that will benefit the back half of this year and into the early part of '27. So those are the really thoughtful conversations we're having with those clients that engage us that way. We can fate, we can build, we can invest meet their needs and then we can phase our deliveries to really make a win for both parties. Operator: Our next question comes from John Braatz with Kansas City Capital. Jon Braatz: Brett, you've spoken a lot about doing things to increase capacity and product flow and so on and so forth. And I guess, 2 questions. Number one, how much might you have to ramp up your CapEx spending to achieve that? And then secondly, when you think about your capacity now and what you want to bring on board in the future, if your top line, if you could do, let's say, if your top line growth was x percent, what might that new capacity be able to drive revenue growth in the future? Are we talking about mid-teens then? Or what kind of new growth -- new top line expectations might there be with this new capacity? Brett Cope: Well, that's a really good question, John. First, on the CapEx side, yes, we've been evaluating for the better part of the year a new facility owned by Powell. A lot of that started off in support of our organic investment in R&D and some of the products we aspire to bring to market to pursue more share of wallet and utility spend. I really like the utility vertical for Powell long term, and we've done really well in there. And I really think the team is -- what we've done is really driving value for our client in the utility space and vice versa. And so we don't want to lose focus on that. So add to that what's going on in the market in this newer dynamic, we're considering right now something on the order of another $100 million type facility. We've not pulled the trigger on that. Really active discussions with the Board. Meanwhile, we saw an opportunity on the lease side. When you look at both in terms of how they could potentially drive revenue, yes, I think double digits is possible. We got to get a few more products organically out like I noted earlier, if we -- and maybe a little bit more -- I'd hedge a little to say when, given how many data center companies are engaging us get inside the data center, -- it will be a pretty chunky add. The low-voltage content, even on the AC designs that are going on now and the momentum that's built because there's a lot of talk on the future DC designs, which we're also involved with but it will be a step change. And some of that with that -- with the investment we did last year at the breaker plant here in Houston, the 50,000 square foot, we're already prepped for some of that. Well, we could quickly need some additional facilities beyond that just to hold the inventory. So we can see out there some potential nice steps to add to the growth of the company. Jon Braatz: Okay. And Brett, on the LNG market, obviously, it's a little bit different today than it was 3 years ago when sort of the initial construction rollout began. Is the competitive environment a little bit different today than 4 or 5 years ago? Brett Cope: It's different, but it's no less intense. And my color comment on that would be, if you go back 4 or 5 years ago and you look at the players that were in the market from the international people that we compete with, along with some of the local building makers and integrated partners at the -- our competition would use, there was a set of competitors that was x. If you look at today, 5 years on and you look at like in our investor deck, we present who we think about every day when we get up to compete on the electrical side. What's changed is their strategy, I think. Our core strategy around industrial oil and gas utility, which we've been working at for the better part of a dozen years. And now this latest piece, we're not going to forget who we are in these first 2 verticals. And we really enjoy that complex industrial hard to do job. And so there's still competition, it's still intense, but there are some new players because of changes on the other side that happened from 5 years ago, maybe the focus is different, I don't know. You have to listen to their calls. But for us, we're still focused on that. And we really like that business, and we're very engaged on it. And the investment we've made in offshore is built for that, and we're out trying to earn all that business that's potentially coming through FID in the next couple of quarters. Jon Braatz: Okay. So Brett, if you -- when you look at the margin that you achieved a couple of years ago on the new projects, new LNG projects, do you think you can see similar margins going forward? Brett Cope: I think so. I mean, there's -- all the segments, that's the one that is given the size of the capital investment in these facilities. There's still a lot of focus on the return of the facilities. And so it's good, but I -- you got to be careful to be fair and what you're really looking to do. And so if there's something that's unique or there's time elements that we can provide, that's unique to our model, for instance, using our offshore facility for large single piece that will help reduce cost at site. We just asked a rare value in return for that for the site, but not to be silly about it. Operator: Our next question comes from John Franzreb from Sidoti & Company. John Franzreb: Brett, I'm just curious about the opportunity pipeline. It seems phenomenal. I wanted to kind of look at it and say, listen, we're going to have an exit book-to-bill ratio of above 1 point for the next coming 2 years. Is that something reasonable to expect? Brett Cope: I think it's reasonable, John. I mean there's no guarantee of future results. You know the phrase -- the amount of conversations we're having across all 3 verticals. I think it's a reasonable expectation, which is why we had chats with the Board, and we had the change in some of the metrics that we're driving the company for. And so the volume potential is definitely there. And as a team, we've got to solve that. And I feel good that we've got the right team and the right environment to make that happen for all the stakeholders. John Franzreb: Got it. And I was wondering, has the Board considered a stock spread at this level? I mean, compared to historic levels, it's fairly impressive. Brett Cope: Yes. We have -- some of the color on that really is more, if you think about our team and the growth of the employees as just critical to the success of all the stakeholders' interests using equity within our structure has become very much more of the forefront discussion with the Board and Mike and I and our CHRO. And so yes, the stock split from a math standpoint about making sure it's a tool that we use for our team to support their engagement in the process here is definitely very active. John Franzreb: Got it. And I guess kind of just one last one. How should we think about the cash on the balance sheet, over $500 million when does that number start to get drawn down a little bit as you use more working capital as these larger projects come on board? Brett Cope: Well, let me just make a couple of comments there and let Mike jump in. As I noted, already this morning, I definitely think we're thinking about allocating some of that to some new facilities. I can't really pin down the timing yet. We've got a board here, 2 weeks. It will be in the discussion -- and then we're not slowing down on the M&A side, even though we did the one with Remsdaq in last summer. There are still some ideas out there that when we can get out in the market and do the strategic work. There's still some really nice potential out there. So there's that. And then I think the capital needs, Mike. Michael Metcalf: Yes. As a follow-up on that, John. From a working capital perspective, roughly 40% to 50% of that balance will be deployed at some point in the future to that $1.6 billion backlog number. But that said, when you look at what's the free cash available for the capital deployment in some way, shape or form, it's probably $200 million to $225 million mentioned that we're thinking about capacity requirements across the business. So I'm sure some of it will get deployed in that fashion. Operator: Our next question comes from Chip Moore with ROTH MKM. Alfred Moore: Just one more for me on Remsdaq, I think you called out getting some traction here in the U.S. So just an update there now that you've had them for not too long, but a little longer -- and then service more opportunity, I guess, more specifically around data center, in particular, just talk to that. Brett Cope: Well, thank you for the question. Yes, Remsdaq, great strategic add, great set of folks in the U.K. We -- when you have these dynamic times in the market, Chip, you -- every market has an approved approach, the way they bring in technology. Remsdaq was so experienced in their market in the utility space. That was one of the things that attracted us to them initially plus their technology road map. The data center market, the commercial and other industrial has definitely opened the door to allow us to get that technology in quicker than we anticipated into the U.S. market. So we've had some technical meetings with some of the customers that have come to us on applying this technology to the powertrain that speeds in the data center for some protective and control logic and it's opened the door. And it's created new opportunities for us even on the high-voltage side. We just took our first order for a high-voltage control protection substation the utility connect, if you will, the high voltage into the medium voltage, which would be a new space for Powell. And again, that was underscored by our ability with having Remsdaq and their technology as an enabler. So super exciting time. I have high expectation for the growth of this business. It is accretive to margin significantly, and Powell has a long history of success here. Service. yes. Thank you, Mike. On the service piece, yes, there is clearly opportunity on the data center front, the commercial and industrial. We haven't taken anything significant yet. But over the last quarter I've been involved myself in some of the discussions where we do see an opportunity for service to come in. On the build side, quite frankly, initially, we've not entered on the OpEx side after. I think that will come. Still a new market for us. And as these assets get installed, I think we'll see some installation and long-term support work. But we right now are developing some ideas with clients on how our team can help the constructability, the timing, given our know-how on the skid and the integration of the mechanical side of these solutions with how they're trying to speed up the time line. And so our service team is engaged and we're actually out providing some quotes for what we think we can do. We haven't closed anything yet, but it would be -- we do see it as a big opportunity as we go forward. Operator: Our next question comes from Manish Somaiya with Cantor. Manish Somaiya: Mike, I'm not sure if you mentioned the next 12 months backlog. Would you mind giving that to us? Michael Metcalf: Manish, you'll see that in the Q that we submit later today. Of the $1.6 billion backlog, roughly 60% of that is convertible over the next 12 months , I think in the Q, you'll see $933 million. And on top of that, we refresh what the book and bill rates been on average over the last 12 months. And that's running $65 million to $70 million cadence every quarter. So those are 2 of the key metrics as you look forward. Manish Somaiya: Okay. Wonderful. And then, Brett, you talked about strong demand across the board, strong activity, strong backlog my big question is the shortage of skilled labor in this country. And is that going to be a constraint as far as your growth ambitions are concerned? Brett Cope: Well, it's always a concern, Manish. It has been the entire 15 years I've been at Powell through any cycle. Is it a concern today? Absolutely. The management team discusses it routinely. On the variable side, there's always a time where there's a skill set within the company that has a need. On the variable side, we're doing fairly well. In fact, I'd say in the last couple of quarters, we've solved some problems. As I sit here today on the fixed side, we do have some needs that are challenging us with this step change in -- especially on the commercial side. The growth in this segment is challenging some growth needs today on engineering. So that's a problem that we're out working and I feel confident in the next 90 days or so, we'll figure out how to solve that one. But it's not unique or new to us. We -- because we are a long-cycle project company by historical sense, we've been here before, and I'm confident the team will find a way to solve the need. But given the growth of the backlog, yes, we've got some needs right now, and we're going to go out and solve them. Manish Somaiya: Well, thank you again, and congrats on the quarter. Operator: This concludes our question-and-answer session. I would like to turn the call back over to Brett Cope, CEO, for any closing remarks. Brett Cope: Thank you, Bailey. Our first quarter delivered solid performance with improvements in our top and bottom line. Powell's employees consistently embrace the challenge while keeping our core focus on executing the most complex of industrial electrical distribution projects, our team is responding to meet new and growing market opportunities, which underscore our ability to secure future business and drive new strategies to improve productivity and profitability. I would like to thank our valued customers and our supplier partners for their continued trust and support Apollo. We're very pleased with our first quarter, and we expect another strong year for Powell. Mike and I look forward to updating you all next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the ATS Corporation Third Quarter Conference Call and Webcast. This call is being recorded on February 4, 2026, at 8:30 a.m. Eastern Time. [Operator Instructions] I'd now like to turn the call over to David Ocampo, Head of Investor Relations at ATS. David Ocampo: Thank you, operator, and good morning, everyone. On the call today are Doug Wright, Chief Executive Officer; Ryan McLeod, Chief Financial Officer; and Anne Cybulski, Vice President, Corporate Controller. Please note, our remarks today are accompanied by a slide deck, which can be viewed via our webcast and available at atsautomation.com. We caution that the statements made on the webcast and conference call may contain forward-looking information and our cautionary statement regarding such information, including the material factors that could cause actual results to differ materially from the statements and the material factors or assumptions applied in making the statements are detailed in Slide 3 of the slide deck. As many of you know, this is Doug's first conference call as CEO of ATS. We're very pleased to welcome Doug as the new leader of our organization. With that, it's my pleasure to turn the call over to Doug. Doug, over to you. Douglas Wright: Thank you, David, and good morning, everyone. I'm pleased to be with you here today. As you know, I joined ATS in mid-January. While it's still early in my tenure, my focus has been on rapidly translating learning into action, particularly around execution discipline, margin performance and capital allocation. This focus has included spending time with our teams across the organization, building a deeper understanding of the business and our day-to-day operations. I've also participated in our President's Kaizen Events, listening to and meeting with teams, including at our Cambridge, Ontario head office. What stood out from this year's group of Kaizens was the depth and breadth of our people's technical capabilities and the high-performance nature of our culture anchored by the ATS business model. During my career, I've had the opportunity to serve several organizations in different parts of the world, focusing on automation and diversified industrial technologies. In bringing an analytical lens rooted in my engineering background and applied in multiple general management and CEO roles, one key takeaway for me is that companies built in a strong lean operating system are better positioned to execute and deliver sustained results. That lean culture is deeply embedded at ATS through the ABM and our focus will only get sharper going forward. These fundamentals, along with our attractive market positions in growing end markets and our high-quality customer base have reinforced my decision to join this organization. Importantly, that foundation is supported by a deep and capable leadership bench, positioning us well to execute on our strategic priorities. In Q3, we welcomed Sarah Moore as our new Life Sciences Group Executive. Sarah brings over 20 years of experience across Healthcare Diagnostics, Medical Devices and Life Sciences, along with a deep sector expertise and a strong operations background to lead our presence in one of our key end markets. We also recently appointed Simon Roberts, a long-tenured ATS leader to lead our Packaging & Food Technology business. This brings a leader with strong operational background to this key end market. This appointment coincided with our decision to embed our growing Services business within our operating units. This change strengthens accountability, improves customer alignment and allows each business to manage services as a recurring margin-enhancing component of their solution offering. Our focus on people and leadership continues to be acknowledged externally. Our U.S. operations recently received a certificate of recognition from the Top Employers Institute, and we were once again named a top employer in the Waterloo area. From an operating standpoint, I expect we can continue to build on the systems, rigor and accountability required to build long-term value with an emphasis on driving margin expansion across the portfolio. There are meaningful opportunities ahead through increased asset utilization and operating leverage, improved mix and continued advancement of the ATS business model. That same discipline also guides our capital investment decisions across the portfolio. Our focus remains on allocating capital where it generates attractive risk-adjusted returns and enhances long-term shareholder value. We continue to evaluate opportunities that support growth and profitability, reinforce our core capabilities and remain consistent with our leverage framework. This approach aligns with ATS' long-term capital allocation strategy and the priorities of our Board. Before I move on, I want to recognize Ryan McLeod for his contributions to ATS. Ryan has played an important role in strengthening ATS' financial foundation and building a strong finance team. We thank him for his leadership and wish him continued success in his new chapter. Ryan's transition is orderly and planned. Anne Cybulski, a trusted member of our leadership team, will resume as interim CFO and provide the continuity. Our finance organization has been built by Ryan and Anne and is stable and capable. As I continue to deepen my understanding of the business, I'll provide additional perspectives as appropriate. With that, I'll turn the call over to Ryan to walk through our third quarter performance and outlook. Ryan McLeod: Thank you, Doug, and good morning, everyone. Before moving to the quarter, I would like to welcome Doug to ATS. Doug brings a proven track record in lean operations and a disciplined approach to capital allocation. I'm confident that under his leadership, ATS will build on its strong foundation and continue to drive value creation for shareholders. Turning to the quarter. I'll start with a brief overview of our Q3 performance before providing an update on our end markets. Anne will provide additional financial details in her remarks. Starting with our financial value drivers. Order bookings were $821 million, up almost 12% sequentially, supported by activity across multiple end markets. Q3 revenues were $761 million, up almost 17% from Q3 last year, driven primarily by organic growth, including continued momentum in services. From a profitability standpoint, adjusted earnings from operations in Q3 were $80 million, in line with our expectations. Moving to our outlook. We ended the quarter with an order backlog of approximately $2.1 billion. Our backlog reflects a well-balanced mix across end markets and geographies. Looking ahead, our funnel remains healthy and diversified. Within Life Sciences, order backlog was $1.1 billion, and revenues for the quarter were $391 million, the second highest in ATS' history. Demand remains constructive in our end markets with ATS' global scale supporting consistent execution in multiple regions and multisite customer programs. Radiopharma led by our Comecer business remains a key growth market supported by strong customer relationships and expanded services footprint and a proven track record. Our unique capabilities in this market are driving engagement with both established and emerging customers across the development and commercial phases of radiopharmaceutical programs. Within GLP-1 auto-injectors, ATS is executing against a healthy backlog and partnering with customers as they scale production. As device requirements evolve and new therapeutic applications emerge, our teams continue to support customers throughout the product lifecycle. In Food & Beverage, quarter end order backlog was $203 million. Funnel activity in Food & Beverage remains strong, driven by brand recognition in core processing markets, including tomato and other fresh fruit applications. In Energy, order backlog was a record $296 million, up 87% over Q3 last year, driven by refurbishment and life extension projects for nuclear reactors. These refurbishment programs are longer cycle in nature and include service components that support both execution and ongoing operational requirements. Alongside refurbishment work, activity continues to progress in new build programs, including both large-scale reactors and SMRs. ATS is engaged early in the project lifecycle, supporting front-end design, engineering and prototyping activities. This work spans fuel production, fuel handling and modular fabrication across multiple reactor technologies. Within Consumer Products, backlog reached a record $321 million, supported by a large enterprise warehouse packaging automation program that leverages ATS' global manufacturing and aftermarket capabilities. Consumer Products funnel remains steady with ongoing opportunities across warehouse automation and packaging. In Transportation, the funnel continues to reflect smaller scale opportunities in both commercial and traditional vehicle platforms. In summary, quarter reflects steady execution across our priorities, supported by a strong order backlog and diversified end markets. Before we move to the financial review, I want to take a moment to express my confidence in the depth, capability and professionalism of the organization I've had the privilege to lead. I've worked closely with Anne for many years, and I've seen firsthand the strength of her leadership and that of the broader team. I'll be moving on knowing the business is in very capable hands, supported by a strong leadership team and an organization deeply committed to operational excellence and disciplined execution. I also want to convey my sincere appreciation to the entire ATS team for their dedication and unwavering commitment to the company's success. With this continuity in place, ATS remains firmly focused on the business and well positioned to deliver long-term value for shareholders. Now I'll turn the call over to Anne. Anne, over to you. Michael Anne Cybulski: Thank you, Ryan. The entire team and I wish you success in your next chapter. I share your confidence in ATS' experienced leadership and finance teams. I also echo both David's and Ryan's words of welcome to Doug. Doug, we're happy to have you on board. On to our operating results for the quarter. Order bookings were $821 million, down 7% compared to Q3 last year due to the expected lower run rate in Transportation and the inclusion of several larger enterprise bookings in Life Sciences and Food & Beverage last year. Notably, our trailing 12-month book-to-bill ratio at the end of Q3 remained healthy at 1.06:1. Revenues for the third quarter were $761 million, up 16.7% compared to last year, including organic growth of 12.6%, along with a 4.1% benefit from foreign exchange translation. Of note, revenue increased in all market verticals, except for Transportation as expected. Moving to earnings. Third quarter adjusted earnings from operations were $79.9 million, a 21.6% increase from Q3 last year, primarily on higher revenue volumes. Gross margin for Q3 was 29.6%, a 111 basis point decrease from last year, mainly due to program mix. Put another way, the decrease is a reflection of timing of programs being executed across our market verticals, which have different gross margin profiles. On SG&A, excluding acquisition-related amortization and transaction costs, expenses in the third quarter totaled $141.9 million, an $11.3 million increase over the prior year, mainly due to foreign exchange translation and, to a lesser extent, increased employee costs and professional fees. Excluding the mark-to-market impact related to changes in our share price, stock-based compensation expense was $3.1 million in Q3. Earnings per share were $0.48 on an adjusted basis. Moving to our outlook. We ended the quarter with an order backlog of approximately $2.1 billion. Q4 revenues are expected to be in the range of $710 million to $750 million. As a reminder, this assessment is updated every quarter, taking into account revenue expectations from current order backlog and new orders booked and billed within the quarter. During the quarter, we incurred $5.5 million of restructuring costs under the program we disclosed last quarter. As we identified additional opportunities to further realign our cost structure, total costs under the program are now expected to be approximately $20 million. The associated payback period remains unchanged. We do expect some reinvestment in strategic growth areas while also supporting our operating leverage, mainly as we move into fiscal '27. As we head into the last quarter of this fiscal year, we are pleased with our overall revenue growth of 13.6% on a year-to-date basis, including approximately 8% organic growth. Adjusted earnings from operations are up 14% on a year-to-date basis. ABM discipline and tools will continue to support focused execution across all of our value drivers, supported by the strong lean pedigree amongst our leadership team. In addition, Doug's experience and focus on lean discipline is clear. While the macro environment remains dynamic amid geopolitical and trade uncertainty, once again, we can confirm that we have not been materially impacted by tariffs across our different geographies. Most of our exports from Canada to the U.S. continue to be covered under the USMCA. Our global decentralized operating model positions ATS well to adapt and serve customers where capital is being deployed. As a result, we continue to execute, maintain leadership in our key submarkets and advance our growth priorities. Moving to the balance sheet. In Q3, cash flows from operating activities were $115 million. Our noncash working capital as a percentage of revenues was 16.4%, an improvement sequentially and also from Q3 last year. As a result, we moved closer to our targeted working capital value of less than 15% of revenues as we received some larger milestone payments before the end of the quarter. As always, payment timing can affect this ratio around period ends, but our goal is to continue to sharpen our working capital efficiency and more broadly, overall asset efficiency. During the quarter, we invested $16.6 million in CapEx and intangible assets, supporting innovation and the continued strengthening of our capabilities. For fiscal '26, we expect our CapEx and intangible investment to be between $70 million and $90 million, slightly lower than the previously disclosed range. On leverage, our net debt to adjusted EBITDA ratio was 3x, reflecting continued progress towards the top end of our target range of 2 to 3x as expected and previously disclosed. In summary, the third quarter results were in line with our expectations, supported by a strong order backlog and diversified end market exposure. Our leadership team and global employee base remain focused on leveraging our opportunities for margin expansion and capital efficiency across our business to drive shareholder value. Now we will open the call to questions from our analysts. Operator, could you please provide instructions. Thank you. Operator: [Operator Instructions] Your first question today comes from the line of Maxim Sytchev from National Bank Financial. Maxim Sytchev: Doug, congratulations on joining the company. And maybe the first question, if I may, for you. Do you mind maybe talking about your maybe 90-day and kind of 6 months priorities in terms of what's going to be on your slate? Douglas Wright: Sure. Thanks, Maxim. So while it's early, I do have a few observations that I'll share with the group. First, I believe that we're aligned to strong and growing end markets in the portfolio. And growth has been strong. And while there's a few areas that need some improvement, our focus will be on -- continuing to focus on those core end markets that we're in today. So we're not -- I wouldn't say that my appointment brings any outlook change in terms of the end markets that we're focused on. Secondly, we recognize that margin expansion potential has not been realized. And I think we have a lot of runway in front of us. And while I'm not ready to establish a new target for the organization yet, our team knows that we need to do better. There's opportunity in both ABM type improvement, which are a great set of tools that we just need to drive harder at executing as well as commercial actions to get more value for the important work that our teams do. And third, as our leverage ratios are now back into our targeted range, we will deploy capital with a high level of discipline as usual, but with an emphasis on improving our margins, our aftermarket mix and bringing in new technologies that complement our portfolio within our existing end-market framework. So those are some of the key observations I would make today, and you can kind of convert that into what I'm focused on in the early days, both with the executive team, our operating units as well as with our Board. And I really remain very optimistic for the outlook for ATS. Maxim Sytchev: That's excellent. And one quick question for Ryan. And Ryan, obviously, all the best, and it's been a pleasure. If I may, do you mind maybe connecting a little bit the improvement in margins that you were telegraphing at the beginning of the year and how that correlates to the gross margin change in the mix perspective and how I guess we should be thinking about modeling the rest of the year? Ryan McLeod: Yes. Thanks, Maxim. I appreciate it. I'm going to let Anne walk through the margin dynamics. Michael Anne Cybulski: Thanks, Ryan. So Max, I would say from a gross margin perspective, we talked about mix, and it really is reflective of the -- what we're seeing the -- what we've got in our backlog and what we're executing on. I wouldn't call it anything unusual there. We've been pretty consistent in terms of performance there and in line with our expectations. We still -- as Doug said, we still got opportunities across the board, but specifically on gross margin through some of our levers that we'll continue to pull, including the usual standardization, supply chain, operational excellence initiatives. So overall, I think some of the work we've got in our backlog right now is more -- you've seen nuclear bumping up, and we've talked about that being, generally speaking, lower gross margin, but accretive to the bottom line. So I don't think there's anything unusual, but there are some dynamics there and then the levers that we have available to us remain available, and we'll continue to focus on them. Operator: Your next question comes from the line of Sabahat Khan from RBC Capital Markets. Sabahat Khan: Great. Just maybe starting at a high level on the revenue side. Obviously, you provided a bit of color on the outlook for each of the segments in your release. So maybe if you could just dig a little bit more into the nuclear, the Energy side and the Life Sciences side. One, were you just sort of expecting the nuclear side numbers to be that big? Are there new orders that came through the year that drove sort of that size growth in nuclear? And then on the Life Sciences side, if you can maybe just talk about what you're seeing on the outlook there in terms of maybe things that could drive mid- to high single-digit type growth that segment seen times in the past? Michael Anne Cybulski: Yes. So maybe, Saba, I'll start with the numbers and then Doug can chime in on the outlook. So from an Energy perspective, as we've talked about, the majority of the work that we have in our backlog right now is focused on life extension projects, and those tend to run out over 18 to 24 months, in some cases, from a top line standpoint. That said, we also have good backlog that we're continuing to generate in terms of our participation in new builds, both SMR and traditional reactors. And an example in the quarter, we did have an order for new build reactor for fuel fabrication. So good participation there and not specific to any one technology. So I think a good demonstration of our team's capabilities beyond the [ CANDU ] technology that is the majority of the life extension work. From a Life Sciences standpoint, we've continued to build out that part of the business. And of course, we have the custom integration piece of the business, but we've also got a good portfolio from a products and services standpoint that we'll continue to focus on driving the business forward from a top line standpoint. So Doug, go ahead. Douglas Wright: Sure. So I would just add in terms of the outlook, Saba, that the -- we've obviously -- in the nuclear side, we've obviously had a very long-standing relationship with a number of customers on the CANDU platforms, and we're really pleased that we're continuing to support those life extension and refurb programs. But inside of our pipeline and kind of looking forward, we are also active on, I would call it, a handful -- a full handful of SMR customers in the early-stage activities in both modular fabrication and fuel handling. And we do expect that over time, these customer relationships will expand as projects gain traction and evolve into operations. Obviously, this is a long-term investment for the company to get involved early. And we have to obviously be prudent in how we manage uncertainty that comes with new technology and new regulatory frameworks, but we feel like ATS is in a strong position to support those evolving technologies as they go forward. I would say on the Life Sciences side of things, we really are pleased with the improvement in the diversity in the -- at the application layer within the pipeline and the backlog in Life Sciences. We're really excited about some of the new innovations that our customers are working on around radiopharma, visual inspection, other med tech applications, including things like mail order pharmacy. So we believe that we have a pretty good stable of new applications coming in that portion of our business that will allow us to help continue to support those great innovations that are happening with our customers. Sabahat Khan: Great. And then just for my follow-up, I guess, a bit more on the capital side, leverage moved in the right direction. And if you can just maybe comment a little bit on sort of the working capital target that you guys have, any initial plans there? And then understanding it's early days, but just your views on where M&A ranks in capital allocation as the leverage moves further in the right direction. Douglas Wright: Sure. So it's a little premature for us to set new financial targets in terms of the working capital ratio, but you can be sure that in future calls with you, we will be reviewing those targets and coming forward with an updated framework. I think the team did make a lot of progress here in the last quarter on working capital. And that's -- honestly, improving working capital is actually quite hard operationally. So I think it shows a good level of execution by the team. And of course, my job is to keep pushing to make it even better than it has been. So you can count on that. I think in terms of capital allocation models, I would think about it like this. We're not going to change our level of discipline and focus and our committed leverage architecture that we've communicated to investors. We recognize that there's a view that as our leverage ratio gets back into our targeted zone that we can become more thoughtful about deploying M&A capital, and you can be confident that internally we are doing that. We have a pretty rich pipeline that across a number of our end markets that we are continuing to evolve. And as I'm meeting with our business unit leaders and our corporate development team and getting an understanding of what's in their pipeline, I'm pretty confident that we've got the ideas to utilize to deploy capital. But obviously, as I said, we will remain quite disciplined in how we do that, but you should expect us to favor deploying capital toward M&A going forward. Operator: Your next question comes from the line of Patrick Sullivan from TD Cowen. Patrick Sullivan: Like everyone said, good luck, Ryan, and then Doug, welcome to the call. I guess first question I had was, it looks like there's a specific line -- kind of aligning opportunities outside of GLP-1 in the Life Sciences sector. So I guess, has there been any updates to customer plans within that market for you guys? Is there still significant capacity that needs to be constructed? Or have advancements in other oral therapies kind of influenced capital expenditure plans more recently? Douglas Wright: Sure. I would say, obviously, Patrick, the GLP-1 ecosystem has a lot of dynamics involved in terms of both the ramp-up of capacity that we're participating in now as we're shifting into the delivery phase of the great upfront capacity partnerships that we entered a while back. But there's still a significant amount of new therapies around GLP-1s, new delivery form factors such as multi-use devices or more sustainable concepts in the devices themselves as well as new trials and customer activities around continuing to deploy new therapies around these therapeutics. So I would say that the long term, the auto-injector market for us with respect to GLP-1s, it will -- it's obviously going to go through its lumpiness in the order cycle. But from a revenue perspective, we still see a pretty strong pipeline of incremental opportunities to continue to support those therapies. Now being prudent, we obviously have to improve the diversity of our pipeline for other types of therapies we mentioned in our prepared remarks. There's a lot of excitement around radiopharma, oncology and other activities that we think will -- well, we're not -- we don't think it is diversifying our pipeline, and that will start to diversify our revenue footprint as time goes on. So we're committed to continuing to work with our GLP-1 and auto-injector customers. We recognize that there's a lot of press now about different companies guiding different views on utilization of orals and other traditional and new therapies around GLP-1s. And I would say that from our perspective, our customers are still being pretty consistent that there's a lot of long-term opportunity in GLP-1s that we'll continue to support over time, recognizing that we have to diversify the portfolio to make sure that we can keep the machine running. Michael Anne Cybulski: And just a small bit of extra color on the quarter. Within the quarter, we saw good examples of that diversification that Doug is referring to. Outside of GLP-1, we had orders in radiopharma and other areas of med device, which are a good demonstration of our team's capability and our capacity to execute across those submarkets. So just hopefully, that adds a little bit extra color for you there. Patrick Sullivan: Yes, that's great. If I could ask one more. ATS often talks about cultivating assets as it relates to acquisition targets, sometimes over many years. Doug, is that approach consistent with your experience? Was that part of your mandate in previous roles? I guess any experience you can elaborate on with respect to that strategy would be great. Douglas Wright: Yes. Thanks for the question, Patrick. I think the answer is very simple. I am very committed to the idea that I have a role and my executive team have a role in working with innovators, founders, sometimes families and other -- we work in a universe of strong levels of innovation that often start as small businesses and then evolve into opportunities to join a larger organization like ATS. That does require a lot of kind of pick and shovel activity on the ground to cultivate those relationships. And it is something that I have a lot of experience in. And I think we'll continue to have a pretty -- a very tactical focus on getting out and meeting partners and working with them over the long term to put us in a better position to make those acquired companies feel at home inside ATS. Operator: Your next question comes from the line of Justin Keywood from Stifel. Justin Keywood: Just following up on the outlook for Life Sciences. We've seen some substantial CapEx investments over the last 6 to 8 months. By our math, about $480 billion has been announced, much of which are ATS' customers. And this is in part to potentially sidestep tariffs and reshore with U.S. manufacturing. I'm wondering if that narrative is leading to increased business for ATS? Or is it just a regular business as it goes as far as new CapEx and if you have any additional color there? Douglas Wright: So Justin, I think specifically, we probably -- I think at a high level, we certainly are aware that there's a lot of discussion within the broader sort of Healthcare and Life Sciences space around reshoring and tariff mitigations. And we certainly are probably seeing some benefit from that in our own pipeline. But I can't -- I think at the end of the day, most of our customers are being very balanced in being close to their large markets as they build out their capacity. So I wouldn't say that it's necessarily dependent on tariff dynamics. I think it's related to just the dramatic increase in demand for these therapeutics and just needing raw capacity. And if you're doing -- if you're adding new capacity in an environment where tariffs and geopolitical items are volatile, it's kind of rational to spread your capacity out among different geographies. I think that's common across a lot of the industrial tech landscape as well among our peers. So I think that's kind of a natural outcome. And -- but you're correct that there is still a significant amount of capacity in the pipeline. And our job is to be able to serve that whatever geography the customer decides to land in. Justin Keywood: Understood. That's very helpful. And then for the Transportation or EV segment, we saw continued pressure this quarter. Our expectation was it was near bottom levels last quarter. Are we at that range where we should see some stabilization going forward? And also, how strategic is the EV or Transportation segment to the overall business going forward? Douglas Wright: Sure. So I think we look at Transportation holistically, the way we look at all of our end markets through a long-term value creation lens. And part of that specific to Transportation is we recognize that we have a lot of technology and value to bring to the EV ecosystem. But it's frankly going to be more targeted than it has been historically. I think we recognize that pursuing mega projects in the, call it, the broad Transportation sector has -- carries a lot of risk that we're not comfortable with. But within sort of niches, within the Transportation segment, maybe it's assembly of batteries or hybrid engines or other sort of unique targeted areas where our technology can bring value and we can be rewarded appropriately for it. We still have a significant amount of pipeline in transportation, but we're going to be more cautious in how we go after the shiny objects. We're going to be more disciplined in how we pursue those projects. So it's still a market that we feel optimistic about. But on a relative scale, it will -- relative to our larger segments that we're participating in now, I think it will stay kind of in its current range. Michael Anne Cybulski: And Justin, just to add, I mean, that's -- what Doug said is reflective of what we see in the backlog and also in bookings in the quarter as well as the funnel. So -- and I think that's a fair reflection of what we'd expect going forward. Operator: [Operator Instructions] Your next question comes from the line of Patrick Baumann from JPMorgan. Patrick Baumann: I know it's been a couple of months already, but we haven't spoken yet. So I wanted to say congrats to Doug on the new role. And also, thanks to Ryan for all the help and guidance while we've been following the company and best of luck in your new role. I had a couple of questions. First on sales. So generally, like when I look at the quarterly -- I know you guys don't like to talk about quarterly, but when I look at the quarters over time, you see a growth rate from third quarter to fourth quarter like in the mid-single-digit range sequentially. Can you help me understand why that might not happen this year? Is it -- was there some sales pulled ahead to the third quarter maybe? Any color on that would be helpful. Michael Anne Cybulski: Yes. Patrick, I can take that one. So from a -- on a full year basis, we're still expecting what we talked about before in terms of high single-digit growth, and we're happy with where we are from an organic growth perspective on a year-to-date basis, especially given some of the market dynamics. The Q3 number, I mean, there was some benefit from scope adjustments and things that just timing of execution of the program. So what we have in our guide for Q4 leaves us consistent with what we would have expected on a full year basis. And I don't think there's anything unusual that I'd call out. Patrick Baumann: Okay. That's helpful. And then the second one is on backlog. And so I guess I just wanted to understand the sequential decline in context of the positive book-to-bill. It looked to me like maybe in Transport, there was a rescoping or something of that nature. Is that right? And if you could provide any color on that, that would be helpful. And then also on the orders front, like consumer looked like it had a big order in there. Could you provide any color on that? Michael Anne Cybulski: Yes, I'd be happy to. So just with respect to the backlog, I mean, just -- about half of our business, roughly half is products and services. So as that portfolio continues to grow, I mean, we kind of look at a number of metrics across the board. So in our guide, we look at the shorter-term businesses. We kind of look at where we are from an execution standpoint on our larger projects. So there's some timing stuff in there. But I would say we're happy with the book-to-bill staying above 1. And even if it does dip below 1 in any particular market or period on an individual quarter or trailing 12-month basis, if we're executing off of a healthy backlog that doesn't give us cause for concern. So I think -- and then your question on consumer, we did have -- we have had some strength in that area, again, reflective of the capabilities of the team. So that work will get executed over a normal time frame, consistent with the other work in our backlog, we typically say 12 to 18 months. Operator: Your next question comes from the line of Jonathan Goldman from Scotiabank. Jonathan Goldman: Maybe just the first one, circling back on the bookings. What are you guys thinking in terms of bookings growth this year? I'm just -- if you can give us any help parsing all the different puts and takes on funnel commentary, the strong revenue this quarter. You're lapping the enterprise orders last year, the timing as well. But how are you thinking about the full year cadence of bookings? Michael Anne Cybulski: So from a -- you mean -- sorry, Jonathan, just to clarify for this year? Or what do you... Jonathan Goldman: Yes for this year? Michael Anne Cybulski: Yes. I mean we're -- we'll continue to -- there's -- obviously, in our Custom Integration business, there's some timing things that may impact the number. But on a full year basis, we're happy with where we've come in from a year-to-date perspective, and the funnel is healthy across the board, as we've talked about. And even if -- and as auto-injector orders modulate based on where customers are in their buying cycles, the funnels in the rest of the submarkets remain healthy. If there's anything, Doug, you'd like to add, go ahead. Douglas Wright: No, I think it's -- I think we've got a great pipeline, and there's obviously some economic uncertainty that we live with every day. And I think the team has calibrated the orders outlook effectively. That's why we provide a range. And -- but I think it's -- the pipeline is robust, and we've got, I think, a pretty good opportunity to continue to deliver the type of growth that we've delivered in Q3. And obviously, our job is to beat those expectations. Jonathan Goldman: Okay. That's helpful. Maybe switching to SG&A. You upsized the restructuring charges this quarter. I think you talked about maybe reinvesting some of that in strategic areas. What sort of areas are you planning to reinvest those savings in? And if we're thinking about kind of payback on restructuring, is this more of a top line payback or a cost payback at this point? Michael Anne Cybulski: So yes, I mean, I would expect that it will be a mix. So we've -- the bump up in the range is basically just associated with some additional opportunities we've identified for efficiency across the program, including with -- associated with our services shift. I think some margin protection measures in a few parts of the business that have seen lower volumes, but nothing that I would call out that's material. From a reinvestment standpoint, I mean, we've had a history of investing in innovation, and that's been critical to our success and will continue to be going forward. So that would be where some of the reinvestment would be as well as in areas of growth, we've talked about nuclear, which is a People business. So there, for example, in other areas -- other market focus areas, including Life Sciences. And as we work through the timing of some of this from a bottom line perspective, the piece that would flow through to operating -- to help with operating leverage would primarily be into fiscal '27 just based on the timing of the execution of the program. Douglas Wright: Yes. And I think, Jonathan, one of the things that I'm -- as I've gotten around to meet our division leaders and talk to some of our innovators, these new therapies that are evolving in Life Sciences and these new kind of energy form factors that we're seeing evolve in our Energy business are very exciting, and I think create -- it's a great alignment between the technology that we have in-house and the needs that these customers have to support their evolution of their product as they kind of bring, in some cases, game-changing new technologies to the marketplace. So I think it's a very prudent action for us to take our restructuring savings and redeploy investments in those growth areas. So when we talk about diversifying our pipeline and making early-stage investments in these new technologies, that's generally the destination for any incremental investment dollars that we get. And that's, I think, a pattern you'll see us repeat. Jonathan Goldman: Okay. That's fulsome color. And maybe just one housekeeping one. The sequential increase in the SG&A, how much of that was due to FX? Michael Anne Cybulski: It would be relatively in line from a proportionate standpoint to what we saw from the top line perspective. But we can follow up with you, Jonathan, on the specific values. Operator: Your next question comes from the line of Michael Glen from Raymond James. Michael Glen: Doug, maybe to start, we've heard a focus on margin expansion mentioned a few times. Are you able to speak to some of your prior roles, any of the margin initiatives you implemented in those roles and maybe highlight some of the success you realized in expanding margins in prior roles. Douglas Wright: Nice to meet you, Michael. Sure. I think I kind of categorize the margin improvement opportunities in 3 areas, all of which I've had extensive experience in my prior roles. So first is amplifying the deployment of our ABM tools to find productivity opportunities. This could be reducing cost, improving lead times, which helps us drive market share. The tool set that we have inside ATS is very strong. They're very familiar tools to my prior roles that I -- companies I've served. And I think there's just a need within the team to drive more focus in executing them, perhaps being prioritizing a little differently. So I'm pretty comfortable that we actually have the tools in mind, but we'll be working harder to more effectively deploy them where we can move the needle on margins. And it could be looking at 80/20 pricing. It could be looking at low-cost country supply chain. It could be on finding labor productivity through value stream mapping exercises at the shop floor level. All up and down the architecture of the company, we have opportunities to deploy ABM to drive more efficiency. And I'm confident that we'll be able to accelerate that. The second area is around focusing our R&D and commercial efforts on applications within our current end markets, but that require more advanced technology and application knowledge that we have inside ATS. And that then brings us the opportunity to enjoy improved gross margins. Some of the new applications that we talked about in our pipeline and emerging into our backlog around Life Sciences, nuclear, the examples that we talked about earlier, these are all areas where the physics challenges of creating something for our customers is quite a big challenge, and we bring technology to the table to help them solve those problems, and that gives us the opportunity to have a better yield and share in that value creation. And then the third area, which has been a focus of the company, but I think has further opportunities is in increasing our mix of aftermarket. I think being -- having a significant portion of our business being in the CapEx cycle, we recognize that from an earnings volatility standpoint, having a higher share of aftermarket can both improve our margin profile as well as smooth out the natural ebbs and flows that come with the CapEx side of the company, as one of the reasons that I supported the decision that the team made to move the services teams into the business units to provide more of an end-to-end model with our end users from -- all the way from conceptual engineering through lifetime service and support. I think that's very logical, and it will start to allow us to pursue organic strategies to expand our service potential. And even in our capital deployment discussions, one of the criteria that we talk about is the same things. We talk about, is there a potential to employ ABM to improve the target company's performance? Do we have the ability to use the technology to create something new for our customers? And does it improve our aftermarket mix. So both in the internal work that we're doing as well as in our capital deployment work, those are kind of the themes that I've seen work in other enterprises similar to ATS, and that's what the team and I are going to be working through. And we'll -- once we have a more definitive framework about what that's going to mean to the economic, we'll come and share that with you. Michael Glen: Okay. That's a great amount of detail. And then just my second question, kind of plays off the first one, but you did see quite a move higher in the run rate on your services bucket revenue in the quarter. And are you able to give some context as to where that move higher did come from? Michael Anne Cybulski: I can cover that one, Michael. So there's -- included in our service revenues, we have some refurbishment work that is ongoing. And so a good chunk of the increase in the quarter came from that work. And beyond that, though, the service -- the rest of the services deliverables are tight, streams of revenue continue to perform well, but the majority of the increase was from refurbishment work, which is being executed. Michael Glen: And would that -- we would expect that to continue in future quarters as well? Michael Anne Cybulski: So that specific refurbishment program is ongoing, although nearing completion, but we -- refurbishment is an important part of our services portfolio in addition to other areas like spares, on-site support, asset management, those types of offerings. Operator: And we have reached the end of our question-and-answer session. I will now turn the call back over to Mr. Wright for closing remarks. Douglas Wright: Thank you, operator, and thank you, everyone, for joining us today. I'm excited to be part of the team here at ATS, and we look forward to speaking with you further on our Q4 call in May. Operator: This concludes today's conference call. We thank you for your participation. You may now disconnect.
