加载中...
共找到 24,883 条相关资讯
Operator: Thank you for standing by. Welcome to the Symbotic first quarter 2026 Financial Results Conference Call. At this question and answer session, if your question has been answered and you would like to remove yourself from the queue, please press the star key followed by the digit two. As a reminder, today's program is being recorded. And now I would like to introduce your host for today's program, Charlie Anderson, Vice President of Investor Relations. Please go ahead, sir. Charlie Anderson: Yes. Hello. Welcome to Symbotic's 2026 financial results webcast. I'm Charlie Anderson, Symbotic's Vice President of Investor Relations. Some of the statements that we make today regarding our business operations and financial performance may be considered forward-looking statements. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our Form 10-K, including the risk factors. We undertake no obligation to update any forward-looking statements. In addition, during this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at ir.symbotic.com. On today's call, we're joined by Rick Cohen, Symbotic's founder, chairman, and chief executive officer, and Izzy Martins, Symbotic's chief financial officer. These executives will discuss our 2026 results and our outlook, followed by Q&A. With that, I'll turn it over to Rick to begin. Rick? Rick Cohen: Thank you, Charlie. Good afternoon, and thank you for joining us to review our most recent results. We are off to a great start this year as our operational execution, product innovation, and financial discipline are translating into improved results. Notably, in the first quarter, we grew revenue by 29% and significantly expanded margins year over year, paving the way for our transition to GAAP profitability. On our last call, I highlighted that one of our key objectives this fiscal year was to unlock higher margins by providing additional value for our customers. You can see from our results, we are on a solid trajectory. We also have increased line of sight that our product innovation, notably with our next-generation storage solution, will yield tangible economic benefits for our customers while benefiting our margins on an ongoing basis. Another objective is to broaden our opportunities with customers, particularly in e-commerce. On this front, we're seeing strong execution on the program launched a year ago with Walmart for their accelerated online pickup and delivery centers at stores. First, we made technical and operational improvements to the first-generation automation system we inherited at 19 Walmart stores. This helped drive record holiday volumes and improved performance metrics from those systems. This is important because we can take those improvements and incorporate them into our enhanced second-generation design, which we're being paid to develop. Second, we delivered record financial results from that paid development program during the quarter as we advanced toward installation of the initial prototypes. We see our offerings as the future of e-commerce. As retailers are increasingly seeking to take advantage of their store footprints and localized presence to offer customers unparalleled availability in order fulfillment speed through automation. We are also meeting our key objective to invest in our innovation engine to expand our capabilities. On that note, we recently closed the acquisition of Fox Robotics, a leader in autonomous forklift solutions. This acquisition further enhances our strategy of utilizing our software to orchestrate robots that move goods through the supply chain from the dock door at the warehouse to the individual customer order from the store. We are also investing in internal R&D intended to drive higher levels of performance across our operational systems. Here, we are also making great progress. Specifically, for our SIM bots that move goods in customer distribution centers, we have seen an over 25% increase in both the number of miles driven and the number of transactions per bot daily versus one year ago. We have also seen meaningful per site volume increases from our floor-loaded inbound cells that ingest unpalletized cases compared to a year ago. The fact that our platform improves over time speaks to our leadership in the emerging category of what some call physical AI. We are doing this on a massive scale. To put it in perspective, Symbotic operational systems processed over 2 billion cases for customers in calendar year 2025 inbound and outbound. And our Symbots logged nearly 200 million miles alone in calendar year 2025. As best we can tell, this may be the most traveled fully autonomous vehicle fleet in the world. In summary, we're meeting our objectives, which in turn are delivering happy customers, sustainable growth, and expanded profitability. As always, I want to thank our team for all their hard work along with our customers and our investors for their continued support. I'll now turn it over to Izzy, who will discuss our financial results and outlook. Izzy? Izilda Martins: Thanks, Rick. Fiscal first quarter revenue reached $630 million, meeting the top end of our forecasted range. We achieved GAAP profitability with $13 million in net income, while our adjusted EBITDA of $67 million was well above the top end of our forecasted range due to stronger margins and continued cost discipline. As a result, we delivered a double-digit EBITDA margin for the first time. Importantly, first-quarter revenue surpassed fourth-quarter levels, driven by the continued expansion of systems and deployment, the transition of systems from deployment to operational status, and ongoing progress in our paid development of a micro-fulfillment solution for e-commerce. We also delivered another strong quarter for new deployments with 10 systems added. This included several phase one deployments for our largest customer, that will do twice the work of our historical phase one deployments and possibility unlocked by the density of our next-gen storage solution. The quarter also included a new deployment in the Northeast for GreenBox, which, as a reminder, is now branded as Exol. Strong start activity, disciplined project execution, and continued progress with our paid development program drove systems revenue growth of 27% year over year to $590 million. We now have 57 systems in deployment. As three deployments transitioned to operational status during the quarter. Installation timelines have continued to improve relative to averages, reflecting ongoing process improvements across our supply chain and implementation teams. As our base of operational systems continues to expand, software revenue grew 97% year over year to $10.9 million in the fiscal first quarter. And operation services revenue grew 68% year over year to $28.8 million. Now turning to margins in the fiscal first quarter. Gross margin expanded both sequentially and year over year, underscoring the accelerating strength of our operating model and the leverage we are beginning to realize at scale. Systems gross margin continued its trend of significant year-over-year improvement driven by structural operational enhancements, disciplined cost management, and the addition of our paid development program. Software maintenance and support delivered further year-over-year gross margin expansion benefiting from scale. We expect this trend to strengthen as our installed base of operational systems grows. In operation services, we generated an improved gross profit with continued process optimization. Operating expenses on a GAAP basis were $127 million in the fiscal first quarter. Adjusted operating expenses totaled $80 million down sequentially as we maintained strong cost discipline and increasingly aligned our R&D investment with revenue-generating activity. Notably, a portion of R&D headcount shifted to supporting paid development where that work is reflected in revenue with the associated costs recorded in cost of revenue. This evolution underscores how our core R&D capabilities are increasingly being monetized as the business scales. Before I discuss profitability, I want to highlight that our results this quarter reflect an accounting change in how we recognize stock-based compensation expenses. We have moved from a graded vesting approach to a straight-line pro-rata method under which expenses are recognized evenly over the service period consistent with how the awards vest. This change follows the completion of the accelerated vesting associated with our becoming a publicly traded company, which required higher expense recognition in earlier periods. With the final grants from the transition to a public company, now fully vested, the more common straight-line method more accurately matches the ongoing timing and financial impact of our stock-based awards. As a result, we recast retrospective periods in fiscal years 2024 and 2025. And those updates are reflected in the earnings tables in the press release. We have also posted a supplemental presentation on our Investor website with the recast quarterly results to assist with model updates. As you will see from the recast results, GAAP results improved modestly due to lower stock-based compensation expense, but there is no change to any prior period adjusted EBITDA results. Our net income for the first quarter was $13 million, a significant improvement from a net loss of $17 million in 2025, reflecting the continued strengthening of our financial performance. Adjusted EBITDA of $67 million was above the high end of our forecast and increased significantly from $18 million in 2025. These results demonstrate the operating leverage available to us and reinforce our confidence in our ability to continue expanding our EBITDA margins and delivering sustained GAAP profitability. Our backlog of $22.3 billion continued to remain strong. The modest change from $22.5 billion last quarter primarily reflects revenue recognized during the quarter largely offset by final pricing adjustments on projects started in the quarter. We finished the quarter with cash and cash equivalents of $1.8 billion up from $1.2 billion in the fiscal fourth quarter driven by the timing of cash receipts tied to project milestones the signing of new projects, $424 million in net proceeds generated from our successful follow-on offering completed in December. Now turning to the outlook. For 2026, we expect revenue between $650 million and $670 million and adjusted EBITDA between $70 million and $75 million reflecting continued strong top-line growth and margin expansion. Looking ahead, we expect our third-quarter sequential growth to be similar to what we anticipate in the second quarter with more pronounced growth in the fourth quarter. With that, we now welcome your questions. Operator, please begin the Q&A. Operator: Certainly. And ladies and gentlemen, we ask that you please limit yourself to one question and follow-up. You may get back in the queue as time allows. Our first question comes from the line of Nicole DeBlase from Deutsche Bank. Your question, please. Nicole DeBlase: Could we just start, I think, a few times Izzy in the script, and Rick kinda comments on this too. You talked about how the paid development impact to revenue and maybe EBITDA was stronger than you expected and a factor in the 1Q beat? Can you just maybe elaborate on the impact a bit? And how that kind of moves throughout the rest of the year if the impact grows? Izilda Martins: Hi, Nicole. Thank you for the question. Here's how I would explain it. If you recall, in the last quarter, we talked about that representing about high single digits of our total revenue. It's not all that significant of a change, but we've now reached, call it, double digits. The way I would think about it going forward, we want to maintain flexibility in how we deploy our resources. So albeit, yes, it reached double digits in the first quarter, it's probably not going to be at that level in the second based on what we're already seeing and how we're redeploying. So it will be lumpy. But I did want to call out that it was higher than the fourth quarter. Nicole DeBlase: Okay. Got it. Thanks, Izzy. And then you also mentioned in your prepared remarks that you guys have continued to improve deployment time. Can we just get an update on what that timeline looks like today? Thank you. Izilda Martins: Sure. I would say as you take, call it, from when we announce a deployment to the end, we're still staying within that two-year period. I think what's important to note is we're focusing on how we shrink the time from installation to, call it, acceptance. To moving it to operational. We have seen improvements in that most recently in our averages. We're now probably on that side of it. Going to ten months, and that's what we want to continually improve. But overall, I would still say two years from the day we announce a deployment is a good proxy as we continue to improve on that end. Nicole DeBlase: Thank you so much. I'll pass it on. Operator: Thank you. And our next question comes from the line of Joe Giordano from TD Cowen. Joe Giordano: Hey, guys. Thank you. On the R&D spend, I hear that some of it was moved into COGS, like, based on where these people are what they're working on. But is the level here, like, is this, like, the run rate that we should be thinking of? And how much should we think of, like, implications on systems gross margins as that cost is flowing in there? Izilda Martins: Hi, Joe. Thank you for the question. Here's how I would think about it. You did see, call it, a decline in the first quarter in total R&D compared to the fourth quarter. And as I mentioned, because we had a little bit more going into that paid development. To answer your question, it's no different than how I just answered the paid development. It's not going to be a, you know, a straight line. It will be a bit lumpy. So the expectation would be if there's how we're allocating our resources in the second quarter. If there'll be less on the top, we're keeping the same resources. They'll be focusing on other priorities. So what I can tell you is in the second quarter, I would expect a higher number in R&D in our OpEx expense versus what you're seeing. So I wouldn't take the first quarter exit trend and model that completely out and more look at it as our annual spend in R&D should stay about relatively the same. Joe Giordano: The same as, like, what it was prior. Like, the same assumptions that you had prior. Izilda Martins: Exactly. Joe Giordano: Okay. And then on the 10 starts in the quarter, like, how do we how should we think of the makeup of those? Like, you know, traditional systems, like, you would have for your large customer versus break packs versus you know, micro fulfillment stuff. So how should we think about the as we think of, like, almost the, you know, the size per start? Izilda Martins: Okay. So I'll start backwards. There are no micro fulfillment in the 10 deployments that we mentioned. We don't give specifics as to what that represents. As I said, one is for Exol, and the remainder, it's a mix. Between, you know, different types. You can't treat every deployment the same, so it's a bit of a mix. But I think the highlight, though, is as we transition to the next-gen structure, you'll know that the you know, now you could fit more because of the density of that NextGen structure. So the call it, the size, you kinda get a two for one. And there's a little bit of that in the 10 deployments that we have that we have in the quarter. Similar to what we had last quarter, but I'm not gonna give specifics between, you know, the types of deployments. Joe Giordano: Fair enough. Thanks, Izzy. Izilda Martins: Thanks, Joe. Operator: Thank you. And our next question comes from the line of Mark Delaney from Goldman Sachs. Your question, please. Mark Delaney: Yes. Good afternoon. Thank you very much for taking the questions and congratulations on the good results. I was hoping to start with the shipment trajectory on the last earnings call, Izzy, you talked about a more muted first half based on your expectation for the deployment timing with the new storage structure and then an acceleration in two h. You actually started two systems in the first quarter, which was more than I was expecting. And you talked about 3Q being similar growth to 2Q and then a pickup in 4Q. So it seems like maybe there's been some movements in how you're seeing the year shape up. I was hoping you could help us better understand what's driving Izilda Martins: Hi, Mark. I remember, you know, when we talked about this. So this is really what's going on. It's really not any different. So when we talked about being a less pronounced, call it, sequential improvement, in the 2026. That was on the heels of a big improvement call it, sequential improvement quarter over quarter last year. So if you look at where we're standing right now, we ended up at a little bit over $618 million in revenue in the fourth quarter, and we're at $630 million. So not that same sequential improvement that you saw in the tail end last year. So that's coming to fruition. And if you take you know, take into account what we guided to or what our outlook is, in the second quarter, we end up pretty much in the same place, maybe a little bit better. And now what I would say is the second and third quarter are a little bit more aligned than what we originally saw. But it still falls within what we what we were talking about, you know, a couple of quarters ago and last quarter. Mark Delaney: Got it. And my other question was on the announcement of the Fox acquisition. Maybe if you could please help us understand what the implications are from that acquisition for revenue margins in the near term and then what it might mean for your business in the longer term as you can bring that capability to your customer set. Thank you. Rick Cohen: Yeah. Can't really say what the revenue implications are. Right now. I think we'll develop that over time. What we liked about Fox is that a number they have 25 different customers. A number of those customers are not Symbotic customers today. So it gives us an opportunity to enter a new customer base and what we liked about Fox is that they're essentially using a fork truck on the dock to do the same thing we do with our transfer deck in our structure. Matter of fact, what we do in the transfer deck in the structure is we might have 100 bots in a 400 by 24-foot wide. So a 10,000 square foot area. And the dock may only have like, 20 or 34 trucks. They're bigger. They're heavier. But the software that we're using and the evolution of what we're doing where they have vision, they have LIDAR, and they can avoid collision. This is, we think, this is a market where we could sell people dock automation separate from even warehouse automation. So we think this is a very big market. A lot of people are looking at this market. We have some very big customers who have been experimenting with Fox. So can't say exactly how it's gonna go. It's very early stage. But we like the customer base, and we like the potential. Mark Delaney: Thanks. I'll pass it on. Operator: And our next question comes from the line of Piyush Avasti from Citi. Your question, please. Piyush Avasti: One on fulfillment system. Like, I think you guys have mentioned the $5 billion with Walmart. But the total addressable market is more like $300 billion plus. Rick, you kinda mentioned on the second generation. Maybe talk about the timeline on when you can market this offering to incremental customers outside Walmart. And if you could refresh us on the timeline for the $5 billion opportunity with Walmart, that would be Rick Cohen: Yeah. So we have a couple of prototypes that will be the next generation. This is what we've learned from the initial 19 installs that we bought. And Walmart asked us to improve that. So we have two installs that'll happen in the next year. Not exactly sure how exactly what month, but it'll be within the next twelve months. Maybe sooner. And then that addressable market it's a little hard for us to figure out because there's everybody that we've talked to with a traditional system has asked us about we call it SIM micro is the way we call these systems. But it's not just these systems are not just food systems. They're not just back of store. They could actually be e-commerce for let's say, somebody like a Medline, which is doing very specific small deliveries to let's say, a surgical room. So I think this is I don't know. Izzy or the financial people put a number to it. It's a very, very big market. And it's a worldwide market. And these systems are smaller, so people are more interested in they're cheaper. So people are more interested in saying, yeah. I could experiment with one of those versus going into a warehouse and saying, I'm 100% committed on a 50 or $70 million system. So not sure I'm exactly answering your question, but this is we are every customer we talk to about a warehouse now talks to us about SimMicro. Piyush Avasti: Helpful. This was helpful. Go ahead. Izilda Martins: I was gonna say, and on the backlog, the way to think about it is exactly how Rick mentioned that within this calendar year, maybe sooner, we'll get past those prototypes, then that backlog would be triggered after that. And, also, just as a reminder, that backlog only represents 400 stores. So as we continue to do more, obviously, as you can tell as you answered asked your question, the backlog is really small compared to the addressable market. Piyush Avasti: Got it. Helpful. And, can you also update us on the interest trends for Greenbox? I think you guys have a site coming live. If you can update on any timeline for this site and other sites, and how close are you to convert potential customers? Like, any kind incremental color would be helpful. Rick Cohen: Yeah. I mean, my answer is we're close. We have a couple of customers that we're actually beginning to talk contracts with. But the site is still not ready to go live, so it'll be it'll be in the next nine months, nine to ten months before we're really ready to start shipping customers. Maybe sooner, but that's what we would expect. It's gonna take time to get contracts done, customers signed, and but a lot of interest now because people can now go visit the sites starting to give tours. And so it's real to people now versus just the concept. Piyush Avasti: I appreciate all the color, guys. Thank you. Operator: Thank you. And our next question comes from the line of Colin Rusch from Oppenheimer. Your question, please. Colin Rusch: Thanks so much. If you move into multiple form factors here with the BOBS and start working through, you know, different generations of these bots. Can you talk a little bit about the potential for designing modular components and things that are common across these form factors to help optimize some of the cost structure? Rick Cohen: Yeah. So that's exactly what we're planning on doing. So today, we have the original SIM bot. But we also have a new bot, which we haven't really talked about. We call it a stretch bot. So the SIM bot can handle a 24-inch box, a stretch bot, handles a 36-inch bot. And that's that so it's kind of like a minivan and then a suburban. So bigger capacities, and different customer bases. And then we also have our brake pack system, which we have a second-generation prototype in Brooksville, that site, and then we're starting to roll those out to many more sites. That is a second generation, what we call a minibot. And then we have a third generation which will become the dock handling. I mean, a fork truck for us is just another bot. And so what we're using is it's really years and years of developing figuring out the technology, but these bots now have will continue to upgrade the chips so they'll have more processing power. But the bots now have eight cameras, and the bots will also have LiDAR on them, which is the newest thing we're installing. And so that allows us to use bots for our structure, but we'll be able to use bots for any part of the warehouse. So we're expanding the warehouse capability. And that same software can control lots of different machines. So it's what we've always said. We want to create a software platform and then we want to have for me, they're just different apps. The bots are just different pieces of technology. Colin Rusch: That's super helpful. And then thinking about the opportunity set for you guys downstream in the logistics space, you know, given, you know, your entrance and kind of engagement in, you know, outside the warehouse or the distribution center. And some of the shipping lines. Could you talk about how quickly you might be able to, you know, potentially serve customers just on that space, if that's of interest? Or does everyone wanna work with you from the warehouse all the way through the final delivery? Rick Cohen: Yeah. So we're pretty busy right now with the customers we have, but we're developing technology to both to be able to unload containers. And some people are now asking us, can we load containers in different ways? And one of the things that we're doing is that we're finding that there's a series of customers that order a full trailer to a store. There's another series of customers. For example, the wine and spirits guys, actually have routes which have very small deliveries, but they're routing. They're very important for the routing of the trailers. And so and for instance, food service might be interested in the same thing where their orders are smaller. So the ability that we have to sequence and sort and stack products we don't think anybody else has the capability to do that in the whole world that we can do. And so what we're spending a lot of time with customers is looking at different verticals. For instance, a lot of people think we're doing food, but, actually, doing food. We're doing general merchandise. We'll be doing route drivers. We'll be doing hospitals. So the technology will be we will continue to invent machines. We will continue to look for acquisitions. And we will continue to refine the software to be able to solve the customer problems. So we look at ourselves really as a solution provider. And many of the automation people look at themselves as hardware suppliers. So sell the software. We integrate the software. We make the machine. And then we're working with customers now where we actually have to invent new machines. We've gotten very good at that lately, and we'll continue to look at acquisitions. And we'll continue to refine the software, and that brings the whole process together. Colin Rusch: Excellent. Thanks so much, guys. Operator: Thank you. And our next question comes from the line of Ken Newman from KeyBanc Capital Markets. Your question, please. Ken Newman: Congrats on a great quarter. First, Izzy, thanks for the color that you gave on the sequential revenue growth expectations for third quarter and fourth quarter. I think if I heard you right, you mentioned a more pronounced sequential growth in 4Q from 3Q. First, I'm just curious, is that truly just the timing of the deployments that were, you know, from new initiations from a year ago? Is there anything else to that that we kinda be aware of in terms of that stronger sequential growth? Izilda Martins: It really relates to, if you recall, in the third quarter of last year, we unveiled the NextGen structure. Right? So if you think about how our percentage of completion revenue comes in, that really and as you we said then, you know, people were kinda wait the customers were waiting for that. So given that, you know, that started as part of the deployments in the fourth quarter, that's why what I see right now is that I would expect more revenue in the fourth quarter this year. So that's the reason for my comments and the driver of it. Ken Newman: Okay. That's helpful. And then for the follow-up, Rick, I think we talked a little last quarter about chip availability, think the takeaway there was that you don't really have that much exposure to the higher inflation memory impact. But when I listened to you all these new exciting developments that you've got, on the new generation of bots that you're developing, it sounds like those are gonna be requiring updated chipsets. So just talk a little bit about your ability to source those updated chips and if you think there's a way to price for those chips in a price cost positive way. Rick Cohen: Yeah. So we'll probably upgrade to, at some point, to the next generation of NVIDIA chip or something like that. But these are not the big $25,000 chips. These chips are plenty available. I mean, we're still at our bots are still at a fairly at let's say the medium end of technology. These are not super expensive chips. I think they're readily available. We're not fighting for with Google and ChatGPT for those chips. So we don't expect that kind of problem and we'll be able to upgrade when we're ready to upgrade. Right now, we can handle what we're doing with the chips that we have, but we actually think the new chips will be the new chips that we're looking at will be more powerful and either the same price or less expensive. So within what you're looking at in the battle going on with the big guys in AI, that's not the space that we're playing in. What we can do is much more moderate control on the bots. And then eventually, the bots will get smarter, but we're not building huge data centers here. Ken Newman: Got it. Very helpful. Thanks. Operator: Yep. Thank you. And our next question comes from the line of Jim Ricchiuti from Needham and Company. Jim Ricchiuti: Thanks. Good afternoon. I apologize. You may have talked about this. I joined a few minutes late. I was wondering if there's any update been given on how the Mexico site is progressing and, you know, how you might characterize the pipeline for securing additional locations there. Rick Cohen: Yeah. So Mexico is progressing well. The timeline I think, is within the next year, next twelve months, maybe sooner. The building's built. We're getting ready to install. I've spent a week down there a month ago. I think there's a lot of opportunities. It's a big country. We're also looking at other places in Central and South America. So our customer in Mexico is very happy with us. They like what we're doing. They can justify it based on more of efficient deliveries to some of the big stores, but also some of small stores in inventory. So we think we have a we without getting very specific, we'll do a number of sites in Mexico, far more than we thought initially. Jim Ricchiuti: Thank you for that, Rick. Just I have a follow-up question. Just with respect to FOXROBOXY, if I heard you correctly, I think you said they had 25 customers and I thought you said a number are not Symbotic customers. So does that mean that they're selling to a couple of your customers? And is one of them your large customer? And I assume these are pilots. Is that a fair way to think about this? Rick Cohen: Yeah. Mostly what they're doing is pilots. They are selling to our large customer. Every time I go in a warehouse, I look at their robots and I look at how we could help them do better. But they also have I mean, the interesting thing with Fox is our large customer has thousands of fork trucks. But there are lots of other customers. The CPG manufacturers, their facilities, where they actually don't do as much manual selection, but they still move pallets from the warehouse to the trucks. They unload goods to their warehouses. So what I'm excited about is that we're looking for more opportunities to interact with customers and acquisitions is a nice way to do it to introduce them as we talk to the supply chain people and we make these robots more successful, they build credibility and trust in Symbotic as a solution provider. So, yeah, some of their biggest customers are not Symbotic customers. Now. Hope they will be in the future. Jim Ricchiuti: Got it. Thank you. Operator: Yep. Thank you. And our next question comes from the line of Guy Hardwick from Barclays. Your question, please. Guy Hardwick: I just wondering, Rick, if you look at the core offering of Symbotic, how progress is being made in offerings of chilled or frozen offering? Which some of your competitors can do. And then I had a follow-up question. Rick Cohen: Yeah. We are working with several customers right now on designs for perishables. I can't tell you we have a contract yet, but the new structure has allowed us to offer to if a customer was building a greenfield, and it was 500,000 square feet, at $500 a foot. Now we're gonna spend $250,000,000 for a building. And we can do that in 60% of the space. So instead of 500,000 square feet, it's 300,000 square feet. They can save $100,000,000 on construction before they even put the system in. That's what we're talking to people about. And so there's obviously, are concerned and tentative because of how sensitive these structures are. But our arguments are much more compelling and we will be spending a bunch of money on R&D to build prototypes internally so we would expect fairly soon. I can't tell you whether it's a year or could be longer, but we would expect fairly soon to announce some perishable sites. But this has gone from theoretical to the new structure and the density. Especially in perishables because the construction costs are so expensive. It's been a real opportunity for us. Guy Hardwick: And just a follow-up for Izzy. I'm just wondering how much of development revenue is still available to be recognized over the next few quarters or next year? Izilda Martins: There's still quite a bit left. I'm not gonna give you specific numbers, but I think the way to think about it is focus on what Rick's answer was. Which was within this calendar year, we expect to have the prototypes. So obviously, after the prototypes, we wouldn't have any more development going on, and we'd be in installing. Guy Hardwick: Thank you. Rick Cohen: One of the things I should have added is that the SIM Microsystems they will have perishables. They will have a perishable aisle, and they will have a frozen aisle. So we're already comfortable that the bots can handle it. There's other technology we need to develop, but this is not a what if anymore. This is, like, this is happening. Operator: And our next question comes from the line of Mike Latimore from Northland Capital Markets. Your question, please. Mike Latimore: Yeah. On the operational services gross margin, it's pretty healthy relative to the fourth quarter. Should we think about the gross margin here as remaining positive going forth? Izilda Martins: Yes. So as we discussed it last time, we said it was a bit of anomaly of what we saw in the fourth quarter. And given, call it, what we should be expecting, is that it should be continuing to improve. I think that improvement occurred a little bit more call it, sooner than what we expected. I think where we're at right now is a good exit trend for what you should see in the coming quarters. Mike Latimore: Great. Sounds good. And then on the kind of sequential growth forecast for the year, does that kind of imply that new starts should improve every quarter as well? Izilda Martins: We don't guide to the amount of new starts. I think as you think about, we had 10 in the fourth. We have 10 in the first. I think what you know, we see that in the coming quarters as it being healthy, but there's a potential for it to drop off at the tail end of the year. So I would say I wouldn't take that as a trend, but at least something that we could count on in the, call it, this quarter and next quarter. Mike Latimore: Alright. Great. Thank you. Operator: And our next question comes from the line of Derek Soderberg from Cantor Fitzgerald. Your question, please. Derek Soderberg: Yes. Hey, everyone. Thanks for taking the questions. Rick, in the prepared remarks, you mentioned broadening within e-commerce. You're now working on in-store automation for buy online, pick up in store. Do any of your customers want to leverage your technology for the direct to consumer distribution centers? And is that even an area that you guys would wanna play in? Rick Cohen: Yep. The answer is yes. Derek Soderberg: Got it. That's interesting. And then as my follow-up, Rick, with the forklift automation, seems like the case handling aspect of your distribution centers are pretty much fully automated. On the break pack side, sort of left to automate there? What's potentially possible to automate over the next coming quarters? Maybe if you could just talk about how that technology has sort of evolved to the point where now rolling out that pilot to multiple facilities. Rick Cohen: Yeah. So we started out with a prototype minibot, we call it, and now it's our fully designed our own SIM bot. The new bots have LiDAR on them. They can handle more units per trip. They're faster. They're safer. So that allows us to do the brake pack, which is basically cutting open up a case and putting something on a minibot, and then we put it into a tote. That process has applications. So the logical thing where you might see that is in a Walmart Supercenter, there's every Supercenter has a huge drugstore in it. So those kind of smaller applications within a store within a store are basically they carry 30,000 items in, let's say, in a drugstore, but they only have one facing, not a whole case. So those applications actually there's a lot of applications. There's convenience stores have applications. There's the auto parts stores have applications where they have a lot of items, but they only want one or two of each one of those. So that would be direct to store. But we can also see that kind of application where people want to use our technology to sort. And so somebody like a Medline is really interested in could we deliver 20 different items? Not cases, 20 different items, in a tote to a surgical delivery room. And nobody else in the world can do that. Nobody else can say, well, if you want a case, we'll deliver a case. If you want an each, we'll deliver an each. In a systematic way. There are other people deal with each's, but nobody can do it with the level of sophistication or the speed with which we can do it. So those are what I would call again, software apps combined with hardware, so that's a particular problem that we're solving. Just happens to be a lot of customers have that problem. And then the third thing as we and so what happens in our system for those of you who have been to a site, is you know that the bots mostly run on rails, and then on the transfer deck, they're kind of free floating. In the brake pack, they're much more free floating. And so that takes a lot of software to stop them from crashing into each other at high speed with LiDAR. That same technology is what got us excited about using fork trucks on a dock, which is, you know, the most congested and dangerous part of a warehouse. And being able to do that so what it allows us to do is when we finish when we finish an order for a customer, and an order could be a pallet, 20 pallets going on a truck, or it could be one, we can now take a fork truck and sequence that onto the truck. And that is typically done by humans. And this is a very good way because we control the whole system. We know exactly when the pallet's gonna be done. We know exactly where it goes on the truck. And so that actually makes a whole new part of the warehouse open to our automation. That's what we're gonna continue to march down that journey. Derek Soderberg: Very helpful. Thanks. Operator: Thank you. And our next question comes from the line of Greg Palm from Craig Hallum. Your question, please. Gregory Palm: Yes, thanks. I wanted to just go back to the systems gross margin for a second and just make sure I understand it right. So there was sort of a reallocation of costs from R&D to cost of goods sold that impacted the system's gross margin. Can you quantify exactly how much that was? And I guess kinda where I'm going with this or what I'm getting at was was systems gross margin stepped down sequentially. So without this sort of reallocation, if you wanna call it that, would systems gross margin been, you know, up sequentially from Q4? Izilda Martins: Yes. Great question, Greg. Thank you. Here's how I would think about it is, like I said, the relative proportion of how much was paid development didn't grow significantly. Like I said last time, it was high single digits. Now it hit double digits. I think how to think about it is and how I how we measure success by the team. As you may know, we have pass-through expenses, and those pass-throughs come in on the top line and the bottom line. They were just a little tad bit higher than what they were in the fourth quarter. And so how I measure or how we measure, call it, systems gross margin, you know, quarter out over quarter, we actually did have a slight sequential improvement. But overall, what I would focus on is at times, those things will be lumpy, and I would focus on the bottom line gross margin where you see that significant improvement from the fourth quarter. Gregory Palm: Got it. Understood. Okay. And then I just wanted to follow-up on the Fox acquisition. I thought that was pretty interesting as well. And, Rick, you talked a little bit about sorta, you know, different kind of applications or use cases. But how do you think about the portfolio expanding longer term? I mean, I'm not trying to get you to give up any sort of secret information. But, you know, in terms of other types of technologies and applications, you talked about trailer unload. But you know, what else might be an attractive fit or a bolt on for Symbotic? Rick Cohen: Yeah. So we're actually we're I mean, you know, we've got this big war chest and we're we did it very purposely. We're looking at a common and we're actually doing a lot of work with some people that specialize in this field. It's like how should we think about M&A? Some M&A could be a way of acquiring customers and getting much more interaction with the customers. In the Fox acquisition, we can sell guided fork trucks to a lot more people than we can sell a Symbotic system to. I mean, we could sell two guided fork trucks to Joe's, you know, pizza warehouse. But there's people like DHL and other people that are very interested in space that are that they're running tests on, a lot of the big CPG companies. So what we're trying to what we're so we're looking at those kind of acquisitions. So we looked at Fox and say, this is a very, very large potential customer base. Smaller sales per transaction but beginning to show customers how they can think about reorienting their warehouse. So you've got we don't do a lot with pallet storage. We're kind of an unpallet storage company. But there are still pallet storage companies. There are automated guided fork trucks. Fox is pretty much dock fork trucks, but there are other types of fork trucks. I think we'll look at that. We'll look at the import DCs and look at what they need there. We'll look at different types of technology. So one of the things that we're probably spending more money on R&D than any other automation company I'm pretty sure by a lot last year, and we'll spend even more this year. And so we're looking at beginning the process of how we can invent stuff. Think about different parts of the warehouse. So there's we don't do a lot with clothing right now. We're interested in clothing. We're interested in fashion. We're interested in automation, auto parts. And so with that, the way I look at the business is we understand if we can understand the customer's problem, I don't wanna go to the customer and say, here's what I got. That's what I got. You need to make your problem fit into my solution. We may only have 75% of the customer's problem solved, and then we would say either we can invent it or we can buy it. So we're very much interested in lots of different startups. A lot of those guys are struggling right now. The VC guys are cutting back on some of the start-ups, so good opportunity for us. But we also could look at a fairly sizable acquisition. And so the money is not burning a hole in our pocket, but we're certainly on the prowl looking for various acquisitions. Gregory Palm: Yeah. Makes sense. Alright. Appreciate the color. Operator: Thank you. And our next question comes from the line of Keith Housum from Northcoast Research. Your question, please. Keith Housum: Thanks. Good afternoon, guys. So over the past year, you guys have expanded your Salesforce. You know, you guys added Medline last quarter. Can you perhaps give us an update on some of the, I guess, the efforts that you have in terms of focusing on places outside of The US and perhaps success you guys are having and confidence in your ability to add customers to your backlog? Rick Cohen: Yeah. So we're spending a lot of time in Europe now. We've got three or four people in Europe. They have very interesting problems because real estate is so scarce and so expensive there. And so it's very expensive for them to either put up a greenfield. So we're looking at Europe. We're talking to all the usual suspects in Europe. We're new there. And but we're now able to and we're able to sell in Europe because we have European suppliers. We have some German suppliers. We have some Italian suppliers. We have some English suppliers. So Europe is something that we're very much focused on and probably spent, don't know, a 100 times more hours there. In the last six months than we did in the prior five years. So that's of interest. I go to Europe three or four times a year now, maybe more. One, to see suppliers, and two, to actually meet with customers, potential customers. So we're still new in Europe, and you know, the Europeans there's a lot of German companies that make stuff, but I think people are now beginning to understand how different our technology is. There's packaging issues in Europe that are different in The US. So we're working on experimenting with those. But I think Europe and Canada, Central and South America, Mexico, those are all markets for us now. Keith Housum: Great. Thank you. Bye bye. Operator: Certainly. And our final question for today comes from the line of Robert Mason from Baird. Your question, please. Robert Mason: Yes. Thanks for taking the question. Izzy, would you be able to provide a little color on free cash flow how that may play out this year, particularly if you cross the line in the gap profitability and maybe grow from here, what kind of implications that has on cash flow, if any? From a tax standpoint? Izilda Martins: I think if you the way I would think about free cash flow, if you see the amount we've reported in this quarter, that is how you would think we should be landing. If you take where we landed in the fourth quarter and the third quarter of last year and you average those out, those just had some timing differences. So I think where we landed in the first quarter, that's a good starting point. And, obviously, as EBITDA improves, I think my guidance was significantly higher than where we are this month or this quarter. That's how I would think about it rolling out. And as quarter progress, I'll give you more insights as we move along. Robert Mason: Okay. Just as a follow-up, Rick, I think in your monologue, you made note of again, improvements in floor loading. Maybe for one of your customers. I'd just could you elaborate on that, and whether that is automation technology that you've developed? I didn't recall necessarily having seen that in your facilities, but if that's new or if that's something you're partnering on or what your implications were. Rick Cohen: So we're having a number of discussions with people that like, if you're a liquor distributor, you might deliver to Costco and you might deliver full pallets. But if you're going to restaurants and bars, you basically have to sequence those orders to help the driver speed up. That technology is something that we're working to develop. And we can pre-sequence not just can pre-sequence a whole trailer. And so today, if a trailer has 2,600 cases, we might and there was 125 cases on a pallet, we might put 22 pallets on a truck. But we could actually sequence every one of those 2,600 cases. That to a lot of people who are delivering small orders, is really interesting. And that kind of sequencing is essentially what we will do for and we're working with people explaining how that type of sequencing is something you can actually do for e-commerce you're gonna do customer delivery or customer pickup. It may be 20 eaches, but it's sequencing totes instead of cases. But if you're a restaurant supplier or a liquor distributor or any other kind of supplier that's doing routes, including beverage suppliers, the ability to sequence that stuff is something that doesn't really exist today. Robert Mason: Very good. That's helpful. Thank you. Operator: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Charlie Anderson for any further remarks. Charlie Anderson: Yes. Thanks, everybody, for joining our call tonight. We really appreciate your interest in Symbotic, and look forward to seeing some of you on the road in the coming weeks at the investor conferences at Wolffen. And good night. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good evening, ladies and gentlemen. Thank you for standing by. And welcome to PTC Inc.'s 2026 First Quarter Conference Call. Following the presentation, the conference will be open for questions. I would now like to turn the call over to Matthew Shimao, PTC Inc.'s head of investor relations. Please go ahead. Matthew Shimao: Thank you, operator, and welcome to PTC Inc.'s first quarter 2026 conference call. On the call today are Neil Barua, Chief Executive Officer; Jen DeRico, Chief Financial Officer; and Robert Dahdah, Chief Revenue Officer. Today's conference call is being broadcast live through an audio webcast and a replay of the call will be available later today at www.ptc.com. During this call, PTC Inc. will make forward-looking statements, including guidance as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in PTC Inc.'s annual report on Form 10-K, Form 10-Q, and other filings with the US Securities and Exchange Commission as well as in today's press release. The forward-looking statements, including guidance provided during this call, are valid only as of today's date, 02/04/2026, and PTC Inc. assumes no obligation to update these forward-looking statements. During the call, PTC Inc. will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website. With that, I'd like to turn the call over to PTC Inc.'s Chief Executive Officer, Neil Barua. Neil Barua: Thank you, Matthew, and good afternoon, everyone. I'll begin today by welcoming Jen DeRico to her first PTC Inc. earnings call as our new CFO. I'm confident she'll be a great CFO for PTC Inc. and a strong partner to our investor community. Turning to our results, we delivered a solid 2026. We grew constant currency ARR 9% excluding Kepware and ThingWorx, and 8.4% including them. And we grew free cash flow 13% year over year. These results reinforce our confidence in the transformation we are driving and the demand we are capturing. Our divestiture of Kepware and ThingWorx is progressing, and we are on track to close on or before April 1. Before discussing execution in the quarter, I want to take a step back and talk about our transformation and my optimism for the road ahead. Every transformation has an important turning the corner phase. The end goal is still ahead, but you start to see collective forward momentum across the most important elements of the transformation. This is where PTC Inc. sits today. We see it clearly in the following ways: Number one, accelerating product roadmap releases; two, record deferred ARR under contract; three, higher seller productivity; four, customer commitments that are strategic and increasingly span the full life cycle; and five, consistent customer feedback that our intelligent product life cycle vision resonates with what they need. To that end, how our customers develop products is changing significantly. Products are becoming more complex, more software-driven, and more regulated. At the same time, development cycles are compressing, competition is increasing, supply chains are fragmenting, and the workforce is evolving to favor modern digital-first systems and processes. The traditional product life cycle built on disconnected tools, siloed data, and manual processes simply can't keep up. That is why the intelligent product life cycle is essential for staying competitive. It is based on three core elements: connected systems of record across the life cycle, enterprise-wide cloud access to product data, and AI embedded directly into enterprise workflows. Together, these elements turn product data from something that's simply stored and audited into something that actually drives better decisions across engineering, manufacturing, service, and the rest of the enterprise. The companies that will win are the ones that successfully leverage product data in this way and use it as a foundation of AI-driven intelligence and transformation. We believe PTC Inc. is uniquely positioned to enable this. Our core products, CAD, PLM, ALM, and SLM, are the systems of record across the life cycle, defining how product data is created, governed, and used across the enterprise. And we support an open ecosystem where this data can be exchanged with other trusted enterprise systems. Our product and AI roadmaps are focused on making the intelligent product life cycle real for our customers. Deeper product integrations are a high priority. The connection between Creo and Windchill is the gold standard. We're making good progress with our Windchill connections to CodeBeamer, ServiceMax, and Onshape. In December, we released CodeBeamer 3.2, which deepens the connection between CodeBeamer and Windchill and improves how customers manage complex cross-domain development. In October, we released a new version of Windchill that includes the new Windchill UI for a more modern user experience and new change management capabilities that make it easier for customers to share relevant product data with suppliers. Our AI roadmaps are progressing well, and we are encouraged by customer feedback. Entering 2026, it became clear that customers don't want AI as another standalone system or workflow. They want AI embedded directly into the systems of record they already trust for their enterprise workflow. That's exactly where PTC Inc. is focused, and customers are increasingly recognizing this as a point of differentiation. In Q1, we continued embedding AI across our portfolio to address our customers' high-value use cases and workflows. In December, we introduced CodeBeamer AI, focused on improving requirements quality, accelerating test case development, and supporting compliance before products move into production. In January, we released Windchill AI parts rationalization, new AI functionality embedded in Windchill to help customers accelerate development and manage costs by identifying duplicate parts, making part data more consistent and reliable, and accelerating part searches. Next month, we will launch a video series called AI in Focus, where we will share our AI strategy in more depth, preview product-specific roadmaps, and show continued acceleration releases. We encourage you to tune in. We are confident in our AI position because our customers tell us universally that structured contextual product data is their top priority. In addition to embedding AI in our products, we are building a common AI infrastructure across our product portfolio. This will enable our users and AI agents to understand and use product data from CAD, PLM, ALM, SLM, and third-party systems in the same way, all backed by data governance and security standards. Our vision keeps our products and AI closely coupled together, thereby encouraging broader adoption of PTC Inc. solutions over time. Turning to go-to-market execution, our transformation is progressing well. In Q1, we increased seller capacity, improved quota attainment, and saw ramping reps more than double productivity year over year. This reflects territory rebalancing, improved enablement, and greater vertical focus. Most importantly, we are expanding the scope of our customer and partner engagements from focusing on one stage of the lifecycle to discussing the intelligent product life cycle holistically, centered on product data and AI. As a result, we are achieving stronger and more strategic demand capture. As previously discussed, we exited 2025 with record deferred ARR under contract. We continued this momentum with a record-setting Q1 of large deal volume and strong competitive displacements and deferred ARR. Some of these deals will begin converting to ARR in 2026, and most will ramp in fiscal 2027 and fiscal 2028. Jen will talk more about the positive impact of deferred ARR on our outlook for the remainder of fiscal 2026. We are confident our transformation is helping us build a more durable multiyear growth engine. An example of our momentum is the expansion deal we struck with Garrett Motion, a leading automotive supplier. We won this on the strength of our intelligent product life cycle vision, how it resonated with their leadership and across the company. Garrett is modernizing its product development environment on a cloud-first, AI-ready architecture. They were already using Onshape and selected Windchill Plus for PLM, displacing a PLM competitor, and CodeBeamer Plus for ALM, displacing an ALM competitor. Garrett's goal is to unify product development with our connected systems, broaden access to product data beyond engineering, and establish a foundation for AI. This is increasingly representative of how large product companies are engaging with PTC Inc. Overall, Q1 demonstrated PTC Inc.'s momentum with the intelligent product life cycle. I credit team PTC Inc. for driving forward with focused execution and purposeful innovation. I'm energized by our progress and optimistic about where we are headed. With that, I'll turn the call over to Jen. Jen DeRico: Thanks, Neil, and hello, everyone. I'm excited and honored to join the PTC Inc. team at this significant time in the company's transformation. Before turning to our Q1 results, I thought I'd share my initial observations and key priorities. I'm impressed by the PTC Inc. team and how our intelligent product lifecycle vision is taking hold with customers. As Neil highlighted, product companies want to leverage AI for their high-value use cases and workflows. The companies that succeed will be the ones that connect product data across the entire life cycle and then leverage that foundation to push AI-driven intelligence. It's an exciting time because PTC Inc. is well-positioned to help our customers address this challenge. In terms of my key priorities, I look forward to partnering with Neil and the leadership team to help PTC Inc. capture its growth opportunity, maintain strong financial discipline, and create meaningful value for our stakeholders. I'm committed to helping the investor community understand and value our business, and I'm looking forward to engaging with you. Now let's turn to our fiscal Q1 2026 financial results. At the end of Q1, our constant currency ARR excluding Kepware and ThingWorx was $2.341 billion, up 9% year over year. Including Kepware and ThingWorx, our constant currency ARR was $2.5 billion, up 8.4% year over year. Our Q1 operating cash flow and free cash flow both grew 13% year over year. Q1 free cash flow of $267 million included $10 million of Kepware and ThingWorx divestiture costs. Finally, on the divestiture, we are still targeting a close on or before April 1, and there are no material changes to the figures we provided last quarter. Turning to share repurchases, as previously guided, we repurchased $200 million of common stock in Q1 under our $2 billion share repurchase authorization. In Q2 2026, we intend to repurchase approximately $250 million of common stock. Based on this, we expect a decrease in our fully diluted share count to approximately 119 million shares, compared to 121 million shares one year ago. In Q3 and Q4 this year, we intend to repurchase $150 million to $250 million of common stock per quarter. On top of this, given current valuations, we now intend to return additional capital to shareholders following the close of the Kepware and ThingWorx divestiture. We continue to expect net after-tax proceeds from the transaction of approximately $365 million. Adding this to our original fiscal 2026 plan means that we will buy back approximately $1.1 billion to $1.3 billion of our common stock this year. With that, I'll take you through our guidance. In fiscal 2026, for constant currency ARR, excluding Kepware and ThingWorx, we continue to expect growth of approximately 7.5% to 9.5%. Including Kepware and ThingWorx, we still expect growth of approximately 7% to 9% in fiscal 2026. In the appendix to our earnings deck, we provide an illustrative ARR model for 2026, and you can see that our fiscal 2026 ARR guidance midpoint for $195 million of annual net new ARR in both scenarios. In Q2, for constant currency ARR excluding Kepware and ThingWorx, we expect growth of approximately 8% to 8.5%. Including Kepware and ThingWorx, we expect growth of approximately 7.5% to 8%. In the appendix to our earnings deck, we also provide an illustrative ARR model for Q2 2026, and you can see that our Q2 2026 ARR guidance is for $35 million to $50 million of sequential net new ARR in both scenarios. Looking at the second half of the year, our intent is to grow net new ARR in Q3 2026 on a year-over-year basis and then deliver a step up in Q4. We are comfortable with that because starting in Q4 2026, the demand capture we've been highlighting will have a positive impact on our ARR growth. We have visibility to a large increase in the amount of deferred ARR that will start in Q4 2026 compared to previous Q4s. And for clarity, the higher level of deferred ARR that is contracted to start in Q4 this year is attributable to the solid progress we've made with our go-to-market initiatives, as well as our commercial initiatives. Both drivers are contributing. Moving to cash flow, revenue, and EPS, our guidance for these does not take into account the Kepware and ThingWorx divestiture, except for the divestiture costs already recognized in Q1 2026 and expected in Q2 2026. For Q2 2026, we are guiding free cash flow of $310 million to $315 million, including Kepware and ThingWorx for the full quarter, which absorbs approximately $5 million of divestiture costs. Our business as currently constituted remains on track to deliver approximately $1 billion of free cash flow in fiscal 2026. Related to the Kepware and ThingWorx transaction, we still expect approximately $160 million of total cash outflows this year, which are not expected to recur in future years. And we'll continue to provide visibility to these outflows in our reporting and guidance. When the transaction closes, we will update our guidance, and I'll host a call to take you through the changes. In recent years, we've developed a high degree of confidence in our guidance for free cash flow based on the predictability of our cash collections and the disciplined budgeting structure we've established. Continuing to deliver the strong financial discipline you've come to expect from PTC Inc. remains a priority. While our focus is on ARR and free cash flow, we're also providing revenue and EPS guidance to help you with your models. We are raising our fiscal 2026 guidance range for revenue to $2.675 billion to $2.94 billion and raising our non-GAAP EPS guidance range to $6.69 to $9.15 in alignment with our Q1 2026 results coming in above the high end of our guidance range. A key driver of our strong Q1 2026 revenue and EPS was similar to last quarter. We did a great job contracting customer commitments. As a result, our revenue growth significantly outpaced our ARR growth for a second consecutive quarter. In Q1 2026, demand capture continued to outpace ARR growth, resulting in additional deferred ARR that will support durable growth in future periods. Importantly, this dynamic reflects the quality, duration, and the structure of customer commitments we contracted, not a change in revenue recognition practices. All in all, our results and guidance show that our focus on the intelligent product lifecycle is resonating with customers. We are on the right strategic path with a compelling set of product initiatives, go-to-market initiatives, and commercial initiatives. I want to thank the extended PTC Inc. team for their continued efforts and energy. Our people are our driving force, and what I've seen thus far gives me confidence that we will deliver on our opportunity. With that, I'd like to turn the call back to the operator for the Q&A session. Operator: At this time, if you would like to ask a question, press star then the number one on your telephone keypad. To withdraw your question, simply press 1 again. Please limit yourself to one question only. If you have additional questions, please return to the queue. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Yun Kim with Loop Capital Market. Please go ahead. Yun Kim: Alright. Great. Thank you. Congrats on a solid quarter, Neil, and welcome aboard, Jen. Since this is your first time, I'll ask a question to Jen first. So Q4 is the first quarter when we can see ARR from those deferred ARR deals. What level of visibility do you have on that, if you can quantify that if you can? What are, for instance, what are some of the variables behind those ramp or deferred ARR deals getting recognized in Q4? And is the timing of that ramp related to billing, then would it affect cash flow? Thanks. Neil Barua: Yun, thanks for the question. And Jen will add to my upfront. But since she's four weeks in, let me take the upfront on the dynamics of the demand capture, and then she could talk about some of the technicalities if I don't cover it. So, you know, again, I think you heard, and thank you for the acknowledgment. We feel really good about the progress of our go-to-market transformation, and it's showing up now in two quarters of demand capture that is now relating to, you know, the amount of deferred revenue deferred ARR that you spoke about in Q4. That's about triple what we had last Q4 entering. And double the deferred ARR that we're building starting in 2027 that we had coming into this year. So Rob and the go-to-market team are really doing a lot of great work on the demand capture. And the crux of the deferred ARR is due to the fact that we're winning strategic cross-product and in some cases, and in many cases, on some product lines, competitive displacements. And so, you know, we're taking the commitment, which is committed dollars from the customer. I'm cognizant that it's not showing up right now in the in-quarter, but we're very positive about how it's starting to build ARR in Q1 and as we guide around Q2, how it'll impact Q4 in a more meaningful way than it did last year and also into the following year. And it's all to do with the implementation cycles of our customers. And we feel good about it because the commitment's there, it's contracted. And it's set to come. Jen, anything to add? Jen DeRico: I think you hit it, Neil. Thanks. Yun Kim: Alright. Thank you so much. Operator: Your next question comes from the line of Joseph D. Vruwink with Baird. Please go ahead. Joseph D. Vruwink: Great. Thanks for my question. And, Jen, welcome. At the big event hosted by PTC Inc.'s user community about this time last year, there was some, I think, foreshadowing by PTC Inc. about AI capabilities that would get added to Windchill and the parts management areas. And at the time, customers were really excited about this. I think that idea as a product is what PTC Inc. is now starting to come out with. I think it was released last week. I guess my question related to this, there's obviously been a lot of AI releases from PTC Inc. across all the core products over the past year, and not diminishing any of those. But are we maybe starting to see some that could prove more material in nature and this is gonna start to register in a more noticeable way on demand decisions over the next year? Neil Barua: So thanks for the question, Joseph, and thanks for acknowledging the really good progress that we're making around our AI strategy. In concert with what customers really need. And as you noted here, you know, our products are mission-critical enterprise systems of records across the life cycle. And as you heard last year at the PTC Inc. user group, the preponderance of our customers are now really wanting us to embed these AI releases as you noted. The Windchill AI parts rationalization, we also did a CodeBeamer AI release as well, and many others that are accelerating over the course of this year, which is really embedding AI capabilities to advise and assist and over time automate workflows within these systems of records that we are very well attuned to understand and train the models around it. So we're thrilled about the progress. Our customers are even more thrilled that we have built these and now there's a rapid iteration of releases to even make these more consumable over time. So we feel good about where we are around our strategy. We feel very excited about the criticality of PTC Inc. to deliver AI to our customers given the strength and the complexity of our system of records within our customer environment. In terms of the impact of when, you know, Jen could start talking about the P&L impact in terms of when we'll see a lift. I'd say right now it's immaterial in terms of how we think about the economic till coming into the company. But as these releases start taking hold and they move from POCs to scale deployments, over the course of the next few years, this should be something we'll be talking to you about and others around a real economic driver of the business. Thank you. Operator: Your next question comes from the line of Adam Charles Borg with Stifel. Please go ahead. Adam Charles Borg: Awesome. And thanks for taking the question. Maybe just on Creo and Windchill. And as we think about those growth rates, any way to parse out the mix of growth coming from expansion versus competitive displacement? And given the new go-to-market promotions that seem to be having some success, what's the opportunity to drive more competitive displacement front? Thanks so much. Neil Barua: Yeah. Let me start this, and Rob could add. Given he's really driving the team in a really disciplined manner the way he said he was going to when he started about twelve months ago. And we're very proud of the progress that team has made. What I'll say is around Windchill, which we don't break out the exact growth rate of Windchill. It's an aggregated PLM number as you might know, Adam. We're very enthused about the Windchill capabilities and the acceptance and the growth rates around Windchill as a standalone product in addition to, by the way, Windchill Plus, where we're seeing really strong traction. Creo, as you noted, continues to be a strong grower, a steady grower, and we feel good about its competitive dynamic in the CAD market. In addition to the fact that we have an amazing Onshape capability that is also starting to be a very strong competitive takeaway off of some of the competitors on their estate. So we feel good about CAD. In terms of PLM, in terms of the mix around expansion versus competitive displacement, I'd still say, Adam, that the significance is still around expansion. And even in expansion, there's competitive displacements that's happening where customers are giving us their entire estate now of take all the disparate PLM systems and put it on Windchill. So you saw some of the appendix slides you're starting to see and we're starting to see that being more of the types of deals we're seeing. Part of it is because the customers are understanding to get the benefit of AI, you need contextual product data that's put in one place in a system of record like Windchill so this advantages customers to expand with Windchill and then build in parallel with us some of the AI capabilities. But we are also lastly seeing competitive displacements, as I mentioned. And we're continuing to see more of that happen over the course of this year as we look at the pipeline. Rob? Robert Dahdah: Yeah. The split's correct that we get the majority from expansion, but there is actual growth and accelerated growth in competitive displacement. And so we feel really good about that as a kind of a next step grower for us. Adam Charles Borg: Great. Thanks again. Operator: Your next question comes from the line of Ken Wong with Oppenheimer. Please go ahead. Ken Wong: Jen? Operator: One moment for Ken. Ken Wong, your line is open. Ken Wong: Hey, Ken. Neil Barua: Operator, let's go to the next. I'm back to Ken. Operator: Your next question comes from the line of Matthew Hedberg with RBC Capital Markets. Please go ahead. Matthew Hedberg: Congrats. I know the software environment seems a bit dicey these days, but it's great to see the consistent results out of PTC Inc. I guess, Neil, I wanted to ask you you just you just talked about Windchill a second I guess I was curious if if you could talk a little bit more specifically on Windchill Plus. Creo Plus, just kind of the broad SaaS portfolio. You know, are you are you starting to see increased customer demand for SaaS? And and, you know, in those instances, are you seeing, you know, customers spend spend go even higher in in in those situations? Neil Barua: Yes. So thanks for the question. And we've been very we've been very practical and also transparent with all of you around our journey around building our SaaS momentum. And I'll take first the board in the cloud solutions that we've got, and in particular, Onshape Arena, ServiceMax. And we feel good about to in some cases, great about the momentum and the adoption of those capabilities in several competitive that are happening across the three of those strong portfolios in addition to the AI capabilities we're building on top of it. Terms of your question on Windchill Plus and Creo Plus, we're having a bang up and we did have a bang up last year in terms of the momentum building for Windchill Plus. We had another strong demand capture quarter for Windchill Plus. If not record-breaking, we have plenty more to go, and I wanna make sure I think Rob and I are measured about that we've been saying for a while that the dam has not broken where the entire market is flipping to our plus platform overnight. But we have been building momentum. We are working towards making sure we meet the customers where they are. The good news story is the following, and I've been saying this for two years consistently. SaaS starts working for Windchill Plus and Creo Plus when they're scaled implementations with a great experience with a back-end experience that's good, and the customers are happy. We're starting to see that. And we're gonna leverage that. We're gonna continue to build on the momentum. And so we feel really strongly about our position on SaaS. We feel like that will continue to be a growth driver. And to your last question around Lyft on pricing, yes, we are seeing the similar sort of Lyft that we've been saying around the one and a half to two and a half times kinda lift in terms of on-prem to SaaS lift on on ARR. Matthew Hedberg: Thanks, Neil. Operator: Your next question comes from the line of Joshua Tilton with Wolfe Research. Please go ahead. Joshua Tilton: Hey, guys. Can you hear me? Neil Barua: Yep. Joshua Tilton: Great. Thanks for sneaking me in here. I appreciate all the commentary on the improvement in sales productivity. But when we kinda, like, dig a little bit deeper in the numbers, it looks like the channel drove over 80% of net new ARR in the quarter. So I'm just trying to understand, like, are there any one-offs in the direct business that we need to understand? Is this tied to the deferred ARR dynamic? And maybe, you know, when can we start to see the direct business maybe contribute at a similar level to the channel? Going forward. Thanks. Jen DeRico: So I think what we're seeing right now is good momentum in both the channel and the direct. What you're seeing actually in the numbers, in particular this past quarter, one large deal does have an ability to influence this. And oftentimes, with a large deal, you have both the channel and the direct. And ultimately, it's about customer preference and how they want that fulfilled. Ultimately, that's all that's happening in those numbers right now. You can add Rob. Robert Dahdah: Yeah, I mean, as we've mentioned, you know, in prior conversations, we're working very hard to more deeply engage with partners on this. So to create an environment where we can allow that flexibility at the customer and not have a battle that's direct against the channel but working together to fulfill at the customer's request. So we think you might see that from time to time. We did have a larger deal this quarter that fit that picture. But you might see it again in the future, but it's not in any way some kind of visibility into weakness in DIRECT. We work very closely together. Neil Barua: And lastly, I want to make sure we're very clear about this. The energy and enthusiasm that turning the corner is around the actual indication and the contracted commitments that are building predominantly deferred ARR. So we feel really strongly about the go-to-market transfer. It's actually doing the thing that we need to do, which is capture customer demand. How it's showing up in Q1 in our guidance for Q2 has only got to do with timing. And the good news is this is committed capture. By the way, this is gonna show up all in another metric that you could look at. Not completely indicative of it is RPO and CRPO. You'll see in the queue but all of these metrics are leading us to make sure we all articulate that demand capture is strong. We gotta continue that. And as that happens, ARR over time becomes durable and multiyear in terms of the sustainability. Joshua Tilton: Makes sense. Maybe just to clarify one thing around that. Was there more deferred ARR added to the balance in 1Q than when you exited Q4? Jen DeRico: Yes. There was. And just to reiterate what Neil said before, as we think about where we are, where we sit today versus one year ago, for Q4 2026, there's triple the amount of deferred ARR on the books for Q4 2026. And then in the same view, for 2027 is double for 2027 versus where there was last year for 2026. Joshua Tilton: Super helpful. Appreciate the clarity. Thanks so much. Operator: Your next question comes from the line of Blair Harold Abernethy with Rosenblatt Securities. Please go ahead. Blair Harold Abernethy: Thanks very much, guys, and welcome, Jen. Just on the go-to-market side again, I just wonder maybe Rob can shed some color on this. But, you know, in terms of new customer ads, what are you seeing out there in terms of interest in your portfolio? Is it skewed at all more towards the SaaS side? The SaaS products? And, also, maybe you could provide a little more color on this the startup aerospace and defense program. It looks like you've been winning some business there. Robert Dahdah: Yeah. So for a couple of the two questions. As it relates to the new business and new logos, we definitely as mentioned earlier, have had a nice run and an increase in our competitive displacement. So we're picking up what we would consider to be new logos in kind of the upmarket. As we bring on new customers, we default to cloud. So they're coming in in a cloud environment and it typically, you know, that's been working very well for us and for the customer who want to enter that way. As they reduce their customizations and the complexity in their own environment. And obviously, try to capture some of the benefits of being in cloud. Some of which are pretty obvious, others which will start to manifest in how AI is deployed. So yes, we're seeing good traction with customers coming in new. That is our default setting as we bring on new logos into the cloud. In defense, it's great that you notice that. You picked up on that. We have an opportunity there. We believe as we serve of the largest customers in the world, at the top of that stack we have an opportunity now to incubate at the lower. And we've seen great reception there. Certainly we always learn and get better every month, every quarter. But the initial response has been really positive there. And we have a number of ways to service that market as well. So feel like we're well positioned at both the top and the bottom. And hopefully we'll be able to report some great success stories that grew through there. Blair Harold Abernethy: Great. Thanks very much. Operator: Your next question comes from the line of Ken Wong with Oppenheimer. Please go ahead. Ken Wong: Hey. Can can you guys hear me? Neil Barua: Yeah. Ken Wong: Okay. Perfect. Appreciate, the the context around deferred ARR and and when some of that timing could pop up. When thinking through the unchanged fiscal year ARR guide and coupled with that commentary that it sounds like more is coming in Q4. Help us think through the seasonality if you could. I mean, is it is it basically gonna be even more back-end loaded than you guys were perhaps three months ago? Jen DeRico: So I think right now, the way we think about it, as you heard me say in my prepared remarks, that we'll have a step up in Q3 and a larger step up in Q4. I would say it's similar to how we've been thinking about the business. Neil, you can correct me if I'm wrong prior. But overall, the shape of the curve is very similar to what we thought about when we guided for the full year. Ken Wong: Okay. Perfect. Thanks a lot, Jen. Operator: Your next question comes from the line of Daniel Jester with BMO Capital Markets. Please go ahead. Daniel Jester: Hey. Great. Good evening. Thank you for taking my question. Maybe you know, in the slide deck, there was a a good story about ServiceMax and an expansion there. You know, last year was maybe a little bit of a tougher year for ServiceMax. And so maybe just an update about what we're what we're seeing there and in terms of the cross-sell opportunity. For fiscal 2026. Thank you so much. Neil Barua: Yeah. Let me start, and Rob could add if if I miss anything. Look. As as we've mentioned a few times starting last year, we've been working through very specific churn events in ServiceMax for a number of quarters now. As I mentioned, I think last call that we've got some still residual churn that kind of hit us in Q1. And most of it, we're trying to work through the system by the end of this quarter. That being said, a ray of sunshine in terms of some green shoots, we've been talking about, like, the cross-sell opportunity you saw you noted the one in the appendix. We've had some good strong demand capture, as we're calling it, i.e., contractual commitments of ServiceMax that was very encouraging as we saw. We need that replicated over the next number of quarters. The end of Q4 and throughout the entirety of Q1. We obviously wanna ensure that churn is mitigated versus what we've seen in prior quarters. And lastly, the integration of ServiceMax into the intelligent product life cycle and in particular, how our AI strategy allows for agents to work across our systems of record where we have a very offer in ServiceMax, we believe is a competitive differentiation, in particular with some of these competitive displacements when customers are giving us PLM. Part of it is to do with the fact that we actually do have such a strong customer record at ServiceMax and ultimately in that AI world where it advantage. So not out of the woods, but making progress and, you know, we're staying in in real focus to make sure we continue on some of the buildup of some of those green shoots that we're seeing. Robert Dahdah: Yeah. And as part of the alignment, we go vertical and start to look at how we rebalance just the go-to-market teams, we've made this a very important part of our elevated messaging. And so it's being brought to market more widely. In addition, we attacked the level of really instituted as part of the comp plans in a way make sure that everybody's got some incentive to bring this in front of the customers. So in addition to the benefit of the customer, there's internal benefits also. So we're trying to make sure the whole company is aligned to get the message out. Daniel Jester: That's great. Thank you so much. Operator: Your next question comes from the line of Jason Vincent Celino with KeyBanc Capital Markets. Please go ahead. Jason Vincent Celino: Hi. Thanks for taking my question. Sorry to belabor. Another ARR question, but this actually relates to the Q2 ARR guide. Know there's an implied decline in net new dollars added for Q2. Did you see any deals, you know, from the Q2 pipeline closed earlier in Q1? Or are you expecting more of the deals in Q2 to also have this bigger deferred component? Thanks. Neil Barua: It's a great question, Jason. This is all to do with our assumption as we sit here today around how these deals will come into the in-quarter start affecting ARR for that. This has nothing to do with demand being lesser than the momentum that we're talking about. It has simply to do with the structuring and our assumption of that being the case. Quite frankly, it is another quarter where we believe we will continue to build on the deferred ARR to make this a durable multiyear sustainable growth engine going forward. Jason Vincent Celino: Perfect. Thanks. Operator: Your next question comes from the line of Sitikantha Panigrahi with Mizuho. Please go ahead. Sitikantha Panigrahi: Thanks for taking my question. Congrats, Jen, and look forward to working with you. So it's good to see some of the initiative on AI side you are doing and and also buyback. But, Neil, I I wanna ask about the macro that you talked about earlier. A little bit. You're conservative there. What kind of trend are you seeing in Q1, and what's assumed in your guidance? And and specifically, if you could give some color in terms of vertical, if you are seeing anywhere strength or weakness there. Neil Barua: Yeah. You you know, Rob could add about the vertical piece but just broadly, we've been in a very difficult macro. We've talked about this for many years now for a long time. And we are still delivering and capturing the types of results that we're talking about, particularly on the demand cap commentary that we gave. That is across regions, across verticals. We're seeing that strength. And the reason for it, despite the macro having so much uncertainty and volatility, despite policies being uncertain. Is because as an example, today, we had one of the larger industrial manufacturers in all of Europe join us at the CXC. And while they are dealing with so much change, they need to modernize. And they need to make sure prioritization of modernizing and creating a strong product data foundation, in this case, Windchill and the expanse of Windchill is what they're looking at with the additional CodeBeamer. To make sure they take advantage of AI as they think about their multiyear journey and competitiveness. So we feel good that even in this environment, our end customers, as you know, Sitikantha has not modernized as fast as almost every other end market. Of companies, they are getting the urgency to move. And now with this intelligent product life cycle, it's a comprehensive holistic story for them to actually be competitive with technology provided by PTC Inc. Robert Dahdah: Yeah. Just in terms of the actual strength within the verticals of the geographies, there's while there may be in a particular vertical a geography that has performed, some other geography has stepped up to outperform. And so if you look across the verticals, they're all our big five are all performing fairly well. And then if you look at any geography, there's no geography that has just been depressed. If they're down in one industry, they pick up in another. And so across our three or four biggest geographies, and across the five verticals, we have some pretty good numbers. We feel like every one of those is a place that has some upside. Sitikantha Panigrahi: Great. Thank you both. Operator: Your next question comes from the line of Nay Soe Naing with Berenberg. Please go ahead. Nay Soe Naing: Hello. Hi. Thank you for taking my question. I'm, again, looking forward to working with you. My question is on the deferred ARR. I think, Neil, you you you attributed to the fact that the booking to ARR conversion will, you know, begin Q4 as a result of implementation of customers. I was wondering if you could share with us how much visibility of control you have over that implementation timeline of the customer? Is there any potential risk that the implementation process might take longer or on the on the on the other on the flip side, it could it could be shorter than the Q4 that's coming up. Thank you. Robert Dahdah: Yeah. So I I was sorry. I was a little unclear, but I wanna make sure I mean, your question was clear. The audio was a little low. But just in terms of the deferred ARR, this is Rob. These are this is contractual commitment. So when we engage and sign these contracts, these are contractually committed amounts of ARR. That's what we hear Neil talk about, the durability and the predictability of the business. So they have a great incentive to be on time in their implementation. But if if they're not, that ARR comes. So we believe that in addition to obviously the predictability, the benefit to the customer and the way we've contracted is that it's allowing them time to ensure that they are aligned to the cycle of the contract. And so why we're also excited about how we've had these quarters and what we call demand capture is because in addition to timing them appropriately, we've done them on the proper commercial conditions, not in any way try to strain the deal by pulling it forward just to hit a current quarter. It doesn't match the implementation cycle or market conditions in those out years. And so these are contractually obligated they'll hit in these quarters. We are hoping and we're planning to be fully aligned with their implementations. And in addition to that, hopefully as we get to those those out cycles, there's actually upside even in those. Nay Soe Naing: Okay. That's super helpful. Operator: Your next question comes from the line of Tyler Maverick Radke with Citi. Please go ahead. Tyler Maverick Radke: Hi. Thanks for taking the question. So I know you've you've been asked you know, almost every question on deferred ARR, but I I guess I was just wondering if if you could help us understand you know, I guess, the magnitude in which that surprised you in in the quarter and then how that changes for the year. Because because clearly, you're you're you're seeing some good things on the rep productivity side. But you know, you came in a little bit below the high end of the guidance. And then that something you're just contemplating or risk adjusting more, in the outlook? It looked like there was on the the net new ARR. For Q2. And and then, sorry, just to clarify, if you think about the the stacking of these ramped ARR deals, I think it implies that your overall ARR growth should reaccelerate in Q4, and if that's the case, would would you expect that to to be durable just given the the visibility you have? Thank you. Neil Barua: Yes, Tyler. Thanks for the question. I just want to take one step back. The work that we're we've done and undertaken around go-to-market transformation, the hard work that we did upfront, and the the the precision and process that we've undertaken for the last twelve months and we're continuing on going forward this year and into next. In addition to product innovation that we're talking about AI, is around bringing PTC Inc. back to a consistent demand capture environment by which we're winning and engaging in strategic cross-product deals across the core priorities that actually build towards this intelligent product life cycle and so fundamental to our customers. And so that process that Rob and CK and the go-to-market team started off twelve months ago, is showing the fruits of all that process in demand capture that happened in Q4 and in Q1. And as we alluded to, we intend to continue that momentum into Q2. That is not showing up yet in net new ARR. And the way we showed you the guidance for Q1, was clearly not a surprise in which we gave you the range because we know that the whole game is build a durable, accelerating growth company. And the way you do that is by capturing great demand in a quality deal that fills deferred ARR and allows churn to continue to stay low keeps building new ACV into the quarter that we're playing in. And we believe in summary, that that inflection the turning the corner, and the turn the corner starts becoming more apparent in Q4 of this year. And substantially into 2027 and 2028. And that's what we're playing for Tyler, and that's the results and the work that we're doing at this current time just so we're being transparent with all of you. Thank you. Operator: Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Please go ahead. Jay Vleeschhouwer: Thank you. Good evening. Neil, your references this evening to large transactions coming on top of similar comments back in Q4 when you clearly had a large number of large transactions leaves you to ask the following. And there's quite a bit of deja vu here for me, which is if you think about ANSYS, you know, six, seven, eight years ago, they too had gone through a significant go-to-market change. They too had evolved and broadened their portfolio. So there's some similarities here. That lead me to ask if you are anticipating a fundamental change in your deal profile or propensity that you will start seeing more frequently the number of 8-figure transactions as as you did in Q4 and as they did over a number of years. Then secondly, I can't help asking about your presence of CES last month, which was quite significant. I think the almost the entire c-level team seemed to be there. There was a significant automotive flavor to your presence there, particularly around ALM and and Windchill. The question is, do you think that you can broaden your momentum in auto beyond the, the tip of the spear that ALM has been giving you plus some so plus some Windchill so that you can, in fact, start seeing a broader, more impactful growth or share contribution in auto. Know, as you've done, for example, at Toyota, Ford, VW, etcetera, etcetera? Neil Barua: Yeah, Jay. Thanks for the question. And and let me start with CES. So we were more than proud, but more than proud we were very enthused by the reception we got at the first ever CES that PTC Inc. has been involved in. And not only from automotive, but Jay, you were there, you know, you saw all around our booth was industrial manufacturers around the world that actually came to our booth as executives asking of us how can we deploy more of Windchill with? Most of them being our customers already Jay, which you're probably familiar with, but really trying to understand, wait a second. Now you have something called CodeBeamer. Now what are you doing with AI? How can we supercharge our Windchill base or our Creo base? ServiceMax in some cases? What can we do? And and that was just a really great pump your chest moment for PTC Inc. around, we're in the big stage now. We deserve it. And we're at the fundamental level of transforming these really amazing companies around the world. Including automotive, a lot of industrial manufacturers as well. On automotive, I will say, right now, CodeBeamer is the tip of the spear. That tip of the spear is very substantial for us. And there's plenty more to go in terms of CodeBeamer displacements, not only manual processes, but also competitive solutions. As you see that product is really gaining scale or adding CodeBeamer AI functionality, which the market is really energized by. So, you know, we're we're happy to get all of automotive onto CodeBeamer and that that's we're marching towards that end for what it's worth. Same on Windchill with automotive. We are continuing to see an ability for Windchill while in some accounts in automotive, it is there as you know, Jay, we're seeing this theme of, like, let's consolidate on Windchill. Let's take all the disparate PLM system and put it all onto Windchill, and we're gonna continue to go down that path. Lastly, ServiceMax. So Lamborghini was a marquee customer at our booth. They're deploying ServiceMax now that's tied back into their Windchill and so that they could deploy the right parts and services to their end customers faster. We're gonna go down that path as well. Ultimately, one day, we're gonna talk about CAD, but right now, we feel really good about in automotive. ALM, PLM, over time as we're seeing server logistics our ServiceMax product and SOM suite of products there. Bob, anything to add? Robert Dahdah: Only thing I'd say is in addition, of course, we we have take down the rest of the automotive industry when it comes to our ALM. We are seeing it start to go into other industries. It's not we have not made any kind of deliberate decision to knock off that. We actually have customers now exploring it and actually in places that you wouldn't even imagine. So we're pretty excited about the possibilities there. And there's obviously a huge white space outside. And your first question, Jay, around are you seeing this dynamic of cross-product larger scale deals? And you know, these large scale deals, they take a lot of effort, timing, you know, is always an art, and we have one of the best artists in the world and Rob kinda with his team landing those. So but but a big part of what has been the up-level messaging that we've been talking about the going to partners, getting to the GSIs, revealing what you know, Joe Jay, I think is, like, the greatness of PTC Inc., the importance of PTC Inc. to be at the same system of record as the big players you know, worldwide in software that's beginning to happen. And the more we get there, the more we're starting to construct these larger deals. When they come in, it's gonna be on Rob, but we're enthused about the fact that they're starting to actually build into the pipeline and we're looking at very optimistic ways in which how we could close that over the next number of years. Jay Vleeschhouwer: Thank you very much. Operator: Your next question comes from the line of Joshua Tilton with Wolfe Research. Please go ahead. Joshua Tilton: Hey, guys. Thanks for thanks for sneaking me in again. And I I I hate to I hate to ask one more on deferred ARR, but if I kinda you know, sum up all the takes of the questions that we're getting sent on the call, I think some of us have, you know, remembering or PTSD whatever you wanna call it from prior communication around deferred ARR that kinda didn't pan out. As we were all hoping for in the year. And I and I'm just I'm I guess what I'm asking, is there anything that you can tell us or give us to instill confidence that this deferred ARR balance will come through in the fourth quarter? And then on top of that, is there a way to think about how much of that balance is currently baked into the guidance? Thanks, guys. Neil Barua: Yeah. So so let me just on the confidence level, and again, can only speak about what we've been doing, since we've been transforming the business across all fronts. And I I wanna make one reference back to twelve months ago when we talked about all the levels of what we're doing in go-to-market transition. One of it was far tighter linkage between sales and customer success. And Rob made plenty of organizational decisions process decisions to align the two. And the reason why that's important answering your question is, customer success i.e., the cut the and that team has the implementation expertise when a deal is underway, they're the ones that actually advise the customer around here's what we see as the way in which the technology can actually be implemented. In addition to a third party. That linkage is tighter. And because it's tighter, we believe that in the contracting process, it's eyes wide open around when the implementation should occur when the customer should pay for it, and what's the right thing to do for the process of the actual project itself. And so we feel confident that we put the right diligence number one. And as far tighter linkages now than there was twelve months ago. Number two is know, I think Rob alluded to this. I wanna just punctuate it. Is we're doing deals to build a durable multiyear growth sustainable business, not telling the customer, if you let us maximize ARR for this quarter, you know, you'll get these certain attributes. We're doing the deals the way they should be the deal do the deals. And so the risk profile of a customer coming back and saying, the implementation schedule is different than what you said is low. Lower than I've seen. And at the end of the day, Rob's got a discipline that says, since we were transparent with you, it's in contract. You're gonna pay for it. So summary of all that long diatribe is that we feel little risk in that deferred ARR for you to have that PTSD of saying, that disappeared or moved out. Joshua Tilton: Love it. Thanks for the clarity. Really appreciate it. Operator: That concludes our question and answer session. I will now turn the call back over to Neil Barua for closing remarks. Neil Barua: Thank you all for joining. We really appreciate the questions and the attention. We're gonna be on the road the next number of weeks, meeting in conferences and investors and we look forward to seeing you. And, again, thank you for joining the call. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good day, and welcome to the TTM Technologies, Inc. Q4 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Sean Hannan, Vice President of Investor Relations. Please go ahead. Sean Hannan: Greetings, everyone. Welcome, and thank you for joining us today. I'm Sean Hannan, Vice President of Investor Relations for TTM Technologies, Inc. With me on the call are Edwin Roks, our President and Chief Executive Officer, and Dan Bailey, our Executive Vice President and Chief Financial Officer. Before we get started, I'd like to remind everybody that today's call contains forward-looking statements, including statements related to TTM Technologies, Inc.'s future business outlook. Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including the risk factors we provide in our filings with the Securities and Exchange Commission, which we encourage you to review. These forward-looking statements represent management's expectations and are based on currently available information. TTM Technologies, Inc. does not undertake any obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events, or other circumstances, as required by law. We will also discuss on this call certain non-GAAP financial measures, such as adjusted EBITDA. Such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP. We direct you to the reconciliations between GAAP and non-GAAP measures included in your company's earnings release, which is available on the Investor Relations section of TTM Technologies, Inc.'s website at investors.ttm.com. We have also posted on the website an earnings presentation that we will refer to during our call. Here is Edwin. Thank you, Sean. Good afternoon, everyone. Edwin Roks: And thank you for joining us for our fourth quarter and fiscal 2025 conference call. At TTM Technologies, Inc., we are focused on designing and manufacturing complex products and solutions in two strategic directions. The first is advanced interconnect, which includes highly complex printed circuit boards, substrates, and advanced packaging. The second strategic direction is built on our advanced interconnect technology to design and manufacture sophisticated modules, subsystems, and systems. Examples of this include our in-house developed RF modules, thermal and power management systems, edge and AI processing products, as well as complex subsystems and fully integrated mission systems. We believe the future of electronics lies in speed to market, high reliability, and efficient technology integration. The markets in which we do business continue to advance highly complex technology solutions in increasingly compact size and footprint. Our strategy is to stay at the cutting edge of advanced interconnect technologies through innovation and continue to move up the value chain into complex modules and subsystems that combine sensors, actuators, RF, and photonics. We engage early with our customers to ensure alignment with product development, which helps optimize their sourcing of leading technologies and streamlines their supply chain. From a demand standpoint, we expect healthy tailwinds due to our participation in two key megatrends currently driving economic growth: artificial intelligence and defense. As stated previously, approximately 80% of our net sales are related to these two megatrends. Our ability to seize these organic growth opportunities requires our continued focus on technological innovation, as well as expanding our capacity across our strategic footprint. We are further investing capital and resources to take full advantage of these opportunities today and in the future through our global footprint, which offers our customers manufacturing options across 24 sites located in China, Malaysia, Canada, and the United States. We stand well-positioned to support this growth across our end markets and are on track towards our ambition to grow revenues 15% to 20% per year for the next three years and to double our earnings from 2025 to 2027, which were goals previously shared on January 13. In our commercial segment, we are highly focused on supporting the demand wave of artificial intelligence in the data center computing and networking end markets. In our aerospace and defense end markets, we continue to excel with our leading position in advanced interconnect products as we work to expand our product offerings in integrated electronics, including modules, subsystems, and information systems. We are also focused on technological opportunities arising through increased use of automation and AI applications in our medical, industrial instrumentation end markets, while we remain strategically positioned in high-value automotive solutions. Now, I will begin with an overview of our business highlights from the quarter, then we'll follow with a summary of our Q4 and fiscal 2025 financial performance, and our Q1 fiscal 2026 sales guidance. We will then open the call for your questions. We delivered an excellent 2025, and I would like to thank our employees for delivering these results. We achieved sales of $774.3 million, above the high end of our guided range, and non-GAAP EPS of $0.70 per diluted share met the high end of our guided range. Sales grew 19% year-on-year, reflecting continued demand strength in our data center computing and networking end markets, driven by the requirements of generative AI, while our medical, industrial, and instrumentation, and aerospace and defense end markets also experienced solid to strong growth. The company's adjusted EBITDA margin was 16.3% in 2025, a strong result compared to the 14.7% in the prior year, reflecting continued improvement in execution. Non-GAAP EPS of $0.70 per diluted share was an all-time quarterly record high for TTM Technologies, Inc. Cash flow from operations was $63 million or 8.1% of sales, which brings fiscal 2025 cash flow from operations to $292 million or 10% of sales. The aerospace and defense end market represented 41% of fourth quarter 2025 sales. Sales in the aerospace and defense markets grew 5% year-on-year for the fourth quarter and 13% year-on-year for the full year of 2025. The sales growth in the defense market was a result of positive tailwinds in defense budgets, our strong strategic program alignment, and the key bookings for ongoing programs. During 2025, we saw significant A&D bookings related to the APS-153 airborne surveillance radar, LTAMDS air defense radar, MRAM, air dominance missile, and Javelin anti-armor missile system. In addition, we continue to see an increase in bookings for restricted programs. A&D book-to-bill was 1.46 for the quarter and 1.04 for the full year of 2025, which increased program backlog to $1.6 billion compared to $1.56 billion a year ago. We expect sales in Q1 2026 from this end market to represent 42% of our total sales. Sales in the data center computing end market represented 20% of fourth quarter 2025 sales. This end market experienced 57% year-on-year growth in the fourth quarter and 36% year-on-year growth for the full year of 2025, which reflects continued demand strength from our data center customers building products for AI applications. The networking end market represented 8% of 2025 sales. Year-on-year growth was 23% for the fourth quarter and 43% for the full year of 2025, as this market continues to become more correlated with the AI-related demand for more complex switching technology. Due to the AI-related correlation between data center computing and networking end markets, we will begin reporting them as a single combined end market in 2026. Consequently, we will be reporting on four end markets going forward. For 2025, combined sales for data center and networking would have represented 36% of total sales, and we expect the first quarter of 2026 to represent 37% of total sales. The medical, industrial, and instrumentation end market represented 14% of fourth quarter 2025 sales. This end market saw year-on-year growth of 28% during the fourth quarter and 22% for the full year of 2025, as medical and industrial areas saw increased demand for AI-enabled robotics and more complex sensing applications. The instrumentation area saw increased demand for automated testing equipment and AI applications. For 2026, we expect the medical, industrial, and instrumentation end market to represent 14% of total sales. Automotive sales represented 9% of fourth quarter 2025 sales. We will be increasingly selective in this market to focus on higher value-add products that carry a margin profile consistent with our financial growth. We expect the automotive end market to represent about 8% of total sales in 2026. Overall book-to-bill ratio was 1.35 for 2025, with the A&D reporting segment at 1.46, and the RF&S reporting segment at 0.94. At the end of 2025, the ninety-day backlog, subject to cancellations, was $654.9 million compared to $502.1 million at the end of last year. Now, Dan Bailey will summarize our financial performance for the fourth quarter and full year. Dan? Dan Bailey: Thanks, Edwin, and good afternoon, everyone. I will review our financial results for the fourth quarter and full year 2025, which were included in the press release distributed today. Key financial highlights are also summarized in the earnings presentation posted on our website. For the fourth quarter, net sales were $774.3 million compared to $651 million in 2024. The 19% year-over-year increase was due to continued strong growth in our data center computing, networking, medical, industrial instrumentation, and aerospace and defense end markets, partially offset by a decline in our automotive end market. For the full year, net sales were $2.9 billion compared to $2.4 billion in 2024. The 19% increase for fiscal 2025 was driven by the same end market dynamics that drove growth in Q4. GAAP operating income for 2025 was $80.7 million compared to GAAP operating income for 2024 of $9 million, inclusive of a $32.6 million goodwill impairment charge related to the RF&S component segment. For the full year of 2025, GAAP operating income was $264.7 million compared to $116 million in 2024, inclusive of the $32.6 million goodwill impairment charge related to the RF&S component segment. On a GAAP basis, net income for 2025 was $50.7 million or $0.48 per diluted share. This compares to GAAP net income for 2024 of $5.2 million or $0.05 per diluted share, inclusive of a $32.6 million goodwill impairment charge related to the RF&S component segment. For the full year of 2025, net income was $177.4 million or $1.68 per diluted share. This compares to $56.3 million or $0.54 per diluted share in 2024, inclusive of the $32.6 million goodwill impairment charge related to the RF&S component segment. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes M&A-related costs, restructuring costs, certain non-cash expense items such as amortization of intangibles, impairment of goodwill, stock compensation, gains on the sale of property, unrealized gains or losses on foreign exchange, and other unusual or infrequent items. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate comparisons with expectations and prior periods. Gross margin in 2025 was 21.7% and compares to 20.5% in 2024. For the full year of 2025, gross margin was 21.3% and compares to 20.4% in 2024. The year-on-year improvement in both periods was due primarily to higher sales volume and favorable product mix, particularly in the data center computing, networking, and aerospace and defense end markets, as well as improved operational execution. Selling and marketing expense was $19.8 million in the fourth quarter, or 2.6% of net sales, versus $18.9 million or 2.9% of net sales a year ago. For the full year of 2025, selling and marketing expense was $80.8 million or 2.8% of net sales, compared to $76.2 million or 3.1% of net sales in 2024. Fourth quarter general and administrative expenses were $43.1 million or 5.6% of net sales, compared to $40.9 million or 6.3% of net sales in the same quarter a year ago. For the full year of 2025, general and administrative expense was $168.3 million or 5.8% of net sales, compared to $156.6 million or 6.4% of net sales in 2024. Our operating margin in 2025 was 12.7%, a 260 basis points improvement from 10.1% in the same quarter last year. For the full year of 2025, operating margin was 11.7% as compared to 9.6% in 2024. The increase in both periods was due to the improvement in gross margin as well as continued spending discipline in selling, general, and administrative expenses. Interest expense was $11.8 million in 2025, compared to $10.7 million in the same quarter last year. For the full year of 2025, interest expense was $43.2 million compared to $45.5 million in 2024. Interest income was $2.8 million in 2025, compared to $2.1 million in the same quarter last year. For the full year of 2025, interest income was $10.4 million compared to $10.9 million in 2024. Other non-operating income and expenses in 2025 totaled a net interest expense of $3 million, as compared to net income of $1.4 million in the same quarter last year. For the full year of 2025, other non-operating income and expenses totaled a net expense of $4.8 million compared to net income of $3.5 million in 2024. Our effective tax rate was 13.2% in 2025, resulting in tax expense of $11.4 million. This compares to an effective tax rate of 12.2% or a tax expense of $7.2 million in the same quarter last year. For the full year of 2025, the effective tax rate was 14.5%, resulting in tax expense of $43.9 million compared to an effective tax rate of 12.4% and tax expense of $25.2 million in 2024. Fourth quarter 2025 net income was $74.8 million or $0.70 per diluted share. This compares to fourth quarter 2024 net income of $51.4 million or $0.49 per diluted share. For the full year of 2025, net income was $259 million or $2.46 per diluted share, compared to $177.5 million or $1.70 per diluted share in 2024. Adjusted EBITDA for 2025 was $126.2 million or 16.3% of net sales, compared with fourth quarter 2024 adjusted EBITDA of $95.7 million or 14.7% of net sales. For the full year of 2025, adjusted EBITDA was $456.3 million or 15.7% of net sales, compared to $351.5 million or 14.4% of net sales in 2024. I will now turn to our guidance for 2026. We project net sales for 2026 to be in the range of $770 million to $810 million and non-GAAP earnings to be in the range of $0.64 to $0.70 per diluted share. As a reminder, we expect first quarter profitability to be typically impacted by increased operating costs, particularly labor costs resulting from the Chinese New Year holiday. In addition, we expect our full year 2026 total net sales to increase in the range of 15% to 20% over 2025 total net sales. The first quarter 2026 EPS forecast is based on a diluted share count of approximately 106.7 million shares, which includes the dilutive effect of outstanding stock options and other stock awards. We expect SG&A expense to be about 8.5% of net sales in the first quarter, and R&D expenditures to be about 1% of net sales. We expect interest expense of approximately $10.6 million, interest income of approximately $2.2 million, and other non-operating expense of approximately $2.7 million. We estimate our effective tax rate to be between 12% and 17%. Further, we expect to record depreciation of approximately $29.8 million, amortization of intangibles of approximately $9.2 million, stock-based compensation expense of approximately $11.5 million, and non-cash interest expense of approximately $500,000. And finally, I'd like to announce that we will be participating in the Citi Industrial Tech and Mobility Conference in Miami, Florida on February 19 and the JPMorgan Leverage Finance Conference in Miami, Florida on March 3. That concludes our prepared remarks. Now I'll turn it over for questions. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone, and wait for your name to be announced. To withdraw your question, press 11 again. Due to time restraints, we ask you please limit yourself to one question and one follow-up question. And our first question will come from the line of James Ricchiuti with Needham and Co. Your line is open. James Ricchiuti: Thank you. Good afternoon. Congrats on the quarter. First question is regarding capacity. And I wonder if you could talk about where you stand with respect to adding additional data center capacity in China. As needed? And second question is just where you stand with Syracuse in terms of the ramp with the new capacity there. And then I have a follow-up question on margins. Edwin Roks: Yes. Thank you very much, James, and good afternoon. To answer your first question, we are making very good progress both in China and the US on expanding our capacity. And remember that we guide, let's say, our growth 15% to 20% over the coming three years. That capacity will do the job, let's say. And we have even more capacity to do even more depending on the demand. So capacity is not the issue. Also, the supply chain is not the issue. The equipment is not the issue. So we are well on track. We were there last week in China. Things are going very, very smooth. To answer your second question on Syracuse, same thing. We have our lead customers there. The building is up, as you know. The equipment is in. We are basically doing the tile and snow. And as we said three months ago, we are exactly on track just for the second half of this year. We will see first revenues coming from Syracuse Diamond, which is a really, really nice milestone. James Ricchiuti: And the question just follow final question from me is just on growth margins. The improvement you saw you highlighted that it was volume driven and mix. I wonder if you could also give us a sense of what the headwind was from Penang? And was it more mix related or volume related in terms of A&D and data center? Dan Bailey: James, hi, this is Dan. I'll take that one. So Q4, first, to address your Penang question, Q4 at the gross profit level still had a headwind of about 180 basis points. And we had guided 160, so a little bit worse than expected there on Q4, but still, as you noted, improved gross margins. So that gross margin improvement was primarily mixed data center and networking, as well as we did have improved margins in A&D. Those two in that order. So you're right on with that. But about 180 basis points on Penang, that will improve throughout this year. And as we guided before, it'll be about half of that by the end of the year. Edwin Roks: Yeah. But maybe some additional color on Penang. We basically doubled the revenues versus last quarter. So that's going in the right direction. Also, I look at the yield numbers, and we look at these yield numbers every week. On the lead vehicles, we see that that is going in the right direction. I will be there in one week from now. It is going really, really smooth in Penang. So I really hope we do better than 160 basis points that cut it in half for the end of the year, what we've said before. We are making good progress. So I really hope we do a lot better. James Ricchiuti: Very much for that additional color. Operator: One moment for our next question. And that will come from the line of William Stein with Truist Securities. Your line is open. William Stein: Great. Thanks for taking my question. Congratulations on the strong results and outlook. Edwin, a moment ago, you referred to capacity in the United States. I suspect you're talking about Eau Claire. Could you give us any update as to what the plans are to equip that facility and when we might see any revenue from it, any longer-term plans you can tell us about Eau Claire? Edwin Roks: Yeah. Absolutely. Absolutely. Give me a while to do that. First of all, I was referring to China and the existing facilities in the US. But I'm happy to talk about Eau Claire. Eau Claire is an amazing site. It's the largest site if I exclude some of the in-house activities of some of our customers. But if I look at the biggest scheme, it's the largest PCB site in the US. It's 750,000 square feet, and it's based on three different modules. I was there two weeks ago, and it is really, really big. Well maintained. The previous owner, TDK, did a really good job as well maintained. So what we are going to do is, in the coming eighteen months to two years, we are going to tool up that facility. We are discussing right now, and this is a work in progress right now, with our lead customers, both on the commercial side and the defense side. So that's still a mix. They need the capacity. So I think we are in a good position there. But, again, this is going hand in hand. The thing is the facility is there. It will take us, let's say, eighteen to twenty-four months to get first revenues, but it's going really, really short. And by the way, Eau Claire is not building the capacity plans we described. William Stein: Okay. So that sounds like that's eighteen to twenty-four months out. So okay. Yeah. Okay. We'll be on top of it. Edwin Roks: Yeah. William Stein: Got it. Thank you. Maybe one other. The very large book-to-bill you had this quarter, it's clearly there's a lot in defense. But even in the commercial part of the business, it was strong. And yet you also disclosed the ninety-day book-to-bill. So it sounds like this is not so much sort of rush orders for the next quarter, but it's providing you greater visibility. Any color on the orders by end market? Or sort of what's driving that? I guess I'm trying to ask whether that's driven by just trying to lock in capacity or if it's a matter of providing a commitment to TTM Technologies, Inc. so that you can then commit to add capacity. Edwin Roks: Yeah. Happy to do that. So if you look at our visibility, that didn't change for the ongoing business. You know, the commercial side, mostly data centers and networking. So it's still about six to nine months. That's our outlook, which is a normal number. Over time, we will get, let's say, on some more strategic elements of the same customers, get some more visibility. But on the running business, it is about six to nine months. And that was the case, and that's still the case. On the defense side, there's, of course, a different story. The backlog we have, the $1.6 billion, is a big number. The pipeline is even bigger. And as you know, this is going over multiple years. So generally, let's say, two years or even two and a half years. That's where we use these $1.6 billion for. So it's still in that same order for this case. William Stein: Great. Thank you. Operator: And one moment for our next question. And that will come from the line of Ruben Roy with Stifel. Your line is open. Sahaj: Hi. This is Sahaj on for Ruben. Congrats on the quarter. I guess I want to ask about the CapEx and how fungible that is relative to aerospace and defense and data center and how you're thinking about that growth relative to the sort of updated long-term '27 targets you provided earlier? Dan Bailey: Yeah. So we had also given some guidance before that for the data center and compute capacity that we're putting on in China, that'll be an additional incremental capital expenditure of about $200 to $300 million over the next two to three years. So that's above the 4% to 5% normal capital expenditures that we have. So, frankly, going in from this year to next year, we'll probably see about, you know, almost the same level of CapEx. We'll disclose in our 10-K, you know, the expected CapEx for 2026, which is in the range of $240 to $260 million. And then that'll grow into the following year as well. Sahaj: Okay. And in terms of the doubling in earnings, are you thinking of that purely organically or inorganically? Like, how are you thinking about M&A in this scenario? Edwin Roks: Yeah. Happy to answer that question. This is all organic growth. Because there is so much demand, and we are investing in our capacity. So based on that, and based on the traction we make on yield, and all the other operational elements, we think we can double the earnings in two years. Sahaj: Understood. Thank you. Operator: And one moment for our next question. And that will come from the line of Mike Crawford with B. Riley Securities. Your line is open. Mike Crawford: Thank you. Just digging in deeper into the additional data center capacity you're putting in place in China. I believe the most advanced printed circuit boards you're making now are done with maybe 87 layers. Asymmetric designs. And is that are those processes being ported to these other facilities in China as well? And how long does that take? Edwin Roks: Yeah. That's a good question. Indeed. Everything beyond the 60 layers, yeah. So we hear numbers. We hear different numbers. The 78, not the 87. The 78 layers is one of the boards we are working on, and that's going very smooth. But I can tell you that numbers go up. If we speak with the brand, we speak with our customers on a daily basis. The demand is high. But the number of layers is going up. There are numbers beyond the 100 layers already, which are required. Of course, these systems become more and more compact, which requires more layers and more complexity. And we are well-positioned there. We're happy to see that because we are well-positioned to do these multiple layers. Dan Bailey: And, Mike, I'll just add that you mentioned the site. So Dongguan and Guangzhou, those two sites both are where we do the artificial intelligence boards now. And the capital expenditures that we are doing out there are additional equipment and facilitation and optimization of those lines in those same factories. So it's not new factories. And so to your question, it will very easily and efficiently be able to get that new capacity up and running. Mike Crawford: Okay. Thanks for that clarification. And then a follow-up is regarding space. So historically, I think defense has been maybe 90% of your aerospace and defense business with maybe 5% space. But now there's talks of putting as many as a million data center satellites in low Earth orbit. And so I would imagine those might have different properties required of the printed circuit boards going into such equipment. And is that something that you're working on now, or is that another future opportunity? Edwin Roks: Both, Mike. It is something we're working on right now. We have the technologies, but space is absolutely one of our strategic directions. And requiring more PCBs. But not only PCBs, also integrated modules, radiation hard, and so on and so forth. So that's absolutely on our radar and absolutely in our strategic plan. Mike Crawford: Great. Thank you very much. Operator: Thank you. And we do have a follow-up question. And that will come from the line of William Stein with Truist Securities. Your line is open. William Stein: Follow-up is a cost question on copper. Copper has traditionally been a significant expense for TTM Technologies, Inc. I think the price has been quite volatile and rising. I believe you hedge it, but can you just sensitize us what should we expect the impact of volatile copper prices to be on the P&L over the next few quarters? Dan Bailey: Sure. Thanks for your question, William. We don't expect any significant impacts from it. Generally, we build the volatility into our pricing. So if we see it going up, we're going to add that into our price. We're able to pass that through to our customers. So we're quickly able to update our pricing models. And then to your point, we do hedge it. So that offsets and mitigates some of the risk as well. But the biggest mitigation is that we're able to price it in. William Stein: Great. Thank you. Operator: Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call over to management for any closing remarks. Edwin Roks: Okay. Thank you, Sherry. So I'd like to close by summarizing three items. First of all, we are growing. We delivered strong sales growth in Q4 of 19% year-on-year, driven by increases in our data center computing, networking, medical, industrial, and instrumentation in aerospace and defense markets. Second, our adjusted EBITDA for the fourth quarter of 16.3% reflected strong operating performance, leading to an all-time high record quarterly non-GAAP EPS of $0.70 per diluted share. And third, we continue to generate solid cash flow from operations, which enables us to invest in our projected continued growth. In closing, I would like to thank all employees of TTM Technologies, Inc., our customers, our suppliers, and our shareholders for their continued support. So thank you very much, and goodbye. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Good afternoon, everyone, and welcome to Snap Inc.'s Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to David Ometer Head of Investor Relations. David Ometer: Thank you, and good afternoon, everyone. Welcome to Snap's Fourth Quarter 2025 Earnings Conference Call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; and Derek Andersen, Chief Financial Officer. Please refer to our Investor Relations website at investor.snap.com to find today's press release earnings slides and investor letter. This conference call includes forward-looking statements, which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from these forward-looking statements, please refer to the press release we issued today as well as risks described in our most recent Form 10-K or Form 10-Q particularly in the section titled Risk Factors. Today's call will include both GAAP and non-GAAP measures. Reconciliations between the 2 can be found in today's press release. Please note that when we discuss all of our expense figures, they will exclude stock-based compensation and related payroll taxes as well as depreciation and amortization and certain other items. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call. With that, I'd like to turn the call over to Evan. Evan Spiegel: Hi, everyone, and welcome to our call. Last fall, we embarked on a new chapter for our company with the articulation of the Crucible Moment faced by our business. At that time, we laid out our plans to accelerate and diversify our revenue growth, pivot our business towards more profitable growth and deliver on the commercial launch of Specs in 2026. The impacts of the strategic direction began to manifest in the operating results of our business in Q4, and we are excited to build on this momentum in the year ahead. Over the last 3 years, we have grown monthly active users by more than 150 million, reaching 946 million in the most recent quarter and bringing us within striking distance of our goal to reach 1 billion global monthly active users. We have already achieved immense reach and depth of engagement in many of the world's most attractive advertising geographies, and we believe this affords us a significant opportunity to grow our top line and expand average revenue per user over time. Growing our community in these prosperous geographies remains a priority, and we remain committed to our long-term goal of reaching 1 billion monthly active users, but going forward, we will seek to strike a better balance between the pace of community growth and the rate of top line growth in order to pivot our business to more profitable growth. For the advertising business, our focus will be on 3 core initiatives. The first is fostering direct connections between brands and Snapchatters by leveraging our core product capabilities across Snapchat. The second will be making it easier and more performant for advertisers to connect with Snapchatters by leveraging AI tooling and capabilities end-to-end through our ad platform, including creative development, campaign setup and performance optimization. Finally, we plan to grow our advertiser base by scaling and optimizing our go-to-market operations that support the success of small- and medium-sized businesses. Ultimately, we will grade the performance of our advertising business based on the rate of growth in advertising revenue with a focus on gaining share over time. The other revenue portion of our business has become an outside source of growth and is playing a critical role in diversifying our top line. In the year ahead, we will focus on growing existing subscription offers, including Snapchat+ and Memory Storage Plans, while innovating to bring compelling new offers to our platform. This momentum is already materializing with subscribers growing 71% year-over-year to reach 24 million in Q4. In the year ahead, growth in subscribers will be a critical input metric to track our progress, and we will ultimately grade our performance based on the growth of the annualized run rate for other revenue. We are focusing on 3 significant catalysts for gross margin expansion to drive profitable growth. First, with community growth focused on monetizable markets, and with our cost to serve increasingly calibrated to the monetization potential of each market, we expect that our infrastructure costs will pivot from being a source of gross margin pressure to become a margin accretive investment. Second, as more of our ad revenue is derived from higher-margin placements such as Sponsored Snaps and Promoted Places, we expect advertising margins to improve. Third, we expect that the growing scale of our subscription business, which is built on a foundation of existing engagement and infrastructure investment will become increasingly accretive to overall gross margins. In the Crucible Moment letter shared last fall, we set a near-term goal to achieve 60% gross margins. We have already made meaningful progress toward that goal by achieving a 59% gross margin in Q4, and we believe there is a clear path to exceed this goal in 2026. We are excited about our plans to accelerate top line growth, diversify our revenue streams and build a more financially efficient business in the year ahead. Ultimately, we will grade our performance on our progress toward achieving meaningful net income profitability over the medium term. Importantly, we believe we can deliver on this profitable growth path as we continue to invest in the future of augmented reality and support the consumer launch of specs later this year. For our community, we are focused on strengthening engagement in the world's most developed advertising geographies by building experiences across Snapchat that spark conversations and deepen relationships between Snapchatters. The connections between friends and family are what unify our camera, messaging, Snap Map and content experiences and enable our platform to enrich the lives of Snapchatters around the world. By prioritizing features that encourage creativity, discovery and interaction across these surfaces, we aim to increase the relevance and durability of engagement in ways that support long-term community growth and monetization. Our camera remains central to have Snapchatters communicate and express themselves and it is often the starting point for conversations on Snapchat. We're enhancing our camera with AI-powered capabilities that make creation more intuitive, dynamic and social. Recent breakthroughs in our proprietary models allow us to deliver high-quality generative AI camera experiences efficiently at scale by running our models on device. AI-driven lenses represent a meaningful evolution from traditional lenses, shifting the experience from applying a fixed set of visual overlays to creating images and scenes dynamically through generative AI. Snapchatters can now prompt, explore and co-create personalized content in real time, and this shift is already resonating with our community. More than 700 million Snapchatters have engaged with generative AI Lenses more than 17 billion times, often discovering and sharing these lenses through conversations with friends and family. Our Imagine Lens launched in September has already been engaged with nearly 2 billion times, highlighting strong early traction and repeat usage. This momentum is supported by a global creator and developer ecosystem that is unmatched in scale more than 450,000 creators from nearly every country have built over 5 million Lenses using our industry-leading AR and AI tools, helping ensure that camera experiences remain fresh, relevant and closely aligned with how our community builds relationships. Sharing Snaps with friends and family remains the foundation of Snapchat and a core driver of engagement, retention and long-term value creation. Our platform is designed around visual communication that enables frequent interactions and helps our community maintain close relationships over time. We continue to see strong momentum in direct communication between friends and family with messaging behaviors reflecting the durability of Snapchat's core value proposition. For example, average daily messages sent increased 5% year-over-year, and the number of bidirectional communicators increased 5% year-over-year in Q4. We are investing in product experiences that make it easier to start conversations, sustain them over time and introduce new ways for friends and family to interact. For example, in Q4, we began testing Topic Chats, a new feature that allows Snapchatters to participate in public conversations around trending topics and events, discover shared interest and explore what's happening visually across our community. We also began rolling out new 2-player term-based games designed to create playful, low friction ways for friends and family to connect such as 2 Player Mini Golf and Magic Jump. In Q4, these experiences contributed to more than 200 million Snapchatters playing games every month on average, representing an increase of 90% year-over-year. The Snap Map has become an increasingly important driver of engagement by helping Snapchatters stay connected to friends, local communities and places in the real world. Snapchatters use the Snap Map to see where friends are spending time, discover what is happening nearby and engage with local businesses and events. Monthly active Snap Map users reached $435 million in Q4, up 6% year-over-year, creating natural opportunities for both organic engagement and monetization through ad placements such as promoted places. We have built a differentiated content platform powered by authentic content that is native to Snapchat and that reinforces human connection through content sharing as a conversation starter. Our systems increasingly surface timely, relevant content by identifying emerging trends and original formats across Spotlight and Stories and matching them to the right audiences. In Q4, enhancements to our ranking and trend detection models contributed to improved content freshness and engagement. For example, the number of Spotlight reposts and shares increased 69% year-over-year in the U.S. reflecting our ability to surface timely content at scale. In addition, Snapchat continues to be a platform where both established and emerging creators can grow an audience and build a sustainable business. For example, Randa Adami, a nail designer and travel creator, grew her follower base by more than 20x over the last 6 months by consistently posting the Spotlight and leveraging engagement tools such as Q&A and Spotlight comments to strengthen connections with our viewers. As we continue to innovate across these services, we are seeing the impact of better calibrating our investments in community growth and cost to serve with the long-term monetization potential of each market. In Q4, global monthly active users increased by 3 million quarter-over-quarter to 946 million, while global daily active users declined by 3 million quarter-over-quarter to 474 million. The decline in global DAU in Q4 reflects in part our decision to substantially reduce our community growth marketing investments in order to focus on more profitable growth. improving average revenue per user through more direct monetization of our core product remains a key priority, including continued growth in Snapchat+, the expansion of Sponsored Snaps in Promoted Places, the launch of Lens+, and Memories Storage Plans. While these initiatives involve trade-offs with engagement, they are strengthening top line performance, supporting more stable and retentive subscription-based revenue streams and improving the gross margin profile of our business. The regulatory environment also presents near-term risk to engagement metrics. In Q4, we implemented platform-level age verification in Australia in accordance with the new law requiring users to be at least 16 years old resulting in the removal of approximately 400,000 accounts. We have since begun testing new signals from Apple's declared age range API, and we plan to test Google solution once it becomes available. While these actions may adversely affect engagement metrics as implementation progresses, we believe it is the right thing to do to maintain the long-term trust of our community and partners, and we remain committed to our long-term goal of serving more than 1 billion global monthly active users. Our long-term vision for augmented reality extends beyond the smartphone to a future when computing is more natural, contextual and seamlessly integrated into the real world. For more than a decade, we have invested in building a platform that brings digital experiences closer to how people see, move through and interact with their everyday environments. Specs are central to this vision. After 5 generations of development and refinement, we plan to launch Specs publicly in 2026, which we believe represents a significant step forward in human-centered computing and the evolution of our AR platform. As we prepare for launch, we have continued to strengthen both the platform and the ecosystem that is designed to support adoption at scale. We began testing Snap Cloud powered by Superbase to make advanced back-end capabilities more accessible within Lens Studio enabling developers to build richer, more dynamic AR experiences. We also announced that all lenses built today for Spectacles will be compatible with Specs at launch, providing continuity and scale for developers from day one. Partners and developers are already building compelling AR experiences that demonstrate the breadth of what is possible on specs. Star Wars: Holocron Histories from ILM is now live on Spectacles highlighting the power of smart glasses for immersive storytelling with one of the world's most beloved franchises. This experience showcases the studio's continued innovation and technology and platforms through an extension of the Star Wars Galaxy. In addition, developer Harry Banda created Card Master, a multiplayer AR card game that lets players face AI opponents in classic card games with tutorials and achievements evolving into a broader suite of AR card experiences for Specs. We believe Snap is uniquely positioned to lead the next wave of spatial computing. With Snap OS 2.0, Lens Studio, Snap Cloud and a global developer ecosystem, we have built an end-to-end AR platform spanning software, tools and hardware. Together, these capabilities position us to deliver fully stand-alone human-centered eyewear that expands creative expression and unlocks new ways for people to engage with the world around them. In Q4, we made meaningful progress executing against the 3 priorities guiding the evolution of our advertising business, fostering more direct connections between brands and Snapchatters, making advertising on Snapchat easier and more performance through our AI-driven ad platform and expanding our advertiser base by scaling and optimizing our go-to-market operations for small- and medium-sized businesses. Together, these efforts delivered measurable improvements in advertiser performance, positioning us for more durable growth as we enter 2026. We are focused on fostering more direct connections between brands and Snapchatters by enabling advertisers to participate natively in the experiences our community use every day on Snapchat, including messaging, the Snap Map, our AI-powered camera and creator led content. These services allow brands to show up in ways that feel timely, relevant and aligned with how our community communicates and discovers the world around them. High-impact conversation driven placements are playing an increasingly important role across both upper and lower funnel objectives. Sponsored Snaps continue to gain traction in Q4 as one of our most differentiated ad placements, allowing brands to engage directly with Snapchatters. Sponsored Snaps revenue grew meaningfully quarter-over-quarter, supported by in-app optimizations and early testing of dynamic product ad integrations. Advertisers are seeing strong results from this placement. In Q4, Sponsored Snaps click-through rates grew 7% and click-through purchases grew 17% from Q3 to Q4, during which numerous format and ranking improvements were introduced. For example, global travel company Contiki, used Sponsored Snaps to drive lower funnel bookings, achieving a 283% increase in ROAS and a 72% reduction in cost per purchase highlighting the format's ability to connect creativity with measurable outcomes. In addition, SHEIN used Sponsored Snaps as part of the total takeover campaign to amplify the launch of its 2025 collection, connecting an online-to-offline event with high-impact camera native creatives that drove engagement beyond digital impressions. The campaign exceeded impression benchmarks by 20% while delivering CPMs below standard benchmarks, demonstrating strong efficiency, scale and the effectiveness of clear product-led creative with a direct call to action. We're also seeing advertisers amplify lower funnel outcomes by combining complementary ad formats across the Snapchat experience. For example, Saudi QSR brand KUDU, combined creative AR Lenses with Sponsored Snaps to drive full funnel performance achieving up to 49.5% lower cost per sign-up, 3.76x more app installs at 76% lower CPI and 38x more purchases at an 84% lower cost per purchase. Promoted Places further extends this strategy by translating digital engagement into real-world action. Early results from our promoted places beta saw an average 65% reduction in cost per incremental visit and an average double-digit visitation lift according to third-party foot traffic measurement by InMarket. We continue to leverage AI to make it easier for advertisers to connect with Snapchatters while delivering stronger performance and more consistent returns. By embedding AI across our advertising platform from creative development and campaign setup to delivery and optimization, we are reducing friction for advertisers and improving ROAS at scale, particularly across direct response use cases. A central focus of our AI strategy is simplifying how advertisers plan, launch and manage campaigns on Snapchat. Our Smart Campaign Solution suite, including smart targeting and smart budget uses AI to identify incremental high-value audiences and dynamically allocate spend across objectives, reducing the need for manual setup and ongoing optimization. We also began early testing of smart ads, which automatically assemble and iterate creative elements to identify the highest performing combinations. These tools are designed to reduce creative friction, accelerate learning cycles and shorten time to spend. Improving direct response performance remains a core priority within this effort. In Q4, we delivered meaningful progress across both DPA and App advertising. For DPA, targeted ranking, format and delivery improvements delivered a 55% reduction in cost per action for 7-0 conversions and 45% reduction in cost per action for 1-0 conversions amongst all Pixel Purchase GBBs, based on cumulative internal testing over the past