Philip Ludwig: Welcome, everyone, joining us today for the Melexis Fourth Quarter and Full Year 2025 Earnings Call. I'm Philip Ludwig, Investor Relations Director at Melexis, and I'm joined today by our CEO, Marc Biron; and CFO, Karen Van Griensven. Earlier today, we published our press release and presentation, which can be found on our website. We will start with some brief remarks on the business and financials before taking your questions, starting with Marc Biron. Marc, the floor is yours. Marc Biron: Thank you, Philip. Hello, everyone, and welcome to this earnings call. Let me start by sharing some perspective on the full year of 2025 and how we see 2026 as of today. Then we will discuss the last quarter of 2025. Looking back at 2025, at the beginning of the year, we had entered a phase of customer inventory correction later than our peers. We are now in a period with more geopolitical uncertainties and more short-term volatility in demand. The period of customer inventory correction was largely completed by the summer. As a result, our sales were stable or grew sequentially as the year has progressed. High in-quarter ordering has started in Q2, which we could serve from our strategic inventory. Still in 2025, sales in our largest region, APAC, has increased as a percentage of group sales. China has followed an alternating pattern of very strong sales in one quarter, lower the next quarter and strong again in the following quarter as it was in Q4 when we recorded our highest ever sales in China. Now looking ahead to 2026, we remain in the recovery phase of the automotive demand cycle. We expect that these sales will not be linear given all the uncertainties and the late ordering behavior of our customers. Following the very strong Q4, sales in China continued their alternating pattern in Q1, also influenced by Chinese New Year mid-February. We are also facing the expected volatility in our nonautomotive business such as digital health application. Finally, we have to factor in the impact of the annual pricing agreement that we have closed at the end of 2025. Those effects translate to a similar level of sales in the first half of '26 in comparison to '25. We expect growth in the second half of '26 with a similar dynamic as in '25. Now turning to the last quarter of '25. Sales of EUR 214.5 million means that we returned to a year-on-year growth of 9%. China posted its highest ever sales and the rest of Asia was also strong. Total APAC sales were up double digit year-on-year and sequentially, while Europe and the Americas were lower sequentially. On the innovation front, we leverage our technology leadership with strong design wins and an expanded pipeline of opportunities across China, Europe and South Korea. This trend is also valid in robotics with the pipe of opportunities up by a factor of 5 in Q4 versus the previous year. We have launched 19 new products targeting structural growth trends in automotive and robotics. In the last quarter, this included a game-changing inductive sensor for steer-by-wire application that simplifies design and reduces cost, paving the way for the next generation of electrified and autonomous vehicle. We have launched also a code-free driver for automotive ambient lighting, which streamlines the development cycle and reduce the cost of our customer. We also see the high potential in power electronics, and we are extremely proud to offer a world premier protective device called snubber. This unique solution protects and enhance power density of silicon carbide power module. All major power electronic manufacturers have shown interest in our product. A great example is Leapers Semiconductor, a Chinese manufacturer of advanced power module incorporating our snubber in their next generation of module. Our new protective device family will continue to expand to meet the evolving needs of power modules and emerging power applications. We have been growing faster than many peers in China over the past 5 years with our broad offering on high-performance and high-quality product and our strong local team to support customers. From my side, I came back from China 2 weeks ago. I'm really impressed how hybrid is gaining traction and how content reach -- are reaching mid-range car much more heavily than in Europe. To continue our trajectory in China, we are accelerating the implementation of our China strategy, including localization of our supply chain. A key step is to have local wafer supply, and we are fully on track to start shipping product this summer based on the 12-inch wafers from our local partner. We also established a dedicated robotics team in China to respond to the stronger interest with more than 60 projects currently underway. As part of our strategy to win in faster-growing markets, we are increasing our effort in India, where we enjoy strong double-digit growth. India presents great opportunities in automotive as well as in alternative mobility, playing to our strengths. We are finalizing the setup of a Melexis entity in India to show our commitment to serve customers locally and further develop in this attractive and growing market. I will now hand it over to our CFO, Karen Van Griensven, to provide more detail on our financial results and outlook. Karen Van Griensven: Thank you, Marc. So sales for the full year 2025 were EUR 839.6 million, a decrease of 10% compared to the previous year. The euro-U.S. dollar exchange rate evolution had a negative impact of 2% on sales compared to 2024. The gross result was EUR 324 million or 38.6% of sales, a decrease of 19% compared to the last year. R&D expenses were 13.8% of sales, Q&A (sic) [ G&A ] was at 6.5% of sales and selling was at 2.4% of sales. The operating result was EUR 134 million or 16% of sales, a decrease of 39% compared to EUR 219.9 million in '24. The net result was EUR 112.5 million or EUR 2.78 per share, a decrease of 34% compared to EUR 171.4 million or EUR 4.24 per share in 2024. Sales for the fourth quarter of 2024 were EUR 214.5 million, an increase of 9% compared to the same quarter of the previous year and stable compared to the previous quarter. The euro-U.S. dollar exchange rate evolution had a negative impact of 3% on sales compared to the same quarter of last year and no impact on sales compared to the previous quarter. The gross result was EUR 82.3 million or 38.4% of sales, an increase of 6% compared to the same quarter of last year and a decrease of 1% compared to the previous quarter. R&D expenses were 14.5% of sales. G&A was at 6.7% of sales and selling was at 2.5% of sales. The operating result was EUR 31.5 million or 14.7% of sales, an increase of 14% compared to the same quarter of last year and a decrease of 17% compared to the previous quarter. The net result was EUR 22.6 million or EUR 0.56 per share, an increase of 24% compared to EUR 18.3 million or EUR 0.45 per share in the fourth quarter of '24 and a decrease of 18% compared to the previous quarter. Now turning to the dividend. The Melexis Board of Directors approved on February 2 '26 to propose to the Annual Shareholders' Meeting to pay out over the result of '25, a final dividend of EUR 2.4 per share, which will be payable after approval of the Annual Shareholders' Meeting. This brings the total dividend to EUR 3.7 per share, including the interim dividend of EUR 1.3 per share, which was paid in October 2025. Now for our outlook. here, Melexis expects sales in the first quarter and first half of 2026 to be around the same levels as the previous year. Sales in the second half of 2026 are expected to grow compared to the first half of 2023. For the first half of 2026, Melexis expects a gross profit margin around 40% and an operating margin around 17%, all taking into account a euro-U.S. dollar exchange rate of EUR 1.17. And for the full year 2026, Melexis expects CapEx to be around EUR 40 million. Our outlook includes the first benefits of our cost actions taken in 2025, such as improvement in the cost of yield. We remain disciplined in executing our cost improvement road map, for example, a shift in some operations to be closer to customers in Asia, and this to keep moving towards our long-term margin objectives. This concludes our remarks. We can now take your questions. Philip Ludwig: Thank you, Marc and Karen. [Operator Instructions] Operator, can you now give instructions and open up for Q&A? Operator: [Operator Instructions] The first question is coming from Aleksander Peterc from Bernstein. Aleksander Peterc: I think the first one was pertaining to your guidance. So as in last year, this year, you also refrained from a full year guidance, could you give us a bit more color. So just help me understand if I got this right. So H1 flat. And then I think, Marc, you said in your introductory remarks that second half should be higher than the first half in a similar manner to what we've seen in '25. So is it then right to assume we're looking at a ballpark something about flattish for the full year? I'm not trying to extract the full year guidance for you. I'm just asking if the math is correct here. And then I have a quick follow-up. Marc Biron: Yes, I confirm your understanding. In my introduction speech, I have indeed mentioned that H2 will grow in a similar manner than H2 last year. Karen Van Griensven: But we can indeed -- yes, that volatility remains -- it's very low. So the -- if you look purely at Q1, we see that mostly Asia is staying behind. So Asia was very strong at the end of last year. We see it -- the order intake there is much lower than, for instance, for Europe. Europe is actually increasing. So it's all attributable to Asia and particularly also China. And we know that in China, there is a lot of volatility in order behavior and also very late ordering. So I want to put that also in that perspective. Aleksander Peterc: Very useful. And then secondly, on China versus Europe, we have a lot of debate going on about Chinese vendors, automotive brands gaining share in Western markets. What does this imply for your market share? Do you have your market share with local Chinese players that is similar to what you have in Europe? Or is there a discrepancy there? Marc Biron: Looking at the past 5 years, the CAGR of Melexis grew by 10% -- a bit more than 10% over the last 5 years. And in China, the CAGR grew 14%, which is higher than the majority of the peers in China. And I do believe we are gaining market share in China if we compare to the CAGR of Melexis with the competition. And there is nothing structural that would tell me that this will change in short term. And I would say, in the longer term, when we consider our design win, our pipe of opportunities, we see also that those design wins and the opportunity pipe is increasing faster in China or in Asia than in Europe. Operator: The next question is coming from Amelia Banks from Bank of America. Amelia Banks: Yes. My first question is just on gross margin. You sort of said last quarter that you saw around cumulative sort of 4 percentage points of temporary headwind stemming from yield issues and wafer inventory revaluation. I'm just wondering if you could maybe break down what you were seeing in Q4 and then also in terms of bridging sort of how you're seeing that guide to get to 40% in H1? Karen Van Griensven: Yes, we still had that same headwind in Q4 indeed because of inventory revaluation. We also still had high cost of yield. But this we -- this cost of yield, both effects -- well, particularly cost of yield is what will drive margin improvement in 2026. It will be a major contributor, and that is the reason why we expect around 40% gross margin in the first half of the year. Amelia Banks: Okay. And is that largely just reliant on sort of revenues picking up and demand picking up to get sort of through the sort of yield issues, the wafers that you're seeing in your inventory. Is that the main sort of driver of that? Karen Van Griensven: No, it's that we get more material out of one wafer. So it's not volume related. Amelia Banks: Okay. I just remember last quarter, you were saying about how you have sort of yield issues in one of your fabs, and that's led to sort of impacted wafers in your inventory that you're still having to work through. Is that still relevant? Karen Van Griensven: Most of that material has now been -- is now out of the inventory. So we now have in inventory wafers with higher yields, and that is helping us to improve the margin. Amelia Banks: Okay. Perfect. And then just my quick follow-up. Just on the sort of annual price resets. So just wondering if you could maybe guide on what sort of ASP change you've been seeing in '26 sort of versus 2025. Karen Van Griensven: I believe the average selling price in '26 will be close to the '25 average selling price. That is the expectation today. Operator: The next question is coming from Janardan Menon from Jefferies. Janardan Menon: I'm just looking for your second half guidance. I'm just wondering what is giving you the confidence that you will see the kind of increase in the second half like you saw last year, especially given your commentary on quite a lot of volatility in the China market. Are you expecting that market to stabilize over the next couple of quarters and therefore, give you some upside there? And just associated with that question is we just came off the Infineon call, and they said that perhaps because some of the customers, including in automotive and other areas is concerned about strong AI demand getting to -- giving rise to supply tightness even in areas outside of customers are willing to put more longer-term lead time orders now just to avoid any future capacity tightness. So is that something that you're seeing, which is also giving you some confidence on the second half of the year? Marc Biron: I think there is indeed multiple reasons for this statement on the second half of the year. First, we know that the inventory at our [indiscernible] in Asia, in particular in China is very low. And we know that they will reorder later in Q1 or in Q2 because the inventory is really low, especially in China and especially for the magnetic products, I would say. The second reason is we are -- in many big customers, we are changing the version of the products. And this change of version will happen in Q2, Q3. And it's why our customers are now busy to reduce their inventory of the previous version before they order the new version, let's say, the more modern version. This is clearly visible for drivers product, but also for some ASIC. Yes, in our price negotiation that has been finished in December, we have also received the forecast from our customers. And clearly, the forecasts are stronger in H2 versus H1. Those are the different reasons, let's say, that bring this comment. To follow up on your question about the, let's say, the supply problem, we have some sign, let's say, for example, of assembly house, where indeed those assembly house are moving, let's say, their capacity to different kind of package, more complex package in order to incorporate those complex AI chips. Yes, we have this view, let's say, from the assembly house, no really yet consequence on Melexis, no real consequence on any allocation, but there is indeed this trend, which is a bit more than the noise, I would say. Operator: The next question is coming from Craig McDowell from JPMorgan. Craig Mcdowell: The first one, I'll just go back to the gross margin. And just can you help us understand the step-up from Q4 into Q1? On the face of it, the sequential improvement, I think, around 150 basis points. It looks quite difficult given volumes, annual price inflation kicking in, currency likely worse. Just trying to understand what's going to get us to that sort of 150 basis point step-up in the face of those headwinds. I've got a follow-up as well. Karen Van Griensven: Yes. I can only repeat the biggest reason why that will happen is indeed that we have gone in inventory through most of the products with high cost of yield loss. So we will -- and as you remember, that was a high contribution of reduction in gross margin in '26, close to 2%. So -- but as we are now leaving that mostly behind, we will see improvement as of Q1 already. Price erosion that we also see in Q1, of course. We still expect a step-up because of this big improvement in cost of yield. Craig Mcdowell: And then just a follow-up. I realize it's early, but I appreciate your thoughts on the acquisition announced with MSO around sensor portfolio by Infineon. Just wondering your reaction of how that might change competitive dynamics in that segment of the market where obviously you're strong. Marc Biron: Yes. In our, let's say, product scope or application scope, yes, OSRAM is not a real competitor of Melexis, meaning that I think this acquisition will not change a lot for us. Operator: The next question is coming from Francois Bouvignies from UBS. Francois-Xavier Bouvignies: I have actually really one question. I mean when I look at your revenues, so you mentioned flat year-on-year in Q1 and Q2. Now when I look at your competitors like Allegro, for example, which I think is the closest, I mean, they are growing their auto revenues by more than 20% year-on-year in December quarter and March, by the look of it, is still 19%, 20% year-on-year. So they are really growing significantly. You mentioned China growing 14% in the last 5 years, but I would imagine that the growth in China was actually higher than 14%. I mean, given all the EV growth that you have seen, the car sales as well in there. So the content and the growth in China was clearly higher than that. So what I'm trying to understand is, is there anything structural here? I mean, a bit more because it feels a bit more than an inventory correction, especially when you compare the growth with some other peers. Even NXP is growing 11% in autos. TI is growing low teens. STM is growing mid-teens in March quarter. So you seem to be well below the others. So I'm just wondering why is that? Marc Biron: I think there is for sure, nothing structural. I repeat that I was in China last -- 2 weeks ago. Yes, my conclusion from the trip, which was the same when I was in China in November, I think that the Chinese customers, they like the Melexis product. They have a lot of trust on our quality. Yes, they like our support, technical support is very important in China. I confirm there is no structural -- there are no structural problem in China, also not in Europe. Yes, we are facing this volatility. The order in China was very high in Q4. In Q1, it is lower because of this Chinese New Year, also because the incentive scheme for EV in China have changed from '25 to '26. But from my perspective, we still have the same traction. And we -- when we refer to the design win or when we refer to all the pipe of opportunity, the discussion with customers, I don't feel any problem there. Karen Van Griensven: Yes. And I also want to add that Melexis went -- started the cycle much later than all the other players in the market. Usually, we started later, but we also come out later. In general... Francois-Xavier Bouvignies: I understand that. Yes. But versus Allegro, I mean, I would say why they would see differently than you. I mean they do similar things, not only the same. But what is your revenue in China? I mean, in Q1, was it -- how much down it is China, you would expect to be? Karen Van Griensven: China, it will be down quite a bit compared to -- well, based on the order intake we have now because January was still strong. February, March is still obviously still order intake. February looks quite weak, but that's probably a lot to do with China New Year. And March, yes, orders are still coming in. So it's also -- even in Q1, it is difficult to predict where exactly we will be landing because of, yes, the very late order intake, certainly also in China. But it's particularly low compared to Q4. But as I mentioned, we don't -- yes, there is no reason to believe why that wouldn't throughout the year pick up again. Q1 tends to be always a lower quarter -- well, not always, but usually a lower quarter in China anyway. Francois-Xavier Bouvignies: So on the year-on-year China, what do you expect your guidance? Karen Van Griensven: On a year-on-year, yes, it will be probably close to what we had a year ago. It might be slowly lower. But like we said, order intake is coming in quite late. Philip Ludwig: Francois, maybe just to come back to some of your comparisons, it's Philip here. Allegro, I think the 5-year CAGR is 2% to '24, okay? We can update for '25 as well, whereas ours is 14%. In China, we outgrow Allegro as well over a 5 years period. So I know we look ahead. Of course, we also look ahead. But I think if we look over time, as Karen mentioned, the quarters are not always in sync. I think the long-term growth track record of Melexis stacks up well versus many, if not the majority of our peers. Operator: The next question is coming from Robert Sanders from Deutsche Bank. Robert Sanders: Yes. Sorry, the line just went bad. I didn't hear the answer to the last question. Did you say the year-on-year decline in U.S. dollars or euros for Q1 China alone? Did you answer that? Karen Van Griensven: Well, like I said, order intake is very late. There could be a decline in the first quarter, although in January, we haven't seen it yet. And this is what -- that's the reality. February and March is still in orders. So very difficult to predict even in 1 quarter where we will land, particularly for China. Robert Sanders: Got it. My question was more around in the medium term. So you've seen a lot of the BEVs being canceled by Western OEMs, more than 30% of launches have been canceled. It looks like EV demand is just not flying without big fingers on the scale. And now that they're taking away subsidies in the U.S. and China, it just doesn't seem to be as strong. So you're going to see a lot of people moving back to plug-in hybrids and zonal architectures as a kind of bigger source of differentiation. So does that affect your TAM growth? Because if I remember rightly, you brought it down at the CMD, your long-term growth. Does it affect how you think about that? Or are you kind of agnostic still to that trend? Marc Biron: I share your view indeed that hybrid, let's say, seems to be the preferred option for many of the customers and many of the manufacturers. And I would say hybrid is great for Melexis because there is -- and an electric engine and a combustion engine. Then we -- let's say, we win 2x because we contribute to the electric engine and we contribute to the ICE. Then for us, it's the best of both worlds, the hybrid motorization. And what I said during the introduction speech, in China, I was really impressed how much those hybrids were taking over because initially, let's say, the hybrid had a battery with, let's say, 50 kilometer range, but now it's 100, 150 and 100 to 150 kilometers. In Shanghai, for example, it's more than enough to move in the city during 1 day. And it's the reason why this hybrid is gaining traction. Robert Sanders: And what you see at the Western OEMs, obviously, they're restarting their development. I mean, a lot of their combustion engine R&D was shut down. Now they're restarting those teams. Is that a good thing for you because they will get more involved in the engine management side? Or is it there's a short-term issue because of cancellations and then a long-term gain because of plug-in hybrid ramps? Marc Biron: Yes, discussing with our customer, the Tier 1, the Tier 1 have faced indeed in '25, a lot of or some cancellation of platform. I think it's also one of the reasons of the current situation. They all told me that '27 will be different. And in '27, they forecast a lot of new platform, which is one aspect. And to answer your question, for Melexis, what is important is that either the electric engine or the combustion engine come with a new platform because the new platform is usually much more electronic rich with much more comfort, much more safety features, then those new platforms are always a benefit for Melexis. But it could be combustion engine or electric engine, it doesn't make a lot of difference for us because we are -- we have the same kind of contribution in both type of motorization. I repeat my previous answer, but hybrid is the best of both worlds for us. Operator: The next question is coming from Guy Sips from KBC Securities. Guy Sips: My question is on the inventory level of EUR 300 million plus. We see it increasing quarter-over-quarter. How comfortable are you with this inventory level? And do you expect that we are now on the peak? Karen Van Griensven: Yes, it is our -- it's indeed a peak level. As we progress in '26, we will probably keep it around that level, maybe a bit lower. But we don't have the intention to further increase it. Marc Biron: And I think this inventory is a strategic asset for Melexis because we have a lot of in-quarter order, and we can respond positively to those in-quarter order because we have the inventory with the right product. And when the business will pick up anytime soon, we'll be ready to ship to our customers, thanks to these inventories, and we really see this as an asset. And I think it's much more expensive to lose business in the future than to keep this inventory as it is today. Guy Sips: And a follow-up question on your sales in Europe, which is just above EUR 50 million in the fourth quarter of '25. And I think you have to go back to COVID times to see this kind of level. What is actually -- what could be a point for your European sales? Is it -- yes, can you elaborate a little bit on that? Marc Biron: Yes, the center of gravity of the business is indeed for the time being, at least moving from Europe to China or to Asia. That being said, yes, Europe remains very important. Also U.S. remains important. But this move from Europe to China is indeed the trigger for us to focus our organization on China. We have -- at the end of '25, we have updated our organization in China in order to give to this organization in China more autonomy, more autonomy in the business aspect to give them the opportunity to answer very quickly to our customers because we do realize that in China, speed is really a essence, and we should avoid the communication flow between China and Europe, then the autonomy has been given to the China team to be on top of the business discussion. And I think this is a very important asset for the future to strengthen our China team because indeed, for the time being, and I repeat for the time being, the business is moving to China. But we also see that in the expectation of the OEM, the European OEM in '26, but even more on '27, they will launch more and more new car with new platform, EV, cheaper, and it's not impossible that a kind of rebalance will happen later this year or later next year. Karen Van Griensven: And I just want to repeat that Europe had a strong start. Q1 is higher than Q4. Marc Biron: Yes. Operator: The next question is coming from Marc Hesselink from ING. Marc Hesselink: Yes. First, I would like to come back a little bit on the volatility that you call out on the revenue because I think the fourth quarter was a bit below what you initially expected, then another step down in the first quarter and a quite significant step-up in the second quarter sequentially. Just trying to understand that a bit better. What changed there? Because I think earlier, we talked more about small sequential improvements quarter-over-quarter. And now you certainly see this volatility. I think you discussed it, but just to really square what is really happening causing this volatility? Karen Van Griensven: Yes. So like we mentioned, what we -- the drop is fully for Asia and then also particularly for China. And China from one quarter to the other also last year can really move up EUR 10 million in one -- easily move up close to even EUR 10 million from one quarter to the other. So we don't have really snubber reason than there is huge volatility in China in general and that it is obviously also impacted seasonally by China New Year. Marc Biron: Yes. And it has been also amplified, sorry. It has been amplified by the change of incentive scheme in China at the end of '25. Marc Hesselink: Okay. Okay. And then the second one is a clarification on what you said on the pricing because I think you said that the ASP will be very close to '26 level to the '25. But you do call it out as one of the reasons for maybe a bit slower revenue in the beginning of the year or less -- no growth in the first half of the year. So just wanted to understand if you -- like product for product, are the ASPs stable? I think that would be probably a bit better than what you initially guided, which was the normal decline of 3%, 4%, I guess. Karen Van Griensven: No, we need to make that -- we need to clarify that. Stable ASP doesn't mean that we don't have price erosion. The price erosion is mid-single-digit expectation for '26, but the product mix has a positive effect in '26. This can vary from 1 year to the other, the product mix effect. Operator: The next question is coming from Michael Roeg from Degroof Petercam. Michael Roeg: I have a question about the China business, which was very strong in Q4. Do you have a sort of a crude estimate how much of your products end up with the top 5 Chinese carmakers and how much ends up with all the other names? Marc Biron: On the top 5 carmaker, I cannot answer. What we know is that, let's say, half of the Chinese business is for Chinese OEM and the other half is for the European OEM. Michael Roeg: And within those Chinese OEMs, you do not really have a good view on how much ends up with sort of the big companies, the familiar names and how much ends up with that very long tail? Marc Biron: No. Michael Roeg: Okay. Do you see a risk that if there eventually will be a shakeout of all those smaller players that eventually their car volumes will move to the big players, the big domestic players, which have much better pricing power than those smaller players? Have you done scenario analysis for that? How much that could impact your business? Marc Biron: Yes, the consolidation will indeed happen. There are a lot of OEM in China then for sure, consolidation will happen. But we don't have an accurate answer to your question. I think indeed, innovation will also help at the end, it's all about new products that we bring on the market to compensate this price erosion. Yes, we have -- in the product that we have launched recently, we have products with much more ASP, much more margin. I don't see any reason why this consolidation will be negative because on the other hand, having a lot of small customers, it's also -- it requires a lot of effort to support all those customers, especially in China, we have a lot of application engineers working with all those small customers, then there is also a very negative effect to have so many small customers. And I could also add that it's the case in Europe. In Europe, we have a lot of big customer and a very limited number of small customers, then it will probably indeed move in this direction in China, but we are able to manage it in Europe, then we will manage it in the same way in China. Michael Roeg: Okay. Well, my impression was that the bigger OEMs in China have much more favorable purchasing conditions so that if the volumes were to move to them, that it could affect your overall ASP in China. But you will be -- you think there will be some compensation in being able to lower your OpEx. Marc Biron: I think it's the same in Europe. The big customers in Europe. Our big customers in Europe have also a better pricing than the small customer. And it's why also we like this long tail for the reason you mentioned. But yes, it will be the same in China, and we will manage the situation in the same way. I think it's -- the price metric is always high volume, lower price. Karen Van Griensven: But overall, we expect high price erosion in China than in the rest of the world. That is calculated in our model. Operator: We go on now to the last question, and it's from Nigel van Putten from Morgan Stanley. Nigel van Putten: I just wanted to talk about the growth or the guidance for the full year, which is flat, maybe not comparing it to others, which have indeed sort of implied some growth you guys aren't able to. So how do I sort of get from -- I think in the past, you would say on sort of 0 SAAR growth still penetration would add, what, high single digits. Let's say that's mid-single digits today. You said pricing in the mix is kind of flat. There's no real inventory digestion going on. So how do I get from, let's say, mid- to high single-digit volume growth to 0 on the euro side? Is that the dollar? Is that sort of headwinds from the nonautomotive business? Is there a mix? Could you just give us some more color on the pieces -- the building blocks how to get down from a volume number to revenue number in euro? That's my first question. Marc Biron: It's a mix, as you mentioned, we did not discuss in the Q&A about the nonautomotive business. I mentioned it in the introduction speech. But yes, one of our big nonautomotive customer has decided to alternate their supplier. And I think it's quite normal. We had the chance to be during 3 years in a row in the application. In '26, they have decided to make the alternate, which affects our revenue. Yes, again, it's not abnormal. We are -- we have good hope that we will come back in the next years. We have good technical features. But this is indeed in the midst of answer. This is one of the reasons that we did not mention in the past. Nigel van Putten: It's great to receive one of the reasons. Can you quantify the impact and also give us just a bridge from -- because it's -- yes, I mean, I've covered companies for quite a while. It's always been volume growth. It used to be teens and high single digit. I think it's now mid-single digit, but still this is a material step down. And I don't have any ways to calculate that, then it would be super helpful, very helpful for you to guys to give a little bit more disclosure and color on how to model the business into '26 and what are the moving parts? Marc Biron: And our customer and probably also OEM are navigating to cautious recovery in auto, and it's why this volatility in sales order is coming. I think it's difficult to give more color and really to give the building block for your answer because of this high volatility. Nigel van Putten: But the whole volatility in the near term, and then I'll move on after this one. But I do want to try again. It's for the full year. So it shouldn't be -- it's not exactly normalized, but it's not the month-to-month volatility that you point out. I fully comprehend that. But it's just compared to peers and also compared to your -- the financial model, the growth model that I'm used to, this is very different. I mean I could have understand it. It used to be the bullwhip inventory effects, that is a big impact, but that doesn't seem to be driving it. So I'm just -- I need to update my understanding about how I model your top line, I think, and it would just be helpful if we can get a little bit more color on that. Marc Biron: In the longer term, we confirm our high single-digit growth. What we have mentioned to the CMD is still fully valid. We have the design win, we have the opportunity pipe. We have in our development, the relevant product to reach this growth. And in long term, I think the model did not reach. In short term, we have this volatility that we mentioned. We have the price erosion that we have mentioned, mid-single digit, low to mid-single digit. This is the reason of the change. But I repeat in long term, we are fully confident that what we have said to the CMD is still valid. We need now to face the short-term headwind. Nigel van Putten: Okay. More math now on the gross margin. I think, Karen, you've talked about the potential of sort of 4 percentage points worth of idiosyncratic or self-help or specific items. I think 2 percentage points related to the yield improvement. I think that's probably what we're seeing in the first half, if I'm not mistaken. And then on top of that, there was potential further improvement or the dollar, I think some normalization would have helped. You've mentioned the restructuring impact of about 1 percentage point before. So I'm just trying to get to the full year gross margin. It seems like given there's no growth either, we probably should assume like 40% for the full year. Yes, can you maybe elaborate a little bit if that's the correct way of thinking? Or is there an element missing? Karen Van Griensven: That is correct. Indeed. We need more operating leverage to push it beyond that 40%. Nigel van Putten: Okay. And maybe then just a quick follow-up. You've guided first half gross margin, not first quarter. I think it's just how you usually talk to the market. But should we assume that improvement towards 40% in the first quarter? Or is it more towards the second? So we step up from I don't know, 39.5% and then... Karen Van Griensven: From Q1, we expect. Operator: This was the last question in the queue. There are no more questions at this time. So I hand the conference back to the speakers for any closing remarks. Marc Biron: Thank you, operator. To summarize, 2025 was a year of navigating through cautious and choppy demand while maintaining our cost discipline. In parallel, we have introduced many innovations for automotive applications, grew business opportunities, accelerated our China strategy and took action to improve margins. These efforts will start to deliver in '26, and we will continue to build on them to further strengthen our business and to move towards our long-term objective. Thank you for joining the call, and goodbye. Operator: Thank you for joining today's call. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Prudential's Quarterly Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Tina Madon. Please go ahead. Tina Madon: Thank you. Good morning, everyone, and thank you for joining us. Representing Prudential on today's call are Andy Sullivan, Chief Executive Officer; and Yanela Frias, Chief Financial Officer. We'll start with prepared remarks by Andy and Yanela, and then we'll address your questions. Before we begin, I want to remind you that today's discussion may include forward-looking statements. It is possible that our actual results may differ materially from those statements. In addition, remarks made on today's call and in our quarterly earnings press release, earnings presentation and quarterly financial supplement, which can be found on our website at investor.prudential.com. include references to non-GAAP measures. For a reconciliation of such measures to the most comparable GAAP measures, and a discussion of the factors that could cause actual results to differ materially from those in these forward-looking statements. Please see the slide titled Forward-looking Statements and non-GAAP measures in the appendices to our earnings presentation and quarterly financial supplement. With that, I'll now turn the call over to Andy. Andrew Sullivan: Good morning, everyone, and welcome to our earnings call. Before turning to our full year results, let me take a moment to address the employee misconduct in our Japan business described in our press release yesterday afternoon. I want to emphasize that doing right by our customers is a core value of our company, and a cornerstone of what we stand for, and we are taking this issue extremely seriously. For nearly 40 years, Prudential has been a symbol of exceptional customer care in Japan and we are committed to restoring the standing that has long set us apart in that market. In January of this year, Prudential of Japan announced findings of an internal investigation in the instances of misconduct by certain of its employees. This misconduct very clearly does not meet our standards or what our customers expect of us. In consultation with the regulators in Japan, we have made the decision to voluntarily halt new sales at POJ for a 90-day period. To fully address the root causes of the misconduct, we are implementing a series of actions across the business which includes strengthening oversight of sales practices, governance and risk management. We will also be restructuring employee compensation and enhancing education compliance training and recruiting standards for all POJ employees. While we have set a 90-day suspension of sales, we will not resume distribution through the Life Planner channel, until we are comfortable that our internal compliance and oversight environment supports doing so. This could result in an extension of the 90-day period. These actions are essential to restoring trust in this important market. While there are financial implications to the sales suspension, we believe that this is the prudent path forward in addressing the misconduct and positioning our business in Japan to rebuild customer trust. We are working with local regulators and other key stakeholders to address these issues thoroughly. Implement the necessary remediation measures and uphold the highest standards of governance and customer care going forward. We expect an impact on 2026 pretax adjusted operating income of $300 million to $350 million, equivalent to approximately 5% of 2025 PFI earnings. Yanela will cover more details on the financial implications in her remarks. We're also establishing a customer reimbursement program that will be developed and administered by an independent oversight committee. We intend to make this right for these customers, and we remain deeply committed to responding in a manner that places customer trust as our highest priority. That is who we are, and we are confident we will come out of this as a stronger company. Now moving to our financial results. Last year, I set out 3 priorities that are essential to delivering stronger performance, more consistent results and sustained long-term value for our shareholders. These were evolving and delivering on our strategy, improving on our execution and fostering a high-performance culture. Our issues in Japan only reinforce that these are the right priorities and we must continue on the path my team has set. While we have more work to do across the company, I am encouraged by the tangible progress we have made. Over the last year, we sharpened the focus on our businesses in large and growing addressable markets where we have differentiated capabilities and believe we can earn superior returns. We executed with greater accountability and discipline as we streamline the organization and strengthened our core franchises. This progress makes clear that our brand, customer value proposition and scale our unique competitive advantages that position us for durable long-term growth as we reposition our company globally. In 2025, we delivered solid progress in results. For the full year, our pretax adjusted operating income was $6.6 billion or $14.43 per share, and our adjusted operating return on equity was approximately 15%, up nearly 200 basis points from the prior year. We also delivered nearly $3 billion to shareholders in the year through dividends and buybacks. Our full year performance displayed improved and more disciplined execution and demonstrated the momentum we believe we are building across our businesses as we continue to meet growing demand for our products fulfilled through our diversified distribution platforms, resulting in higher sales growth. Let me now recap the highlights across each of our businesses. In PGIM, we delivered strong investment performance last year with solid traction across our core capabilities, including public fixed income, securitized products and asset-backed finance as well as indirect lending. We also saw continued progress in newer vehicles, such as ETFs and are beginning to see tangible benefits from our new centralized distribution model. 