year. CPA revenue grew 19% year-over-year, supported by expanded adoption among large advertisers and continued migration to higher performing dynamic solutions. For example, WOLFpak, a North America retail fashion and apparel brand, leverage dynamic product ads to drive lower funnel performance, delivering 90% higher return on ad spend compared to non-DPA campaigns. Our App advertising business also accelerated meaningfully in Q4. Revenue from in-app optimizations grew 89% year-over-year supported by advances in foundational app models, broader adoption of the App Power Pack and new immersive formats such as playables. For example, our partnership with Triumph Arcade delivered 2.6x more app installs at 37% lower CPI and 94% more purchases at a 15% lower cost per purchase demonstrating how native formats can drive strong lower funnel outcomes. We are growing our advertiser base by scaling and optimizing go-to-market operations that support the success of small- and medium-sized businesses. SMBs contributed the majority of advertising revenue growth for the sixth consecutive quarter, underscoring sustained product market fit and the impact of our investments. In Q4, total active advertisers increased 28% year-over-year driven in part by simplified onboarding, improved campaign workflows and increased performance. We reduced setup friction by enhancing Ads Manager workflows and expanding integrations across the commerce and measurement ecosystem, enabling advertisers to launch campaigns directly from partner platforms. We also strengthened our SMB offerings through new partnerships, including a global integration with Wix, which allows e-commerce businesses to more easily create campaigns, manage catalogs and improve measurement. In addition, we are investing in AI agents designed to accelerate SMB activation through automated recommendations and onboarding optimizations that reduce decision friction and improved performance. Our Q4 results reinforce our confidence in the strategic direction outlined in our 2026 plan. By fostering deeper connections between brands with Snapchatters, improving advertiser performance through AI and expanding our advertiser base with greater discipline, we are building a more resilient and competitive advertising business. As we move into 2026, we will continue to grade our progress based on growth in conversions, improvements in ROAS, expansion of our active advertiser base and ultimately the rate of growth in advertising revenue and share over time. I'll now turn the call over to Derek to discuss our financials. Derek Andersen: Thanks, Evan. Q4 was a pivotal quarter for our business as we began to see the impact of our strategic focus on profitable growth translate into further revenue diversification, meaningful gross margin expansion, elevated flow-through of top line growth to adjusted EBITDA, the achievement of net income profitability and substantially improved free cash flow generation. Total revenue was $1.72 billion in Q4, up 10% year-over-year. Advertising revenue reached $1.48 billion in Q4, up 5% year-over-year, driven primarily by growth in DR advertising revenue. The growth in DR advertising revenue was driven by strong demand for our Pixel Purchase and App Purchase optimization as well as continued strength from the SMB client segment. Other revenue increased 62% year-over-year to reach $232 million in Q4. We with subscribers growing 71% year-over-year to reach 24 million in Q4. Global impression volume increased approximately 14% year-over-year driven in large part by expanded advertising delivery across Sponsored Snaps and Spotlight. Total eCPMs declined approximately 8% year-over-year, with the rate of decline moderating by 5 percentage points quarter-over-quarter driven by growing demand for sponsored snaps that helped boost yields for this new placement. We are encouraged to see our advertising partners experience strong advertising performance alongside the supply growth and that the improvements in pricing and performance are bringing increased demand to the platform. Adjusted cost of revenue was $699 million in Q4, up 4% year-over-year but growing at less than half the rate of our top line. Infrastructure costs per DAU was $0.86 in Q4 and below the top end of our full year cost structure guidance range as we began to experience the initial benefits of better calibrating our cost to serve relative to the long-term monetization potential of the geographies in which we operate. The remaining components of adjusted cost of revenue were $289 million in Q4 or 17% of revenue, which is below the low end of our full year cost structure guidance range. due in large part to the outsized growth of higher-margin ad placements, including Sponsored Snaps and Spotlight. With the combination of revenue growth outpacing infrastructure cost growth and a favorable shift in impression delivery mix adjusted gross margin reached 59% in Q4, up from 55% in Q3 and 57% in Q4 of the prior year. Adjusted operating expenses were $660 million in Q4, up 8% year-over-year, but growing 2 percentage points slower than revenue. Personnel costs increased 8% year-over-year, driven primarily by a 7% increase in head count with hiring tightly focused on our core strategic priorities. Higher legal costs, including litigation and regulatory compliance-related costs were an additional driver of operating expense growth in Q4. These factors were partially offset by reductions in community growth marketing spending as we began to execute on our strategic initiatives to better calibrate our investments in community growth with the long-term monetization potential of each geography. Adjusted EBITDA was $358 million in Q4, an improvement of $82 million compared to the prior year. Adjusted EBITDA flow-through or the percentage of year-over-year revenue growth that flowed through to adjusted EBITDA was 51% in Q4 and contributed to adjusted EBITDA margins expanding 9 percentage points to reach 21% in Q4. Importantly, we delivered positive net income of $45 million in Q4, up from $9 million in prior year. The $36 million year-over-year improvement largely reflects the flow-through in adjusted EBITDA. Offset by a $31 million increase in interest expense reflecting the high-yield notes issued earlier in the year. Stock-based compensation and related payroll expenses or $265 million in Q4 or approximately flat year-over-year as progress towards a flatter and leaner leadership structure helped power the business to net income profitability in Q4. Free cash flow was $206 million in Q4, while operating cash flow was $270 million. Over the trailing 12 months, free cash flow was $437 million and operating cash flow was $656 million. as we continue to execute on translating top line growth into sustained growth in cash flow. We continue to manage our share count carefully with share repurchases completed throughout 2025, helping limit share count growth to 3% in Q4. We ended Q4 with approximately $2.9 billion in cash and marketable securities and just $47 million in convertible notes set to mature in fiscal 2026. Given the strength of our balance sheet, our progress towards sustained free cash flow generation and our desire to opportunistically manage our share count for the benefit of our long-term shareholders. We have authorized a new share repurchase program in the amount of $500 million. For the full year, we generated $5.93 billion in revenue, reflecting 11% year-over-year growth, driven by a combination of ongoing strength in our SMB advertising segment as well as the rapid growth in our subscription business. We delivered $689 million in adjusted EBITDA, representing adjusted EBITDA flow-through of 32% in 2025. Importantly, we came within or below our full year cost structure guidance across all key metrics as we managed our investment levels in balance with the rate of revenue growth realized by our business throughout the year. As we begin 2026, we are focused on accelerating top line growth further diversifying our revenue streams, expanding gross margins and making meaningful progress towards net income profitability. Our investment plans for 2026 reflect these priorities, and our intention is to calibrate our investments to revenue growth as we move through the year. Our infrastructure investment levels for 2026 will be driven by our strategic initiative to better align our cost to serve with the long-term monetization potential of each geography in which we operate. As a result, our full year cost structure guidance range for infrastructure costs is $1.6 billion to $1.65 billion. which would represent flat year-over-year infrastructure costs at the low end. We estimate that the remaining components of adjusted cost of revenue will be a combined 16% to 17% of revenue in each quarter of 2026 and which would represent a 1 to 2 percentage point improvement over 2025, driven by the benefit of outsized growth and higher-margin ad placements. Personnel costs are the largest component of adjusted operating expenses, and we expect head count growth in 2026 to be roughly in line with the 7% head count growth we experienced in Q4 of 2025. And with hiring tightly focused on our core strategic priorities. We anticipate continued elevated legal and regulatory-related costs, and we plan to make meaningful proactive investments in community safety that will contribute to adjusted operating expense growth. In addition, our adjusted operating expense range for 2026 includes incremental investments in product development and go-to-market support for the consumer launch of Specs later this year. These factors will be partially offset by reduced spending on community growth marketing as we adjust these investments to better reflect the long-term monetization potential of each geography. As a result, we estimate that full year adjusted operating expenses will be approximately $3 billion. For SBC and related expenses, we estimate approximately $1.2 billion in 2026. For Q1 specifically, our guidance range for revenue is $1.5 billion to $1.53 billion. Our Q1 revenue guidance range excludes any potential revenue from the perplexity integration as we have yet to mutually agree on a path to a broader rollout. Given this revenue range and our investment plans for the year ahead, we estimate that adjusted EBITDA will be between $170 million and $190 million in Q1. As we begin 2026, we are excited to execute on our pivot towards profitable growth and to make incremental progress towards our medium-term goal of delivering meaningful net income profitability. The impacts of this strategic direction are already evident in our Q4 results and we are incredibly proud of the work our team is doing to build on this momentum in Q1. Thank you for joining our call today, and we will now take your questions. Operator: [Operator Instructions] The first question comes from Eric Sheridan with Goldman Sachs. Eric Sheridan: I want to talk about where the initiatives, Evan, with Snap Specs as 1 of the key priorities in the next 1 to 2 years. Can you just go a little bit deeper into what you've built on the platform and the application and use case side? And how you think it feeds into where you want to take the hardware side of the business. When we think about the next 12 to 18 months and how this fits into your broader strategic priorities for the company and more particularly for spatial computing longer term? Evan Spiegel: Eric, thanks so much for the question. We're super excited about what's ahead this year with the launch of specs and obviously, graduating from the R&D phase of Specs to broader consumer adoption. In preparation of that, we've been working on several prior versions of Specs, including most recently, the version released in 2024 to developers who can subscribe to Specs and start building Lens experiences. We've seen some people build really spectacular things, whether it's utilities or new educational tools, for example, like at-home chemistry lab, you can have an augmented reality to even some of the more interesting work we've been doing with the browser and the ability to stream video on a virtual screen grounded in the real world through your glasses. So it's been really exciting to see all the new use cases that developers are building for Specs with the current version released back in 2024. And those will be able to run on the upcoming or the forthcoming version of specs released later this year. So I think we'll be able to launch with a really wide variety of compelling experiences, which I think is so important for the early success of a product like this. And we're just really focused on getting the hands of early adopters. We're so fortunate to have this passionate base of developers, hundreds of thousands of developers who've used Lens Studio to build lenses. And I think they're really excited about this forthcoming product. So really trying to engage them and early adopters with specs later this year is super exciting. And I think as we look out to future generations of the product through the end of this decade, we've got a really clear path here to lightweight, affordable and incredibly powerful glasses that can deliver immersive experiences in the real world. Operator: The next question comes from Ross Sandler with Barclays. Ross Sandler: High end of the range. And also -- can you hear me? . Evan Spiegel: We can now go ahead. Ross Sandler: Okay. Sorry. Okay. The 1Q guide assumes a pickup in growth at the high end, and you guys mentioned that there's no perplexity in there. Could you just talk about what's driving that between DR and brand and how you're kind of expecting trends in 2026 in the ad business to play out? Evan Spiegel: Thanks for the question. On the ad side, the biggest focus is continuing to generate additional demand by demonstrating the strong performance of the Ad Platform. So at the top of that, we're seeing really strong growth in active advertisers. They were up 28% year-over-year in Q4 as we continue to invest and scale our SMB go-to-market operations. And that's something you're going to see us build on into 2026. That's part of the investment plan for the year ahead is to continue to scale that out so that we can build on the momentum we have there. We've seen especially strong growth in the medium customer segment globally with medium customers in North America, in particular, being the largest contributor to absolute dollar growth there, which is good to -- that's the kind of momentum we want to build on in '26. We do continue to face some headwinds in the North America large customer business, but there are some bright spots there, including the U.S. LCS financial services vertical as well as autos. We have new leadership in place over the North America LCS segment. We've got new products to connect brands with Snapchatters, including Sponsored Snaps and Promoted Places to build with their and smart campaign solutions to make it easier for advertisers to leverage the full set of Snapchat placements to make those connections easy and performance. So those will be big themes that we'll be building on in '26 as well. In terms of the guide for Q1, the macro operating environment has thus far remained relatively stable compared to what we saw in Q4. There's a lot of quarter left to go in Q1, of course, but our guidance range is built on the assumption that the macro environment continues to be stable. I hope that extra color helps a little bit. Operator: SP1 The next question comes from Rich Greenfield with LightShed Partners. Richard Greenfield: A couple of questions. First, the subscription side, which I know, Evan, if I go back to your letter a while ago, you sort of marked the importance of subscription. It seemed like it really accelerated this quarter. And I'm curious, are you marketing it differently? Are there new features that you added? I know you've talked about sort of charging for memories and other things that will add to this. But just in terms of what happened in Q4, it would be great to better understand what's happening inside of that Snap? And then -- the other thing, I think, 2 years ago, Evan, you got on this earnings call and you talked about the fact that you were sort of refocusing user growth efforts from Android developing markets to the bigger markets like the U.S. where the meat of your monetization was. And if I look at sort of where U.S. users -- or sorry, North American users have fallen to a $94 million do you need to put even more effort into those efforts to sort of drive U.S. users or North American users? Just what's happening in the North American user market would be great to just better understand, given your focus there? Evan Spiegel: Yes. Definitely excited about what we're seeing on the subscriber side of the business. Certainly, memory storage plans were a big driver of the subscriber growth that we've seen recently and also have helped improve retention rates overall. So that definitely has been really helpful to the subscription business. And we've got some other great features on debt coming up this year for the direct pay segment of our business. So really excited about that overall, and I think really helps support our efforts to diversify our revenue in addition to the small and medium customer growth that Derek mentioned. So overall, really excited about the progress on subscriptions and the diversification of our revenue -- as it pertains to user growth, I think if you take a step back and look at the growth overall of the platform, monthly active users, now 946 million. So we're pretty close to our goal of 1 billion monthly active users. And I think, as you know, over the past 3 years, our community growth has really outpaced our revenue growth and ARPU has actually declined, while we simultaneously increased the cost to serve. By which has put downward pressure on our margin. So as we look at this crucial moment and the pivot to profitability, we have immense daily reach and engagement in many of the most valuable advertising markets, including in North America. And we think we can strike a much better balance between pursuing community growth and also growing average revenue per user. So in addition to that, obviously, we're working through some of the regulatory landscape and some of the shifting user engagement patterns as we focus on organic growth. But I think taking that all in totality, we've made some choices to reduce community growth marketing spend to adjust the cost to serve and to roll out additional paid features like the Memory Storage Plans that we just discussed. And all of those can cause headwinds to user engagement. So those changes actually free up more resources to focus on our most valuable geographies so that we can continue innovating and delivering great customer experiences, which really believe is the most important driver of long-term growth. Operator: The next question comes from Dan Salmon with New Street Research. Daniel Salmon: Evan, I wanted to just talk a little bit more about, as you called it, the sort of litigation or regulatory risk caused by changes in age verification policies, sort of broader teen smartphone and social media restrictions. You obviously commented on the actions that you took in Australia following the ban going into place there. But what I'm particularly interested to hear a little bit more about is the potential for those types of actions to impact North America. Obviously, a $4 million step down in the DAU this quarter. I'm curious just maybe to unpack a little bit of what drove that more and what the outlook could be there during the year based on some of those litigation risks or regulatory risks you mentioned. Evan Spiegel: We're certainly aware of some pending legislation. Obviously, there's quite a bit working its way to the court system right now that would further restrict the use of Snapchat for our community. I think as we look at, for example, global ad revenue from impressions served to users under the age of 18, that revenue is not material. . So I think looking at sort of the revenue generating potential of the business looking forward, we're not overly concerned about the changing regulatory environment. I will say one of the things that's very interesting is that if you look at the research studies that look at Snapchat specifically as separate from some of the studies that look at social media in totality. I think what we continue to see, which makes us proud of the service we've developed is that Snapchat actually has a positive impact on people's well-being and people's friendships. And that's actually in contrast to other services that don't necessarily have that positive impact. But I think we have had quite a bit of trouble as we look at the regulators, explaining how different Snapchat is because there is really this moment where people are expressing concern about use of social media. So we have to continue making the case that Snapchat and its orientation around your close friends and your family can have a really positive impact. I think that's backed up by the research. But certainly, it's going to take time to prove that out, and especially as these regulations sort of work their way through the court system. Operator: The following comes from Ken Gawrelski with Wells Fargo. James Cordwell: Maybe first, I'll touch on Specs. Could you talk about maybe, Evan, could you talk about the kind of synergy between specs and Snap services more broadly and the audience and kind of the developer base. And then talk about the right way to capitalize that entity? I mean, if there's -- if you have confidence in the end product -- how do you think about appropriately capitalize on that? Can it -- does it -- should it happen all within Snap, should there be outside partners? And how do you accelerate kind of the development and the deployment of specs throughout the ecosystem. I'll stop there. Evan Spiegel: Yes. Well, I think to just maybe take a step back on why we started working on specs in the first place. When we invented Snap and we worked on things like a femoral messaging or stories that put content in chronological order or even things like opening to the camera, our vision, our work was really designed to make computing or smartphone feel more human. And we think that's quite a really important role in connecting people with their friends and their family. But we also saw a lot of limitations of the smartphone and of computers. And I think today, people are spending something like 7 hours a day in front of a screen. And so I think there is, at this moment, a real opportunity to change what the computer is instead of something that you're constantly operating using a keyboard and a mouse something that now powered by AI can actually get work done for you. And so in that way, it's really a continuation of this vision to try to work to make computing more human for folks. And so I think now that we are exiting the R&D phase of spec development, there's a couple of important things. One is developing a strong stand-alone brand I think Specs the product itself, in many ways, appeals to a different audience segment than the core Snapchat audience, and it's going to be really important for us to develop a stand-alone brand identity for Specs. And then I think longer term, as we look at the rollout and broader deployment of Specs, there may be opportunities to raise additional capital to accelerate balancing that, obviously, with our own sort of ownership interest and any potential dilution. So I think right now, given that we're so close to launch, the key here is really just nailing the launch and making sure that we deliver an extraordinary product. And then I think we have a lot of flexibility to think about how we want to capitalize it moving forward. Operator: The next question comes from Justin Patterson with KeyBanc. Justin Patterson: I wanted to talk about agentive coding. We've seen more companies see meaningful improvements in engineering productivity from these tools. How is this thing deployed at Snap today? And how should we think about potential benefits, whether it's product velocity more engagement on the platform, more monetization opportunities or expense efficiency. Evan Spiegel: Yes. There's just so much opportunity here. Obviously, I think now, something like 40% of new code at Snap is AI generated. We made a ton of headway with trust and safety and customer service. in terms of automating those workflows. I think there's a lot of opportunity for the sales workflow as well to empower our sales team but also to automate quite a bit of that. So certainly, we're seeing gains across the board and how we're operating our business today. I also think this can be a real accelerant for our own creativity. I mean one of the things we love to do is invent new services. And we've got a bunch of ideas for new apps, for example that we could build using these AI tools and deploy very, very quickly, leveraging, of course, the distribution we have, our friend graph, some of the unique assets we have like folks memories, for example. So I think there's a lot of opportunity here for us to think about how we accelerate the growth of our business and actually develop new services quickly using these tools. And I think in addition to that, we're just running as fast as we can to roll out new agents across the enterprise new tools. And it's especially for a small team, like the one we've got at Snap, this is just a massive force multiplier. And I think really will help accelerate a lot of the creative vision we have in terms of turning it into reality. Operator: Our last question comes from Benjamin Black with Deutsche Bank. Benjamin Black: Great. Can you talk about the decision to moderate infrastructure spending at a time when others are ramping spend to drive ad performance? Was there sort of slack in the system? Maybe just talk through that decision. Evan Spiegel: It's a great question. Thanks for asking it. I think the first thing I would say just for context, the big driver in the ramp of infrastructure investment over the last couple of years has been a really significant growth in our ML and AI investment, and that was to both support the rebuild of the Ad Platform and the DR advertising business. and also to support the content business and banking and personalization and all of the work that we've done there. And I think I would say, first and foremost, we intend to continue to invest pretty heavily there. And so that's not an area of focus for pulling back. As it pertains to infrastructure, specifically, there are really 2 big catalysts where we see a lot of opportunity and are already making progress in terms of driving margin efficiency for the business and margin expansion. The first there is just our investments in how we handle cost to serve. And getting that in a place where we're calibrating that better relative to the monetization potential of each of the markets in which we're operating. And there's a lot we can do to optimize that. And that's really about the theme that we've been talking about in terms of getting to profitable growth. And so translating that into the growth in infrastructure really being keyed in against the growth in monetization. The other real opportunity we see here is to take some of the infrastructure things that are cost right now and turn them into revenue-generating investments. And so I think the recent launch of the memory storage plants is a great example of that, where we can take cost and not only find ways to make it more efficient, but then also turn it into a revenue-generating source of top line growth, which is going to help with even further margin expansion. So a lot of this is about efficiency. A lot of it is about being really sensible about our cost to serve relative to monetization potential markets and then scaling efficiently. But those investments in AI and ML will continue to be really important to the performance of the business in both the adds and the content side. So hopefully, that gives a little bit more context there. Thanks for asking. Operator: This concludes our question-and-answer session as well as Snap Inc.'s Fourth Quarter 2025 Earnings Conference Call. Thank you for attending today's session. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to Kemper's Fourth Quarter 2025 Earnings Conference Call. My name is John, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I would now like to introduce your host for today's conference call, Michael Marinaccio, Kemper's Vice President of Corporate Development and Investor Relations. Mr. Marinaccio, you may begin. Michael Marinaccio: Thank you. Good afternoon, everyone, and welcome to Kemper's discussion of our fourth quarter 2025 results. This afternoon, you'll hear from Tom Evans, Kemper's Interim CEO; Brad Camden, Kemper's Executive Vice President and Chief Financial Officer; Matt Hunton, Kemper's Executive Vice President and President of Kemper Auto; and Chris Flint, Kemper's Executive Vice President and President of Kemper Life. We'll make a few opening remarks to provide context around our fourth quarter results, followed by a Q&A session. During the interactive portion of the call, our presenters will be joined by John Boschelli, Kemper's Executive Vice President and Chief Investment Officer. After the markets closed today, we issued our earnings release and published our earnings presentation and financial supplement. We intend to file our Form 10-K with the SEC in the coming days. You can find these documents in the Investors section of our website, kemper.com. Our discussion today may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, the company's outlook on its future results of operation and financial condition. Our future results and financial condition may differ materially from these statements. For information on additional risks that may impact these forward-looking statements, please refer to our Form 10-K and our fourth quarter earnings release. This afternoon's discussion also includes non-GAAP financial measures we believe are meaningful to investors. In our financial supplement, earnings presentation and earnings release, we've defined and reconciled all non-GAAP financial measures to GAAP where required in accordance with SEC rules. You can find each of these documents in the Investors section of our website, kemper.com. All comparative references will be to the corresponding 2024 period unless otherwise stated. I'll now turn the call over to Tom. Carl Evans: Thank you, Michael, and good afternoon, everyone. I'll start with a simple appraisal. Our results this quarter did not meet expectations. We'll walk through the underlying drivers and the actions we're taking to improve the performance in our auto business and increase shareholder value. Before that, I want to offer some context on both the businesses and the operating environment we're presently navigating today. We're a specialty insurer focused on niche underserved markets. We are focused on these markets because they are attractive and there's a continuing need for our products. We know these markets and have the scale, experience and competitive advantages to succeed. Our portfolio of specialty auto and life insurance businesses may address different customer needs, but both are managed with the same core principles: disciplined underwriting, risk management and long-term value creation. We have identified and are acting on a number of strategic and tactical priorities that will get us to target profitability with growth to follow. We'll discuss these priorities in more detail today. As we noted before, the specialty auto market is a fast-moving segment. Market shifts often appear in this segment before showing up in other parts of the auto insurance landscape. As an auto underwriter, one of the most important drivers of our long-term success is our ability to accurately predict loss costs and price our business appropriately. This has been more challenging of late because of significant structural changes in key states in which we operate. For example, in California last year, minimum liability insurance limits for auto increased for the first time since 1967, with bodily injury limits doubling and property damage limits tripling. When markets are stable, predicting future costs is more straightforward. However, when changes of this magnitude occur, particularly against the backdrop of social inflation and legal system abuse, loss cost predictability becomes more difficult and complex. While we anticipated the need to adapt to the new requirements in California, the scale of the disruption exacerbated by elevated severity trends created pressure on our results over the past several quarters. In Florida, our second largest market, the tort reforms enacted in 2023 have reduced loss costs and made the market more attractive for carriers and affordable for consumers. The result is a significantly more competitive marketplace. This improvement in loss costs led to our $35 million charge this quarter for refunds to personal auto customers under the state statutory profit limit rules. We view these refunds, which other carriers are also undertaking as clear evidence of the benefits of tort reform. We have a strong performing book in Florida, and we're making targeted rate adjustments there to be more competitive and support growth. Away from Specialty Auto, I'd highlight that our life insurance business continues to deliver solid performance. This business provides stability and diversification within our overall portfolio, and Chris will provide additional detail shortly. While our auto business faces near-term challenges impacting our consolidated results, we're acting quickly and taking purposeful steps to improve financial performance. On Slide 5, we outline the priorities and actions underway to improve results, enhance operations and reduce earnings volatility through diversification. In particular, I'll note the recent restructuring initiatives, our focus to enhance claims processes and the introduction of new products to support the acceleration of geographic diversification. Together, these actions will protect and advance our competitive advantages, drive growth, enhance profitability and ultimately create value for our shareholders. Our objective as a management team is continuous improvement that strengthens performance and positions the company for long-term success. Before turning it over to Brad, Matt and Chris, I'll provide a brief update on the CEO search. The Board search process is well underway, and they have developed a pipeline of highly qualified candidates with the help of a leading independent executive search firm. The Board is actively evaluating those candidates with deliberate speed as the Board focuses on identifying the right leader for Kemper's next phase. Thank you. And with that, I'll turn it over to Brad. Bradley Camden: Thank you, Tom. Good afternoon, everyone. Before discussing the quarter, I want to expand on what Tom just shared. At a high level, the primary goals of our initiatives are threefold: first, to restore and improve profitability in our Specialty Auto business; second, to reduce earnings volatility through portfolio and geographic diversification; and third, to improve execution and operating efficiency by simplifying operations and capturing meaningful expense savings through restructuring and cost discipline. Taken together, these initiatives are designed to strengthen near-term performance while positioning the business for more consistent profitable growth. With that context, I'll now walk through our quarterly results. I'll begin on Slide 6. For the quarter, we reported net loss of $8 million or $0.13 per share and adjusted consolidated net operating income of $14.6 million or $0.25 per share. These results produced a negative 1.2% return on equity and year-over-year book value per share growth of 4.6%. Despite these results, our trailing 12-month operating cash flow remained strong at $585 million. In our P&C segment, the underlying combined ratio increased 5.4 points sequentially to 105%, driven by elevated bodily injury claim severity in California and statutory refunds in Florida. Excluding the impact of refunds, the underlying combined ratio was 101.2%. The statutory refunds reflect improved loss cost experienced following Florida's 2023 tort reform. Policies in force and written premium declined 7.3% and 9.3% year-over-year, respectively. This decline reflects typical fourth quarter seasonality as well as non-rate actions to moderate new business writings in certain markets. Our Life business delivered solid results, driven by disciplined expense management. This business continues to provide stable contribution to earnings and cash flow. And lastly, our balance sheet continues to provide flexibility to support organic growth initiatives and strategic investments. Turning to Slide 7. This slide provides additional detail on the drivers of our quarterly results. We recorded a $15.5 million charge related to restructuring, integration and other costs. A portion of this relates to the restructuring initiative announced last quarter, bringing the cumulative annualized run rate savings to approximately $33 million, up $3 million from last quarter. This initiative is building momentum, and we expect to realize additional savings over time. Also included in this charge is a valuation adjustment for a tax credit equity investment that reflects its updated fair market value. This quarter, we also had two noteworthy items that impacted operating income, the Florida statutory refunds and reserve strengthening. The Florida statutory refunds were recognized as a reduction to earned premium and added 3.8 points to the Specialty auto underlying combined ratio. Excluding this item, the underlying combined ratio was 101.2%. Finally, we strengthened loss reserves within Specialty Auto, primarily in commercial auto, reflecting updated loss experience related to bodily injury severity and defense costs, primarily stemming from accident years 2023 and prior. Turning to Slide 8. Our balance sheet provides financial flexibility. At quarter end, we maintained over $1 billion in available liquidity, and our insurance subsidiaries remained well capitalized. Over the past year, our operating cash flow enabled the retirement of $450 million in debt and the repurchase of approximately $300 million of common stock. As a result, our debt-to-capital ratio improved by 6.4 points to 24.6%, modestly above our long-term target of 22%. Moving to Slide 9. Our quarterly net investment income totaled $103 million, down $2 million sequentially due to lower returns within alternative investments. Our core portfolio comprised of high-quality investments continues to generate stable and gradually increasing net investment income. This income will continue to support our businesses. Overall, we maintain a high-quality, well-diversified investment portfolio supported by thoughtful asset allocation and prudent risk management. Next, on Slide 10. Here, we provide an update on our January 1, 2026, reinsurance renewal. Our catastrophe excess of loss program is a 1-year structure that provides 95% coverage for losses in excess of $50 million, up to $160 million. The total limit is $15 million lower than last year, reflecting the continued reduction in total insured value due to the wind down of our preferred business. This program structure is appropriate and reflects our exposure profile. The key takeaway is that our catastrophe exposure is meaningfully lower than it was several years ago. In summary, fourth quarter results reflect near-term pressure in Specialty Auto from elevated claims severity and Florida statutory refunds, and we are taking deliberate actions to improve results. We continue to maintain a well-capitalized and liquid balance sheet and are executing expense initiatives to enhance profitability. Our Life business delivered stable results, core portfolio investment income is positioned to benefit from higher reinvestment yields and our reinsurance program remains aligned with our current risk profile. I'll now turn it over to Matt to discuss the Specialty P&C segment. Matthew Hunton: Thank you, Brad, and good afternoon, everyone. Turning to Slide 11. Adjusted for Florida statutory refunds, the Specialty P&C segment produced an underlying combined ratio of 101%, while personal auto produced a 105 and commercial remained relatively stable at 90%. Personal auto loss performance continues to be adversely impacted by bodily injury severity trends. This trend is particularly pronounced in California. As Tom mentioned, the recent doubling of state minimum limits is driving a structural change in BI costs. In response, we have taken decisive non-rate actions, resulting in the slowing of new business in the state. We are actively working with the California Department of Insurance on rate filings to address this liability rate need. In addition to underwriting and pricing actions, we continue to enhance our claims management processes. Over the last few years, we focused our efforts primarily on material damage management, which has been instrumental in offsetting the cost pressures of rising tariffs. More recently, our focus has shifted to third-party liability management. By leveraging advanced analytics and AI-enabled workflows, we are more quickly and accurately assessing claims, getting them in front of the right skill sets and driving resolution. Our efforts are beginning to reduce excess attorney involvement and mitigate costs associated with legal system abuse. The result is lower optimal claim settlement cost and an improved customer experience. A high priority for the PPA business is achieving a more geographically balanced book. A more balanced portfolio will enable us to more effectively navigate market cycles, better manage state-specific dynamics and reduce underwriting income volatility. Over the last few years, the concentration of our PPA business in California has increased, primarily driven by the post-COVID hard market in that state. This can be seen on Slide 12. This slide is intended to provide transparency into our current position and the direction we are taking. Over time, our book should reflect a composition more aligned with our target customer base with greater than 50% residing in non-California states. While California will always be our largest market, we are looking to accelerate profitable growth in other states. Accordingly, the restructuring initiative we mentioned is designed to lower our expense ratio and enhance overall price competitiveness. Additionally, we are in the process of launching a new personal auto product in our non-California states. This new product includes modernized contracts, more sophisticated pricing and a seamless agent quoting experience. The primary goal of this new product is to improve competitiveness across the portfolio through better rate to risk matching. We have been piloting this product in Arizona and Oregon with early production and segmentation results meeting our expectations. We are currently in advanced discussions with the Florida and Texas Departments of Insurance with the goal of the product going live in both states within the next few quarters. Together, a lower expense ratio and enhanced pricing precision is expected to support profitable growth in our non-California markets. In commercial auto, underlying margins remained strong while producing double-digit policy growth. We continue to be optimistic about the profitable expansion of this business. We have a series of differentiating competitive advantages that have driven consistent and predictable results. With that said, we are opportunistically increasing rates where justified with a specific focus on addressing liability cost increases. Overall, this business remains well positioned, and we are confident in our ability to profitably grow. In conclusion, we are focused on restoring California profitability and building a more diversified personal auto portfolio. We remain committed to our target market segments, disciplined execution and continuous improvement of our existing capabilities to drive consistent value over time. I'll now turn the call over to Chris to cover the Life business. Christopher Flint: Thank you, Matt, and good afternoon, everyone. Turning to our Life Insurance segment on Slide 13. The Life segment continues to deliver a consistent return on capital and reliable distributable cash flow. Earned premiums were stable year-over-year, and we finished the quarter with the face value of our in-force business at approximately $19.6 billion. Adjusted net operating income was $20 million in the quarter, driven by ongoing expense management. Importantly, we continue to experience favorable policy economics. Our average face value per policy increased modestly, while our average premium per policy issued rose 6%. To support continued growth and increased cash flow over time, we successfully launched an updated product portfolio and expanded the distribution of our liability offering. In closing, the Life business is performing well and continues to provide stable and consistent results to the overall portfolio. I'll now turn the call back to Tom to cover closing comments. Tom? Carl Evans: Thanks, Chris. To wrap things up, we know our results this quarter weren't where we want them to be. We believe in our businesses and in the markets we serve, and we are confident in our capabilities and competitive advantages to be successful. We're focused on executing the actions we've laid out today. This work takes discipline, and we're committed to making the improvements necessary to deliver stronger, more consistent performance. Before we close, I want to thank our colleagues throughout the organization for their hard work and commitment. They show up every day for our customers to deliver on our promises. Thanks for your time today, and we will now take questions. Operator: [Operator Instructions] Your first question comes from the line of Brian Meredith from UBS. Brian Meredith: A couple of them here. First, I'm wondering if you could tell us what the profitability kind of breakdown is between California and then Florida, Texas. Just to get a sense of what the profitability looks like in your non-problem state. Matthew Hunton: Brian, this is Matt. California combined ratio is about 105% around there. Florida sits in that target combined ratio in that 95% to 97% range as does Texas. The issue from a profitability perspective, as we highlighted in the prepared comments, is rate -- earned rate catching up to sort of the BI cost in California. So the PPA profit issues are driven predominantly by California. The other states are in pretty healthy standing. Brian Meredith: Okay. That makes sense. And then I guess the next question, Matt is, why are you shrinking in the other states right now if your profitability is fine? Matthew Hunton: The profitability is in a good place from a pricing perspective. We -- in those markets, Brian, Florida and Texas specifically, they softened pretty dramatically last year, and we wanted to ensure in Florida specifically that the benefits of tort reform were durable. We didn't want to be too aggressive from a pricing perspective. That was one reason. The other is from a structure perspective, which we talked about last quarter, is we need to drive more expense efficiency to keep -- to get our products to a more competitive level. We did that partially. We took a step forward in those states in the fourth quarter, third and fourth quarter. We saw that our new business when we made those pricing adjustments took a meaningful pop in the direction that we want it to. We stabilized PIF in Florida. We're seeing sequential growth in Texas. And like we said in the prepared comments, we have a new product we're looking to launch sometime in the next quarter or 2, which should further accelerate our competitiveness. and ultimately, our PIF production. Brian Meredith: Great. And then one more quick one, if I could. Commercial auto, I'm just curious, given the consistent adverse development you've been seeing, how comfortable are you with current year profitability and the fact that that's actually one area that's growing? Matthew Hunton: Yes. So current year profitability, I'll just take a step back for a second. The segments that we focus on, we stay away from the nuclear verdict segments, the long-haul trucking, the dirt sand gravel. We generally have a fair mix of limit profile that's evenly spread across large limit to small limit. Artisan contractors, landscapers, delivery, that's really where we focus. From an underlying perspective, we feel confident that we're getting the pricing and we have the rate adequacy. That said, again, in the prepared comments, we are appropriately opportunistic in terms of strengthening our rate position, specifically on BI, where we can justify it. So we feel good about our adequacy. Underlying performance has remained very consistent there, and we continue to opportunistically take rate where we can support it. Operator: Your next question comes from the line of Andrew Kligerman from TD Cowen. Andrew Kligerman: I need a little help with kind of a road map, if you will, in personal auto. So if you're starting with 110 underlying combined ratio. And then maybe I could take off the table 4 points from the Florida refund. So then I'm at 106. And then I think Brad mentioned some seasonality. So maybe there's another point or two. So I want to make sure, a, am I at the right starting point of like maybe more normalized at 105? B, given 70% of the book is in California, how soon can you get that fixed? How can you get California to that kind of targeted 95-ish that you're seeing in Florida and Texas? And with that, we saw a PIF decrease of 7%. I was kind of surprised premium dropped more than that at 9-plus percent. So bottom line, how soon can you get to normal on that combined ratio? And what's likely to happen with PIF? Should we see more quarters like the one we just saw with PIF down 7%? Matthew Hunton: So this is Matt again. Thanks for the question. I just want to first comment on the rate activity in California. So we saw severity pop higher than what we had initially priced to in our FR filing. Immediately, we took new business non-rate actions and underwriting actions to make sure we weren't putting unprofitable business onto the books. We filed with the Department of Insurance for a 6.9% rate increase. That said, the filing hits bodily injury much more significantly than that. We had redundancy on our metal coverages. And so we're hitting bodily injury pretty heavily north of 40 points of rate that we're looking to get approved. We believe we're in the final stages of approval. We have good back-and-forth dialogue. We had a conversation with the department even this morning talking about that. We will hope to get that effective as soon as we can. And 100% of our policies in California are 6-month policies. And so rate will earn in over a 12-month period and will accelerate over that time to the file levels that we're hoping to get effective ASAP. Bradley Camden: And Andrew, this is Brad. I know you're looking at doing your modeling. You're starting off at the right point, the 105-ish combined ratio on the personal auto business. When you think about what Matt is talking about, some of it is in our control and some of it's not. We can respond very quickly to the regulator. We can work through the process with them as effectively as we can, but we're waiting for that approval. As we wait for that approval, we still have severity trends each quarter. So if you have a 6-point severity trend year-over-year or an 8-point severity trend, you pick it. You've got some headwinds until we get that rate approved and it becomes effective in the marketplace and then it's earned in. So it will be some time before you start marching back towards that mid-90s combined ratio. It's highly predicated on getting that rate, one; and two, how we're managing the claims process related to the liability coverages. There, as we've talked about in the past, it's all BI and loss costs are ballooning mainly due to higher attorney attachment rates and higher claims selling at limit. And so we're working on that process. It's very sensitive. As you know, a rep claim is 4 or 5x more expensive than an unrep claim. And so we're working through that process, enhance that as well as working on our underwriting to mitigate frequency to bring down overall loss cost. Andrew Kligerman: That was very helpful. And with that, just kind of part of that question was PIF decline. It feels like PIF will need to decline or continue to decline until you actually do get those rates approved. And then maybe when you get them approved, you won't be as competitive, so maybe PIF will continue to decline. So I just wanted to kind of clarify on that part of the question. Was -- am I thinking about that the right way? Bradley Camden: You're generally thinking about it the right way, Andrew. We anticipate further declines in California, and we expect some growth both in Florida and Texas, given some of the reinvestment we've made in that -- in those states. And later in the -- maybe in the first half of the year, second quarter-ish, we'll launch a new product there that will become effective to help, as Matt said, with competitiveness. That is in late-stage negotiations with those regulators. But I wouldn't expect in the first quarter to see California be growing. I'd expect to see some additional growth in Florida as we've seen some stability there in Florida at the end of the year, and we saw actually sequential growth in Texas on a quarter-over-quarter basis. Andrew Kligerman: And then just the last question. The commercial auto prior year development, the adverse development of 3.8 points. I believe it started to become adverse like 6, 7 quarters ago. So the question for you, and I know Brian had kind of touched on it just before me, but it seemed like last quarter, you'd kind of finally gotten your arms around it. But what -- just to kind of come back at it a little differently, like what's different this time that would make you feel confident that there won't be another adverse PYD next quarter or the quarter after? Bradley Camden: Great question, Andrew. Again, the adverse development is coming from large losses mainly stemming from accident years 2023 and prior. As we continue to move forward in time, there's less claims out there. And so the claim count now has come down as we've gone from accident years 2020 through 2023. So there's less count. I think we're in pretty good shape, but there's been -- obviously, adverse development is always a surprise because we're looking at reserving the best we can. My expectation though is I think we've got most of that. And when I think about accident year '24 and '25, as I mentioned previously, we changed our reserving practices for large losses in mid-'23. What I'm seeing develop in '24 and '25 actually looks favorable. So I think we got most of the development in '23 and prior and '24 and '25 looks significantly better than those other accident years. Operator: Your next question comes from the line of Paul Newsome from Piper Sandler. Jon Paul Newsome: I was hoping you could talk a little bit about the Florida situation a little bit more with respect to the potential rate filings. If you had a -- obviously, you had extremely good profitability there. Did you need to lower rates further in response to that as well? So should we expect prospectively, a little bit lower profitability? If you need to reduce the run rate of your profitability? Or is that already sort of in the run rate now? Matthew Hunton: Great question. This is Matt. Like I said earlier, we wanted to ensure that the benefits of tort reform were durable. It's a stroke of the pen that things can reverse back on you. So we want to make sure they were durable. Additionally, once we saw that the performance was sticking, as we were looking to file rate in the marketplace, you have to with the OIR, the Department of Insurance there, justify decreases as well as increases, right, the same level of scrutiny. And so had we taken rates down dramatically this year, which, by the way, would have put noneconomical business on from a pricing perspective, yes, we could have mitigated a little bit of the refund, but we would have put a cohort of business on the books that was uneconomical, right? Because you had such good periods, performance periods over the 3-year waiting. And so we made the decision not to make that rate investment. It was a good trade economically for us. But as we march forward and we have the ability to support rate adjustments, which we are doing now, we're making those pricing changes, and we're driving the production that we feel good about on a vintage basis. Jon Paul Newsome: So I guess that -- to clarify that sort of mid-90s combined ratio you mentioned to Brian in Florida, that incorporates rates as we have them today or rates as they will be filed in the near future? Matthew Hunton: That does not include future rates. Those are -- that's performance as of today. Pricing is done on a prospective basis, which takes your current underlying performance and you roll that forward based on prospective trends, which you justify with the Department of Insurance and then you set your rates off of that prospective outlook. Jon Paul Newsome: That's really helpful. And then second question, I wanted to ask about cash flow and the liquidity situation. Obviously, you get the caps back down. There's obviously good levels of parent company levels. But I did notice that the RBC ratio for the property and casualty business ticked down during the quarter a bit, and it's not that far above the sort of 200 level. Do you anticipate putting more capital into the property casualty operation? Or is the thought that you'll shrink to make that RBC ratio go up? I guess I'm supposing to be wrong that a 230 RBC capital ratio is not your target. Bradley Camden: Paul, this is Brad. Great question. When you look at that RBC information that's on the chart, that is a window into our legal entity point of view from a P&C and life standpoint. When you think about capital available for Kemper, it includes not only the holding company capital as well as the capital in our legal entities. So yes, the 230 is a little bit lower than we ran historically. It's not outside our normal ranges, but it is on the lower end of what we have been historically. But we still have plenty of capital and well above our buffers from a rating agency standpoint as well as a regulatory standpoint. At this time, I'm not planning on dropping more capital down there. I expect us to make money and to generate more capital in those legal entities over time to further rebuild that capital base. Operator: Hope that helps. Your next question comes from the line of Mitch Rubin from Raymond James. Mitchell Rubin: This is Mitch on for Greg. On the new personal auto products in Arizona and Oregon, can you provide some additional color on those competitive market dynamics and the time frame you would expect the decision for a broader rollout to be made? Matthew Hunton: Yes, great question. This is something we've had in the works for the last couple of years. Again, it's the first time in over a decade that Kemper is launching a new personal lines product. We piloted in Arizona and Oregon in the second quarter of 2025. And so we've empirically got to see how the product performs. We've tuned it a bit. We're seeing production in those environments are very competitive. We're seeing production lift right in line with where we would have expected it to. We're generally from a pricing perspective, in line with the levels that we want to be. The segmentation is working as expected in the spreading of risk. So we feel generally pretty good about it. That product has gotten us meaningfully more competitive in those marketplace, upwards of 30 points more competitive just through better segmentation. So that's working as intended, and we're looking to scale in those states. The states that we currently have that we're working through approval processes are Florida and Texas. Florida, we've gotten some of the product approved. We're in the final stages of sort of the last bit of rubber stamping working with the department there. In Texas, we're working through contracts and forms right now. And we have great working relationships with those departments. The process is moving along really well. And as I mentioned, our intention is to roll out those products in Florida and Texas as soon as possible. Our goals in the next few quarters. Mitchell Rubin: That's helpful. So my follow-up, with the debt-to-capital ratio coming down to 24.6%, can you provide us with an update on your capital allocation philosophy heading into 2026 and how you plan to balance additional paydown versus repurchases or increased dividends? Bradley Camden: Sure. This is Brad. Our capital philosophy remains the same. First and foremost, make sure all of our legal entities have enough capital. Second, have enough capital to support organic growth. Third would be any inorganic acquisitions, which I will clearly say are not on the table at this point in time. And then third is to return cash to shareholders or pay down debt. It's always been that order. So there's no change in that. And as Matt indicated earlier, we're trying to grow in certain geographies, namely Florida, Texas and other non-California states, and we have enough capital to support that organic growth, and that's what we're focused on in the near term. Operator: There are no further questions at this time. I will now turn the call over to Tom Evans. Please continue. Carl Evans: Thank you. We appreciate everybody's time today and your continued interest in Kemper, and we look forward to continuing the conversation with you when we release our first quarter results in 12 weeks or so. So take care, and thanks for your time. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, and welcome to the Universal Technical Institute First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. If you need assistance, press zero. After today's presentation, there will be an opportunity to ask questions. To withdraw your question, press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Matt Kempton, Vice President of Corporate Finance and Investor Relations. Please go ahead. Hello, and welcome to Universal Technical Institute's fiscal first quarter 2026 earnings call. Matt Kempton: Joining me today are our CEO, Jerome Grant, and CFO, Bruce Schuman. Following our prepared remarks, we will open the call for your questions. A replay of this call, its transcript, and our investor presentation will be archived on the Investor Relations section of our website at investor.uti.edu, along with our earnings release issued earlier today and furnished to the SEC. During this call, we may make comments that contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which by their nature, address matters that are in the future and are uncertain. These statements reflect management's current beliefs and expectations and are subject to a number of factors that may cause actual results to differ materially from those statements. These factors include, but are not limited to, those discussed in our earnings release and SEC filings. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. We do not intend to update these forward-looking statements as a result of new information or future developments except as required by law. Please note unless otherwise stated, all comparisons in this call will be against our results for the comparable period of fiscal 2025. The information presented today also includes non-GAAP financial measures. These should be viewed in addition to and not as a substitute for the company's reported results prepared in accordance with US GAAP. All non-GAAP financial measures referenced in today's call are reconciled in our earnings press release to the most directly comparable GAAP measure. For more information regarding definitions of our non-GAAP measures, please see our earnings release, financial supplement, and investor presentation. With that, I will turn the call over to Jerome Grant, CEO of Universal Technical Institute for his prepared remarks. Jerome? Jerome Grant: Thank you, Matt. Good afternoon, everyone, and thank you for joining us. In just a few minutes, our CFO, Bruce Schuman, will go into more details from a financial perspective. Prior to that, I'd like to share some thoughts on our three areas of focus: performance of the company, execution of our North Star strategic plan, and finally, opportunities we're exploring to move beyond that plan. First, performance. As we begin fiscal 2026, we're performing with clarity and momentum against a well-defined strategy. We entered the year on strong operational and financial footing, and the first quarter tracked in line with our plans and exceeded our expectations for disciplined execution. Revenue for the first quarter grew 10% to $221 million. Our baseline adjusted EBITDA was nearly $35 million, including over $7 million in growth investments, our reported adjusted EBITDA was $27 million. Average full-time active students increased 7% with total new student starts growing roughly 3% year over year, which is right in line with our and broader market expectations. These results position us well for acceleration as fiscal 2026 unfolds. Overall, we delivered a strong start to the year and the progress we made this quarter reinforces the durability of our North Star strategy. With that strong performance in the first quarter, we remain confident in our expectations for the full year. To reiterate, in fiscal 2026, we expect revenue to be between $905 million and $915 million, reflecting approximately 9% year-over-year growth at the midpoint. Our baseline adjusted EBITDA is anticipated to be $156 million with approximately $40 million in growth investments related to launching and scaling new campuses and programs, our reported adjusted EBITDA is expected to range between $114 million and $119 million. New student starts are also on track and are anticipated to be between 31,500 and 33,000. As Bruce will discuss in more depth, our guidance appropriately reflects the balance between near-term performance and long-term value creation. It is important to note that while driving double-digit growth in revenue and baseline EBITDA, as well as strong student start growth in 2026, our team remains intensely focused on delivering the impressive student and employer outcomes that have been the cornerstone of our over sixty years' history. Moving now to our strategic execution during the quarter, which is guided by our North Star strategy, we are continuing to build and further scale a durable, repeatable growth engine through our disciplined and proven operating model. This approach is guided by a refined and continually evolving playbook for launching campuses, replicating and expanding programs on our existing campuses, and optimizing performance, which allows us to reproduce success with consistency as we grow. Our most recent campus launches, UTI Austin and Miramar, are excellent representations of this strategy's success. Both Austin and Miramar continue to meet and exceed our expectations, validating our approach to site selection, program mix, marketing, and ramp timing, all while driving strong student outcomes. In Miramar, we have over 600 average full-time active students. We are adding additional sessions for the automotive program and are actively pursuing expansion of the capacity-constrained aviation maintenance technology program at that campus. Austin continues to perform significantly beyond our expectations with over a thousand average full-time active students, which is 70% higher than we modeled. Performance of our campuses gives us confidence that our new facilities can scale efficiently while generating attractive long-term returns. As we announced on our Q4 and full-year 2025 call, over the next several years, we plan to open a minimum of two and up to five new campuses annually pending regulatory approval. The first of our fiscal 2026 campuses, our Heartland Conquered co-branded campus in Fort Myers, Florida, just opened in November. Demand has already exceeded our expectations with programs filling to capacity within two weeks of opening. We already have waiting lists in place. In San Antonio, we're approximately a month away from opening the doors to our new skilled trades and aviation-focused campus. Our recruiting efforts are going quite well for the initial start in March. As a matter of fact, we already have over 300 students ready to start. There's particularly keen interest in welding and HVACR in San Antonio. To remind you, this campus is slated to train over 600 students annually and generate approximately $32 million in run-rate revenue at scale, and it further diversifies UTI's geographic footprint in a high-demand region. We are also preparing to open our UTI Atlanta location, a comprehensive campus in a greenfield state. This facility will offer a comprehensive collection of our strongest UTI programs, including auto, diesel, aviation, and the trades. The UTI division team is projecting to enroll over 1,200 students and generate upwards of $45 million in run-rate revenue at scale. And the campus remains on track to launch in the second half of the fiscal year. The Atlanta campus has been actively recruiting for one month and student interest is quite impressive, indicating strong interest in that market. Looking beyond this year, our next wave of campuses slated for fiscal 2027 are also tracking well. To date, for fiscal 2027, we have announced our intention to open a comprehensive UTI campus in Salt Lake City, as well as comfort campuses in the Houston, Atlanta, and Phoenix metropolitan areas. As always, the exact launch timelines on these are based on securing various regulatory approvals. We look forward to providing further updates on these and our other planned future locations as we continue to execute on our North Star strategy. Alongside new campuses, we continue to scale our rich program portfolio. Throughout phase two of North Star, we plan to launch between twelve and twenty new programs across the UTI and Concord divisions annually. This year, we'll be launching over 20 programs with at least 10 coming from each division. Across our UTI campuses in '26, we plan to launch 12 programs: two HVACR, one aviation maintenance, and nine programs in our electrical suite, which includes industrial maintenance, robotics, automation, as well as wind turbine technology. Adding UTI programs continues to optimize the legacy UTI campus. These in-demand skilled trades programs were brought to us through the MIT and are addressing the diverse interest expressed by the nearly 600,000 young people who inquire at UTI annually. One example of this optimization effort is our October announcement, which we outlined the new programs being launched at UTI Dallas campus. At scale, the expanded Dallas campus, which currently offers auto, diesel, and welding to nearly 1,200 students annually, will now be able to serve an additional 1,000 students and will offer HVACR, aviation, and electrical programs beginning in the coming weeks. With the Concord acquisition-related growth restrictions in our rearview mirror, we're now set to launch at least 10 new programs in high-demand areas on the legacy Concord campuses in 2026. These include eight radiation technology programs, as well as one surgical technology program, and one diagnostic medical sonography program. All of our program replication initiatives are tightly aligned with employer demand and work shortages and build on capabilities we already know how to deliver well. In addition to opening new campuses and 33 facilities to enhance operations, maintain high-level outcomes, maximize our resources, and ultimately improve margin. Specifically, this work focuses on expanding capacity for popular programs that have waitlists building. Programs such as aviation, HVACR, and welding on our UTI campuses and dental hygiene on our Concord campuses. To recap, the business is performing quite well, and the North Star strategy is progressing on track due to our continued focus on execution and strong market demand for our graduates. I'll conclude my remarks by addressing a question that we're consistently getting while we're out talking to both new and existing investors. What else? Acknowledging that performing at a high level and executing on our aggressive organic growth strategy needs to remain the primary focus, we're also keeping our eyes on future opportunities we see on the horizon. First, on the regulatory front, with the new level of collaboration in Washington, we're now actively participating in dialogue as rules, guidelines, and policies are being developed that foster the opportunity to accelerate closing the gap with respect to the American skilled labor workforce in new and innovative ways. For example, the success of our Heartland partnership is already spurring evaluation of collaborative expansion opportunities with Heartland and other dental service organizations, as well as other large-scale employers across both divisions who are experiencing similar labor shortages. Furthermore, this administration has acknowledged us as a leader in this space and the critical role we play in securing America's workforce for the future. That recognition, combined with the level of engagement in Washington, supports our ability to open new campuses and expand program offerings, and innovate thoughtfully within a highly regulated environment with greater speed and consistency. From an inorganic standpoint, we continue to actively evaluate opportunities that align with our North Star strategy, particularly in the areas that enhance our healthcare portfolio. In conclusion, we are executing from a strong operational and financial foundation. And we believe fiscal 2026 represents an important year of both investment and execution that sets the stage for accelerated returns in the years ahead as these initiatives take scale. With that, I'll turn the call over to Bruce, our CFO, to review our first quarter financials and provide you with further details on our guidance. Bruce? Bruce Schuman: Thank you, Jerome. The fiscal first quarter represented a strong start to the year on average full-time active students, revenue, and adjusted EBITDA as we continued executing the priorities of our North Star strategy. Importantly, these results were delivered while we began deploying the significant growth investments we outlined last quarter. Investments that support new campus launches, program expansions, and long-term capacity creation across both UTI and Concord. In the first quarter, total average full-time active students grew 7.2% year over year to 26,858. While total new student starts increased 2.6% to 5,449, in line with the outlook we shared last quarter. As we've mentioned previously, average full-time active students is how revenue is derived, and therefore often a more direct and consistent indicator of revenue and operating performance than new student starts. Further, prioritizing total new student starts as a company rather than at the divisional level provides us the flexibility to allocate marketing and growth investments where we see the greatest return potential, even if that results in uneven start growth between divisions in a given period. The Concord division generated a 9.5% increase in average full-time active students. This growth was driven by sustained demand for our programs, particularly across nursing and allied health. The UTI division grew average full-time active students 5.7% year over year for the quarter, reflecting continued strength across the division's program suite and employer demand as well as further optimized campus utilization. Shifting to our financial performance, first quarter revenue on a consolidated basis increased 9.6% to $220.8 million. Concord contributed $78 million, an increase of 11.5% over the prior year quarter, while the UTI division contributed $142.8 million, an increase of 8.6% over the prior year quarter. Turning to profitability, consolidated net income for the first quarter was $12.8 million or $0.23 per diluted share. Baseline adjusted EBITDA for the first quarter was $34.7 million, including $7.6 million in growth investments, our SEC reported adjusted EBITDA for the quarter was $27.1 million. At the end of the quarter, we had 55 million shares outstanding. Total available liquidity at the end of the quarter was $233.2 million, including $69.2 million of short-term investments, and $70.4 million of remaining capacity on our revolving credit facility. Year-to-date capital expenditures were $24 million or 24% of our expected spend for the year. As Jerome mentioned, with our solid first quarter results, we are reiterating our fiscal 2026 guidance. We continue to expect consolidated revenue to range from $905 million to $915 million for fiscal 2026, or approximately 9% year-over-year growth at the midpoint. As I shared last quarter, for quarters two and three, we expect mid to high single-digit revenue growth with Q3 being slightly higher than Q2. Q4 is anticipated to be the highest revenue growth quarter in the low double-digit range. Net income is expected to be between $40 million and $45 million with diluted earnings per share of $0.71 to $0.80. As I also shared last quarter, while revenue will be up quarter as we make our significant growth investments this year, net income will contract further in Q2. This will improve slightly in Q3, though we still expect year-over-year contraction. In Q4, we expect low to mid double-digit growth. Baseline adjusted EBITDA is anticipated to exceed $150 million, including approximately $40 million in growth investments, our SEC reported adjusted EBITDA is expected to be between $100 million and $119 million. Similar to net income, as we make our significant growth investments this year, adjusted EBITDA will contract more strongly in Q2 than it did in Q1, but then yield mid to high single-digit growth in Q3 and significantly stronger growth in Q4. As a reminder, growth investments are not added back when calculating our adjusted EBITDA. Total new student starts are expected to be between 31,500 and 33,000. We anticipate low to mid double-digit starts growth in Q2 and mid to high single-digit growth in the remaining quarters. Looking beyond fiscal 2026, our long-term financial framework under our North Star strategy remains unchanged. We continue to target revenue of more than $1.2 billion by fiscal 2029, representing roughly a 10% revenue CAGR through that period. And adjusted EBITDA approaching $220 million by that same year. We expect revenue growth to begin accelerating in fiscal 2027 with marginal EBITDA dollar growth emerging in 2027, and accelerating more significantly in 2028 and 2029. As a reminder, margin expansion will not be linear given the multi-campus build cycle and upfront investment requirements. And we continue to plan for $100 million or more of annual CapEx to support new campuses and program expansions. While the majority of the execution on our enrollments and revenue remains to be achieved this year, the first quarter marked a strong and encouraging start to our fiscal 2026. We delivered on our revenue and adjusted EBITDA commitments while advancing critical work for our North Star strategy. Our financial position provides the capacity to support these expansion efforts without compromising discipline, and the early performance indicators from our newest campuses reinforce our confidence in the repeatability of our model. We remain focused on converting these investments into sustainable enrollment growth, operating leverage, and long-term shareholder value. In addition to this earnings call transcript, we encourage everyone to review our press release, financial supplement, investor presentation, and upcoming 10-Q filing. These materials include the latest updates on our consolidated and segment results, strategic initiatives, and guidance. Thank you to our students, team, partners, and investors for your ongoing support. I'd now like to turn the call over to the operator for Q&A. Operator? Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Alex Paris with Barrington Research. Please go ahead. Alex Paris: Hi, guys. Hey, Alex. Can you hear me? Jerome Grant: We can hear you great, Alex. Alex Paris: Okay. Great. I just was switching from my speaker. So congrats on the quarter, better than expected, and we're on target for the full year. And you addressed this in your prepared comments, but wanted to dive a little deeper into from a color perspective. It starts where we're pretty much consolidated starts were pretty much in line with my published estimate. With stronger growth on the UTI side, and flat on the Concord side. Again, I hear you. In that you're approaching it on a consolidated basis. And I absolutely expected some better performance out of UTI starts because I believe more emphasis on it. I think you talked on the last conference call about shifting some marketing dollars to UTI adult and UTI high school. I was just wondering, you know, what sort of additional color you could offer. Jerome Grant: Sure. Well, thanks for confirming. I think the quarter in terms of starts came in exactly what we guided to. And frankly, it came in exactly what we expected in both of the divisions. I think the most important thing to consider when we looked at Concord starts for the quarter was they had an over 26% increase in the first quarter of last year. So their compare last year in the first quarter was very, very high. And so we expected them to be around flat this quarter. We have been investing more aggressively in UTI in front of the launches of both Atlanta and San Antonio. To be prepared for that, and we're starting to see the benefits. And as Bruce said in his comments, you know, we're absolutely on track to get what we expected in terms of high single-digit growth for the year with double-digit growth in the second quarter and then mid to high single-digit growth in the last quarter. So the teams are set. You heard my comments. The enrollments are rolling in right now. On both of the campuses. Over 300 kids ready to start down in San Antonio, and I'll remind you that we said at peak, our plan was to have a run rate of around 600 students. On average in the building, and so we feel great about our ability to meet or exceed that campus. We're just getting in the water on Atlanta, but, you know, signs are very, very positive initially there as well. Alex Paris: Great. And then what about investment into high school? Jerome Grant: Yeah. We added a number of high school reps. We added a number of high school reps in the fall, and that's be that you won't really see that payoff till next fall. Right? Because you know, they're focused on the kids who are juniors and seniors right now, mostly seniors, and are gonna be graduating in May. But the pipeline is filling quite well. As you know, as we head towards that May, June, July time period. So, you know, we really think we're gonna get the bang for the buck out of that investment. Bruce Schuman: The other encouraging thing, Alex, this is Bruce on the UTI starts. It was really nice kind of across the board. Pretty much every channel was kind of that nice mid-single digits. So we're encouraged about the start to Q1, as Jerome said. Alex Paris: Okay. And then while I have you, Bruce, just to recap on the CapEx comments. You said you're at $24 million year to date for the first quarter. And that's about 24% of full-year expectation. You're expecting $100 million this year. I think you said that too. Right? Bruce Schuman: That's correct. Our expectation is about $100 million for the full year. And just another quick note, of that $24 million, a full $19 million of that was road CapEx. So similar to kind of that roughly $8 million of OpEx, we had about $19 million of CapEx purely focused on getting these new campuses, new programs rolled out that Jerome was talking about. So, yes, that's correct. Alex Paris: And we should expect $100 million again in 2027. You got four new campuses. Planned already at this point for 2027. Bruce Schuman: Yeah. It's gonna be probably at least $100 million. It could be slightly higher, but it's in that general quantum of $100 million. That's right. Alex Paris: Okay. That's great. I'll get back into the queue. Thanks for that additional information. Jerome Grant: Great. Talk to you again soon. Alex Paris: Yep. Thanks. Operator: The next question is from Steve Frankel with Rosenblatt. Please go ahead. Steve Frankel: Good afternoon. I'd like to ask a couple of questions about the Heartland Fort Myers campus. When you first announced this, one of its unique characteristics was it was gonna be cash pay because you had the growth restrictions removed. Now that those have been removed, is this ending up being a combination of government loans and cash pay, or is it still cash pay at this point? Jerome Grant: No. Absolutely. Rolling forward, it's gonna operate like every other campus. You know, there are sport programs associated with Heartland, but then also students have options to government loans, Pell grants, and the like. You know? My commentary around how the approval machine is working right now with the Department of Education is underscored by the Heartland situation where we submitted and received our approval for title four funding there after getting a creditor approval. We submitted and achieved our approval within seventy-two hours. And so, the lines of communication are wide open, and, you know, we're aligned on our ability to move quickly to try to solve this workforce gap. Steve Frankel: And, in terms of the quick response from regulators, is the same true on the state level in the states where you're operating? Or are you still battling some bureaucracy there? Jerome Grant: Well, no. Not the same. Not all the state levels. The state levels are operating as they always have, right? And you know, sometimes as you enter new states, etcetera, one of the reasons why we talk about the timing of launching before campus that we've announced already for 2027 is, you know, sometimes state governments will only meet on a topic like this once every six months. And you've gotta wait in line. And if you get on that docket, you do or you gotta wait six months, and that can affect your start of a campus. So far, for Fort Myers, for Atlanta, and for San Antonio, we're absolutely where we wanna be. Our planning was in place. The timelines are holding, and we're happy to see what's happening. But you know, with the regulatory environment in states, creditors, and the federal government, you know, there sometimes can be some sway. I guess what we're signaling is one of the biggest pieces of sway over time was title four funding in the federal government, and that's something that's operating quite well. Steve Frankel: Okay. And then, you know, I know the divisional profitability can swing around a lot. Period to period, but the margin pressure in the quarter at Concord, what do we attribute that to? And do you expect margins to bounce back there fairly quickly? Bruce Schuman: Yeah. Steve, this is Bruce. So really the little bit of a decline there in EBITDA margins, frankly, both sides on the Concord and the UTI side, that's directly attributable to these growth investments. Right? We're gonna have kind of this profitability dip here this year that we're navigating through as we execute on these growth investments. That's all it is. There's nothing structurally wrong or something going on at the divisional level. It's really just the growth investment being applied appropriately as we navigate through that. That's what drove the decline. Steve Frankel: Yeah. Was just checking in on that. Alright. Thank you. I'll jump back in the queue. Bruce Schuman: Thanks. Thank you. Operator: The next question is from Jasper Bibb with Truist. Please go ahead. Jasper Bibb: Hey, guys. Just wanted to ask like I guess, give you confidence in the reacceleration for starts over the balance of the year. Sounds like in your framework, the fiscal second quarter starts would be particularly strong versus fiscal first quarter. So I guess hoping to get some more color on the drivers of that improvement. Is it easier cost? Is it more marketing dollars? Jerome Grant: Well, it's a combination of things. First of all, just to underscore, the first quarter starts were exactly where we guided to. And, you know, give us at least more in the fact that the momentum continues to build. The second quarter you start to build the momentum around some of the new programs that are starting the campuses in the Dallas expansion, which is coming to life in the second quarter, and then the San Antonio campus, which opens. And so you know, that's where you start to see the acceleration of start growth in that quarter, which leaves only Atlanta in the end of the third, beginning of the fourth quarter to open. And so that's what we mean when we're talking about momentum. Jasper Bibb: That makes sense. And then can you remind us or frame for us how large those first start cohorts at San Antonio and Atlanta might be in the second quarter and the third quarter? Jerome Grant: Well, they're quite small. But remember, look at UTI. The first March of the year are only half of the starts for the year, and then the fourth quarter is half. Right? And so, you know, any swing of 25 or 30 students, which is maybe a cohort for, you know, starting a new aviation program, etcetera, is sort of a law of small numbers, swings the numbers pretty significantly. And remember, we're gonna be opening over 20 programs this year. Right. And they're all starting to come to life in the second, third, and fourth quarter. And so and they're each one of them is individually small, but when you start putting them together, it starts to move the needle. Jasper Bibb: That makes sense. Last one for me. Just wanna ask, you know, what you're seeing on marketing yield and student acquisition costs? Jerome Grant: We're continuing to see improvement. We're continuing to see that the tools we're putting into place are finding us efficiency and effectiveness in the channel. I think that, you know, a lot of the experiments we're doing with AI-driven technology, etcetera, is helping us quite a bit in the channel. Our targeting is much more precise. And, therefore, we're able to get more leads for the buck. In this space. So, you know, we're very happy with what we're seeing so far. Bruce Schuman: Yeah. I would agree, Jasper. Probably just add quickly. If you look at our marketing dollar efficiency, as a percent of revenue, it is up a little bit. Q1 2026 versus Q1 2025, about a point or so, and that's directly tied to these new campus openings and new locations, new programs, and that's why it's ticked up a little bit, but it's for the right reason to make sure we drive those enrollments. Jasper Bibb: Yeah. Thanks for taking the questions, guys. Operator: The next question is from Griffin Boss with B. Riley Securities. Please go ahead. Griffin Boss: Hi, good evening. Thanks for taking my questions. I appreciate all the color and transparency. So just one for me. I don't think I heard anything about this in the prepared remarks. On the last earnings call back in November, you discussed adjusted free cash flow expectations for fiscal 2026 of $20 to $25 million. I think I heard a reiteration of that. Just curious if you could you had anything to update there or if you're still looking at that same level of free cash flow for the year. Bruce Schuman: Oh, yeah. Thanks, Griffin. This is Bruce. So, yes, we're definitely reiterating the same level kind of in the $20 to $25 million range for the year. And, again, that's just directly attributable. You look at that sort of $100 million CapEx bill for this year, a full $75 million of that is growth CapEx. So that's what's driving kind of that dip in free cash flow. But, yes, we're reiterating that same range. We feel really good about our execution, frankly. The first quarter kind of right on spending 24% of the year. We feel really good about how that's playing out, and we are definitely reiterating that same range. Griffin Boss: Okay. Got it. Great. Thank you, Bruce, and appreciate the progress. Thank you for taking my question. Bruce Schuman: Great. Thank you. Operator: The next question is from Eric Martinuzzi with Lake Street Capital. Please go ahead. Eric Martinuzzi: You talked about the positive momentum out of the gate at the Fort Myers Heartland campus. Curious to know if there's any appetite for other Heartland locations and what the timeline might be for them. Jerome Grant: Oh, I mean, we have no new locations to announce. But we are in active conversations with them. They're happy. We're happy. We're seeing the signs pointing in the right direction. You know, it's early in the cycle. The first two cohorts did sell out. We have waiting lists associated with them, and their needs are not declining. So, you know, Heartland and other DSOs are very keenly interested in what we have, which is a very large dental hygiene program that can be scaled upon. So nothing to announce today, but we're having some very healthy conversations. Eric Martinuzzi: Okay. And then on the UTI side, as far as partner initiatives, anything new to report and this can be across auto, diesel, aviation, partners pulling you or asking more of you in calendar 2026. Jerome Grant: Yeah. I mean, you know, one of the things that we've tipped to, and we don't again, we don't have anything to announce today on the UTI side for that, is that the Heartland model has peaked a lot of keen interest from major manufacturers and employers on the UTI side as well. Right? And as we've also said, some people are in sort of a wait and see mode. Let's see what you get out of it. I think of selling out the first two cohorts has accelerated some of those conversations because there are other sectors where the needs are just as high as they are in the dental areas. And so our business development team is actually working quite hard to work on some of those deals as well. Eric Martinuzzi: Yeah. Thanks for taking my questions. Operator: The next question is from Raj Sharma with Texas Capital Bank. Please go ahead. Raj Sharma: Questions. Again, congratulations on a beat and reiterating the year. Like, I had a couple of questions on the just the EBITDA, noticing the EBITDA margins even after adjusting the growth OpEx, it seems like the margins are slightly lower? Then last year, any sort of color there? Bruce Schuman: Well, I mean, thanks, Raj. This is Bruce. The vast majority of that decline year over year is the growth investment. I mean, there could be some timing variability. For example, in Q1, I mentioned before, our sales and marketing has ticked up a little bit. As we get ready for some enrollments here. In our new campuses. But by and large, the vast majority of our decline this year is due to the growth investments. The underlying base business, we are still expanding margins on the core if it weren't for the growth OpEx. Jerome Grant: Yeah. I think the modeling is important to lay out here. Which is, you know, after growth investments last year, or without growth investments, we would have printed around $133 million in adjusted EBITDA. Our baseline pointer right now for this year is somewhere in the mid-150 range. Fifty-six. That's right. That's the core business margin growth. So you're definitely gonna see it. Raj Sharma: Right. So it's the timing, you know, through the year, the baseline core EBITDA is gonna move up. Bruce Schuman: Yeah. Exactly. Raj Sharma: Got it. This is exactly. Raj Sharma: Right. So on starts, do you break out the old can you give more some color on the old campuses where it's versus the new campuses? Are they performing consistently I mentioned I think, Bruce, you mentioned consistently mid-single digits across Is that true for the old all of the campuses across? Anything stands up? Jerome Grant: We're now in year three at Austin and Miramar. And so they're not considered new campuses anymore. We're just we wanted to outline for you so that, you know, folks can have confidence in the models we're putting together for all the new campuses that we're launching that both of them are performing at and significantly above what those models were. But you know, the new campuses are just coming online right now, and we won't have the ramp rates on those probably until next year to be able to talk about. So, you know, I don't like to call them old, but every campus right now is in the same boat. They're all at run rate. And so, no, we don't have any variation to report. Raj Sharma: Got it. Think and you also you don't break out the young adults versus the high school students as they're any sort of Jerome Grant: Nope. Raj Sharma: No. No. We Jerome Grant: Well, I mean, we've already always talked at UTI about the three different tributaries of our of our you know, of the UTI piece. Now it's inconsequential on the Concord side. The average demographic is somewhere between 25 and 35 years old, so there's no such thing as young adults versus older adults. But on the UTI side, you know, somewhere in around 35% of the students come right out of high school. You're not gonna see any of those until the fall. Right? And then the balance 15% come from military, and then the balance are people who, as I've always said, are people who should have come right after high school but went out into the unskilled labor market and are now looking for a career. And so, you know, just about everything you're seeing right now in Q1, two, and three is that adult population. And you know, so that's probably the best contour I can give to you for right now. Raj Sharma: Got it. Got it. So consistently, the different campuses and are performing consistently, you know, they're gonna grow. The EBITDA is gonna the core EBITDA is gonna improve. There is no sort of changes. Businesses usually I mean, the Jerome Grant: the variation the variation on the legacy campus over campuses over the next four years is gonna be variation driven by the timeline for implementing new program replications on those campuses. You know, we're opening five new programs in Dallas. With four new programs in Dallas with the expansion that we put into it. So Dallas is gonna grow at a higher rate. Than putting one program on another campus. But so you sort of have to look at how we're distributing the program replications, which is over 20 this year across the 33 campuses. And those are really the only variations you're gonna see off of sort of the normal run rates that we've given you. Bruce Schuman: That's right, Raj. But like for like programs, there's a very high degree of consistency. Between campuses and how they perform. Raj Sharma: Got it. Got it. Thank you. And then one last question for me. Are you are you at all concerned that there could be, you know, DOE or regulatory changes if the Democrats take the midterms? And especially new school new school approvals. As you move forward. Jerome Grant: No. And, yeah, the reason is that new school approvals and the regulations associated that are directly associated with the Department of Education and those regulatory bodies, they are not legislative approved. They're approved by that department. And so we don't anticipate any changes in what's going on with the department. Now that being said, I just wanna be clear. We operated and grew quite well during the Biden administration. Right? It is that, yes. Approvals move more slowly. There were more regulations on the channel in that time frame. But when you graduate 70% of your students and 85% get jobs in market within a year, you're operating above the fray of anybody that anybody's keeping their eye on as a bad player. And so, you know, regardless of a red or blue administration, you know, our plan operates quite well. Raj Sharma: Got it. Thank you so much for answering my questions. I'll take it offline. Again, congratulations on the solid results. Jerome Grant: Thank you so much. Thanks, Raj. Raj Sharma: Cool. Thanks. Operator: The next question is from Mike Grondahl with Northland Securities. Please go ahead. Mike Grondahl: Hey, guys. Thank you. First question, just you know, peeling the onion back a little bit on San Antonio. And Atlanta, it sounds like those are off to good starts. Would you say you spent the marketing dollars you expected to help those? Did you spend a little less? Just kinda curious in this demand environment, how that went. Bruce Schuman: So I'll give you my perspective, Mike. Yes. We did spend some incremental marketing on those. We feel very good about sort of the initial initial signals we're getting on enrollment pipeline is quite good. You know, frankly, a lot of our you know, $8 million even we talked roughly $8 million of growth OpEx was very focused on San Antonio, Atlanta, getting those ready to open well and make sure the expansion's even in the program expansions were done on those campuses. So yeah, we did spend some more, and we feel good about the initial yield we're getting from that investment. Mike Grondahl: Got it. And then maybe for Jerome, you know, it seems like the macro backdrop from two years ago has gotten a lot better. And I'm talking one sort of four-year college, return versus trade schools, and just job demand helping. Where do you see the backdrop going from here? Next couple years? Can it continue to get better? You just want it to stay where it's at? I don't know, Jerome. I'd love your thoughts there. Jerome Grant: I mean, it took decades to in a sense, atrophy the sort of cultural divide between the trades and four-year education. Right? Starting in the eighties when high schools started drying up their CTE programs and adding more academic subjects, because we felt like we were falling behind in terms of academics in America. It took decades for that to atrophy. I don't think that there's a switch that flips overnight that, you know, suddenly alternatives to a four-year education become much more popular for a lot of students than a four-year education. Right? That being said, you are seeing an inflection point where there's significantly more energy being applied towards the awareness that we need a lot of tradespeople. You know? The CEO of AI companies saying AI is one thing, but I can't build data centers because I don't have electricians and welders. And my data centers are falling behind. Those are the kind of things that are making say, well, wait a minute. Everybody doesn't have to be, you know, a sociologist or a teacher, etcetera. Being a welder is a great thing to do. Being an electrician is a great thing to do. And so we're seeing the movement and we're seeing that in the interest, and we're seeing that in our relationship in Washington as being much more collaborative around, okay. What else can we do to encourage this? But you know, I don't and I do think that that's going to continue. Because a lot of the changes I've made are durable changes about what we're gonna build here in The United States and what we're not gonna build here in The United States. And that means the demand's gonna continue to increase. But you know, but there's not a light switch that flips and the whole thing moves. We're gonna continue to fight the fight. Get the message out, and I do think that the environment's gonna continue to evolve in this direction. Mike Grondahl: Got it. And then maybe just lastly quick, any updated thoughts on acquisitions? Jerome Grant: We've spent a lot of time in the last quarter really sort of getting the engine ready to execute on this aggressive plan, you know, with three campuses in the chute to open up in the next few months. 20 some programs opening in the next few months. That's taken a lot of our attention. And as I've said, I think on other calls, you know, frankly, because of the macro environment, we talked about in the question before this, there isn't that much inventory out there. There aren't that many people in the space who are saying, I've gotta get out of this business because they're seeing what we're seeing, which is the ability to navigate more freely, the ability to move more quickly, and the ability to attract students in many, many, many major metropolitan areas. And so you know, exiting is not been strong on the minds of many of the people that we see in the space. Mike Grondahl: Thanks, guys. Operator: This concludes our question and answer session. I would like to turn the conference back over to Jerome Grant for any closing remarks. Jerome Grant: Well, thank you, operator. I appreciate that. Like to thank everyone for attending the call today. Now as always, Bruce, Matt, and I are available to follow-up questions and we encourage everyone as always to visit one of our campuses. We had a lot of visits this last quarter from investors, and we really appreciate that interest. If you're interested, we'd be happy to host you. We look forward to speaking to you at our next quarterly output, which will be in May. So thank you very much, and have a wonderful evening. Operator: Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, good afternoon, and welcome to the Moelis & Company Fourth Quarter and Full Year 2025 Earnings Conference Call. To begin, I'll turn the call over to Mr. Matt Sucrose. Matthew Tsukroff: Good afternoon, and thank you for joining us for Males & Company's Fourth Quarter and Full Year 2025 Financial Results Conference Call. On the phone today are Navid MamMuzatagan, CEO and Co-Founder; and Chris Calosano, Chief Financial Officer. Before we begin, I would like to note that the remarks made on this call may contain certain forward-looking statements which are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors section of Moelis & Company's filings with the SEC. Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements. Our comments today include references to certain adjusted financial measures, We believe these measures, when presented together with comparable GAAP measures, are useful to investors to compare our results across several periods and to better understand our operating results. The reconciliation of these adjusted financial measures with the relevant GAAP financial information and other information required by Reg G is provided in the firm's earnings release, which can be found on our Investor Relations website at investors.malls.com. I will now turn the call over to Navid. Navid Mahmoodzadegan: Thank you, Matt. It's great to be with you all this afternoon. We closed 2025 with significant momentum and entered 2026 from a position of strength, underscored by elevated levels of client activity, record new business generation and the highest quality talent and breadth of expertise we've ever had. We earned record fourth quarter revenues of $488 million. And for the full year, our adjusted revenues grew 28% to $1.54 billion. Our revenues in 2025 were driven by 35% growth in M&A, a record-setting year for our capital markets business and double-digit increases in both average fees and number of completed transactions. Momentum continues to build across our business. Since our last earnings call, we advised on a number of notable M&A transactions, including Netflix acquisition of Warner Bros. Allied Gold sale to Zijin Gold and Ventix Biosciences sale to Eli Lilly. Outside of M&A, we advised on USA Rare Earths transformative partnership with the U.S. Department of Commerce, the debt restructuring of King of dula Economic City and xEnergy's pre-IPO convert transaction. Constructive financing markets and strong equity market performance are setting the stage for an active transaction environment in 2026. The breadth and depth of M&A activity that we saw at the end of last year is expanding and accelerating. Strategics are becoming even more active as the Boards gain confidence to pursue larger transformational deals to drive scale and best position themselves for rapid technological shifts. Sponsor activity is also building as valuation alignment improves and sponsors respond to growing pressure to deploy and return capital to investors. While larger cap transactions have been driving the M&A market, momentum in our pipeline gives us increasing confidence that activity will broaden across transaction sizes as the year progresses. In capital markets, our team is benefiting from increased investor appetite across growth-oriented sectors with strong capabilities in both the public and private markets. With respect to capital structure advisory, we continue to see a long runway of liability management assignments driven by the significant leverage that exists across many companies, compounded by the accelerating pace of technology disruption. And over time, we anticipate more traditional restructurings as prior out-of-court solutions run their course. Finally, following substantial investment in 2025 our private capital advisory business is gaining meaningful traction and is well positioned to serve our sponsor clients as the GP-led secondary market continues to hit record levels. Our thesis for this business is clearly being validated. Our PCA team is fully integrated with our industry and financial sponsor bankers and our secondaries pipeline is developing rapidly. We continue to invest in this area with the addition of a Managing Director focused on private credit secondaries joining next week and with another MD joining later this year, we will have a team of 7 Managing Directors dedicated to GP-led secondaries. This growth enhances our ability to support sponsor clients and reinforces our conviction that PCA will be an increasingly important fourth pillar of our firm. Against this constructive backdrop, we see significant opportunity to continue growing our client capabilities and footprint. During 2025, we added 21 managing directors, including 9 lateral hires. In the beginning of 2026, we promoted an additional 13 professionals to Managing Director, bringing our total MD count to 178 as of today's call. These promotions, together with our continued hiring, deepen our global centers of excellence and further align the firm with the largest market opportunities. Given our strong revenue performance and the maturation of our recent investments, we delivered meaningful operating leverage this year highlighted by a 320 basis point improvement in our adjusted compensation ratio to 65.8%. Our capital position remains strong with no debt and substantial cash and we materially increased our capital return through significant share buybacks in the fourth quarter. In summary, our coverage platform and our culture of collaboration have never been stronger, our business outlook is positive and our pipeline is near record levels. We are confident in our ability to continue driving growth while generating operating leverage and delivering sustained value for our clients, our shareholders and our team over the long term. With that, I'll pass the call to Chris to review our financial results in more detail. Christopher Callesano: Thanks, Navin, and good afternoon, everyone. We reported record fourth quarter revenues of $488 million, an increase of 11% versus the prior year period. For the full year, our adjusted revenues increased 28% to $1.54 billion. As Navid said, our revenue growth was driven by year-over-year increases in M&A and capital markets, partially offset by a decline in capital structure advisory. Our business mix for the fourth quarter and full year was approximately 2/3 M&A and 1/3 non-M&A. Turning to expenses. As Navin mentioned, we saw a significant improvement in our adjusted compensation expense ratios, which were 61.1% for the fourth quarter and 65.8% for the full year, down from 69% last year. Adjusted noncompensation expenses were $60 million for the fourth quarter, resulting in a 12.4% noncompensation expense ratio. Our adjusted noncompensation expenses for full year 2025 were $224 million, resulting in a non-compensation expense ratio of 14.6%, down from 15.9% in the prior year. The main drivers of the expense growth for the year were increased deal-related T&E and client conferences, continued investments in technology and data, including AI and higher occupancy costs due to headcount growth. Given our ongoing investments in technology, increased deal activity and headcount, we currently anticipate full year 2026 noncompensation expenses to grow at a similar rate to 2025. Our adjusted pretax margin was 28.6% for the fourth quarter and 21.5% for the full year 2025, representing 510 basis points of improvement from a 16.4% adjusted pretax margin in 2024. Regarding taxes, our normalized corporate tax rate for the year was 29.8% and our effective tax rate was 22.4%. The difference in rates is primarily driven by the excess tax benefit related to the delivery of equity-based compensation in the first quarter of 2025. As a reminder, consistent with prior years, the annual vesting of RSUs will occur later this month, and we expect to recognize an excess tax benefit, which will favorably impact Q1 EPS. Our revenue growth and reductions in both our comp and noncomp expense ratios contributed to EPS gains. For full year 2025, we reported adjusted EPS of $2.99 per share representing an increase of 64% from the $1.82 per share in 2024. Turning to capital allocation. The Board declared a regular quarterly dividend of $0.65 per share. During the fourth quarter, we increased buyback activity, repurchasing 716,000 shares in the open market at an average price of $62.96 per share bringing total repurchases for the year to approximately 950,000 shares. For the 2025 performance year, we will have returned $284 million of capital to shareholders through dividends, net settlement of shares and open market repurchases. Additionally, the Board authorized a new share repurchase program of up to $300 million with no expiration date. And lastly, we continue to maintain a strong balance sheet with $849 million of cash and no debt. With that, let's open the line for questions. Operator: [Operator Instructions]. And our first question comes from the line of Devin Ryan with Citizens Bank. Devin Ryan: And goodafternoon Navid and Chris, how are you. Navid Mahmoodzadegan: Good, Devin. How are you doing. Devin Ryan: Doing great. First question, just kind of on the broader advisory outlook. So clearly, a good year in 2025, growing 28% year-over-year even without having kind of sponsors at their, I'd say, potential, and this is clearly an important customer base for Ola. So shows that you guys were able to kind of work with a number of different sizes of customers and types of customers. But on the sponsor specifically, how would you frame kind of the order of magnitude of how much upside there is towards kind of more of a normal level and the impact for Moelis because you're coming off of a very good year, but it still feels like there's probably maybe another step function of sponsor is truly reengaged, but just love to get some sense from you and if you can kind of frame out how you think about quantifying that? Navid Mahmoodzadegan: Sure, Devin. Thanks for the question. I think the premise of your question is exactly right. As we -- as 2025 developed, we saw an increasing velocity of sponsor deals. We think there's still a fair amount to go before we get the kind of volumes that I think will create more equilibrium between capital return and deployment. I do think both in terms of opening up the aperture to more deals in the middle market. I think that's coming in 2026. That's certainly what we're seeing in our pipelines and our conversations with sponsors. We've talked about it on a lot of the previous earnings calls there's just a real push from LPs to get capital return in these portfolio companies. I think we're reaching the point where the financing markets are good, the broader economy is good, inflation seems to be under control. And this is the point where valuations are what they are in the market, and I think sponsors are getting their head around what options are available to them to get return back to their LPs. One of those options in addition to M&A is doing a GP-led secondary and that's 1 of the reasons why we're super excited about that business. We have now an industry-leading GP-led secondary capability to pair with our industry-leading sponsor coverage and industry-leading M&A capabilities to bring the sponsors to be a solution provider to help solve those issues. And I think we're really seeing an opening of the market. I think that's going to happen in 2026. And I think we're really well positioned to take advantage of that. Devin Ryan: That's great color, Navid. And then just as a follow-up on the restructuring liability management. You mentioned kind of a long runway of activity here. Can we maybe just parse through that a little bit more, like how we should be thinking about a base case for the level of activity there. Is it something around what we've been seeing like you can kind of hold the line or view that maybe it takes a little bit of a step back, but the high -- it stabilizes at a higher base. Just love to kind of think through what kind of that looks like right now? I appreciate there's obviously scenarios where if an economy rolls over, it could be more active, but that probably wouldn't be as good for M&A. So I just love to think about kind of the base case for what that long runway suggests. . Navid Mahmoodzadegan: Sure. So as we look at the base case as you put it, we do think there is this long runway of companies. There's just a number of companies that took advantage of very favorable financing a very favorable rate and financing environment to take on a fair amount of leverage over the last many years through the last cycle. There's still -- some of those companies have done various stages of liability management exercises, but you still have a lot of balance sheets that are still out of whack, quite frankly, relative to the size and the earnings of those companies. On top of that, you see technology disruption coming and it's going to impact some of these sectors pretty dramatically. And so as we look out into the future, I think there's just going to be many, many companies that still have to grapple with their balance sheet. I think some of that's going to happen through amended extends and liability management type exercise out of court. But I think some of those companies are going to tip in to more active in-court restructuring assignments. And again, we're well positioned for all of that. In addition, we've significantly bolstered and invested in our creditor site capabilities so that if we're not on the company side in these situations, we have a really good seat working with creditors there. And we're really excited about the rise of that business and our traction in that business. So a year ago, you said to me, remember we came off a really strong 2024 on the CSA side of the business that we sort of predicted that our business might be down a little bit, given the market backdrop. As I look out this year, I'm predicting flat to up as opposed to flat to down in terms of the strength of our business in what we call CSA. Devin Ryan: Yes. That's really helpful. Appreciate it. . Operator: Our next question comes from the line of James Yaro with Goldman Sachs. James Yaro: I wanted to touch a little bit on on the M&A composition of 2025 and what we could see for 2026 and beyond. [ 2025 ] was a heavily mega cap M&A driven market. So I'd love to just get your perspective on the outlook for large deals to continue and juxtaposing that versus the outlook for smaller deals, which I think ties into your sponsor comments. And then I guess if you take a step back, when and why would smaller deals catch up to the big ones? Navid Mahmoodzadegan: So look, I think as we look out into the next few years, I do think there's a real possibility of the bigger cap type transaction that we've seen a lot of last year was really a close to a record year on the larger side of the curve of transactions, that continuing. And I think the reason that's going to continue is the motivation to create more scale for these larger companies to serve their customers, to create efficiencies to best position themselves for technology change. Those motivations are only accelerating and you have a market environment, a regulatory environment that's allowing those kinds of transactions to happen and who knows how long that's going to last and a financing environment and a stock market that's conducive to promoting those kinds of transactions. So we continue to see very active dialogues with our clients on these bigger type transactions. But I think we're at that point now where this middle market, which we talk about, which has been more muted because there's been sort of a disconnect on buyer-seller expectations, we had financing costs that had risen, which make it harder to finance new buyouts of these companies. You had tariffs and inflation and all of those things that make it hard to underwrite a purchase of those kinds of companies. A lot of those issues have dissipated and this pressure from LPs to get money back, that the pressure they're putting on the private equity firms is still really there. And so I think we're at that point where a number of the financial sponsors who own these portfolio companies now for 6, 7, 8, 9 years, are finding it hard to do anything other than actually go to market and see what the market will bear in terms of the price for these portfolio companies. And I just think that's increasingly happening. There's really no reason to wait at this point unless there's something specific with that company, where you see there's going to be a step function up in the earnings of that company in a year it now is what it is, it's time to monetize, and I think more and more sponsors are bringing those companies to market. James Yaro: Excellent. Very clear. So you've talked about a lot of areas of positivity here. I just wanted to touch on 1 area, which is evolving a lot recently, which is geopolitical backdrop. When you're in the boardroom, is that having any impact on dialogues? Or is it just that we've seen so many different permutations of geopolitical considerations that boards are getting more comfortable with that at this point? Navid Mahmoodzadegan: So it's a great question. And of course, geopolitics and what's happening on the world stage is always a topic when we're in board rooms and we're conversing with clients over potential transactions. Uncertainty is never a friend generally of larger scale corporate transactions. And so certainly, if there was to be some kind of exogenous shock, some geopolitical flare-up that's significant -- that could have an impact on the level of transaction activity as we roll forward. But you're right. I think in a certain respect, there's been, over the last year, just a lot of activity and people may be coming a little numb to some of the flare-ups, the short-term flare-ups and sort of saying, look, I got to do what I need to do to position my business, the best I can. We know technology changes coming. We have to be prepared for that. We have to position ourselves well for that. We know the equity markets are rewarding focus and execution and growth and simplicity of story. We know that's happening. So let's undertake corporate transactions that help us best position ourselves for equity value creation and for dealing with technology disruption that's coming. And perhaps unless there's a very visible geopolitical thing that's on the horizon, people are kind of playing through that. James Yaro: That's super clear. . Operator: And our next question comes from the line of Alex Baum with KBW. Alexander Bond: Just a question on the revenue backdrop and how you expect the cadence of revenue recognition to play out over the course of the coming year. So it's only been a month to start the year here, but on the announcement side at the industry level, it's been a little weaker than most had hoped. And from what we can see in the public completion and pipeline data for all specifically the first quarter looks like it could be a little bit on the lighter side relative to the past couple of quarters. But with all that said, the overall backdrop obviously remains really constructive. So wondering how you're thinking about this and maybe if you're expecting revenues to potentially be more back-half weighted this year as the environment continues to improve. Yes, any color there would be great. Navid Mahmoodzadegan: Yes. Look, I don't -- I appreciate the question, Alex. I don't -- we don't want to extrapolate too much based on a month or any particular snapshot. Here's what I can tell you. We -- as we've talked about, we see a really constructive and conducive environment for transactions. We see our clients having a lot of motivation to do transactions. We see our new business generation activity at all-time highs, and we see our pipeline at all-time highs. So how that plays out in terms of specific months and specific quarters is always a little tough to predict. But -- and I think you're right, in an improving environment, you tend to see the first quarter be the weakest quarter seasonally and you build through the year. We certainly saw that last year for us. So I don't want to make any predictions about the first quarter versus the second quarter, et cetera. I just think when you look out into the outlook for 2026 and beyond 2026, we're really optimistic. Alexander Bond: Got it. No, fair enough. That makes sense. -- then maybe for a follow-up, just on comps. So really strong leverage there in the quarter and the full year. But thinking about, again, 2026, if the year plays out as expected from a revenue setup and volumes improve, at a solid rate. Can you just give us your updated view on the cadence of maybe getting to that low 60s kind of normalized range that you've highlighted previously. Navid Mahmoodzadegan: Yes, sure. Thanks for the question. Look, we're really pleased with our ability to bring that comp ratio down. Just by way of reminder, we did have an elevated comp ratio as market revenues were weaker and we were making substantial investments in the business and saw the opportunity to really catapult our business forward, went from 83% in 2023 to 69% last year and now 65.8%. So we're really pleased with that progress. I think we can continue to do even better than 65.8% to your -- to the point of your question, how much better we can do in 2026, I think will really be dependent on 3 factors: One is what revenues we produce in 2026. That's always a really important determinant in terms of the leverage we can create in the model. Second, what's the environment for banker pay and competition for bankers. It is a competitive market out there. We've pointed that out in previous calls, and we need to obviously protect our base of great bankers we have, and we want to keep growing. And our ability to find great bankers who fit the culture, who are industry leaders and big TAMs, it's not easy to find those people. And when we do find those people and they want to come, if we can make a sensible deal with them, we want to bring them on board. And so how many of those people we can bring on board in 2026 will also impact the specific comp ratio in that given year. So we try to balance all of that. We want to bring the ratio down. I think we're committed to doing that. But we want to do that in the context of still taking advantage of all the opportunities we see in front of us all the great dialogues we're having with bankers who want to join the firm and trying to get more and more of those people to join so we can attack this great opportunity we see in front of us. Operator: And our next question comes from the line of Brendan O'Brien with Wolfe Research. Brendan O'Brien: To start, Naved, you alluded to this a bit in your prepared remarks, but just 1 of the big topics of discussion at the moment is AI disruption and the potential implications for the outlook for M&A activity. On the 1 side, I understand that this can be a catalyst for more strategic activity, but just given software companies represent a significant portion of inventory there's risk that they could struggle to exit a significant portion of their portfolios. So I just wanted to get a sense as to how you view these puts and takes and whether you've seen any impact on your discussions around some of these PE softwae companies? . Navid Mahmoodzadegan: Thanks, Brendan. Look, I think it's an excellent question, and I think your framing of it is spot on. As we talked about earlier, I think in a lot of different parts of the economy in different industries, AI disruption technology shifts are accelerate of M&A activity. And in other parts of the ecosystem, although we haven't seen yet there's not 1 example I can point to where AI has created a restructuring opportunity in the near term. That's probably coming at some point. Software is getting a lot of attention these days. The public markets are clearly devaluing the multiples on software companies and SaaS companies are coming down because people are worried about the threat to the business model that AI brings. At some point, that could impact the ability of those companies to finance themselves, and that could lead to transactions that look more like liability management transactions than M&A transactions. And so we're watching all of that. We're obviously in active dialogue with all our clients about all of those trends. I think you're right to point out that disruption could have a counter effect relative to M&A, but it also could create other opportunities for us to give advice to clients that have to deal with balance sheets in those spaces that are coming under stress. So early days. We're monitoring it really carefully and more than anything, look, we're in the business of giving advice. And disruption creates the opportunity for us to get closer to our clients and help them navigate through those periods. Brendan O'Brien: That's helpful color. And for my follow-up, I just wanted to get an update on the time line for the PCA build out. I know you guys have previously indicated that you think this business could get to a couple of hundred million in revenues but that's likely to be a relatively nonlinear growth curve. So I just wanted to get a sense as to how we should be thinking about the trajectory into next year, how far -- how much or how far along that growth path you could be by 2026. Navid Mahmoodzadegan: I don't want to make a specific prediction on 2026. Here's what I'll say. We love the team that we're putting together. We love the dialogues we're having with additional folks who may want to join the team and the early reception from our PE clients has been phenomenal. Our thesis here is spot on. We have such great relationships in the sponsor community and they're so long-standing and deep and our coverage teams do a great job there. We have incredible industry bankers, and we were missing this capability so that we can actually go and have conversations with sponsors about GP-led secondaries. And now we're able to have those, and we're winning mandates and we're executing mandates, and it's ramping pretty much exactly the way I thought it would ramp. And I think the opportunity for this to be a very meaningful business for us like our CSA businesses, like our capital markets has ramped. I think it's going to be a business that's just like that in terms of the size and scale and the quality. It's just the question is on what time period that happens. And I'm optimistic we'll be able to achieve that over the next few years. Operator: And our next question comes from the line of Brennan Hawken with BMO Capital Markets. Brennan Hawken: And I think that's the first time we went Brendon to Brennan. So there we go. So I appreciate the comments, Navid, on the comp leverage uncertainty. But given we've got a marketplace that's really active, and therefore, it's probably good bankers might be a bit low to move because they want to be there for their clients given competition for talent is elevated, so costs are there. Why not maybe ease up on the throttle a little with recruiting at this just current moment, not necessarily changing the opportunity set, but just saying maybe it's not the best time. How do you balance that? Navid Mahmoodzadegan: So Brendan, it's a good question. And look, we're only going to do deals that make sense for the firm in the long run and make sense for the culture of the firm. But these individuals, a uniquely talented individual in an area that we want to be in or in a sector that we want to be in that fits our culture that's a high bar. It's a very, very high bad across. And when that person shows up and you start a dialogue with them and you know they're going to trade. And by the way, when they trade, they're probably off the market for a number of years. Bankers don't like college football players these days where they're trading themselves, marking themselves to market every year. They're going to be at a firm for a period of time. And so when you find that person who's perfect for your platform, and again, culture is critical. We're just not hiring great bankers. We're hiring great bankers that want to be part of the team, a collaborative team. And when that person shows up, and you have a good dialogue and they're ready to move for whatever reason, they don't love the firm. They don't feel like they got paid the right way, something happens inside their firms, they don't like it anymore or their firm lets them down on some assignment. When that person shows up, you may lose them for a number of years if you don't move. And so we don't always -- can always dictate the timing and these people are unique. They don't grow on trees. So look, we're very cognizant of the pace of what we do. We're very cognizant of our ability to onboard people the right way and make sure we can get them going the right way with the right support. And we're very cognizant about deal structure. And beyond that, some of the timing is a little out of our control. Having said that, as we said before, the comp ratio and our ability to get leverage and our ability to make sure we're being prudent there is at the very top of our concerns as we think about growth of the company. Brennan Hawken: That actually is really helpful in framing it. I appreciate that answer Navid, and obviously, you guys did a good job on the comp leverage here recently. So we can certainly point to that. Following up on 1 of Brendan's questions. And if you think about software and IT services within your sponsor franchise. It's kind of tricky because the public data doesn't do a great job of capturing all your activity. How big are those sectors for your banking and activity-driven business. And I know you spoke to the fact that it might be somewhat fluid, it might shift from an M&A discussion to a liability management discussion. So thinking about it broadly just across MoIs, are those a big sector for you? It was always my sense that they were, but curious about sizing. Navid Mahmoodzadegan: Sure, Brian. Look, as I think you know, we made a major investment, a really great investment in an excellent technology franchise and technology team a few years ago. That build has been really successful and technology, broadly speaking, is pretty much at the top of the list now our most productive sectors of the firm. And then within technology, software is a really big piece of that. So you're right to say that we have a lot of dialogue and a lot of client connectivity to both the sponsors and the companies that fit broadly within the software sector. And then again, as you think about products, it's not just liability management. So if you have a sponsor that owns a technology company or a software company, that dialogue can be M&A. It could be raising bespoke capital, more of a capital markets type transaction to either get a sponsor some liquidity or deal with a balance sheet challenge. It could be a CV or it could be liability management, right? And so having the ability now for the first time in our history to be able to be super versatile super fluid across 4 products that could be applicable to that software company or that technology company. It's the first time in our history, we've been able to really do that in a meaningful way with a top technology franchise with a great sponsor coverage team. So we're going to be there to help our clients find solutions as the market evolves and as they're dealing with the disruption that's coming in that space, for instance. Operator: And our next question comes from the line of Ryan Kenny with Morgan Stanley. Ryan Kenny: So you've done a lot of hiring over the last few years, and it sounds like you'll be opportunistic going forward. Is there any way that we can think about what percent of MDs currently are ramped? And maybe what percent since 2021 are ramped? Navid Mahmoodzadegan: Yes. Let me give you some stats. Great question, Ryan. So about 1/3 of our MDs have been MDs on the platform for less than 3 years, and about 1/4 of our MDs have been MDs on the platform for less than 2 years. And when I say -- just to clarify, when I say MDs on the platform, that's either lateral hires or internal promotes. So that captures both of those cohorts. And so to this point, we're still a firm that's maturing into its talent base, a very, very meaningful percentage of our MDs are younger MDs or MDs that haven't been on the platform for a long period of time. And so the best years of those MDs, the most productive years of those MDs are really in front of them as they sink into the platform as they introduce their clients to the platform as they mature as bankers. And that's 1 of the things I'm so excited about is just such a high-quality talent level of people who's really brightest days are ahead of them as they partner with their other parts of the firm and as they introduce the firm to their clients. Ryan Kenny: And as you build out PCA, is the time to ramp for MDs and private capital advisory a lot faster than traditional M&A. Just trying to understand, as you lean into PCA, is that less of a drag on the comp ratio because the MDs can ramp faster? Navid Mahmoodzadegan: Yes, I think it's a great question because remember, we already have the sponsor relationships, and those are long-standing -- you already have the industry relationships, those are long-standing and a growing platform of industry relationships as we hire great sector bankers. So in fact, it's funny. I was -- oh I brought Matt West, who runs our group and to see a client last week. This is a client we had done capital raising for already, and we were looking at doing M&A for. And the client said, I may want to do a CV and I had mapped there the next day. And so there's no ramp up there because that's already a client of the firm. We just -- we're missing that product capability. We would have missed that opportunity if it wasn't there. And so I think apropos to your question, a lot of the ramp-up there is happening quickly because we're just plugging a product set into it an existing set of relationships, and it's working really beautifully. Operator: Our next question comes from the line of Nathan Stein with Deutsche Bank. Nathan Stein: In the release, you specifically called out the M&A and capital markets revenues increasing in 4Q, while capital structure advisory decreasing. Could you just really quick highlight trends in the PCA business relative to the fourth quarter of last year. Navid Mahmoodzadegan: Yes. PCA remember, is still ramping. So that team has really come together towards the back half of this year. And so most of their activity is still winning new mandates, originating new business you're not going to see a lot of actual revenues in the fourth quarter or in 2025 from that business. I think there'll be much more meaningful revenue growth as we move into 2026 on PCA. Nathan Stein: Okay. That's fair. And I appreciate the transparency. And for my follow-up, I actually wanted to ask about capital allocation. for the $300 million announced buyback authorization, do you have any thoughts on timing that we can think about. Navid Mahmoodzadegan: Sure. It might be helpful just again, to talk through just how we think about excess capital. So look, we had a good year this year. We're really pleased with our revenue growth. We were able to do all the things we needed to do strategically in terms of hiring, in terms of making technology investments like Chris talked about. And so we still have created a lot of excess cash we have a dividend. So the dividend is the first priority to make sure we maintain and protect that dividend. And then even beyond the dividend this year, we had a fair amount of excess cash. And we deployed a lot of that excess cash towards share repurchase, especially in the fourth quarter. So I think that's how you're -- we're going to think about prioritization going forward is let's grow the business within prudent constructs as we've talked about relative to the previous questions. Let's make those investments that we need to make in our people and our technology, client conferences, those kinds of things, all the things that we need to grow the business long term. The dividend, we're committed to maintaining. And then beyond that, we do want to mitigate some of the share dilution from our equity issuances for compensation. And so we're committed to trying to do that as much as it makes sense to do all within the context of keeping a really, really, really strong balance sheet. We think that's a real strategic advantage for us. And in a business where there is some cyclicality, we just think it makes all the sense in the world to continue to keep dry powder and keep optionality on the balance sheet and make sure we can withstand any market environment. Operator: Our next question comes from the line of Daniel Cocchiaro with Bank of America. Unknown Analyst: Has regulatory scrutiny on the G-SIB has diminished over the past year? Is this coincided with the pickup in competition from the bulge brackets to win more deal mandates -- how would you describe Mellis' ability to gain market share in a deregulatory environment? Navid Mahmoodzadegan: Sure. I don't it will probably depend a little bit on which sectors you're talking about and maybe some sectors are different than others. I don't see meaningfully stronger competition than we've seen in recent years from the bulge brackets who already weren't strong. Look, we have strong bulge bracket competition, clearly, from a handful of firms. They've always been strong, they'll continue to be strong. . And so I don't -- I think that's there, and it's the way it has been. With respect to that next set of bulge-bracket firms, I don't see that meaningfully being different than it's been in the past. And clearly, the momentum that I see on the client side is really us competing against other independent firms who have really good people and who are entrepreneurial and nimble and have a lot of good intellectual capital and ideas. And that, to me, feels like where we sit in our part of the market is where a lot of the action is taking place and the incremental market share is being gained. And that -- of course, we compete against the bulge bracket. But a lot of the times, we're competing against independent firms like us. Operator: And our next question comes from the line of Ken Worthington with JPMorgan. Kenneth Worthington: Circling back to comp in the past couple of years, you've determined the comp ratio. You've started the year at that comp ratio. And then as you move to either the second half of the year or even the fourth quarter, you've adjusted compensation and the compensation ratio based on the activity levels that you've seen. So as we think about 2026 and where we start the year, where do you anticipate kind of starting that comp ratio just to give us a little help in modeling out the first part of the year? Navid Mahmoodzadegan: Yes. I would imagine we would maintain a similar comp ratio to where we ended the year at. So that 65.8%. I think Q1, as you mentioned, it's usually too early to predict the remainder of the year. And I'd expect changes to come in later quarters, assuming nothing out of the ordinary takes place. And just an additional reminder, we fully expense our retirement eligible equity that's granted in Q1. So depending on revenues, the Q1 ratio may not be indicative of the full year. Operator: And that concludes our question-and-answer session. I will now turn the conference back over to Navid for closing remarks. Navid Mahmoodzadegan: Great. Thank you, everyone, for joining us. Really appreciate you being on the call and look forward to speaking to you all very soon again. Thank you. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to today's conference call to discuss LifeVantage's 2026 Results. At this time, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up. Hosting today's conference call will be Reed Anderson with ICR. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. Anderson. Please go ahead, sir. Reed Anderson: Thank you. Good afternoon, and welcome to LifeVantage Corporation's conference call to discuss results for 2026. On the call today from LifeVantage with prepared remarks are Steve Fife, President and Chief Executive Officer, and Carl Aure, Chief Financial Officer. By now, everyone should have access to the earnings release which went out this afternoon at approximately 4:05 PM Eastern Time. If you have not received the release, it is available on the Investor Relations portion of LifeVantage's website at www.lifevantage.com. This call is being webcast. A replay will be available on the company's website as well. Before we begin, I would like to remind everyone that our prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of LifeVantage's most recently filed forms 10-K and 10-Q. Please note that during today's call, we will discuss non-GAAP financial measures, including results on an adjusted basis. Management believes these financial measures can facilitate a more complete analysis and greater transparency into LifeVantage's ongoing results of operations, particularly when comparing underlying operating results from period to period. We have included reconciliation of these non-GAAP measures with today's release. This call also contains time-sensitive information that is accurate only as of the date of this live broadcast, 02/04/2026. LifeVantage assumes no obligation to update any forward-looking projection that may be made in today's release or call. Now I will turn the call over to Steve Fife, the President and Chief Executive Officer of LifeVantage. Steve Fife: Thanks, Reed, and good afternoon, everyone. Thank you for joining us today. The second quarter presented both challenges and opportunities as we navigated a rapidly evolving competitive landscape while executing on our strategic initiatives. While our Q2 revenue and earnings were down significantly from prior year levels, we were cycling the explosive launch of our MINDBODY GLP-1 system in October. Despite this headwind, we made significant progress on several key fronts and remain well-positioned for long-term growth in the broader health and wellness ecosystem. As a management team, we acknowledge that our performance during the quarter did not meet your expectations or ours, and we are redoubling our efforts to stabilize our GLP-1 business and make the other changes necessary to return to revenue growth. Let me start by addressing the primary driver for our revenue decline. The competitive dynamics we've experienced in the natural GLP-1 market since launching our MINDBODY GLP-1 system last year. Our product is scientifically validated and proven effective, and we have a loyal customer base. However, the overall market has become significantly more competitive with pharmaceutical GLP-1 drugs becoming more accessible and affordable, along with new formulations and formats, including pills. When we launched MINDBODY, pharmaceutical options were in short supply and cost several hundred dollars per month to consumers. At that time, MINDBODY was a compelling value proposition, plus had the added benefit of not requiring any injections and being a proven all-natural solution. Today, pharmaceutical options have come down significantly in price and are increasingly covered by insurance, which has led to much broader use by consumers. In addition, the drug is now available in more convenient formats, including pills. This rapidly shifting competitive dynamic has dramatically impacted the sale of our GLP-1 offering. As a result, to be conservative, we are recognizing a reserve against a portion of our GLP-1 inventory and evaluating all options to respond to the changing competitive landscape. We are also taking a hard look at cost reduction opportunities to ensure we continue to maintain strong levels of profitability. We remain committed to our MINDBODY GLP-1 system. It is a great product that works, and we continue to believe strongly in the positioning of natural weight management solutions. The science supporting our approach is robust, and we see this as a temporary market adjustment. What excites us most about this quarter is the continued momentum from our LoveBiome acquisition. From an operational perspective, we successfully integrated the LoveBiome team and systems and we're realizing the operational synergies. The combined expertise of our teams is already in our product development pipeline and go-to-market strategies. Two new products from the LoveBiome portfolio launched earlier this week that should drive engagement, consultant growth, and continue to diversify our product portfolio. First is Axila X, a new addition to our Axial line that focuses on pre-workout consumers looking for long-lasting energy, enhancing oxygen uptake, and stamina. Second is Phytopower B, where the B stands for blocker, an innovative approach that helps to slow sugar absorption and support a healthy metabolism. These launches represent the power of our combined innovation capabilities and demonstrate how the LoveBiome acquisition is already paying dividends in terms of product diversification and market growth. Over the next couple of months, we will be launching additional LoveBiome products, further leveraging and expanding the LoveBiome portfolio. Our now patent-pending P84 product continues to be a hero product with strong positioning in the rapidly growing gut microbiome market. The in vitro testing results we announced in October at our Momentum event further validate the science behind this comprehensive gut health activator, and we're seeing strong adoption among both our combined consultant and consumer base. The HealthyEdge stack, which combines our proven Protandim NRS2 synergizer with P84, has become a lead enrollment story for our consultants. In January, we released the results of our third-party cell study that shows this combination delivers foundational health support throughout the entire body, and the synergistic benefits are resonating strongly with health-conscious consumers. I'm also pleased to report continued progress on our Shopify partnership. This strategic initiative represents a significant modernization in our technology infrastructure and will deliver enhanced e-commerce capabilities that benefit both LifeVantage and our consultants. We're on track for our pilot program and expect this platform to drive improved conversion rates and customer experience. Looking at our international expansion efforts, we continue to see opportunities for growth in key markets. The infrastructure we've built through the LoveBiome integration positions us well to scale our operations globally and serve the evolving needs of health-conscious consumers worldwide. Now as we look ahead, I'm optimistic about our positioning. We have a comprehensive wellness ecosystem that addresses multiple aspects of human health, from cellular health with Protandim to metabolic wellness with MINDBODY, to gut health with P84, to beauty and longevity with TruScience liquid collagen. Combined with our industry-leading EVOLVE compensation plan and vibrant consulting community, we're uniquely positioned to serve the evolving needs of both consumers and entrepreneurs. The direct sales industry continues to evolve, and companies that can combine innovative products, compelling compensation, modern technology, and authentic communities will be the winners. We believe LifeVantage, enhanced by our LoveBiome partnership and strengthened by our commitment to science validation, is perfectly positioned to lead in this new era. We also continue to have a strong balance sheet and proven track record of returning excess capital to shareholders. Since the beginning of fiscal 2024, we've returned over $20 million to shareholders through dividends and share repurchases. And today, we announced a new $60 million share repurchase authorization, underscoring our commitment to the future and commitment to driving long-term value. The board remains committed to this perspective, as evidenced by the quarterly dividend and new share repurchase program just announced. With that, let me turn the call over to Carl for the detailed review of our financial results and outlook. Carl Aure: Thank you, Steve, and good afternoon, everyone. Let me walk you through our second quarter financial results. Please note that I will be discussing our non-GAAP adjusted results where applicable. You can refer to the GAAP to non-GAAP reconciliations in today's press release for additional details. For 2026, we delivered net revenue of $48.9 million, which was down 27.8% compared to $67.8 million in 2025, but was up 2.9% sequentially from the first quarter. The decrease compared to the prior year period was primarily driven by declines in sales of our MINDBODY GLP-1 system, which decreased $16.2 million compared to the prior year period. This decline was partially offset by sales of the LoveBiome product line, which contributed $4.1 million in revenue following our October acquisition. Breaking down our regional performance, revenue in the Americas region decreased 32.6% to $38.5 million, while revenue in the Asia Pacific and Europe region decreased 2.1% to $10.4 million. The Americas decline was primarily driven by lower sales of our 25.2% decrease in total active accounts, mostly from decreases in our active customer base. In Asia Pacific and Europe, the decline in revenue reflected a 6.5% decrease in total active accounts. Revenues did increase slightly in Japan on a constant currency basis. Our gross profit percentage for the second quarter was 74%, down from 80.5% in the prior year period, reflecting a one-time allowance for inventory obsolescence related to MINDBODY along with increases in shipping and warehouse-related expenses. Excluding the $2.4 million one-time inventory reserve, our non-GAAP adjusted gross profit percentage was 78.8%. Commissions and incentive expense as a percentage of revenue was 40.7% in the second quarter compared to 48% in the prior year period. The decrease as a percentage of revenue was primarily due to elevated incentive-related expenses recorded in the prior year period and impact from changes to the mix of customers and consultants in our overall active account base. Selling, general, and administrative expenses were $15.8 million or 32.3% of revenue compared to $18.6 million or 27.5% of revenue in the prior year period. The increase as a percentage of revenue was primarily due to the overall decrease in sales volume and elevated event-related expenses in comparison to the prior year period. GAAP operating income was $500,000 compared to $3.4 million in the prior year period. Adjusted non-GAAP operating income was $2.6 million compared to $3.9 million in the prior year period. GAAP net income was $300,000 or $0.02 per diluted share compared to $2.6 million or $0.19 per diluted share in the prior year period. Adjusted non-GAAP net income was $1.9 million or $0.15 per diluted share compared to $3 million or $0.22 per diluted share in the prior year period. Adjusted EBITDA for the second quarter was $3.9 million or 7.9% of revenues, compared to $6.5 million and 9.6% in the same period a year ago. Our financial position remains strong with $10.2 million of cash and no debt at the end of the second quarter. We generated $500,000 of cash from operations during the first six months of fiscal 2026, compared to $8.6 million in the same period in fiscal 2025, mostly due to the timing of incentive payments, payments of other accrued liabilities, and other working capital changes. Capital expenditures totaled $1.5 million for the first six months of fiscal 2026 compared to $800,000 in the prior year period, reflecting our continued investment in technology infrastructure. We also utilized $3.7 million in cash during the second quarter relating to the closing of the LoveBiome transaction. Turning to capital allocation, we did not repurchase any shares during the second quarter. During the first six months of fiscal 2026, we repurchased 44,000 shares for an aggregate purchase price of $600,000. We are also pleased to announce the company's board of directors recently approved a new $60 million share repurchase program, which replaces in its entirety the prior share repurchase program and authorizes the company to repurchase shares in both open market and private transactions through 12/31/2027. Today, we also announced a quarterly cash dividend of $0.45 per share of common stock. This dividend will be paid on 03/16/2026, to stockholders of record as of 03/02/2026. Turning to our outlook for fiscal 2026, we now expect revenue in the range of $185 million to $200 million, adjusted EBITDA of $15 million to $19 million, and adjusted earnings per share in the range of $0.60 to $0.80 per fully diluted share. This guidance reflects the current trends in our business, including the competitive dynamics in the GLP-1 market, the positive momentum from our LoveBiome integration, and the expected impact of our February product launches. We remain committed to improving our profitability metrics and driving long-term value for our shareholders. And with that, let me turn the call back over to Steve. Steve Fife: Thanks, Carl. Immediately following our earnings release today, we also issued another press release announcing my planned retirement in April. While these decisions are never easy, I'm confident now is the right time for this transition after accomplishing so much as a team over the last nine years and laying the foundation for LifeVantage's next chapter of growth. The board has been working closely with me on a comprehensive succession planning process for my eventual retirement that ensures leadership continuity and positions LifeVantage for continued success. Leading LifeVantage has been one of the most rewarding experiences of my career, and I am incredibly proud of what we've achieved. From evolving our business model to strengthening our market position and impacting the lives of thousands of individuals, our entrepreneurial opportunity is unlike any other industry, and I have complete confidence in our talented team and the board's ability to guide LifeVantage into its future. Operator, we're now ready to open up the call for questions. Operator: Thank you. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate the line is in the question queue. You may press 2 to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Doug Lane with Water Tower Research. Please proceed. Doug Lane: Yes. Thank you, and good afternoon, everybody. And, so Steve, best wishes on your retirement here. All the best. Let me ask about LoveBiome. You mentioned the $3.7 million cash at closing, is that a transaction cost, or is that the actual purchase price for LoveBiome? Carl Aure: Yeah, Doug. That's the actual cash transaction price related to the LoveBiome piece. And so I think that we've also talked a little bit more if you look in the details of the 10-Q, I think we've talked about this in, you know, some of our previous discussions. But the deal was structured in two pieces. You had the cash down payment component, which worked out to be that $3.7 million number. And then there's also the ability for a future earn-out that's based off of future revenue targets. And so, those are really the two components of that. So any further either cash or stock compensation there would be subject to the long-term earn-out amounts. Doug Lane: Got it. So that explains about almost half of the $10 million reduction in cash on your balance sheet. What are the other big things that impacted that reduction in cash on your balance sheet from the first quarter? Carl Aure: Yeah. That was definitely one of the big items. The other big items, just the timing of accrued payables. If you look at where we were at the June, we had some pretty significant accrued payables that just the timing of those turned here during the first half of the year. And then the other component that we had is that one of the other items we do is when we settle stock-based compensation, the withholding tax from employees vesting, the company utilized about $3 million of cash associated with that during the first half of the year. So I would say just between those three buckets, that really accounts for the $10 million decline from where we were in June. But looking forward, as I look at the back half of the year, I would anticipate that we'll start to really start to build cash here in the back half of the year from now through the end of our fiscal year. Doug Lane: Okay. That makes sense. And can you give us an update with MINDBODY so far this year as you enter the weight loss season? What are your marketing plans? How are you approaching that? And what's sort of an early read on how things are going? Steve Fife: Yeah. We kicked off in our fiscal Q2 and in November and December a whole go-to-market strategy around MINDBODY. It included a 20% off sale for the product, which we've carried over through January and now into February. So our product has been discounted by the 20% promotion we have. We also had an event in December that people could qualify for. We call it our Activate Ninety event, which is a weekly access to professional trainers, lifestyle, and business individuals that on every week on Thursday evenings, they have access to these individuals that talk to them, you know, holistically about health and wealth maintenance and management. Those calls, you know, the people qualified to be on those calls live. We record them and now distribute them out or they're made available to everyone now, you know, after the events occur. So that's kind of this weekly reminder for the field. We've also in January, introduced a new feature in our app. Our app has previously been, you know, really consultant-driven and to help them with their businesses. But we also now have provided access to a tracking mechanism for customers and consultants to go through and utilize it to help track their calories, their activities, daily reminders, and goal setting. We all know that having those kinds of devices and reminders help all of us be more mindful of our activities regardless of what it is. And so we are pleased to be able to introduce that in January, and we see and receive positive feedback from that. We also, I guess the last thing that I'd say is we have a very active win-back campaign where we target consumers of MINDBODY that were part of, you know, that had utilized it in the past and maybe even going back to a year ago, where all of our minds tend to drift a little bit as it relates to weight management in this time of year, but win-back campaigns and incentives to come back and, you know, get back on the product or try the product again. So it's really, I'd say, multi-pronged in terms of what we're doing to focus our attention on that. Doug Lane: Okay. Getting back to LoveBiome. I see in the queue, got a chance to look briefly at it, that it contributed about $4 million to the quarter. Does that sound about right? I did not see what if you even disclose how it impacted your consultant numbers and your customer numbers. Carl Aure: Yes. On the product revenue, that $4 million that we disclosed, that relates to the actual LoveBiome products that were sold during the quarter. So just the products that they brought over through the transaction. There would have also been other revenue of LoveBiome consultants that came over that purchased LifeVantage products. We didn't break that out separately in the queue. But so that's what that $4 million refers to. It's just the LoveBiome product line itself. And then as far as on the consultants, we haven't disclosed the number of active consultants that came over. But there, you know, they've been integrated correctly, and that's something that maybe we can speak to at a future time. Steve Fife: The other thing just to add on to that, I did say in my prepared remarks, you know, we did launch two LoveBiome products on Monday. We had a kickoff. We had just under a thousand participants on Monday night and Tuesday night this week, where we launched two of LoveBiome's previous products, Axio X, which fits into our Axio product line. It's targeting more, you know, a higher level of energy and people use it for pre-workouts and or when they would need a boost during the day. And then Phytopower B, and that B stands for blocker. And so it's a product designed to be not necessarily a daily use product, but one where all, you know, in anticipation of a big meal, it helps to combat, you know, the downside of sugar and carbs as we consume them. So these kickoff calls that we had on Monday and Tuesday night, it was really expanding the knowledge of those launching the products and then educating, you know, the LifeVantage consultants as to the phenomenal products that they are. A lot of it was actually led by LoveBiome individuals, you know, because they had access to the products previously. So we're thrilled to now make them available to everyone and expect them to, you know, provide some growth in the second half of the year. And then also, mentioned there will be two products that will be launched here that were, again, were previous LoveBiome products that will be launched in the next couple of months. And that will kind of then round out the portfolio of products that came to us through that acquisition. Doug Lane: Okay. Got it. And, just looking at the sales, you know, I get the tough comparison with MINDBODY. That, you know, we saw coming. But I noticed in the previous three years in the second quarter, you were north of $50 million pretty consistently. And then now you're a little bit below that and maybe even more so if you exclude LoveBiome. So I'm just wondering if there's something else, one or two things besides MINDBODY that maybe wasn't working up to your expectations in December? Steve Fife: Well, no. I think it has been we've seen a decline in our especially in our customer base and modest in our consultant base. And really, you know, I think the top-line story there is over the last year, MINDBODY became the enrollment story for many of our consultants. And as, you know, some of the challenges that we described in, again, the prepared remarks, started to play out throughout the year. You know, the consultants continued to push MINDBODY, but we lost some momentum around, you know, the other hero products that we have. You know, and specifically, NRF2 collagen and it's one of the reasons why, you know, we're so excited about now having added LoveBiome to the mix and having another hero product that has really reengaged a lot of our consultants. With a new story and really opening up a whole new white space for LifeVantage consultants to take a gut health activator to. And so it's just, you know, that shift doesn't turn overnight. The enthusiasm, excitement about P84 and, you know, I've we talked you and I have spoken. We've spoken in the past around our HealthyEdge stack, which is the combination of P84 and NRF2. And that combination, I think, will very shortly be our biggest and highest enrollment product. Because of how, you know, the synergistic benefits and where our consultant, you know, base heads are right now. So we're repositioning. You know, MINDBODY is still a great product for us. It's contributed just under 10% of our revenue for the quarter, and, you know, the science behind it, the benefits that people feel, you know, and are achieving are real. They're demonstrable. But we're trying to now also balance the other great products that we have and incorporating them into that, you know, enrollment story. Doug Lane: Thanks, Steve. That's good color. Just one more for me. You know, the Shopify thing you've been talking about, and it looks like it's about to be underway here. Can you take a little bit deeper dive into how you're going to use Shopify? Are there other direct sellers that use Shopify, or are you basically pioneering that for the channel? Just a little more color on how Shopify is going to impact your business. Steve Fife: Yeah. You know, Shopify is probably the best known and leader from an e-commerce customer experience platform standpoint. They started off as really a solution to the mom-and-pop small business areas, you know, people that didn't have resources to address, you know, the technology associated with owning a business. And since those early years and that's really how they cut their teeth. They built their reputation and the high technology standard that they are known for today. And over the past several years, they have expanded and are working up the food chain, if you will, to larger and larger companies and expanding their capabilities to address bigger companies and e-commerce in those platforms. And there's a lot of benefit that we are going to see from this. You know, some of them would, you know, I again, I think I mentioned these in the prepared remarks. Around conversion rates. And just the ease of a customer experience of going through checkout and having a modern approach. I'm sure you've been on our site and purchased product. It has not been a seamless experience for consumers. And the data, you know, that's been provided by Shopify in conversions of previous systems to Shopify is pretty staggering around the improvement in that conversion. So that's one aspect of it. The other aspect is just ease of use from a corporate standpoint. When we do promotions, how we display our products, our internal pricing, and how do we get it, you know, onto our e-commerce website. The technology that we're currently using is fairly dated, and it takes a lot of internal resources to navigate that. And so we think that there will be benefits from a process improvement standpoint. And I guess the last one, just again at a high level, this gives us the opportunity to, although not directly tied to Shopify per se, gives us the opportunity, and we're taking it to look at our whole consultant tool base. So the, you know, what we refer to as the back office, what their consultants are looking at to run their business. We are taking the opportunity to also make enhancements to that so that it again ties in now with the ease of use from a Shopify standpoint. And, you know, one of the things about Shopify is, again, that they are the industry leader in this space. And by creating this partnership with them, we're really putting our future in a position where we're not chasing what's next. We've partnered with someone who is always going to be at the forefront of technology as it relates to e-commerce, and we are going to be able to leverage that and not, you know, be in a constant catch-up mode like we are today. Doug Lane: Okay. Thank you. Thanks, Doug. Operator: Our next question is from Ryan Myers with Lake Street Capital. Please proceed with your question. Ryan Myers: Yeah, guys. Thanks for taking my questions. Given the demand and competitive dynamics in the MINDBODY and GLP-1 space, you know, why do you feel like that's a category that you guys can return to growth in, and why is that a category that you feel like you guys can actually win in? Steve Fife: We believe that because of our solution. There are we still when you look at our clinical studies, our science, and our results, and you layer on top of that a natural solution versus it doesn't matter really if it's an injectable or a pill that you're taking. It is still introducing the GLP-1 hormone into your body and not helping your body to actually produce more effective in the production of that natural hormone. So there are millions of people out there that look more to prevention and natural holistic alternatives that are still going to be very interested in our option. And that will always be the case with our products, versus synthetic drugs that might tout the same kind of results, but without, you know, by but are able to do it in a natural way. Ryan Myers: Got it. And then, you know, walk us through the decision to take the inventory charge and just the background information on that. Carl Aure: Yeah. No, I can share some more insight there, Ryan. You know, as you know, when we launched the GLP-1 product last October, a year and a half ago, we just had an incredible response to the demand of that product. We sold out really quickly. We sold out the initial stock that we had within a three-week period. And just based off of that demand, we really ramped up our supply chain, and based off of that, those early months of demand, we really felt like we needed to build up inventory. And frankly, we got a little bit ahead of ourselves. I think it's now that we've got the more right-sized demand that MINDBODY has really settled in and we have more visibility into what the seasonality looks like. We decided to take a conservative approach and put a reserve against some of the inventory that we have. The shelf life, I mean, the shelf life of the product is two years. But we felt that it was appropriate to put a reserve against it to be conservative. We'll still look for other ways to find a way to either sell that or find other uses for it. But that was really the background behind why we went ahead with the inventory reserve. Ryan Myers: Got it. And then just lastly, you know, how should we be thinking about the revenue split in the second half of the year? I mean, have you guys seen a rebound at all here in the third quarter? Just any commentary on what we should be thinking about for Q3 and Q4 in terms of revenue split would be helpful. Steve Fife: Yes. I think when we think about the back half of the year, we do believe that the MINDBODY trends have stabilized a bit, and this is a traditional weight loss season. But I do think that we anticipate the build to build from the third quarter and then also again into the fourth quarter. So especially coming from as we integrate the LoveBiome acquisition and we get their leaders more engaged in the continued rollout of the LoveBiome product, I would anticipate that when you're balancing between the two quarters, that Q4 will likely have a higher proportion of the revenue versus Q3. Ryan Myers: Got it. That's helpful. Thank you. Operator: Thanks, Ryan. We have reached the end of our question and answer session. I would like to turn the conference back over to Steve for closing remarks. Steve Fife: Thanks, operator, and thank you, everyone, for joining us today. Clearly, the second quarter presented some challenges for us. And although that's the case, you know, we do remain confident in our strategic direction and the strength of our diversified both product portfolio and our business model. The successful integration of LoveBiome and our incredible consultants and our recent product and future product launches, our international expansion plans, and our continued focus on scientific innovation position us well for sustainable growth. As we move forward, we remain committed to our mission of activating optimal health processes at a cellular level while providing our independent consultants with the tools and opportunities they need to build successful businesses. I want to extend my appreciation to our dedicated employees, outstanding consultants, loyal stockholders, and faithful customers. And while I'm approaching my end as tenure as CEO, I'm excited about the bright future ahead of LifeVantage, and I'm confident in the strong foundation we've built together. We'll continue to drive innovation and growth for years to come. Thank you once again for your continued support and trust in our mission. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Stan Finkelstein: Thank you, and welcome, everyone to FormFactor's Fourth Quarter 2025 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Slessor and Chief Financial Officer, Aric McKinnis. Before we begin, Stan Finkelstein, the company's VP of Investor Relations, will remind you of some important information. Thank you. Today's company will be discussing GAAP P&L results. Aric McKinnis: And some important non-GAAP results intended to supplement your understanding of the company's financials. Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company and on the investor relations section of our website. Today's discussion contains forward-looking statements within the meaning of the federal securities laws. Examples of such forward-looking statements include those with respect to the projections of financial and business performance, future macroeconomic and geopolitical conditions, the benefits of acquisitions and investments, anticipated industry trends, potential disruptions in our supply chain, the impacts of regulatory changes, including tariffs, and changes in export controls, the anticipated volatility demand of our products, our ability to develop, produce, and sell products, and the assumptions upon which such statements are based. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for the fiscal year ended 12/28/2024 and in our other SEC filings, which are available on the SEC's website at www.sec.gov. Forward-looking statements are made as of today, 02/04/2026, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor. Thanks, everyone, for joining us today. FormFactor's fourth quarter revenue, gross margin, and earnings per share. Mike Slessor: All exceeded both third-quarter results and the high end of our outlook range. And we posted record revenue on both a quarterly and annual basis. Building on that momentum, we expect to again deliver sequentially higher revenue and non-GAAP gross margin in the current first quarter. As you've consistently heard from us, we're focused on and committed to improving our gross margins on a path to achieving our target model. We're making progress faster than expected by executing a program of rapid and immediate gross margin improvement actions that produce the 290 basis points sequential increase in the fourth quarter and are forecasted to add another 100 plus basis point improvement in the first quarter. Within our existing footprint, we expect to deliver both output increases and gross margin expansion throughout 2026, albeit at a more moderate pace than in the past few quarters. Later this year, we expect our Farmers Branch site to come online, providing increased capacity with structurally lower cost, creating the foundation for further revenue growth and gross margin expansion. Aric will discuss details of both our current operational performance and our future plans later in the call. Moving back up the income statement, rapid innovation and accelerating investment by our customers, principally at the intersection of advanced packaging and high-performance compute, is driving increased test intensity and test complexity, creating strong demand in our served markets. In some of these areas, like HBM and DRAM and network switches and foundry and logic, we today have leading market positions. In others, like GPUs and custom ASICs, we're making steady progress on qualifications to produce market share gains and revenue growth. Driven by this revenue growth in our existing and building market positions, with gross margin expansion from operational improvements and earnings leverage from disciplined operating expense control, we're closing in on our target financial model. We expect these trends to continue and we'll host an Analyst Day on May 11 where our executive team will share FormFactor's next target financial model and discuss the market opportunities, strategic priorities, and operational focus areas underlying that new target model. Turning now to segment and market level details. In DRAM probe cards, we delivered the expected sequential growth in the fourth quarter to a new record, with the increase coming from non-HBM DRAM applications like DDR4 and DDR5. When we provided our outlook a quarter ago, we accurately forecasted DRAM growth would be driven by non-HBM strength, which is now understandable given the widely publicized end market demand and pricing for non-HBM DRAM. In the first quarter, we again expect to post an all-time DRAM record, this time on HBM strength, with contributions from both sustained demand in HBM3E and the early stages of the HBM4 ramp. As I've discussed previously, the ramp-up of the HBM4 offers some exciting opportunities for FormFactor in 2026, and the first quarter offers an early glimpse into these opportunities. Mike Slessor: First, the test intensity for each HBM stack further increases with the transition to HBM4 16-high stacks of core die chiplets, up from the 8 and 12-high stacks of HBM3 and 3E. This layer count increase is a powerful driver of increased test intensity, resulting in higher probe card spending by our customers for HBM applications. As we've also seen in Foundry and Logic in recent years, this dynamic is not unique to HBM. All advanced packaging architectures require increased test intensity, as each of the component die chiplets must be comprehensively tested to ensure that a single defective chiplet does not cause a failure of the entire stack. Aric McKinnis: In addition, Mike Slessor: Both the PNIO speeds and overall stack bandwidth for HBM continue to increase at a relentless pace as the industry moves from HBM3 to HBM4 and then on to HBM5. Mike Slessor: The overall stack bandwidth of HBM4 more than doubles HBM3 to an astounding 2+ terabits per second. And HBM5 bandwidth is projected to double again over HBM4. These speed increases drive greater test complexity, which produces a competitive advantage for FormFactor, as our SmartMatrix architecture is the industry's only production-proven probe card architecture that combines high parallelism productivity with high-speed test capability. This enables our customers to test hundreds of die simultaneously at the 10 gigabit plus IO data rate of HBM4. And to ensure we're ready for the future, our global R&D and engineering teams are partnering closely with customers to advance the SmartMatrix architecture to meet the challenging specifications for HBM5 and beyond, further extending our differentiation in HBM applications. This combination of high parallelism product and high-speed performance, which is critical for several important test insertions in our customer's HBM process flow, is producing market share gains at all three major HBM manufacturers. We expect this trend to continue as we execute our long-term strategy to be a key supplier to all the leading customers in the industry, thereby growing and diversifying our HBM demand profile. That said, our first quarter HBM revenue continues to be skewed towards our largest customer, consistent with the current market share split between our customers. Shifting to the foundry and logic probe card market, as expected, fourth-quarter demand in this market was comparable to the third quarter. In the current first quarter, we expect increased foundry and logic demand levels. Notably, this growth is not anticipated to come from our historical drivers of client PC and mobile, but instead from a significant shift toward rapidly growing data center applications like network switches. Our evolving customer makeup offers important evidence of this diversification. As our top customer historically, a large microprocessor IDM was not a 10% customer in either the fourth quarter or for 2025 overall. Even as we posted all-time record revenues in both of those periods. Continue to partner closely with these customers, supporting turnaround initiatives in their core business, as well as their effort to become a leading foundry. Given our long-standing partnership and corresponding market share, FormFactor is well-positioned to grow with this customer as they make progress in these areas. At the same time, like in HBM, we're successfully executing our strategy to be a top supplier to all the leading customers in the industry and continue to build the foundation for market share gains at a large fabless CPU manufacturer. We're also accelerating the pivot to fast-growing high-performance compute applications with our ongoing production qualification in leading-edge GPU applications. We continue to expect to be in a position to compete for volume orders for GPU probe cards later this year. Aric McKinnis: Finally, Mike Slessor: As an additional longer-term component of high-performance compute exposure, we're also growing our custom ASIC XPU business on the back of a multimillion-dollar mid-2025 design win and are expanding the future opportunity set in this space by deepening our engagements with the hyperscalers and their ASIC design partners. Turning to our system segment, we delivered the expected sequential revenue increase in the fourth quarter driven by customer investment in co-package optics and quantum computing. In the first quarter, we're expecting the typical seasonal reduction in demand for co-package optics or CPO continues to be a primary area of focus for us, as it represents an exciting growth opportunity where we have a strong leadership position. Strengthen FormFactor's leadership in CPO test, we recently made an important strategic initiative to our optical test capabilities with the December acquisition of Keystone Photonics. Keystone's innovative and differentiated optical probe technology enables high-efficiency optical coupling to our customers' photonic devices. In much the same way, our advanced MEMS probes provide best-in-class electrical connectivity to our customers' chips. These optical and electrical probe technologies enable the highest fidelity test and therefore yield, whether the device runs on photons, electrons, or in some cases, like CPO, both photons and electrons. Together with our market-leading CM300XI and Triton test platforms, Keystone's optical probe technology expands FormFactor's leadership position as we help enable the adoption of energy-efficient optical data transmission in tomorrow's data centers. Before I turn the call over to Aric, I want to reiterate our continued commitment to achieving our target model. As expected, we reached run-rate target model revenue levels before reaching target model gross margin levels, but have made excellent progress in closing the gross margin gap. We plan to continue that progress with output increases and gross margin expansion across our existing manufacturing footprint, followed by further improvement as we bring our Farmers Branch expansion online at a structurally lower cost. We look forward to demonstrating continued progress in 2026 and are excited to share FormFactor's next target financial model in May at our Analyst Day. As we meet the challenges and opportunities of increased test intensity and higher test complexity at the intersection of advanced packaging and high-performance compute. Aric? Aric, you're up. Stan Finkelstein: Thank you, Mike, and good afternoon. Aric McKinnis: Before we dive into the details of our fourth-quarter financial results, I want to remind you of our strategic emphasis on improving growth margins. Over the past two quarters, we have made gross margins and our commitment to achieve our target model one of our top priorities as a company. We are pleased to have reached our revenue target and believe we are on track to demonstrate the target model gross margins adjusting for the impact of tariffs within 2026. As we expand gross margins, we are committed to achieving these improvements in a sustainable way by driving operational effectiveness and better financial discipline across the company. Over the past two quarters, we have taken several actions including first, reducing and reallocating our workforce and more effectively deploying those resources, even as we execute on record-level demand. Second, driving improvement in manufacturing yields in key process areas. Third, innovating to reduce manufacturing spending. And finally, reducing cycle times in our key manufacturing operations. We are seeing the benefits of these actions in the unit cost of our products and we have made even better progress in Q4 against our multi-quarter gross margin improvement roadmap than we expected. Looking back just two quarters, Q2 2025 gross margins were 38.5%. Through Q4 2025, we have generated a cumulative improvement of 540 basis points in gross margins. And at the midpoint of our guidance, we expect to generate an additional 110 basis points of expansion in Q1 2026. Operational effectiveness improvements like reduced cycle times and higher yields are structural in nature and will drive durable gross margin expansion. These fundamental improvements in underlying cost drivers have a system-wide benefit that will help us weather and partially offset the impact of inevitable shifts in product mix and volumes. Over the coming quarters, we will continue to drive a relentless focus on attacking these key cost drivers within our existing footprint. In addition to the improved operational effectiveness, we also believe that driving good financial discipline is critical to our long-term success. Accordingly, we continue to examine our overall portfolio of products, markets, and businesses. Aric McKinnis: Evaluating those elements of our operations through the lens of how each best supports our target model and our key strategic priorities. The reduction in force and site consolidation announced early in January is a recent example of how we are executing on this front. While the trajectory of gross margin improvement and the path to the target model is now evident, our journey is not over. We will continue to drive incremental improvements throughout 2026 at a more moderate pace, given the speed at which we have worked through our roadmap to date. Even as we drive the unit cost of our products down, we are simultaneously enabling higher output from our current infrastructure. Our exposure to fast-growing markets that Mike described is generating demand that requires more output. As reflected in our record Q4 2025 revenues and our outlook for Q1 2026, we are demonstrating the ability to produce at a higher level and in a more efficient footprint. Improvements in cycle times, yields, and how we deploy our workforce, in addition to reducing unit costs, have the secondary benefit of increasing the available output from the same resources in our existing manufacturing footprint. These improvements enable us to get more out of each tool, process, and site by ensuring more good product out and better fungibility of our workforce. Aric McKinnis: As Mike mentioned, we expect our Farmers Branch site to begin to come online later this year and to ramp over the course of 2027. This expansion is a good example of how we are taking advantage of our strong balance sheet to increase available capacity quickly at a structurally lower cost and create the foundation for further gross margin expansion and growth beyond the current target model. Something we are excited to describe in further detail at our Analyst Day in May. Stan Finkelstein: As you saw in our press release, our Q4 2025 results were favorable to our outlook on revenues, gross margins, and EPS on both a GAAP and non-GAAP basis. Q4 2025 revenues of $215.2 million came in at the high end of the Q4 outlook range of $205 million to $215 million. GAAP gross margins for the fourth quarter were 42.2%, up 40 basis points from 39.8% in Q3. Cost of revenues included $3.6 million of GAAP to non-GAAP reconciling items which we outlined in our press release issued earlier today and in the reconciliation table available in the Investor Relations section of our website. On a non-GAAP basis, gross margins for the fourth quarter were 43.9%, 290 basis points higher than the 41% in Q3, and above the high end of our range. This increase in non-GAAP gross margins was driven by improvement in gross margins for the probe card segment, which were up 364 basis points to 44.5%, partially offset by a decrease in the Systems segment which declined 50 basis points. Our GAAP operating expenses were $67.3 million for the fourth quarter, and down 340 basis points from the same period in the prior year as a percent of revenue, demonstrating additional leverage and continued spending discipline across the P&L. Even as we continue to invest in R&D to drive innovation and fund projects like Farmers Branch for future growth. GAAP net income for the fourth quarter was $23.2 million or $0.29 per fully diluted share, up from GAAP net income of $15.7 million or $0.20 per fully diluted share in the previous quarter. Fourth-quarter non-GAAP net income was $36.6 million or $0.46 per fully diluted share, up from $25.7 million or $0.33 per fully diluted share in Q3. The GAAP effective tax rate for the fourth quarter was 13.6%, and the non-GAAP effective tax rate for the fourth quarter was 15.7%. Moving to the balance sheet and cash flows. We had free cash flows in the fourth quarter of $34.7 million compared to $19.7 million in Q3. The $15 million increase in free cash flows demonstrates the cash-generating power of the company at improved margin levels and the value of good financial discipline in working capital and operating expenses. Operating cash flows were $46 million in the fourth quarter, $19 million higher than the $27 million in Q3 2025, primarily driven by improved net income on higher revenues and gross margins and efficient use of working capital. As Mike described, we used about $20 million in cash to acquire Keystone Photonics, a key element of our co-packaged optics product roadmap. And at quarter-end, total cash and investments were up $9.1 million to $275 million. Since purchasing the Farmers Branch facility, we have made excellent progress in executing our planning and pre-startup activities. We continue to expect the cash expenditures related to Farmers Branch Capital will be between $140 million and $170 million over 2026. In addition to the capital spending, we expect to incur roughly $6 million in preproduction operating expenses in Q1 2026, up from $1.7 million in Q4 2025 and in line with our project roadmap. Over the course of 2026, we expect preproduction operating expenses related to the ramp of Farmers Branch to be between $20 million and $25 million. Once production begins in 2026, the majority of these costs will be recorded as cost of goods sold, and upon completion of the ramp, we expect Farmers Branch to be accretive to gross margins. During the fourth quarter, we did not repurchase any shares. At quarter-end, authorization of $70.9 million remains available for future repurchases under the $75 million two-year buyback program that was approved and announced in April 2025. We remain committed to our share repurchase program as a tool to offset dilution from the stock-based compensation program. Over the two-year period of the program. However, in the short term, we are prioritizing our deployment of cash to accelerate the ramp of our new manufacturing site in Farmers Branch. Turning to the first quarter non-GAAP outlook. We expect Q1 revenues of $225 million plus or minus $5 million. This increase in revenues and the impact of continued gross margin improvement initiatives described earlier are expected to result in higher non-GAAP gross margins of 45% plus or minus 150 basis points. As a reminder, we continue to see about a 200 basis point impact to gross margins from tariffs. We are continuing to take actions to mitigate the impact of these tariffs, but those efforts are ongoing. At the midpoint of these outlook ranges, we expect Q1 non-GAAP operating expenses to be $62 million plus or minus $2 million, approximately $4.5 million higher than Q4, mainly due to expenses related to the startup costs for Farmers Branch. Our Q1 non-GAAP effective tax rate is expected to be within the range of 15% to 19% with a similar range expected for the fiscal year. Non-GAAP earnings per fully diluted share for Q1 is expected to be $0.45 plus or minus $0.04. A reconciliation of our GAAP to non-GAAP Q1 outlook is available on the Investor Relations section of our website and in our press release issued today. As demonstrated by our Q4 results and our Q1 outlook, we're making encouraging progress to our target model. We also believe that we have more room to run. Underpinned by both our initiatives to improve structural cost and our expanding leadership position in the fast-growing markets that Mike described. Look forward to sharing our new target financial model and the key elements of our strategy at our planned Analyst Day in May. With that, let's open the call for questions. Operator? Stan Finkelstein: Thank you. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please limit yourself to one question and one follow-up. One moment for questions. And our first question comes from Matthew Frisco with Cantor. You may proceed. Matthew Frisco: Hey, guys. Thanks for taking the question. I mean, to kick things off, obviously, very strong performance on the gross margin side, on track to hit that mid-40% level, three quarters ahead of plan. So what's the big change statement here over the past ninety days? And how should we think about the primary drivers and the magnitude of the continued expansion here ahead of the Farmers' Rep? Yeah. Hi. Thanks for your question. Yeah. We're very pleased with the results that we have seen to date. And the Q4 2025 gross margins of 43.9% definitely represent a faster than expected improvement on our roadmap to improve gross margins. And we are a little surprised ourselves, but we're happy about that. We took actions. As a reminder, we took some actions to reduce our workforce early in Q4 starting to see the full benefit of those actions. And we continue to see improvements in our output in terms of cycle times and yields in our processes. And those are the primary drivers of improvements we're seeing in our gross margin performance. Now we do expect that as we look forward into 2026 that we may not make progress at the same speed and perhaps in smaller increments than what we've seen to date, but we believe that we are still on track to hit our target model gross margins at the target model revenue levels within 2026. Great. Thanks. And then moving to the memory side, as we think about forms revenue growth through the year within the backdrop of the HBM4 transition, accelerating supplier build plans, robust pricing tailwinds, customer market growth coming in ahead of expectations, maybe offer color on how you're thinking about these moving parts for FORM and how should we be linking these industry dynamics to FORM's growth potential through the year for DRAM? Mike Slessor: Yeah, Matt. It's Mike. I'll take that one. Certainly, they're all tailwinds and some very powerful tailwinds. It's one of the reasons why we're investing aggressively in both making sure that we're getting as much as we can out of the existing footprint and then ramping Farmers Branch as fast as we can. We believe the overall demand environment is gonna continue to be robust. Based on conversations with customers, you know, data points like both major ATE manufacturers having very robust forecasts and views of 2026. And looking at the overall industry and where we're at. So we definitely expect memory DRAM in particular, to continue to grow. And it's an area where we're very focused on expanding our both competitive advantage but also our capacity so that we can capture as much market share as we can. Matthew Frisco: Thank you. Stan Finkelstein: Our next question comes from Charles Shi with Needham and Company. Charles Shi: Hi. Good afternoon. Nice results. Maybe the first question, your Q1, guidance implies basically $900 million annual run rate already, and we knew that, you in the past, you said you exist capacity, excluding Farmers Branch, was around maybe it can be slightly above $850 million. So any chance for you to go higher run rate between now and when the Farmers Branch comes online? That's the first question. Thank you. Yeah. Thanks for your question, Charles. As you can see from our Q4 results and our outlook for Q1, we believe we now have the ability to execute at a run rate of $225 million a quarter. We believe that the expansion that we've been able to create there in our output is closely related to the improvement actions that we have been focused on over the past couple of quarters. As we focus on cycle times and yields, those improvements ultimately allow us to get more out of our existing footprint. And get more good product out for every input that we put in. So we're effectively increasing the leverage on our existing infrastructure. And as I noted in the prepared remarks, we continue we're going to be continued our focus throughout 2026 on making further incremental improvement. And so we do expect to continue to squeeze capacity out of our existing footprint over the course of the year. Any thought maybe a quick follow-up, and I do have a second question. So maybe where how much more do you think you can squeeze out out of the existing ones? Like, out of, above that $225 million level? Charles Shi: Yeah. It remains to be seen. As we've noted, we've made substantial progress to date. We expect that our improvements going forward may not be of the same magnitude. We're happy with what we're seeing so far, but, again, very closely linked to our the same initiatives that are driving our gross margin improvement or how we're gonna get additional output out of our. Charles Shi: Got it. Okay. Maybe another question for Mike. Mike, you talked about HBM. You are deeply engaged. With all customers already working on HBM5. R&D. So mind if you, tell us a little bit, what are the key inflections at HBM5 as you can see right now from the test probe card perspective and any thought whether and how any of those things inflections could further benefit the form factor? Thank you. Mike Slessor: Yeah. I think there's several, Charles, and it's one of the reasons why this early engagement with our customers is required. I mean, HBM5 is a couple of years away from volume production. But you need to be ready with some complex R&D and capacity to deliver that complex R&D in volume to meet these ramps. I think the same kind of dimensions that we've seen in the transition from HBM3 to 3 to 4 driving the inflections. Increased layer heights, which are driving increased test intensity, one of them. HBM4 gets to 16 high. We'll see whether HBM5 continues to climb. But sort of and you're well aware of this, I think. The coupling with new packaging and stacking techniques like hybrid bonding are certainly a potential for HBM5. And that's an interesting one for FormFactor because we have tremendous know-how on probing on copper. And without getting into all the details, copper is an important part of a hybrid bonding flow. I think the other thing is a dynamic, again, we've seen through the March of the HBM roadmap, and that's increased speeds. Both the individual IO speeds where the end customers are continuing to push for individual pin rates to go up. Most recently, this 11 gigabit per second spec for HBM4, but also the overall stack throughput. And when you think about testing at these high speeds, with good productivity, and that means high parallelism, while dealing with all of the challenges associated with power and thermal. These are all I'm not sure I'd call them inflections. But continued places where collaboration with customers is absolutely required to solve some very significant technical challenges. Charles Shi: Thanks, Mike. Aric McKinnis: Thank you. Stan Finkelstein: Our next question comes from Craig Ellis with B. Riley Securities. You may proceed. Craig Ellis: Yeah. Thanks for taking the question, guys, and congratulations. On very strong execution, both with revenues and the underlying drivers to much better gross margin. Mike, I'm gonna start with you, and I'll stick with the broader theme that Charles was on with DRAM. What I wanted to follow-up on specifically in your comments, you had indicated, I believe, that the company is gaining share at each of the top three DRAM OEMs, and so my question is, can you help us with how that's playing out in terms of the magnitude of gains that are possible across customers, the timing with which that will occur and any of the other things that might help us as we think about what the financial impact of that could do over the coming quarters? Thank you. Mike Slessor: Sure. Well, I think as most people know, we have a very strong share position as our number one customer. And so right now, the HBM market's kind of a sweet spot for us. That's why it's been such an initiative to work closely with the other two HBM manufacturers, customers for us, to make sure we're taking the competitive advantages of the SmartMatrix technology high parallelism and high speed, and really starting to use that as a beachhead, if you will, to increase market share of both of those customers. Now I don't as I said, I think it's a sweet spot. We're never maybe not never. It's unlikely that we have grow to share positions like we have at our number one customer. But there's really only two suppliers that can do anything close to this. And so I think there's the element of to really gain share at those two based on the technical differentiation that we have for HBM. Tough to put a magnitude on it at this point, but given the growth of the HBM market and some relatively low in incumbent share positions at those other two customers, it's a significant opportunity. Craig Ellis: Interesting. Thank you. The second question, really relates to how well the business is executing at its current manufacturing facility and your proximity to what would have been previously considered an output ceiling. Can you just talk about your confidence in being able to meet customer demand if in the near term, grows above $225 million a quarter before you can get Farmers Branch up? And related to that, assuming that customer demand remains on a very strong trajectory, how quickly can you bring up Farmers Branch and how material it how material can it be? In the next twelve to twenty-four months to production and revenue? Thank you. Aric McKinnis: Yeah. Thank you for your question. As you've seen, we've continued to increase the output of our current footprint, and we're going to continue to make the improvements maybe at a slower pace through 2026 to drive additional yield and then drive additional improvements in cycle times that will also increase our output capacity, if you will. However, you know, Farmers Branch come online on schedule. At the end of the year. There's been no changes to that timeline. That obviously provides us additional capacity beyond this year. Will continue to do the best we can to enhance our throughput through this year. And we'll talk about the longer term in analyst or at our Analyst Day in May. And that's where we'll really be able to see kind of the longer term. Our business continues to remain relatively short-term visibility, right? We continue to operate an insurance business. You know, with visibility within a quarter. You know, we're doing what we can to react within timelines that we have, and I think we've done a pretty good job so far doing that. Craig Ellis: And on that note, Aric, if I could just ask a follow-up to it. Clearly, you your team executed just incredibly well in the fourth quarter given the big surge in gross margin. Was there anything that you would consider to be a one-off in that execution or are the levers that you're pulling things that you can continue to pull? If the demand remains very strong. Aric McKinnis: Yeah. Good question. I think that if I were to look at the increase from Q2 2025 through the end of the year and the 540 basis point improvement that we generate over that period of time, we estimate that about two-thirds of that improvement is related to the initiatives that we've been driving on the cost side. Things like increasing our site cycle time actually, decreasing our cycle time and increasing our yields. And the remainder is things like volume and we did benefit from volume in Q4, right? So we still have some additional work that we're wanting to do there. But as we've said in our last call and again in this call, really focused on changing the underlying cost drivers of the business so that at all operating levels and mix scenarios that we see, we are improving our performance and our leverage on our capacity, on our sites, and on our cost structure. Very good. Thanks, Mike. Craig Ellis: Thanks, Aric. Aric McKinnis: Thank you. Stan Finkelstein: Thank you. Our next question comes from Brian Chin with Stifel. May proceed. Brian Chin: Hi there. Good afternoon. Thanks for letting us ask a few questions. Maybe first, just to square the Q1 revenue guide. I did notice that system in Flash probe card revenue were both pretty strong sequentially in Q4, but systems can be seasonally softer in Q1? So when I look at the $10 million revenue growth Q1 versus Q4 at the midpoint, is probe card revenue maybe up more than the $10 million sequential? And how much of that sequential revenue increase is DRAM versus foundry logic? Yeah, Brian. You're right. And I parsed it a little bit in the prepared remarks. We do expect systems to be down in the first quarter as it often seasonally is. Also undergoing a bit of a transition as we start to ramp up CPO and focusing resources on that because it's an exciting opportunity. But, obviously, the implication there given the midpoint of the guide sequentially up $10 million is the probe card business is gonna grow by more than $10 million. It's roughly equal parts of foundry and logic. And DRAM. And as I said in the prepared remarks, we're seeing some real strength in Foundry and Logic. In areas that have not typically driven the business historically for FormFactor. Not PC and not mobile, but instead things like data center network switches. In DRAM, the step up to a new record that we anticipate in the first quarter is due to HBM growth. So I hope that gives you enough detail for some of the moving pieces. But, yeah, we expect probe cards to outgrow systems. Right, and be responsible for the majority of the step up. In fact, more than the step up in Q1 given the sequential decrease in system. Brian Chin: Okay. Great. Maybe the two follow-up questions. One, on sort of the constraint in the next few quarters that you referenced, what is your sense of how constrained some of your advanced probe card peers are either in DRAM or foundry logic? And do you expect peer capacity to come online in a similar time frame? Mike Slessor: Yeah. I think if you follow, our major competitors, closely, I mean, you know, 70% of probe card market shares owned by three of us. We have a primary competitor in Foundry and Logic and a primary competitor in DRAM. And they, like us, have all been transparent about the need and the initiatives to add capacity. You can imagine that we've got our head down here, and they're trying to add our capacity as fast as we can. This is an area, sure, we like to keep our content at competitive antenna up. But this is one where what our competitors do doesn't really make a difference to what we're gonna do. Aric talked about the faster than expected pace on both output and gross margin. We're applying the same urgency with getting Farmers Branch up and running. And so we're gonna run as fast as we can and try and capture some incremental market share if we can just with the ability to deliver. Great. That's helpful. Maybe just last question. Can you size the AI GPU plus XPU ASIC plus, I guess, data center networking probe card TAM, and 2025, kind of where your share shook out last year? And then when you think about the growth, of the TAM in 2026, should it be similar to kind of that growth rate in year-over-year growth rate in AI accelerators? I think TSMC talked about a multiyear TAM, but it was sort of in the 50% plus range. Mike Slessor: Yeah. I think if you look at and I you know, I'm gonna broad brush kind of the AI opportunity. If you look at the growth rate associated with things like GPU, custom ASIC, networking in the server rack, both scale-up and scale-out. These are areas of the industry that are growing much faster than the overall industry growth rate, which is growing pretty fast by itself. I don't know that I'd sign up for 50% growth but it's clearly growing quicker than the rest of the industry. And you know, as we've talked about, we have some share gain opportunities inside that as well. Both with the merchant GPU and the custom ASIC business. We've got strong positions in the networking piece, but are working to build out these other pieces. And it's an area where there's tremendous focus internally and with our customers on making sure that we're driving significant market share positions with those. I had to estimate it, you know, we're talking about hundreds of millions of dollars of SAM for all of those different things in 2025, and we expect them to grow in 2026 and beyond. Brian Chin: Great. Great. Thanks, Mike. Aric McKinnis: Thank you. Stan Finkelstein: Next question comes from Robert Mertens with TD Cowen. You may proceed. Robert Mertens: Hi. This is Robert Mertens on, for Krish Sankar. Thanks for taking my question. I know you guys have spoken to great lengths about what you're seeing in the DRAM market across the traction across all the high bandwidth memory manufacturers. Can you provide a dollar amount, for high bandwidth memory probe card sales this quarter? And just any color you could give us on, on this calendar year, the shakeout maybe between what you're expecting between traditional DDR and DDR5 designs and, those from high bandwidth memory. Thank you. Yeah. Mike Slessor: Yeah. It's just an interesting question, Robert. Let me start with our HBM revenue in the first quarter. Again, connecting the dots on the guide that we provided, we expect DRAM to step up to another record in the first quarter with that growth being driven by HBM. And so know, if in Q4, it was kinda mid-forties. Think of it as a low fifties kind of number for Q1 based on where we currently sit. Now remember, this is a terms business, and lead times still are well within a quarter. But our visibility for certainly the more complex DRAM cards is now extending out to the end of the quarter. If we then kind of think about commodity DRAM and the mix between HBM and DDR, this is a very dynamic and active situation. Not surprisingly. Right? Our customers are wafer start constrained. And they're making choices every day of whether they start HBM wafers, HBM core die wafers, or a DDR5 or a DDR4 part. And so for me to speculate, beyond kind of our you know, six, seven, eight-week visibility, I don't have a view. And I'm not sure our customers have a view of how they're gonna respond to the relative profitability they can generate the relative share gains they can generate given how dynamic the DRAM, both HBM and DDR4, DDR5 are right now. What I will say is we're positioned to serve both, and we'll continue to stay in close contact with our customers to make sure we are serving both effectively. Robert Mertens: Great. Thank you. That's helpful. Stan Finkelstein: Thank you. Our next question comes from Elizabeth Sun with Citi. You may proceed. Elizabeth Sun: Hi. Thanks for taking my question. I guess the first question is how should we think about the foundry logic market this year? So, you know, there I see there's a lot of moving pieces. There's upside from, you know, networking, potential GPU qualification, but there's also some softness on your traditional, like, bigger mark bigger end market or soft smartphones and PCs. So I like to kind of early, but I want to get your thoughts on how should we think about phonologic growth this year. Mike Slessor: Yeah. Well, we do expect it to grow for us and as a market overall. And one of our key initiatives is to gain share. And so if the market's growing and we're gaining share, clearly, we're gonna have a growth here. Now there's a lot of work to do in that. Right? We've talked about the GPU qual we're on track for and some of these other share gain initiatives, let's call it. One of the, I think, important pieces I do wanna highlight is you know, the shift we've driven to make sure that we're participating in the sort of spectacular growth associated with high-performance compute. You see that in some of the first-quarter results, again, networking switches and some other pieces. But the other point I made on the call the fact that we delivered a fourth quarter and full-year revenue record without our, you know, large microprocessor IDM being a 10% customer. I think is a testament to the shift we've driven and the exposure we've now generated in the high-performance compute sector. So overall, lots of different pieces, but we expect it to grow and we have expect to gain share in 2026. Elizabeth Sun: Great. Thanks, Mike. And then Aric, on gross margin, I think you talked about you are still on track to achieve the target model gross margin. I think that's 47. Is that including the 200 bps tariff impact and also for that 200 bps, what's the mitigation method you are implementing? And how should we think about, like, you know, some upside from the mitigation? Aric McKinnis: Yeah. The target model is 47% margins at $850 million a year run rate for revenue. And that did not include tariffs as potential impact. And so what we've said is that we expect to hit target model gross margins adjusted for our tariff headwind which is 200 basis points. So 45% is what we're targeting as long as we have a 200 basis point tariff headwind. Now that said, we really want to stop spending money on tariffs. So we're doing everything we can to mitigate what's going on there. And the primary path that we're pursuing right now is something called drawbacks where we work with the customs department to reclaim tariffs that we have paid for items that we have re-exported. That's a very detailed time-intensive process. We're working through it. You know, we would love for that to go faster if at all possible, but it could be several quarters before we see any benefit in our P&L from recoveries there. Elizabeth Sun: Thanks, Aric. Stan Finkelstein: Thank you. And as a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please limit yourself to one question and one follow-up. One moment for questions. Our next question comes from Vedbati Schroeder with Evercore ISI. You may proceed. Vedbati Schroeder: Hi. Thanks for taking my question. So the first one I had is, if you could quickly give us an update on where you are the qualification process for GPUs and then for the custom ASIC, and it sounds like you kind of have it down and you're expecting revenues in the second half from both of those opportunities. Is that right? Mike Slessor: Yeah. Well, let me start with custom ASICs because as we updated you in mid-2025, we actually already have some design wins that have generated multimillions in revenue in the custom ASIC space. And are now seeing the second leg of that for some recently announced custom ASIC. We've got a long way to go in that space to make sure we've got the broad customer coverage and broad customer engagement to make sure that we're a key supplier on all the large custom ASIC projects in the industry. But you know, we're clearly relevant. We're generating multimillion dollars of revenue, and we see it as a growth area. On the GPU qual, continue to make excellent progress. We're in a reliability test part of the qualification where our cards are being run, you know, with hundreds of wafers, multiple touchdowns, just making sure we've got the quality and reliability required to operate in a very, very demanding test application. And we continue to expect to generate revenue from this merchant GPU call in the second half of the year. Vedbati Schroeder: Understood. And have you, like, quantified how much that opportunity could be? Mike Slessor: We've kinda waved our hands at it. You know, if you look and this is probably the merchant GPU opportunity. You know, it's probably was a $50 million spend primarily with our competitor in Foundry and Logic in 2025. That may be conservative. So as test intensity continues to climb, as spend continues to climb, there's a significant opportunity there, obviously, as we're running something like $225 million a quarter. Custom ASIC one's a little harder to size. But we see significant growth there and the continued investment in these programs and projects make it a place worth really, you know, focusing our resources and making sure we've got strong market share and good coverage there. Vedbati Schroeder: Understood. And then the second question I had was on the gross margin side, you know, you talked about cost strategies that bring up the gross margin. Manufacturing footprint. Like, does pricing play out at some point at pricing become a piece where you could drive gross margin expansion just given how much the test complexity is increasing in foundry logic and in HBM DRAM? Mike Slessor: Yeah. Let me take that. I know it was a margin question, but pricing certainly in the area of customer and product focus. So I'll take that one. Look. Anytime in this industry where you deliver incremental value you often are able to share if you've done your job. And share in that value you're providing for a customer. Often for FormFactor, and for many other peers in the test and even WFE space, that comes from providing some sort of product attribute, higher throughput, better yield, you know, a higher performance, a better spec. But there's an interesting situation right now where you know, if there's a specific program that's super important for a customer, and valuable for their time to market, we're able to share in that value as well, share in that conversation. Now it's not across the board, but it is an interesting time in the industry where the elements to share in the increased value the industry is creating are more than they have been in the past. Aric McKinnis: Thank you, Shane. And maybe I'll just add maybe I'll just add to that really quick that, you know, our main path for gross margin improvement is not pricing, but rather more long-term controllable items on the cost front. That's why you hear us emphasize that so much. Of course, if there's opportunities on the pricing bump, front where we can deliver value, as Mike said, we love to see that. But that's not what we're relying on in order to drive long-term gross margin improvement. Vedbati Schroeder: Understood. Thank you. Stan Finkelstein: Thank you. Our next question comes from David Duley with Steelhead Securities. You may proceed. David Duley: Thanks for taking my questions, and congratulations on the awesome execution on the gross margins. My questions kind of a two-part question on HBM. You talked about the increased intensity, as we go from HBM3 to HBM4 to HBM5. I was just wondering if you could take a guess as to what the increased intensity was or probe intensity is between HBM3 and HBM4. Would it be a similar type of increase intensity as we move to HBM5? Mike Slessor: Yeah. So one of the real drivers of test intensity is the stack. If I'm going to put your if our customers are gonna put 16 core die in the stack in of eight core die in the stack. As for HBM3, that's gonna increase the test intensity. Now there's other puts and takes in this. Their yields are going up. They're figuring out how to get rid of different defect modes. But I think a good rule of thumb is one that we've articulated in the past that maybe 20, 25% on a like-for-like same stack out basis is not a bad way to think about the test intensity as we go from HBM generation to HBM generation. David Duley: Okay. And then as far as I think we understand you have very high market share at the market leader in HBM. I was just kinda curious so I can understand what the potential opportunity is. What do you guess your market share is on a combined basis with the other two HBM players? Mike Slessor: I don't we haven't quantified that for people. And because it's tough to parse through all the different HBM applications. Excuse me, at each customer. What I'll say is and I think I already said it, is we have low enough incumbent share that there's a real opportunity there as we deliver into places where we have differentiation, like the high parallelism, high-speed test insertion I talked, where we're driving very strong share at all three manufacturers in that particular application. David Duley: Well, maybe another way to ask it is, so you're the number two source at the other two guys, essentially. Correct. Mike Slessor: From an overall DRAM standpoint. David Duley: Alrighty. Thank you. Stan Finkelstein: Thank you. I would now like to turn the call back over to Mike Slessor for any closing remarks. Mike Slessor: Thanks, everybody, for joining us. As I said, as I closed my prepared remarks, we're looking forward to continuing to demonstrate progress in growing revenue and expanding gross margin and profitability in our existing footprint, and then updating you on our May Analyst Day on the longer-term prospects for FormFactor. As we bring the Farmers Branch site online as well and drive more growth, more gross margin expansion. Thanks again for joining us, and take care. Stan Finkelstein: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Cerence Inc.'s First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, we will open up for questions. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's call is being recorded. I would now like to hand the conference over to your speaker, Kate Hickman, Vice President of Corporate Communications and Investor Relations. Please go ahead. Kate Hickman: Hello, everyone, and welcome to Cerence Inc.'s First Quarter 2026 Conference Call. I'm Kate Hickman, VP of Corporate Communications and Investor Relations. Before we begin, I would like to remind you that the call may involve certain forward-looking statements. Any statements that are not statements of historical fact, including statements related to our expectations, anticipation, intentions, estimates, assumptions, beliefs, outlook, strategies, goals, priorities, objectives, targets, and plans are forward-looking statements. Cerence Inc. makes no representations to update those statements after today. These statements are subject to risks and uncertainties which may cause actual results to differ materially from such statements and expectations. As described in our SEC filings, including the Form 8-K with the press release preceding today's call, our most recent Form 10-Q, and our Form 10-Ks filed on November 20, 2025. In addition, the company may refer to certain non-GAAP measures, key performance indicators, and pro forma financial information during this call. Please refer to today's press release for further details of the definitions, limitations, and uses of those measures and reconciliations of non-GAAP measures to the closest GAAP equivalent. The press release is available in the Investors section of our website. Joining me on today's call are Brian Krzanich, CEO, and Tony Rodriguez, CFO. Please note that slides with further context are available in the Investors section of our website. Before handing the call over to Brian, I would like to mention that we will be participating in the 38th Annual ROTH Conference taking place in March. Now onto the call. Brian? Brian Krzanich: Thank you, Kate. Good afternoon, and welcome, everyone. I'm excited to speak with you today following another strong quarter of performance for Cerence Inc. We are pleased with our results this quarter, with revenue of $115.1 million and adjusted EBITDA above the high end of guidance at $44.6 million. Importantly, we generated record quarterly free cash flow of $35.6 million, demonstrating continued profitability. Tony will provide further details on our Q1 results later in the call. As I mentioned on last quarter's call, we have three key priorities for 2026. They are advancing our business through leading technology, including our next-gen platform, XUI, maintaining cost diligence, and driving top-line growth. First, we made important progress in driving our business through continued innovation, especially as we geared up for the CES in early January. On the ground in Vegas, we showcased the latest advancement to Cerence XUI, highlighting new LLM palette experiences spanning both edge and cloud. We demonstrated our Calm Edge small language model running across multiple chipsets, enabling faster performance, lower latency, and reliable in-car interactions, even when connectivity is limited. Plus, we showcased XUI running live in a Geely vehicle, marking the first public demonstration of a near-production car powered by XUI. And we showed off our Audio AI suite, including advanced multi-speaker and multi-zone capabilities. Importantly, within Q1, we completed the development of several of our new AI agents, which are now fully integrated into XUI but can also be implemented in non-XUI platforms. At CES, for the first time, we demonstrated our mobile work agent developed in partnership with Microsoft. This agent turned your car into a trusted device with voice-first access to Microsoft 365 Copilot, Teams, Outlook, and OneNote. This was incredibly well received, and we have significant customer traction and active commercial negotiations coming out of the show with OEMs who want to bring this new agent to their drivers. We also debuted two new purpose-built AI agents that expand our portfolio beyond the in-vehicle experience into broader areas of the automotive ecosystem. The new dealer assist agent helps dealerships automate sales and service workflows like lead capture, test drive booking, and service scheduling while integrating with CRM and dealer management systems to improve responsiveness and efficiency. The ownership companion agent enables OEMs to provide drivers with an always-on in-car service companion that supports diagnostics, maintenance guidance, and instant service booking, creating a more connected ownership journey and strengthening brand loyalty. The introduction of these new agents expands our reach and enables us to deliver an end-to-end full journey solution from vehicle purchase to regular in-car usage, to troubleshooting, and to service and maintenance. Overall, feedback from customers, partners, media, analysts, and investors was incredibly positive, including Cerence XUI being named Gizmodo's best in-vehicle assistant in its best of CES 2026 awards. We look forward to continuing the conversations we kicked off at the shows. On our second priority, of cost diligence and strategic capital allocation, in Q1, we paid down $30 million of principal of debt due in 2028 using cash on hand while maintaining our cash position to invest in future growth. In addition, we are continuing our attention to cost management and delivering strong cash performance. In Q1, we completed the implementation of the previously mentioned restructuring plan related to certain foreign operations, further reducing operating expenses and positioning Cerence Inc. for profitable sustainable future growth. For the remainder of fiscal 2026, we will remain diligent and maintain our attention to cost management. Lastly, in terms of our goal of driving top-line growth, we believe there are three key areas of focus. First, increasing adoption of Cerence XUI, driving greater penetration of our stack in existing programs, which we believe will deliver increased PPU. To give you a sense of how we're progressing with customer adoption of XUI, as of today, we have now five significant customer programs for XUI. There's the previously mentioned programs with JLR and a brand within the Volkswagen Group. At CES, we announced our plans with Geely for their cars shipped outside of China. In Q1, we received a new award from another major Chinese EV OEM, leveraging XUI for their overseas development in five languages. We received an award from a major volume global automaker, which we look forward to sharing more about in the future. These programs are currently on track to hit the road during the calendar year with strong PPU growth. There are a few important things to note about these deals. One, that we have a strong win rate for XUI and that these wins have been against big tech competition. This not only tells us that XUI is needed in the market, but we believe offers a good indicator of how we'll perform in the outstanding RFQs we have on the table. Two, all of these programs have PPUs that are higher than our current run rate, demonstrating clear value and OEM willingness to invest. We continue to see strong customer traction outside of XUI as well. In Q1, we signed several important deals. A win that brings our generative AI apps, that's Cerence ChatPro and Car Knowledge, to additional countries with HKMC. Audio AI wins with GM, Mercedes Benz, and Daihatsu. An upgrade to our latest neural TTS for Mercedes. We contracted development of Slovenian language to help our customers meet regional language requirements, expanding our product offering. Importantly, on the GM Audio AI deal, this was a competitive win back that brings our speech signal enhancement, one of the highest margin elements of our software stack, to GM's next-generation infotainment platform across all brands. This lays out the foundation for potential adoption of additional elements of our Audio AI suite with this major North American automaker in the future. We also saw eight programs start production, including BYD, GWM, and HKMC. Trucking programs with Scania and Ford trucks also went live this quarter, marking continued strong momentum in adjacent transportation markets and building upon our existing work with Daimler Trucks, Volvo Trucks, PACCAR, and Iveco Trucks. Our second area for potential growth is increasing the number of connected vehicles shipped, resulting in an expansion of our connected service business. As Tony will detail, we continue to see growth in connected services as customers continue to adopt connected solutions, and we believe this momentum will continue. This is a key pillar of our long-term growth strategy, providing high-quality, predictable revenue. Third, we have an opportunity for growth in our non-automotive businesses. In Q1, we continued to operationalize our strategy and model, and we spent time at CES meeting with new customers and validating our approach to bringing the power of agentic AI and voice to new industries, including one of the leading digital signage players worldwide that is interested in integrating our solutions across their portfolio. We have good momentum with awards expected through Q2 and beyond. As a reminder, we believe the impact of our work to expand beyond automotive will be seen in our revenue and profitability starting in late fiscal year 2026 and beyond. This is reflected in the fiscal 2026 guidance we provided last quarter. We believe our IP monetization strategy will continue to yield benefits for Cerence Inc. As we mentioned on our last quarter's call, we resolved our suit with Samsung, which among other things resulted in Samsung agreeing to pay Cerence Inc. a one-time lump sum payment of $49.5 million. We recorded this patent license revenue in Q1, and we believe the resolution of this suit marks an important milestone in our IP monetization strategy. We have cases with Sony, TCL, and Apple outstanding. As a reminder, with most cases taking multiple years to reach resolution, this is a long-term strategy. In conclusion, we believe we have strong technology and customer momentum and are on solid ground to execute on our future growth plans through the rest of fiscal year 2026 and beyond. For Q2, we expect revenue of between $58 million to $62 million and adjusted EBITDA of $2 million to $6 million. We're pleased to reaffirm our full-year guidance that we provided on last quarter's call. Tony will provide further details on this. We believe that Cerence Inc. has the right foundation for long-term sustainable growth, and we're incredibly proud of what our team has accomplished this quarter. With that, I'll turn it over to Tony. Tony Rodriguez: Thank you, Brian. Good afternoon, everyone, and thank you for joining us today. We appreciate your continued interest in Cerence Inc. I'll walk through our first quarter fiscal 2026 results, highlight the key drivers of the quarter, and then share our outlook for Q2. For 2026, total revenue was $115.1 million, up $64.2 million or 126% from $50.9 million in the prior year period. We believe it's important to start by highlighting the continued positive progress in our core technology business, including variable and fixed license revenue, our recurring connected services revenue stream. Excluding the impact of patent license revenue, our core technology lines delivered solid growth and stability, reflecting steady customer utilization, continued adoption across our programs, and the increasing importance of our recurring revenue base. Variable license revenue for the quarter was $30.59 million, up 34% year over year, driven by steady customer utilization, more in-period shipment recognition, and continued adoption across our core programs. Fixed license revenue was $7.8 million in the quarter. These fixed license deals were not present in Q1 of last year, as they were primarily reported in Q2 of the prior year, creating a timing difference. Importantly, for the full fiscal year, we continue to expect fixed license revenue to be comparable to the prior year, and we view this as a time shift rather than a change in underlying demand. Connected services revenue was $14.5 million, up 6% year over year despite a $2 million true-up benefit in the prior year quarter. Without this prior year true-up, connected services revenue would have increased over 20% year over year. This connected services revenue line represents a recurring revenue stream driven by continued expansion of our connected install base and remains a key pillar of our long-term growth strategy, providing high-quality, predictable revenue and improved visibility over time. Now turning to a strategic milestone achieved during the quarter. During Q1, we recorded $49.5 million of patent license revenue, reflecting the successful resolution of our patent litigation with Samsung. As previously disclosed, this resolution includes a one-time lump sum payment to Cerence Inc. The agreement is part of a confidential cross-license arrangement, which limits the level of detail we can provide. That said, we believe this outcome represents an important validation of the strength and breadth of our IP portfolio and a strong proof point for the applicability of our technology across multiple industries and verticals. Including the patent license revenue, total license revenue for the quarter was $87.8 million compared to $22.7 million in the prior year. Professional services revenue was $12.8 million, down 12% year over year, reflecting our continued focus on standardization, scalability, and margin improvement, as well as the impact of revenue deferrals when services are bundled with license arrangements under applicable accounting guidance. Gross profit for the quarter was $99.4 million, representing a gross margin of 86%, up from 65% in the prior year period. This improvement reflects the favorable mix shift towards license revenue as well as continued discipline across cost of revenue. Turning to operating expenses. Total non-GAAP operating expenses were $57.3 million, up $23.2 million compared to Q1 of last year. The increase was driven primarily by the legal costs associated with achieving the patent license outcome this quarter. These costs were directly tied to the patent license value creation and are not reflective of our ongoing run rate expense structure. Additionally, while total R&D spend remained fairly comparable year over year, R&D expense increased as a smaller portion of our R&D costs qualified for capitalization as internally developed software, resulting in higher expense to R&D. Resulting adjusted EBITDA for Q1 was $44.6 million, representing a 39% margin, compared to $1.4 million or 3% in the prior year period. This reflects strong operating leverage, disciplined cost management, and the benefit of the patent license revenue. GAAP net loss for the quarter was $5.2 million compared to a $24.3 million net loss in the same quarter last year. Another key accomplishment during the quarter was the continued deleveraging of our balance sheet. During Q1, we repurchased $30 million in principal value of our 2028 convertible notes at a discount to par, using $37.9 million of cash generated from operating activities. We produced $35.6 million of free cash flow, a record for any quarter in the company's history. While not necessarily indicative of future results, we have generated over $100 million of free cash flow over the last eight quarters. We ended the quarter with $92.1 million of cash and marketable securities, and we believe that the company remains well-positioned to fund strategic initiatives while continuing to strengthen our balance sheet. From a metric standpoint, approximately 11.9 million cars were produced that included Cerence Inc. technology in the quarter, flat from 11.9 million in the prior year first quarter. We also grew our number of connected cars shipped by 14% on a trailing twelve-month basis, underscoring the continued momentum that we are seeing in vehicle connectivity. Also on a trailing twelve-month basis, 51% of worldwide auto production included Cerence Inc. technology, remaining in line with our historical penetration. Adjusted total billings were $231 million, an increase of 2% year over year. As previously discussed, when we look at total licenses shipped, pro forma royalties is an operating measure we use representing the total value of variable licenses shipped in a quarter, including shipments from prior fixed licenses where revenue was previously recognized upon contract signing. We refer to the shipments where revenue was recognized in a prior period as fixed license consumption. Our pro forma royalties were $39.8 million, which were up as compared to $36.7 million for Q1 of last fiscal year. Consumption of our fixed license contracts totaled $8.7 million this quarter, lower than the same quarter last year by 38%, but in line with expectations given the lower level of fixed contracts than historical periods. This drives more pro forma royalties into revenue in the current period as compared to a year ago. Similar to our five-year backlog metric, we will provide the details of our PPU metric in the middle and the end of each fiscal year. That said, we expect the PPU metric to increase by the end of fiscal 2026. Looking ahead to Q2 fiscal 2026, we expect revenue to be between $58 million and $62 million, gross margins between 71-72%, a GAAP net income at about breakeven with EPS between negative $0.01 and positive $0.08, and adjusted EBITDA between $2 million and $6 million. The Q2 revenue guidance reflects some fixed license revenue, but not to the extent of Q2 last year where virtually all of last year's fixed license deals were recorded. We are also reaffirming our full-year fiscal 2026 guidance as previously communicated, with revenue between $300 million and $320 million, adjusted EBITDA between $50 and $70 million, free cash flow between $56 and $66 million, and gross margins between 79-80%. In summary, Q1 marked a strong start to fiscal 2026, highlighted by solid core technology performance, an important IP milestone, and continued progress towards sustainable profitability and balance sheet strength. We believe Cerence Inc. is well-positioned to execute against our strategy, expand recurring revenue, and deliver long-term shareholder value. With that, I'll turn it back to Brian. Brian Krzanich: Thanks, Tony. So in closing, we're pleased with our results this quarter and incredibly proud of what our team accomplished as we start 2026. We remain focused on the three key priorities: driving top-line growth, advancing our business through leading technology, including XUI, and maintaining cost diligence. We believe we have an exciting path ahead and we look forward to sharing more on next quarter's call. We will now open it up for questions. Operator: As a reminder, to ask a question, you need to press 11 on your telephone. Wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Jeff Van Rhee from Craig Hallum Capital Group. Your line is open. Jeff Van Rhee: Great, thanks. Thanks for taking my questions, guys. A couple for me. On the Connected side, I'm curious about the mobile work agent. Just, you know, where does that rank in terms of the agents in XUI other capabilities as you're layering in a lot of sort of AI-centric capabilities? Is that top of the list in terms of what customers are most enthusiastic about? It sounded like you were sort of messaging extremely strong demand there or interest there. And then along those lines, just any sort of framing around the impact that can have on your ARPUs going forward? Brian Krzanich: Sure. So this is Brian. Jeff, I can start. The Microsoft Outlook or Office 365 does not require XUI, and that's the good thing. It's a cloud-based solution that actually just makes the car a trusted device and then puts our LLM on top of that. So we manage the request. So when you put a request in that says, for example, "Hey, I only want to get messages from Jeff while I'm driving to work because he's the most important person I need to talk to this morning," it will filter all that and manage so you're not distracted while you're driving. What's good about that, the fact that it is cloud-based is it can go on existing vehicles that are maybe two to three years old that have a connected capability as well. So what we're seeing is the interest is not only in the future forward-looking XUI systems, but we have OEMs coming to us and saying they'd like to put this on vehicles back two and three years. So it's quite positive. We haven't talked about pricing yet, but it will be an additive, and it will add to our PPU. Did that answer your question, Jeff? I mean, I want to make sure I got it. Jeff Van Rhee: It does. It does. In terms of an existing car, if you make it available to an existing vehicle, is that a revenue event? Or is that just getting people addicted to the technology and you get the revenue down the road? How does that work? Brian Krzanich: It would be a revenue event for us. Jeff Van Rhee: Okay. Got it. And then on the numbers front, you called on a number of interesting bookings or signings, including this major volume global automaker in Q2. I'm curious in terms of TTM billings, is that going to show up? Are we going to start to see TTM billings growing in Q2? And maybe even just a preview of backlog that's going to be reported at the end of Q2. Are those going to step in there where we should see some meaningful uptick both in backlog and TTM billings when we wrap up Q2? Brian Krzanich: So I'm going to let Tony talk about how it'll see in the in the a in a profile. But if I take a look at that, we talked about JLR and the Volkswagen Group vehicle coming in late summer, let's call it. The other ones are we've said the other ones are all going to come in this calendar year. But that's really started production, and they'll ramp. Right? So remember, we get paid both when the car ships out of the factory and then for the connected portion when the car drives off the dealer lot. So the revenue from a pure revenue stream won't start until late summer. And will start to ramp, right, as the vehicles kind of go through their normal ramp in both geography and volume. And then a lot of it will really happen at the back end. So I was trying to do by showing all five is that, you know, we've I've gotten a lot of questions in the past. Hey. I said, you know, we have six RFQs out, and we're, you know, got two guys already signed up with JLR and the Volkswagen Group. Company. I wanted to give you guys an additional update that we're continue now we're actually, you know, signing more deals and seeing good growth. And good PPU growth out of this technology. And so those those six RFQs are turning into actual deal side. Yep. How does that loop for you guys? Jeff Van Rhee: Got it. Got it. Then maybe the other part of the question, just maybe for Tony, is the should we expect are these signings that you're putting up and that you're talking about here big enough that we should assuming continued trend and continued strength in Q2 that we should start to see backlog and TTM billings pop by the end of Q2? Tony Rodriguez: Yeah. These will be reflected in a five-year backlog, of course, because, you know, once the contracts are signed and then as you know, you've been familiar with this, that we project the volume over a contract period or at least it's over five years in the five-year period. And, apply the contract price to the to that volume, and so you will see it in in backlog next quarter. Jeff Van Rhee: Okay. And just last for me, and I'll let somebody else jump on. Also on the connected side, just curious, based on the metrics that you're watching, how is usage of the existing in-car connected systems trending? I think back in the day, you used to hear some metrics around how frequently people were interacting with the system. Just what trends and what learnings with respect to sort of apples to apples usage of a person who has connected in their car over time are you seeing? Brian Krzanich: Yeah. I'd tell you that if you have one of the older systems, the usage is, you know, pretty good early on when you first get the vehicle, and then it kind of drops off. That was before LLM's really available. If you look at vehicles from, say, let's say, the Cerence Assistant and onward, we're starting to see more and more usage. We don't publicly talk about, you know, what's the percentage and all, but what we're seeing is as functionality has increased, and ease of use has increased, we're absolutely seeing stronger usage of the product. And we think as you add things like the Microsoft Suite, the Office 365, and all of that, it's just gonna, you know, really massively increase the usage rate of these products. Jeff Van Rhee: Got it. Great. Thanks for taking my questions. Brian Krzanich: Thank you. Operator: One moment for our next question. Our next question will come from the line of Mark Delaney from Goldman Sachs. Your line is open. Aman S. Gupta: Hey, guys. You have Aman on for Mark. Thanks for taking the questions. I guess, sticking with the XUI and AI product front, thanks for the updates on the pipeline there. Maybe if you can help parse out the interest from, you know, more of the western OEMs versus, you know, you talked about getting two wins, one with Geely and one with another China OEM for overseas business. You know, how is that pipeline relative to the Western OEMs? And are you seeing any difference in time to market from when you sign one of these agreements and actually start of production? And EPPU as well would be helpful. Thank you. Brian Krzanich: Sure. So let's see. So as you just described, three of the five are, I'll call them from Western or more classic OEMs. And so we're seeing, you know, strong interest. We still have, you know, several other OEMs we're talking to in negotiation and deal preparation that tend to be more Western as well. I'd tell you, you know, if I take a look at the JLR and the Volkswagen one, they're running about as fast as the Chinese ones. So I don't see a huge difference. I'd say the western OEMs are becoming especially kind of the lean ones are becoming more and more aggressive about their timing and bringing this stuff to production. So I'd tell you right now, three to five West or more classical OEMs versus the two Chinese brands. We're seeing additional Western OEMs with interest from a TPU standpoint. All we've said publicly is that, you know, the prices we're getting for XUI on these deals is significantly higher than what our current listed PPU is that we've talked about, which is around $5. I think it's $5.05, if I remember correctly. Tony can correct me if I got that off. That we published last quarter. So we're seeing a good significant increase in PPU from these deals. And they're all a little bit different because they all, you know, they take different features and stuff like that. So they're, you know, you'll see, as Tony said, you'll start to see it in backlog. And then you'll start to see it in revenue in the back half of this year. Into fiscal 2027. It'll be more and more significant. Aman S. Gupta: Understood. Thank you for that color. And then maybe one a little more on the financials. I think EBITDA came in a couple million above the high end of your Q1 guide, but you maintain the full-year guide. Are there any, you know, puts and takes or things we should be thinking about through the balance of the year? Is it, you know, how should we think about the full-year guide being maintained relative to the Q1 guide beyond some of those metrics? Tony Rodriguez: Yeah. And a couple of things. One is, you know, yes, we did overachieve on EBITDA, and that was good. We're one quarter in, though, right? So what we want to look at is as we think about the rest of the year, we typically wouldn't change guidance unless there was some significant movement, you know, that would guide us that way for the full year. So what it does is provide us really confidence. Q1 certainly provides us much confidence in achieving the full-year EBITDA estimate, which we've reaffirmed. So, you know, and I would think that some of that is, you know, a little bit of deferral of some expenses in Q1 into the other three quarters. So we're still, I guess, like we reiterated that, you know, reaffirming guidance for the full fiscal year, and this just gives us, you know, good confidence in that range. Aman S. Gupta: Thank you very much. Operator: Thank you. Once again, that's star one one for questions. One moment for our next question. Our next question will come from the line of Itay Michaeli from TD Cowen. Your line is open. Itay Michaeli: Great. Thanks. Good afternoon, everybody. Just to follow-up on the EBITDA question, can you just dimension what kind of allowed you to beat the range in fiscal Q1? And then to just clarify perhaps what the EBITDA was excluding the settlement in the quarter? Tony Rodriguez: Sorry. Sorry, guys. Yeah. Let's talk a little bit about the beat first. So a couple of things. One is we had some good news with regard to legal costs associated with the Samsung settlement. So as I think we've discussed in the past and certainly in Q4 when we talked about it is that the patent license agreement part of that was that the legal fees were on a contingent basis. And we were able to look at that agreement and achieve about $4 million better in legal costs associated with that. So that was part of the beat. The other one related to compensation. So, looking at a couple of R&D projects that have got deferred, so that's assisted in OpEx in the quarter. It's really two main areas. Itay Michaeli: That's helpful. And then maybe secondly, on the new win with the major volume global automaker, maybe just walk us through maybe, Brian, just how the competitive process went and kind of what you think kind of led to your win there? And maybe going forward, how you think about your win rate going forward just given some of the recent traction you've experienced? Brian Krzanich: Yes, sure. This is Brian. You know, I'm excited by the progress we've made, right, to have the five deals signed considering we really, you know, officially launched the XUI product in the back half of last year, calendar year. It's significant. And all of the competitions, it's coming down to there's usually just a couple of us left in the running at the end. And it becomes less about things like price and all. You know, price is always a bit of a part of the negotiation. But, really, at the end, it comes down to a couple of things. One, capability of the technology. Do they have belief that you're going to deliver what you say you're going to deliver? And for us, we're able to show up with a vehicle like we did at CES, fully functional, with the XUI fully operating and including things like the Microsoft Outlook Office 365 fully functioning, running in the vehicle live. So that gives them confidence that the technology is there. It can go. It can do what we say. So that's the first thing. And then it's about the confidence in the team's ability to actually work with the OEM. And we have a long history of that with our team. And then just the overall technology capability of your product. Right? What can it do? And we have a lot of things that differentiate us, everything from, you know, some of the agents we've added, like the Microsoft one, the audio technologies we've added. So it really comes down to the end. It's more about the technology and the team and less about the price. And that's really how we win. And then it's oftentimes around customization. They'll have things that they want that are unique to their brand or to the product they're trying to deliver. And our ability to be very flexible in that space and deliver those customizations in a timely manner is oftentimes a differential too. That was in some of the earlier ones a clear differentiator. Itay Michaeli: Terrific. That's very helpful. Thank you. Operator: Thank you. And I'm not showing any further questions in the queue. I'd like to turn it back over to Brian for closing remarks. Tony Rodriguez: One thing before Brian probably kicks in too that we should probably clarify a little bit because we talked about the EBITDA beat. Which was great, you know, as we've said, we were very successful profitability quarter and cash flow quarter. And as we think about the GAAP financials, if you look at the earnings release and look at the pre-tax income compared to a year ago, it was a pretty dramatic improvement year over year. And we beat EBITDA. We actually beat our we didn't we don't put guidance out for pre-tax income, but the pre-tax income was actually better than anticipated similar to EBITDA. That said, you can see in our materials that we had an effective tax rate of 117%. And what's a little bit wonky about these taxes is many of you know, the analysts aren't called, but understand FIN 18. And that fact that what you do each quarter is you project your anticipated tax rate for, you know, for the full year you put into each quarter. So the fact that and you can see that this quarter was 117%. So what that really says is for the full fiscal year, we expect a tax rate of about 117%. That said, we still, like, we've mentioned, we've reiterated or reaffirmed our net income guidance of negative $8 million to positive $12 million. But what's a little bit wonky about that is that we have a certain amount of tax that we are going to pay this year. Part of it is the withholding tax associated with the patent license agreement that we did this year with, you know, in Korea. So that'll be a big chunk with foreign withholding tax. We also have other entities that we pay for and withholding tax. So there's a certain amount of set tax that we are going to pay, and we're so close to breakeven that that percentage really impacts, you know, is impacted by the actual results and then had that set amount of tax as opposed to what most people think about is you think about a tax rate and you apply that to again, a little bit higher or lower earnings. So I guess way to think about this if you're doing your modeling is to think that we're probably gonna have a, you know, an actual tax provision in the range of probably $18 to, you know, call it, $22 million. And then if you see that, 117% effective tax rate that we use this you can really back into the, ex of pre-tax income for the whole year by taking the net income average, which is negative eight to 12. Middle of that is roughly two. And then you can well, if you had to gross that up to get to, you know, if you're gonna have rough midrange taxes of about 20 million, that means pre-tax income of about 22. So a midrange guidance. So, it's a little bit wonky, this one. So the fact we overachieved in, pre-tax income and applied that 117% of FIN 18 rate actually increased our net loss even though we had a better than expected pre-tax loss. So a little confusing, but certainly, if the folks on the call have subsequent discussions, if you wanna talk a little bit more about taxes, we can. Itay Michaeli: Okay. Thanks, Matt, Tony. That was very helpful. Brian Krzanich: I know that that whole tax situation was a little bit confusing for everyone. To close, I just wanna say, you know, it was a great Q1 and start of our fiscal 2026. You know, we're really happy with the deals we've signed on XUI. I think they're clear indicators of the power of the technology and our ability to compete in this marketplace against, you know, whoever our competitors are at the time. And so I'm really proud of what the team's both delivered and accomplished this quarter. You saw the great earnings, the great results that we've had, record free cash flow. And we're set up for a great Q2. And so I just I look forward to talking to everybody at the end of this quarter. You know, I think you'll be happy with our results, and with that, I'll talk to you all during the quarter and look forward to talking to you on this call at the end of Q2. So thank you very much. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Hello, and welcome, everyone, to today's Corpay Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. To register to ask a question at any time, please press 1. Please note this call is being recorded. We are standing by if you should need any assistance. It is now my pleasure to turn the meeting over to Jim Eglseder, Investor Relations. Please go ahead. Jim Eglseder: Good afternoon. Thank you for joining us today for our earnings call to discuss the fourth quarter and full year 2025 results. With me today are Ronald F. Clarke, our Chairman and CEO, and Peter Walker, our CFO. Our earnings release and supplemental materials for the quarter are available on the Investor Relations section of our website. Please refer to these materials for an explanation of the non-GAAP financial metrics discussed on this call along with the reconciliation of those measures to the nearest applicable GAAP measures. Our remarks today will also include forward-looking statements about expected operating and financial results, strategic initiatives, acquisitions and synergies, and divestitures, among other matters. Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. Some of those risks are mentioned in today's press release and on Form 8-Ks, and can also be found in our annual report on Form 10-Ks. These documents are available on our website and at sec.gov. So now I'll turn the call over to Ronald F. Clarke, our Chairman and CEO. Ron? Ronald F. Clarke: Okay, Jim. Thanks. Good afternoon, everyone, and thanks for joining today's call. Upfront here, I plan to cover three subjects along with highlights for 2025. First, provide my take on Q4. Second, I'll share our 2026 guidance. And then lastly, I'll outline our major priorities for 2026. Okay. Let me begin with our Q4 results. We reported revenue of $1.248 billion, up 21%, and cash EPS of $6.04, up 13%. That would be up 20% at a constant tax rate. The results were better than our expectations, mostly driven by cross-border and Alpha overperformance. We did call the macro spot on, so impact versus our guide. In the quarter, overall revenue growth was 11%, marking three consecutive quarters. Inside of that, our 10% and our 16%. So our two biggest businesses are doing quite well against pretty difficult comps. Importantly, our trends in the quarter were also quite positive. New sales, or bookings, were up 29% versus the prior year. So super robust sales. Same-store sales inched into the territory, up 1%. And overall, revenue retention was stable at 92%. Cash EBITDA in Q4 surpassed $700 million in the quarter. So look, all of this produced a record cash EPS print of over $6 a share. So really a terrific quarter for us. Let me make the turn to highlights for the full year 2025. So first, our financial performance for the year was quite good. Full year revenue of $4.5 billion, that's up 14%. Cash EPS of $21.38, up 12%, or again up 17% at a constant tax rate. Organic revenue growth for the full year was 10%. So that makes four of the last five years 10% organic revenue growth or higher. Full year sales growth was also 29%, with improving productivity. So we're continuing to sell a lot. Additionally, in the year, we made a number of moves to better position the company for the midterm. We acquired Alpha, the second largest acquisition in the company's history, giving us access to an international bank account product as well as the asset management market segment. Mastercard invested $300 million in our cross-border business at a $13 billion valuation, hopefully unlocking and serving the FI channel. We invested in Avid, which deepens our position in the middle market AP automation and payment space. And lastly, we acquired a second vehicle debt company in Brazil that'll further help accelerate Brazil's non-toll revenue growth. So look, financial performance ahead of our initial 2025 guide, along with a further rotation of our portfolio towards corporate payments. So quite pleased. Okay. Let me transition to our 2026 guidance. We are quite excited about it. So we're providing full year 2026 guidance at the midpoint of print revenue, $5.265 billion, that's up over $700 million versus last year or up 16%. And we're writing cash EPS at the midpoint of $26, on the button. That it's up 22%. Look. The drivers behind this 2026 guide are a few things. So first, fundamentals. Look, the business is working. We had a record Q4 finish. And the corresponding exit rate was super good trends, you know, positive sales, healthy client base, same-store sales, stable retention trends, big sales year again in 2025. We get a lot of that benefit as it rolls into 2026. And we are expecting continued 10% organic revenue growth this year. A second driver is accretive acquisitions. So our Alpha acquisition is expected to contribute about $300 million of incremental revenue, and Alpha paired with Avid together should contribute approximately $1 of cash EPS to our 2026 outlook. That's based on our final plans now. And then third, macro, we are expecting the macro to be our friend, to be helpful here in 2026. Favorable FX rates, particularly so in the first half. Lower SOFR rates, and finally, a constant year-over-year tax rate expected. So look, lots of reasons for confidence in our 2026 guide. The guide, just for clarity, does not include the impact of expected divestitures, including the pay by phone, nor the impact of any material capital allocation actions beyond simply delevering. Okay, let me turn to our top five priorities for 2026, which really are pretty consistent with last year's priorities. So first up is our portfolio. The goal, again, is to further simplify the company resulting in fewer bigger businesses and accelerate our rotation of corporate payments. We've announced one vehicle payment divestiture. We have two additional divestitures that we're working on. And as always, we're continuing to work the acquisition pipeline for new corporate payment acquisition opportunities. Second priority, USA sales. We're continuing to work to improve U.S. sales, particularly of our vehicle payments and lodging solutions. We've done a few things. We've hired a new CMO who recently started. We've developed some new Corpay brand creative ads to raise awareness of the company. We're growing our Zoom sales teams here in 2026. Concurrently, we're also really rethinking entirely new ways to sell our U.S. vehicle payment solutions as we deemphasize digital sales. A third priority, in payables, a number of things. One, we're trying to add new enterprise accounts there, particularly after our success with our first elephant last year. We are selling payables now in the UK, seeing some initial traction. We are doubling down on the sales force in the UK. And lastly, lots of energy exploring new monetization options with our merchant base or our vendor base. Those things include instant payment options, debit card payments, and even eChecks to help accelerate revenue growth in the AP segment. Our fourth priority is cross-border. Super focused on our multicurrency account and our international bank account capabilities, particularly given the Alpha deal. We're furthering our stablecoin capabilities. And obviously working hard to implement synergies related to the Alpha acquisition. We are progressing the FI channel opportunity with Mastercard. We have logged our first joint sale, so kudos there. And building really a pretty meaningful pipeline. So, excited about that. So fifth and last, AI. Yes. We have gotten religion around AI. We're currently in pilot with conversational AI being added to a number of our client UIs. We're using AI agents to reduce live agent expense, particularly in our lodging business. And we're even using AI to speed our merchant matching process against our internal merchant database to help drive new payable sales with prospects. So, look, five key priorities here in 2026. Each is well defined. Each is being worked. The portfolio, USA sales, payables expansion, cross-border capabilities, and AI implementation. So a busy year for sure. So look, in conclusion today, a strong finish, record earnings in Q4, on the high side of our guide, again encouraging organic revenue, new sales, same-store sales, and retention trends. Our full year 2025 financial performance again, finishing ahead of our initial guide. We logged another 10% full year organic revenue growth year that makes again for the last five years, again, a repositioning active repositioning year. Further simplification of the company, and the addition of more corporate payment assets. In terms of '26, again, outlooking really a super strong 2026, EPS expected to be up over 20% driven by the favorable fundamentals. The accretive acquisitions, and even a favorable macro. And lastly, we have laid out a clear set of priorities to better position the company to continue to compound over the midterm. So with that, let me turn the call back over to Peter to provide some additional detail on the quarter, the year, and our '26 outlook. Peter? Peter Walker: Thanks, Ron, and good afternoon, everyone. Let's start with highlights of the quarter and the year. Q4 revenue was $1.248 billion, overperforming the midpoint of our guidance driven by strong corporate payments performance. GAAP revenue grew 21% year over year driven by 11% organic revenue growth. Q4 adjusted EPS of $6.04 per share over the midpoint of our guidance and grew 13% year over year due to strong top-line performance and solid expense management. The headline for the quarter is overperformance, over 20% top-line and low teens bottom-line growth driven by our third consecutive quarter of delivering 11% organic revenue growth. We grew Q4 new sales 29% year over year and delivered a 92.3% retention rate fueling our business for 2026. Full year revenue was $4.528 billion delivering organic revenue growth of 10% for the full year and for four out of the last five years. Full year adjusted EPS was $21.38 growing 12%, but growing 17% at a constant tax rate. These strong year-over-year results are further reinforced by the healthy, consistent sequential quarterly growth in revenue, EBITDA, and adjusted EPS throughout 2025, which positions us well for 2026. We are exiting 2025 as an even stronger company than we entered the year. Now turning to our segment performance and the underlying drivers of our organic revenue growth. Corporate Payments delivered 16% organic growth for the quarter, 200 basis points drag from float revenue compression due to lower interest rates. This exceeded our expectations by 100 basis points, partially driven by Alpha revenue overperformance setting us up well for 2026. Overall, corporate payments performance was driven by growth in spend volumes, which increased 44% on a pro forma basis to over $81 billion in spend. Cross-border continued to deliver strong sales and revenue performance in Q4. This business is quite resilient with significant demand even in the face of trade-related uncertainty throughout the year. Additionally, the Alpha Group integration efforts are progressing well. The payables business continues to perform with especially strong sales performance in Q4. We're optimistic about the future of the business as we are in the early innings of market penetration and closed our strategic investment in Avid Exchange during the fourth quarter. We see tremendous upside over a very long period of time for this business. Vehicle Payments organic revenue growth was 10% again this quarter. As a reminder, we operate three approximately equal-sized vehicle payments businesses across the globe in the U.S., Europe, and Brazil. We saw continued strong results in all three geographies which drove the performance, improving U.S. Vehicle payments performance throughout the year is particularly encouraging. Lodging, representing less than 10% of our total revenue, decreased 7% year over year or was roughly flat for the quarter when adjusting for a 600 basis point drag from lower FEMA emergency revenue year over year. While clearly not recovering, progress continues and we are assuming low single-digit growth in our 2026 outlook, with headwinds in the first half of the year and returning to positive organic growth in the back half of the year as new sales and implementations come online. In summary, we delivered 11% organic growth in Q4, at the high end of our target range driven by continued strong corporate payments organic growth and double-digit vehicle payments organic growth. Now looking further down the income statement. Operating expenses of $684 million increased 25% primarily driven by a lower net gain on business dispositions year over year, acquisitions, divestitures, and related expenses and FX partially offset by a non-cash impairment charge in Q4 of last year. Excluding these impacts, operating expenses increased 8% driven by investments in sales and processing expenses related to higher transaction volumes. As we exited the quarter, we're starting to see benefit from expense rationalization initiatives recently that will deliver additional savings in 2026. Our adjusted EBITDA margin was 57.1%, our adjusted effective tax rate for the quarter was 25.8%. The increase in the rate was due to the favorable impact of employee stock options on the tax rate last year. On to the balance sheet, we ended the quarter in excellent shape with a leverage ratio of 2.8 times, spot on our guidance. We repurchased 1.7 million shares in the quarter for $500 million and a total of 2.6 million shares for the year. This leaves us with approximately $1.5 billion authorized for share repurchase inclusive of the $1 billion of additional authorization approved by the Board at the December meeting. We will continue to pursue M&A opportunities and we'll continue to buy back shares at this valuation, while maintaining leverage within our target range. Now, let me share some additional information on our 2026 full year and Q1 outlook. As Ron mentioned, as part of our continued rotation into corporate payments, we signed a definitive agreement to sell pay by phone, a non-core vehicle payments asset. The transaction is expected to close in 2026. The impact of this sale is not included in our guidance as we are sharing today as our policy is to update guidance for closed deals. Pay by phone is expected to produce 2026 annual revenues of approximately $100 million and the transaction is not expected to have a material impact on adjusted EPS, as we plan to use the proceeds to buy back shares. We'll provide more information when the deal is closed. Our 2026 revenue guidance is $5.265 billion at the midpoint of our range, growing 16% year over year. This assumes 10% organic revenue growth, also the midpoint of our range. 2026 organic revenue growth is lower than our 2025 exit rate of 11%, due to additional float headwinds more heavily weighted in 2026 in our corporate payments business. Our 2026 guidance for adjusted EPS is $26 per share at the midpoint, growing 22% year over year. Our confidence in our guidance is high, given most of the building blocks for this performance are already in place. This includes our strong organic growth exit rate and annualized Q4 trends, our expense rationalization initiatives which are already producing savings, and our Q4 share buybacks. $1 of accretion from the Avid and Alpha deals is achievable given our strong track record of M&A integration. The macro environment provides additional tailwinds, including a flat tax rate year over year. As a reminder, our revenue and adjusted EPS build throughout the year. You can see on Page 19 of the supplement, the percentage of full year revenue and EPS are lowest in Q1 and highest in Q4. This pattern is driven by our clients' highest business volumes occurring in Q2 and Q3, along with acquisition synergy realization increasing through the year, all over a relatively fixed cost basis. The consistent historical pattern gives us confidence in our ability to deliver our 2026 guidance. Below EBITDA, we're expecting net interest expense to be $370 million and $400 million, the adjusted tax rate to be between 25% to 27%, and weighted average shares to be flat with the period-end shares for Q25. Related to capital allocation, our forecast assumes free cash flow is used to pay down debt, which provides some potential upside opportunity should we deploy capital for buybacks or M&A. Our guidance does not include any share buybacks. From a segment perspective, we expect the following organic revenue growth rates: Corporate payments, mid-teens inclusive of the drag on float revenue from lower interest rates. Vehicle payments, high single digits. Lodging, low single digit. Our Q1 revenue guidance is $1.21 billion at the midpoint, growing 20% year over year. We expect Q1 organic revenue growth of 9% at the midpoint, lower than the full year 10% organic growth guide driven by the float headwind I mentioned earlier. We're expecting adjusted EPS of $5.45 at the midpoint, growing 21% year over year. We're planning organic revenue growth to increase in the remaining quarters as we digest the float headwinds. We provided additional detail regarding our full year and Q1 outlook in our press release and earnings supplement. Before I turn it over to the operator for Q&A, I'm delighted to share that we've remediated the outstanding material weakness related to user and you'll see this formally in our 10-K. I want to thank the team that made this happen. So operator, please open the line for questions. Operator: Thank you. If you'd like to ask a question, press 1 on your keypad. To leave the queue at any time, press 2. We do ask that you please limit yourself to one question and one follow-up. Once again, that is 1 to ask a question. Our first question comes from Andrew Jeffrey with William Blair. Please go ahead. Your line is now open. Andrew Jeffrey: Thank you. Appreciate you taking the question. Great to see the business momentum. Ron, I wanted to ask a little bit about the commentary around payables monetization. I know this is an area that you know, historically has been a little bit stubborn when it's come to you know, non-check based payments. I know you mentioned eCheck. But could you maybe dimensionalize that for us? Is it is that an initiative that could add to already impressive segment organic revenue growth? Or what's the timeline, do you think for driving better yield, from those initiatives? Ronald F. Clarke: Hey, Andrew. It's a great question. I think, you know, we've been a one-trick pony to the industry in terms of using, you know, virtual cards for monetization. And so this, you know, set of options now and basically kind of eliminating paper checks is the game. The idea of getting that thing sunset and using, you know, eChecks, debit at lower interchange, you know, ACH plus instant payments, the whole plethora of things that we can do that research suggests that merchants like that choice and some set of merchants will accept these new methods of payment where they won't accept virtual cards. And so we're in the middle of it. We're laying that stuff out. We're doing the research. We're testing. And so I would say, sometime Q2, Q3, we should see some impact of that. I think it just creates more legs for the business, right, long term. Andrew Jeffrey: Yeah. I agree. And then just a quick follow-up for Peter, if I may. Could you sort of parse out domestic vehicle payment, organic revenue growth versus Brazil? I assume that US and Europe look pretty similar. Just try to get a sense of what positive same-store sales might mean for that business. Peter Walker: Yeah. So UFCP business, you know, approximately 5% organic growth for the quarter. And, Europe and the rest of the world and Brazil, you know, tracked right on where they were for earlier in the year, so consistent results across all three for the 10% overall organic growth rate for vehicle payments. Andrew Jeffrey: Okay. Thank you. Operator: Thank you. We'll now move on to Darrin Peller with Wolfe Research. Your line is now open. Darrin Peller: Hey, guys. Thanks. Nice job. I just wanted to start off with one more of a strategic question and then a sustainability question on the growth rate on vehicles. Then I'll have a follow-up on the modeling side. But just when I look at the double-digit growth rate, obviously, good to see it holding up in these ranges even against what you're getting into harder comps towards the end of '24. So maybe just touch on sustainability, especially of The U.S. Fleet acceleration and what's needed to maybe push same-store sales meaningfully higher. Your view? Ronald F. Clarke: Hey, Darrin. It's Ron. It's sales is the answer. Right? So just to follow-up on Peter's thing, if you think of the three horsemen that create 10% as kind of low single digit. Like, right on ten. High double digit, average those things, you get to ten. And so the good news, if there is any, is this work we've done on The US visa vehicle has finally landed. Right? We've got stable retention that's now kind of in line with the rest of the businesses. I'm literally looking at a piece of paper and the same-store sales of The US business vehicle business went positive for the first time in six quarters. I'm looking at the piece of paper now. Approval rates are up. Credit is so so literally, the business has gotten to a good kinda reset spot. And now, like I said, the entire assignment sales. So if we could make a lot more sales there, we could, you know, inch the aggregated vehicle, you know, growth rate up. And if not, we'll stay with kind of low, mid, high. For that mix. The real question for me is, do we keep allocating what level of investment for growth do we keep making in that business? These are the other ones. This is one of the internal questions. Darrin Peller: Right. Alright. That's good to hear. Thanks. I guess just one follow-up would be on more of a modeling couple of questions, which is number one would be just if you could provide a little more color on the cadence of the accretion contribution given that's a pretty notable, a fair amount of the versus some of the Street numbers was the magnitude of accretion. Just so it's ramping through the year, help us understand that. And then I know getting some questions on interest expense. I think you're assuming a lower interest expense rate dollar amount. Just help us understand that notion just given you're adding debt at a pretty healthy rate as well. Thanks again, guys. Good job. Ronald F. Clarke: Well, Darrin, it's Ron. Let me take the first part, and Peter can take the second. So you know, we're kind of done with the plan. So when we talked, I guess, ninety days ago and we're literally just onboarding, out, but we finished the work. And so in the opening comments, I gave the dollar. So between those two deals, the NAV and investment, the Alpha acquisition, we're pretty comfortable we can get the dollar. And so we're literally already underway on a bunch of the things. Certainly on the cost takeout side on some of the revenue synergies that are super easy, like, coming across to our contracts and things. And so the biggest thing that'll unlock a bunch in the second half is the IT. We're gonna sunset their, you know, kind of their core corporate IT system in favor of ours, which opens up all kinds of savings around not only IT, but compliance and stuff like that. So I would say, you know, this is our third, fourth, fifth rodeo, right, of doing these things. So our confidence in what to do and what number is high. Then the last point I'll make, because you're good at math, is it's not one and done. It's one and more. So the way we think about it is whatever EBITDA we're getting in those businesses has to grow over. Right? The interest expense to finance those. So as we create the synergies, and those businesses grow, they're growing obviously over a fixed interest expense. And so, you know, in our multiyear plan, that creates even acceleration in EPS as you walk into next year. So the setup for those two things is quite good. Peter Walker: So, Darrin, picking up on your question on interest expense. So we ended the year about $7.7 billion in debt. As you know, we produced really high cash flows, so call it $1.8 billion of cash flows we produced throughout the year. So debt will produce throughout the year. Also, the forward curve is looking pretty positive for us on SOFR. So you put those two together, and that's what's leading to lower interest expense. Darrin Peller: Okay. Very helpful. Thanks, Peter. Thanks for Operator: Thank you. We'll now move on to Tien-Tsin Huang with JPMorgan. Please go ahead. Tien-Tsin Huang: Thank you so much, Haifman, Peter, and Jim. Great results. I wanted to ask on corporate payments if that's okay. Just mid-teens growth expected this year. Do you have the backlog to support this growth, or is there more business to go get? I'm just curious what the visibility looks like there. Could there be some room for upside? And if so, where? Ronald F. Clarke: Hey, Tien-Tsin. Thanks for the data boys. So I'd say on the 26 number, it's really two different things. In the payables, the full payables business, I'd say, we have the sales. Because the implementation cycle is longer there. And so, basically, we have a bunch of deals that we implement that drive that revenue. In the cross-border, it's a much shorter, right, sales to implementation cycle. So we have to make sales there. Although if there was one that took place on our company, I would not bet against the cross-border sales. We had a just rocking finish between you know, our core cross-border business and even the new Alpha business and stuff. And so that thing is firing. So I would say our confidence in the thing is super high. And, again, the reason for the thing not being a bit more robust is just the compression, obviously, of the float rates. Right, particularly as you as we absorb Alpha. Has a way bigger bank account deposit-based business than we do. It's a bit more acute. Right, the compression there, particularly early on. So know, when we get it's transitory, obviously. So we get to the other side of that. I think the outlook would be will be even better for business. Tien-Tsin Huang: Yeah. And if we get the monetization today, right, that Andrew asked if we get that cranking, that would be another upside, basically, to the business. Got it. No. You sound quite pleased with Alpha. That's great to hear. So mid-teens would be a win. For that segment. I did want to ask just on margins, if that's okay, as my follow-up with the expense rationalization. Is there a way to think about that impacted to '26 and just some broader comments on incremental margins in '26 any surprises or puts and takes to consider? Peter Walker: Yeah. Maybe I'll start. Finjan went Peter pick up. So we're targeting above $75 million of expense out. We've executed kind of $50 million of it. We're still working on the other $25 million, which we've identified, but still working. If you looked at our internal plan, not shockingly, margins climbed like crazy sequentially. Pretty fixed cost base once we make the sales investment, which we do early. And then revenue snowballs. Right? So revenue increases, call it, $100 million plus as you get into the second half or quarters. And so that's I think it's probably three points if you look at it. 300 basis points from Q1 to Q4. The reason that the overall margins for the full year wouldn't look a ton different is really it's the acquisition. Acquisition. Expense. Right? We're bringing across in these couple of deals, you know, a fair amount of cost, you know, at lower margins, basically. And then second, we paid the call given the profitability to put more in the sales and marketing and even into our brand. So we're trying to hold the margins, you know, pretty constant, improve them sequentially, and spend on some things that will help the growth going into next year. Tien-Tsin Huang: Perfect. It's great. Well done. Thank you. Operator: Thank you. Our next question comes from Mihir Bhatia with Bank of America. Your line is now open. Mihir Bhatia: Hi. Good afternoon. Thank you for taking my question. Nice results here. But Ron, maybe just have one to ask you about pay by phone. I think you bought that asset maybe a couple of years ago. Just any lessons from that process from owning that just what worked, what didn't as you think about go forward? Ronald F. Clarke: Yeah. Hey. That's a good question. So lessons, I'd say maybe two lessons on that. One is, you know, we had a thesis for buying that their five, six, 7 million active users and a lot of them in Europe could be kind of a launching pad for us to put those people into the network. And basically, we grew we couldn't do very well at that. So a new idea and it didn't work as great as it has in Brazil. But the second learning is we're good. Like, we take a business. We buy it. We triple the profits. We're selling it for 50% more than we bought it for. And so it's a great reminder that even when the thesis isn't perfect, that we can still make a return on the thing. And so we're pleased. I'm also pleased with the people that you know, that are running a thing, that built it, that where they where they'll go, they'll be happy and stuff. So I'm hoping for only good things for the buyer and the management team. Mihir Bhatia: Got it. No. And I think, you know, kudos to y'all for trying and pulling the plug when you all realize it wouldn't work. Wanted to maybe switch gears a little bit to just going back to the corporate payments. Business and just some of the questions there. Maybe, like, I think you kind of answered a little bit, but just trying to understand you know, you laid out a lot of priorities in that business, right, whether it's building The UK payables, adding enterprise accounts. New monetization options, growing sales in the FI channel, multi So just trying to understand the timelines there, like the lift that it'll take to implement some of those changes Like, what's gonna be a meaningful contributor there in 2026 versus initiatives that are maybe longer term, but just you're laying the building blocks today? Ronald F. Clarke: Yeah. That is a really good question. I think the main thing we're trying to do with that priority is just make sure people are clear on the opportunities. That when you stare at payables, you know, beyond just chopping the wood we have that there's some kind of factors you know, out from the middle market core there where hey. We can get more monetization against the spend. We can add enterprise, right, to the mix. We can go to geographies that widen the TAM. I'm also trying to make sure people are clear. That there's wave vectors to make the business go. I'd say on that one, it's clearly the monetization is the short term, is the 2026. Thing because we have the clients. We have the merchants. We have the money moving. And so we're simply trying to get more choice and stuff. So I'd say for sure, in that one. And then the same kind of on, I think, on the cross. Border side. I think longer term, because the sales cycle will be like the Mastercard you know, opportunity there or even, frankly, the international bank account opportunity. I think those are longer term, whereas the synergies of combining the Alpha corporate business would be a 2026. So I'd say those are the two get the money in 2026 things, monetization and payable, and alpha consolidation and synergies would be the things for this year. Mihir Bhatia: Got it. Thank you for taking my questions. Nice results. Operator: Thank you. Our next question comes from Sanjay Sakhrani with KBW. Your line is now open. Sanjay Sakhrani: Thank you. Ron, you talked about a couple of more divestitures in the pipeline and this one that you did today or announced today. Could you just give us a sense of what kind of liquidity you're looking at in terms of raising from that? I know you put out that $1.5 billion number last quarter, but if we just think about today's announcement plus the other two, does that get you to a higher number or equal number? Just trying to think through, you know, the liquidity you could raise and use of proceeds. Ronald F. Clarke: Yes. Think it's a good question, Sanjay. So, yeah, there's two other vehicle businesses that are out in process now, pretty late stage too. If we end up transacting on both of those, it'll be over $1 billion. Think of, call it, a know, $1 billion or $1.3 billion, somewhere in there. And the use of proceeds is to buy C Pay. At this price that we're at. So we'll have an answer. My guess is the next probably thirty days on those things. Sanjay Sakhrani: Got it. And then just maybe if you could elaborate on lodging. I know it remained weak, you guys are assuming the low single digits, but any anything specific happening there in terms of turning that ship around and how we should think on a go forward basis? Thanks. Ronald F. Clarke: Yeah. The prints, obviously, Sanjay, not too good. I feel a little bit similar for The US vehicle business. You know, I think I characterize those two businesses as problem children, you know, not behaving well a couple of years ago at lots of things wrong. I feel kind of the same that both businesses, particularly lodging, have stabilized. We fixed the IT. We fixed the product thing. We fixed the customers that kinda scooted away, the volume that scooted away. So if you look at, like, the same store as I quoted, you know, that's actually positive now with US vehicle and I think mostly flat and lodging. And so the good news is the management teams have made progress doing things that have stabilized the revenue. I'm still super disappointed in the new sales. And so that's the ticket. Really, the ticket for both of them is can they produce new sales now that the losses you know, have stabilized? They're both super great margin businesses. They're both above the line average in front of me, but they're in the sixties. In terms of EBITDA margin. So they're super great cash generators. The question is just can we productively make sales there vis a vis the other options we have for investing sales of the company. So we're giving it a run here in 2026. And if we see sales improvement and accelerate throughout the year, we'll be happy. And if we don't, we'll be probably thinking about doing something else. Sanjay Sakhrani: K. Great. Thank you. Operator: Yes. Thank you. We'll go next to Nate Svensson with Deutsche Bank. Please go ahead. Nate Svensson: Hey, guys. Thanks for the question. I want to follow-up on some of the cross-border priorities that were talking about in the prepared remarks, Ron. So you mentioned outperformance at Alpha a few times, and you obviously bumped up the alpha plus avid accretion to $1. Just maybe hoping for a little more color on what's going better than expected at alpha. What on the revenue synergy are you realizing? Is it better organic growth? Anything beyond that? And then you also called out the first joint sale with Mastercard. Fully get from your earlier answer. That's kind of a longer-term opportunity. We'd just love to hear more about that first wins on any specific details or learnings from that partnership as you look to go out and win more sales? In the pipeline that you do have. Ronald F. Clarke: Yeah, Nate. Two good questions there. I think the overperformance in alpha is the integration, the people thing has gone better than I thought. So when you meet a new group like that and bring the organizations together, sometimes there's a pause. People aren't firing and stuff. But I just feel like our management team and their team did a great job, a great kumbaya or whatever, where their guys just came, you know, roaring out of the blocks. You know, pitching, hey. We're a bigger, meaner company. We have better credit. We obviously have better products. We have better payment products. Versus just risk management products. And so to me, what was so great is the people, particularly the salespeople, have embraced some of the stuff that we bring to them and just went running out. And got a bunch of business closed. So that thing not only performed better than the finish. Yeah. I've looked at January, and those businesses are ahead again. This month. So I think it's cultural. It's something. But just