2025 was a transformative year for PGIM. We moved quickly to integrate our asset management capabilities into one unified platform, enabling deeper client cross-sell engagement and reducing costs over time. Additionally, bringing together our public and private fixed income capabilities into a single $1 trillion global credit platform positions us as one of the largest and most differentiated credit managers in the industry. Clients value the ability to access the full spectrum of credit from liquid public markets to bespoke private solutions through one integrated platform with consistent underwriting, deeper origination and the scale to source opportunities others cannot. And as I've said many times before, I am a deep believer in being proactive in the marketplace which means we're continuing to be vigilant for the best opportunities to enhance our capabilities, scale our business and better serve our customers around the world. Alongside this momentum, it is important to acknowledge areas where we see pressure. As I noted on our last call, our fundamental active equity platform, Jennison, is not immune to broader industry trends and is experiencing systemic outflows with the continued shift from active to passive management. These outflows have weighed on PGIM's organic growth and earnings momentum. In addition, this quarter's net flows were impacted by a single low fee fixed income client withdrawal at the end of 2025, which was unrelated to performance. We continue to manage through these headwinds and expect offsetting growth over time as PGIM's diversified offerings across public fixed income, private credit and real estate continue to grow. The bottom line is we generated over $30 billion of total net inflows last year from these 3 asset classes. Additionally, our momentum is building in key growth areas, such as asset-backed finance, direct lending and ETFs. This success will be enhanced going forward as we start to realize the benefits of our newly integrated distribution model. The results of our U.S. businesses reflect the actions taken over the last year to sharpen our focus and leverage our competitive strengths. In retirement strategies, we delivered $40 billion of sales across our institutional and individual channels for the year. Reflecting solid demand, diversified distribution and our ongoing leadership in meeting the evolving needs of retirement customers. We continue to strengthen our solutions, improve the mix of products we sell and refine the capital and asset strategies that underpin our business. In Institutional Retirement, we remain well positioned to lead the large pension and longevity risk transfer markets in both the United States and Europe. In 2025, we delivered nearly $26 billion of sales, including our second longevity risk transfer transaction in the Netherlands. In Individual Retirement, we generated sales of $14 billion in 2025, capping an eighth consecutive quarter of more than $3 billion in sales, reflecting strength in RILA as well as growth in fixed annuities supported by strategic reinsurance partners, including Prismic. Our diverse product set and distribution strength are driving strong top line growth, a clear proof point of our focus on consistent execution. Group Insurance generated full year sales of over $600 million, up 11% year-over-year, underscoring the benefits of further product diversification and increasing our market presence in our premier segment. These are key areas of strategic focus as we continue to grow and expand the profitability of this business. In Individual Life, full year sales of $955 million increased 5% over the prior year as we continue to pivot our focus towards less capital-intensive accumulation products, including FlexGuard Life. We continue to deliver this new business growth at solid returns on capital. Now turning to our international businesses. In Japan, we are highly focused on the issue in POJ. That said, we are capturing growing customer demand for retirement and savings products, which now account for a majority of our sales in the country. Over the past 3 years, we have launched 10 new products in this category which have steadily gained traction and accounted for nearly 1/4 of 2025 sales. Now turning to emerging markets. This business reported record full year sales of $386 million on a constant currency basis, up 6% from the prior year. This growth is primarily driven by broader distribution in Brazil. As we turn to 2026, we will continue to evaluate our global footprint to ensure that we are prioritizing markets and geographies that are large and growing and where we believe we are competitively positioned to win and can deliver industry-leading returns on capital. The decision to exit our PGIM Taiwan business last quarter and our insurance business in Kenya last month are prime examples of us executing on this priority and driving stronger discipline across the company. As part of our focus on talent and high-performance culture, we continue to refine our management structure to make the organization more results-driven and accountable and to improve the speed of decision-making. The changes we made last year bring me closer to our businesses and their leaders as well as our customers as we execute our growth strategy in 2026. To conclude, we believe we've established the foundation for the broader reimagining of Prudential, one that positions us to lead and win in the markets we choose to compete in. While we are still early in this transformation the momentum we're building gives us great confidence in the road ahead. With that, I'll hand the call over to Yanela. Yanela del Frias: Thank you, Andy, and good morning, everyone. I will begin with covering our fourth quarter financial results before turning to the financial implications related to POJ. Our fourth quarter results reflected continued progress against the 3 priorities we outlined in early 2025, capping a solid year of financial performance. We reported fourth quarter after-tax adjusted operating income of approximately $1.2 billion or $3.30 per common share. These results include an after-tax onetime charge of $107 million or $0.30 per commenter, primarily related to severance, which I will discuss in more detail later on. Excluding the impact of this charge, after-tax adjusted operating income per share was $3.60, reflecting an increase of 22% over the prior year quarter. Let's now turn to Slide 4, which provides a high-level summary of our quarterly operating results by business. PGIM reported pretax adjusted operating income of $249 million. down slightly from the prior year quarter. Higher asset management fees driven by market appreciation were more than offset by higher expenses related to ongoing business investments including the continued expansion of our asset-backed finance platform and our technology and data strategy. Other related revenues were also weaker due to lower seed and co-investment income. Our U.S. businesses delivered pretax adjusted operating income of approximately $1.1 billion, a 22% increase compared to the prior year quarter. This result was driven by higher spread income and retirement strategies, coupled with more favorable underwriting results in Individual Life and Group Insurance and lower expenses in Individual Life due to onetime transaction costs that occurred in the prior year quarter. Partially offsetting these positives was lower fee income resulting from the ongoing runoff of our legacy variable annuity block. Our International Businesses generated pretax adjusted operating income of $757 million, modestly higher than the prior year quarter as higher spread income and more favorable underwriting results were partially offset by higher expenses primarily related to timing as we noted last quarter. Now turning to the key highlights on Slide 5. PGIM's assets under management of approximately $1.5 trillion increased 7% from the prior year quarter, driven primarily by market appreciation and strong investment performance. PGIM experienced net outflows of approximately $10 billion in the quarter across third-party and affiliated channels, reflecting the industry trend away from active equities as well as a single low fee fixed income withdrawal. Additionally, our VA runoff and the inherently lumpy nature of PRT new business impacted our affiliated net flows. As we noted last quarter, we expect PGIM to deliver over 200 basis points of margin expansion in 2026, accelerating the path towards our 25% to 30% margin target. Now turning to the key highlights on Slide 6. Our U.S. businesses again produced strong quarterly results, reinforcing the benefit of our diversified sources of earnings from fees, spread and underwriting income. Institutional Retirement reported sales of approximately $4 billion, including $1 billion of pension risk transfers across 4 middle market deals. While fourth quarter activity was relatively muted, our strong brand and our proven track record in executing large complex transactions position us well to lead in the sizable pension and longevity risk transfer opportunity across our core markets in the U.S., U.K. and the Netherlands. Individual Retirement delivered more than $3 billion in sales, driven by fixed and registered index-linked annuities. Our broad product portfolio provides flexibility to deploy capital where returns are most compelling. Additionally, we continue to innovate to address evolving customer and adviser needs. However, the runoff in our legacy variable annuity block remains a headwind. For 2026, we continue to expect $3 billion to $4 billion of quarterly account value runoff which translates into approximately $10 million to $15 million of pretax adjusted operating income runoff per quarter, compounding to $100 million to $150 million annually prior to market impacts on account values. Now turning to Group Insurance. Sales totaled $56 million in the quarter, reflecting continued momentum in our Premier segment in both Group Life and Disability as we execute our product and market segment diversification strategy. The benefit ratio of 82.5% in the quarter came in below our target range reflecting favorable life underwriting results and less favorable disability experience driven by higher new claims, coupled with lower resolution. In Individual Life, quarterly sales totaled $269 million, down from the prior year record quarter as we continue to pivot towards more capital-efficient products. On a full year basis, we increased sales traction and accumulation-focused variable life products, fueled by our strong brand and distribution footprint. Now turning to the key highlights on Slide 7. Sales in our International businesses of $525 million were up 4% on a constant currency basis compared to the prior year quarter, driven by growing demand for retirement and savings products in Japan and record sales in Brazil. While surrender activity in Japan moderated in 2025, it remains a headwind that will partially offset new business growth. We continue to closely assess macro indicators, including the value of the yen, which has been extremely volatile. We estimate that the impact to 2026 earnings from the excess surrenders that we experienced in 2025 will be roughly $50 million. Now turning to the key highlights on Slide 8. Our capital position and strong regulatory capital ratios support our AA financial strength and our ability to grow our market-leading businesses. Our cash and liquid assets were $3.8 billion, which is above our minimum liquidity target of $3 billion, and we have substantial off-balance sheet resources. The Board has authorized share repurchases of up to $1 billion in 2026 and increased the common stock dividend for the 18th consecutive year. Consistent with our approach across the enterprise, we remain well capitalized and manage our Japanese entities to levels aligned with our AA objective. ESR results remain well above our 150% operating target outlined last quarter, even with a sharp increase in long-term Japanese interest rates last month. Now let me take a moment to outline a few key financial highlights heading into 2026. First, as I mentioned earlier, we recorded a pretax charge of $135 million in our corporate and other operations related to our ongoing efforts to improve our organizational efficiency. These changes are expected to deliver approximately $150 million in pretax run rate benefits in 2027. I want to emphasize that the benefits from these actions were already embedded in our intermediate financial targets, including the target for our operating expense ratio. Second, on Slide 17, we have provided additional earnings considerations specific to 2026. And third, as Andy noted in his remarks, we have made the decision to voluntarily hold new sales in POJ for a 90-day period. I want to share our preliminary view of the financial implications for both the new sales suspension and the remedial actions we are taking. We currently believe that the impact to our 2026 pretax adjusted operating earnings will be in the range of $300 million to $350 million. There are 3 components to this estimate. The first is the impact of the 90-day new sales suspension, which we expect will be in the range of $150 million to $180 million. This range reflects the anticipated costs associated with sustaining the business and compensating the distribution force during the suspension period. The impact of suspending new sales activity, and anticipated higher surrenders. The second component is $70 million of estimated onetime costs, of which roughly 70% relates to customer reimbursement. The third is roughly $80 million in estimated lower earnings attributable to the gradual ramp-up of new sales through the remainder of the year once we resume sales. The lower sales and higher surrenders we expect this year will also have an impact on 2027 results. However, based on what we know today and assuming the 90-day new sales suspension, we expect the overall impact will be considerably lower in 2027. Now let me tell you what this means for our intermediate EPS growth target of 5% to 8%. Recall that our intermediate targets are for the 2024 through 2027 period. In 2025, we met our internal expectations for earnings growth, and we are on track with the actions and expense efficiencies that underpin this intermediate term guidance. That said, the financial impact associated with the POJ issue could bring us to the low end of this range by the end of 2027. In addition, to the extent that the magnitude and/or duration of the POJ issue is different than we currently anticipate we may not hit the low end of the EPS range by the end of 2027. We are providing these estimates to help frame the range of potential financial implications. But as Andy noted, we will not resume new sales until we are satisfied that our internal compliance and oversight environment supports doing so. We are closely monitoring each element of the financial waterfall that I just laid out, and we'll update you as we gain better visibility into the trajectory of POJ sales, surrenders and earnings. Despite these headwinds, it is important to remember that we are a large, diversified company with multiple sources of earnings and cash flows, and we are confident in the path ahead as we reposition Prudential to deliver strong value to shareholders. And with that, we're happy to take your questions. Operator: [Operator Instructions] Our first question today is coming from Suneet Kamath from Jefferies. Suneet Kamath: I wanted to start with Japan and the 90-day sales suspension. How did you arrive at the 90-day period? And was this done in conjunction with the FSA and other regulators in Japan? Andrew Sullivan: As you can imagine, voluntarily suspending sales in such an important channel for us was a very carefully considered decision and something that we didn't take lightly. We have the leadership in POJ right now focused on 4 major initial actions. Customer reimbursement, which Yanela spoke to. Life Planner training, which obviously will be a major focus during the shutdown period, enhancing our sales supervision and then Life -- redesigning our Life Planner compensation. As we looked at those 4 actions and the time frame it would take to make major progress, we thought that 90 days was a reasonable time frame to make meaningful progress. But I would reiterate what we -- what I said in my opening comments and what Yanela said in hers as well that we're not going to resume distribution in the channel until we're comfortable that the internal compliance and oversight environment really supports us reopening it. As far as your question on the FSA, I would reiterate that this was a voluntary decision. But as you would expect, we work closely with our regulators in every market, every single week. So we consulted with the JFSA before announcing this decision. Suneet Kamath: Okay. Got it. And then have you done a similar review for Gibraltar Life in terms of sales practice issues? And does the suspension have any impact on Gibraltar or any of the channels that you're talking about in Japan? Andrew Sullivan: Yes. So Suneet, yes, the answer is yes. We are conducting a similar review of Gibraltar. This is underway and in process and will conclude a few months from now. You should expect this, right, from a leadership team perspective here at PRU, we take the responsibility for making sure that every one of our operations in every market and every channel is conducted in the right way and that we keep our customers upfront as job #1. As far as any effects that we've seen so far, the only effect we've seen in Gibraltar is some modest pressure is the way I would frame it on recruiting of life consultants. But we intend to be very assertive in restoring the trust and confidence that people have of us half of us in Japan, and we intend to come out of this stronger. Operator: Next question is coming from Tom Gallagher from Evercore ISI. Thomas Gallagher: Andy, a few follow-ups on Japan. I guess, will you also suspend hiring new Life Planners while you shut down sales? Or are you going to continue normal course with hiring plans? And is the plan here to pay out special bonuses that vest over a number of years from a retention standpoint? Just want to see what you're doing to make -- to kind of ensure that you keep your -- one of your best assets, which is the Life Planner system intact while you go through this? Andrew Sullivan: Yes, Tom. So let me start by just saying thank you for your last comment because we really do believe that this is a special company and an incredible asset. To take your first question, we are not stopping recruiting of new Life Planners in the channel that will continue. But we are taking decisive steps that is every bit intended to preserve the distribution force. Two things I would specifically mention. The first is investing in our Life Planners in their training and development. So we always do that, but over the next 90 days, it will be at a much enhanced level. And the second is providing financial support to them to retain them over the longer term. I'm not going to get into the exact specifics of what that looks like. We do have confidence that these actions are going to help us retain this special asset. But I would mention one other thing, Tom, that I think is really, really critical. Taking these actions also ensures that we have a company that our employees could be incredibly proud of and that they want to work for. And in particular, in Japan, that is one of the most important elements that goes into retention. So that combination of actions will help us retain the life planners, but we know will also help us with the broader employee population. Thomas Gallagher: And for my follow-up, I had read a news report that indicated the FSA was going to conduct an on-site investigation for POJ as well and it said it was going to start in February. Just want to see if you can confirm whether that's begun? Is that going to be going on side by side while PRU does its own due diligence? Andrew Sullivan: So Tom, what I would say is we don't comment on specific ongoing interactions with the regulators. Obviously, this is something that, as I said earlier, we were in -- discussed with the FSA before we voluntarily see sales. We have regular ongoing interactions with the FSA every single week. But as far as the specifics of ongoing regulatory actions and the actions they take, I'm not going to comment. Operator: Your next question today is coming from Wes Carmichael from Wells Fargo. Wesley Carmichael: My first one, also on Japan, but maybe a little bit of a different topic. In terms of surrender activity that you're seeing, I mean, I think there's a couple of components. Maybe one is FX with the yen at [ 156, 157 ] versus your guidance for strengthening to [ 135 ]. And I just wanted to ask on loan rates being much higher, are you seeing an impact to surrenders there? And then just maybe on POJ with any kind of fallout from this conduct. Is there any way you can dimensionalize those 3 impacts, please? Yanela del Frias: Yes, it's Yanela. So let me start on the surrenders. So in terms of the impact of the yen, the depreciation of the yen since 2022, has driven an elevated level of U.S. dollar product surrenders. We've been talking about this for several quarters. The surrender rates declined to mid-single digits through third quarter 2025, in line with the stabilization that we saw at that time. But we did see it pick up this quarter, fourth quarter '25 with the renewed yen weakening. So we have seen the volatility as well. So to give you a sense, fourth quarter '25 surrender rate increased to 6.3% from 5.6%, so a slight uptick. But we're still below the rates that we've seen earlier in the cycle. And the fact here is that the customers with heightened sensitivity to FX rates have already surrendered. And frankly, this kind of leaves us with a block that is less sensitive to FX movement. So that's how I would position that. You did hear in my opening remarks that for the full year 2026, we expect the impact of 2025 surrenders to be in the range of $50 million. With regards to rates, frankly, we view the impact of rates in terms of earnings and sales as a positive. It allows us to offer more attractive yen-denominated products and invest in new money rates that are higher. Andrew Sullivan: Wes, I would just add because I think you also mentioned, given our misconduct issues. We expect sales and surrenders obviously, to be impacted in the short term that's included in the financial estimates that you heard from Yanela at the opening of the call. We're going to continue to do the right things and put our customers first. What I would say is, remember, we have an exceptional all-weather product portfolio that really protects our customers and helps them in both protection and retirement so while we expect near-term impacts, we gave very thought -- a lot of thought and care to the numbers that we provided to you. Obviously, it's early days, but we'll continue to monitor this, but we know that over the longer period of time, will be stronger. Wesley Carmichael: That's very helpful. And just my follow-up on ESR, I know that's coming up for publication shortly. But just wondering if you could touch on what -- how that moved in the quarter, higher yen rates. I think Yanela, maybe a couple of quarters ago, you gave a little bit of sensitivity on ESR. But did that pressure the ratio in the quarter, perhaps there's some positive equity market performance. But if there's anything you can help us with, that would be great. Yanela del Frias: Yes. No, absolutely. So first of all, I would start with ESR remained well above our 150% operating target that we outlined last quarter. As you know, that's the target that we believe is consistent with AA standards. And this is the case even after the sharp increase in rates that we saw in January so we still remain above that target. And frankly, as we discussed last quarter, we are managing ESR to a level at normal times that is well in excess of what we believe to be the AA standard and that provides ample cushion following market stresses, and that cushion has absorbed some of the increase in rates that we saw. And so the sensitivity I shared a few quarters ago still holds if Japanese rates rise 50 basis points and equity markets decreased by 10%. We do not expect ESR to be binding in terms of Japanese cash flows. I do recognize that there's been a sharp rise in rates. So I would also add that from where we are today, around above 3.5%, right above 3.5% for the 30-year rates, even if rates were to increase by approximately another 100 basis points, 90 to 100 basis points, we would still be within the operating target range. Operator: Our next question today is coming from Bob Huang from Morgan Stanley. Jian Huang: I just have one question circling back on the 90-days sales suspension. If we look at prior other companies miss behaviors when they get caught, it generally felt like the penalty is a lot longer than 90-days. Do you feel that the 90-days is enough to kind of regain the public trust, so to speak, is 90-days enough for you to normalize back to a normal sales environment, I guess, is what I'm trying to get at? Or do you think the public will naturally give you a much longer penalty time frame in this particular situation? Andrew Sullivan: Yes. So Bob, thank you for the question. So first, let me start just by reiterating what I've said earlier, which we sized the 90 days based on the set of actions that we felt was necessary to begin that restoration of customer trust. So there's 4 items I went through earlier. And we believe that 90 days is that right time frame. That said, as you referenced, we won't talk about any specific situation. every situation is unique. There certainly have been a variety over the last decade or so of other companies that have had cessation periods, some of those not being voluntary. But what you should understand as part of this is this is a collective set of actions that we're taking. The cessation of sales is one of them in order to begin this beginning of the restoration of trust and confidence and we're obviously going to work very closely with the regulators. But this is much more, as you heard me emphasize, this is about when we feel as a leadership team and as a company, that we can resume sales and feel fully confident in the customers being placed first. We think 90 days is the right estimate for that, but we will share information if that changes in the future. Operator: Your next question today is coming from Joel Hurwitz from Dowling & Partners. Joel Hurwitz: Just given the macro with the yen and JGB movements and the lost earnings from the POJ sales issues and remediation, what's the impact to your cash flow from international? And does that drive any impact to your overall capital deployment outlook? Yanela del Frias: Yes. Joel, so we do not expect a significant impact to cash flows out of our Japan businesses. I would remind you, we generate these cash flows from multiple sources and legal entities. This includes the 3 legal entities in Japan, POJ, Gibraltar, PGFL. It also includes Prudential Insurance, our U.S. statutory entity, which has historically reinsured a good amount of Japan's U.S. dollar business; and thirdly, Gibraltar Re, our Bermuda entity, which also reinsurance business from Japan. So the fact is that we're not overly reliant on any single vehicle to deliver cash flows to PFI either in Japan or across our businesses. Of course, we continue to monitor the Japan situation carefully, but we do not expect an impact to our capital deployment plans or our shareholder distribution. Joel Hurwitz: Got you. That's helpful. And then just a follow up on Wes' question on surrenders in Japan. Any impact from the higher JGB yields on the yen business that you write? Yanela del Frias: Yes. No, there's some modest impact but the reality is that 90% of our earnings come from U.S. dollar products. So it's really the yen impact that will drive our earnings sensitivities. Andrew Sullivan: And Joel, the only thing I would add to that, and we've talked about this in previous quarters. I think there's 2 things to keep top of mind. One is that we have this all-weather portfolio, where we now have a much better blend of yen and U.S. dollar-denominated products. And we, over the last couple of years due to the surrender headwinds had actually enhanced our staffing across our distribution teams and across our service teams because even if there is pressure from some of these, I'll call them, economic type things. At the end of the day, the customers still have needs and generally move from one type of product to another and we make sure that we have the right staffing and the right engagement with the customer to catch those flows. Operator: Your next question today is coming from John Barnidge from Piper Sandler. John Barnidge: I wanted to -- my question, the first one is on kind of the exiting the businesses in Taiwan and Kenya over the recent several quarters, are you able to dimension the size of the businesses that are kind of like up for a review in international markets where you don't view yourself as a leader? Andrew Sullivan: So John, maybe what I would do there is just talk more about strategically how we think about the strategy. As you've heard me say before, we are evaluating our global footprint to prioritize markets that are large and growing that are -- where we're well positioned to win, given our differentiated capabilities and are spots that we think we can deliver industry-leading returns. The other part of this is we are focusing our capital and our investment dollars because we think that is very, very important in order to be a winner in our chosen spots. For emerging markets, our main focus is twofold. It's Brazil, and Brazil is running very, very well. We had another record sales quarter there. And second is our Habitat business where we have a very successful pension business. As far as when you say dimensionalizing, obviously, our -- I'll use the words by far, predominant or Japan and in our international operations and as far as the percentage of earnings. So that's the lion's share. John Barnidge: My follow-up question on Japan. If we get an extension of that 90-day suspension, does the impact from less sales volume actually compound and grow similar to how the runoff of the VA block compounds? Yanela del Frias: So John, so let me maybe walk through the components of the $150 million to $180 million, which is the impact -- the direct impact from the suspension. So we have a couple of components there. The direct impact of the lost sales is roughly 20% of that number. We also anticipate higher surrenders. That's also about roughly 20% of that number. And now with regards to surrenders, it is uncertain whether they'll continue at the level that we're expecting and anticipating but that's the number that we built into the 3-month number. And then the remainder is related to anticipated costs associated with providing financial support to our distribution force. That is not something that carries over. That is a discretionary decision that we've made during that 3-month period. And so therefore, that is really tied to the period where we have suspended sales. Operator: Next question today is coming from Mike Ward from UBS. Michael Ward: I was just wondering if you guys had any update on in Japan on policyholder behavior in January or year-to-date thus far? And I think the comments sort of largely pertain to '25 activity. Andrew Sullivan: Mike. So yes, it pertains to '25, but I would tell you, there's nothing new or different as far as '26 other than, I would break this into a couple -- into the 2 components, right? There's the impacts on policyholder behavior that are more driven by, I called it earlier, the economic effects, the FX rate, the interest rates. And obviously, those -- all of a sudden wouldn't change '25 to '26, they're directionally similar. The thing that is different is the effects of the misconduct and the perception issues and public reaction. The press release was done in January. The press conference was held and was quite prevalent in the media. So 2 different effects. But maybe one thing I would tag on is the change in the interest rate environment in Japan is, I think, something to really take note of and is for historical terms, quite dramatic. But the things we're observing, and this is over a longer period of time, not just the beginning of '26. One is demand for yen products is gradually increasing because of that. We think that's a good thing, right? The fact that there is an interest rate there, we could deliver products of greater value. And the other thing is we've talked about in the past is the government is incentivizing their citizens to take more investment risk and seek higher yield. And we are seeing customers that have a higher risk profile or a higher risk tolerance and are seeking improved returns. So as those shifts are occurring we feel very good about our all-weather product portfolio, the strength of our distribution to capture the changing nature of this marketplace. Yanela del Frias: And Mike, what I would say is that the assumption or the estimate that we have embedded in the $100 million to $180 million of impact of the sales suspension for surrenders, is informed by what we have seen since the press release and since the results of the internal investigation have been published publicly. Michael Ward: Okay. That's helpful. And then one of the things I'm wondering -- I don't think we've really touched on this, but just the inflows and outflows. I'm curious if you can quantify at all like the level of outflows that you can absorb thinking about capital and liquidity and the fact that you're basically cutting off new business. I'm just trying to get some comfort in this dynamic. Yanela del Frias: Yes. So Mike, I'll start -- I mean from a capital liquidity perspective, as I mentioned in the answer to the other question, we do not expect this to impact our cash flows out of our Japan operations. Part of it is because we have multiple sources of cash flows, as I mentioned. From a liquidity perspective, we -- the majority of the Japan portfolio is in JGBs. We do not expect an impact of this on liquidity. And again, we've sized the impact of surrenders during this 3-year period -- 3-month period, and it is roughly 20% of the $150 million to $180 million or $30 million. Andrew Sullivan: Yes. So Mike, all I would add is, obviously, we've been in the market for 40 years. These are very, very large of in-force blocks of business. So the impact of new sales, I don't want to underplay it because, obviously, this was a difficult decision and very important, and we frame the financial impacts for you compared to the in-force this cessation is -- compared to the in force, it's not large. So that's why Yanela just went through the numbers, and we're comfortable with those numbers. Operator: Next question today is coming from Jimmy Bhullar from JPMorgan. Jamminder Bhullar: So first, Yanela just on your comments on cash flow not being impacted based on this. I realize in the short term, there's not exact correlation between income in the businesses and cash flow. But eventually, there should be an impact to the extent that earnings in the business are depressed either because of fines or just other actions or just spending to remediate what's been going on. Wouldn't there be an eventual impact on cash flows beyond this year or next year if the earnings, in fact, are depressed in the business? Yanela del Frias: Yes. No. So what I've given you is what we expect for 2026, and that is correlated to the $300 million to $350 million impact we expect this year. As I said, if you assume the 90-day sales suspension, the impact to '27 would be less lower than that. If the impact continued, we would see an impact on continue to expand on cash flows but what we're giving you is based on what we know today. Jamminder Bhullar: And then just, Andy, on -- the business has fairly high persistency. So obviously, sales don't -- or the lack of sales doesn't really affect earnings in the short term that much. To mean the bigger impact of the lack of sales would be just your ability to retain agents because if people are not able to earn income for much more beyond 3 months than the sort of distribution channel begins to melt away. But I don't know if you view that as a credible risk and sort of what are your view -- what are the sort of things that you could do to ensure that you can retain the agents if, in fact, the suspension period is running longer. Andrew Sullivan: Yes. Jimmy. So yes, first of all, that is of paramount importance because this is -- we consider this to be an incredibly valuable franchise and one of the best operations in Japan. I'll just go back to my earlier comments. We are taking decisive steps to make sure that we preserve the Life Planners, but also the other employees in POJ. And the 2 predominant actions is investing in our Life Planners, training and development. And second is providing them ongoing financial support so that we do retain them over the longer term. But I would also reiterate what I said, people work here at Prudential because they're proud of the company. We're a purpose-oriented company and us taking assertive action and my words leading from the front on this issue. We'll make sure that people are proud to work here and that's as important to retain people as the compensation and the training. Operator: Our next question today is coming from Jack Matten from BMO Capital Markets. Francis Matten: Just one follow-up on Japan. Regarding Japan FSA, it sounds like you're in contact with them regarding the actions that you're taking voluntarily. But just wondering if there's a possibility that they could impose either a fine or some other financial or operational impact beyond those voluntary actions? Or are you comfortable that they're satisfied with the proactive steps that you're taking? Andrew Sullivan: So Jack, I'll go back to what I said, which is we won't comment or speculate on what the regulators actions are or may be. But we are working in collaboration with them on a weekly basis. They were aware of our voluntary decision to cease selling and the most important thing that we could do to make sure that we come out of this as expeditiously as possible and as strong as possible is stay focused on the set of actions that I've already shared. Francis Matten: Got it. Okay. And then can you just follow up on free cash flow generation more broadly. I know you have the target of 65% of net income over time. From a payout standpoint, you're on track to do, I think, around $3 billion again in '26, including dividends and buybacks. That $3 billion would apply a pretty high conversion rate relative to where your net income has been running in recent years. Just want to make sure you feel that the level of return sustainable given that net income trend and the potential impacts in Japan that you've talked about? Yanela del Frias: Yes, Jack. So we have not changed our capital deployment priorities. So we are continuing to focus on balancing the preservation of financial strength and flexibility, investing in our businesses and shareholder distributions. The fact is that cash flows and dividends from our operating entities are not linear and throughout the years and across the year so that's why the 65% is an overtime measure. And the 65% correlates to the distributions that we have put out there, the $3 billion. So we are confident in our cash flow generation, again, recognizing that the timing of cash flows can be volatile in that linear, but also that is based on our capital allocation decisions as well. So we actively manage capital deployment decisions through out the year. This is a dynamic process for us. And again, I would just say, I would also highlight that we have strong cash balances at the holding company and strong financial ratios at our operating entities. Operator: Our next question today is coming from Yaron Kinar from Mizuho. Yaron Kinar: Just going back to Japan for a second. The $350 million expected impact to operating income, does that include reimbursements to customers on the civil side? I'm not talking about the regulatory potential fines and whatnot? Yanela del Frias: Hi Yaron, yes. So the $300 million to $350 million, if you think about that, the second component I mentioned, the $70 million onetime cost does include and it's about 70% of the total customer reimbursement. Yaron Kinar: Got it. Okay. And then moving away from Japan, I'm sure you'd like to. On the -- sorry, RILA sales slowed down in 2025, fixed annuity sales picked up. Can you talk a little bit about spreads and expected returns in each? Andrew Sullivan: Yes. So let me take that and let me just more broadly address what's going on in the space. So obviously, we've talked about the RILA market becoming more competitive, and that remains to be true. We've gone from 5 competitors to '25. And we always look for ways to differentiate ourselves that beyond price. We have a great all-weather product portfolio. We have very strong service and our brand matters. So while our RILA sales were down somewhat, our fixed annuity sales were up. In essence, we've done a lot of work to innovate and broaden our product portfolio that enables us to lean into the customer demand across a whole range of market environments. As far as the pricing environment, we're always going to be disciplined and ensure that we have profitable sales. And we're not focused on just driving a sales number. So it's more -- it's about returns and profitability. But this is an area given the longevity needs, the income needs of the U.S. society that is a sizable market that's going to grow for a very long time. and we're really well positioned to take advantage of that secular tailwind. So we don't get overly exercised quarter-to-quarter or specific product to specific product. It's more about long term, we know we're going to be a winner. Yaron Kinar: And specifically on the returns there, can you compare the returns in the RILA book versus the FA book as they are today? Andrew Sullivan: Yes, Yaron. I'm not going to provide product-specific spreads or returns. Operator: Our next question is coming from Tracy Benguigui from Wolfe Research. Tracy Benguigui: Staying with Japan, since the value of new business takes a while to materialize, how should we think about the longer-term impact to earnings from pausing new business? Should we look at that $80 million third component of that $300 million to $350 million for '26 and carry that over to '27 and beyond? Yanela del Frias: Tracy, no. I wouldn't -- no, we wouldn't do that. So the way to think about it is of the $150 million to $180 million component of stopping sales, 20% of that is due to not selling, right? So that's about $30 million. Then the $80 million is really what we think about when we ramp up because we don't assume that we immediately go back up to full sales. And frankly, so we're ramping up throughout the year, getting up to about 90% sales levels through 2027. So the $300 million to $350 million includes no sales for 90 days and then a slow ramp-up throughout the year that gets to 90% by the end of 2026. So in total, what this results in is that POJ sales will be 50% lower in 2026 from normal levels. Tracy Benguigui: Okay. I just to give you a breather on Japan. I like seeing your private credit disclosure. I'm just curious, in your definition of traditional, are you including private letter ratings and on that? If you could just give a breakout between the large 3 versus the smaller agencies? Yanela del Frias: Yes. So we primarily rely on the 3 large agencies. And what I would say in terms of sort of the smaller ones and Egan-Jones specifically, we virtually have no exposure to Egan-Jones Tracy Benguigui: Okay. And just if I could throw another quick one in. I saw an announcement that PGIM is expanding $1 billion into private credit secondaries. Will the general account be part of that ? Yanela del Frias: Yes. I mean, look, the general account is -- we're always looking at asset diversification, how that matches up with our liabilities. We are very comfortable with private credit as a long-term asset supporting our liabilities. The reality is we've been investing in underwriting private credit for a long time. We see value in private credit for the general account, and we see opportunities in terms of where we can pick up additional investment yield portfolio diversification and get better downside protection at the end of the day. So we continue to see this as a good asset class. 85% of our private credit exposure is investment grade. These are largely private placements with strong covenants and downside protections. And historically, we've consistently performed better in these private credit investments than equally rated public during economic downturn. So this is a good asset class for us. Andrew Sullivan: Yes. And Tracy, maybe just let me add in from the PGIM business perspective. We're really excited about the secondary space in general across asset classes. I think you probably recall, we bought Montana Capital Partners, a private equity secondary business back in 2021. That's now fully assimilated into PGIM. And we believe that we could combine our world-class credit prowess with this deep secondary's expertise. And we're already seeing -- so we just talked about the general account. We're already seeing strong third-party client interest in this capability, and we see this as a really good growth extender PGIM. Operator: Our next question is coming from Alex Scott from Barclays. Taylor Scott: Thanks for squeezing here in the end. First, I do have one on Japan. I just wanted to see if you could opine at all about what this does just at a more high level to the trajectory of revenue. And I'm just sensitive to it because I think you guys been talking about maybe some of the Life Planners beginning to sell more financial products and we'll be interested in does this set that back and by how much? Or is it more permanent? Because I think we may have had something for that is an offset in our revenue growth. And I just want to make sure that I get that consistent with what you're expecting? Andrew Sullivan: Alex, it's Andy. I'll take that. So I guess the first thing I would say is, this is really early days in navigating the situation. But I would always turn to long-term trends and secular tailwinds. And in reality, what we're seeing in Japan is, it's one of the wealthiest markets in the world where we have incredible distribution despite this near-term challenge. If 10,000 captive agents, we have incredible bank access, great independent agent access. We are looking to rotate more towards retirement and savings and investment. If anything, we are seeing very clear evidence that the consumers in Japan want to seek higher yield and want to seek investment type products. So while I would expect that we're going to see pressure on the protection side, I think we have everything we need to rotate as the market rotates. And while it's early days to talk about specifically this issue, there's a longer-term secular tailwind that we would expect to be able to grow over the longer term. Taylor Scott: Got it. Okay. That's helpful. And then maybe my last one on PGIM flows. They generally been doing pretty well over the last year but a little bit of a setback. I think there's some lumpiness to it this quarter. Is there any element of that that's sort of some of the yen-based investors that have been investing in USD and maybe higher rates in Japan is causing some lumpiness in terms of accounts being pulled back to just invest in yen? I mean, is that something you're seeing there? Or is there not that kind of dynamic, and we should see this kind of revert back to positive flows? Andrew Sullivan: Yes, Alex, let me start directly and then talk more broadly about flows. So directly, I do not believe that, that is in any way kind of the factor that you're seeing show up in our flows that may be more of a minor factor or more specific to certain individuals, but it's not really the story when it comes to our flows. And as you know, when we talk about flows, we talk about total flows. What we're seeing on the third-party side is consistent with things we've talked about in the past and just be very upfront, we're not pleased with our flows this quarter. In retail, we're seeing this very heavy headwind from active to passive management. Jennison is a great platform. and customers expect public equity as part of their portfolio. So it certainly is an important part of our system, but that is quite a headwind to overcome on the retail side. On the third-party institutional, we have some of the largest clients in the world. And that can inherently make things lumpy on a quarter-to-quarter basis. And what we saw, as I said in my upfront was a fairly sizable low fee redemption that was one of these lumpy quarter-to-quarter. We've seen that go the other direction in the past as well to our benefit. So I don't think the yen is a driver here. It's more of those other factors I spoke to. Operator: Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further closing comments. Andrew Sullivan: So thank you again for joining us this morning. As we outlined, we are moving fast. We're moving with discipline to address the issues in POJ. Our commitment to the highest standards of customer care is absolute. At the same time, we remain focused on executing on our 3 priorities and driving momentum across our businesses as we lay the foundation for a stronger, more durable growth pattern. We're moving with speed to deliver the value that our customers and our shareholders expect and deserve from Prudential. I just want to close, as I always do, by recognizing our employees around the world for the dedication and commitment that they show every single day. Thank you for everything that you're doing for our customers and for each other. And with that, we'll conclude our call. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Please stand by. Welcome to McKesson Corporation's Third Quarter Fiscal 2026 Earnings Conference Call. Please be advised that today's conference is being recorded. At this time, I would like to turn the call over to Jeni Dominguez, VP of Relations. Please go ahead. Jeni Dominguez: Thank you, operator. Good afternoon, and welcome, everyone, to McKesson Corporation's Third Quarter Fiscal 2026 Earnings Call. Today, I'm joined by Brian Tyler, our Chief Executive Officer, and Britt Vitalone, our Chief Financial Officer. Brian will speak first, followed by Britt, and then we'll move to a question and answer session. Today's discussion will include forward-looking statements such as forecasts about McKesson Corporation's operations and future results. Please refer to the cautionary statements in today's earnings release and presentation slides available on our website at investors.mckesson.com and to the Risk Factors section of our most recent annual and periodic SEC filings for additional information concerning risk factors that could cause our actual results to materially differ from those in our forward-looking statements. Information about non-GAAP financial measures that we will discuss during this webcast, including a reconciliation of those measures to GAAP results, can be found in today's earnings release and presentation slides. The presentation slides also include a summary of our results for the quarter and guidance assumptions. With that, let me turn it over to Brian. Brian Tyler: Thank you, Jeni. Good afternoon, everyone. Appreciate you joining McKesson Corporation's fiscal third quarter earnings call. Today's results once again demonstrate the strength and durability of our business. Revenue and adjusted EPS grew double digits driven by continued momentum across oncology, biopharma services, and North American distribution. The consistency of this performance gives us the confidence to raise full-year EPS guidance to a range of $38.80 to $39.20, which reflects 17 to 19% year-over-year growth. I want to thank team McKesson for their unwavering commitment to excellence and innovation, driving tangible impacts every day for our stakeholders and keeping patients at the center of everything that we do. Today, my remarks will focus on the continued progress of our company priorities and the momentum we are driving across the organization and, of course, recognizing the dedication and engagement across team McKesson. Then, as is customary, I'll hand it over to Britt for a more detailed review of the financials. So let me start where I usually do with our people and our culture. We aspire to be the best place to work in health care, and supporting our employees' growth and success remains a top priority. Our employee resource groups play a critical role in strengthening connections and reinforcing our culture of care and belonging. These employee-led networks empower colleagues to come together to advance the business and to build an environment where everyone can thrive. This year, we're pleased to see membership of more than 30%. Participation in these groups results in increased employee engagement, improved retention, and better business outcomes. Now let me move on to our two strategic growth pillars: oncology and multispecialty and biopharma services. Within our oncology and multispecialty business, we continue to support a growing network of providers through a portfolio of services including distribution, practice management, commercial services, and clinical research. Today, the US Oncology Network has approximately 3,400 providers, and Prism Vision brings together over 200 providers in retina and ophthalmology. During the quarter, we continued to make progress in the integration of Florida Cancer Specialists and Prism Vision, contributing meaningfully to the strong performance of the segment. Oncology continues to be a compelling growth area, and we're leveraging our scale, leadership, and connectivity in the community space to stay ahead of the market's evolving needs. Recently, we released our advancing community oncology report highlighting the central role of community practice in cancer care and the anticipated growth in precision medicine and innovative therapies. These insights underscore the strength of our platform and the opportunity to leverage our solutions to deepen provider and biopharma partnerships, to expand access to next-generation treatments, and to address barriers to care in the community setting. The report highlights our role in helping community providers navigate a dynamic policy environment. We have and will continue to be actively engaged with lawmakers, patient coalitions, and provider organizations to advocate for changes that will expand patient access and support the growth of community practices. We firmly believe in the unique value of community-based care and the importance of advancing high-quality local cancer care in particular. In November, we hosted our inaugural McKesson Accelerate conference, an annual event focused on the future of community oncology. With more than 1,500 industry leaders in attendance, the event brought together the people, the insights, and the innovations that will strengthen care delivery and advance patient outcomes. It reinforced the powerful momentum across our oncology platform and the critical role McKesson Corporation plays in shaping the future of cancer care together with our many partners. Moving on to our 50 new programs across 43 unique brands to our platform, highlighting the strong demand for our access and affordability solutions. With the pace of drug innovation accelerating, we're energized by the tremendous opportunity to bring novel therapies to patients and to enable real-world impact. To achieve this goal, we continue to invest thoughtfully across the business, modernizing and expanding the services we provide to our biopharma partners and building next-generation patient access and affordability solutions. As an example, we're investing in capabilities to simplify the electronic patient enrollment process, reducing time from days or weeks to sometimes just minutes, while reducing administrative errors and improving accuracy. Today, we're digitizing enrollment for more than 1,600 specialty medications, creating an opportunity to apply our experience in improving access to retail medications and helping stakeholders navigate through the complex enrollment process for specialty medications. Our evolving suite of solutions will accelerate the patient authorization workflow, speed up the process for patients to access medication, introduce transparency with real-time prescription benefit check, and improve affordability with automated searches for financial assistance programs. We're also focused on opportunities that improve our own workflow efficiency. By applying technology automation and enhancing training to streamline our operations and elevate the customer experience, we are improving our efficiency. As an example of this, in our annual verification season, each full-time employee is successfully supporting 120 more patients than we achieved last year. This is a meaningful increase in our productivity. Let's move on to our pharmaceutical distribution business in North America, which I would remind you includes our combined footprint in the US and Canada. We continue to see strong broad-based momentum, supported by stable utilization trends, strength in specialty, and focus on operational excellence. Our growth is underpinned by the strength of our long-standing strategic partnerships with manufacturers. Together, we're navigating an evolving market, shaping the future of health care, and advocating for solutions that will improve the access and affordability of care. In January, the Inflation Reduction Act's plan Medicare Part D price changes went into effect. We work closely with our manufacturer partners to ensure a smooth transition. As a trusted distribution partner, we bring unmatched scale, deep supply chain expertise, and broad channel reach to deliver exceptional quality every day. We're positioning the business for long-term growth by investing in capabilities that meet the evolving needs of our customers and the market. An example of this would be our multiyear plan to expand the refrigerated capacity across our network. We're halfway through this five-year effort, and once completed, we will have increased refrigeration capacity at many of our forward distribution centers by more than 50%. This expansion strengthens our ability to support temperature-sensitive products and further strengthens our commitment to meeting customer requirements with operational excellence. Within our North American pharmaceutical business, our teams continue to leverage AI and automation to drive efficiencies. In Canada, we're modernizing our contact center digital operations to create a more advanced and simplified customer care experience. It includes capabilities like agent assist and enhanced live chat. Our early pilots are demonstrating strong results, close to 100% service accuracy and reliability while reducing turnaround time. In the US, we launched an AI chat tool in November to specifically handle customer inquiries related to the Drug Supply Chain Security Act. By enabling natural language answers to complex DSCSA data questions, we prevented 75% of inquiries from being escalated and materially improved first contact resolution. These are strong examples of how we're using technology to simplify the supply chain at scale while improving customer experience. And lastly, I'd like to note in this segment, I'm proud to share with everyone that recently our HealthSmart Pharmacy franchise was honored as a recipient of the 2026 American Pharmacists Association HAB Dunning Award. With this award, we're joining a prestigious list of chain pharmacies and other industry supporters who are dedicated to advancing the practice of pharmacy. Let me give you a brief update on our portfolio. We continue to progress in our separation of the medical-surgical business. On January 1, we reached a major milestone in the separation journey with transition service agreements now in place across the enterprise. This is an important step as we prepare the medical-surgical business to be an independent operation. We continue to focus on the next steps, which include establishing an independent organization and capital structure. We continue to track towards the timeline of an IPO by the second half of calendar 2027, subject, of course, to market conditions and customary regulatory approvals. In January, we announced the completion of the divestiture of our Norwegian business, marking the final step in our full exit from the European region. Over the past four years, our teams executed this multi-stage initiative with dedication and focus, ensuring a smooth process and a successful outcome. With the invaluable experience we've gained, we're confident in our ability to focus on our current portfolio actions, optimizing our assets, portfolios, and accelerating growth for the enterprise. So let me conclude my remarks. McKesson Corporation delivered another strong quarter of results. Our strategy is working, it continues to propel us forward as we advance our mission, as we grow the business, and as we drive meaningful value for our shareholders. Looking ahead, I continue to be confident in our ability to extend the momentum and execute against our strategic priorities. Our broad portfolio and our diversified solutions position us to continue to drive sustained long-term growth. With that, Britt, I'll turn it over to you. Britt Vitalone: Thank you, Brian, and good afternoon. Today, we reported another strong quarter of execution, advancing our strategic priorities with clear measurable performance. We reported record quarterly revenue and adjusted operating profits and saw year-over-year double-digit adjusted operating profit growth in our oncology and multispecialty and biopharma services platforms and continued strength across North American pharmaceutical distribution. These results demonstrate the resilience of our portfolio, disciplined and consistent strategy, deep customer relationships, and scale and breadth of McKesson Corporation's portfolio. Before turning to our adjusted results, I want to begin with two brief updates starting with the divestiture of our Norway operations. On January 30, we completed the divestiture of our retail and distribution businesses in Norway included in our other segment. This transaction marks the final step in our planned exit of Europe. In the third quarter, held-for-sale accounting for Norway contributed $0.05 to adjusted earnings per diluted share. For fiscal 2026, we now anticipate the Norwegian businesses to contribute approximately $1 billion of revenue and approximately $70 million of adjusted operating profit, which is inclusive of approximately $0.10 adjusted earnings per share accretion due to held-for-sale accounting. The completion of this transaction reflects disciplined execution, strategic clarity, and commitment to sustained long-term value creation for our shareholders. Additionally, during the third quarter, we recorded a GAAP-only pretax credit of $160 million or $118 million after tax within the North American pharmaceutical segment related to the bankruptcy of Rite Aid. The remainder of my comments today will refer to our adjusted results. I'll begin with our third quarter fiscal 2026 performance and then address our full-year outlook. Consolidated revenues increased 11% to $106.2 billion, reflecting broad-based growth across the business. Higher prescription volumes from retail national account customers within our North American pharmaceutical segment, continued momentum in our oncology and multispecialty segment, including expanded distribution of oncology and multispecialty products, and contributions from recent acquisitions contributed meaningfully. Gross profit was $3.7 billion, an increase of 10% led by provider growth and continued strength in specialty distribution within the oncology and multispecialty segment. Operating expenses increased 7% to $2.1 billion, reflecting higher expenses in our high-performing growth platforms within the oncology and multispecialty and prescription technology solutions segments, including current year acquisitions. We delivered strong operational execution and enhanced efficiency, driving a 138 basis point improvement in operating expenses as a percentage of gross profit as compared to the prior year. At the same time, we're making targeted investments to modernize our operations through automation and AI-driven capabilities, which we anticipate will accelerate growth while creating enterprise-wide efficiencies. Operating profit was $1.7 billion, an increase of 13% year-over-year. This growth reflects increased demand for access solutions in our prescription technology solutions segment as well as strong growth in specialty distribution volumes in both the oncology and multispecialty and North American pharmaceutical segments. Interest expense was $59 million, a decrease of 5% year-over-year driven by effective cash and portfolio management. The effective tax rate for the quarter was 23%, compared to 23.9% in the prior year. Third quarter diluted weighted average shares outstanding were 123.7 million, a decrease of 2% reflecting ongoing share repurchase activity. Third quarter earnings per diluted share increased 16% to $9.34 driven by strong operational performance, including contributions from acquisitions within the oncology and multispecialty segment. Turning now to third quarter segment results can be found on Slides eight through 12 and starting with North American Pharmaceutical. Revenues were $88.3 billion, an increase of 9% driven by higher prescription volume, including higher volumes across retail national account customers and continued specialty product distribution strength. GLP-1 distribution revenues were $14 billion in the quarter, up $3 billion or 26% when compared to the prior year. GLP-1 sequential revenue growth was 7%. Segment operating profit increased 6% to $872 million, benefiting from growth in the distribution of specialty products, including to health systems. As a reminder, prior year results included a $19 million benefit from held-for-sale accounting related to the sale of our Canada-based Rexall and Well.ca businesses. The prior year held-for-sale accounting benefit had an approximate 3% impact on year-over-year segment growth. Turning to the Oncology and Multispecialty segment. We delivered another strong quarter demonstrating the strength of our differentiated platform and the value we deliver to our providers. Revenues increased 37% to $13 billion driven by strong provider growth, expanded specialty distribution, and contributions from acquisitions completed this fiscal year. The acquisitions of Prism and Core Ventures contributed 13% to third quarter's second segment revenue growth. Operating profit increased 57% to $366 million led by growth in provider solutions and specialty distribution, including contributions from acquisitions. Excluding the impact from acquisitions, organic operating profit increased 15% highlighting the segment's strong underlying performance. In the prescription technology solutions segment, we delivered another strong quarter of performance. With revenues increasing 9% to $1.5 billion supported by higher prescription volumes across our third-party logistics and technology services businesses. Operating profit rose 18% to $277 million driven by continued demand for our access solutions, including prior authorization services. Our connectivity and workflow integration remain key differentiators for patients, providers, and biopharma partners. Turning to medical-surgical solutions. Revenues were $3 billion, an increase of 1% compared to the prior year, driven by higher specialty pharmaceutical volumes. Operating profit decreased 10% to $265 million reflecting lower volumes across physician office settings and lower incidence of seasonal illness. Wrapping up our review with corporate. Corporate expenses were $156 million, which included increased technology infrastructure investments. Corporate expenses also included pretax gains of $11 million or $0.07 per share from equity investments within McKesson Ventures portfolio as compared to gains of $6 million or $0.04 per share in the prior year quarter. Turning to third quarter cash and capital deployment, which can be found in Slide 13. We ended the quarter with $3 billion in cash and cash equivalents. Third quarter free cash flow was $1.1 billion, which included $175 million in capital expenditures. For the trailing twelve months, McKesson Corporation delivered free cash flow of $9.6 billion, demonstrating strong operational performance and working capital management. During the quarter, we also returned $781 million of cash to shareholders, which included $680 million in share repurchases and $101 million in dividend payments. Our balance sheet remains a significant source of strength, underpinned by strong cash generation and disciplined capital allocation. This robust financial position gives us the flexibility to invest in growth initiatives while continuing to return cash to shareholders. We move now to our fiscal 2026 outlook. We continue to see sustained momentum across our core businesses, as demonstrated by our fiscal third quarter results and improved full-year outlook. We're raising and narrowing our fiscal 2026 earnings per diluted share guidance range to $38.80 to $39.20, representing 17 to 19% growth over the prior year. We anticipate revenue growth of 12 to 16% and operating profit growth of 13% to 17%, reflecting our strong third quarter performance and the confidence that we have in the trajectory of the business. The consistency of our strategy, operational execution, and disciplined portfolio management led to outstanding long-term results. Over the past five years, we've delivered a compound annual growth rate in operating profit and adjusted earnings per share of 11% and 18%, respectively. Turning to the segment outlook for fiscal 2026. In the North American pharmaceutical segment, we continue to deliver a differentiated and dependable value proposition, providing best-in-class solutions to our customers and their patients. We anticipate revenue to increase 10 to 14% and operating profit to increase eight to 12%. The increased operating profit outlook reflects strong third quarter performance, stable utilization trends, strong specialty distribution growth, and our continued focus on operational excellence and efficiency. In the core distribution business, we anticipate continued growth of GLP-1 medication. However, we anticipate this growth may vary from quarter to quarter. And as a reminder, prior year results include a $0.15 impact from the divestiture of our Canada-based Rexall and Well.ca businesses at the end of 2025. In the oncology and multispecialty segment, we anticipate revenue growth of 29 to 33% and operating profit growth of 51% to 55%. The guidance includes the acquisitions of Prism Vision and Core Ventures completed in 2026. We're pleased with the performance of these acquisitions, and we anticipate that they'll contribute approximately 30 to 34% to the fiscal 2026 segment's operating profit growth. Our full-year outlook reflects the impact of these acquisitions and strong organic specialty distribution volume growth. We remain well-positioned to support innovation and growth across the oncology and multispecialty markets through our diversified portfolio of assets spanning the care continuum. In the prescription technology solutions segment, we anticipate revenue to increase by nine to 13% and operating profit to increase 14% to 18%. We remain confident in the outlook for this segment, driven by organic volume growth across our access and affordability solutions. Our improved full-year outlook reflects the strength of our annual verification program, and we've observed meaningful year-over-year volume increases through January. Brian Tyler: Our full-year outlook also anticipates Britt Vitalone: technology infrastructure and capability investment. We anticipate fiscal fourth quarter technology investments to be an approximate $0.05 incremental cost as compared to the prior year. As I previously discussed, revenue and operating profit trends in this segment are not linear, and results can vary from quarter to quarter due to a range of factors, which includes utilization trends, the timing and trajectory of new product drug launches, the evolution of a product's program support requirements as it matures, which could result in the shift to other services or a program termination, product delays and supply chain dynamics, payer utilization and formulary requirements, the annual verification programs that occur in our fiscal fourth quarter, and the size and timing of investments to support and expand our product portfolio. Moving now to the 2% to 6% growth. We're closely tracking the development of the current illness season. We've observed soft illness season demand in our fiscal third quarter. In December, illness severity levels peaked based on CDC data. Variability remains a key factor. Timing, severity, and the duration of each illness season can drive variation and meaningfully affect results on both a quarterly and annual basis. We continue to execute the separation of the medical-surgical segment with discipline and focus. With the transition service agreements in place, we're making significant progress to establish the medical-surgical segment as an independent company. Intesa has a strong track record of advancing our mission and unlocking shareholder value in complex and strategic transactions. In recent years, we've demonstrated this multiple times, including the exits of Change Healthcare, Europe, and our Canada-based retail operations. These portfolio actions have streamlined the company, sharpened strategy, and created significant shareholder value, including more than doubling returns on invested capital. Looking ahead, we remain confident in our ability to execute on the planned separation, accelerate growth across our differentiated platforms in oncology, multispecialty, and biopharma services, and maximize shareholder value. We anticipate corporate expenses to be in the range of $620 to $650 million, which includes the year-to-date impact of $15 million of pretax gains from equity investments within the McKesson Ventures portfolio. Turning now to items below the line. We're narrowing the guidance range for interest expense to $215 to $235 million. We anticipate income attributable to noncontrolling interest to be in the range of $230 to $250 million, driven by the continued success of ClarusOne's generic sourcing operations. And we anticipate the full-year effective tax rate of approximately 19%. Wrapping up our outlook with cash flow and capital deployment. For fiscal 2026, we anticipate free cash flow of approximately $4.4 billion to $4.8 billion. Our outlook includes plans to repurchase approximately $2 billion of shares with weighted average diluted shares outstanding of approximately 124 million. We remain committed to a disciplined capital allocation framework that balances investment in high-return growth opportunities, return of capital to shareholders, and the preservation of a strong balance sheet supported by an investment-grade credit rating. Our focus on accelerating growth across the portfolio of businesses aligned with our strategy continues to deliver superior shareholder value creation. This consistent focus and execution has increased return on invested capital by more than 1,900 basis points since fiscal 2020, and now exceeding 30%. Our financial strength and flexibility remain a competitive advantage, enabling us to invest for future growth while returning meaningful value to our shareholders. In summary, McKesson Corporation delivered strong third quarter results, driven by performance across our core businesses and accelerated growth in our strategic growth platforms: oncology, multispecialty, and biopharma services. The updated outlook reflects our confidence to build on this momentum, delivering optimized value creation for our shareholders. Our continued focus on executing against our strategies, combined with disciplined portfolio management and thoughtful capital deployment, provides the foundation for a durable financial profile and positions us for sustained future growth. With that, let's move to the Q&A session. Operator: Thank you. If you would like to signal with questions, please press 1 on your touch-tone telephone. If you are joining us today using a speakerphone, please make sure the mute function is turned off to allow your signal to reach our equipment. Again, that is 1 if you'd like to ask questions. Britt Vitalone: And our first question will come from Allen Lutz with Bank of America. Good afternoon and thanks for taking the questions. A two-part question Brian Tyler: question, first for Brian. You talked about technology and automation, allowing some of your employees to support more patients in the annual verification season. Can you talk about the specific investments you're making there? And then as a follow-up to Britt, how should we think about the longer-term opportunity to improve margins in that segment? It seems like through this annual verification season, you're seeing really strong margin pull-through there. Just curious what those margins can look like longer term. Britt Vitalone: Thanks. Brian Tyler: Thanks, Allen. Yeah. We were very pleased to say the investments we've been making in technology and that we've call it AI or large language models or generative AI or just other general tech tools. To improve, basically, the workflows we experience internally to allow, for example, emails to be automated and read and queued up to agents in a way they're able to work through them, in a much more rapid fashion. And, and that translated into a a big boost in productivity and what you all know, is a very you know, person intensive, blizzard season for us. So we were we're very pleased with that, and that's you know, not a sole example. I also gave an example of how for DSCSA, which is a new process being set up around a new regulatory requirement, Britt Vitalone: We sort of Brian Tyler: built it digitally native from the start so that we're able to to autonomously resolve 75% of customer inquiries, which is obviously a great outcome for the customer, and it's a great outcome for us for an efficiency and a productivity standpoint. I could really go through examples like this throughout the entire business. We think of it in three different areas. We think about our employee experience, how do we make it easier to be an employee at McKesson Corporation so there's less kind of paperwork that has to be done, and all your time can be focused on the job at hand. And it's just a great experience to work at McKesson Corporation. We wanna focus on our patients and our customers. We wanna make their experience with us seamless can be. And then, obviously, we want to focus on things where we think we can translate it into efficiency, productivity, leveraging the scale of the business. So it's really I could if I wanna give me the rest of the twenty eight minutes, I could go through, you know, company by company, business by business. I don't think we wanna do that, but we're very excited And we think these are strong proof points that the investments we've been making in technology are yielding results for the company. Britt Vitalone: Allen, maybe I'll just follow-up on your question. I I don't have a lot more to add than what Brian said, but I as we look at the portfolio within the segment, I just would remind you that half of the revenue of the segment is related to third-party logistics services, which are more distribution related. But the other half are technology service businesses, that support biopharma. And as Brian pointed out, we look to position the portfolio to continue to automate capabilities and automate services and products on behalf of our biopharma partners. And I think we like the trajectory that we're seeing in the business. If you look at the segment, we've seen operating margins grow over a 130 basis points year over year. So, again, focusing on positioning our capabilities and our services to Brian Tyler: automate Britt Vitalone: those products for for biopharma partners is gonna continue to improve that trajectory going forward. Operator: Next question, please. And next will be Brian Tanquilut with Jefferies. Hey, good afternoon, guys, and congrats on the quarter. Maybe, Brent, just as I think about Brian Tyler: 2027 fiscal twenty twenty seven guidance, obviously, a little earlier just with one quarter behind us. Just curious any puts and takes you would call out or any nuances that we need to consider And then as I think about just oncology and multi specialty margins, I think those were down almost 50 basis points sequentially versus down 10 last year for comparable period. So any callouts there that you would share with us especially since the moving pieces of the segment are new to the street Thanks. Britt Vitalone: Hey, Brian. Thanks for the question. Let me try to address that for you. You know, as as we think about 27 as we typically do, we will provide you a full set of our outlook and and guidance thoughts in May when we get to our fourth quarter call. But I would just point out a few things that you know, clearly, we're seeing in the business. Brian and I both talked about stable utilization trends. We continue to see very strong specialty distribution growth and specialty product growth. And that's playing out very well not only in our North American pharmaceutical segment, but also in the oncology multispecialty segment where we're investing We're acquiring providers and building out platforms and that certainly is is having an impact on the positive growth that you're seeing. You know, I think some of the things that Brian also talked about, we just chatted here briefly about the operating efficiency that we're seeing across the company and as I mentioned, we saw a hundred and thirty eight Operator: You know, really positive building blocks as we as we move forward into FY '27. As I as I think about the segment itself to your to your question, you know, we're really pleased with the growth that we're seeing in the segment. I talked about the organic growth of the business. And we had 24% organic revenue growth. You know, you when you strip away the acquisitions at about 15% organic adjusted operating profit growth, you know, quarter to quarter to quarter, you're gonna have some variability from mix. Generally speaking, we're pleased with the with the with how the segment is building and progressing on both revenue operating profit dollars, and the overall margins, In adding acquisitions like Prism, and Core Ventures are going to be accretive to all of those. Next question, please. Brian Tyler: And next will be Lisa Gill with JPMorgan. Thanks very much. Britt, I just want to follow-up to that comment. So if I go back to last quarter, you talked about $51,000,000 of a non-recurring gain. In oncology and multi specialty. So actually, if I back that out, it looks like the margin improved in that division by nearly a 100 basis points. So you also made the comment today that between Prism and Core Ventures that, you know, the contribution still represents same as what you said last quarter, 30 to 34%. So I I wanna ask the question in a different way. It appears to me that margins are improving quarter over quarter. And I'm just curious, what's driving that. I know at our conference, Brian and I talked about, for example, ambient scribing, making that more of the physician more effective. We talked about biosimilars. Is there anything you would call out specifically as to what's driving that margin improvement? And and how we think about that going forward. Operator: Yeah. It's a it's a good point, Lisa, and again, that gain that you mentioned, that was in the second quarter. As we added the the providers to the platform for Florida Cancer, as we continue to build out our vision platform, those are positive mix attributes to the segment. We're also seeing continued growth in specialty and specifically in oncology products. So those are those are favorably impacting the overall operating margins of the segment. And to the point that Brian made, we are early in our journey of automating and and building AI capabilities for our customers, but we are seeing that have an impact, and we would expect that impact will continue to build over time. Quarter to quarter, you'll you'll have some variability. You'll have some mixed variability, but you know, overall, as I mentioned in my comments to to Brian, we believe that the additions of both Prism and Ford of Cancer are accretive, not only to revenue and and operating profit dollars, but also to the margins over time. Brian Tyler: Next question, please. And next will be Michael Cherny with Leerink Partners. Operator: Good afternoon, and thank you so much taking the question. Really nice job on the quarter. Maybe if I can hone in a bit on North American Pharma for 4Q. Britt Vitalone: The Operator: implied guidance still, indicates a pretty nice acceleration. Terms of overall growth quarter over quarter. I guess, for the full year. Is there anything we should consider relative to the growth trajectory, anything that's driving that, within the North American side, And then relative to what it's a wider range than normal Stephen Baxter: way we should be thinking about differences in the puts and takes on the top and bottom of the range? Operator: So, again, I think if you if you think about our third quarter results, as I mentioned, we had the held for sale accounting benefit last year. That created about a 3% year over year impact to the segment. So our results were still quite strong in the quarter As we continue to move into the to our fourth quarter, we're pleased with the growth that we're seeing in specialty. I mentioned the growth that we're seeing specifically in health systems and that, you know, overall, the efficiency gains that we're seeing. Again, I mentioned the operating expenses as a percentage of gross profit. That's been consistently improving for for us. That's the efficiency and the operational excellence and some of the investments that we've been making across our distribution center and in other areas to support our business, whether that be inventory management or demand planning. So I think just generally speaking, the momentum in the business is good. You know, I don't know that there's anything else specifically that I would call out. But, overall, the momentum, the mix, the the scale of our operations is is performing well. Brian Tyler: Next question, please. And next will be Eric Percher with Nephron Research. Thank you. Maybe a question on the regulatory front. And Brian, I would ask you, George Hill: it feels like the distributor value prop has held up very strong in the face of IRA, NFP. Seem to be a lot of variables in DC right now. Be interested in your view of what areas you're leaning into the most and how you try to influence things that may be outside of your direct negotiation like MFN and changes to gross to net? Operator: Yeah. Sure. I'll Britt Vitalone: I'll attempt to tackle that one. Michael Cherny: As it relates to IRA, Part D, the first 10 drugs that went live just went live in January. So that's obviously not in our Q3 numbers, but it is in the increased guidance range that we have provided to you. And as you know, these kinds of things are you know, they happen routinely. And so, you know, we sit down with our manufacturer partners continuously and talk about evolution in their portfolios and their pricing strategies and the value that McKesson Corporation brings and, you know, speak in a very constructive way. We feel feel good about how those conversations have progressed. You know, as we've talked in the past about MFN, for example, you know, we think that it's the way it's rolled out today, it's largely a niche population of cash paying patients that those with commercial insurance will still access their medicines through the same way. We will continue to monitor it. We'll continue to watch it. As you know, we have lots of assets that, can support and and help scale those if we thought that that's what the direction the market was was gonna go. And then as it relates to the policy landscape in general, there's a lot out there. But as we have evaluated it, we know, continue to think that the implications for McKesson Corporation are quite navigable. You know, if you take something like Globe, which is Part B, you know, it's it's exempts anyone that already has an IRA drug out there. It only applicable to 25% of of the ZIP codes. It's only about 35% of oncology Medicare business. And as you start to do the math and chunk it down, we don't think it's gonna be that material. And the fact is that mechanism that they're using to administer the rebate is really goes doesn't impact the provider reimbursement in any way. It's direct from manufacturer to Medicare. So the policy landscape is dynamic. We continue to have a great team in DC that is very engaged in the conversation. We take the approach try to understand the problem that they want to solve. And then help find a solution that is supportive of the industry and, importantly, is supportive of care being practiced in the community. Where it's lower cost, it's higher accessibility, and we think it's the right answer for Americans. Brian Tyler: Next question, please. And next will be Glenn Santangelo. With Barclays. George Hill: Yes. Hello, and thank you for taking my question. I just also wanted to follow-up on Michael's question regarding the North American Pharmaceutical segment operating profit. Britt, I hear if you sort of Kevin Caliendo: back Rexall out of last year, it looks like the growth in that segment was sort of 9% this quarter, if I'm doing my math right. And then if I look at your full year segment guidance you're you're kind of implying growth of five to 18%. And you know, again, as Michael suggested, it's a little bit wider than normal. And I and I think I asked because kinda looking at the stocks today, obviously, the market is paying a little bit more attention about the the potential for decelerating growth in that core. And so I'm just kind of curious if you're seeing anything that registers on on your radar screen positively or negatively heading into fiscal four q and fiscal twenty seven. That that we should be paying closer attention to. Positive or negative for that matter. Operator: You know, Glenn, thanks for the question. Let me just Britt Vitalone: stop and just Operator: make sure that we're on the same page here. We took our adjusted operating profit growth targets for the full year from five to 9% to eight to 12%. So the the width of the range is the same. What we've done is just simply increased it One, for the performance that we've seen through the first three quarters of the year, and two, really, the confidence that we have in the trajectory through the through the balance of the year given really the strong specialty distribution growth that we're seeing, our continued focus and execution on operational excellence, the utilization trends that we're seeing, all of those are supportive of the raise that we provide you today for our full year outlook, again, with the same width of the range at eight to 12%. So I and we are very pleased with performance. We are very pleased with the the trends that we're seeing. You know, certainly, the the growth that we're seeing in specialty distribution, the strength that we're seeing across the business in retail pharmacy as well as health systems and as I mentioned, the operational efficiency gains that we're seeing. So all of those are are certainly positive. And have led to the the raise that we gave today for the full year adjusted operating profit. Britt Vitalone: Next question, please. Brian Tyler: And next will be Elizabeth Anderson with George Hill: ISI. Brian Tyler: Hey, guys. Thanks so much for the question. Given the IT investments you talked about in response to Alan's questions and certainly makes sense in the long term vision of the company. If we think about your cap deployment priorities and always talked about this portfolio management, should we expect sort of a shift more towards those internal growth investments versus what we've seen recently in terms of being more acquisitive? Or would we expect to sort of continuation of what we've seen in the historical pattern? Thanks. Michael Cherny: Yeah, I don't I don't think we've changed our philosophy at all, and we have continuously know, for the last many years, been investing back into our businesses to innovate new products, add new features, extend our differentiation, and we've similarly deployed capital sometimes to acquire capability that we think is is is better to acquire than take the time to build internally. But our capital allocation framework is is still the same. We still are excited about the opportunities we have to continue to scale through inorganic acquisitions that that are aligned to our strategy that fit our business model, and that meet our financial returns, But our first priority is always to invest back in the growth of the business, and that can take two forms. That could be internally. We can invest in people, technologies, other resources to help expand the differentiation and and mix maybe our market opportunities, or we can do it through inorganically. And we're I think we've got a a successful track record of doing both, and we would look to continue that. Maybe I'll just add one more comment here just to talk about our balance sheet. Operator: And the financial position that we have. We have strong cash flows. And as I mentioned, our balance sheet is a competitive advantage for us. And it gives us the ability to not only continue to invest back into the business, to acquire assets that are on strategy, and then it will accelerate our growth opportunities. But, also, at the same time, to return capital to shareholders and maintain a very strong balance sheet and investment grade credit rating. We're able to do all of those given the execution that we have, the focus that we have of being disciplined, and that strength of the financial position, I think, is an is an advantage for us. Britt Vitalone: Next question, please. Brian Tyler: And next will be Charles Rhyee with TD Cowen. George Hill: Yes. Thanks for taking the question. Brett or Brian, just wanted to ask, you know, obviously, results here and, you know, you saw accelerating core growth in both North America Pharma and Oncology. And multi specialty by our estimates here. You know, some of your competitors are, you know, kind of seeing maybe a little bit more deceleration in performance on a year over year basis. Thinking specifically that you're doing or seeing specifically in your business that's Kevin Caliendo: contributing to that? Britt Vitalone: Well, Michael Cherny: I don't wanna talk about my competitive business, but I love to talk about my my business. And I think it boils down to a clear strategy that's been in place for know, an extended period of time. A focus management team that is investing and deploying capital and resources to advance those strategies, some good deployment of capital this past year both you know, Prism Vision and Florida Cancer were great additions that fit right into our model. That we're very we're very, very pleased about. And then just great execution in the day to day by teams across the business. And really embracing the possibilities of of of improving the business, having that mindset every day, how do we improve and make the business better. So I think it's a combination of right strategy, good execution, focus, discipline, and execution against that. And that's what I think has produced the momentum we've seen over the last several years. Britt Vitalone: Next question, please. Brian Tyler: And next will be Erin Wright with Morgan Stanley. Great. Thanks. So as it relates to Stephen Baxter: Prism and FCS, I guess, can you speak a little bit more about how the transactions are progressing? You you maintain the guidance in terms of the contribution for those deals. Is that true for both assets? And and anything you can break down in terms of underlying MSO business growth and how we should think about that longer term? Anything to call out that you're seeing now on the MSO side? It it excluding or stripping out that distribution component of that segment? Operator: Yeah. Well, I would say that we we maintain the full year year the year one accretion guide that we provided But as I've mentioned before, not only are we pleased with the business, we're pleased with the integration. We're pleased with the the volumes that we're seeing thus far. We did make a small acquisition to add to the Prism platform. Earlier in the fiscal year. And and I think, generally speaking, both businesses are performing on their acquisition case in the case of of Prism, maybe slightly ahead. So I think we're everything that we saw going into it and what that we guided you, we has come to fruition. And in addition to that, I think we're we're really pleased with the integration work that's been done and and certainly the volumes have been stable and growing. And all of those have led to at least maintaining the guidance that we provided. And as I mentioned, maybe just slightly ahead of our our acquisition case. Britt Vitalone: Next question, please. Stephen Baxter: And next will be Daniel Grosslight with Citi. Kevin Caliendo: Hi, guys. Thanks for taking the Congrats on a soft quarter here. I want to focus a little bit more on the RxTS segment, particularly the strong operating profit results Hoping you can provide a little bit more detail on on the drivers there. It sounds like it was mostly and affordability on the on the bottom line, but much of that growth is coming from GLP-one related programs versus other specialty drugs? And given the significant growth we've seen in the cash pay GLP-one channel, particularly with the launch of of oral GLPs. Or Wegovy. Are you seeing any shift in prior authorization behavior I'll start Michael Cherny: and, Britt, feel free to add on if you want. I I spoke briefly in my opening remarks about the quarterly results adding 50 new programs across 43 different unique brands. And that was really you know, not concentrated in any particular area. So it was loyalty script. It was hub services. It was access and affordability programs. So, you know, we continue to find the market very receptive to the the solutions that we have that improve access and and affordability. And in a technology business, you know, this the scale of adding new customers, is is very constructive. The business. Know, it was also we talked about the impacts of running the business more efficiently, and that certainly added to the performance of the business. But I would say we're just pleased with the breadth of the product portfolio and the market support we're seeing for the solutions that we offer. Operator: I would just make the the point that as I mentioned in my remarks that what we've seen thus far in terms of our annual programs is they've been off to a really good start as well. We're seeing meaningful volume growth, and to Brian's point, where we're adding new programs and new customers, we're seeing good volumes across all of those, not just GLP ones, but the new brands and programs that we're adding. And so all of this is is certainly accretive to the business on a year over year basis, and we're certainly comfortable in raising the outlook for the full year based on that. Britt Vitalone: Next question, please. Stephen Baxter: And next will be Kevin Caliendo with UBS. Operator: Hi. Thanks for taking my question. George Hill: You had called out Operator: earlier, you've made positive comments about annual verifications. I'd love a little bit more color on that. And also, do you see GLP ones possibly introducing new utilizers on the prior authorization side? Like, is that is that part of the thing that's giving you more confidence in the business? How is that trending? How should we think about it? I think we're all wondering sort of how our XTS is gonna continue to grow at the same pace into fiscal twenty seven and beyond and what the other drivers are. If you could expand on those two, that'd be great. Michael Cherny: Yeah. The look. The it's very early days for the oral GLP one launch, so it's really hard to try to dissect trends from the given the size of the injectable market versus you know, a few weeks of launch of the oral drug. But we we are we are seeing some prior authorizations come through there. You know, I think we'll have to track this over time. I mean, I don't think anyone could tell you what share of GLP one oral growth will come at the expense of the injectable or what share of it will be net new customers So that's something that we'll we'll watch, but it we we're very confident the category will continue to grow. Britt Vitalone: Next question, please. Stephen Baxter: And next will be George Hill with Deutsche Bank. George Hill: Hey, good afternoon, guys. Thanks for taking the question. Brian, I'm not sure which one this which question which of you guys' question is for. But we know that going into your fiscal fourth quarter, we're going to see a significant number of brand drug manufacturers take price decreases. It doesn't look like it's going to hit your income statement at all, either at the revenue line Kevin Caliendo: or at the operating earnings line. But, Fred, I would just love if you could opine what you've seen from pricing actions from branded drug manufacturers George Hill: whether we should expect to see any impact? I know that you don't want to speak to fiscal 'twenty seven. And I'd love to hear you talk about how McKesson Corporation's negotiated around its value proposition and maintain its economics. Operator: Yeah, George. I'm happy to do that. You know, we've maintained very strong relationships with our manufacturing partners, and we have continual conversations with them about the products that they need us to support and about the fair value for the services that we provide. So we've continued to have very constructive conversations. We've continued to to maintain the value that we're providing in our pricing, in our agreement to the manufacturers and what we've seen thus far in terms of pricing activity and changes in prices has been right in line with our expectations. There's really nothing out of line and really consistent with what we've seen over the past few years. So you know, there's been a lot of a lot of changes over the last several months, but nothing that has impacted our economics. At least from the bottom line perspective. You know, pricing declines will have an impact on revenue, but it's not really material to to our results. And you know, I think we're really pleased with the strength of the relationships that we have with our manufacturing partners and the ability to retain the value. Britt Vitalone: Thank you for the question today. Michael Cherny: Great. Well, yes. Thank you, everyone. Appreciate the the great questions and really appreciate you joining the the call tonight. I'd like to thank Cynthia for facilitating the call. You know, we McKesson Corporation is really proud of the strong results that we delivered in our fiscal third quarter. We we continue to demonstrate our strong and our compelling value proposition and our ability to deliver superior returns for you, our shareholders. I would be remiss to end this call without thanking all of our employees for their outstanding contributions and their unwavering commitment to McKesson Corporation and the execution of our strategies. Together, we're all excited in the progress we're making to advance health outcomes for all. Thanks again, everybody. I hope you have a terrific evening. Britt Vitalone: Thank you for Stephen Baxter: joining today's conference call. You may now disconnect. Have a great day.
Operator: Welcome to the OMV Results January to December Q3 2025 Conference Call and webcast. [Operator Instructions] Please be advised today's conference is being recorded. At this time, I would like to refer you to the disclaimer, which includes our position on forward-looking statements. These forward-looking statements are based on beliefs, estimates and assumptions currently held by and information currently available to OMV. By their nature, forward-looking statements are subject to risks and uncertainties that will or may occur in the future and are outside the control of OMV. Therefore, recipients are cautioned not to place undue reliance on these forward-looking statements. OMV disclaims any obligation and does not intend to update these forward-looking statements to reflect actual results, revised assumptions and expectations and future developments and events. This presentation does not contain any recommendation or invitation to buy or sell securities in OMV. I would now like to hand the conference over to Mr. Florian Greger, Senior Vice President, Investor Relations and Sustainability. Please go ahead, Mr. Greger. Florian Greger: Thank you, and good morning, ladies and gentlemen. Welcome to OMV's earnings call for the fourth quarter 2025. With me on the call are OMV CEO, Alfred Stern; and our CFO, Reinhard Florey. Alfred and Reinhard will walk you through the highlights of the quarter and discuss OMV's financial performance. Following their presentations, the 2 gentlemen will be available to take your questions. And with that, I'll hand it over to Alfred. Alfred Stern: Thank you, Florian. Ladies and gentlemen, good morning, and thank you for joining us. Before I discuss the details of our fourth quarter performance, I would like to briefly reflect on the operational and strategic highlights of last year. Despite the challenging economic and geopolitical backdrop, we achieved a strong performance across our 3 business segments. In Energy, we were able to almost reach the prior year oil and gas production level if we exclude the divestment of the Malaysian business. We slightly increased our Fuel sales volumes reinforcing our position as a supplier of choice in the downstream sector. And in Chemicals, total polyolefin sales volumes, which include the joint ventures, rose by 3% year-on-year, underscoring our product strength in a challenging market environment. Our Clean CCS operating result reached a strong EUR 4.6 billion; however, decreased by 10% compared to the prior year quarter. Importantly, despite the difficult backdrop, our cash flow from operations, the basis for shareholder distributions amounted to EUR 5.2 billion and thus was just 4% lower than the year before. This resilience demonstrates again the strength of our integrated business model, delivering robust cash flows in a volatile market environment. A particular achievement worth noting is that by the end of 2025, we have already surpassed 70% of our efficiency program 2027 target demonstrating our steadfast commitment to operational excellence and supporting our strong cash flow generation. We have maintained a disciplined approach to investments. Our balance sheet remains very strong, reflected in a very healthy leverage ratio of only 14%. This strong financial position provides us with the necessary flexibility to navigate market uncertainties, while continuing to invest in future growth opportunities and OMV's transformation. Ladies and gentlemen, as promised, our shareholders will directly benefit from our success. For the financial year 2025, we will propose to the Annual General Meeting a regular dividend of EUR 3.15 per share and again, an attractive additional dividend of EUR 1.25. In total, this will amount to a cash dividend of EUR 4.40 per share, resulting in a dividend yield of 9.3% based on the closing price of last year. This payout will represent 28% of our cash flow from operating activities. Despite the weaker economic environment, OMV will once again offer attractive shareholder distributions. Let me briefly highlight our strategic progress in 2025. In the Energy segment, the flagship gas project of OMV Petrom, Neptun Deep remains firmly on track and within budget for a targeted start-up in 2027. This marks a major milestone in our ongoing commitment to diversifying and securing gas supply. We strongly believe in the Black Sea's potential for the region and have reinforced our position through further exploration in Bulgaria, partnering with NewMed Energy and the Bulgarian state. Exploration drilling in Han Asparuh began in December 2025 with the Noble Globetrotter 1 vessel contracted to drill 2 exploration wells. Having 2 rigs simultaneously in operation, 1 offshore Bulgaria and another offshore Romania, represents a significant achievement of OMV Petrom. We have successfully diversified our cost portfolio, ensuring continuous and uninterrupted supply to all our customers since more than 1 year. As a result, we are no longer dependent on any single supplier and now have the strongest gas portfolio in OMV's history. In Renewables, OMV Petrom achieved notable progress by expanding its renewable power capacity, advancing towards a leadership in Southeastern Europe. We have advanced geothermal energy projects. We completed drilling and the successful production test in Vienna and are on track to commission our first geothermal plant by 2028. In October last year, we have made an oil discovery in Libya in the Sirte Basin with estimated recoverable volumes between 15 million and 42 million boe. What makes this especially promising is the location, just 7 kilometers from existing infrastructure. Turning to Fuels. Our coprocessing plant is operational and producing renewable diesel. In April last year, we started up our 10-megawatt electrolyzer plant in Schwechat, the biggest of its kind in Austria. Construction of the SAF/HVO plant at Petrobras is progressing as scheduled with start-up targeted for 2028. We are also investing in around 200-megawatt electrolyzer capacity in Austria and Romania. These green hydrogen projects are fully integrated with our refineries and primarily designed to supply our own facilities captive demand. In Retail, we have nearly doubled our EV charging network in 2025 and rebranded our retail stations, underscoring our commitment to sustainable mobility and enhanced customer service. In Chemicals, the game-changing agreement with ADNOC to form Borouge Group International establishes a global polyolefin powerhouse and more resilient chemicals growth platform. We successfully commissioned our ReOil chemical recycling plant and continue to advance key growth projects such as Kallo and Borouge 4. Kallo is expected to start up in the second half of this year, while Borouge 4 production is expected to ramp up through 2026, as units are commissioned and brought online. First unit of Borouge 4 should come online till this quarter. Aligned with our Strategy 2030, we remain focused on an agile transformation, responding to evolving customer needs all while maintaining strong cash flow discipline and carefully managed investments to ensure attractive returns for our shareholders. Let me update you on the status of Borouge Group International. We made very good progress regarding the closing of the transaction and expect this, as previously communicated, in the first quarter of this year. We are pleased to report that we have already secured all necessary foreign direct investment approvals as well as almost all the other required regulatory clearances. In addition, in preparation for the acquisition of Nova Chemicals, we have successfully completed our financing process. We have secured $15.4 billion ensuring that sufficient liquidity is in place to support the transaction. At this stage, the primary remaining tasks are to obtain the outstanding clearances. Discussions regarding the recruitment of BGI Executive Board and Executive Leadership team positions are nearly complete. Announcements regarding these appointments, along with nominations for the Supervisory Board will be made in due course. Finally, the active collaboration between ADNOC, OMV, Borouge, Borealis and Nova Chemicals has resulted in detailed plans for day 1 and beyond. And we have established a robust framework from the very outset of the integration to realize the synergies of more than $500 million. Overall, these developments clearly demonstrate strong momentum, and we remain confident in the successful closing and integration of Borouge Group International. Let me now move on to the details of our fourth quarter performance. Our Clean CCS operating result reached around EUR 1.15 million, representing a decrease of EUR 222 million or 16% compared to the same quarter of 2024. Excluding the positive net effect of EUR 210 million arbitration award received in the fourth quarter of 2024, our Clean CCS operating result would have been broadly in line with the prior year quarter despite lower oil and gas prices. The quarter was marked by significant geopolitical volatility. Brent crude prices declined, driven by weak short-term demand outlook and increased OPEC+ output. The introduction of new U.S. sanctions against major Russian oil exporters were somewhat supportive. European gas prices also fell despite the onset of the winter season as demand was easily met thanks to ample LNG supply. Refining margins increased further, supported by product tightness resulting from the announced sanctions on Russian refiners and unplanned outages at other refineries. In the Chemicals market, we observed some improvement of the olefin indicator margins. However, overall demand remains subdued with many customers focused on reducing their inventories before the end of the year. The Clean CCS tax rate saw a significant decline from 50% to 36%. This was mainly due to a reduced share in the overall group of certain companies in the Energy segment located in high-tax countries as well as stronger contribution from equity-accounted investments. As a result, Clean CCS earnings per share remained nearly stable at EUR 1.7 per share. At EUR 1.7 billion of cash flow from operating activities was truly exceptional this quarter, jumping by over 60% year-on-year. This very strong operating cash flow clearly demonstrates our continued ability to generate strong liquidity even in the face of a challenging market environment. The clean operating result in the Energy segment dropped markedly to EUR 586 million. Around 40% of the decrease is explained by one-time effects. The Malaysia divestment and the net arbitration award of EUR 210 million received in the prior year quarter. The remainder approximately EUR 390 million was largely attributable to decreased oil and gas prices as well as lower sales volumes. The realized oil price fell by 13% to $62 per barrel, mirroring the movement in Brent prices. Our realized gas price decreased by 14%, averaging EUR 26 per megawatt hour, thus less than European gas hub prices, which declined by 28%. This was mainly due to changes in portfolio composition following the divestment of SapuraOMV. Additionally, negative currency developments impacted our results by about EUR 80 million compared to the prior year quarter. Production volumes decreased by 11% to 300,000 boe per day. The main reason was the sale of the Malaysian assets, which had contributed 24,000 barrels of oil equivalent per day in the fourth quarter of 2024. Excluding the effect from the divestment, E&P production declined by about 4% due to production declines in Norway, Romania and New Zealand, reflecting their fields natural decline, partly offset by slightly higher output in the UAE. Unit production costs rose slightly to above $10 per barrel. This increase resulted mainly from lower production volumes and unfavorable exchange rate movements. Cost reductions -- cost reduction measures taken had a mitigating effect. Sales volumes decreased by 65,000 boe per day, thus stronger than production. In addition to the missing volumes from SapuraOMV, the sales in Norway and Libya were lower due to the lifting schedule. The result of gas marketing and power declined to EUR 116 million, primarily due to the missing positive impact from the arbitration award received in the fourth quarter of 2024. Aside from the arbitration award, Gas West decreased mainly due to lower release of transport provision. The contribution of Gas East rose strongly, driven by excellent results across both the gas and power business lines, supported by higher gas sales volumes and increased production of the Brazi power plant in the context of power market deregulation. The Clean CCS operating result of the Fuel's segment more than tripled to EUR 346 million, primarily driven by substantially stronger refining indicator margins, a significantly higher contribution from ADNOC refining and global trading and improved results of the marketing business. This strong performance was partially offset by, amongst others, negative production effects related to repairs at the Burghausen refinery. The European refining indicator margin rose sharply to $14 per barrel, while the refining utilization rate remained high at 89%. The marketing business delivered a higher contribution compared to the prior year quarter with retail performance benefiting from slightly improved fuel margins due to a more favorable quotation development for oil products, higher nonfuel business profitability and slightly higher sales volumes following the acquisition of retail stations in Slovakia. The performance of the commercial business came in slightly better as well, supported by higher contributions from the aviation business and increased sales volumes. The contribution of ADNOC Refining and Global Trading increased significantly to EUR 51 million, mainly due to a better market environment. The Clean operating result of the Chemicals segment rose sharply to EUR 236 million, driven to a large extent by the stop of Borealis depreciation. In our European business, we recorded favorable market effects totaling EUR 58 million, reflecting higher olefin indicator margins. Inventory effects were slightly lower. The utilization rate of our European crackers stood at 72%, which is significantly below the level of the prior year quarter. This was mainly because of weaker demand and inventory optimization measures at year-end. Nevertheless, the result of OMV-based chemicals improved due to stronger olefin margins. The contribution from Borealis, excluding joint ventures, increased to EUR 89 million, mostly driven by the stop of depreciation. However, the results of both base chemicals and polyolefins declined. The base chemicals result was affected by lower utilization rate as well as decreased feedstock advantage and phenol margins. Improved olefin indicator margins in Europe and lower fixed costs provided some support. For polyolefins, the contribution decreased primarily due to softer indicator margins and greater market discounts. This was partially counterbalanced by reduced fixed costs. Polyolefin sales volumes for Borealis, excluding joint ventures, grew by 4%, largely attributable to higher sales in the infrastructure and consumer product sectors. Contributions from our joint ventures rose by EUR 41 million, mainly reflecting the deconsolidation of Baystar. The contribution from Borouge remained broadly stable versus the fourth quarter of 2024, as a less favorable market environment in Asia was compensated for by substantially higher sales volumes. Thank you for your attention, and I will now hand over to Reinhard. Reinhard Florey: Thank you, Alfred, and good morning from my side as well. At the beginning of 2024, we launched a comprehensive efficiency program aimed at generating at least EUR 0.5 billion of additional sustainable annual operating cash flow by the end of 2027. This initiative helps to mitigate inflationary cost increases we have experienced over the past years as well as effects from lower commodity prices. In October, we had announced that even considering the BGI transaction and resulting deconsolidation of Borealis, we expect to achieve the originally targeted at least EUR 500 million, from the efficiency program, as we introduced a new cost savings program of EUR 400 million by end of 2027, further derisking the program's implementation. This program is well on track. By the end of 2025, we successfully delivered more than EUR 350 million of additional cash flow compared to 2023, which represents around 70% of our 2027 target. We achieved this through technical improvements in oil production, optimization of gas flows, reduction of E&P cost base as well as various margin improvement measures and refining optimization related to utilities, crude supply and energy efficiency. Overall, more than EUR 100 million are attributable to operational cost reduction measures. This builds upon our continued drive for operational excellence, following initiatives from prior years with the impact clearly visible on our cash flow from operating activities. Turning to cash flows. Our fourth quarter operating cash flow, excluding net working capital effects, was EUR 821 million. This figure was impacted by a significant net cash outflow related to CO2 emission certificates of around EUR 330 million, which is always booked for the year-end in the fourth quarter. In the fourth quarter of 2024, the net cash related to CO2 emission certificates was around EUR 270 million, largely offset by the one-off net gas arbitration award of more than EUR 200 million. The year-on-year decline also reflects a lower contribution from energy, partially compensated by lower tax payments and a higher contribution from fuels. Net working capital cash inflows were very strong. At EUR 860 million, it more than reversed the minus EUR 400 million recorded in the third quarter of 2025. This was largely driven by substantial inventory reduction in the fourth quarter 2025, whereas in the prior year quarter, we recorded a negative effect of around EUR 140 million. As a result, the cash flow from operating activities amounted to around EUR 1.7 billion in the fourth quarter of 2025, an increase of more than 60% compared with the previous year's quarter. Let us now look at the full year's picture. At EUR 5.2 billion, cash flow from operating activities was once again very strong, only 4% below the high 2024 level. After payment of dividends of EUR 2.3 billion, our free cash flow stood at positive EUR 180 million, supported by inorganic cash inflows coming from the Ghasha divestment and Bayport loan repayment. Our balance sheet remains very strong with a leverage ratio of only 14% at the end of 2025, despite ongoing macro challenges. Our financial strength is also reflected in our investment-grade credit ratings, A- from Fitch and A3 from Moody's, both with stable outlook. This strong rating underscores our healthy capital structure and prudent financial management. Following the closing of the BGI transaction, we anticipate our leverage ratio to increase mainly as a result of the deconsolidation of Borealis equity and net debt from our balance sheet as well as the agreed equity injection of up to EUR 1.6 billion into BGI to equalize OMV's and ADNOC's shareholdings. I think it's worth highlighting that even after this game-changing transaction, we anticipate our leverage ratio to be in the low 20s by year-end, well below the mid- and long-term threshold of 30%. This reflects our commitment to maintaining a robust capital structure and healthy balance sheet. Such a strong financial position provides us with the ability to do both, continue with attractive shareholder distributions and moving forward based on our headroom with our strategic growth initiatives. We once again deliver on our promise and offer our shareholders attractive distributions. We will propose to the Annual General Meeting an increased regular dividend of EUR 3.15 per share plus an additional dividend of EUR 1.25 per share. Thus, we will distribute total dividends of EUR 4.40 per share, which is an attractive yield of 9.3% based on the closing price year-end 2025. With the total payout of 28% of our operating cash flow, we once again went to the upper part of the guided corridor of 20% to 30% of operating cash flow. Since 2015, we have delivered every single year on our progressive dividend policy, which aims to increase the dividend every year or at least maintain it at the respective prior year level. Over that period, we have more than tripled our regular dividend from EUR 1 per share to now EUR 3.15 in [ 2022 ] to further enhance our shareholder distributions. We had introduced an additional variable dividend, which we now also paid for the fourth consecutive year. OMV remains committed to pay attractive dividends to its shareholders. As announced on our Capital Markets update in October last year, we are introducing a new dividend policy effective as of this financial year that builds upon our previous approach and incorporates the clear benefits arising from the BGI transaction for our shareholders. Under the new policy, OMV will distribute 50% of the BGI dividend attributable to OMV in addition to distributing 20% to 30% of cash flow from operating activities from our consolidated businesses. Our dividend will continue to consist of 2 components: a progressive regular dividend, which we strive to increase each year or at least maintain at the previous year's level; and an additional variable dividend, which will be paid if our leverage ratio remains below the 30% threshold. This approach aligns with our commitment to deliver attractive and growing shareholder returns supported by strengthened cash flows and a solid capital structure. Based on the estimated closing in the first quarter of this year, we expect Borouge Group International to pay at least the floor dividend for the full year 2026, which means net to OMV at least USD 1 billion. The dividend will be paid in 2 tranches. Now let me move to the outlook, beginning with capital spending. For the year 2026, we expect organic CapEx to be around EUR 3.2 billion, substantially lower than the past few years reflecting the deconsolidation of the Borealis business and our ongoing capital discipline. The major growth projects in 2026 are the Neptun Deep project, which is scheduled to start up next year, the South HVO plant in Romania and the green hydrogen plant in Austria and Romania. In the following years to 2030, the average organic CapEx will be below the guided level of EUR 2.8 billion per annum outlined at our Capital Market updates. About 60% of our organic CapEx in 2026 will be allocated to energy with the majority of the remaining spend going to fuels. Following the BGI transaction and the deconsolidation of the Borealis business, organic investments explicitly shown in our financial statements in Chemicals will be relatively small, reflecting only our fully consolidated Chemicals business, specifically the refinery integrated crackers in Austria and Germany and the new plastic waste sorting plant in Germany. The latter is expected to start up this year. Around 70% of our organic CapEx in 2026 is dedicated to growth, positioning OMV for the future. In addition to Neptun Deep, major organic growth project initiatives include developments in Norway, Austria, the UAE and renewable power initiatives in Romania. In the Fuels segment, we are advancing key projects like the SAF/HVO plant as well as the 2 hydrogen plants in Romania and Austria. Around 30% of the investments planned for 2026 are allocated to sustainable projects in line with our average guidance for 2030. Please note that our guidance for organic CapEx of EUR 3.2 billion in 2026 excludes any expenditures related to Borealis. Let me conclude now with our outlook for key market assumptions and operations for 2026. We forecast an average Brent price of around $65 per barrel. The average TAG gas price is estimated to be above EUR 30 per megawatt hour, while the OMV average realized gas price is expected to be below EUR 30 per megawatt hour. In Energy, we expect average oil and gas production of slightly below 300,000 boe per day, reflecting natural decline and assuming no interruption in Libya. The unit production cost is expected to stay below $11 per barrel, supported by various plant cost initiatives. Exploration and appraisal expenditure for the group is expected to be below EUR 200 million, in line with previous year's spending. In Fuels, the refining indicator margin is projected to be around $8 per barrel. We anticipate the utilization rate of our European refineries to be above 90%. No major maintenance is planned throughout the year at our refineries, supporting high operational availability. Total fuel sales volumes are expected to be higher than last year. Retail margins are projected to be slightly below the levels seen in 2025, while commercial margins are also anticipated to decline. In Chemicals, we do not anticipate a significant market recovery in the first half of 2026. Following the closing of the BGI transaction, Borealis will become part of the new company in which OMV and ADNOC will hold equal shares. BGI will be reported at equity within our financial statements. Hence, we will no longer report separate KPIs for the polyolefin business, these will henceforth be published by BGI. However, we will continue to provide an outlook for European olefin indicator margins, which will impact our fully consolidated Chemicals business. We expect market indicator margins to be slightly below the levels of the previous year with realized margins continuing to be affected by prevailing market discounts. The utilization rate of our 2 crackers is expected to rise to approximately 90% in 2026. There are no major turnarounds planned for the year. The clean tax rate for the full year is expected to be around 45%. Thank you for your attention. Alfred and I will now be happy to take your questions. Florian Greger: Thank you, Alfred and Reinhard. Let's now come to your questions. [Operator Instructions] We begin the Q&A session with Josh Stone from UBS. Joshua Eliot Stone: Yes. Two questions. Firstly, on CapEx. It looks like there was a slight overspend in '25 as compared to your initial guidance. So anything you want to flag on what might have been driving that? And then also for 2026, at least the spending outlook a bit higher than what I had in or certainly higher than the long-term guide. So any comments around what the key building blocks within that? And any potential risks that you can see in this year's budget? And then second one, I wanted to focus on your Chemicals result, particularly on the olefins side, which everyone has been extremely bearish on European chemicals and you've got sort of almost doubling of your monomers profit this quarter. What would you say is driving that better results? And any one-offs? And then if we're thinking about next year, given this is the business that will stay on your balance sheet, what should we be thinking? Alfred Stern: Okay. Maybe let me start a little bit with chemicals and olefins part and then Reinhard will add and explain the CapEx. On the Chemicals side, I would really say, as you could see, right, 2024 our Chemical sales went up some 10%, last year was plus 3%. And this is really because of the position that we have in the Borealis crackers with mainly Nordic crackers having light feedstock advantage. They are on the -- they are very cost competitive and thus able to run at high rates. While the OMV crackers in Germany and in Austria are fully integrated into our refineries, and we can use that integration advantage to also optimize our margins. So while we see, as you can see on our outlook for 2026 more or less flat kind of margin expectation for ethylene and propylene. We do believe that we are in a strong position also as a local and integrated supplier here. Reinhard Florey: Yes, Josh. Regarding your CapEx observation, you're, of course, right. I would rather like to explain. We had guided for EUR 3.6 billion, we came out with EUR 3.7 billion. In fact, we only had an overrun of EUR 90 million, which is around 2%. And this happened very much in the downstream part with the new activities, specifically around our big projects with electrolyzers and the HVO plants where we already started with some spending on long lead items. So this is more or less distributed among a variety of projects. There is not a significant big overspend in one project. In 2026, it is very clear that we start with a higher CapEx compared to the average of the years until 2030 because we still have the Neptun project in full, the HVO/SAF plant in full and also the main part of the spending on the electrolyzer plant. So therefore, this average is, of course, a little bit distorted and we are geared towards a little bit higher but significantly lower though compared to 2025. So therefore, regarding risks that you see, we do not see significant risks of overspend because we have contracted out the projects in a very, very high degree. That is also true for Neptun project. And we are going with the speed that we anticipate in spending in order to make sure that 2027 is the year for start-up of Neptun project. Florian Greger: Thanks a lot, Josh, for your questions. We now move to Gui Levy from Morgan Stanley. Guilherme Levy: I have 2 questions, please. First one, maybe on working capital. The company, of course, enjoyed a very strong release in the fourth quarter. And you know it's still early in the year, but I was wondering if you could say a few words in terms of how much and how quickly you would expect that working capital release to reverse over the course of this year? And then secondly, on exploration, if you could share with us if you have any initial results from your exploration well in Bulgaria, expectations in terms of drilling completion and also following the recent announcement of the Bulgarian Government joining the block, if you are currently happy with your stake in that asset? Or if we could -- you expect further dilution for OMV Petrom from here? Reinhard Florey: Let me start with the working capital. We indeed enjoyed a strong cash inflow from working capital optimization in the fourth quarter. However, this does not reflect any, I would say, unnatural levels. This, on the one hand side, reflects very much the business environment in which we operate and we were able to significantly also reduce our inventory levels actually in all 3 segments. Why am I saying that because also the inventory levels in the Energy business with our gas storage are now at a lower level, maybe compared to earlier years. This is a attribute to the cold winter and also to the very, I would say, small summer-winter spreads that have been available throughout 2025. So we anticipate that also after first quarter, we will come out with even lower level of inventories of storage in there. How fast will the recovery be? It depends very much on the boundary conditions that we see. If economy picks up strongly in both refining as well as in chemical, of course, also our inventories will go up. This is not what we expect as a situation in the first half of 2026. And we will also then, in Q2 and Q3, see how much of gas storage will be available for decent prices that we can lock in and then put the gas storages again on the level appropriate for surviving the next winter for all our customers. So this is something that will come across the full year in smaller stages. But as I said, this is not an unusual levels of working capital that we have at this point of time. Alfred Stern: Okay, Gui, and regarding the exploration in the Black Sea in Bulgaria. Maybe just to recap here quickly, OMV Petrom is operator with a 45% share, together with Newmet Balkan with 45% share and the Bulgarian Energy Holding with 10% share. And we have contracted the Noble's Globetrotter 1 drillship that will drill 2 offshore exploration wells. The first drill started in December. And then as it is with all these explorations, right, we need to beat for the results what we get there. Maybe also on the estimated costs for the 2 wells, that's about EUR 170 million for the 2 wells together and the agreements that OMV Petrom made with the partners are such that total cost for OMV Petrom for both wells will be about EUR 30 million. But it's exploration, right, so let's wait and see what we find. Florian Greger: Thank you, Gui, for your questions. And now we come to Henry Tarr, Berenberg. Henry Tarr: Two, if I may. The first, just on the Fuels business. We've obviously seen weaker refining margins this year. Where are you averaging sort of Q1 to date? And how do you see the outlook here for the rest of the quarter and then 2026? Alfred Stern: You said 2 questions, Henry. Henry Tarr: That's the first. I can come back on the second... Alfred Stern: Yes, yes. Okay. Then let me try and answer your question. Yes, indeed, the refining indicator margins what we what we found in the fourth quarter last year, we were at about 14%, but with declining kind of thing through the quarter, right? So in December, we saw the margins coming down and then we picked up in January at around 8%. So more or less, what we see as an expectation for the average for the year. I have to say, right, looking back at the last years refining indicator margins were extremely volatile, very difficult to predict. Supply chains are rearranging themselves, we see outages and so on. So our prediction would be around 8% January also started around that level. And I would see that maybe that's about what's the predictability of the segment, let's say, right? Henry Tarr: Okay. That's great. And then the second question is just on BGI and the floor dividend. So I think you've said but I just wanted to double-check that if the merger goes ahead as planned and completes in Q1, you'd expect the floor dividend to be paid in 2026. I guess are there any -- if the merger takes a little bit longer, is there a risk that the dividend gets prorated or anything like that just for this year or is it fixed for '26 at that floor dividend level? Reinhard Florey: Yes. Thanks, Henry. The floor dividend contractually is fixed to be a full dividend for 2026. That is our expectation, and this is the way how we also calculate. Personally, I do not have any doubts that we will not close in Q1. Florian Greger: Thanks, Henry, for your questions. We now come to Adnan Dhanani from RBC. Adnan Dhanani: Two for me, please. Just 1 follow-up on the BGI dividend. Just in the context of your comments earlier saying that the 2026 dividend would be at least at the floor level. I think at the CMD, you mentioned that the dividend would likely be the floor for 2 to 3 years. So is there a change in the thinking there that it could be at least floor level this year could be higher? Or is that still the thinking that it's going to be 2 to 3 years of just being at the floor level? And then the second question, just on your upstream production guidance. Obviously, with the 2030 target that was upgraded, just wanted to get your view on the current M&A landscape and just how you're seeing the market right now for barrels? Reinhard Florey: Yes. Adnan, maybe on the first questions. You know me, I never lose my optimism. But realistically speaking, I expect that there will be the floor dividend, which already is a very attractive thing for the current situation of the market. But theoretically, if the market picks up and the whole economy fires up, then I'm confident that also the dividend policy will kick in and could have an upside. But realistically speaking, I calculate with the floor dividend level and enjoy around USD 1 billion coming to OMV. Alfred Stern: Okay. And let me try on the upstream, Adnan. So just as a reminder, right, we said from 2025 level, we have natural decline and then we have organic projects. One is a very big Neptun project, which contributes directly the 50% share in OMV Petrom 70,000 barrels to our production target and then there's other organic projects that we have across our portfolio that contribute in the 70,000. And that means we have about another 70,000 more or less that we need to close inorganically and we said our strategy will be that we want to strengthen the portfolio in and around Europe that we have to make sure we can move this forward. We are actively trying to fill a pipeline to do that. But at this point, nothing has progressed enough that I could give you specifics on any kind of deal. Florian Greger: Thank you, Adnan, for your questions. Before we come to the next, we have one more in the queue. [Operator Instructions] And now let's come to Oleg Galbur from ODDO BHF with the next question. Oleg Galbur: Congratulations on the robust results. I have 2 questions. The first one is on the Fuel segment and more specifically, the marketing business. In the past, you were disclosing the average EBIT contribution per filling station. And I wonder if you could already give us the number for 2025? And my second question is on Chemicals. You mentioned earlier the startup expected at or planned PDH Kallo and Borouge 4. So taking into consideration that the recovery of the petrochemicals market is not yet in sight. What level of annual EBITDA would you expect to be delivered by PDH Kallo and Borouge 4 in the current market environment? And since I'm at the end of the list, maybe I can take advantage and ask a very short third question. On Libya discovery, you mentioned earlier, when do we expect the new discovery to start contributing to production from Libya? Alfred Stern: Oleg, thank you for your questions. Let me start with the fuel question on the marketing business. So what we did in the Capital Market update last year, we updated to give, let's say, a deeper look into our Fuels segment, we updated on the EBIT contributions of our retail marketing type of business. We do not and we have not regularly in the quarterly updated on this number, right? But what I can tell you is that this is something that helped last year and also in the fourth quarter that we were able to continue to not just grow the contribution from the fuel business in retail, but also nonfuel has grown there and making good contributions and we continue to see this as a value growth driver that we can do. This is our VIVA stores where we sell both [ gastronomy ] and other shop products, but it is also around EV charging, it is also around car washing and so on. So good contributions from this will continue to grow. Then on your Chemical question. I would maybe go -- want to go back to also what we disclosed in the Capital Market update that hasn't changed. We think Kallo will contribute EBITDA after full ramp-up of about EUR 200 million. And then on Borouge 4, we have said it's about $900 million, yes, that will be at full ramp-up. However, right, so we the Kallo or PDH more towards the second half of this year. And we see Borouge 4 is a very big complex with 1.5 million tonnes of production. And there is multiple plants involved, and you will see that we need to take those into operation step-by-step in stages. The first stage -- first plants will come on stream in the first quarter, but then you will see that throughout the rest of the year ramping up. You were -- so and last, your question around the Chemicals segment. I do believe, and you can see in our sales volume growth that we have, both in Europe, but also with Borouge and our joint ventures, you can see that there is underlying demand there. However, the challenge is supply/demand and unbalance. There is too much supply, new capacity that has come on stream. And -- but what we see now is increasingly old, not optimal plants being taken out of operation. In total, this is more than 20 million tonnes globally now, a big part of this is in Europe, a significant part in South Korea, but it looks like there are some first actions now also in China on rationalization with their evolution program that they have in China. Florian Greger: Thanks, Oleg, for your questions. We now come to Sadnan Ali from HSBC. Sadnan Ali: Two, please. The first one on -- just want to go back to Neptun Deep. I know you mentioned that the project is on track to deliver a start-up in 2027. I just wanted to check if you can provide any more clarity on when in the year we can expect it to start up? And what are the key milestones we should expect between now and then? And do you see any risks to that time line or any of those elements that would present more of a risk to delay if there's a delay in the project? And secondly, just wanted to clarify, your comments today said I believe that post BGI closing, you're expecting leverage in the low 20s by year-end. Just want to clarify, if I'm not mistaken, the prior communication was, I think, it was at 22% after the deal closes, so does this now mean potentially that you expect something higher than 22% upon closing immediately and that's to taper off by year-end? Alfred Stern: Let me maybe start with the Neptun project and then Reinhard will follow up on your second question. So project progress, right, just as to recall here, Neptun Deep consists of 2 fields. One is the Pelican field and the other one is the Domino field. In the Pelican field, which -- we -- OMV Petrom wanted to drill 4 wells. They have done so in 2025 and now the Transocean Barents rig is moving on to the deepwater wells in Domino field, where it's 6 wells that have to be drilled. Then there's, of course, not just the wells, but there's a lot of other activities that need to happen to bring this into production. One was the construction of natural gas metering station, which is making good progress, is ongoing and the equipment is arriving there to the site. We have also finished a microtunnel that is basically bringing then the underground pipeline connection to the onshore. We have also made good progress on the shallow water platform that is moving ahead on the construction and then has to be transported into the Black Sea later this year with good progress on umbilicals, field support vessels and so on. So all this is running. And so far, we are on track according to the plan. We have not finalized completely when in 2027 this startup will happen, but we will be able to do so in the course of the year. Reinhard Florey: Yes. And Sadnan, thanks for your question on the leverage. I admit that it's courageous to predict leverage on the single-digit percentage. I still stick to what we said that after close, we will be around 22%. And for the rest of the year, so if that happens in Q1, we still have Q2, 3 and 4. We want to reaffirm by that statement that we stay in the low 20s percentage, which should be really an affirmation of our statement of low leverage, including also the transaction of BGI. Florian Greger: Thank you, Sadnan, for your questions. There is a follow-up question from Oleg Galbur. Oleg Galbur: Yes. Well, it's rather the question that I asked, but was not answered about Libya discovery when do you expect it to turn into production? Reinhard Florey: Oleg, sorry, that we overlooked the third question. First of all, Libya has been a successful discovery and the beauty about this discovery is that it's only around 10 kilometers from existing infrastructure. This means that the tie-in of that well should go rather fast, and we're expecting it the latest by next year. Florian Greger: Apologies, Oleg, for not taking the third question, but now we come to Ram Kamath from Barclays. Ramchandra Kamath: I have a question on natural gas sales. So can you talk a little bit about what you are seeing in the gas business on demand side particularly? Because I note that the sales in your West business, in particularly, was -- I mean, has come down. I think possibly this year, it's averaging around 40 terawatt hours down from over 50. So how do you see shaping up here, particularly on if you can talk about if it is particularly on the industrial sector demand, which is coming down. And of this volatile time, how do you see this business evolving or the demand evolving? Alfred Stern: Yes. Ram, let me try and provide some insights into this. I think if you look further back a little bit, we -- so before the Russian attack on Ukraine. Since then, we have seen significant decline in market demand, both in industrial areas, but also in household and other areas. I think this was driven by very high gas prices and so on. However, last year, there was, in the markets, some rebound into the gas usage probably also again driven by normalization of the gas prices as we saw that last year. What we have done in OMV, of course, is also that we have also commercially optimized our gas portfolio, diversified it into different sources, and this is probably what you are seeing from our sales figures there. However, looking out a little bit longer, we do see the demand signals now that Europe will remain a net importing gas region until 2050, at least. And this is also the opportunity that we want to address with our Neptun Deep or some of our other gas production projects. Florian Greger: Thanks, Ram, for your questions. We now come to the end of our conference call and would like to thank you all for joining us today. Should you have any further questions, please contact the Investor Relations team. We will be happy to help you. Thank you again, and goodbye, and have a nice day. Alfred Stern: Thank you very much. Have a good day. Reinhard Florey: Thank you. Bye-bye. Operator: That concludes today's teleconference call. A replay of the call will be available for 1 week. The replay link is printed on the invitation, or alternatively, please contact OMV's Investor Relations Department directly to obtain the replay link.