everybody's at it. People aren't moving around and stuff. They're excited to be part of the game with us and stuff. So this is way before the other synergies of contract advantages, rate advantages, cost, IT. We got all the stuff in front of us. Bank account license. We nine other things that are gonna create money. But to me, that's super important. On the Mastercard thing, I gotta say, it is way exceeded mine, I know if it has the Mastercard folks. Expectations, but we now have a second sale. I think I said one, so that script's old already. We've actually closed out two deals. But more importantly, it's a crazy pipeline. Particularly in Europe, where, you know, Mastercard has done their part of getting some dedicated people to call on accounts that they know and love, and our guys go in to know a lot and literally I don't know if it's 50 to 70 in process opportunities. And so that thing which tends to have a very long sales cycle, stood up quite well. And I think back to the thesis question that was before us, I think the thesis is proving out the good relationships and credibility that Mastercard has coupled with our products and expertise is a good combo. So it'll take time to build, but it is a way help to make that segment meaningful. Right, for cross-border. I mean, I don't know if everyone's getting it, but that business was mostly a one-trick pony. We went out to midsize businesses around the world and sold services, and now we're talking about basically getting banks, getting FIs around the to use our services and becoming, you know, an international bank account deposit company as well. And so the extensions of those two additional kind of product and market segments is way significant. I don't know if people are picking it up, but it completely changes, I think, the long-term prospects for that business. So we spent a lot of time in this company doing iceberg work, kind of getting ready, getting things positioned. I think people discount it because everyone just wants to know what the numbers are. But I'm telling you that is gonna make a big difference for durability. Nate Svensson: Super, super exciting stuff. I guess for the follow-up, also on the cross-border business, we get some questions from time to time on a potential Supreme Court ruling on IEPA and maybe some impact that could have to CFAI even the tariffs are rolled back. So I'm not asking you to speculate on any potential outcome. But I guess in the event that there is some level of rollback of tariffs, any idea on how that could play out across either your corporate payments business or maybe the vehicle payments business as well? Is there still any pent-up demand you think might be released? Could this alleviate some of the pressure on the shipping and freight industry in The US or any other factors to keep in mind there? Ronald F. Clarke: Yeah. That's a super good follow-up. I would say care of certainty is our friend. Like, whatever it is, just be what it is. So it had a super jolt during Trump's liberation thing. I think our numbers in April were crazy as people try to anticipate things and then kind of our US, our North America business did really bad. The rest of the year because of the uncertainty and the other geographies picked it up. So anything that would either roll back limit or even just fix tariffs would be a plus to the cross-border business. Remember, like half you know, the dollars that they were service-based, not goods-based. And then, again, we have con you know, we do risk management contracts and stuff. So the exposure isn't across that entire business. And, really, most of the exposure is in North America, which probably, you know, a third of the business. So it's not like a massive amount, but it still would be, to your point, a plus for us if that thing got clarified. Nate Svensson: Super helpful. Thanks, Ron. Operator: Thank you. We'll go next to Ramsey El-Assal with Cantor Fitzgerald. Your line is now open. Ramsey El-Assal: Hi. Thank you so much for taking my call tonight. Wanted to ask about the strong sales growth, which is obviously super impressive. Can you give us your thoughts on whether the conversion of that sales to revenue, the timing of that conversion of bookings to revenue has changed as your business has changed? In other words, is now you have more corporate payments. Are you seeing a situation where you convert that revenue faster or convert those bookings rather faster or slower to revenue, or is it sort of the same as it was when you were primarily a, you know, fleet card business years and years ago? Ronald F. Clarke: Well, hey, Ramsey. Welcome to your new spot. Wanna say thank you. Congrats to you, on that and appreciate you continuing to keep an eye on us. So it's a really good question. So at the high level, the answer is it varies by business. As I mentioned, I think Tien-Tsin asked you know, our payables business has a slower contract signings or bookings to implementation and ramping. And I mentioned the cross-border business is much faster. So if you run through the businesses we have, that vary. Summer, you know, super fast, like in the fleet card business, it's almost systematic. We don't even book until we start. We actually call it a go-live. But the total is for the company, it's about one-third. In year. So for example, let's let me make up a number. Let's say we recorded $300 million in bookings in calendar year 2025. We would print about $100 million of print revenue inside of the 2025 goalposts. And then we would ramp some amount of that $200 million that we didn't capture into the forward year. So the way we think about building our revenue plans is we already have, in that example, $200 million coming our way here in 2026 that we didn't have. Right, hit our revenue numbers last year. And we'll grab a third of what our bookings plan is here in 2026. So that's kind of the model, kind of one-third in the current year, and then the two-thirds ramp depending on what the attrition is. So we've really did the statistics in all of this. So it's really easy for us to model it. Ramsey El-Assal: Got it. Yeah. That's super helpful. Thank you for that. And one follow-up for me. Stablecoins are a big thematic topic. Can you just give us an update on what you're seeing in the marketplace in terms of demand, if any? Also, just give us a quick overview of the capabilities that you guys are building out to accommodate stablecoins? Ronald F. Clarke: Yeah. That's a super I'm laughing a bit, Ramsey. Do you this morning when I get up, going, we had this earnings call tonight. I went out three of our guys. I went to the guy that has, you know, thousands and thousands of US merchants that we pay across border head that obviously moves tons of money to beneficiaries around the world. And our alpha guy who does the, you know, bank accounts, the 7,000 bank accounts, you know, that hold deposits. And I asked all three of them, hey. Talk to me about the demand. How many of the merchants or the deposit holders or beneficiaries are asking for a companion stablecoin wallet so that they can receive funds in stablecoin. And the basic answer was crickets. There's been really no, you know, basically, kind of no noise kind of no demand. Despite that, we are I think we said before, doing three things anyway. One is trying to serve crypto clients that actually have crypto, have Bitcoin, have stablecoins as clients. So we're doing that. We have four or five signed up. Two is we are working on the rails and piloting that, like, in our own treasury for example, to make sure we can actually move funds, you know, via, you know, blockchain. And then third, which is my favorite, is despite the demand comment, we are building stablecoin digital wallets so that anyone that has a bank account, if you will, they'll have a companion stablecoin account. So if someone wants to send them money outside of the banking hours, it could be captured, and then we could toggle it, you know, into the fiat account that we have from. So we are pushing ahead to have that and just see if there's more uptake on this. But it's what's the line? It's all quiet on the western front. At Agatha. Ramsey El-Assal: Fantastic, Ron. Thanks for your response there. Operator: Thank you. Our next question comes from Rayna Kumar with Oppenheimer. Your line is now open. Rayna Kumar: Good evening. Thanks for taking my question. Could you talk about just some of the drivers that'll get lodging back up to low single-digit growth this year? And separately, could you talk about your outlook for EBITDA margin this year and any puts and takes we should be aware of? Thank you. Peter Walker: Yeah. Hey. Hi, Rayna. It's Peter. So on the lodging side, the thought process is full year, we're expecting, you know, call it, low single digits there, but it's really a tale of two stories. So the first half of the year will continue to be negative organic growth. With a pickup in the back half of the year. And so I think the good news to share there is we have had quite a bit of luck on the sales side. And so those implementations are coming online in the back half of the year. So that kind of what gets you to the full year outlook on lodging. Then if we look at EBITDA margins, they are increasing substantially quarter over quarter 2026. Even margins will be slightly down year over year, mostly driven by the acquisitions. But as we start to implement the as the business volume grows and we implement the synergies, that's where you see the margins start to expand. Rayna Kumar: Thank you. Operator: Thank you. Our next question comes from Trevor Williams with Jefferies. Your line is now open. Trevor Williams: Great. Thanks very much. Peter, I want to go back to the organic guide. So the 9% growth in Q1 relative to the 11% in Q4 and the 10% you're assuming for the full year. It sounds like that's mostly just due to a bigger float headwind. For corporate payments in the first half and then the lodging improvement that you just walked through. But any other puts and takes cadence-wise for us to be mindful of? And then specific to the first quarter, just what you're baking in for Corporate Payments growth, both with and without float would be helpful? Thanks. Peter Walker: Yeah. So, Trevor, I do think you have it right when we look at Q1 twenty-six. It is the float headwinds mostly, really, as we pick up the alpha business. Right? You see a pretty sharp drop in the rate for the pound. And the rate for the euro. So it's a big driver there. Whereas the drop in SOFR is more kind of even throughout the year. And then you're exactly right on launching being a drag on the organic growth for Q1 at the 9%, but then we see ourselves returning to 10% for Q2 and the rest of the year. In terms of the guidance for corporate payments, you know, I'd say the guidance for the quarter is similar to what I shared for the year. We expect it to be mid-teens with, you know, flow drag against Ronald F. Clarke: Yeah. Hey, Trevor. It's Ron. I just just to add to what Peter said. So when we look at out at the curve, in our weighted average of what we earn, the Q1 versus Q1 last year is just the compression is just way more acute in this quarter we're sitting in. It's about 70 or 75 basis points. When we run it out to the end of the year, that thing shrinks to, like, 25 to 30 basis points. And so that's enough given we have alpha in the mix now for us to run the quarter at nine instead of 10. The other one just, by the way, which is a tad is really gift. We have a, you know, that thing has been running super hot with this secure packaging thing. I have it in front of me, but mid to high teens the last three or four quarters, that's coming back to Earth. Positive, but back to Earth here in Q1. So those two things together is what would have us, run-in the quarter at nine. Trevor Williams: Okay. No. That's helpful and good color on Gift. And then just as a follow-up on Brazil, with how much you guys are outpacing the underlying tag growth that's all coming from the contribution from extended network? Ron, how you think about the sustainability of that? And if you're able to keep that, if we think, like, high teens to 20% growth in Brazil, if you can keep that without layering in more acquisitions, like, Gringo, ZapPay. I know there was the other vehicle debts company that you bought last year. Just how to think about the durability of that growth? Thanks. Ronald F. Clarke: Great question. Yes, we're planning, Trevor, another crazy high teens year. As you know, half of it, you get because it had a crazy good year last year. Right? So that just rolls in. But look. The story of Brazil is the free banks didn't beat us. We said we were gonna create a bunch of non-toll revenue. We've got millions and millions of customers and business as well. So we're like, okay. If we give them some of these other vehicle things, will they come? And I wanna be super clear. Yes. They will. They buy fuel. They buy parking. They buy insurance. They buy vehicle debts. They're now going crazy with 10% of our new sales. We're selling the Sempra credit card. The Sempra credit card now for 10% of her new sales. And so to say it's working, I think, is an understatement. The second thing I say is I think it's helping sell the core toll because it's so differentiated now from a guy, a bank, who's buying some crappy toll thing wholesale one product. And offering it. So not only is it creating incremental revenue with profit leverage because it's added on, I think it's allowing us to keep selling mid- to high single-digit tag growth as well. So it is good, and I do feel like the banks there are getting weary. From some market feedback. So that could be the next domino to fall there as people think they could beat us by being free, and they haven't. And so that would be the next thing I keep an eye on. Trevor Williams: Okay. You, Ron. Operator: Thank you. Our next question comes from Michael Infante with Morgan Stanley. Your line is now open. Michael Infante: Yeah. Hey, guys. Thanks for squeezing me in here. I'll just ask Juan for the sake of time. Commentary on stablecoin demand was helpful, but I'd be curious just to get your high-level perspective on really the mechanism by which we'll actually start to see some medium-term compression of Stablecoin off-ramp costs in the future if those costs themselves are effectively just dictated by liquidity in those corridors. And if the answer is we're not likely to see that cost compression, like, how should we be thinking about the incremental tailwind for if you do actually start to see that demand from your customers show up. Thanks, guys. Ronald F. Clarke: Yeah. Hey, Michael. It's Ron. I mean, I'd say, well, I guess your guess is as good as ours because we see nothing, right, at this point. And I think we reiterated that the rails are an insignificant piece of the cost structure and of the value chain. And so look, who knows? I mean, people can price things crazy. Right? For whatever reason they have. But, like, we don't see it to your point. We see nothing, and we don't think it's likely if we're getting 50 or 60 basis points on a trade. And sometimes 100 depending on the customer in the quarter. It's mostly because of the liquidity and the compliance and everything else. And so we're staying in tune. We're watching it carefully and stuff, but we do not see that as a high risk. And then as I said, whether there is demand or not, we're gonna be there with the stablecoin offerings. And so if our clients want it, we're gonna make it available. But it reminds me a little bit of EV, this whole thing. You know, there's more being written and said about this than actually being used today. Is my takeaway. Michael Infante: It's helpful. Thanks, Ron. Operator: Thank you. We'll go next to David Koning with Baird. Your line is now open. David Koning: Yes. Hey, guys. Thanks so much. Just one question. Minority interest, that line has become a lot more important now with Avid, and a little bit of the Mastercard impact. It looks like on an adjusted basis, it was, like, $27 million in the quarter when you do the add back that was in your line. Is that I guess, why was that so high? That seems very high. And is that the right number on a quarterly basis going forward, or what should we think about that line? Peter Walker: So there maybe let's take that question with you offline. In a modeling conversation just so we can go through it more detail. David Koning: Okay. Great. Thanks. Operator: And our last question comes from Madison Sewer with Raymond James. Your line is now open. Madison Sewer: Hey, guys. Thanks for sneaking me in, and I'll just ask one as well here. Just circling back to the Mastercard partnership, early indications sound pretty positive there. So is the 200 to 300 basis point tailwind to cross-border still kind of the right way to think about the contribution from that partnership? Or do you think there could be potential upside given some of the early indications? Thanks, guys. Ronald F. Clarke: Yeah. That's another good question. I'd say it's a timing call, right, because the sales cycle on FI is longer than it is for corporates. But to your point, given the size of the pipeline and the fact that some of the things were actually, you know, converting, it's a whopper segment. I do want to remind you and others that virtually all of the cross-border business that we don't have, they have. So, like, all of it, right, is there. And so to the extent that we're successful, getting this thing going and happening with Mastercard, all I can say is, like, it is just so crazy large the flows that these banks have today that if we get in with a number of them, it, you know, over some cycle, it could be a big, big contribution. Just because they have all the business today. Right? The independents like us have such a fraction of the book today. So it's super exciting. Again, it's to me, it's just a question of what the time frame is. Madison Sewer: Thank you. Operator: At this time, there are no further questions in queue. I will now turn the meeting back to our presenters for any additional or closing remarks. Jim Eglseder: Great. Thanks, everybody, for your interest. If you need anything else, you know where to find me. Have a good evening. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lucky Strike Entertainment Corporation Q2 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. I would now like to turn the call over to Bobby Lavan, Chief Financial Officer. Please go ahead. Bobby Lavan: Good afternoon. This is Bobby Lavan, Lucky Strike Entertainment Corporation's Chief Financial Officer. Welcome to our conference call to discuss Lucky Strike Entertainment Corporation's second quarter 2026 earnings. Today, we issued a press release announcing our financial results for the period ended December 28, 2025. A copy of the press release is available in the Investor Relations section of our website. Joining me on the call today are Thomas Shannon, our Founder and Chief Executive, and Lev Ekster, our President. I would like to remind you that during today's conference call, we may make certain forward-looking statements about the company's performance. Such forward-looking statements are not guarantees of future performance, and therefore, one should not place undue reliance on them. Forward-looking statements are also subject to the inherent risks and uncertainties that could cause actual results to differ materially from those expressed. For additional information concerning factors that could cause actual results to differ from those discussed in our forward-looking statements, you should refer to the cautionary statements contained in our press release as well as the risk factors contained in the company's filings with the SEC. Lucky Strike Entertainment Corporation undertakes no obligation to revise or update any events or circumstances that occur after today's call. Also, during today's call, the company may discuss certain non-GAAP financial measures as defined by SEC Regulation G. The GAAP financial measures most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on the company's website. I will now turn the call over to Tom. Thomas Shannon: Thanks, everyone, for joining today's call. We finished December with a positive same-store sales comp of plus 0.3% and total revenue growth of plus 2.3%. The result was driven by continued strength in both our retail and league businesses, while we made steady progress turning around our events business, which ended nearly flat for the quarter, its best showing in years. Retail and leagues performed well throughout the quarter and provided a stable foundation for the comp. Events, which had been the primary drag on same-store sales over the past several quarters, inflected meaningfully in January. The changes we have made to the events organization, pricing, and funnel are beginning to show results. January started off with strong double-digit results. We saw one week of headwinds from the biggest snowstorm this country has seen in a while, and then a return back to momentum of strength in retail, leagues, and events. During the quarter, we made deliberate investments in payroll, marketing, and elevated activity levels to drive traffic and return the business to positive same-store sales growth. A number of these investments delivered attractive returns and helped establish positive momentum, particularly in retail, leagues, and the early stages of the events turnaround. However, not all of the spending generated the ROI we expected, with incremental labor in particular weighing on profitability. As a result, while we remain focused on driving organic growth, we are shifting toward a more balanced approach that places equal emphasis on same-store sales growth and EBITDA expansion. Going forward, investments will be more targeted, more measured, and held to a higher return threshold. In January, we also closed on the acquisition of Raging Waters, the largest water park in California. It will contribute meaningful EBITDA in the June and September quarters. When combined with Wet 'n Wild Emerald Point in North Carolina and three new family entertainment centers we have acquired, we expect a significant seasonal lift to earnings as we move through the summer months, reflecting the continued diversification of our portfolio. On the brand front, we opened Lucky Strike Aliso Viejo in Orange County, California in December, and early results have been encouraging. We now operate approximately 100 Lucky Strike locations and remain on track to sunset the Bolero brand by the end of this calendar year. Conversions to Lucky Strike have delivered strong lifts, and simplifying the portfolio to two cohesive brands, Lucky Strike and AMF, will drive efficiencies, particularly in marketing spend. At the same time, we plan to roll out a refreshed AMF look later this year that leans into the brand's more than 100-year history. This evolution strengthens our value-oriented offering while clearly differentiating it from Lucky Strike, positioning the portfolio for profitable growth and improved returns. With that, let's turn it over to Q&A. Operator: Ladies and gentlemen, we will now begin the question and answer session. As we enter Q&A, we ask that you please limit your input to one question. If you would like to withdraw your question, please press star 1 again. One moment, please, for your first question. Your first question comes from the line of Steven Wieczynski of Stifel. Please go ahead. Steven Wieczynski: So, Bobby, this is probably for you. Like, you know, as we kind of think about the results we have seen here, I am surprised you guys did not elect to kind of lower the EBITDA guidance for the full year, at least maybe bring the high end of that range down. Based on the EBITDA generation through the first six months, you guys would need to see a pretty significant uptick in the second half of the year to kind of get inside of that range at this point. So I guess my question is, are you guys still confident in getting into that range? And, you know, the start of the year has been strong. Bobby Lavan: Yeah. So, Steve, if you think about it from a numbers perspective, the past two years, we have had this $300 million business being really a drag on our results. You know, it is a drag on our financial results, but also events is sort of the tip of the spear as a lead gen for the business. That business has turned, you know, as Tom said in his commentary and in the press release, that business had organic growth in January and February. When you compound that with retail being up mid-single digits and leagues being up mid-single digits, you know, we are still within the paradigms of our guidance. You know, when we talked last quarter, we were very focused on people not getting super excited about December because we still had this corporate events business, which was front-end loaded in December as expected. Corporate events are down, but then you got into December, and our consumer events and our retail were on fire. And the first three weeks of January, the business was up double digits. So, you know, our confidence in the business is very high. We invested to get there, and now we need to pull back some of those investments. But, you know, we are definitely still within the confines of our guidance we gave out in August. Steven Wieczynski: Okay. That makes sense. And then maybe if I could add one more real quick. You know, I want to ask how we should think then about kind of, you know, a flow like, how the flow through would look for the rest of the year. Obviously, you know, you guys were investing, it seems like, pretty heavily in the corporate events business turning that around through December. So maybe a better way to ask that is, you know, how much of a drag was that on margins in your second quarter? Hopefully, that makes sense. Bobby Lavan: Yeah. So, you know, there are two or three buckets, I would say, of direct drag. So center payroll, on a comp basis, was up $6 million year over year. Right? Two, you know, we talked about and we flagged very heavily the marketing. The marketing investment on a year-over-year basis was up $4 million, and the marketing team investment on a year-over-year basis was up a million. Right? So, ultimately, finding the right balance on those numbers and organic growth is what we think we have gotten to in January. And we are very happy with the January results. We are going to, you know, ultimately optimize those numbers to make sure that, you know, we are getting the appropriate flow through. You know? And, you know, from our expectations, you should see margin growth in a material way in the fourth quarter as all the water parks and the boomers go from being a few million a quarter of drag to significant EBITDA. Steven Wieczynski: Okay. Helpful. Thanks, guys. Really appreciate it. Operator: Your next question comes from the line of Matthew Boss of JPMorgan. Please go ahead. Matthew Boss: Great. Thanks. So could you elaborate on progress with your initiatives that you have made to date to rebuild the Events business? Or specifically, drivers you think are underlying this recent inflection in the events business relative to the headwinds that you faced on that side of the house in the first half of the year? Bobby Lavan: Yeah. We chased price for two years. So if you called us and you wanted a discount, we would give it to you. Now discounts are an important part of any sort of location-based entertainment company. You know, if you call in the summer, Monday afternoon, you know, a discount is warranted. But if you call for a Thursday at Times Square in December, we should not give you a discount because demand is greater than the supply. And so in September, we built out dynamic pricing reporting systems. When we looked at where we were tracking in September, we were tracking for our events business to be down double digits, and we brought it all the way back. And that was really less through volume and more through dynamic pricing. And that is something that has dramatically changed over the past few years. You know, the volume, it is hard on the corporate side. You know, that is business that we need to build functions to kind of build, you know, our marketing function to get our name out there more. But, you know, also our marketing, which has really helped the kids' birthday parties and consumer parties. So pricing has been paramount, and also the partnership with marketing is really a sea change for the business. Matthew Boss: And maybe to that point, Bobby, could you elaborate on which investments you made in the second quarter that you saw translate to improved traffic or same-center comps? And then just how best to think about the continued investments as we think about the third or the fourth quarter, as I think you mentioned balancing margin in the back half of the year and particularly it sounds like the fourth quarter. Bobby Lavan: I am going to hand the hand over to Lev because you... Lev Ekster: Hey, Matt. So you saw we made a significant increase to our marketing budget, and that was an investment in building our brand and increasing the brand awareness. We feel like it was, for the most part, a pretty worthy investment. In fact, we saw our media impressions in the quarter increase 200% from Q2 of the prior year. We had 340 million impressions in Q2 of this year; we exceeded over a billion impressions. And that also converted. We saw online revenue increase 28% year over year, and booking conversions improved twofold. The rebrands of Lucky Strike, of which we did 30 in Q2, are also bearing fruit, and we anticipate being done with all of those rebrands this calendar year, which would put us right around 218 Lucky Strike locations. But when you consider the efficiency of going from three brands to two, it really helps our national awareness. I also want to mention that the marketing investment increased our share of voice. So our search impressions climbed significantly. In fact, it was a 520% increase, but we also saw efficiency with our CPMs decreasing by 38%. So from a high level, marketing increased, but largely as an investment in brand building, and we saw the benefits of that in January, and I think that is going to continue as we scale the rebrands of Lucky Strikes. Matthew Boss: Great. Best of luck. Lev Ekster: Thank you. Operator: Your next question comes from the line of Jason Tilchen of Canaccord Genuity. Please go ahead. Jason Tilchen: Good afternoon. Thanks for taking my question. I was wondering if we could talk about the food and beverage sales that you saw during the quarter. It was a little bit below what we were expecting. And I am just curious sort of how attach rates trended and what are some of the benefits you are starting to see from sort of the increased emphasis on training and some of the tablet implementation that you guys are rolling out? Thanks. Lev Ekster: So our retail comp was just shy of 2% at 1.7%, but our retail food was at 10.9%. So it continues to outperform. And while alcohol was a bit of a drag, with retail alcohol down right around 4.7%, we saw that our retail nonalcoholic comp grew more than the drag did; that increased 26.2% or $2 million. So in terms of food and beverage, it is pretty dynamic. We are seeing, obviously, as a society, the decrease in alcohol consumption. But we continue to invest in our zero-proof program. So we launched, as you remember, Kraft Lemonades earlier in the year. That has a run rate of over $5 million. With the success of Kraft Lemonades, later this quarter, we plan to introduce dirty soda programming to our traditional properties and boba drinks to our experiential properties, and we anticipate similar results. We are also, for the first time ever, going to introduce a zero-proof program to our AMF properties, our traditional locations. They have never had a mocktail program. So we are just changing with the times, investing more in zero-proof, and it is working. What also is working is our tablets. We introduced server tablets. Today, we sit at 125 locations with server tablets, and we are seeing the average check size increase about 7% with increased gratuities for the associates using the server tablets. By March, we are going to have server tablets in 160 of our locations. We are going to continue to evaluate as we scale that. But, ultimately, as Tom mentioned, we increased service labor in Q2. And some of it worked, and we saw retail comp growth. Some of it was inefficient, and we have to evaluate that. So we have actually recently trimmed some of our least profitable operating hours as a result of that. And we are looking at in and out times of our associates to make sure that they are very productive. But that investment in labor increased service labor for our guests, and our increased hospitality training is working because we have now seen for fourteen straight months our NPS score comp from the prior year. In fact, it hit our highest point of 78.7% in October. So from a hospitality perspective, from a retail growth perspective, the service is working. We just want to optimize it. Operator: Your next question comes from the line of Ian Zaffino of Oppenheimer. Please go ahead. Ian Zaffino: Great. Thank you very much. You know, you guys mentioned some of the investment that you are making and upping the return that you are expecting. Can you give us maybe kind of particulars of what was unexpected? I think you mentioned labor, but anything else? And then how are you actually accounting for some of the line items as you get to the return that you want to get to? Thanks. Bobby Lavan: Yeah. I mean, investments are focused on center payroll, marketing, infrastructure at the water parks, boomers, and then what I would call the other bucket or the incremental activity bucket. The center payroll, as Lev spoke at, we look center by center. We look at the amount of payroll we added, and we identify where that payroll delivered a return or did not deliver a return. Right? You know, returns are, in this world, you know, ultimately, you know, average labor is going to cost you $25 to $30 an hour. And if you are not getting the revenue to justify that, then you should not be investing in labor. Right? We are in an incremental margin business. You know, the incremental revenue needs to be greater than the incremental cost. You know, from a marketing perspective, you know, right now, we are injecting capital into a system that has generally been starved of marketing. We are watching impressions very strategically. We are testing market by market. And so, you know, the first market we leaned into was New York. New York City, we increased marketing spend. We rebranded Times Square, Chelsea Piers, Lucky Strikes, and both of those centers comped double digits in the second quarter. Right? At the same time, we have a state like Colorado where we have a hodgepodge of Bolero, Lucky Strikes, AMFs. It is harder to test that marketing spend. And that is why the rebrand is so important to get done this year. As it relates to the water parks and the FCCs, you know, these businesses have been starved of management labor. We think that there are massive opportunities on awareness, on investing capital into these locations, and we saw that with the robust performance at Boomers. Destin Water Park that we bought a year and a half ago, you know, that water park was up 20% year over year last summer. We continue to lean into that team, but that team does drive, you know, a multimillion-dollar drag in the off-season, but then you get EBITDA and more back. You know? And then the one that we found had the least returns was kind of incremental activity. We had more programs. More programs mean you are spending money faster. You are ultimately dealing with marketing materials, collateral, and the center of uniforms that you are not being as efficient. Now those are the things that we are going to plan better, pull back on, and really focus on service labor and marketing that drives the top line. Operator: Next question comes from the line of Eric Handler of ROTH Capital. Please go ahead. Eric Handler: So we are now about, let us call it, three and a half months away from Memorial Day when a lot of the regional water parks will be opening. You know, as you sort of when customers show up on a sort of, like, on a like-for-like basis, where are they going to notice the biggest changes in operations? Thomas Shannon: This is Tom Shannon. We have been investing in all of these assets really from shortly after we acquired them, and one of the reasons that Big Kahuna in Destin was up 20% is it got a comprehensive facelift. It was done very efficiently. It was done largely within park labor, but there was a lot of rot literally in the park where you had things like bridges that were dilapidated, fences that were not, you know, appealing or maybe even structurally sound. And the team in the off-season went through the entire park. They rebuilt seven bridges. They probably replaced half of the fencing. They painted literally everything. Gel-coated the slides, replaced, you know, malfunctioning pumps, lighting, etcetera, and the park looked effectively new. And the customers responded. We have done the same on the Boomers. So the preliminary numbers I have on the Boomers, the legacy Boomers that we have owned for more than a year, they are up in revenue 25% over the last two weeks. And that is six large locations from Boca Raton, Irvine, Little Moore, Modesto, etcetera. They all benefited from meaningful capital investment and some very efficient capital investment. I think you are going to see that in all the parks with the exception of probably Raging Waters, which we literally just closed on. We will do our best to upgrade aspects of that. But when the guest comes, they are going to see something they have not seen in a long time. And that is a really refreshed, really appealing, and upscale water park or family entertainment center where we have made the investments we have seen the return, and I think we have seen a better return than we would have reasonably expected or even hoped for. Operator: Your next question comes from the line of Eric Walt of Texas Capital Securities. Please go ahead. Eric Walt: Thank you. Good afternoon. I just have a question kind of following up on the very first question. Out of the gate around the guidance range, Bobby. I guess, you know, January is done, so five-ish months left in the fiscal year. You know, maybe talk about the biggest variables between kind of the, you know, the $50 million high end, low end range of revenue and $40 million on EBITDA, the biggest variable that would take it in your mind from the high end to low end or vice versa. And then which of those are most in your control, you know, like marketing, maintenance, something like that versus something that maybe is a little less out of your control? Bobby Lavan: Yeah. So if you go for six months, the comp is flat. Right? The comp is unbelievably easy for the next six months or five months, I guess, on the event side. Right? Additionally, leaning more into summer season pass, last year, we did $13 million. You know, we think we can beat that significantly this year. You know? And most important is going to be how profitable the Boomers, Emerald Point, which is, you know, the biggest water park in North Carolina, Raging Waters, which is the biggest water park in California, Raging Waves, the biggest water park in Illinois, all of these are we have invested in. We have done what we did to the legacy Boomers. And you remember we bought the legacy Boomers for $27 million, and those properties are doing $16 million of EBITDA at this point. We think we can, you know, get to not exactly there, but close on the water parks. And so how profitable the water parks come on with the capital invested is really the main driver in the fourth quarter. In the third quarter, you know, we started January strong. Right? And so, you know, we started January strong. You know, if it was not for this snow apocalypse that happened, you know, we would have been up double digits on a comp basis in January. We are still up. You know, we had a great month. We will see a ton of operating leverage that month. And the thing that, you know, Tom put in his quotes in his press release is committing to taking down the inefficiency spend. Right? And so the difference between, you know, the top and the bottom is going to be performance in the water parks, maintaining good organic growth, but also us getting costs under control. Operator: This question comes from the line of Michael Kupinski of NOBLE Capital. Please go ahead. Michael Kupinski: Yeah. Obviously, you are anticipating that the water parks are going to contribute meaningfully into the fourth quarter, so I plan to get a little granular here and start for the questions. In terms of Raging Waves, you indicated that it came with a lot of land. And I know that you had anticipated that you had planned to build out some event space there and maybe do some expansion. I was wondering if you had already done that. And then part of the growth that we saw last year, I think you said that you introduced alcohol and that we saw a little revenue lift from that. I was wondering if your Raging Waters in California, if that was part of the acquisition plan, if that already had alcohol, you know, they had that there, or is that a part of the introduction that you can see a little lift from that as well? And then, I guess, in terms of other investments into the water parks, are there other expansion plans that you have either done or contemplated for those? Thomas Shannon: Hi. This is Tom Shannon. Thanks for the question. With regard to Raging Waves, we did add some covered event spaces with open sides, and those were open for the last season. We also got a beer license in the middle of 2024, and we had that last year. That contributed a couple hundred thousand dollars in alcohol sales. We are increasing food and beverage availability throughout the park for this year. We have sort of reconfigured the flow as you walk in and where we have placed certain food and beverage outlets, optimized that. I think you will see continued lift. We purchased 66 acres adjacent to that park. We have not done anything with it, and we do not have any plans at present. We were going to embark on a pretty meaningful expansion of the park with the addition of an Action River, a family pool, and an adult pool with a swim-up bar that would have increased the in-park capacity by somewhere between 1,500 to 2,000 people. Unfortunately, we were not able to get through the permitting process in time to start construction this year, so that will be deferred to next winter for a 2027 summer opening. With regard to Raging Waters, it does not have a liquor license. We will be applying for a liquor license. That will not happen for this summer. Hopefully, we will have that for the following summer. Given the volume of that park, you know, that should be a meaningful number. I do not recall if there was anything else you asked that I have not covered. Please let me know. Michael Kupinski: Other outside of alcohol in terms of the prospects for growth there. Like, is there other land that you are getting, other expansion plans done in the future? Thomas Shannon: Well, I mean, we have extension opportunities within the confines of all of the parks. None of them are built out to their capacity. So over time, the answer is yes. But I think that you have a lot of very low investment, high return opportunities. For example, in Big Kahuna in Destin, you could do a lot of rides and make the park more dynamic and exciting. But the gating factor there is really there is not enough deck space and lounging space, which is relatively inexpensive. And so we focused on those sorts of things. We have ambitious expansions planned, as I mentioned, in Raging Waves. Also in Shipwreck Island in Panama City, we are doing a number of upgrades over the next two years at Wet 'n Wild Emerald Point, which is a very large high-volume park. We are adding a meaningful kiddie/family area. There will be upgrades to the cabanas there, which sell out nearly every weekend. We are adding something like 40 or 50 cabanas that will be in place for this coming season. There is a lot of that sort of stuff, relatively inexpensive, very high ROI, has a big impact on the guest experience. But we also have things planned like a large tower complex slide tower complex at Shipwreck Island in Panama City that we hope to have in place for the 2027 season. The expansion I mentioned at Raging Waves for the 2027 season and also some things that we would like to do at Raging Waters. For the most part, you know, these parks are in pretty good shape. It really comes down to being able to increase revenue through simply having more availability of food and beverage, more cabanas to sell, and, you know, and then optimizing pricing and packages, which I think we have done a pretty good job on for this upcoming season. Michael Kupinski: Thanks for the color. Thomas Shannon: My pleasure. Operator: Your next question comes from the line of Gregory Miller of Shoeh Securities. Please go ahead. Gregory Miller: Thanks. Good afternoon all. I am hoping you could provide some help in terms of getting a better understanding of how we should be thinking about, say, the next 50 or so Lucky Strike conversions relative to the first 100. How similar or different are these stores from a demographics perspective? Locations, the types of stores? In part, in terms of how we should be thinking about the ramp of these rebranded locations over the course of the rest of the year? Thank you. Thomas Shannon: Sure. This is Tom Shannon. There is no difference. It is not like we started at the top in terms of revenue and went down. A lot of what got converted was a function of how quickly they moved through a permitting process. As you know, we deal with a lot of permitting issues in a lot of municipalities. Some are very easy and efficient to deal with. Some are not. And so, you know, the pace at which these things happen is somewhat dictated by an external audience, which is municipal governments. So there is really no difference between the next fifty and the first 100. What is going to happen, and this is really important to note, is that we are going to build out critical mass in most, if not all, markets with the new Lucky Strike brand. So I think Bobby mentioned that we have markets like Denver where you still have three brands and you may have, you know, four or five Lucky Strikes out of 20 centers. It is not enough to do any meaningful marketing. You just cannot amortize the spend over enough centers. But when you get to, call it, 15 Lucky Strikes in the market, you are able to do that, and you are also able to do that on a national basis. So I think the returns will accelerate, and, you know, Lucky Strike will become a very, very powerful brand once we have 200 locations, which we expect by the end of calendar '26, and we are able to put real marketing muscle behind it in a way that has never occurred before. You are going to start to see a lot more relevance and unaided awareness of Lucky Strike. And then following that, AMF. You know? Just to sort of flesh out the point, AMF as a brand has probably had no meaningful marketing spend in three or four decades. It does not mean anything at all. The same is largely true of Lucky Strike. When Lucky Strike first launched, back in, I believe, 2003, it had a lot of excitement around the brand. It was on Entourage. You know, it was really considered a cool brand. And then it really sort of fell by the wayside, and no real money was spent on the brand. And so we are going from an environment of little to no investment over a very long period of time to one now where we have, or soon will have, critical mass in two brands that we are going to be investing serious marketing effort behind, and I think the upside in both of those is tremendous. Gregory Miller: Thank you, Tom. Operator: Your next question comes from the line of Jeremy Hamblin of Craig Hallum. Please go ahead. Will: Hey. This is Will on for Jeremy. Thanks for taking my questions. Just first wondering if you could break down the comp cadence by month through the second quarter? Then if you are able to quantify the weather impact you saw from the snowstorms? Bobby Lavan: Yeah. So it was the easiest cadence is plus one, plus one, minus one. A little bit better in October, November, and December, but that is the easiest way you should look at it. The hit from the snow in January was about $5 million in revenue. So, you know, it really took down Saturday afternoon to Saturday night about, you know, we lost at least $2.5 million on Sunday. We lost about $500,000 on Monday, Tuesday. So it is, you know, we were looking at double-digit comp for January until that. You know, we are still pretty happy with the comp. But, you know, we get through, yeah. And then snow in December offsets about $2 million. Will: Okay. That is helpful. And then just curious on the EBITDA drag from the water park business in the quarter. Then I know the focus has been on organic growth this year, but is there anything in the acquisition pipeline that we should consider for the back half? Bobby Lavan: We have done $95 million of acquisitions this year. You know, we are always looking at things, but right now, we are focused on having a monster summer season, you know, in our Boomers and water parks. Will: Got it. Appreciate the color. Operator: There are no further questions at this time. And with that, ladies and gentlemen, concludes today's conference call. We thank you for participating. You may now disconnect your lines.
Florence Lip: Good day, and thank you for standing by. Welcome to Yum China Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Ms. Florence Lip, Senior Director, Investor Relations of Yum China. Please go ahead. Thank you, operator. Hello, everyone. And welcome to Yum China's Fourth Quarter 2025 Earnings Conference Call. With me on the call are our CEO, Ms. Joey Wat, and our CFO, Mr. Adrian Ding. Before we begin, I'll remind everyone that our remarks and investor materials contain forward-looking statements. These are subject to future events and uncertainties, and actual results may differ materially. Please refer to these forward-looking statements together with the cautionary statement in our earnings release and the risk factors included in our SEC filings. We'll also be talking about non-GAAP financial measures. We encourage you to review the comparable GAAP measures along with the reconciliation of non-GAAP and GAAP measures provided in our earnings release, which is available on our Investor Relations website at ir.yumchina.com. You can also find both the webcast replay and a PowerPoint presentation on our IR website. Please note that all year-over-year growth rates discussed today exclude the impact of foreign currency unless we mention otherwise. With that, I'll now turn the call over to Joey Wat, CEO of Yum China. Joey? Joey Wat: Thank you. Hello, everyone, and thank you for joining us. I would like to start by saying thank you to our team for delivering strong results this year, especially in such a dynamic market. In 2025, we opened more than 1,700 net new stores, taking our total to over 18,000 stores across more than 2,500 cities. Our focus on both system sales growth and same-store sales growth is paying off. Same-store sales growth has been positive for three consecutive quarters. System sales growth improved sequentially in quarter four, reaching 7%. Our dual focus on innovation and operational efficiency also boosts our healthy margins. OP margin expanded year over year in every quarter of 2025, reaching 10.9% for the full year. It is the highest level since our US listing. Excluding special items, operating profit grew 11% to $1.3 billion for the full year and was up 23% year over year in quarter four. By brand, both KFC and Pizza Hut exceeded our expectations in 2025. KFC's solid momentum continued with system sales growth reaching 8% in quarter four and 5% for the full year. Pizza Hut transformed its menu and operations resulting in 16% same-store transaction growth and 20% operating profit growth in 2025. While we accelerated growth, we also returned $1.5 billion to shareholders in 2025 through dividends and share repurchases, which is around 8% to 9% of our current market cap. Let me share a few key highlights from our core initiatives, and then I'll hand it over to Adrian to go through our results in more detail. First, we continue to delight our customers with year-round innovation, launching about 600 new or upgraded items annually. At the same time, we stay laser-focused on our hero products, which are significant drivers of sales and repeat purchases. These items have a loyal fan base that is also highly receptive to the new innovations they inspire. At KFC, our hero innovations include spicy original recipe chicken and crackling golden chicken wings. In 2025, hero products accounted for one-third of KFC sales, and together with their inspired innovations, they delivered high single-digit sales growth. At Pizza Hut, we sold over 200 million pizzas in 2025. The pizza category continued to grow strongly. Our newest thin crust pizza, Sohu Bao Di, perfectly crispy with plenty of toppings, has earned top reviews and become our best-selling crust. It now accounts for one out of every three pizzas sold and is bringing more customers, especially younger ones, into our stores. Second, we focus on delivering great value for money and emotional value on top of serving good food. As we shared at our Investor Day, our pricing strategy has been crucial to our success and has helped us deliver 12 consecutive quarters of same-store transaction growth. Total transactions grew 8%, exceeding 2 billion transactions in 2025. Emotional value matters too. Last year, we partnered with 70 leading IPs in gaming, animation, and sports. Whether tied to the latest hits or tapping into childhood memories, these collaborations help us engage customers and capture additional traffic. Beyond themed toys and special packaging, we decorated select stores and pop-up stores to make the experience more fun for our customers. Third, we capture new opportunities through front-end segmentation and back-end consolidation. Our multi-brand portfolio, diverse modules, and food offerings help us reach more customer segments and serve a wide range of occasions. On the back end, we force the synergies by sharing and centralizing resources in and across stores, regions, and even brands. Side-by-side modules K Coffee Cafe and K Pro are scaling quickly, reaching 2,200 and 200 KFC locations, respectively. They drive incremental sales and profit with light investment. Last year, we also piloted the Gemini model, which places KFC and Pizza Hut stores side by side to support entry into lower-tier cities. With a CapEx of 0.7 to 0.8 million for a pair of stores, it's a very attractive model for franchisees. We opened around 40 pairs of Gemini stores last year and expect to ramp up openings in 2026. Fourth, we are adopting an equity and franchise hybrid model to drive faster and more efficient store openings. We see great potential for growth in China. Recently, I visited Chongqing, China's largest city by population, with over 30 million people. In this wide-brand market, I saw a strong appetite for affordable good food. KFC's density there is only four stores per million people, well below the average of 17 in tier one and two cities, or Shanghai's 28. With menu innovation and multiple store formats, we are confident we can continue to expand our market share in China. To capture incremental opportunities in lower-tier cities, remote areas, and strategic locations, we began accelerating franchise expansion in 2024. The franchise mix of net new openings for KFC and Pizza Hut increased from 25% in 2024 to 36% in 2025. Equity stores remain the core of our business, representing over 80% of our store portfolio. The payback period of our new stores remains healthy at around two years for KFC and two to three years for Pizza Hut. Last but not least, we are embracing GenAI across our business to drive growth and efficiency. In our restaurants, we are piloting Q Smart, a giant AI assistant that integrates operation data such as labor and inventory. It identifies potential issues, recommends actions, and implements them. For example, Q Smart can detect staffing shortages, propose replacement staff, and initiate calls to them. This helps our RGM save time, make informed decisions, and run restaurants more smoothly. And in January, we rolled out SmartK, our AI ordering agent, to all KFC super app users. SmartK helps customers place orders. This feature has already been used by 2 million members, especially those who order breakfast and coffee. Customers respond positively to the added convenience and customized suggestions. At our Investor Day in November, we introduced our RGM 3.0 strategy, which takes a balanced approach across all three aspects of resilience, growth, and moats. We also outlined our plans for our next phase of growth, including expanding to over 30,000 stores by 2030. We are confident that we can continue our rapid growth while improving profitability and returning capital to shareholders. Let me now turn the call over to Adrian. Adrian Ding: Thank you, Joey. Let me now update key highlights by brand. Starting with KFC, in 2025, KFC opened 1,349 new stores, bringing its total to nearly 13,000 locations. System sales grew 5%, and restaurant margins expanded 50 basis points to 17.4%. Same-store sales growth turned positive for three consecutive quarters. In quarter four, system sales growth sequentially improved to 8% year over year. Same-store sales grew 3%, and same-store transactions increased by 3% year over year. Ticket average was flat, as growth in smaller orders was offset by the increase in delivery source mix, which carries a relatively higher ticket average. KFC side-by-side modules are rolling out rapidly. K Coffee Cafe tripled its footprint from 700 locations in 2024 to 2,200 locations in 2025. While expanding to more locations, we'll also increase per store daily cup sold by 25% year over year. Menu innovation has been key in driving repeat purchases. Last year, we launched a new product every week on average. K Coffee Cafes generated a mid-single-digit sales uplift for their parent KFC stores, and we're confident in this future expansion. K Pro added more than 200 locations in just one year. The slide view concept offers grain and pasta bowls and superfood smoothies. Backed by KFC's trusted quality and strong value for money, K Pro has resonated well with consumers and generated a double-digit sales uplift for its parent KFC stores. We aim to double K Pro's footprint to more than 400 locations in 2026, focusing on higher-tier cities. Now moving on to Pizza Hut. In 2025, Pizza Hut opened a record 444 net new stores, raising its total to 4,168 stores. Restaurant margins improved by 80 basis points to 12.8%, bringing its OP margin to 7.9%, the highest level since our 2016 listing. In quarter four, system sales grew 6% year over year, up from 4% in quarter three. Same-store sales grew 1%, positive for the third consecutive quarter. Same-store transactions increased 13%, growing double-digit for the fourth consecutive quarter. Ticket average was 69 yuan, down 11% year over year, reflecting our mass market strategy. Last year, Pizza Hut entered more than 200 new cities. About half of these, around 100 new cities, adopted the Wow format. We continue to refine the SOAR format and test different service models. The CapEx for a standalone new Wow store is around 0.65 to 0.85 million yuan. With lower CapEx, streamlined operations, and a simplified menu, Wow enables us to penetrate previously untapped locations, especially in lower-tier cities. We saw improving restaurant margins and a solid estimated payback period of two to three years for the new Wow stores, in line with the average new stores for Pizza Hut. Our emerging brands are also making steady progress. Lavazza opened 34 net new stores, including its first store in Hong Kong, taking its total store count to 146. Same-store sales growth turned positive in 2025, and overall store economics improved meaningfully. Its latest light model only requires 500,000 yuan in CapEx, roughly half the cost of the previous formats. Its retail business of packaged coffee products, the other growth engine, delivered over 40% sales growth and more than doubled operating profit year over year in 2025. Let me now go through our quarter four P&L. System sales grew 7% year over year, and same-store sales grew 3%. Our restaurant margin was 13.0%, 70 basis points higher year over year, mainly due to improvements in cost of sales and occupancy and other cost ratios. Cost of sales was 31.6%, 30 basis points lower year over year, mainly due to favorable commodity prices and supply chain efficiency gains. We share some of these savings with our consumers in the form of great value for money. Florence Lip: Cost of labor was 29.4%. Adrian Ding: 120 basis points higher year over year. While overall rider costs were higher due to a higher delivery mix, we maintained non-rider costs as a percent of sales at relatively stable levels through operational efficiency gains despite wage inflation. Occupancy and other was 26%, 160 basis points lower year over year, mainly due to sales leverage, store CapEx optimizations, and better rent. Our OP margin was 6.6%, 80 basis points higher year over year. Operating profit was $187 million, growing 23% year over year. Net income was $140 million, 22% higher year over year. Excluding our investment in Meituan, net income grew 14% year over year. Our investment in Meituan had a negative impact of $500,000 in quarter four, compared to a negative impact of $9 million in quarter four last year. As a reminder, we recognized $11 million less in interest income in quarter four this year due to a lower cash balance, resulting from the cash we returned to shareholders and lower interest rates. Diluted EPS was 40¢, 29% higher year over year, or up 21% year over year excluding our investment in Meituan. For the full year, system sales grew 4% and same-store sales grew 1%. Restaurant margin was 16.3%, 60 basis points higher year over year. Both KFC and Pizza Hut's restaurant margins improved year over year. G&A expenses were 4.9% of revenue, 10 basis points lower year over year. Operational efficiency gains more than offset higher performance-based compensation in the year. Operating profit grew 11% to $1.3 billion. Diluted EPS was $2.51, growing 8% year over year, or 14% excluding our investment in Meituan. Total CapEx was $626 million. Capital efficiency improved, ROIC reached 17.3%, up from 16.9% in 2024. Let's now turn to capital returns to shareholders. We're on track to return a total of $4.5 billion to shareholders from 2024 to 2026. That is $1.5 billion each year. In 2025, we returned $353 million in cash dividends and $1.14 billion in share repurchases. In 2026, we remain committed to returning $1.5 billion to shareholders. We're raising our quarterly dividend by 21% from 24¢ to 29¢. At 29¢ per quarter, the payout ratio will exceed 45% of our 2025 diluted EPS, with an annual dividend totaling around $400 million. We have also initiated a $460 million share repurchase plan for 2026. With these arrangements, we're well positioned to deliver on our commitment for the year. Starting in 2027, as outlined at our 2025 Investor Day, we plan to return approximately 100% of annual free cash flow after subsidiaries' dividend payments to noncontrolling interests. And this is expected to translate into an average annual return of $900 million to $1 billion plus in 2027 and 2028, and exceed $1 billion in 2028 and onward. These commitments are supported by our healthy cash position and robust cash generation. In 2025, we generated $840 million in free cash flow, an increase of 18% year over year. I ended the year with $2 billion in net cash. Now moving on to our 2026 outlook. We're confident we would reach more than 20,000 stores in 2026. This means opening over 1,900 net new stores, with 40% to 50% coming from franchisees for both KFC and Pizza Hut. We will continue to deepen our presence across China, especially in lower-tier cities and strategic locations, using a variety of store formats. With lower CapEx per store and a higher franchise mix, we expect the total CapEx to stay in the range of $600 million to $700 million this year. As for other financial metrics, we expect our growth in 2026 to be consistent with our three-year guidance shared at our Investor Day. That is thanks to our sales index of 100 to 102, mid to high single-digit system sales growth, high single-digit operating profit growth, double-digit EPS growth, and a slight improvement in restaurant margin and OP margin for Yum China. As activity on delivery platforms remains dynamic, we have factored in different scenarios and are confident that the impact on our businesses will be limited due to our balanced and disciplined approach. Our full-year projections are based on our current plans and have not assumed any changes in macro. Any improvement would represent potential upside. We will continue to track the progress of our new store openings, module development and rollouts, and other core initiatives and provide updates as we go. For quarter one, we're working hard to deliver our fourth consecutive quarter of positive same-store sales growth and thirteenth consecutive quarter of positive same-store transaction growth. Our margins face a tough year-over-year comparison. First, rider costs are the biggest headwind, driven by a higher delivery sales mix. Delivery mix increased from 42% in quarter one to 53% in quarter four last year and is expected to grow further. Second, the benefit from lower commodity prices will be smaller than before. Additionally, last year's base already reflected significant benefits from Project Freshii and Redeye. KFC's restaurant margin was already 19.8%, and Pizza Hut's restaurant margin improved 190 basis points year over year in quarter one last year, setting a high base for quarter one this year. We'll focus on efficiency and sales leverage and strive to maintain Yum China's restaurant margin and OP margin roughly in line with the prior year period in quarter one. With that, let me pass it back to Joey for her remarks on the Chinese New Year. Joey Wat: Thank you, Adrian. Let me share a few thoughts on the Chinese New Year, our key trading window of the year. Chinese New Year falls on February 17, considerably later than in most years. Our teams have prepared comprehensive scenario plans by the week and even daily. People will soon be traveling and gathering for the holiday season. Our brands are focusing on their signature products to capture the heavy traffic during Chinese New Year while maintaining strong operational efficiency. At KFC, buckets have long been our Chinese New Year signature, offering exciting food and abundant value. This year, in addition to our classic golden bucket and wing bucket, we are introducing for the first time peanuts and sunflower seed mini buckets. These packaged snacks honor Chinese tradition and help create a festive Chinese New Year atmosphere. At Pizza Hut, we are focusing on one of our hero products, the super supreme pizza. This time, we are adding new choices by pairing it with our classic Bolognese and trendy salted egg yolk toppings. Customers can also top up the pizza with a mountain of crunchy potato chips and rich sauce. These offerings are available in combos designed for family and friend gatherings and to drive ticket average. Overall, for this Chinese New Year, we are executing according to our plans. Trading year to date has been in line with our expectations. With that, I would like to wish everyone a happy and prosperous year of the horse. Now let me pass it back to Florence. Florence Lip: Thanks, Joey. Now we will open the call for questions. In order to give more people the chance to ask questions, limit your questions to one at a time. Thank you. We will now begin the question and answer session. On your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Michelle Cheng from Goldman Sachs. Please go ahead, Michelle. Michelle Cheng: Hi, Joey, Adrian, Florence. Congrats for the very strong results and ending 2025 with these impressive numbers. My question is about pricing. We noticed that you raised the delivery price recently, and earlier, we also hear some other brands are raising the price. So can you comment on your expectation on the pricing trend, including any changes in your end market promotion activities? And how this will be reflected in the same-store sales growth, especially since we should have a pretty easy base for the first quarter on both same-store sales growth and overall sales last year first quarter. And separately, if I may, regarding delivery mix, we noticed that delivery mix increased quite a lot, but the margin is still pretty good. So unlike other kinds of catering businesses, which have been suffering from higher delivery mix and lower margin, and for Pizza Hut, we even see payroll cost is down in the fourth quarter. So can you still elaborate a little bit more on how we should think about 2026 delivery mix and impact on the margin? Thank you very much. Joey Wat: Thank you, Michelle. Let me take the pricing part, and Adrian can answer the second one. The price increase for KFC was a mild adjustment. It only affects the delivery menu, and it has no change to dine-in and takeaway. And we also did not make any change to the signature campaign, such as the Crazy Thursday or the Weekend Buy More, Save More. And the price increase helped absorb some rider cost increase because of the higher delivery mix. With that said, we remain committed to offering great value for money, something we have done for a long time. And therefore, we are very committed to it. And that was thoroughly discussed in our Investor Day. Together, with our good food and emotional value, the primary goal of our business, of our commitment, is still to drive traffic. So we are still targeting the thirteenth consecutive quarter of same-store transaction growth and fourth quarter of same-store sales growth in quarter one. And so far, the trading has been in line with our expectation. So overall, in the short term and long term, I hope this demonstrates our confidence in our business model. Adrian? Adrian Ding: Yeah. Sure. Michelle, on your second question regarding margin outlook and also the delivery mix, I guess very briefly on delivery mix outlook for 2026. We do expect further increase in mix for delivery. For full year 2026. I mean, our delivery growth has been pretty solid for the past more than ten years. And for the past one year, given the dynamics in delivery aggregators, our growth has been particularly high, which has proven a pretty big surge in the delivery mix. I think from 42% last year to around 48% for the full year 2025. So it's a pretty significant increase. For the full year 2026, we do believe regardless of the delivery aggregator subsidy dynamics, we do expect that the delivery mix will surge further. And in terms of the margin impact on Yum China and the two brands, as we mentioned in the prepared remarks, we expect the full-year restaurant margin and OP margin to slightly improve year on year, and we are confident to achieve and deliver that. Specifically on two brands. For KFC, we expect the full-year restaurant margin to remain relatively stable year over year. It's already a very healthy level. And as you may recall, during our Investor Day three months ago, we actually gave a long-term guidance for KFC's restaurant margin, which is to be relatively stable over the long term as well at a healthy level. For Pizza Hut, we expect the full-year restaurant margin to slightly improve from 2025's level, with streamlined operations offsetting higher delivery costs and a higher base year over year. I would like to reiterate that for quarter one specifically, we face a tougher year-on-year comparison. As we mentioned in the prepared remarks, there are different factors that we mentioned in terms of meaningful delivery mix increase, and thereby the rider cost increase correspondingly. And also, the tailwind from favorable commodity prices gradually reduces. And also, the quarter one last year is a really high base, KFC's restaurant margin being as high as 19.8% and Pizza Hut's restaurant margin improved by 190 basis points year over year in quarter one last year. So both brands have a really high base. And, obviously, our guidance for the quarter one margin being kind of stable has accounted for the price increase on delivery platforms for KFC. And lastly, I think you asked about how do we understand each line of the key cost line items for full year 2026. For COS, cost of sales, we expect it to remain relatively stable. There will be a tailwind from commodity prices, but the tailwind will be smaller, and we will pass good value for money to our consumers. For COL, cost of labor, obviously, we face continued headwind from the higher rider cost as a result of the higher delivery mix expected for this year as well. And we aim to maintain the non-rider cost stable, offsetting the low single-digit wage inflation with more streamlined operations. And lastly, on O&O, occupancy and other costs, we continue to explore optimization opportunities and expect O&O as a percent of sales to keep improving year over year for the full year 2026. This is supported by store CapEx optimization and better rent. So, hopefully, that addresses your question. Thank you, Michelle. Michelle Cheng: Thank you so much, Joey and Adrian, and we wish you a great Chinese New Year. Joey Wat: Thank you. Thank you. Florence Lip: Thank you. We will now take our next question from Chen Luo from Bank of America. Please go ahead, Chen. Chen Luo: Hi, Joey, Adrian, Florence. Congrats again on the strong result. In fact, today is in China, and for those foreign investors, it actually stands for the first day of spring. So China consumption has been in winter for too many years. And our strong result has, fortunately, brought us a touch of warmth. And my question is more on the sales side. I noticed that our SSG has actually edged up higher in Q4 versus Q3. Despite the fact that the online delivery subsidy intensity has eased a little bit quarter on quarter. What have we done differently to boost SSG in Q4? And, also, as we are already into the on the constant currency basis, pre-COVID