Operator: Good day, everyone, and welcome to today's BrightView Earnings call. [Operator Instructions] Please note, this call may be recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Chris Stoczko, Vice President of Finance and Investor Relations. Please go ahead, sir. Chris Stoczko: Good morning, and thank you for joining BrightView's First Quarter Fiscal 2026 Earnings Call. Dale Asplund, BrightView's President and Chief Executive Officer; and Brett Urban, Chief Financial Officer, are on the call. I'll now refer you to Slide 2 of the presentation, which can also be found on our website and contains our safe harbor disclaimer. Our presentation includes forward-looking statements subject to risks and uncertainties. In addition, during the call, we will refer to certain non-GAAP financial measures. Please see our press release and 8-K issued yesterday for a reconciliation of these measures. With that, I'll now turn the call over to Dale. Dale Asplund: Thank you, Chris, and good morning, everyone. We had a strong start to 2026, as we grew total revenue 3% and delivered improvements in EBITDA while accelerating investments in our sales force, adding 80 incremental sellers in the quarter. While the needs of our customers vary geographically during the quarter based on weather, our focus on our frontline employees and delivering reliable service to our customer drove another sequential quarter of improvement in employee turnover and customer retention. Our intense focus on accelerating investments in our sales force, coupled with stronger customer retention, drove improvements in our underlying Land Contract book of business, one of the leading indicators of future revenue growth. More on this in a few minutes. Our accelerated investment in the sales force is proving effective, and we remain on track to deliver on our 2026 guidance, which represents a return to land growth in the third consecutive year of record adjusted EBITDA, as we continue to transform our business and deliver value for shareholders. We are well positioned to execute against our objectives. This quarter's progress reinforces my confidence in achieving our 2026 guidance, and our continued investment across the business positions us to deliver sustainable, profitable topline growth in both the near and long term. We have strengthened the foundation of the business, making significant strides in leveraging our size and scale, unlocking efficiencies and improving profitability over the past 2 years. Now, as we move forward, we will continue to cultivate a world-class sales organization to drive new sales to position BrightView as the investment of choice. With that, let's move to Slide 5, where we continue to see sequential improvement in our frontline turnover. Since day 1, my focus has been prioritizing our frontline crew members. And with ongoing investments, we continue our journey toward becoming the employer of choice. We have seen a considerable decline in turnover with approximately 30% improvement in just 2 short years. As an example of our continued commitment to our frontline, this quarter, we implemented advance pay, allowing our employees to access a portion of their earned wages ahead of the typical pay cycle, providing them with financial stability and flexibility. Our goal of becoming the industry's employer of choice has driven material cost savings that we've reinvested back into our frontline, and our continued improvement in employee turnover has created a more reliable workforce with consistent service levels for our customers. Turning to Slide 6. I'd like to highlight the impact that consistent service levels continue to have on retaining our customers. After reaching a low of approximately 79% in 2023, customer retention has improved by approximately 450 basis points as of Q1 2026, driven by initiatives focused on delivering consistent service levels to our customers, prioritizing our frontline employees and investing record level of capital to refresh our fleet. This is a true reflection of the exceptional service our employees deliver each day. Turning to Slide 7. We've also made significant progress across our branch network in driving retention improvements, in both the top and bottom quartiles. We have seen sequential improvement resulting in a 10% shift in both quartiles. While we are pleased with these results, we remain encouraged with the opportunities that still lie ahead. Our commitment to high-quality customer service has yielded significant improvement in customer retention. And, as we know, the longer a customer stays with us, the stronger relationship we build and ultimately results in us being able to provide a full suite of services over many years. The sequential improvement we have seen in this metric is a key contributor to now 3 consecutive quarters of positive net new sales in our Land Contract business, which I'll touch on in more details in a few moments. Turning to Slide 8. I'd like to update you on the rapid progress we've made in strengthening our sales force. During Investor Day, we outlined plans to expand our sales organization by 50%, representing approximately 500 net new hires by 2030. In the second half of fiscal 2025, we added approximately 100 new sellers, followed by about 80 additions in the first quarter of fiscal 2026, which is an increase of approximately 20% since the beginning of 2025. We are pacing ahead of our initial expectations, as this represents more than 1/3 of our progress toward the 2030 target. There are 2 categories of sellers, as shown in the bottom left, new business sellers focused on acquiring new customers and capturing a larger share of the total addressable market, while our customer-facing support team manages existing relationships and drives ancillary sales on top of contracted services. As new business sellers ramp their productivity and add new contracts, our customer-facing support team will further expand ancillary sales, helping to drive overall growth. Hiring is pacing ahead of our original expectations, and we plan to continue to ramp our sales organization through 2026. Expanding our sales force is critical to driving growth. And with structured training and enhanced technology tools in place, we are encouraged by the early momentum we are seeing in new sales. Turning to Slide 9. Now, I'd like to build on the topic of new sales and talk about a metric that's critical to Land Maintenance growth. This chart shows the improvement we made in our Land Contract book from Q2 2025, underpinned by a sequential improvement in our net new sales, a metric that factors in both customer retention and new sales. Ultimately, a growing contract book is an indicator of future Land Contract revenue growth. In my first year, we have realigned the sales and ops structure and changed the incentive plan to reward sellers for driving profitable new sales. This resulted in our branch managers and sellers working in tandem to align on new sales and equip them with the appropriate go-to-market tools. As we solidify the foundation of our business through reductions in employee turnover and improvements in customer retention, we began ramping the sales force in the back half of 2025. Since then, we have increased our sales force by approximately 180, or approximately 20%, and continue to see sequential improvements in customer retention, 2 key metrics needed to drive growth in our Land business. In Q3 2025, the momentum drove positive net new results, and we have seen 3 consecutive quarters of increased net new contract sales and growth in our Land Contract book of business of approximately 2%. This sustained momentum in improving customer retention and new sales growth gives me confidence that we will return to sustainable topline growth in the back half of fiscal 2026. Moving now to Slide 10. I want to remind everyone of the progress we've made in solidifying the foundation of our business and our focus for 2026 and beyond. In my first 2 years, my focus was on investing in and prioritizing our frontline employees, delivering consistent and reliable service to our customers and unlocking our size and scale as the industry's largest commercial landscaper. This has resulted in sequential improvement in employee turnover, customer retention and margin expansion, all key catalysts to help solidify the foundation of our business. Going forward, we will continue delivering in these key areas while also focusing on driving profitable topline growth in 2026 and beyond. As I mentioned a few moments ago, accelerating investments in our sales force will allow us to capture a greater share of the market. Through new sales and a sustained commitment to quality service, we expect sustained growth in our contract book, allowing our customer-facing support teams to layer in additional ancillary sales. By continuing to solidify the foundation of our business and by making strategic investments in our sales organizations, we are well positioned to accelerate contract growth and deliver sustainable, profitable topline growth. Before I turn it over to Brett, I want to express my appreciation to our more than 18,000 employees for their unwavering commitment to delivering consistent service and strengthening BrightView's position as the provider of choice. A recent example of this, although not an impact to the first quarter, was the team's readiness during the recent winter storms to safely and reliably service our customers. It is events like these that set us apart from other landscapers in the nation. Our ability to provide dependable service to our key customers was highlighted over the past few weeks. Once again, thank you to all our employees for putting the customer at the center of everything we do. With that, I will now turn it over to Brett. Brett Urban: Thank you, Dale, and good morning, everyone. 2026 is off to a strong start with our financial results positioning us to deliver on our guidance, which implies Land revenue returning to growth and delivering a third consecutive year of record adjusted EBITDA. The strategic decisions we have made over the past 2 years to invest in our employees and customers has paid significant dividends, as you can see in our employee turnover and customer retention metrics. And now, our strategy to add to our sales force is already showing positive signs in our selling performance. I am continually encouraged by the momentum we are building in the business to deliver long-term profitable growth. Let's turn to Slide 12 to discuss our results in the quarter. Total revenue for the first quarter was $615 million, which is a 3% increase, driven by heightened snowfall and continued improvement in underlying land metrics. Snow was a major benefit in the quarter, increasing 110% from the prior year, as we saw higher-than-average snowfall in the Mid-Atlantic, Northeast and Midwest geographies. Maintenance land revenue was impacted by weather-related factors, including the year-over-year step over from the 2 named hurricanes in prior year Q1 and increased snowfall this quarter, which limited our ability to perform core land maintenance. However, as Dale just mentioned, we're highly encouraged by the trends we're seeing in employee turnover and customer retention, and now, net new positive contract sales, which is the catalyst for land growth in the back half of 2026. In the Development segment, revenue decreased 7%, driven by timing and mix of projects. I want to be clear that the headwinds we experienced were timing related as we saw this impact start late in 2025 and should not be viewed as lost revenue over the long term. Turning now to profitability on Slide 13. We delivered another quarter of adjusted EBITDA growth, as we continue to transform our business. Higher revenue was a benefit to flow-through, as we are continuing to see advantages of refreshing our fleet, unlocking purchasing power through procurement and realizing efficiencies across the business to drive G&A savings. These benefits were partially offset by accelerated investments in our sales force, as our revenue-generating resources are up 180 employees or 20% over last year. This investment underpins the next leg of our sustainable growth journey. Now, let's move to Slide 14 to discuss our strategic capital allocations focused on driving long-term shareholder value. Our strong balance sheet highlights this strategy, supported by ample liquidity and a favorable debt structure with no long-term maturities until 2029. We continue to accelerate our fleet strategy in 2026, which saw a significant improvement to the average age of our core mowers and production vehicles in 2025. And now on to refreshing our fleet of trailers, this refresh has provided not only P&L benefits in the form of lower rental and repair and maintenance expense, but also intangible benefits through higher employee morale and customer satisfaction, which are major contributors to the improvement we've seen in frontline turnover and customer retention. Additionally, at the start of 2026, we increased our share repurchase authorization from $100 million to $150 million, as we believe our current valuation does not fully reflect our earnings potential. This increase resulted in $14 million in share repurchases in Q1, essentially doubling the quarterly average from 2025, as we continue to see our shares as significantly undervalued. While we currently view our fleet refresh and share repurchases as an efficient use of capital, we remain poised to return to M&A when the time is right, and we've developed a robust pipeline focused on service line density and market expansion. Moving to Slide 15. We felt confident by the first quarter results and underlying trends we are seeing in the business, and we are reiterating our 2026 revenue, EBITDA and free cash flow guidance. This represents the third consecutive year of record-breaking EBITDA, continued margin expansion and a return to Land revenue growth. Additionally, our free cash flow guidance, coupled with ample liquidity, provides significant financial flexibility to continue to reinvest in the business. Before turning the call back over to Dale, I want to reiterate my conviction in the trajectory of BrightView and our ultimate goal, delivering sustainable, profitable topline growth while creating meaningful shareholder value. The investments we've made into our business have paid dividends, as evidenced in our employee turnover and customer retention. And now, we expect our investments into our sales force to do the same. With that, I'll turn the call back to Dale. Dale Asplund: Thanks, Brett. Before we turn to questions, I want to reinforce a core belief that our people are the foundation of our progress. By investing in our employees and building an employer of choice culture, our intense focus on delivering best-in-class service is at the forefront of everything we do. Now, as we continue to ramp our sales organization, we are excited about the contributions the new 180 sellers are going to make. This, combined with leveraging our size and scale and strategically allocating capital, I'm confident in our ability to achieve sustainable topline growth and position the company to deliver long-term shareholder value. With that, operator, you can open the call for questions. Operator: [Operator Instructions] We'll go first this morning to Bob Labick of CJS Securities. Bob Labick: Congratulations on a great start to the year. Yes, I wanted to go back to the sales force investment, obviously. You mentioned you're ahead of pace. Does this mean you're going to pause? Or do you keep your foot on the accelerator? What's the target for the year? And what's the impact on the P&L? I guess, finally, like how long does it take until new salespeople break even and add to the top and bottom line? Dale Asplund: Yes. Great question, Bob, because we're proud of the progress we've made. First, we're going to start off by saying we join you today from our team -- with our team down in Homestead, Florida location. So we're seeing weather all over, and our teams continue to embrace the need for more employees to communicate with our customers. You saw in the quarter, Bob, we added 80 FTEs to support our growth levers. We are not going to slow down. We are seeing benefit. It's building our contract book, and we can talk through the effect it had on revenue in the quarter, as we saw outpaced snow across the country. But everything we've seen from the transition of moving our sales force to work directly with our branch managers is working. Now, it's about making sure as our branch managers request additional go-to-market resources, we're supporting them and continuing to give them people to help us grow this business. The 80 people we added in the quarter on top of the 100 people that we brought in last year, we are going to keep going. Originally, we said we were looking to add another 100 this year on our goal to adding 500 before 2030. We're well ahead of schedule. We're at 80 as of the end of the year. I want to keep promoting to add resources across the whole network. So I feel great about the momentum. It is our future to grow this business. We've done so much to improve the foundation. Now, it's about adding resources. So we're not going to stop at the 100. If there's opportunity and the branches can absorb them, can go get more market share, I'm going to keep giving them those investments to help them grow their business. Brett, do you want to add anything? Brett Urban: No. Bob, I would just say we're excited by it. We've made significant progress in a short period of time to ramp up our sales force. And you go back a little bit over 2 years, when Dale started as CEO, it was all about fixing the foundation, making sure we take care of our employees who in turn take care of our customers. And you look at that strategy now 2 years later, and that's paying huge dividends. Employee turnover is down significantly, over 30%, and customer retention is up significantly. Now, the next leg of our journey is to make sure we can support our branches by getting customer-facing sellers out into the markets. And we're going to do that as quickly as possible. So I'd say, yes, it was higher than expected, but we couldn't be more excited about the progress we're making with adding those sellers to the business. Bob Labick: Okay. Yes, that's great. And, yes, you've done a remarkable job over the last 2-plus years in building the foundation for growth. And obviously, sales force acceleration is part of it right now. You mentioned a few other things. What are the remaining steps to building this core foundation to get the flywheel fully running? And how much longer do you think that part will take until you have the foundation where you want it and you start to see the acceleration in top line? Dale Asplund: Yes. Great add-on, Bob. I think we made great improvements in taking care of our existing customer base. As I said in my prepared remarks, when I joined the company, our customer retention on an annual basis was running at 79%. It is very hard to grow a business when you're losing 21% of your customer base each year. I'm proud of the progress we made. And as we put in the deck, we're up 450 basis points over the last 27 months. So great progress. But what is the most beneficial? I'm so optimistic because we still have ample opportunity. As we put in the deck on Slide 7, you can see we've shifted from 20% of our branches being below 70% customer retention and only 20% being above 90% to just 24 months later, we're at 30% above 90% and 10% below 70%. Now, I'm not going to be happy until none of our branches are below 80% customer retention because that's our path to growth. We cannot lose our existing customer base. There's always reasons we might lose a few, but at the end of the day, we've got to make sure the service we provide our customers each and every day and support our employees that provide that service, make sure our customers recognize the value that we're trying to add to their businesses each day. So we're going to keep going, Bob. That retention is a critical number. We're going to invest in new sales, but we've got to keep chasing that retention number. We're at 83.5%, as we put in the deck. 85% is the next stop on our journey, I hope. Then, I'm not going to stop until I can say one day, we're keeping 90-plus percent of our business. But Brett, do you want to add anything? Brett Urban: I'll just add a little context. Obviously, you could tell the excitement in our voices over here. It starts with taking care of our employees, as Dale said, will take care of our end customers. We've improved that customer retention metric significantly. We've improved our fleet and our go-to-market significantly, just the look and brand of BrightView. And if you look at Page 9 of the deck, the strategy is starting to pay dividends. We continue to share more metrics on the business to give confidence of our ability to grow this in the back half of this year. And if you look at Page 9 of the deck, it's a new metric we're sharing, which is our Land Contract values that we have on the books at any given point in time. It's the annualized amount of these contracts. And if you look over the last 3 quarters, a big piece of this 2% growth in our contract book is coming from that customer retention, but we're now also starting to see those sellers we added back in the last June quarter, right, producing some incremental positive wins in the business and adding to that Land growth. So we couldn't be more excited about the strategy actually paying dividends into the KPIs. And if you look at Page 9, this is the leading indicator that would predict growth in the back half of the year once we get into our busy season. Operator: We'll go next now to Tim Mulrooney of William Blair. Timothy Mulrooney: So Maintenance Land, let's just start there. Yes, your Maintenance Land business was down a little more than 2% in the first quarter, but you maintained your guide for 1% to 2% growth for the full year. That implies about 2.5% growth for the remaining 3 quarters. And I know January is off to a snowy start, so if there's disruption in the second quarter here, then it looks like a lot of that growth in Maintenance Land is going to have to come from those last 2 quarters of the fiscal year. Can you just help us understand where you expect that growth to come from? Help bridge that gap for us. Dale Asplund: Yes. Great question, Tim, because I think it's worth taking a look at the quarter and digesting it for a minute. As everybody saw, and we said in our prepared remarks, snow was very, very high in the quarter, almost a record level for the quarter, being up $36 million. So it's great. We were able to take care of our customers in the market that they needed. If you look at our Land, we shrunk Land $8.9 million, Tim. So let me break apart that $8.9 million. First, we stepped over 2 named storms last year from 2 hurricanes that hit our southern markets, Milton and Helene. That was roughly $3.5 million. And then, $6 million of that other shrink is directly attributed to the markets that saw that outsized snow. So if you think of $6 million that comes out of our Land business that we can't put into the ground with ancillary work, that will position us to roughly flat if we didn't step over the storm and we didn't have the outpaced snow. So we feel great, Tim. We feel like the business would have been flat, as we enter the winter season, and the business is going to be poised to grow, whether it's 2% or 3% as we go across our 2 busiest quarters come April and go through the summer. So we are very optimistic that what you see on a headline for shrinking land, when you really break it down, it was impacted by the amount of snow that we had in those markets. And people saw we've had a very busy snow January based on everything in the news. But we're going to continue to take care of our customers each and every day based on what services they need. And I will tell you, I have seen more positive comments from customers the last 2 weeks than I've seen in many months. They're all reaching out to realize anybody can talk about doing snow services in July, but only true people that invest in the people and the equipment are able to deliver the service when we have as much snow as we've seen over the last several weeks. So we're in a great position, Tim. We are not -- we didn't change our guide. Despite what we're seeing on snow, we are very confident that we will achieve that 1% to 2% Land growth very easily. So we are positioned very well. But Brett, do you want to add anything? Brett Urban: No, I agree with Dale. January is off to a bit of a snowy start. We still have 2 heavy snow months in front of us, in February and March, which are still part of our total snow season. So we'll see how the quarter finishes out here. It is quite cold across most of the U.S. still. So we have optimism there. But as Dale said, look, if the $6 million that we were impacted by snow in Q1, even if we see a little bit of impact in Q2, given some more snowy weather, you'd have to grow the back half of the year north of 2%, like you said, Tim. And we feel ultra confident, especially looking at the contract book growth that we show on Page 9. That is the key, right? That is the number of customers we have, the value of contracts we have, that annuity businesses within our Land business that gives us that confidence to be at that 2% plus growth in the back half of the year. And we'll update as we get through Q2. When we do finish the snow season, we get through February and March, we'll provide a full update on the guide as we enter into Q3. Timothy Mulrooney: All right. That's helpful color, Brett and Dale. Brett, maybe you and I can nerd out on that contract book number that you just highlighted for a second because up 2% does look promising. But honestly, we don't have much to compare this metric to. Can you help us understand what this metric looked like this time last year? Brett Urban: Yes. Absolutely. Well, look, last year, we were still fixing the foundation and making sure we took care of our employees and took care of our customers. So if you go back a year, this is a new metric, we haven't shared it, but you wouldn't see an increase in this metric, right? We were working through kind of some things in the past and getting to a point where we're really significantly improving that customer retention. And now, like I mentioned before, with the sales force adds that we did 9 months ago, we're starting to see those sellers be productive. And we know it takes -- the first year to 6 months of a new seller, they're semi-productive, but not nearly fully ramped up. In that 6- to 12-month tenure range, they start to get ramped up and become productive and really start to sell. And then 12-plus months on, they would become fully productive. So that's why we're so excited about the adds we've made in Q1 to the sales force because that will pay dividends really later this year and really more importantly into '27 in the future. So we are investing in future growth. But going back to Page 9, just to give you a little more detail, if you look at our Land business, we do about $1.7 billion in Land revenue. I'm just going to round some numbers here, $1.7 billion in Land revenue. We've said publicly 2/3 of that is our contract business and roughly 1/3 of that is our ancillary business. So, rough math here, 2/3 of our $1.7 billion would say we have $1.150 billion of contract value on the books. So if you go back, Tim, a year ago, that number would have been less because obviously, the business hasn't been growing. But if you look at the last 3 sequential quarters now with the business growing, that contract value growing, 2% increase on, call it, $1.15 billion, roughly $22 million, $23 million. So that's what gives us the confidence, as we get into the busy season, right? 2/3 of our Land revenue happened between April and September, those last 6 months of the year. So this is definitely a leading indicator to what's going to come to the P&L in the back half of the year. Operator: We'll go next now to Greg Palm of Craig-Hallum. Greg Palm: I wanted to maybe hit on the weather stuff a little bit more just given some of the recent events. So can you talk about kind of what you've seen quarter-to-date in terms of impacts, both positive and negative? And I guess, as I'm thinking about it, just given this elevated amount of snow in certain markets, are you using that as a way to maybe onboard new customers that you can maybe convert to annual Land Maintenance contracts as well? Dale Asplund: Yes. Great question, Greg. Let me start off, and then, Brett can add. So I think, as everybody saw in our release, snow was very, very positive in the first quarter. In fact, we had a lot of questions I know on people asking, why didn't we think about increasing our expectations for snow from the $190 million to $220 million of our initial guide. But like I've said, since I've been in seat, we're only going to deliver good news on snow. Let me give you a little bit of additional data. So January has been a very strong month with storms going from anywhere in Texas all the way out through the Northeast. And this past weekend, we saw some pretty good weather down in the Carolinas and Virginia, so -- but if you look at our typical Q2, let me just give you a statistic, February and March combined in the past has been anywhere from $60 million combined in snow revenue to $160 million combined in snow revenue. So while it's still early, and we are optimistic about where we're going to finish snow, we'll give everybody that upside once we get through Q2. If I just did some quick math, Greg, and this is what we told a lot of our investors, if we did quick basic math, we did $173 million of revenue last year in Q2. We did $68.4 million this year. So you can assume that we're probably going to pace if we don't see any major warming happening. On the snow side, we're probably going to pace ahead of the top end of our range. But we'll update everybody come the end of Q2 once we get full visibility. And then, we'll decide how much of that benefit that we see from snow once we hit the end of Q2, we can reinvest back into the business. So, we feel great about it, Greg. It's only going to be upside for us wherever we land the plane with snow. And we just don't think it's going to create a long-term headwind that our summer months, where we get 2/3 of our Land revenue, we won't be able to outrun to get the growth that we promised for land. Brett Urban: Yes. I'd just add to it, Greg. Look, Dale said it several times here in the last probably month or so. Any competitor and/or landscaper can say they can do snow in July. But when the flakes start flying and snow is hitting the ground, we've actually seen that be quite different. And we've had customers in our markets, especially the southeastern part of the United States in Texas through Georgia, the Carolinas, come to us and say, "Hey, guys, we need help. Can you guys help us in snow"? And we've had a lot of customer outreach to the point of your second question of, is this going to lead to new customer acquisition? Yes, potentially. We're taking care of our customers first. We want to make sure the customers who have us for both land and snow and signed us up early in the season, that we're taking care of those customers first. But where we can and we have capacity, we're starting to pick up additional customers for snow, and now, having conversations with them about picking up their land contract, right? So if they're seeing some struggles from their incumbent landscaper on snow, they'll probably see the same struggles when it comes to landscaping. So that's creating an opportunity for us in the future to create more customer acquisition. Dale Asplund: Greg, let me add a little more color. And remember, this is a tough metric because the way that we price snow is obviously either with time and materials and you don't know how much snow you're going to get or we had tiered pricing for our fixed contracts. My team, who's been working so hard through the first 4 months of the year, gave me some high-level numbers, and these are just high level. I would say they feel like we believe we're going to get somewhere around 5 incremental annual -- $5 million of incremental annual contract value in snow based on customers coming to us to support their business. And they're thinking there could be about the same amount, Greg, in emergency needs for us to go out and service customers because their existing provider failed. Now, those all depend on the amount of volume we get in snow. But I will tell you, for us, that just shows the strength of people coming to us, asking us to do incremental services. So it comes down to making sure our team is prepared. Our team has the materials, our team has the equipment and our team is ready to do the work to take care of our customers. And we've seen that year-to-date. So we feel great that this is going to drive eventually more Land business because like I started off, anybody can talk about doing snow in July. But when you're getting 18 inches and you've got to have a parking lot clear, 24/7, you've got to have the equipment and people to make sure that you can service that property. So that's some more detail for you, Greg. Greg Palm: You answered 2 of my follow-up questions without doing, so I will -- I guess, I'll just pivot to something, maybe a little bit different, thinking back, I don't know, 6, 9 months ago about just sort of the overall discretionary spend environment. I know it's a tougher question in some of these seasonal markets like we're talking about. But overall, what are you seeing now versus that year ago period? And I'm just kind of thinking how this might impact some of the ancillary trends going forward. Dale Asplund: Yes. Look, it's still early, Greg, in the year. And obviously, if we get a lot more weather across those southern markets, especially in the HOA communities, you could feel some headwind on the Land side just because people end up spending a lot more money on snow removal. Nothing we're alarmed of. I would go the opposite way and tell you, we've seen a lot of damage from ice, whether it's plant material dying or whether it's tree damage across the country. We've dispatched tree crews out to many markets to try to make sure we can service our customers who have tree damage. So I would say there's always the possibility of headwinds, but we're seeing existing tailwinds. So I would say it's still too early to say are we going to see any noise from that. Once we get to the end of the second quarter, and we know exactly how much snow we had and where it was, we'll update everybody. But the good news is the commitment we made to take care of our customers and get higher retention and create that relationship continues to promote them to turn to us to actually do more and more of their services. So Greg, we are positioned so well, still too early to say if there's going to be some noise, but I have no worry even if we have some noise, like Brett said earlier, we're going to hit our Land forecast that we gave you in November of growing 1% to 2%. Operator: Gentlemen, we'll go next now to Andy Wittmann of Baird. Andrew J. Wittmann: Slide 9, again, the contract book of business, 3 quarters up 2%, that's great. I just wonder like if there's some context here around like we're in the middle of winter right now. And I know that -- I guess, you guys have said that your selling season has become more of an all-year-round thing. But for those seasonal markets, I have to think that some of your customers are still thinking about what they want to do for the coming green season. So does the 2% more likely look better a quarter from now after you get through some of those people in the seasonal markets making the decision for the year? I'm just trying to understand if this is actually conservative, for lack of a better term, or if I'm making too much out of it. Dale Asplund: No. I think, Andy, it's a great question. I don't think it's conservative because it's historic. So we're just giving you the facts of where we're at. You bring up a great question. We're starting to sell in our northern markets, even though it's a little bit of a challenge when you're getting as much snow as you're getting right now, but our customers are thinking about their April through October Land business. So absolutely, we sell Land contracts all year long. And I will tell you, even to Greg's question a minute ago, when we get additional needs for snow, it gives us the foot in the door to get those Land contracts, as we go into the summer. So Andy, to answer it a different way to say it's not conservative, we feel that momentum will continue to show on this slide. Our goal is not to say we've grown our book 2%. We think with the additional 80 resources we added in sales, we think of the 180 we've added over the past year, we feel great that we're going to continue to see momentum in this metric. Our goal is to keep adding resources to drive new contract book, and then, drive those customer-facing roles to drive all those ancillary services that those customers are going to need. So the teams in the field are very excited. Managing salespeople was a new thing to them a year ago, but now, they're all seeing the power of getting people out there, getting us new business so we can grow our business. And it's been a great journey, and I think 2026 will continue to show that momentum. Brett? Brett Urban: I would just add, we continue to manage this business for the long term. The quicker we can get these sellers added, like we showed on Page 8 of the presentation, the more inflection we'll have on Page 9, the contract book. And we're starting to see those 60 sellers we added last April, May, June, starting to produce and be productive here in Q1 of 2026. So it takes a little bit of time. But as you think about the business, you think about the way we're managing it. The strategy really is, Andy, based on that long-term view of the business. And that's why we went as far as to put our 2030 goals back into this earnings presentation to show we're committed to getting there as quickly as possible. So yes, I agree with you. I couldn't be more excited about the progress we made on Page 9. Whether it's 2% or something north of 2%, we'll continue to kind of share that metric just to show the progression in that underlying contract annuity business that makes BrightView such an attractive investment. Andrew J. Wittmann: I also wanted to ask about your IT tools. These have been some pretty big areas of investments that you guys have been making. Two of the bigger ones were around your HR IT system. I think that you guys are now -- have now gone live on a new system there. I think it was Workday that you put in. I want to know how that's gone, if there's been any disruption growing pains through that. And maybe even more importantly, though, I think you guys are now in the process of rolling out or more thoroughly rolling out your field management software that really kind of gives your guys the tools in the field for all sorts of different things. Maybe, Dale, could you just talk about how that's going? And how disruptive or not disruptive the field software is in particular? Dale Asplund: Yes. I think it's a great question. I would say, first, let's start with the HRIS system. Our employees are our #1 asset, and we've got to make sure we've got visibility and ways to manage them. I think what that tool has given us is added benefit for all of our leaders and made their jobs easier. So from a transition, as we've started to migrate to that for visibility, and we'll continue to have phases, Andy, as we add different modules on to get away from the litany of IT systems we had and put it all in one system. But the field has embraced it. It continues to show benefit, and we'll continue to leverage the different modules as we go forward. On the field service side, that's one that is really starting to take way. We've seen continued progress. We have over 1/3 of our branches on it. Our initial goal was sometime late March, early April was to get all of our branches on field service. The branches that have been on it for 30 to 60 days are seeing benefit in creating capacity with their labor. So that's a positive thing that the teams that are using it to help route and define how many hours for each job it's creating capacity. And that's key for us because I want to use not it as a labor savings tool. I want to use it to create capacity. So as we're growing this business this summer, we have the ability to service customers with the resources we have today. Now, I would say this, Andy, we had a couple of branch managers send me an e-mail, and I'm always there to help them. Obviously, when you get as much snow in a couple of these markets and you have training scheduled, we pushed a couple of branches out because I recognize we've got to service our customers, and we just moved the training out for a few weeks, and we get our team to reassign a date. But we are making wonderful progress on both of those initiatives. And like we said, our IT investments were behind schedule several years ago. These are the first 2 in a litany of different technologies we can help grow our business. So we're enabling our field. We're giving them tools, and our goal is to long term help them be more efficient and spend more time with their customers. Brett Urban: And Andy, I would just add, this is why it's so exciting, we have the balance sheet, liquidity and flexibility to do all these investments, which is fantastic, not only investing in our employees, in our customers, in our fleet, in our sales force, but also invest in technology. So Dale mentioned some of the tools that are rolling out, but that's all supported by the flexibility we have on the balance sheet, so we couldn't be more excited about the ability for us to grow the business, produce higher EBITDA than the year before and continue to invest back into the business. Operator: We'll go next now to Stephanie Moore at Jefferies. Stephanie Benjamin Moore: I wanted to circle back on maybe a question that was asked earlier, but I'm going to ask it a little bit differently. As you think about all of the success you've had thus far to start the year from the investment standpoint, obviously, the strong snow season, maybe just talk about the level of confidence you have in the guide, understanding it's obviously still early in the year and you need to get through your busy season? But I'm trying to understand what could maybe go wrong or in a more negative direction, which would make the guidance a little bit more difficult. So maybe downside scenarios that you guys walk through. Dale Asplund: Yes. I think, like I said, I'll take it into some buckets. Obviously, snow, if we continue to add the volume of snow we saw in Q1 and we saw in January, that could create some delays in our ability to do Land Maintenance service here in the second quarter, especially when you're looking at markets that are getting extreme cold all the way down into Florida. I was out with my teams this week to start the day and dispatch our teams, and we had temperatures in the low 30s across Florida. So we could always get that, Stephanie, more snow. It gives us more upside in the Snow business we do, and then, it will give us some potential delays in our maintenance and our development business. But, all these storms and the ice damage across the country, I would flip it the other way. I feel like long-term, as we go into our busy season with the summer, we had equally as much opportunity to see ancillary grow faster because of the tree work, because of the plant damage that's going to occur because once we get out of winter, people will want to make sure their properties look good. So I feel like there could be some timing. There's no question that when you get as much snow as we've had over the first 4 months, it could create some noise in timing. But at the end of the day, I think there's going to be a lot of opportunity that comes out of a little bit rougher winter. And I think that even in the development business, okay, we're going to have some timing, like we saw in this quarter. Our 3 biggest projects that we're doing right now are all in the northern markets. We could have done more work with them if they weren't under snow for the majority of the quarter. So we feel great, Stephanie. I don't -- you say what risks do we have? We always have risks in every environment, but I feel our upside is greater than our downside right now. Stephanie Benjamin Moore: That's very helpful. And then, maybe switching to capital allocation priorities, obviously, you noted that the M&A pipeline remains robust, but you also have been very active in share repurchases. So maybe just talk through as you evaluate both options, what's more for the near-term priorities, when we might expect to see M&A start again. Any color there would be great. Dale Asplund: Yes. Great question. I'll start off, and I'll give it to Brett. I remind my senior leaders that you have to earn the right to do M&A by growing your own business before you've earned the right to buy somebody else's business. And my guys remind me of that all the time because they're all on the verge of seeing that business grow. So they're all reminding me it's time to get back into M&A. And you saw it. We had a strong quarter of share repurchase. We're buying our equity back at 7.5x at the price that we averaged in Q1. At 7.5x, we'd have a hard time getting a quality company like we have at BrightView for that multiple. We believe we've got a big robust pipeline, a quality company, so even if smaller is going to trade at 8 to 9x. Even if we get a turn on that based on synergies, we're still paying a price that some were higher than what we can buy our own shares back at. So we know the quality of company we have at BrightView. We recognize we're significantly undervalued. So we're going to keep -- and our Board approved us to upsize our share repurchase and get more aggressive. So we feel great about the investments we're making. It's real simple, invest in our people and our fleet, invest in buying our shares back, and then, do M&A. But Brett, do you want to add anything? Brett Urban: No, I would just add that we're currently levered at 2.4x, essentially flat to where we were, very favorable debt structure, no long-term maturity in 2029. And we have plenty of liquidity, right around $0.5 billion to invest in the business of liquidity. So to your question, Stephanie, and Dale's point, I think on Page 14, we've tried to lay out our priorities very clearly. And I think we're executing on those priorities. We've executed on a fleet refresh that has essentially seen all of our core mowers get to our targeted average age. Almost all of our production vehicles, by the end of this year, we feel like they'll be at the average targeted age. And we have some work to do on trailers. But this year is probably going to be our last year of elevated CapEx in the business. We're going to run about 6.5%. And then, we'll come back down more to that 3.5%, 4% normal range as we get through our trailer refresh. But Dale said it well, buying a company comes with some inherent risk of integration and acquisition. And if our stock is going to trade at 7.5x multiple, definitely an accretive use of capital to buy our own shares. And look, we feel like we should be in the 10-plus multiple trading range. So when we get there, and this business is growing, and we get there, we get a re-rate, there's absolutely a tremendous amount of opportunity to go down the acquisition trail. And I will tell you that the pipeline we're maintaining here is significant. So we have a pipeline of potential targets. When the time is right, we'll be able to pull that lever fairly quickly. Operator: We'll go next now to Jeffrey Stevenson at Loop Capital. Jeffrey Stevenson: How should we think about the cadence of development revenue growth this year after the segment was negatively impacted by project timing in the December quarter? And then, has there been any change in the timeline of the 4 to 5 large projects you're working on compared with prior expectations? Or is that in line with what you were expecting when you gave guidance last quarter? Dale Asplund: Yes. We feel great about the progress we saw from Q4 into Q1 for development. It's definitely swinging back. Is there timing differences? Jeff, yes, like Brett said in the script, when you've got a lot of those big projects up in the northern climates and you get the amount of snow, they still grew, but they could have grown more. We had more opportunity. Those projects will still hit our timelines. It's going to be about when we can recognize it. We feel great about what the customers are asking us to do, and we continue to work on them. So I'm not worried about the development business long term. We just got to stay on top of everything we're working on, take care of our customers, communicate to our customers and continue to keep driving forward with the development backlog, so we keep booking work each and every day. Jeffrey Stevenson: Great. No, that's helpful, Dale. And sticking on the development business, I was wondering if you could provide an update on your cold start initiative and the timeline of that this year? And then, also, with the increase you've seen in the sales force, obviously, that's mainly on the maintenance side. But have any of the new hires been on your development business as well? And how will that help with growth over the coming years? Dale Asplund: Yes. Look, I think it's a great question. We updated everybody that our goal is to get several new locations open for development. We have now opened 6 locations across North America that we're seeing green shoots out of. Some of it is markets that we traditionally did remote work in. So we had some development teams there that could do work. But Jeff, yes, about 10% of those new sellers in the quarter, that money that we spent went to the development team because our whole goal is when we add a location, make sure we've got a development sales rep out in the market to get us more and more work. So yes, it's about 10%-90% for that $6 million that we talked about spending in the quarter on sales resources. And we've got 6 of the locations that we've gotten stand-alone P&Ls that they're operating independently versus they used to be doing work remotely. So great progress there, and we're going to continue to keep our foot on the gas and grow as fast as we can with new locations. Operator: [Operator Instructions] we'll go next now to Greg Parrish at Morgan Stanley. Gregory Parrish: I'll just squeeze one in here. Maybe just help us think about snow margin, especially heading into the second quarter with how much we had, had in January, and we'll see how February, March play out. But how much of the snowfall so far is in fixed versus variable? And then, can you talk about the potential for some of these clients, as they move up in tiers, does that potentially add more margin upside in the Snow business in the second quarter? Dale Asplund: Yes. Good question, Greg. I think, when you look at our -- we announced that we basically saw $3 million of improvement from the revenue in the quarter. If you digest that and you really break it down, you look at it and say $6 million of that incremental EBITDA came from that incremental snow revenue, where the shrinkage in development and land, there was about $2 million of negative EBITDA in land and $1 million in development giving us the $3-ish million of net benefit. I would say you were head on. So we've got a big portion of our contracts, where, especially in the northern markets, we went to more fixed tier pricing. Now, as much snow as we saw, the Chicago market saw 3x the normal snow up and from New Jersey up to Boston saw double the normal snow in the first quarter. All those, when we have fixed tier pricing, kind of limit the margin that we're going to have until we start triggering those additional tiers. As we trigger those additional tiers, it becomes more profitable. So we have always said our margin expectation on incremental snow is between 20% and 25%. We feel once we land the plane for the year and we exit Q2, we will be very comfortably in that range. I know Q1, $6 million of benefit on $36 million of revenue is slightly below that on flow-through, but we feel like a lot of that is just timing of how we see those fixed tier contracts. We continue to see more and more customers go to fixed tier, especially after a year like this because some of the markets on the fringe that traditionally took more risk and tried to go to time and material are probably going to want to go look at fixed pricing again, so -- but yes, we feel great. We feel that we're going to get added benefit as we go through Q2, maybe as much on revenue, but more on profit because we're -- right now, it's all about just taking care of the customer. Operator: And ladies and gentlemen, that is all the time we have for questions this morning. At this time, I'll turn things back to Mr. Asplund for any closing comments. Dale Asplund: Look, I want to thank everybody again, and I apologize. I know we still had some questions in the queue. I think it was a great discussion. And operator, thank you. But I'd like to close by reaffirming our confidence in the trajectory of the business, as we continue to work toward its transformation. Over the past 2 years, we fixed the foundation of this business, becoming a unified company and unlocking efficiencies to drive this business forward. All the while, we have started to reinvest back into our sales organization. I am beyond proud of how many resources we were able to add in the quarter, and we are going to benefit from them, not here in Q1, but throughout 2026 and position us for long-term growth. So to all the employees, thank you. Everybody continue to be safe. To all of our investors, thank you for taking the time to listen in today. Everybody, be safe, and we'll talk to you again at the end of the second quarter. You can now end the call, operator. Operator: Thank you, Mr. Asplund, and thank you, Mr. Urban. Again, ladies and gentlemen, that will conclude today's BrightView conference call. Again, thanks so much for joining us, and we wish you all a great day. Goodbye.
Operator: Good afternoon, and welcome to the Artisan Partners Asset Management Business Update and Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Artisan Partners Asset Management. Please go ahead. Ryan Bruhn: Welcome to the Artisan Partners Asset Management Business Update and Earnings Call. Today's call will include remarks from Jason Gottlieb, CEO; and C.J. Daley, CFO. Following these remarks, we will open the line for questions. Our latest results and investor presentation are available on the Investor Relations section of our website. Before we begin today, I would like to remind you that comments made during today's call, including responses to questions, may include forward-looking statements. These are subject to known and unknown risks and uncertainties, including, but not limited to, the factors set forth in our earnings release and detailed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those disclosed in the statement, and we assume no obligation to update or revise any of these statements following the presentation. In addition, some of our remarks today will include references to non-GAAP financial measures. You can find reconciliations of these measures to the most comparable GAAP measures in the earnings release and supplemental materials, which can be found on our Investor Relations website. Also, please note that nothing on this call constitutes an offer or solicitation to purchase or sell an interest in any Artisan investment product or a recommendation for any investment service. I will now turn it over to Jason. Jason Gottlieb: Thank you, Ryan, and thank you for joining the call today. Since our founding in 1994, we have steadily expanded our capabilities across equities, credit and most recently, alternatives. We have done this while remaining true to a consistent business philosophy and approach, high value-added investing, a talent-driven business model and thoughtful growth, all in the pursuit of generating and compounding wealth for our clients over the long term. 2025, we generated significant absolute returns for our clients, delivered strong results for our shareholders and continue to expand our multi-asset class platform. Firm-wide asset-weighted investment returns exceeded 20% net of fees. Our investment strategies generated over $33 billion in returns for clients. Compared to 2024, we grew revenue by 8%, operating income and adjusted operating income by 9% and 12%, respectively, and assets under management by nearly 12%. Turning to Slide 3. Investment performance remains strong across our platform with 79% of our AUM outperforming benchmarks for the 3-year period, 74% for the 5-year period and 92% for the 10-year period gross of fees. Several strategies generated particularly strong results in 2025. In equities, six of our strategies generated over 500 basis points of outperformance net of fees, including U.S. Mid-Cap growth, Non-U.S. growth, Global Equity, Global Value, Select Equity and Sustainable Emerging Markets. The Global Equity, Global Value and Select Equity Strategies outperformed their benchmarks by 2,422, 1,188 and 1,175 basis points, respectively, net of fees. In credit, the emerging markets local opportunity strategy generated a calendar year return of over 24%, 527 basis points above its benchmark net of fees. In alternatives, credit opportunities returned nearly 8%, global unconstrained returned nearly 12% and Antero Peak returned over 20% each net of fees. Longer-term performance across our platform is compelling and broad based. All 12 Artisan strategies with track records over 10 years have outperformed their benchmark since inception net of fees. 14 of 17 strategies in equity, 4 of 4 credit strategies and 3 of 5 alternative strategies have outperformed their respective benchmarks since inception net of fees. Trailing 1-year performance has been weighed down by underperformance in two of our largest equity strategies, International Value and Global Opportunities, both of which have very strong long-term track record. Turning to Slide 4. We ended the year with $180 billion in assets under management, an all-time high at year-end, driven by over $33 billion of investment gains. Our credit platform performed well in 2025. AUM grew by 29% compared to 2024 to $17.9 billion. Net inflows totaled $2.8 billion and organic growth exceeded 20% for the third consecutive year. Our alternatives platform also experienced healthy growth with AUM growing 20% from 2024 to $4 billion. With strong organic growth in global unconstrained in particular. Our equity platform was impacted by higher-than-expected outflows of $15.6 billion. Outflows were primarily concentrated in global opportunities U.S. mid-cap growth and non-U.S. small-mid growth strategies, driven by challenging short-term performance, changing asset allocation preferences and profit taking on the back of strong long-term performance. Maintaining and growing AUM in public equities requires differentiated and compelling investment performance, asset allocation demand, the right vehicles and pricing and effective sales and client service. The bar is high, but we believe we can continue to maintain and grow our equity businesses. In addition, we continue to make meaningful progress towards expanding the breadth of our platforms towards credit and alternatives. Slide 5 provides an overview of our newest investment franchise, Grandview Property Partners. Grandview is a real estate private equity firm specializing in originating, developing, acquiring and managing middle market properties across the United States and joins Artisan as our 12th autonomous investment franchise. The Grandview team led by founding partners, Raj Menon, Dean Sotter, Eric Freeman and Jeff Usas has worked together for an average of 22 years. Since forming Grandview Partners in 2018, the team has delivered top quartile results and consistent DPI realization. Grandview's macro-driven investment approach focuses on growth markets supported by shifting demographic trends and regional supply-demand dynamics. Recent funds have emphasized industrial, residential and power land themes. Grandview has raised three discretionary closed-end drawdown funds and currently manages approximately $880 million in institutional assets across its flagship fund series and co-investment programs. The acquisition of Grandview advances our strategic expansion into alternative investments, establishes a foundation in private real estate and creates new pathways for growth. It also aligns with our long-standing business model, high value-added investing talent-driven and thoughtful growth. We believe we can leverage our institutional and intermediated wealth relationships to further expand and develop Grandview's business. Marketing the team's next fund will be high on the priority list in 2026. With Grandview's acquisition, we have broadened the ways in which we can partner with and onboard differentiated investment talent. We intend to leverage our enhanced transactional and operational capacity to add additional capabilities across our platform with a disciplined focus on allocating capital towards our highest conviction opportunities. I will now turn it over to C.J. to review our recent financial results. Charles Daley: Thanks, Jason. Our complete GAAP and adjusted results are presented in our earnings release. We are pleased with our financial results for the fourth quarter 2025. Assets under management as of December 31, 2025, were $180 billion, up 12% from year-end 2024. Revenues in the December quarter reached a new all-time high of $336 million, up 11% compared to the September quarter and up 13% compared to the prior year fourth quarter. The December 2025 quarter reflects approximately $29 million of performance fees from six different strategies. Strong relative investment performance in the fourth quarter across three performance fee eligible accounts drove performance fees above our third quarter projections. As of the end of 2025, approximately 3% of our AUM is subject to performance fee arrangements and the majority of those arrangements are annual fees with measurement dates at the end of December. Our weighted average fee rate for the fourth quarter was 74 basis points, which includes performance fee revenue. Our recurring management fee rate remained consistent with recent quarters. In the fourth quarter, the Artisan funds completed their annual income and capital gain distributions. Distribution is not reinvested in Artisan funds totaled $1.5 billion for the quarter and $2 billion for the full year. Representing an $800 million increase from 2024. This increase was driven primarily by strong absolute investment performance in our two largest equity mutual funds. Adjusted operating expenses for the quarter were up 4% compared with the third quarter 2025 and up 7% compared with the fourth quarter 2024, primarily from higher variable incentive compensation expense due to increased revenues. While total adjusted operating expenses increased, fixed compensation costs for the quarter declined modestly. Long-term incentive compensation expense was lower in the quarter due to the forfeiture of unvested long-term incentive awards associated with a small number of employee departures. Additionally, we benefited from the quarterly true-up of self-insurance liabilities, which reflected updated estimates. Adjusted operating income increased 23% compared to both the prior quarter and the same quarter last year. Adjusted operating margin for the quarter was 40.2%, an improvement of 400 basis points from the prior quarter. Adjusted net income per adjusted share was up 24% compared to last quarter and up 20% compared to the fourth quarter of 2024, largely consistent with operating income. Full year 2025 revenues were up 8% compared to 2024 on higher average AUM. Full year 2025 adjusted operating expenses increased 5% from 2024, primarily from higher incentive compensation on elevated revenues and the impact of the addition of the January 2025 long-term incentive award. Calculating our non-GAAP measures, nonoperating income includes only interest expense and interest income. As of December 31, we had $152 million of seed capital invested in emerging products. Those investments have produced solid returns. During the year, we realized $20 million of gains from seed investment redemptions in products that no longer require support from firm capital. Those gains, which are excluded from our non-GAAP earnings, provide capital to support dividends as well as future growth through reinvestment in new products, GP investment in private funds or acquisitions. Our balance sheet remains a source of strength. We ended the year with approximately $214 million of cash and a conservatively leveraged capital structure at approximately 0.4x leverage. Importantly, our $100 million revolver remains fully undrawn, providing additional liquidity and downside protection. As a result, we are in a position to return capital to shareholders on a consistent and predictable basis while maintaining the flexibility to invest in the business. Consistent with our dividend policy, the Board declared a quarterly dividend of $1.01 per share with respect to the December 2025 quarter, along with a $0.57 year-end special dividend. In total, dividends declared with respect to 2025 cash generation were $3.87 per share, representing a 98% payout ratio relative to adjusted earnings and an 11% increase versus dividends declared on 2024 cash generation. Year-end special dividend was 14% higher than the prior year, reflecting stronger earnings and cash generation. Based on our stock price on December 31, this equates to a dividend yield of 9.5%. Importantly, even after funding the quarterly and special dividends and our near-term growth initiatives, including Grandview, we retain approximately $80 million of excess capital to fund organic growth and explore potential M&A opportunities. Overall, our capital structure is intentionally designed to be durable through market cycles combining strong cash flows and liquidity, modest leverage and a variable cost model that generates attractive margins. Looking ahead to 2026. Our Board approved the 2026 Annual Long-Term Incentive Award of approximately $72 million, consisting of $51 million of cash-based franchise capital awards and $21 million of restricted stock awards. Consistent with our long-standing philosophy of retaining investment talent, the vast majority of the awards were awarded to our investment professionals. The result of the 2026 grant, we expect long-term incentive amortization expense to be approximately $85 million for 2026, excluding mark-to-market impacts. The acquisition of Grandview closed on January 2 is expected to have an immaterial impact on our 2026 earnings. We expect that the acquisition will be mildly accretive to earnings per share after the final closing of Grandview's next flagship closed-end drawdown fund. Including approximately $20 million of increased fixed expenses from the long-term incentive compensation grant and the addition of Grandview expenses, fixed expenses are expected to increase low single digits in 2026. Low single-digit increase primarily reflects merit-based salary increases and inflationary market data and technology costs. As a reminder, we estimate our fixed compensation and benefits expenses will be approximately $6 million higher in the first quarter of 2026 compared to the fourth quarter of 2025. In closing, we believe our long-standing investment-led culture, disciplined allocation of resources and capital and expanding multi-asset platform positions us well to continue to compound wealth for our clients and shareholders over the long term. I will now turn the call back to the operator. Operator: [Operator Instructions] The first question comes from Bill Katz with TD Cowen. William Katz: Okay. So maybe all things grand view to get started. There's probably a cluster of questions here, maybe accounts for my first question, so if you don't mind. One, the AUM was a fairly lower level than I think maybe many of us were anticipating. I appreciate the close earlier. Maybe you could sort of explain why that happened? And then secondly, as you mentioned in terms of the accretion guidance looking ahead, how do we think about maybe the timeline for the next flagship fund? And maybe what was the previous size of the fund as we can sort of try to lay that through our models. Charles Daley: Bill, I'll start. The AUM was down because in the fourth quarter, there were some realizations on some properties in the first fund, the Grandview Fund I, which is fully invested in the harvesting phase. So there were realized gains as well as distributions out to LPs, which is a good thing. Jason Gottlieb: And Bill, on your question regarding Fund III. Fund III was about $150 million in raised out and committed assets. They're almost through the investment period there. And so that's obviously a lower bar than what we're certainly expecting in Fund IV, which we're going to be actively pursuing, as I mentioned in our prepared commentary, this will very much be a goal of ours -- a top priority of the management teams as well as Grand Views to build out Fund IV, which we're effectively launching as we speak. And so we expect that to build throughout the course of the year. We hope to have a first close sometime in the early to mid part of the summer which will be a good indication as to how we're tracking. But we do expect it to be significantly higher than their last fund launch, which was Fund III. William Katz: Great. And then just sticking with -- I was encouraged by some of your comments in the press release and in your prepared commentary. I was just sort of leaning into the M&A opportunity. I was wondering if you could maybe expand on your commentary a little bit, just sort of where you're seeing the greatest receptivity? How is the portfolio potentially seasoning of maybe 3 months ago? And then just given just everything that's going on in the market, how are you sort of seeing like the bid-ask spread on expectations around purchase price? Jason Gottlieb: Yes. So maybe I'll just talk a little bit about the future pipeline. There's a couple of things that I would highlight. We're clearly not exclusively focused on M&A. We're really letting the talent drive the outcome here. And certainly, there's asset classes where we have a an emphasis in terms of where we're seeking opportunity. And I would continue to focus on the areas that you would expect private credit is one where we've been reasonably active both in the form of lift out and the potential for M&A. Private equity in the form of secondaries has been an area that we remain pretty active. We've seen some really interesting idiosyncratic opportunities within equity that has more recently come back. This is one in particular that we've been talking about 5 or 6 years ago, we were very excited about. There was a little bit of a hesitation, I think, more on their part just due to where they were in their career and what they wanted to achieve and get accomplished before they did something more entrepreneurial, but we're now engaged with them, and we're talking. And another one in particular that is interesting is just the potential to broaden out our credit platform, not necessarily just purely in private, but also on the public side as well as the hybrid side. I would go back to some of the comments I made around Grandview and most of their transactions are off market. And I think that what we saw with Grandview, which was an off-market transaction. I think that, that will continue to be a more fertile hunting ground for us. The transactions that are being shown and prominently shopped, are hard for us to really get excited about. Those tend to be more about dollars and cents as opposed to investments, and we really need to just stay true to who we are and focus on the investment side. But the other -- the last thing I would say about the pipeline, and it goes back to Grandview, we're excited about Grandview for all of the reasons we're excited about the prior 11 teams. And what's great about Grandview is they already are a fully functioning investment platform. It's not like we have to build something. The foundation has been laid. The team has been working together for 20-plus years. They have had great deal of investment success. And so it's really up to us to collectively work with them to build in some and layer in some growth. And so that's different from when you go into a lift out where you have to really drop all your pencils and really focus on everything that's required to make a team successful. And so while we're still going to be there and do that, I think there's less that's required of the middle of the firm, given that this is a team that's operating at a high level already. Operator: The next question comes from Alex Blostein with Goldman Sachs. Anthony Corbin: This is Anthony on for Alex. Maybe just one 2-part question on the international value strategy. So this has been kind of one of the top flowing strategies at APAM for a while now, yet we saw another quarter of elevated outflows despite what seems like an industry kind of rotation out of growth and into value. So what's driving this recent weakness? And how have you seen kind of client demand change recently? Jason Gottlieb: Yes. I don't -- Anthony, it's Jason. I wouldn't put too much emphasis on the elevation of the outflows. I think it's primarily due to the fact that David and the team have just continued to deliver really exceptional absolute returns even in the face of a challenging market for them. They continue to produce great absolute returns with a slight relative headwind. So we haven't seen anything notable or in particular that gives us pause or concern -- or certainly, David and the team. There's been some institutional reductions just largely due to the impact of the equities book of several of our clients just outperforming. And so we're getting a little bit of that rebalanced flow that you naturally expect. And we would expect some of that to continue to happen throughout the course of the first quarter in light of how strong markets were globally, especially ex U.S. So that's there's nothing that we're seeing in the trends or there's nothing underlying that we -- that gives us concern or something that suggests that there's an issue on the horizon. Operator: The next question comes from John Dunn with Evercore ISI. John Dunn: I wanted to maybe get an update on what you're seeing as far as interest in and demand for non-U.S. strategies just given what a contributor is to your AUM base? Charles Daley: Yes. John, yes, it's a good question. I'd say there's probably four -- there's really four areas that I think there's going to be some interesting opportunities for our platform. And I think they aligned directly to your question. So right now, I think our AUM is 70% ex U.S., plus or minus a few percent. And when you think about the big trends that we're seeing, number one, we think there's a reemergence of emerging markets allocations coming on the horizon. We spoke about something last quarter, which was we were aligning some sales efforts and some sales focus and running a campaign specifically in emerging markets. And while it was early days and it remains extremely early days, we're seeing some green shoots and some direct allocations coming out of that effort. I think we raised north of $1 billion in the 5-ish plus months that we enacted that campaign with -- we have four very distinct strategies that are able to capture that, and all four of them had over $100 million in net flows over that very short period of time. We fully expect that, that campaign will be in force throughout 2026 as we see the pipeline grow and build. And so we're very much excited about that area, in particular, you rightly point out the international markets. And I would expand that out to global as well. I think a lot of people don't want to give up the ghost on U.S. and the beauty of global clearly gives you the ability to toggle between U.S. and non-U.S. And we've had a great deal of success in our global franchises. So global value, as I've mentioned in my prepared comments, has just shot the lights out performance-wise our global equity team with Mark Yockey also had an outstanding year. They -- I think they produced a 47% return in their global equity strategy. And then underneath that, we also have some international capabilities that we're excited about. Mark Yockey, again, produced a really outstanding return in 2025, which is on the heels of outstanding returns in prior years as well. And so his record is really compelling. We're starting to see some real activity in that strategy as well. And so we think the engagement in international will remain elevated, and we expect that several of our strategies will be aligned to at least have conversations with the clients about the benefits of how they operate in those markets. Some that are maybe a little less aligned to your question, but still relevant to, I think, the trends that we're seeing in our conversations, we still think that there's a long way to go in credit. And you're seeing that in all of our areas where we have exposure. So the high income team with Bryan Krug and his -- the development of custom credit solutions, we've seen significant uptake in interest from our institutional marketplace where they're really designing a bespoke solution around a specific need, and Bryan is able to accommodate those. So we're seeing really good uptake there. One thing that's been sort of flying a little bit under the radar screen for quite a long time, but we're starting to see some uptake as well as our -- we have a floating rate fund that is top quartile on a 1-year, top quartile on a 3-year that's being run out of Bryan's franchise. We're starting to see some interesting opportunities coming from that. And then when you look at the cross-section of emerging markets and credit with our EMsights team, they're firing on all cylinders, emerging market debt opportunities, emerging market local opportunities continuing to really deliver outcomes to the upside, both in absolute as well as excess returns. And so they're at the intersection of a couple of interesting themes for us. And then lastly, something that we've talked about for quite a while, which is alternatives. Certainly, Grandview is going to play a very important current and future role in the growth and development of our alternatives platform. And then when you think about what's going on, again EMsights as well as in our high income team. EMsights, the global unconstrained strategy through the end of the year, I think we raised about $500 million or $600 million in assets. And this, again, is a top quartile performer with a very, very differentiated return profile that people are really -- it's really resonating with our intermediate wealth space as well as our institutional space. And then lastly, credit opportunities, which I cited as a really strong performer over a multiyear time horizon is continuing to see incremental flows, which we would expect to continue in 2026. John Dunn: Got it. And then maybe just because it's been a swing factor for flows lately. Maybe could you just give us kind of the puts and takes looking forward the institutional side, particularly by region? Charles Daley: Yes. I think institutionally, we're -- if you look at the regions, I'd say where we're probably a little bit more of a little bit more at risk has probably been more in Europe in light of some of the regulatory changes that we've talked about for quite a while. We talked about it in Australia, and it sort of impacted a couple of countries in Europe as well the combination of some of the regulatory changes that are occurring, some short-term performance where -- that is where we have a lot of global exposure, specifically with our growth team and global opportunities. There's going to be, I think, a little bit more of a challenge in that region, specifically because of that. where clients are reallocating the active passive debate rages and then you've got that regulatory overhang is -- causes it to be a little bit more challenging. But institutionally in the U.S. marketplace, we are still continuing to see pretty good opportunities, and it's going to -- it's coming in our emerging markets franchises as well as in our credit franchises. So there's to your point, there's going to be some puts and takes. So it's going to be hard to tell exactly where it all shakes out. But I'd say U.S. is probably a little bit more favorable in that regard institutionally relative to non-U.S. Operator: [Operator Instructions] This concludes our question-and-answer session and the Artisan Partners Asset Management Business Update and Fourth Quarter 2025 Earnings Call. Thank you. You may now disconnect.
Operator: Welcome to the OMV Results January to December Q3 2025 Conference Call and webcast. [Operator Instructions] Please be advised today's conference is being recorded. At this time, I would like to refer you to the disclaimer, which includes our position on forward-looking statements. These forward-looking statements are based on beliefs, estimates and assumptions currently held by and information currently available to OMV. By their nature, forward-looking statements are subject to risks and uncertainties that will or may occur in the future and are outside the control of OMV. Therefore, recipients are cautioned not to place undue reliance on these forward-looking statements. OMV disclaims any obligation and does not intend to update these forward-looking statements to reflect actual results, revised assumptions and expectations and future developments and events. This presentation does not contain any recommendation or invitation to buy or sell securities in OMV. I would now like to hand the conference over to Mr. Florian Greger, Senior Vice President, Investor Relations and Sustainability. Please go ahead, Mr. Greger. Florian Greger: Thank you, and good morning, ladies and gentlemen. Welcome to OMV's earnings call for the fourth quarter 2025. With me on the call are OMV CEO, Alfred Stern; and our CFO, Reinhard Florey. Alfred and Reinhard will walk you through the highlights of the quarter and discuss OMV's financial performance. Following their presentations, the 2 gentlemen will be available to take your questions. And with that, I'll hand it over to Alfred. Alfred Stern: Thank you, Florian. Ladies and gentlemen, good morning, and thank you for joining us. Before I discuss the details of our fourth quarter performance, I would like to briefly reflect on the operational and strategic highlights of last year. Despite the challenging economic and geopolitical backdrop, we achieved a strong performance across our 3 business segments. In Energy, we were able to almost reach the prior year oil and gas production level if we exclude the divestment of the Malaysian business. We slightly increased our Fuel sales volumes reinforcing our position as a supplier of choice in the downstream sector. And in Chemicals, total polyolefin sales volumes, which include the joint ventures, rose by 3% year-on-year, underscoring our product strength in a challenging market environment. Our Clean CCS operating result reached a strong EUR 4.6 billion; however, decreased by 10% compared to the prior year quarter. Importantly, despite the difficult backdrop, our cash flow from operations, the basis for shareholder distributions amounted to EUR 5.2 billion and thus was just 4% lower than the year before. This resilience demonstrates again the strength of our integrated business model, delivering robust cash flows in a volatile market environment. A particular achievement worth noting is that by the end of 2025, we have already surpassed 70% of our efficiency program 2027 target demonstrating our steadfast commitment to operational excellence and supporting our strong cash flow generation. We have maintained a disciplined approach to investments. Our balance sheet remains very strong, reflected in a very healthy leverage ratio of only 14%. This strong financial position provides us with the necessary flexibility to navigate market uncertainties, while continuing to invest in future growth opportunities and OMV's transformation. Ladies and gentlemen, as promised, our shareholders will directly benefit from our success. For the financial year 2025, we will propose to the Annual General Meeting a regular dividend of EUR 3.15 per share and again, an attractive additional dividend of EUR 1.25. In total, this will amount to a cash dividend of EUR 4.40 per share, resulting in a dividend yield of 9.3% based on the closing price of last year. This payout will represent 28% of our cash flow from operating activities. Despite the weaker economic environment, OMV will once again offer attractive shareholder distributions. Let me briefly highlight our strategic progress in 2025. In the Energy segment, the flagship gas project of OMV Petrom, Neptun Deep remains firmly on track and within budget for a targeted start-up in 2027. This marks a major milestone in our ongoing commitment to diversifying and securing gas supply. We strongly believe in the Black Sea's potential for the region and have reinforced our position through further exploration in Bulgaria, partnering with NewMed Energy and the Bulgarian state. Exploration drilling in Han Asparuh began in December 2025 with the Noble Globetrotter 1 vessel contracted to drill 2 exploration wells. Having 2 rigs simultaneously in operation, 1 offshore Bulgaria and another offshore Romania, represents a significant achievement of OMV Petrom. We have successfully diversified our cost portfolio, ensuring continuous and uninterrupted supply to all our customers since more than 1 year. As a result, we are no longer dependent on any single supplier and now have the strongest gas portfolio in OMV's history. In Renewables, OMV Petrom achieved notable progress by expanding its renewable power capacity, advancing towards a leadership in Southeastern Europe. We have advanced geothermal energy projects. We completed drilling and the successful production test in Vienna and are on track to commission our first geothermal plant by 2028. In October last year, we have made an oil discovery in Libya in the Sirte Basin with estimated recoverable volumes between 15 million and 42 million boe. What makes this especially promising is the location, just 7 kilometers from existing infrastructure. Turning to Fuels. Our coprocessing plant is operational and producing renewable diesel. In April last year, we started up our 10-megawatt electrolyzer plant in Schwechat, the biggest of its kind in Austria. Construction of the SAF/HVO plant at Petrobras is progressing as scheduled with start-up targeted for 2028. We are also investing in around 200-megawatt electrolyzer capacity in Austria and Romania. These green hydrogen projects are fully integrated with our refineries and primarily designed to supply our own facilities captive demand. In Retail, we have nearly doubled our EV charging network in 2025 and rebranded our retail stations, underscoring our commitment to sustainable mobility and enhanced customer service. In Chemicals, the game-changing agreement with ADNOC to form Borouge Group International establishes a global polyolefin powerhouse and more resilient chemicals growth platform. We successfully commissioned our ReOil chemical recycling plant and continue to advance key growth projects such as Kallo and Borouge 4. Kallo is expected to start up in the second half of this year, while Borouge 4 production is expected to ramp up through 2026, as units are commissioned and brought online. First unit of Borouge 4 should come online till this quarter. Aligned with our Strategy 2030, we remain focused on an agile transformation, responding to evolving customer needs all while maintaining strong cash flow discipline and carefully managed investments to ensure attractive returns for our shareholders. Let me update you on the status of Borouge Group International. We made very good progress regarding the closing of the transaction and expect this, as previously communicated, in the first quarter of this year. We are pleased to report that we have already secured all necessary foreign direct investment approvals as well as almost all the other required regulatory clearances. In addition, in preparation for the acquisition of Nova Chemicals, we have successfully completed our financing process. We have secured $15.4 billion ensuring that sufficient liquidity is in place to support the transaction. At this stage, the primary remaining tasks are to obtain the outstanding clearances. Discussions regarding the recruitment of BGI Executive Board and Executive Leadership team positions are nearly complete. Announcements regarding these appointments, along with nominations for the Supervisory Board will be made in due course. Finally, the active collaboration between ADNOC, OMV, Borouge, Borealis and Nova Chemicals has resulted in detailed plans for day 1 and beyond. And we have established a robust framework from the very outset of the integration to realize the synergies of more than $500 million. Overall, these developments clearly demonstrate strong momentum, and we remain confident in the successful closing and integration of Borouge Group International. Let me now move on to the details of our fourth quarter performance. Our Clean CCS operating result reached around EUR 1.15 million, representing a decrease of EUR 222 million or 16% compared to the same quarter of 2024. Excluding the positive net effect of EUR 210 million arbitration award received in the fourth quarter of 2024, our Clean CCS operating result would have been broadly in line with the prior year quarter despite lower oil and gas prices. The quarter was marked by significant geopolitical volatility. Brent crude prices declined, driven by weak short-term demand outlook and increased OPEC+ output. The introduction of new U.S. sanctions against major Russian oil exporters were somewhat supportive. European gas prices also fell despite the onset of the winter season as demand was easily met thanks to ample LNG supply. Refining margins increased further, supported by product tightness resulting from the announced sanctions on Russian refiners and unplanned outages at other refineries. In the Chemicals market, we observed some improvement of the olefin indicator margins. However, overall demand remains subdued with many customers focused on reducing their inventories before the end of the year. The Clean CCS tax rate saw a significant decline from 50% to 36%. This was mainly due to a reduced share in the overall group of certain companies in the Energy segment located in high-tax countries as well as stronger contribution from equity-accounted investments. As a result, Clean CCS earnings per share remained nearly stable at EUR 1.7 per share. At EUR 1.7 billion of cash flow from operating activities was truly exceptional this quarter, jumping by over 60% year-on-year. This very strong operating cash flow clearly demonstrates our continued ability to generate strong liquidity even in the face of a challenging market environment. The clean operating result in the Energy segment dropped markedly to EUR 586 million. Around 40% of the decrease is explained by one-time effects. The Malaysia divestment and the net arbitration award of EUR 210 million received in the prior year quarter. The remainder approximately EUR 390 million was largely attributable to decreased oil and gas prices as well as lower sales volumes. The realized oil price fell by 13% to $62 per barrel, mirroring the movement in Brent prices. Our realized gas price decreased by 14%, averaging EUR 26 per megawatt hour, thus less than European gas hub prices, which declined by 28%. This was mainly due to changes in portfolio composition following the divestment of SapuraOMV. Additionally, negative currency developments impacted our results by about EUR 80 million compared to the prior year quarter. Production volumes decreased by 11% to 300,000 boe per day. The main reason was the sale of the Malaysian assets, which had contributed 24,000 barrels of oil equivalent per day in the fourth quarter of 2024. Excluding the effect from the divestment, E&P production declined by about 4% due to production declines in Norway, Romania and New Zealand, reflecting their fields natural decline, partly offset by slightly higher output in the UAE. Unit production costs rose slightly to above $10 per barrel. This increase resulted mainly from lower production volumes and unfavorable exchange rate movements. Cost reductions -- cost reduction measures taken had a mitigating effect. Sales volumes decreased by 65,000 boe per day, thus stronger than production. In addition to the missing volumes from SapuraOMV, the sales in Norway and Libya were lower due to the lifting schedule. The result of gas marketing and power declined to EUR 116 million, primarily due to the missing positive impact from the arbitration award received in the fourth quarter of 2024. Aside from the arbitration award, Gas West decreased mainly due to lower release of transport provision. The contribution of Gas East rose strongly, driven by excellent results across both the gas and power business lines, supported by higher gas sales volumes and increased production of the Brazi power plant in the context of power market deregulation. The Clean CCS operating result of the Fuel's segment more than tripled to EUR 346 million, primarily driven by substantially stronger refining indicator margins, a significantly higher contribution from ADNOC refining and global trading and improved results of the marketing business. This strong performance was partially offset by, amongst others, negative production effects related to repairs at the Burghausen refinery. The European refining indicator margin rose sharply to $14 per barrel, while the refining utilization rate remained high at 89%. The marketing business delivered a higher contribution compared to the prior year quarter with retail performance benefiting from slightly improved fuel margins due to a more favorable quotation development for oil products, higher nonfuel business profitability and slightly higher sales volumes following the acquisition of retail stations in Slovakia. The performance of the commercial business came in slightly better as well, supported by higher contributions from the aviation business and increased sales volumes. The contribution of ADNOC Refining and Global Trading increased significantly to EUR 51 million, mainly due to a better market environment. The Clean operating result of the Chemicals segment rose sharply to EUR 236 million, driven to a large extent by the stop of Borealis depreciation. In our European business, we recorded favorable market effects totaling EUR 58 million, reflecting higher olefin indicator margins. Inventory effects were slightly lower. The utilization rate of our European crackers stood at 72%, which is significantly below the level of the prior year quarter. This was mainly because of weaker demand and inventory optimization measures at year-end. Nevertheless, the result of OMV-based chemicals improved due to stronger olefin margins. The contribution from Borealis, excluding joint ventures, increased to EUR 89 million, mostly driven by the stop of depreciation. However, the results of both base chemicals and polyolefins declined. The base chemicals result was affected by lower utilization rate as well as decreased feedstock advantage and phenol margins. Improved olefin indicator margins in Europe and lower fixed costs provided some support. For polyolefins, the contribution decreased primarily due to softer indicator margins and greater market discounts. This was partially counterbalanced by reduced fixed costs. Polyolefin sales volumes for Borealis, excluding joint ventures, grew by 4%, largely attributable to higher sales in the infrastructure and consumer product sectors. Contributions from our joint ventures rose by EUR 41 million, mainly reflecting the deconsolidation of Baystar. The contribution from Borouge remained broadly stable versus the fourth quarter of 2024, as a less favorable market environment in Asia was compensated for by substantially higher sales volumes. Thank you for your attention, and I will now hand over to Reinhard. Reinhard Florey: Thank you, Alfred, and good morning from my side as well. At the beginning of 2024, we launched a comprehensive efficiency program aimed at generating at least EUR 0.5 billion of additional sustainable annual operating cash flow by the end of 2027. This initiative helps to mitigate inflationary cost increases we have experienced over the past years as well as effects from lower commodity prices. In October, we had announced that even considering the BGI transaction and resulting deconsolidation of Borealis, we expect to achieve the originally targeted at least EUR 500 million, from the efficiency program, as we introduced a new cost savings program of EUR 400 million by end of 2027, further derisking the program's implementation. This program is well on track. By the end of 2025, we successfully delivered more than EUR 350 million of additional cash flow compared to 2023, which represents around 70% of our 2027 target. We achieved this through technical improvements in oil production, optimization of gas flows, reduction of E&P cost base as well as various margin improvement measures and refining optimization related to utilities, crude supply and energy efficiency. Overall, more than EUR 100 million are attributable to operational cost reduction measures. This builds upon our continued drive for operational excellence, following initiatives from prior years with the impact clearly visible on our cash flow from operating activities. Turning to cash flows. Our fourth quarter operating cash flow, excluding net working capital effects, was EUR 821 million. This figure was impacted by a significant net cash outflow related to CO2 emission certificates of around EUR 330 million, which is always booked for the year-end in the fourth quarter. In the fourth quarter of 2024, the net cash related to CO2 emission certificates was around EUR 270 million, largely offset by the one-off net gas arbitration award of more than EUR 200 million. The year-on-year decline also reflects a lower contribution from energy, partially compensated by lower tax payments and a higher contribution from fuels. Net working capital cash inflows were very strong. At EUR 860 million, it more than reversed the minus EUR 400 million recorded in the third quarter of 2025. This was largely driven by substantial inventory reduction in the fourth quarter 2025, whereas in the prior year quarter, we recorded a negative effect of around EUR 140 million. As a result, the cash flow from operating activities amounted to around EUR 1.7 billion in the fourth quarter of 2025, an increase of more than 60% compared with the previous year's quarter. Let us now look at the full year's picture. At EUR 5.2 billion, cash flow from operating activities was once again very strong, only 4% below the high 2024 level. After payment of dividends of EUR 2.3 billion, our free cash flow stood at positive EUR 180 million, supported by inorganic cash inflows coming from the Ghasha divestment and Bayport loan repayment. Our balance sheet remains very strong with a leverage ratio of only 14% at the end of 2025, despite ongoing macro challenges. Our financial strength is also reflected in our investment-grade credit ratings, A- from Fitch and A3 from Moody's, both with stable outlook. This strong rating underscores our healthy capital structure and prudent financial management. Following the closing of the BGI transaction, we anticipate our leverage ratio to increase mainly as a result of the deconsolidation of Borealis equity and net debt from our balance sheet as well as the agreed equity injection of up to EUR 1.6 billion into BGI to equalize OMV's and ADNOC's shareholdings. I think it's worth highlighting that even after this game-changing transaction, we anticipate our leverage ratio to be in the low 20s by year-end, well below the mid- and long-term threshold of 30%. This reflects our commitment to maintaining a robust capital structure and healthy balance sheet. Such a strong financial position provides us with the ability to do both, continue with attractive shareholder distributions and moving forward based on our headroom with our strategic growth initiatives. We once again deliver on our promise and offer our shareholders attractive distributions. We will propose to the Annual General Meeting an increased regular dividend of EUR 3.15 per share plus an additional dividend of EUR 1.25 per share. Thus, we will distribute total dividends of EUR 4.40 per share, which is an attractive yield of 9.3% based on the closing price year-end 2025. With the total payout of 28% of our operating cash flow, we once again went to the upper part of the guided corridor of 20% to 30% of operating cash flow. Since 2015, we have delivered every single year on our progressive dividend policy, which aims to increase the dividend every year or at least maintain it at the respective prior year level. Over that period, we have more than tripled our regular dividend from EUR 1 per share to now EUR 3.15 in [ 2022 ] to further enhance our shareholder distributions. We had introduced an additional variable dividend, which we now also paid for the fourth consecutive year. OMV remains committed to pay attractive dividends to its shareholders. As announced on our Capital Markets update in October last year, we are introducing a new dividend policy effective as of this financial year that builds upon our previous approach and incorporates the clear benefits arising from the BGI transaction for our shareholders. Under the new policy, OMV will distribute 50% of the BGI dividend attributable to OMV in addition to distributing 20% to 30% of cash flow from operating activities from our consolidated businesses. Our dividend will continue to consist of 2 components: a progressive regular dividend, which we strive to increase each year or at least maintain at the previous year's level; and an additional variable dividend, which will be paid if our leverage ratio remains below the 30% threshold. This approach aligns with our commitment to deliver attractive and growing shareholder returns supported by strengthened cash flows and a solid capital structure. Based on the estimated closing in the first quarter of this year, we expect Borouge Group International to pay at least the floor dividend for the full year 2026, which means net to OMV at least USD 1 billion. The dividend will be paid in 2 tranches. Now let me move to the outlook, beginning with capital spending. For the year 2026, we expect organic CapEx to be around EUR 3.2 billion, substantially lower than the past few years reflecting the deconsolidation of the Borealis business and our ongoing capital discipline. The major growth projects in 2026 are the Neptun Deep project, which is scheduled to start up next year, the South HVO plant in Romania and the green hydrogen plant in Austria and Romania. In the following years to 2030, the average organic CapEx will be below the guided level of EUR 2.8 billion per annum outlined at our Capital Market updates. About 60% of our organic CapEx in 2026 will be allocated to energy with the majority of the remaining spend going to fuels. Following the BGI transaction and the deconsolidation of the Borealis business, organic investments explicitly shown in our financial statements in Chemicals will be relatively small, reflecting only our fully consolidated Chemicals business, specifically the refinery integrated crackers in Austria and Germany and the new plastic waste sorting plant in Germany. The latter is expected to start up this year. Around 70% of our organic CapEx in 2026 is dedicated to growth, positioning OMV for the future. In addition to Neptun Deep, major organic growth project initiatives include developments in Norway, Austria, the UAE and renewable power initiatives in Romania. In the Fuels segment, we are advancing key projects like the SAF/HVO plant as well as the 2 hydrogen plants in Romania and Austria. Around 30% of the investments planned for 2026 are allocated to sustainable projects in line with our average guidance for 2030. Please note that our guidance for organic CapEx of EUR 3.2 billion in 2026 excludes any expenditures related to Borealis. Let me conclude now with our outlook for key market assumptions and operations for 2026. We forecast an average Brent price of around $65 per barrel. The average TAG gas price is estimated to be above EUR 30 per megawatt hour, while the OMV average realized gas price is expected to be below EUR 30 per megawatt hour. In Energy, we expect average oil and gas production of slightly below 300,000 boe per day, reflecting natural decline and assuming no interruption in Libya. The unit production cost is expected to stay below $11 per barrel, supported by various plant cost initiatives. Exploration and appraisal expenditure for the group is expected to be below EUR 200 million, in line with previous year's spending. In Fuels, the refining indicator margin is projected to be around $8 per barrel. We anticipate the utilization rate of our European refineries to be above 90%. No major maintenance is planned throughout the year at our refineries, supporting high operational availability. Total fuel sales volumes are expected to be higher than last year. Retail margins are projected to be slightly below the levels seen in 2025, while commercial margins are also anticipated to decline. In Chemicals, we do not anticipate a significant market recovery in the first half of 2026. Following the closing of the BGI transaction, Borealis will become part of the new company in which OMV and ADNOC will hold equal shares. BGI will be reported at equity within our financial statements. Hence, we will no longer report separate KPIs for the polyolefin business, these will henceforth be published by BGI. However, we will continue to provide an outlook for European olefin indicator margins, which will impact our fully consolidated Chemicals business. We expect market indicator margins to be slightly below the levels of the previous year with realized margins continuing to be affected by prevailing market discounts. The utilization rate of our 2 crackers is expected to rise to approximately 90% in 2026. There are no major turnarounds planned for the year. The clean tax rate for the full year is expected to be around 45%. Thank you for your attention. Alfred and I will now be happy to take your questions. Florian Greger: Thank you, Alfred and Reinhard. Let's now come to your questions. [Operator Instructions] We begin the Q&A session with Josh Stone from UBS. Joshua Eliot Stone: Yes. Two questions. Firstly, on CapEx. It looks like there was a slight overspend in '25 as compared to your initial guidance. So anything you want to flag on what might have been driving that? And then also for 2026, at least the spending outlook a bit higher than what I had in or certainly higher than the long-term guide. So any comments around what the key building blocks within that? And any potential risks that you can see in this year's budget? And then second one, I wanted to focus on your Chemicals result, particularly on the olefins side, which everyone has been extremely bearish on European chemicals and you've got sort of almost doubling of your monomers profit this quarter. What would you say is driving that better results? And any one-offs? And then if we're thinking about next year, given this is the business that will stay on your balance sheet, what should we be thinking? Alfred Stern: Okay. Maybe let me start a little bit with chemicals and olefins part and then Reinhard will add and explain the CapEx. On the Chemicals side, I would really say, as you could see, right, 2024 our Chemical sales went up some 10%, last year was plus 3%. And this is really because of the position that we have in the Borealis crackers with mainly Nordic crackers having light feedstock advantage. They are on the -- they are very cost competitive and thus able to run at high rates. While the OMV crackers in Germany and in Austria are fully integrated into our refineries, and we can use that integration advantage to also optimize our margins. So while we see, as you can see on our outlook for 2026 more or less flat kind of margin expectation for ethylene and propylene. We do believe that we are in a strong position also as a local and integrated supplier here. Reinhard Florey: Yes, Josh. Regarding your CapEx observation, you're, of course, right. I would rather like to explain. We had guided for EUR 3.6 billion, we came out with EUR 3.7 billion. In fact, we only had an overrun of EUR 90 million, which is around 2%. And this happened very much in the downstream part with the new activities, specifically around our big projects with electrolyzers and the HVO plants where we already started with some spending on long lead items. So this is more or less distributed among a variety of projects. There is not a significant big overspend in one project. In 2026, it is very clear that we start with a higher CapEx compared to the average of the years until 2030 because we still have the Neptun project in full, the HVO/SAF plant in full and also the main part of the spending on the electrolyzer plant. So therefore, this average is, of course, a little bit distorted and we are geared towards a little bit higher but significantly lower though compared to 2025. So therefore, regarding risks that you see, we do not see significant risks of overspend because we have contracted out the projects in a very, very high degree. That is also true for Neptun project. And we are going with the speed that we anticipate in spending in order to make sure that 2027 is the year for start-up of Neptun project. Florian Greger: Thanks a lot, Josh, for your questions. We now move to Gui Levy from Morgan Stanley. Guilherme Levy: I have 2 questions, please. First one, maybe on working capital. The company, of course, enjoyed a very strong release in the fourth quarter. And you know it's still early in the year, but I was wondering if you could say a few words in terms of how much and how quickly you would expect that working capital release to reverse over the course of this year? And then secondly, on exploration, if you could share with us if you have any initial results from your exploration well in Bulgaria, expectations in terms of drilling completion and also following the recent announcement of the Bulgarian Government joining the block, if you are currently happy with your stake in that asset? Or if we could -- you expect further dilution for OMV Petrom from here? Reinhard Florey: Let me start with the working capital. We indeed enjoyed a strong cash inflow from working capital optimization in the fourth quarter. However, this does not reflect any, I would say, unnatural levels. This, on the one hand side, reflects very much the business environment in which we operate and we were able to significantly also reduce our inventory levels actually in all 3 segments. Why am I saying that because also the inventory levels in the Energy business with our gas storage are now at a lower level, maybe compared to earlier years. This is a attribute to the cold winter and also to the very, I would say, small summer-winter spreads that have been available throughout 2025. So we anticipate that also after first quarter, we will come out with even lower level of inventories of storage in there. How fast will the recovery be? It depends very much on the boundary conditions that we see. If economy picks up strongly in both refining as well as in chemical, of course, also our inventories will go up. This is not what we expect as a situation in the first half of 2026. And we will also then, in Q2 and Q3, see how much of gas storage will be available for decent prices that we can lock in and then put the gas storages again on the level appropriate for surviving the next winter for all our customers. So this is something that will come across the full year in smaller stages. But as I said, this is not an unusual levels of working capital that we have at this point of time. Alfred Stern: Okay, Gui, and regarding the exploration in the Black Sea in Bulgaria. Maybe just to recap here quickly, OMV Petrom is operator with a 45% share, together with Newmet Balkan with 45% share and the Bulgarian Energy Holding with 10% share. And we have contracted the Noble's Globetrotter 1 drillship that will drill 2 offshore exploration wells. The first drill started in December. And then as it is with all these explorations, right, we need to beat for the results what we get there. Maybe also on the estimated costs for the 2 wells, that's about EUR 170 million for the 2 wells together and the agreements that OMV Petrom made with the partners are such that total cost for OMV Petrom for both wells will be about EUR 30 million. But it's exploration, right, so let's wait and see what we find. Florian Greger: Thank you, Gui, for your questions. And now we come to Henry Tarr, Berenberg. Henry Tarr: Two, if I may. The first, just on the Fuels business. We've obviously seen weaker refining margins this year. Where are you averaging sort of Q1 to date? And how do you see the outlook here for the rest of the quarter and then 2026? Alfred Stern: You said 2 questions, Henry. Henry Tarr: That's the first. I can come back on the second... Alfred Stern: Yes, yes. Okay. Then let me try and answer your question. Yes, indeed, the refining indicator margins what we what we found in the fourth quarter last year, we were at about 14%, but with declining kind of thing through the quarter, right? So in December, we saw the margins coming down and then we picked up in January at around 8%. So more or less, what we see as an expectation for the average for the year. I have to say, right, looking back at the last years refining indicator margins were extremely volatile, very difficult to predict. Supply chains are rearranging themselves, we see outages and so on. So our prediction would be around 8% January also started around that level. And I would see that maybe that's about what's the predictability of the segment, let's say, right? Henry Tarr: Okay. That's great. And then the second question is just on BGI and the floor dividend. So I think you've said but I just wanted to double-check that if the merger goes ahead as planned and completes in Q1, you'd expect the floor dividend to be paid in 2026. I guess are there any -- if the merger takes a little bit longer, is there a risk that the dividend gets prorated or anything like that just for this year or is it fixed for '26 at that floor dividend level? Reinhard Florey: Yes. Thanks, Henry. The floor dividend contractually is fixed to be a full dividend for 2026. That is our expectation, and this is the way how we also calculate. Personally, I do not have any doubts that we will not close in Q1. Florian Greger: Thanks, Henry, for your questions. We now come to Adnan Dhanani from RBC. Adnan Dhanani: Two for me, please. Just 1 follow-up on the BGI dividend. Just in the context of your comments earlier saying that the 2026 dividend would be at least at the floor level. I think at the CMD, you mentioned that the dividend would likely be the floor for 2 to 3 years. So is there a change in the thinking there that it could be at least floor level this year could be higher? Or is that still the thinking that it's going to be 2 to 3 years of just being at the floor level? And then the second question, just on your upstream production guidance. Obviously, with the 2030 target that was upgraded, just wanted to get your view on the current M&A landscape and just how you're seeing the market right now for barrels? Reinhard Florey: Yes. Adnan, maybe on the first questions. You know me, I never lose my optimism. But realistically speaking, I expect that there will be the floor dividend, which already is a very attractive thing for the current situation of the market. But theoretically, if the market picks up and the whole economy fires up, then I'm confident that also the dividend policy will kick in and could have an upside. But realistically speaking, I calculate with the floor dividend level and enjoy around USD 1 billion coming to OMV. Alfred Stern: Okay. And let me try on the upstream, Adnan. So just as a reminder, right, we said from 2025 level, we have natural decline and then we have organic projects. One is a very big Neptun project, which contributes directly the 50% share in OMV Petrom 70,000 barrels to our production target and then there's other organic projects that we have across our portfolio that contribute in the 70,000. And that means we have about another 70,000 more or less that we need to close inorganically and we said our strategy will be that we want to strengthen the portfolio in and around Europe that we have to make sure we can move this forward. We are actively trying to fill a pipeline to do that. But at this point, nothing has progressed enough that I could give you specifics on any kind of deal. Florian Greger: Thank you, Adnan, for your questions. Before we come to the next, we have one more in the queue. [Operator Instructions] And now let's come to Oleg Galbur from ODDO BHF with the next question. Oleg Galbur: Congratulations on the robust results. I have 2 questions. The first one is on the Fuel segment and more specifically, the marketing business. In the past, you were disclosing the average EBIT contribution per filling station. And I wonder if you could already give us the number for 2025? And my second question is on Chemicals. You mentioned earlier the startup expected at or planned PDH Kallo and Borouge 4. So taking into consideration that the recovery of the petrochemicals market is not yet in sight. What level of annual EBITDA would you expect to be delivered by PDH Kallo and Borouge 4 in the current market environment? And since I'm at the end of the list, maybe I can take advantage and ask a very short third question. On Libya discovery, you mentioned earlier, when do we expect the new discovery to start contributing to production from Libya? Alfred Stern: Oleg, thank you for your questions. Let me start with the fuel question on the marketing business. So what we did in the Capital Market update last year, we updated to give, let's say, a deeper look into our Fuels segment, we updated on the EBIT contributions of our retail marketing type of business. We do not and we have not regularly in the quarterly updated on this number, right? But what I can tell you is that this is something that helped last year and also in the fourth quarter that we were able to continue to not just grow the contribution from the fuel business in retail, but also nonfuel has grown there and making good contributions and we continue to see this as a value growth driver that we can do. This is our VIVA stores where we sell both [ gastronomy ] and other shop products, but it is also around EV charging, it is also around car washing and so on. So good contributions from this will continue to grow. Then on your Chemical question. I would maybe go -- want to go back to also what we disclosed in the Capital Market update that hasn't changed. We think Kallo will contribute EBITDA after full ramp-up of about EUR 200 million. And then on Borouge 4, we have said it's about $900 million, yes, that will be at full ramp-up. However, right, so we the Kallo or PDH more towards the second half of this year. And we see Borouge 4 is a very big complex with 1.5 million tonnes of production. And there is multiple plants involved, and you will see that we need to take those into operation step-by-step in stages. The first stage -- first plants will come on stream in the first quarter, but then you will see that throughout the rest of the year ramping up. You were -- so and last, your question around the Chemicals segment. I do believe, and you can see in our sales volume growth that we have, both in Europe, but also with Borouge and our joint ventures, you can see that there is underlying demand there. However, the challenge is supply/demand and unbalance. There is too much supply, new capacity that has come on stream. And -- but what we see now is increasingly old, not optimal plants being taken out of operation. In total, this is more than 20 million tonnes globally now, a big part of this is in Europe, a significant part in South Korea, but it looks like there are some first actions now also in China on rationalization with their evolution program that they have in China. Florian Greger: Thanks, Oleg, for your questions. We now come to Sadnan Ali from HSBC. Sadnan Ali: Two, please. The first one on -- just want to go back to Neptun Deep. I know you mentioned that the project is on track to deliver a start-up in 2027. I just wanted to check if you can provide any more clarity on when in the year we can expect it to start up? And what are the key milestones we should expect between now and then? And do you see any risks to that time line or any of those elements that would present more of a risk to delay if there's a delay in the project? And secondly, just wanted to clarify, your comments today said I believe that post BGI closing, you're expecting leverage in the low 20s by year-end. Just want to clarify, if I'm not mistaken, the prior communication was, I think, it was at 22% after the deal closes, so does this now mean potentially that you expect something higher than 22% upon closing immediately and that's to taper off by year-end? Alfred Stern: Let me maybe start with the Neptun project and then Reinhard will follow up on your second question. So project progress, right, just as to recall here, Neptun Deep consists of 2 fields. One is the Pelican field and the other one is the Domino field. In the Pelican field, which -- we -- OMV Petrom wanted to drill 4 wells. They have done so in 2025 and now the Transocean Barents rig is moving on to the deepwater wells in Domino field, where it's 6 wells that have to be drilled. Then there's, of course, not just the wells, but there's a lot of other activities that need to happen to bring this into production. One was the construction of natural gas metering station, which is making good progress, is ongoing and the equipment is arriving there to the site. We have also finished a microtunnel that is basically bringing then the underground pipeline connection to the onshore. We have also made good progress on the shallow water platform that is moving ahead on the construction and then has to be transported into the Black Sea later this year with good progress on umbilicals, field support vessels and so on. So all this is running. And so far, we are on track according to the plan. We have not finalized completely when in 2027 this startup will happen, but we will be able to do so in the course of the year. Reinhard Florey: Yes. And Sadnan, thanks for your question on the leverage. I admit that it's courageous to predict leverage on the single-digit percentage. I still stick to what we said that after close, we will be around 22%. And for the rest of the year, so if that happens in Q1, we still have Q2, 3 and 4. We want to reaffirm by that statement that we stay in the low 20s percentage, which should be really an affirmation of our statement of low leverage, including also the transaction of BGI. Florian Greger: Thank you, Sadnan, for your questions. There is a follow-up question from Oleg Galbur. Oleg Galbur: Yes. Well, it's rather the question that I asked, but was not answered about Libya discovery when do you expect it to turn into production? Reinhard Florey: Oleg, sorry, that we overlooked the third question. First of all, Libya has been a successful discovery and the beauty about this discovery is that it's only around 10 kilometers from existing infrastructure. This means that the tie-in of that well should go rather fast, and we're expecting it the latest by next year. Florian Greger: Apologies, Oleg, for not taking the third question, but now we come to Ram Kamath from Barclays. Ramchandra Kamath: I have a question on natural gas sales. So can you talk a little bit about what you are seeing in the gas business on demand side particularly? Because I note that the sales in your West business, in particularly, was -- I mean, has come down. I think possibly this year, it's averaging around 40 terawatt hours down from over 50. So how do you see shaping up here, particularly on if you can talk about if it is particularly on the industrial sector demand, which is coming down. And of this volatile time, how do you see this business evolving or the demand evolving? Alfred Stern: Yes. Ram, let me try and provide some insights into this. I think if you look further back a little bit, we -- so before the Russian attack on Ukraine. Since then, we have seen significant decline in market demand, both in industrial areas, but also in household and other areas. I think this was driven by very high gas prices and so on. However, last year, there was, in the markets, some rebound into the gas usage probably also again driven by normalization of the gas prices as we saw that last year. What we have done in OMV, of course, is also that we have also commercially optimized our gas portfolio, diversified it into different sources, and this is probably what you are seeing from our sales figures there. However, looking out a little bit longer, we do see the demand signals now that Europe will remain a net importing gas region until 2050, at least. And this is also the opportunity that we want to address with our Neptun Deep or some of our other gas production projects. Florian Greger: Thanks, Ram, for your questions. We now come to the end of our conference call and would like to thank you all for joining us today. Should you have any further questions, please contact the Investor Relations team. We will be happy to help you. Thank you again, and goodbye, and have a nice day. Alfred Stern: Thank you very much. Have a good day. Reinhard Florey: Thank you. Bye-bye. Operator: That concludes today's teleconference call. A replay of the call will be available for 1 week. The replay link is printed on the invitation, or alternatively, please contact OMV's Investor Relations Department directly to obtain the replay link.
Operator: Welcome to the fourth quarter investors conference call. Today's call is being recorded. Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. Actual results may be materially different from any future results, performance or achievements contemplated in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's annual information form as filed with the Canadian Securities Administrators and in the company's annual report on Form 40-F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is February 4, 2026. I would now like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir. D. Patterson: Thank you, Tanya. Good morning, everyone, and welcome to our fourth quarter and year-end conference call. Thank you for joining us today. Jeremy Rakusin is on the line with me and will follow my overview comments with a more detailed review of our financial results for the quarter and the full year. We're pleased with how we closed out the year in an environment that continues to challenge us across several of our businesses. Our fourth quarter results in aggregate were modestly better than our expectation that we communicated at the end of Q3 with revenues up 1%, EBITDA flat with the year ago and earnings per share up 2% to $1.37. For the year, we reported solid results that we're proud of in the face of tough macro headwinds. Revenues finished 5% up over the prior year. Consolidated EBITDA was up 10%, double the revenue growth, reflecting a 40 basis point improvement in margins and earnings per share reflected further leverage with year-over-year growth at 15%. Looking now to separate divisions for the quarter. Revenues at FirstService Residential were up 8% in aggregate, with organic growth at 5%, matching our expectations and the results for Q3. The growth was broad-based across North America and generally reflects net contract wins versus losses. Looking forward, we expect organic growth to continue in the mid-single-digit range. There could be modest movement from quarter-to-quarter with seasonality and fluctuation in ancillary services, but on average, for 2026, we're expecting mid-single-digit organic growth similar to our full year results for 2024 and 2025. We will face organic growth pressure early in the year relating to declines in certain amenity management services that we provide to some of our managed communities, but primarily to multifamily rental and other commercial customers. These services include pool construction and renovation, which is being impacted by the same economic headwinds we're seeing in roofing and home services. It also includes contracts to provide custodian and front desk concierge labor. Several contracts primarily with multifamily apartment owners were not renewed at year-end, some voluntary and a few involuntary, all primarily due to pricing. These cancellations will impact our revenue, but will have little impact to profitability. We expect to be at the bottom end of our mid-single-digit range at 3% or 4% for Q1. This is unrelated to our core community management business, which we believe will carry the division to mid-single-digit organic growth for the year. Moving on to FirstService Brands. Revenues for the quarter were down 3% in aggregate and 7% organically with organic growth at Century Fire more than offset by organic declines with our restoration brands and our roofing platform. Looking more closely at restoration. Paul Davis and First Onsite together recorded revenues that were flat sequentially compared to Q3 and down 13% versus the prior year, somewhat better than expectation due to our pickup in claim activity during the quarter with our Canadian operations. We benefited in the prior year quarter from Hurricanes Helene and Milton and generated about $60 million in revenue from the storms. Excluding these specific events, our restoration brands were up modestly year-over-year. As I described on last quarter's call, revenues from named storms have on average, exceeded 10% of our total restoration revenue since 2019. For 2025, revenues from named storms amounted to less than 2% of total restoration revenues. We finished the year down 4% in restoration relative to an industry that we believe was down over 20%. Our platform investments and focus on day-to-day service delivery continues to drive gains in wallet share with key national accounts and overall market share. Looking forward, we expect to show growth for the full year 2026, assuming we return to historic average weather patterns. Our restoration brands have grown on average by 8% organically since 2019, and we expect that to continue on average going forward. Our backlog at year-end was down from the prior year, pointing to a revenue decline for Q1. However, we've seen an uptick in activity over the last week from the expansive winter storm. It's still very early, but based on activity levels and the nature of the quick response mitigation work, we expect to show Q1 results that are modestly up over the prior year. Moving to our Roofing segment. Revenues for the quarter were up a few percentage points, the result of tuck-under acquisitions made during the year. However, as expected, revenues were down organically by over 5%. The demand environment in roofing remains muted. New commercial construction outside of the data center and power verticals is down significantly. On the reroof side, we continue to see tighter capital expenditure budgets amongst our customers and delays with some larger projects. As I noted last quarter, we're confident that our market position and relationships remain strong. Bid activity is solid and our backlog has stabilized. Our expectation is that we will show modest organic growth this year with sequential improvement quarter-to-quarter. Looking to Q1, we expect revenues to be up mid-single digit versus the prior year and approximately flat organically. Now to our home service brands, where revenues were up by 3% over the prior year, better than expectation and a result we're proud of in an environment where consumer confidence remains depressed. The consumer index was down again in December, marking 5 months of sequential decline. As I set out on the last few calls, our teams are doing more with less by incrementally improving lead to estimate ratios, close ratios and average job size. Current economic and industry indicators do not suggest an improved environment through 2026. Our lead flow in the last several weeks is flat to slightly down with prior year. If this continues, our current conversion metrics would suggest that we will drive higher revenue year-over-year in the low to mid-single-digit range for Q1 and 2026. And I'll finish with Century Fire where we had a strong Q4 and finish to the year. Revenues were up over 10% versus the prior year with high single-digit organic growth. Century continues to experience solid growth on both sides of its business, that is installation and repair service and inspection. The growth is broad-based across almost all our branches at Century. We're benefiting on the installation side of our business from solid activity in multifamily and warehouse with some positive exposure to data center construction. Our backlog is strong and activity levels remain buoyant. Looking forward, we expect another year of 10% growth or more spread evenly across the quarters. Let me now call on Jeremy to review our results in detail and provide a consolidated look forward. Jeremy Rakusin: Thank you, Scott, and good morning, everyone. As you just heard for the fourth quarter, we delivered on our expectations provided on our Q3 call, which culminated in solid annual operating and financial performance. As we look back at our consolidated annual results for 2025, we are pleased with the growth we delivered on the earnings lines, notwithstanding the top line headwinds we were facing throughout the year. I'll first walk through a summary of these financial metrics and then move on to reviews of our segmented divisional performance as well as our cash flow and balance sheet. Note that my upcoming comments on our adjusted EBITDA and adjusted EPS results, respectively, reflect adjustments to GAAP operating earnings and GAAP EPS, which are disclosed in this morning's release and are consistent with our approach in prior periods. During the fourth quarter, our consolidated revenues were $1.38 billion, up 1% versus the prior year period. Our adjusted EBITDA of $138 million was in line with Q4 2024, yielding a margin of 9.9%, slightly down from the 10.1% level during the prior year. Our Q4 adjusted EPS was $1.37, up from $1.34 in last year's fourth quarter. For the full year, consolidated revenues increased 5% to $5.5 billion, and adjusted EBITDA came in at $563 million, up 10% over the prior year and delivering a 10.2% margin, up 40 basis points compared to 9.8% in 2024. Adjusted EPS for the 2025 fiscal year was $5.75, up 15% versus 2024. This 5%, 10%, and 15% top to bottom line annual growth profile reflects the exceptional efforts of our operating leaders across every brand. As they emphasized efficient job execution in the face of market challenges and drove margin improvement where possible. Turning now to a segmented walk-through of our 2 divisions. FirstService Residential revenues during the fourth quarter were $563 million, up 8%, and the division reported EBITDA of $51.5 million, a 12% increase over the prior year period. Our margin for the quarter was 9.1%, modestly up from the 8.8% in Q4 2024. The quarterly performance largely mirrored the full year growth profile for the division. We closed out the year with annual revenues of $2.3 billion, up 7% over 2024 including 4% organic growth. Annual EBITDA increased 13% with our full year margin at 9.8%, up 50 basis points over the 9.3% margin for 2024. In summary, the FirstService Residential division achieved key financial targets for the year, getting back to mid-single-digit annual organic top line growth while also driving profitability to the upper end of our 9% to 10% annual margin band. Looking next at our FirstService Brands division, the fourth quarter included revenues of $820 million, down 3% compared to Q4 2024, and EBITDA was $88.5 million, down 12% year-over-year. These year-over-year decreases were due to declines in organic top line performance and the related negative operating leverage at our restoration and roofing brands, partially offset by another strong quarter of organic growth and profitability at Century Fire Protection. The Brands division margin during the quarter was 10.8%, down 110 basis points from 11.9% in the prior year quarter. For the full year, revenues were $3.2 billion and EBITDA came in at $354 million, both up 4% over prior year. As a result, our full year Brands margin remained in line with the prior year at 11%. Finally, 2 remaining points to highlight regarding profitability below the operating division lines that contributed to the 15% annual EPS growth. First, we reported significantly lower corporate costs both during the current fourth quarter and annually for 2025 versus the comparable prior year periods. Most of the variance was attributable to the positive impact of non-cash foreign exchange movements largely reversing the negative impacts we saw in 2024. Second, our annual interest costs were lower throughout all periods in 2025 compared to the prior year due to lower debt levels on our balance sheet and declining interest rates. I'll now summarize our cash flow and capital deployment. During Q4, operating cash flow was $155 million, a 33% increase over the prior year quarter and contributing to annual cash flow from operations of more than $445 million, which was up 56% versus 2024. Our capital expenditures during 2025 totaled $128 million, and we expect 2026 CapEx to be approximately $140 million, an increase proportionate to the collective growth of our businesses. Our acquisition spending during the year totaled $107 million as we remain selective and disciplined in a competitive acquisition environment. Finally, we announced yesterday, an 11% dividend increase to $1.22 per share annually in U.S. dollars up from the prior $1.10. Beyond financing these capital outlays, our strong free cash flow contributed to further strengthening of our balance sheet throughout the year. At 2025 year-end, our leverage sits at 1.6x net debt to adjusted EBITDA, down from 2x at prior year-end. With cash on hand and undrawn capacity within our bank revolving credit facility aggregating to $970 million, we maintained significant liquidity to direct towards attractive investment opportunities as they emerge. Finally, in terms of outlook, Scott has already provided detailed commentary on the top line growth indicators for the individual brands. On a consolidated basis for the upcoming first quarter, we are forecasting revenue growth to be in the mid-single-digit range. In subsequent quarters, throughout the year, we expect to see an uptick with high single-digit year-over-year increases in revenue, primarily driven by organic growth. Any tuck-under acquisitions during the year will contribute further to this top line growth profile. In terms of consolidated EBITDA for the first quarter, we expect to be roughly in line with Q1 2025. For the balance of the year, we anticipate EBITDA year-over-year growth in the high single digits at similar rates or slightly better than revenue growth. Consolidated EBITDA margin for the full year is expected to be relatively flat compared to the 10.2% annual margin we just reported for 2025. Operator, this concludes the prepared comments. You can now open up the call to questions. Thank you very much. Operator: [Operator Instructions] Our first question will be coming from Frederic Bastien of Raymond James. Frederic Bastien: Scott and Jeremy. Just want to talk about M&A. I mean cracks appear to be showing in private equity various reports suggesting that mid-market firms are holding on to investments, they can't sell and then struggling to raise capital to buy businesses. That in theory, should be positive for strategic buyers like FirstService? From your perspective, are you seeing any change? Is the company -- is the competitive landscape improving from, say, where it was 3, 6, 12 months ago? D. Patterson: We haven't seen it yet, Frederic. It's definitely a slower market than, say, 12 months ago, particularly in roofing, but really across the board. We know of a number of opportunities that have been pulled or delayed until the environment improves. And there's no indication that multiples are trending higher or lower. They still remain high across the board. We haven't seen mid-market private equity deals come to the market. I'm just thinking about it. Really, it's, we haven't seen it yet, I would say, Frederic. Frederic Bastien: Now obviously, recognizing it's still tough out there. Where do you see the best place to deploy future capital? Is it in newer platforms like roofing or restoration or go back to the more long-dated franchises like California Closets. I know you bought like the 20 or so largest franchises in the early probably 10 years ago -- 5, 10 years ago, where do you stand on potentially consolidating the rest of the California Closets franchises? D. Patterson: Yes. I mean definitely, we want to own the major markets over time, particularly if they're underperforming. But it's -- that will be sort of one step at a time as those families are ready to sell. It's been a few years since we pulled in our California Closets franchise. But I think on average, we would expect to pull in one a year. And I think the same at Paul Davis, too, in the best interest of the brand if there's an underperforming market, we will look to pull that franchise in and operate it. And we would expect to see 1 or 2 of those a year as well. Otherwise, it would be tuck-under within our existing platforms. That's our focus. I would say that we are being very patient in the current environment. Multiples are high, and there aren't a high number of quality companies coming to market. So we are focused on picking our spots and finding the right partners, if there's a situation where the founder is looking to exit, that's not a great fit for us. We're focused on partnering and then driving sustainable growth. Operator: And our next question will be coming from Stephen MacLeod of BMO Capital Markets. Stephen MacLeod: I just wanted to just focus in on the margins a little bit with respect to the outlook. Would it be fair to say that your margin outlook in kind of both segments is sort of flattish through the year? Presumably, it sounds like not much movement in the FSR margin, but maybe you'll see some headwinds in Q1. But on a full year basis in Brands, would you expect both segments to be sort of flattish year-over-year? Jeremy Rakusin: Stephen, it's Jeremy. Correct. Full year, both divisions are roughly in line and hence, the consolidated margin in line. The first quarter, we expect residential margins to be roughly in line, again, consistent with the full year and a decline in Brands margins in the first quarter, and hence, the sort of flat EBITDA with a little bit of revenue growth in the first quarter. So Brands margin a little declining and then picking up in sequential quarters as we see a commensurate uptick in revenue growth. Stephen MacLeod: And then just with respect to Scott, you talked about just the recent freeze that we saw through North America and potentially an uptick in activity. I know early days, but is there any way to kind of quantify what that potentially could look like as the year progresses? D. Patterson: No. It's still very early in taking shape and some of the areas are impacted, they're still frozen. So there is an opportunity when the thaw starts, but very hard to quantify at this point. I mean we've attempted it for Q1 just based on some of the activity. As I said, we expect our revenues to be up modestly. Our backlog at year-end was down because we didn't have a carryover from Q4 storms, which was pointing to a soft Q1. We do think the activity will take us back to -- through prior year modestly. But mitigation work comes in, we respond and move on. And for the most part, the jobs are smaller at this point. And the unknown is the reconstruction. Will there be any? Will we get to work and how much revenue will it generate? So that will evolve in the coming weeks and months, but it's still too early to really give you any more than that. Stephen MacLeod: Yes, that's fair. I figured that would be the case. And would it be fair to assume that like in Q4, you had basically 0 revenues from named storms relative to $60 million last year. Is that right? D. Patterson: Yes. Stephen MacLeod: And then maybe just finally, just speaking of capital allocation, would you consider sort of being active on the buyback given where the stock is and given the NCIB you have outstanding? D. Patterson: That is not something that we've discussed. That would be a Board level discussion and it hasn't come up. Operator: And our next question will be coming from Stephen Sheldon of William Blair. Stephen Sheldon: First, just on kind of margins, great year-over-year margin trends in residential once again this quarter. And then full year results came in closer to the high end of that 9% to 10% margin range you've historically talked about there. So can you unpack some of the levers driving that? Is that still mainly being driven by some of the offshoring and AI leverage and I think you talked about accounting and call center operations. And has your thinking on the margin trajectory over the next few years changed at all? I mean, you already talked about kind of flattish for 2026. But is there an opportunity down the road you think you could potentially get the margin in residential into the double-digit range above 10%? Jeremy Rakusin: Yes, Stephen, Jeremy again. The progression, we've done a lot of the heavy lifting in those areas. In fact, they started in '24 and really started to play out on the margin improvement in '25. We're starting to lap those now. So a lot of the -- you saw the margins start to taper towards the margin expansion start to taper towards the back end of the year, which is indicative that we've squeezed a lot of the low-hanging fruit. Team is always working on related initiatives to those that you just called out as well as others. And again, we don't see much for '26. But in terms of going above 10%, yes, that's an opportunity over a multiyear time horizon for sure. And we'll continue to evaluate the team's progress in that and then call out the opportunities as we see them coming through. Stephen Sheldon: And then I wanted to ask about just the roofing side. And I guess from your view, I guess, the new construction piece, that's something that you can look at permits and starts and that's -- it's been very weak and not a lot of pickup that we're expecting here over the next year or 2. But I guess on the reroofing side, what could it take for that to pick up? I guess the question would really be how long can commercial properties wait and push out reroofing as I would assume that, that can only be delayed for so long before that owner or manager takes on bigger risk related to it with a bigger loss potential. So I guess, how long can reroofing really stay kind of depressed? D. Patterson: Yes, certainly, it can't be deferred for long, Stephen. And we do think the market has stabilized. Our backlog certainly has stabilized, and it's heavily weighted towards reroof as you would expect. Historically, we've been 2/3 reroof and 1/3 new construction. And so we're very much focused on the reroof side of that. So the overall market has shrunk certainly. But our momentum in reroof has stabilized. And as I said, we expect to grow this year and look for sequential improvement quarter-to-quarter. And generally, we feel optimistic. We're bidding work. We feel good about our market position. We believe in our leadership locally, branch to branch. And certainly, we will continue to invest in the platform this year and hopefully in further tuck-under acquisition. So we're feeling optimistic that we'll start to see quarter-over-quarter and year-over-year growth from here. Operator: And our next question will be coming from Erin Kyle of CIBC. Erin Kyle: I just want to stick on the Roofing Segment here. Maybe start with more of a macro question. I guess your views as it relates to the new construction cycle in the U.S. And the question is kind of on the basis of if new construction remains depressed here, as it's looking to be -- do you anticipate competition in like the reroof segment to intensify further than it's already been? Or I know you mentioned it's stabilizing, but just anything you can add to speak to just competition in that space would be helpful. D. Patterson: Yes. I mean the competition has intensified. Certainly, there are fewer opportunities and more companies bidding, and it has compressed gross margins. And so we don't expect that to alleviate in the near term until there is an uptick in the new construction market. And I don't know that I can give you more than that, Erin. Erin Kyle: No. That's helpful there. Maybe I'll switch gears on M&A as well. And you mentioned it in response to your previous question. But for 2026, is roofing still a focus area for tuck-in M&A? And then maybe more broadly here, if we think about your commercial maintenance businesses that you currently operate in, what is the appetite maybe for another large platform deal in an adjacent space or any larger M&A? D. Patterson: I think we're focused primarily on tuck-under right now and certainly roofing is an area where we're committed to. Again, I said we're picking our spots. We're very patient and it's about the leadership and the partnership. We're open-minded to larger acquisitions, certainly, and it would be an adjacency. And I'm not sure it would be a platform per our description, which would be sort of a separate operating team. It's more likely to be within restoration or within roofing or within fire, but we're open-minded certainly, but also being cautious around valuation and in a market that's still, in our mind, overheated. Operator: And our next question will be coming from the line of Tim James of TD Cowen. Tim James: My first question, going back to M&A for a minute. I appreciate the comments on kind of the competitiveness in that market. Can you talk about if valuations do remain high, whether it's through '26 into '27. Does that change your approach at all? And what I'm thinking about rather simplistically is, do you change the risk profile of the businesses you buy? Or do you pay higher valuations. How do you approach it as multiples and as the competition for M&A remains relatively elevated? D. Patterson: We would approach it the same way we did this past year. As Jeremy said, we allocated over $100 million on tuck-under, but these are solid good add-ons with great leadership that fills white space for us or adds to our service line. And these are at valuations that we're comfortable with. And in most cases, we were able to differentiate ourselves from private equity. And increasingly, we're seeing opportunities to do that with families and owners that want to be in a family where they're not resold. They want a forever owner. And so we're seeing more opportunities like that. And so I would -- we're not going to change our risk profile unless the returns change to hit our hurdle rates. We'll continue to work hard. And I would think that in 2026, it may well be a capital allocation year similar to '25, and we're comfortable with that. Tim James: And then is there any sort of silver lining here potentially in the roofing business with -- you talked about it being very competitive gross margin pressure. Are you seeing any silver lining in that, that maybe is kind of shaking out some businesses to look for a sale opportunity? Or is it too early to see that yet in the marketplace. D. Patterson: No, I think that's true. I think that's true. There are -- we're seeing opportunities that they're reluctant to transact because their revenue and EBITDA may be down from previous years, but it's -- the market is not going to change dramatically in '26, certainly. And so we are seeing opportunities where the seller comes to grips with a lower valuation based on results that are lower than the past few years. Operator: [Operator Instructions] Our next question will be coming from Daryl Young of Stifel. Daryl Young: Just wanted to circle back on margins for a second. I might have expected to see more margin expansion as opposed to the guide for flattish this year, just given the operating efficiencies you've had. And I wonder if possibly you're toggling between the price volume equation in some of your end markets and maybe giving away some price in order to keep the growth going. Is that the right way to think about it? Or is there something else going on that's keeping margins, call it, lower for longer? Jeremy Rakusin: Daryl, I assume you're talking more on the Brand segment? Daryl Young: Well, even within resi as well. Jeremy Rakusin: Okay. Well, I'll touch on Brands. Scott touched on it in Roofing. The competitive environment, a lot of our competitors that were accustomed to getting a lot of new construction work migrating to reroof and putting pressure on bidding and gross margin. So we're going to see roofing margins, notwithstanding the uptick in the top line through the year, a compression in margins in that business. And that will be offset in the Brands segment by better margins year-over-year in '26 for restoration, again, a function of higher normalized activity levels, higher revenue growth and so forth. So that's really the puts and takes for the most part in the year in Brands. And then in residential, we don't get a lot of pricing in that business. It's a very high variable cost business. So growing revenues and EBITDA in lockstep is the typical path we happen to garner a lot of efficiencies in '25 in the areas that we've spoken about through the year, and we're starting to lap that now. Again, I mentioned it earlier, we'll continue to look at other opportunities for efficiencies, but I wouldn't be baking in a lot of that into the baseline model for 2026. Daryl Young: And then you touched on data centers in one of your remarks. Are these projects getting big enough and fast enough that you could potentially have a cross-sell or a go-to-market approach between, say, Century Fire and Roofing and maybe even restoration where you kind of create national account strategy across all of your divisions to tackle the data center build-out? D. Patterson: No, we're not approaching it that way, Daryl. Century has long-term relationships with a few large general contractors that are involved in new construction of warehouses and also engaged in data center construction. So Century is benefiting from the data center boom. But definitely picking their spots and being cautious about balancing this work in these customers with other day-to-day customers. And I don't see us tilting more to data centers than the current mix reflects. Roofing doesn't have the same relationships. And I think we're very cautious about really leaning in rather than focusing on durable, sustainable growth. We've seen a few of our competitors jump in, and it really consumes them and they've let down their day-to-day customers. So we're approaching it in a different way and only at Century Fire at this point. Operator: And this concludes today's program. Thank you for participating. You may now disconnect.
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.