season, can you actually share with us some color on the year-to-date trading environment? I understand that we have the calendar distortion. So any comparison based on the calendar will be helpful. And lastly, I noticed that for SSG, for the system sales and revenue growth, usually, in previous quarters, revenue growth would be slower than the system sales growth. But in Q4, both numbers came in around 7%. How to reconcile the Q4 pattern versus the previous few quarters? That's all my questions. Thank you. Joey Wat: Thank you. Let me make a comment on the trading in Chinese New Year, and Adrian can tackle the numbers. So overall, the customer sentiment, as we mentioned at our Investor Day, we are seeing or we continue to see early signs of improving consumer sentiment, which is good news. With that said, Chinese New Year is a very key trading window. Heavy traffic concentrates into several days, and it creates a very significant challenge to operation. So we need to balance sales initiatives with operational efficiency as wages are higher, much higher during the public holidays. Point two is the Chinese New Year this year, as you mentioned, is considerably later than most years. And we actually have yet to reach the peak trading. We call it in Chinese. So we are climbing up the mountain, but we have not reached the peak yet. So it's slightly a bit early to make any big comment. So all we can see right now while sales are ramping up, year to date, trading has been in line with our expectation. And last but not least, we will continue our strategy to drive traffic, sales, and profit growth for the quarter, all three at the same time. We target to deliver our fourth consecutive quarter of positive SSG and thirteenth consecutive quarter of positive transaction growth, as I mentioned earlier. Adrian? Adrian Ding: Sure. The second question regarding the comparison between revenue growth and system sales growth, yes, normally, system sales growth should be slightly higher than revenue growth. And that's mainly caused by the higher growth of the franchise business contributing fully to the system sales but only roughly half to the revenue. And sometimes you do see similar figures or even the same figure for the growth of the two metrics. That's partially also due to rounding as well. But going forward, I think, generally speaking, we do expect a slightly higher system sales growth than revenue growth if we kind of disregard the rounding factor in it. So, hopefully, that addresses your question, Chen. Joey Wat: And also, the system sales growth, when we open a lot of stores during the last quarter, it helps the number, particularly the quarter four is slightly smaller one. Chen Luo: Got it. Thanks again. And congrats. Joey Wat: Thank you. We will now take our next question from Lillian Liu from Morgan Stanley. Please ask your question. Lillian Liu: Hello. Can you hear me? Joey Wat: Yes, we can. Lillian Liu: Okay. Hey, Joey, Adrian, and Florence. Congrats again. I have one question on Pizza Hut sales momentum. Because obviously, KFC still delivers very strong momentum in the fourth quarter, higher than Pizza Hut's trend. And I recall on the Investor Day, 2026 onwards, major sales growth will be mainly driven by actual growth, actually, will be mainly driven by Pizza Hut, which should be growing at a faster rate than KFC. So would like to understand, in particular, for 2026, what kind of incremental measures management plan to implement to drive up the Pizza Hut revenue or system sales momentum? Which could be higher than KFC. Thank you. Joey Wat: For Pizza Hut, first of all, our core business continues to drive very nice growth, and in 2025, you will see we actually entered more than 200 cities. And this is a very big number for Pizza Hut. And that was helped by the Pizza Hut model, which alone entered into more than 100 cities. Because for a long time, Pizza Hut city penetration was stuck at 900 cities. But now we are in over a thousand cities. And 2024 was the year we shared that we feel that Pizza Hut has reached the inflection point. So 2024 was nice growth, 2025 with the help of a Pizza Wow store, also grew very nicely. So that's one way. And the other one I would like to mention is some additional color on the product. So it's worth trying. If you have not tried yet, it's a handcrafted thin crust pizza. Sohu Bao Di pizza. The new crust was really amazing. And within a very short time, it accounts for one out of three pizzas sold. And this is a very big number. So now we have a good variety of pizza crust choices, the thin crust, the pan, the hand-tossed, and stuffed crust. And for those who spend a lot of time at Pizza Hut, you will know that doing pizza crust is the real deal. It's much harder than doing the topping. And the other product I would highlight is the burger. We have been selling burgers for more than a year now, and it's a mid-single-digit of our sales mix. So from the module to the key products, these are very exciting growth drivers for 2025, and it will continue into 2026. And I think I'll pause here. Thank you, Lillian. Lillian Liu: Okay. Thank you. Joey Wat: Thank you. We will now take our next question from Anne Ling from Jefferies. Anne Ling: Hi. Thank you, management team. A couple of questions here. So I would like to check first regarding the company mentioned about the like, you know, expanding or ramping up in year 2026. The Gemini stores. So just wanna check whether we will have to figure, like, you know, how much more Gemini store do we plan to open. And you mentioned that, you know, that is a new format, you know, on the franchising, which is called equity franchise model. I'm just wondering whether it means that Pizza Hut will sorry. I mean, Yum China will be investing in the franchise model. And if you can elaborate on that. And the second question is on the new coffee format as well as the K Pro. What is our plan for year 2026? And whether, like, you know, this attribute to, like, you know, same-store sales growth, you know, how much is attributable to same-store sales growth in year 2025? Thank you. Joey Wat: Again, I'll take the first question. Adrian, you can pick the second one. Thank you, Anne. So GEMINI, so the side-by-side, KFC small town, and Pizza Hut Wow Store is a pair with their own separate entrance and counter. However, on the back, we share the in-store resources, the staff, equipment, rent. It's particularly effective to enter lower-tier cities. And the CapEx is good. It's only 0.7, 0.8 million yuan for a pair. So very attractive for franchisees. And the sales are sort of the lighter version of the chassis small town and the lighter version of Pizza Hut Wow. So we would like to control the average payback estimate at about two years. The menu will continue to be even simpler. So KFC menu will be similar to the small town, and Pizza Hut's menu is probably only about 20% to 25% of the regular menu. And we expect the margin contribution will be incremental. And it's still early stage. We only have 42 pairs right now. Very small number, and we're testing it. But we do expect the Gemini model to improve its OP margin of our franchise business in the long term. And that's sort of the most updated progress of the Gemini store. Adrian? Adrian Ding: Yeah. Sure. Anne, I think you have a small question between the first one and the second one, which is what is the equity franchise hybrid model? Just to clarify, that is not a particular store model. It's like, basically means the acceleration of franchising initiative for Yum China. So, you know, in the future, we'll become a business, shifting from an equity-focused business only to a hybrid of equity franchise business. So that's not a store model. Just to clarify on that one. And then your second question is basically regarding K Coffee Cafe and K Pro. You know, as we mentioned, K Coffee Cafe contributes mid-single-digit incremental sales to the parent KFC store, and K Pro, which is a reasonably new initiative, I mean, the K Pro model now is quite different from the older K Pro two years ago. Right? So, you know, this new version of K Pro, we opened more than 200 new locations in the year 2025. And it's contributing double-digit incremental sales for the parent store with incremental profits. But given it's only 200 locations or slightly more than 200 locations out of 13,000 for the store count for KFC, you could imagine the K Pro contribution to the same-store sales growth for KFC is rather limited. Similar for K Coffee Cafe, actually, because if you think about K Coffee as a whole, the menu mix for K Coffee and K Coffee Cafe altogether is roughly, you know, we mentioned previously, roughly 4% of KFC's menu mix. So, you know, the K Coffee Cafe alone is even smaller. But we do have high hopes for both these two modules, you know, when they grow bigger and bigger, when they have more locations, they will represent higher contributions to the same-store sales growth of KFC. Thank you. Joey Wat: Thank you. Florence Lip: Thank you. We will now take our next question from the line of Christine Peng from UBS. Please ask your question. Christine Peng: Thank you, management, for the opportunity to raise questions. So I have two questions. So firstly is about K Pro. So, Adrian, can you provide us more details in terms of the economics of the K Pro model such as ticket value, the margin profile? And most importantly, if you can provide some details in terms of the customer profile, you know, the kind of differentiation from the major format of KFC. I think that'll be very helpful to understand the module in the longer term. I think the second question is about the Pizza Hut launching burger. You know, the question for Joey is that what's the management rationale behind this? Because, obviously, this is mostly targeted maybe, like, a single person menu. And in terms of the product differentiation, pricing strategies, what are the differentiations from the KFC burger offering, and what's gonna be, you know, the longer-term development strategy for this category going forward. Thank you. Joey Wat: Christine, for the K Pro, we plan to double the number of stores in 2026. So from 200 plus to at least 400. And it offers a very good value for money for the light meal with very strong food safety as a brand. And the menu is very distinct. It just needs to cross the border and try in Shenzhen. We have quite a few of those in Shenzhen. It offers energy bowls and smoothies. Smoothies are doing incredibly well there. In terms of the format, whatever I can say is, again, it's consistent with our corporate strategy of front-end segmentation and back-end consolidation. So it has its own counter and space for seating space for customers, but we share the KFC store space. Membership, equipment, resources, you name it. And here's some interesting sort of context for the customer. A significant portion of customers, namely could be as high as 80% or 90% of our sales, are from KFC members. This is a great example of how our membership program is really helping our long-term and short-term business. So it's an alternative for KFC members and that's right frequency. The frequency so far is very pleasing to us because it gives very little psychological burden to people for the light meal option, I guess. And, also, you can imagine the office location works really well for the K Pro. So we are hopeful for that. And then let me move on to Pizza Burger. We offer that for over a year now. And it's different from KFC burger. It's different in both ways. The pizza burger, the bun, is freshly made in the store with the same pizza crust dough, if that makes sense. So you can probably understand why we are doing burgers because we have this lovely dough. We can make pizza dough, we can also make burgers. But why not? It tastes really good. And then with very high-quality meat, and there are two flavors, which are fantastic. It's the burger with pineapple, fresh pineapple, and also Bolognese sauce. Which is quite creative. Why Bolognese sauce? It's pizza sauce. It's a sauce that customers really love. It's classic. So we have this category, this new product called burger. And you are absolutely right. It works very well for the single person's offering. And we can see the single person meal is an opportunity for Pizza Hut. Right now, the base is low, but for 2025, that one-person meal is growing at 50%, five zero. For Pizza Hut? It's lovely. So we continue to do a bit more of that. And let's see what 2026 will bring us. But, again, it's still early days. It's only one year. We'll continue to learn and do better for our customers. Thank you, Christine. Christine Peng: Thank you, Joey. Florence Lip: I'll take our next question from Ethan Wong from CLSA. Please go ahead, Ethan. Ethan Wong: Good evening. Joey Wat: So my question is on the delivery Sorry. Ethan, you might want to speak louder. We have a hard time hearing you. Ethan Wong: Sorry about that. Good evening. Yes. It's Joey. And yeah. Hi. So the question is on the delivery strategy. Joey Wat: Thank you, Ethan. That's a good question as well. So as we have observed over the last ten years trend, as Adrian mentioned earlier, the delivery continues to grow. So we continue to expect it to grow in 2026 too. But at the same time, I'm with you too. Dine-in and takeaway will still continue too. If I look at Pizza Hut, the takeaway, for example, 2025 takeaway percentage compared to 2019, it almost doubled. And I want to go more for takeaway. Takeaway is a good business. But at the same time, dine-in is still an important part of our business. For KFC, dine-in is still about 30%, and Pizza Hut is over 40%, about 45%. So it's still a very important part. And we still believe that the business will still be there in the long term. But at the same time, we are not judgmental. We basically embrace whatever the customer preference in terms of delivery, takeaway, and dine-in. And we strive to serve them well in all three channels. And then we'll balance the cost structure to do the best we could. So, yeah, we are really open-minded, and we'll do our best. But dine-in will continue. And in the lower-tier city, would dine-in be slightly higher to a certain extent in a sense that the ticket average, the big family consumption still is a Gansu. But one last thing is, you know, how do we balance the growth of delivery while the growth of delivery continues, we protect the margin. As you can see, we have done it. But at the same time, we have new growth drivers such as or means, like, customers right now, we see growing in terms of car ownership. Right? The car ownership is growing. And then the business related to that is growing too, and then we will deliver the food closest to the customer's car. And that is growing nicely. Now we have over 4,000 plus KFC stores that have what we call car-side pickup. So we are doing a variety of the business to balance the sales growth. Thank you, Ethan. Ethan Wong: Thank you, Joey. Florence Lip: Thank you. Our final question for today comes from Sijie Lin from CICC. CICC. Sijie Lin: Thank you for the last question. Thank you, Joey and Adrian. So my question is on the delivery platform subsidy. We know it's very dynamic, but could you provide a sense on how should we evaluate the trend and impact in 2026? And will the platform competition mitigate? What measures will we take to attract customers back to our own channel? Thank you. Adrian Ding: Thank you, Sijie. So on delivery subsidy dynamics, as we mentioned in the prepared remarks, we have different scenario planning for the subsidy, how that evolves. And regardless of the scenario would be, we believe and we're confident that the impact on our business will be limited. Because of our disciplined approach to drive sales, at the same time to protect margin and price integrity. And at the same time, and that's kind of the short-term horizon. The long-term horizon is we do believe this whole delivery aggregator subsidy, as we previously mentioned, it's good for the merchants, especially the larger merchants in the long run. Because the merchants have the choice of working with multiple parties. And, also, you know, we can obviously take the opportunity to secure some long-term benefits, you know, during the subsidy war. So, that's a response on both the short term and long term. And, you know, I think the natural question has always been on margin. And as we demonstrated in the previous quarters, we were able to protect our margins, actually, even slightly increase our margin. And that's why we're confident to give the guidance for the full year 2026. We have an improvement in restaurant margin and OP margin for Yum China slightly. But, you know, I would like to caution again. Sorry to repeat myself. For quarter one, we faced a tough comparison, and our guidance for quarter one is to stay roughly in line for restaurant margin, operating margin year over year for quarter one. Thank you, Sijie. Florence Lip: Thank you, Adrian. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.
Daniel Fannon: Good morning. My name is Daniel, and I will be your conference facilitator today. Welcome to T. Rowe Price Group, Inc.'s Fourth Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode until the question and answer period. I will give you instructions on how to ask questions at that time. As a reminder, this call is being recorded and will be available for replay on T. Rowe Price Group, Inc.'s website shortly after the call concludes. I will now turn the call over to Linsley Carruth, T. Rowe Price Group, Inc.'s Director of Investor Relations. Linsley Carruth: Hello, and thank you for joining us today for our fourth quarter earnings call. The press release and the supplemental materials document can be found on our IR website at investors.troweprice.com. Today's call will last approximately forty-five minutes. Our Chair, CEO, and President, Robert W. Sharps, and CFO, Jennifer Benson Dardis, will discuss the company's results for about fifteen minutes. Then we'll open it up to your questions, at which time we'll be joined by our Head of Global Investments, Eric Lanoue Veiel. We ask that you limit it to one question per participant. I'd like to remind you that during the course of this call, we may make a number of forward-looking statements and reference certain non-GAAP financial measures. Please refer to the forward-looking statement language and the reconciliations to GAAP in the supplemental materials as well as in our press release. Discussions related to the funds are intended to demonstrate their contribution to the organization's results and are not recommendations. All investment performance references to peer groups on today's call are using Morningstar peer groups and for the quarter that ended December 31, 2025. Now I'll turn it over to Rob. Robert W. Sharps: Thank you, Linsley, and thank you all for joining today's call. 2025 brought a third straight year of strong global market returns, though it remains a narrow market dominated by a handful of mega-cap stocks, and with riskier names outperforming quality and value. While this market growth served as a tailwind for our assets under management and investment advisory revenue, it was not an environment that was highly conducive to fundamental research, active management, and long-term investing. But we did see some evidence of the market broadening in the fourth quarter, which would be a positive for fundamental research-driven active management. We closed the year with $1.78 trillion in assets under management, up over 10% from the start of the year despite $56.9 billion in net outflows. Net outflows were concentrated in our equity and mutual fund business, with $75 billion of net outflows from equity and on a vehicle basis, almost $64 billion from mutual funds in 2025. Importantly, we saw an increase in gross sales, which were higher than 2024 and up over 40% from 2023. Offsetting these higher gross sales were redemptions that were greater than anticipated and were driven by performance shortfalls in certain strategies and from portfolio rebalancing due to elevated equity markets. We generated over $2 billion of free flow in 2025 and returned nearly $1.8 billion of cash to our stockholders. We also extended our long history of increasing our regular dividend, marking our thirty-ninth consecutive year of increases since our IPO in 1986. We are building momentum across our strategic initiatives. I remain confident in our plan, and our people, and I look forward to what's ahead. With that, I'll turn to investment performance. We are seeing improvement in the performance of several key and continue to have strong long-term performance across a range of strategies and asset classes. While we're headed in the right direction, there remains room for further improvement. About half of our funds beat their peer group, across the time periods, with 49%, 56%, 46%, and 61% outperforming on the one, three, five, and ten-year time periods respectively. For the three, five, and ten-year time periods, asset-weighted performance is stronger, with 72%, 54%, and 79% of fund assets beating their peer groups for the respective periods. For the one-year time period, 42% of fund assets beat their peer groups. On an asset-weighted basis, over half of our equity funds beat their peer groups on a three and five-year basis, and over 70% beat their peers for the ten-year time period. Fixed income continued to deliver strong performance with over 75% of fund assets beating their peer groups across the one, three, five, and ten-year time periods. Long-term performance in our target date franchise remains strong, with 81%, 55%, and 98% of fund assets outperforming the three, five, and ten-year time periods respectively. Several very strong quarters in 2020 that have been rolling off have been a recent drag on the five-year performance numbers. Returns for the one-year time period were weaker, with 29% of fund assets outperforming peers. This was driven by a slightly lower weight to international equities than some peers and by security selection in some of the underlying portfolios, primarily in 2025. Across alternatives, performance for the quarter was generally strong, amid a more discerning credit backdrop. Credit selection continued to be highly effective as it successfully avoided any exposure to widely publicized frauds or failures. Beyond investment performance, in 2025, we continue to make progress on our strategic initiatives. We established a strategic collaboration with Goldman Sachs, to pursue opportunities in wealth and retirement through co-developed public-private offerings and advice solutions. And in the fourth quarter, we launched the first co-branded model portfolios, including four portfolios that are now live on the GOL platform, and a fifth expected in 2026. In January, we launched one of the model series, the Goldman Sachs T. Rowe Price Group, Inc. dynamic ETF portfolio, on the Morgan Stanley platform. We extended our retirement leadership globally with a sub-advised retirement date fund series in partnership with a Japanese asset manager and two new retirement allocation funds with a strategic partner in Asia, marking the first time a US asset manager offered retirement-focused products to retail investors in Hong Kong and Singapore. Additionally, we saw growth in the Canadian target date series we launched in 2024. We maintained our position as an industry leader in active target date solutions. Building on over twenty years of product innovation and surpassing $500 billion in assets under management across a diverse suite of solutions. We also help clients navigate change and achieve better outcomes with the breadth of retirement solutions, including the launch of our innovative Social Security Analyzer tool. We grew our active ETF business with the recent launch of two new active core ETFs. One focused on the US and one on international. These active core strategies combine quantitative and fundamental research for alpha generation and we believe this approach will compete effectively with passive. We also expanded our fixed income ETF range with three new muni strategies, and one multi-sector ETF. All told, we launched 13 ETFs in 2025, bringing our total to 30, and we grew assets under management to over $21 billion at year-end. We continue to expand our alternatives business. At the start of January 2026, we had the first close for a T. Rowe Price Group, Inc. managed private equity fund. This strategy is a closed-end drawdown fund and seeks to create a portfolio of approximately 25 category-leading private companies. T. Rowe Price Group, Inc. has exceptional access to late-stage private given our successful eighteen-year track record of investing over $24 billion across approximately 300 private companies. And our reputation for being thoughtful, long-term, and value-added shareholders well beyond the IPO. OHA enjoyed a second consecutive record fundraising year, with over $16 billion of capital raising across the platform, led by private lending strategies. Private credit deployment experienced a strong finish to the year, reflecting increased sponsor activity and looking ahead there continues to be an expectation of an acceleration in deal volume. As the pipeline of pending private credit transactions remains robust. We made key organizational changes including the creation of the technology data and operations function to focus on integrating digital capabilities, data strategy, and enterprise operations to accelerate execution. And the global strategy function to sharpen our strategic vision integrate corporate development and product strategy, and support our growth agenda. We advanced our use of artificial intelligence across the firm, amplifying our investment professionals' capabilities without replacing their judgment. Improving the speed and personalization of client service, and adopting new technologies with disciplined governance and thoughtful onboarding. The momentum we built in 2025 carried into 2026 with our announcement in January of a new strategic partnership with First Abu Dhabi Bank. Leveraging our collective strengths and capabilities, our partnership with FAB aims to deliver world-class investment solutions across public and private markets, tailored to meet the needs of investors throughout the Middle East. While we have had an institutional business in the Middle East for some time, this is our first strategic partnership in the region. And it reflects our commitment to growing and diversifying our business through innovative global partnerships. This partnership and all the progress we made in 2025 are a reflection of our associates' steadfast commitment to our clients, and I want to thank each of them for their dedication. And now, Jen will share an update on our financial results. Jennifer Benson Dardis: Thank you, Rob, and hello, everyone. I'll review our financial results before opening the line for Q&A. Our adjusted diluted earnings per share for Q4 2025 was $2.44 bringing full-year adjusted diluted EPS to $9.72, up 4.2% from 2024 on higher average AUM investment advisory revenue, and lower average share count. As previously reported, we had $25.5 billion in net outflows in Q4, bringing the full year to $56.9 billion. As Rob noted, in 2025, we experienced elevated redemptions from our legacy equity and mutual fund business. Despite these redemptions, strong equity market returns more than offset the net outflows. And we ended the year with nearly $50 billion in additional equity assets under management. This trend, where equity market appreciation has exceeded equity net outflows, has been consistent over the past three years. We saw encouraging momentum and signs of strength quarter and in a few areas of our business we ended the year with positive net flows. Fixed income and alternatives had positive net flows for the quarter and along with multi-asset had positive net flows for the full year. Fixed Income has now delivered eight consecutive quarters of positive net flows. And our target date franchise ended the year with net inflows of $5.2 billion. Our ETF business remains strong with $1.8 billion in net inflows during the quarter, bringing 2025 net inflows to nearly $10.5 billion. Within other investment vehicles, for the full year, trust continued to see strong net inflows in the DC channel and we saw positive net flows to SMAs. In 2025, strong equity markets lifted the growth of our average AUM, increasing our investment advisory fees, net revenues, and diluted EPS over the prior year. Our Q4 adjusted net revenue of $1.9 billion raised our full-year adjusted net revenue to nearly $7.4 billion, an increase of 2.8% from 2024. Our Q4 Investment Advisory revenue of $1.7 billion increased 2.3% from the prior quarter and 4.2% from Q4 2024, driven by higher average AUM partially offset by a lower effective fee rate. Full-year investment advisory revenues of $6.6 billion were up 3.1% from the prior year. Our Q4 annualized effective fee rate excluding performance-based fees was 38.8 basis points, which is down from 39.1 basis points in Q3 2025. The decline in average effective fee rate continues to be driven by changes in our asset and vehicle mix. As client demand increasingly shifts toward lower-priced vehicles and strategies, we remain focused on delivering our investment strategies in our clients' vehicles of choice while maintaining competitive fee rates. Slide 19 in the supplement illustrates the changes in our vehicle mix over the past five years. Over time, we've seen a growing proportion of our gross sales going to fixed income and multi-asset, and to lower-priced vehicles like ETFs, trusts, and SMAs, while redemptions remain primarily concentrated in higher-priced equity strategies and mutual funds. These sales and redemption patterns drive the change in our asset and vehicle mix. Performance-based fees in Q4 of $14.2 million were predominantly from alternative strategies and were up from the prior quarter, but down from Q4 2024. Full-year performance-based fees of $37.4 million were down from 2024's $59.3 million. Turning to expenses, Q4 adjusted operating expenses were $1.2 billion bringing 2025 adjusted operating expenses, excluding carried interest expense, to $4.6 billion, which is up 3.4% from 2024's $4.46 billion and within the previously provided guidance of 2% to 4%. Based on normal market conditions, and assets at the end of 2025, we anticipate 2026 adjusted operating expenses excluding carried interest expense will be up 3% to 6% over 2025's $4.6 billion. This range includes our ongoing expense management program that allows us to invest in growth areas of the market. We remain committed to maintaining a strong cash position and returning capital to stockholders. During Q4, we bought back $141 million worth of shares, bringing buybacks for 2025 to $624.6 million or 2.8% of our shares outstanding. We closed the year with a strong balance sheet, holding $3.8 billion of cash discretionary investments, up $735 million from the start of the year. This allows us to support our recurring dividend while preserving the ability to pursue opportunistic acquisitions or partnerships and execute share buybacks. Our long-term approach to managing our business enables us to invest strategically in areas that strengthen our capabilities and drive meaningful results for our clients. Combined with our continued focus on prudent expense oversight, we remain well-positioned to navigate changing market cycles and evolving trends. And now we will open the line for Q&A. Daniel Fannon: Please press 11 on your telephone and wait for your name to be announced. In the interest of time, ask that you please limit yourself to one question. If you have any additional questions, you may rejoin the queue. Please standby while we compile the Q&A roster. Our first question comes from Alexander Blostein with Goldman Sachs. Your line is open. Alexander Blostein: Good morning. Thank you for the question. So maybe starting with just a question around how you guys are planning from an operating perspective for 2026. Heard this expense guide, so maybe just remind us of the ability to flex up or down, and then the bend the environment, for is maybe flattish for the year? Just want to understand that. Robert W. Sharps: Yeah. Alex, thank you for the question. The biggest factor in any single year on our operating margin is equity market return. As we've discussed in the past, there's a portion of our expense base, about a third of it, that's variable. But the biggest driver of our revenue is equity market returns. That said, we understand the dynamic of the revenue outlook with regard to flow and fee pressure. And we're going to need to balance going forward in investing to position ourselves for success long term and ensuring that we have world-class talent with a commitment to being a highly efficient organization with an ongoing focus on productivity. So we have a number of initiatives to drive cost savings to fund those investments. But, you know, I'm really not going to comment on what I think the margin profile will look like over time because as I said, the market return has such a significant influence on that. Jennifer Benson Dardis: And maybe if I can talk specifically about expenses and the guide for 2026. We had talked last time about the two-thirds of our controllable expenses that we were managing toward low single-digit growth. That's included in this plan. And as Rob mentioned, that's a balance of cost savings efforts and also earmarking funds to be able to invest in some of our growth areas. New vehicles such as ETFs, SMAs, models, and alternatives and in our partnerships where we're introducing new products. And also in things like advice. And then if you look at our market-driven expenses, that's what's driving it slightly higher into the range, and it's really two big drivers there. One is on what we call distribution expenses. That's things like 12b-1, trailer fees, or revenue share. Those increase with assets under management as opposed to revenue, and we saw tailwinds in growth in AUM at the end of the year and we have our normal market growth assumptions kind of moderate equity market growth in 2026 as well as modest fixed income growth. The second thing that's within there is our year-end compensation. And, again, that generally runs with revenue, but there are some accounting implications from our LTI program that are driving that a little higher this year. Daniel Fannon: Thank you. Our next question comes from Michael J. Cyprys with Morgan Stanley. Your line is open. Michael J. Cyprys: Hey, good morning. Thanks for taking the question. More of a longer-term view just on tokenization. Just curious, you could just talk a little bit about how you're experimenting with tokenization and blockchain. Where do you see some of the most compelling use cases and value to be unlocked? And curious how you see this all playing out over the next twelve, twenty-four months versus longer term and where might there be scope for differentiation? Eric Lanoue Veiel: Yeah. Hi, Michael. It's Eric. I'll take that one. First of all, we've been investing in our digitization capabilities going back to '22 when we first, you know, brought on a team and have built it out internally to develop expertise in this area. We think about it along three different vectors. First, there's an efficiency opportunity within tokenization for middle and back office savings that I think could be consequential in time. There's a product opportunity as you move more traditional finance assets on-chain. You open up opportunities to accelerate some of the trends that we're seeing, whether that's the convergence of public and privates, whether it's fractionalization or mass customization. There's a distribution opportunity. It opens up a new generation of investors who are native to mobile and crypto. We're working on all three of those. I would say on the efficiency front, within investments, we're doing a lot of work on end-to-end processes. That we think will really impact over time from a cost savings perspective, our middle and back office and potentially even some front office opportunity. On the product side, we've already talked about how we've registered with the SEC, our active crypto ETF that we hope to have in market. In '26 that will use a blend of fundamental and quantitative analysis to bring a multi-token ETF to the market. And then on the distribution side, I think that's a more open opportunity for us, and we'll explore everything from partnerships to de novo builds. Daniel Fannon: Thank you. Our next question comes from Craig Siegenthaler with Bank of America. Your line is open. Craig Siegenthaler: Good morning, everyone. My question is on the update on the potential migration of private into the 401(k) channel. So, we should be getting the DOL update shortly, maybe not this month as planned due to the government shutdown, but how do you think this plays out across the industry with single partnerships or multi-partner models? And, also, where is T. Rowe Price Group, Inc. now on the product launch front? With your new Goldman Sachs partnership, which will also include some OHA and credit? Robert W. Sharps: Yeah, Craig. Thank you for the question. So not a lot new since we've commented on this in the last few calls. Our multi-asset team has really researched the investment case for including private alternatives in defined contribution solutions, including target date funds. And they believe that the investment case is strong. That said, there is a mixed view among plan sponsors based on lack of clarity with regard to fiduciary risk. And change just, you know, kind of not only around fee, but also around liquidity. And it's a dynamic ultimately that we're going to need to navigate. As you said, the DOL comments are due to come back from the OMB. There'll be a public comment period. We may not get real clarity on what the ultimate guidance looks like for several months. You know, what we want to do is have a flexible approach that's responsive to our clients' interests. So with regard to the specific question about the Goldman Sachs T. Rowe Price Group, Inc. retirement date offering, we continue to work on product design and plan to have the offering in market in around midyear this year. We think there's a segment of the market that will be early adopters. And, you know, kind of ultimately, you know, kind of feel that interest could grow. But, you know, my sense is that penetration of the overall set will evolve relatively slowly and won't be for some period of time. Daniel Fannon: Thank you. Our next question comes from Dan Fannon with Jefferies. Your line is open. Dan Fannon: Thanks. Good morning. So wanted to talk about the target date business. You showed some outflows in the fourth quarter, something we haven't seen in a few years. Wanted to get a little bit more context around the momentum and or outlook for that business. As we think about 2026, whether that's kind of backlog, you know, kind of new win opportunities and or losses that might be, you know, within the periphery as of now. Robert W. Sharps: Yeah. Dan, thanks for the question. And if I may, maybe I'll take the opportunity to zoom out and talk about flows more broadly and then drill down on the target date business. Flows in the fourth quarter were meaningfully softer than we anticipated, especially in the month of December. The weakness was largely driven by equities. With particular pressure in growth equity portfolios driven by a handful of institutional losses and some rebalancing given the robust equity market returns in 2025. But as you cite, outflows in the retirement date funds which are not necessarily unusual for the month of December, but are unusual for the full fourth quarter were also a factor. About a third of the Q4 retirement date outflows were driven by M&A activity where our client was acquired and the plans were consolidated, we ended up losing the mandate. We also lost a handful of lumpy or larger mandates that weren't M&A related. But if you look at the broader trend, I think what you see is that fully active target date funds are losing share to passive and blend. Given our position as the largest fully active target date fund manager, that's going to be a headwind for us. On the positive side, I think we're really well positioned to mitigate or offset that headwind with our very strong blend and hybrid offerings, which incorporate a component of passive. The blend area is the fastest growing category within target date. It's actually growing faster than passive. And T. Rowe Price Group, Inc. is gaining market share in the blend category. So we believe that we'll continue to grow our retirement date franchise going forward. Whether or not that growth is consistent with the levels that have been in the past, I think to some extent, will depend on the intensity of the shift away from active and our ability to capture a portion of that with our blend and hybrid offering, but also to grow and gain market share, you know, from a new dollar perspective. Within that category. Just as a more current data point, we did have a billion seven of target date inflows in the month of January. I also got to take the opportunity to share some perspective on the 2026 flow outlook. You know, flows have been volatile and difficult for us to predict. But our base pace reflects continued pressure in equities. Partially offset by inflows in retirement date fund, and consistent with the previous comment with a continued shift towards blend. Steady growth in fixed income and accelerating growth in alternative. The intensity of equity outflows is the biggest factor for our overall flows. To get back to positive flows, we need equity outflows to moderate. We're confident that that will happen over time with strong performance. In January, we did have just under $6 billion of outflows, but the pipeline suggests that the rest of the quarter, being February and March, has the potential to improve from those levels. Daniel Fannon: Thank you. Our next question comes from Benjamin Elliot Budish with Barclays. Your line is open. Benjamin Elliot Budish: Hi, good morning and thank you for taking the question. Maybe, Rob, just following up on that last point. I know the market had a bit of a shock just yesterday, and I would expect your comments are sort of higher level taking over the course of the year. But just curious, how would you expect that sort of impact to translate to near-term equity flows? How do advisors and retail customers tend to respond to that sort of disruption? Could you maybe talk about the sort of mix across the equity franchise, how exposed is the business to, you know, software and services and, you know, the areas which, you know, at least the market is sort of worrying maybe under some kind of, you know, near-term threat from AI development. Thank you. Robert W. Sharps: Yeah. I'll start and welcome input from Eric and Jen who I'm sure have a perspective on the topic. With regard to how equity market returns impact flows, it depends by client type. I think there are certain client types that tend to react more quickly and other client types that, you know, have a commitment to the asset class. And allocation framework that kind of in some instance with the drawdown in the market may actually be inclined to rebalance and add to equities. I would say the net effect to us over a period longer than days or weeks really isn't that substantial. I think in the very short term, you may see a knee-jerk reaction to a sharp drawdown in the market in certain segments. But ultimately, there are a number of puts and takes. And as I've said in my earlier comment, despite robust market returns last year, that actually caused a bit of a drag as some of our clients rebalanced away from strategies had significant absolute returns. So that's, again, I'd say not something that is a meaningful factor in our outlook from a flow perspective. In terms of our exposure to software and services, I'll ask Eric to offer his perspective. I think a lot of the consternation in the market is over some of the private equity sponsors having significant deals and exposure to PE firms. As a largely liquid public manager, we have the ability to adapt and adjust to changing market environments. So our positioning can obviously be very fluid. You know, I would say that our overall mix is no more exposed than the market as a whole. But I'll ask for Eric to give a little bit more specific commentary in terms of software exposure. Eric Lanoue Veiel: Sure. So, you know, with almost roughly a trillion dollars in equity assets across a wide variety of different types of portfolios. We're obviously going to have a lot of different types of mandates with different types of exposure to software. As you think about what happened yesterday and the disruption risk of AI, specifically some very unique opportunities that were brought forward by Anthropic. We have been studying these opportunities and risks for a long time and have very deep research on them and have been positioned for events like this in many of our portfolios. That doesn't mean that in every portfolio, we're perfectly positioned for what happened in a single day of market action. But what happened yesterday in terms of the potential disruption of AI across different parts of the software industry is not a surprise to us. Daniel Fannon: Thank you. Our next question comes from Kenneth Brooks Worthington with JPMorgan. Your line is open. Kenneth Brooks Worthington: Hi, good morning. Along those same lines, on the AI disruption, what is Oak Hill's exposure to investments potentially disrupted by AI? Ultimately, you think the problems could be big enough in private credit to drive market share shifts and where might T. Rowe Price Group, Inc. fit into those share shifts if they're big enough to, you know, discuss here today? Robert W. Sharps: Yeah. Look. I'm not going to comment on OHA's underlying exposures. What I will say is that they have an extraordinarily rigorous credit process. And to the extent that we go into a credit environment where defaults are more prevalent, we think that OHA's process and performance will be a differentiating factor relative to the rest of the industry. And I might just take the opportunity to comment on OHA more broadly. OHA is doing well. They had a second consecutive year of record capital raise with particular strength in private lending. The T. Rowe Price Group, Inc. and OHA teams are working very well together on opportunities across wealth, insurance, and the broader institutional market. As a matter of fact, the T. Rowe Price Group, Inc. client-facing teams helped OHA bring in over $3 billion in new institutional commitments, with much of that in 2025. As we'd referenced earlier, OHA is deeply involved in our collaboration with Goldman Sachs. Their private credit capabilities are designed into several of the investment strategies, including the co-branded retirement date fund and multi-alts offering for wealth. We do plan to do a spotlight on OHA and our alternatives on one of the earnings calls later this year. And anticipate having Glenn Paul Schorr join us for that call. Daniel Fannon: Thank you. Our next question comes from Brennan Hawken with BMO Capital Markets. Your line is open. Brennan Hawken: You were speaking earlier to M&A and the sort of noise created in the target date sort of DC plan sales process. Plus maybe a few misses on some plans. Couple questions on that, couple follow-ups. Were there any particular factors that caused the misses, and how are you adjusting your offering in order to enhance your competitive positioning? And can you speak to the pipeline I know those sales cycles are likely pretty long. So how are we looking as we move forward, on that front? Thanks. Robert W. Sharps: Yeah. In terms of the Q4 activity, I think it's relatively straightforward. When one of our plan sponsors gets acquired, eventually the acquirer consolidates the plans. In certain instances, we're given the opportunity to compete for the combined plan. And in certain instances, the acquirer makes the decision that they automatically want to consolidate with their incumbent target date fund provider. So, you know, I mean, at the end of the day, that's really all the color on that that I have. I also don't really have any more color on the dynamic in the marketplace outside of saying that we're seeing less interest in new opportunities for fully active target date funds and a significant increase in opportunities in blend and hybrid. Yeah. I think to some extent, that's a reflection of where the market's been. Where the power of the returns in the market cap-weighted benchmarks, particularly in US large-cap equity. Ultimately, if that market dynamic changes and you have a backdrop that is more conducive to alpha generation from active management, then, you know, I think the fully active proposition will have more of an opportunity to stand out and be differentiated. In terms of the pipeline for target date funds, it would again be consistent with the comment. The overall activity is robust. But there we have more interest and more opportunity in blended hybrid than we do in fully active. Daniel Fannon: Thank you. Our next question comes from Michael Patrick Davitt with Autonomous Research. Your line is open. Michael Patrick Davitt: Good morning. Thank you. Just most of mine have been asked just a quick follow-up on that again. Can you remind on the targets, can you remind on the cadence each year on when those lumpier plan losses can occur? I know mostly December. I seem to remember there are a couple of other months where they can come through in the past as well. Thank you. Robert W. Sharps: Yeah. Outside of elevated activity around year-end, I would say that, you know, there really is no specific seasonality to plan activity. And, you know, it really can happen throughout the course of the year. Daniel Fannon: Thank you. I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Thank you for your continued patience. Your meeting will begin shortly. And a member of our team will be happy to help you. Good morning and welcome to Evercore Inc.'s Fourth Quarter 2025 and Full Year Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Evercore Inc. management and the question and answer session. I will now turn the call over to Katy Haber, Head of Investor Relations at Evercore Inc. Please go ahead. Katy Haber: Thank you, Operator. Good morning, and thank you for joining us today for Evercore Inc.'s fourth quarter and full year 2025 financial results conference call. I'm Katy Haber, Evercore Inc.'s Head of Investor Relations. Joining me on the call today is John Weinberg, our Chairman and CEO, and Timothy LaLonde, our CFO. After our prepared remarks, we will open up the call for questions. Earlier today, we issued a press release announcing Evercore Inc.'s fourth quarter and full year 2025 financial results. Our discussion of our results today is complementary to the press release, which is available on our website at evercore.com. This conference call is being webcast live in the For Investors section of our website, and an archive of it will be available for thirty days beginning approximately one hour after the conclusion of this call. During the course of this conference call, we may make a number of forward-looking statements. Any forward-looking statements that we make are subject to various uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. These factors include, but are not limited to, those discussed in Evercore Inc. filings with the SEC, including our annual report on Form 10-Ks, quarterly reports on Form 10-Q, and current reports on Form 8-Ks. I want to remind you that the company assumes no duty to update any forward-looking statements. In our presentation today, unless otherwise indicated, we will be discussing financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the company's performance. For detailed disclosures on these measures and the GAAP reconciliations, you should refer to the financial data contained within our press release, which is posted on our website. We continue to believe that it is important to evaluate Evercore Inc.'s performance on an annual basis. As we have noted previously, our results for any particular quarter are influenced by the timing of transaction closings. I will now turn the call over to John Weinberg. John Weinberg: Thank you, Katy. And good morning, everyone. 2025 was a strong year for Evercore Inc. We saw broad-based momentum across all of our businesses and ended the year with the strongest revenue performance in our history. Firm-wide adjusted net revenue reached approximately $3.9 billion, up 29% versus the prior year and nearly 17% above our previous record in 2021. In fact, our fourth quarter represented the strongest revenue quarter in our history with nearly $1.3 billion in adjusted net revenue. For the year, we generated approximately $14.56 in adjusted earnings per share, continued to return a meaningful amount of capital to shareholders, and improved our margin profile. Our quarterly and full-year record results reflect the improving market environment, the benefits of our diversified business model, and the execution of our long-term growth strategy. We are pleased with how we delivered for our clients and our shareholders in 2025, and we enter 2026 with strong momentum and optimism. Before getting into the details, I want to put our results in the context of the market environment. Industry-wide global M&A activity rebounded meaningfully last year. Announced transactions totaled approximately $4.5 trillion, up 49% from the prior year and just 19% below record levels of 2021. Importantly, activity accelerated throughout the year. Deal volumes in the second half of 2025 were approximately 45% higher than in the first half, reflecting a clear shift in sentiment and decision-making. That improvement was particularly evident in the large-cap segment of the market. Global M&A volumes for transactions greater than $5 billion were the highest ever and approximately 13% above 2021 levels. Taken together, these metrics reflect improving confidence among boards and management teams, constructive financing conditions across public and private markets, and strong equity markets. Now turning to Evercore Inc. I want to highlight a few of our key accomplishments from the year across our market position, talent investment, and platform expansion. We continue to serve clients on a number of the most complex and notable transactions, acting as financial advisor on five of the 15 largest global M&A deals for the year and ranked third for sell-side transactions in the U.S. based on dollar value. Relative to our largest global competitors, we continue to gain share. For the second year in a row, we ranked as the third largest investment bank globally in 2025 based on advisory fees across all public firms. Nearly all of our businesses posted record results, including our North America and EMEA advisory businesses, private capital advisory, private funds group, our equities business, and wealth management. Importantly, the benefits of our diversification were increasingly evident. For the fourth quarter and full year, approximately 45% of revenues were generated from non-M&A businesses. Turning to talent. 2025 was a year of continued investment as we built out our senior advisory bench globally. We enter 2026 with 171 investment banking senior management directors. We hired 19 SMDs across sectors, products, and geographies, representing our largest class of new lateral SMDs to date and added 11 new promotes at the beginning of 2025. We are also excited to announce the recent promotion of eight investment banking SMDs globally, which is in addition to the 171 SMDs, underscoring our continued commitment to developing talent from within. In fact, 40% of our investment banking SMDs have been promoted internally, the highest percentage in our history. Our SMD base is 50% larger than it was at the end of 2021, and more than 40 SMDs are currently in a ramp mode, positioning us well for years ahead. Finally, expanding our platform across regions, sectors, and products was a key area of focus for us in 2025. We completed the acquisition of Robey Warshaw, a leading UK-based advisory firm. The acquisition represents a significant next step in our EMEA expansion strategy, and the integration is progressing well. We also continue to expand our footprint across key markets in EMEA, including significant investment in France, and first-time offices in Italy, The Nordics, and Saudi Arabia. And we remain focused on building those out over time. We further strengthened our sector coverage globally, including healthcare, industrials, and transportation, while continuing to deepen our sponsor coverage efforts. We remain focused on broadening our product capabilities, including debt advisory, securitization, private capital advisory, ECM, and ratings advisory, to name a few. Before turning to the outlook, I'll briefly highlight a few key trends across our businesses from the quarter and the year. Our M&A advisory businesses finished the year with strong momentum. In North America, our team achieved a record year, and activity was broad-based across sectors, while financial sponsor engagement continued to increase and broaden. Industry-wide, financial sponsor activity for 2025 was up 43% in dollar volume and 14% in the number of transactions, excluding deals below $100 million, and we are expecting continued improved activity in 2026. In EMEA, advisory activity accelerated meaningfully in the second half of the year. Our EMEA advisory business delivered record results in the fourth quarter and year, with strength across sectors and products. In the fourth quarter, we advised on a number of significant transactions around the globe, including Warner Bros. Discovery on its $83 billion sale of Warner Bros. to Netflix and the related spin-off, which was the largest M&A transaction of the year. Axalta's $25 billion merger with ExxonMobil, Sadara Therapeutics on its $9.2 billion sale to Merck, and Sealed Air's $10.3 billion acquisition by CDNR. Our Strategic Defense and Shareholder Advisory Group continued to be busy into year-end as activist campaigns remained at elevated levels. The liability management and restructuring group had a strong close to the year, generating its second-best year for revenues and notably well above last year's performance. Activity in the quarter and year reflected a more balanced mix of liability management and traditional restructuring activity. The private capital-related businesses remained a source of strength. PCA delivered another record year with strong performance across GP-led continuation funds, LP transactions, and structured capital solutions, and we advised on nearly half of industry-wide secondary volumes in 2025. The private funds group also posted a record year, continuing to deepen relationships with our core client base while also expanding our reach. Equity capital markets activity continued to gain momentum into the year-end, benefiting from an improving market backdrop for IPOs. We were a book runner in all of our equity transactions across products, and we continue to be diversified across sectors. Our equities business delivered a record quarter and year and had nine consecutive quarters of year-over-year revenue growth. Finally, our Wealth Management business had a record year and reached its highest quarter-end AUM of approximately $15.5 billion. As we look ahead, we believe 2025's steady build of activity will continue into 2026 and beyond. We expect many of the themes from 2025 to continue, including sustained engagement on large strategic transactions alongside a further broadening of activity across deal sizes, sectors, products, and geographies. Given the investments we've made across our platform, we believe Evercore Inc. is well-positioned to serve clients across the full spectrum of the market. We start the year with strong momentum and backlogs at record levels. Overall, we are constructive on the environment. At the same time, we remain mindful of the geopolitical and macroeconomic risks and note that transaction timing can be uneven. Importantly, the strategy we've been executing over the last several years continues to deliver results. We remain focused on delivering outstanding client service and intend to continue investing thoughtfully as new opportunities arise. We are confident in our position as we start the New Year. With that, let me turn it over to Tim. Timothy LaLonde: Thank you, John. Evercore Inc.'s fourth quarter and full-year results reflect strong performance across all our businesses. For 2025, net revenues, operating income, and EPS on a GAAP basis were $1.3 billion, $312 million, and $4.76 per share, respectively. For the full year, net revenues, operating income, and EPS on a GAAP basis were $3.9 billion, $790 million, and $14.05 per share, respectively. My comments from here will focus on non-GAAP metrics, which we believe are useful when evaluating our results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results can be found in our press release, which is on our website. Our fourth quarter adjusted net revenues of $1.3 billion increased 32% versus 2024, our best quarter to date. On a full-year basis, adjusted net revenues of $3.9 billion increased 29% compared to last year and represent our strongest year on record. Fourth quarter adjusted operating income of $337 million increased 55% versus 2024. Adjusted earnings per share of $5.13 increased 50% versus the prior year period. For the full year, adjusted operating income of $839 million increased 50%, and adjusted earnings per share of $14.56 increased 55% versus the full year 2024. Our adjusted operating margin in the fourth quarter was 26%, an improvement of 380 basis points versus the prior year period. For the full year, our adjusted operating margin was 21.6%, up 300 basis points from the full year 2024. Turning to the businesses. Fourth quarter adjusted advisory fees of over $1.1 billion increased 33% year over year and represents a record quarter. Adjusted advisory fees were $3.3 billion for the full year, up 34% compared to 2024 and 19% above our prior record in 2021. Our advisory results for the quarter and year reflect strong client activity levels and momentum that built throughout the year. Our fourth quarter adjusted underwriting fees were $49 million, up 87% from a year ago. For the full year, adjusted underwriting revenues were $180 million, up 14% versus last year, reflecting improved market conditions. Commissions and related revenue of $66 million in the fourth quarter was up 15% year over year. For the full year, commissions and related revenue of $243 million was up 13% compared to 2024. Both the quarter and the year represented record results. Fourth quarter adjusted asset management and administration fees were $24 million, up 10% versus the fourth quarter of last year. For the full year, adjusted asset management and administration were $91 million, up 8% versus 2024. Fourth quarter adjusted other revenue net was approximately $30 million, which compares to $24 million a year ago. For the full year, adjusted other revenue net was $103 million compared to $105 million last year. Approximately 25% of the other revenue in 2025 was a gain on our DCCP hedge, with the remainder predominantly from interest income. Turning to expenses. The adjusted compensation ratio for the fourth quarter was 62%, down 320 basis points from last year's fourth quarter. Our full-year adjusted compensation ratio was 64.2%, down 150 basis points from 2024 and down 340 basis points over the past two years. Our increased revenue and the reduction in our full-year comp ratio reflect the benefits of a strengthening in the investment banking environment, an increase in our market share, partially offset by our significant investment in talent, including our largest ever addition of external SMDs. We are continuing to strive for additional gradual improvement in our comp ratio, balancing that with investment in our business and execution on our strategic growth plan. As I have said on past calls, our goals are to deliver excellence to our clients and to create value for our shareholders over the medium to longer term. The latter is accomplished by investing in and building our business and managing our expenses in a way that maximizes the present value of our future earnings and cash flows. Adjusted non-comp expenses in the fourth quarter and full year were $150 million and $552 million, up 26% and 17%, respectively. The non-comp ratio for the full year was 14.2%, down 150 basis points from 2024, driven by stronger revenues. For the quarter, the non-comp ratio was 12%. The 17% increase in our full-year non-comp expenses was in line with the increase we saw in 2024. The year-over-year increase reflects continued investment in the firm's technology infrastructure, an increase in client-related expenses, particularly as deal activity accelerated throughout the year. The increase also reflects higher rent and occupancy costs associated with office expansion, including additional floors in and renovation costs related to our New York offices, and additional occupancy costs related to our new leases in Paris, London, and Dubai. Client-related travel and entertainment spend also increased in the year as deal activity picked up. As we grow and continue to diversify our revenue streams, both geographically and with respect to lines of business, we must continue to invest in talent, technology, and infrastructure. We have discussed in some depth over the years our investment in talent. Some of our investment, such as in occupancy-related areas, is required to support our growth in the U.S. and EMEA. And at the time of investment, we must obtain enough capacity to provide for planned future growth. Part of our non-comp expense is for information services, for which the costs increase at a rate faster than the rate of inflation. In addition, as is broadly known, there are significant improvements in the rapidly evolving technology landscape, and we must make investments and incur costs today that we believe will provide benefits in the medium term. In the past, we have discussed non-comp growth drivers such as headcount growth, inflation, and some upward pressure beyond that related to the items I have just discussed. And they will continue to influence non-comp costs in the near term. As a reminder, the non-comp expense line consists of a mix of fixed and variable expenses, of which a significant portion would be considered variable and will fluctuate with transaction activity and headcount both in our businesses and in our corporate area, to execute on our increased transaction activity and growth initiatives. Nonetheless, as you can see from the improvement in both our full-year comp and non-comp ratios, we demonstrated leverage in 2025. We maintain a disciplined focus on our expenses, balancing that with investment in order to execute our strategic plan. Our adjusted tax rate for the quarter was 29.4%, up from the fourth quarter of last year. Our full-year adjusted tax rate was 19.8%, down from 21.8% in 2024. The full-year adjusted tax rate was significantly impacted by, among other things, the appreciation of the firm's share price upon vesting of RSU grants above the original grant price, generating a benefit which was larger than the prior year's tax benefit. As a reminder, the majority of this impact typically occurs in the first quarter. Turning to our balance sheet. As of December 31, our cash and investment securities totaled $3 billion. In 2025, we returned the second-largest amount of capital in the firm's history, totaling $812 million. This included approximately $151 million through dividends and $661 million through the repurchase of 2.4 million shares at an average price of $275.42. Our fourth-quarter adjusted diluted share count was approximately 45 million shares, modestly higher than the third quarter. For the full year, our weighted average share count ended at 44.4 million shares, approximately 225,000 shares higher versus the year prior. We remain committed to repurchasing shares to offset dilution from our year-end RSU bonus grants, and for the fifth year in a row, we have repurchased a number of shares greater than that, and we expect to do so again in 2026. We also repurchased shares sufficient to cover the number expected to be issued in both 2025 and 2026 in relation to the Robey Warshaw acquisition. We continue to maintain a strong cash position and take into consideration our regulatory requirements, the current economic and business environment, cash needs for the implementation of our strategic initiatives, including hiring plans, and preserving a solid financial footing. We are pleased with our performance in 2025. And as John mentioned, we begin the year with strong momentum in all of our businesses. We believe we are well-positioned for 2026 and are approaching this year with optimism. With that, we will now open the line for questions. Operator: Thank you. We will now conduct the question and answer portion of today's conference. Please limit yourself to one question only. You are welcome to rejoin the queue for any additional questions. And our first question will come from James Yaro with Goldman Sachs. James Yaro: Hi, this is Sunshin Jian, stepping in for James Yaro. 2025 was a heavily mega-cap M&A driven market. So could you help us think through the outlook for the large deals to continue or even accelerate from here? Thanks. John Weinberg: Thank you very much for the question. We think that we will continue to have a healthy environment. All of the things that have really existed to fuel the merger recovery still exist. Whether it's business prospects for many of the large companies, the strategy outreach from the companies, access to capital, and, in many respects, a relatively benign environment with respect to the regulatory side. Our backlogs are very strong. Those backlogs really incorporate both large-cap and mid-cap and small-cap, really at all sizes. We are very optimistic about this year. We continue to believe that it's going to be a constant and steady build. And we think that if our backlog is an indication, we are going to see a continuation of large-cap deals as well as deals really of all shapes and sizes. Operator: Okay. Thank you. We'll take our next question from Mike Brown with UBS. Mike Brown: Hey, good morning. So in 2025, we had a bit of the Goldilocks environment with the strong performance from restructuring and also M&A. As we look to 2026, can both continue to remain elevated here? Can restructuring revenue actually grow in 2026 versus 2025? And if the restructuring market itself stays somewhat flat, how much additional share do you think you can get in liability management and restructuring? John Weinberg: We think that the environment where restructuring and M&A coexist both strong is highly likely to persist. Our backlogs in each of those areas are high and really, in most respects, at record levels. We think that with respect to restructuring, our backlog is very diversified. So we're looking at whether liability management, looking at restructurings, we're looking at bankruptcies, all of those things are quite full in our backlogs. And we think that those will continue. And really, we feel very good about the restructuring environment for our business. On the M&A side, it's the same. We have very strong backlogs. We have real activity. We are in very serious and strong dialogues with corporations and management teams, and also boards. And we think that this is going to persist. So the answer to your question is we believe that both will coexist and both really will be quite strong if our backlogs and our activity levels are any indication. In terms of market share, I think that we are continuing to pick up market share in liability management and restructuring. We feel really good about how we're covering clients. And really, the new activity coming in is very diversified. So we feel really good about where we stand. Operator: Thank you. Our next question comes from Brennan Hawken with BMO Capital Markets. Brennan Hawken: Morning. Thank you for taking my question. So Tim, you talked a little bit about investing, sort of making hay when the sun is shining on the tech side, which makes a lot of sense. Could you help us maybe understand is that going to be calibrated to revenue, right? So you're almost start to think about the non-comp ratio, not obviously, it's not going to be the same as comp ratio, inherently, but maybe think about the growth rate with an eye to that and then maybe help us think about guardrails about how you manage it? And also, are there any particular businesses that are tech-heavy? I know like the PCA business is a very data-driven business. So any color on that would be great. Timothy LaLonde: Yes. Sure, Brennan, and thanks for the question. Look, the way to think about it is we feel like we've made significant strides with respect to growing the business and diversifying the business both with respect to lines of business and geographically. And in order to kind of build the first-rate corporation and then a foundation upon which to continue that kind of growth, we do need to invest in our infrastructure, and part of that is technology. And I mentioned in my comments about how there's a kind of a rapidly evolving landscape. And I don't need to go into that because it's well covered in the news, but I think that you've seen a pickup probably in the investment in our non-comps over the last couple of years. And so the increase in 2024 was 16%, the increase in 2025 was 17%. And I think in order to support the growth and the diversity and the technology initiatives, and so on, I wouldn't be surprised to see something somewhat similar as we head into 2026. I would note though, I think that the good news is the growth in the non-comps is less than the growth in our revenues. And so the corresponding revenue growth rates over those last two years were 23%, 29%, and we have made pretty significant progress on the non-comp ratio, bringing it down from 16.6% two years ago to 15.7% last year, and 14.2% this year. And so I think we're going to continue to invest in our infrastructure, but we're pleased with the fact that we're able to make some progress on the non-comp ratio. Brennan Hawken: Sure. And the business is Sorry. that drive the non-comp, any color on that? Timothy LaLonde: Pardon? Brennan Hawken: Any color on which part business drives the non-comp? Timothy LaLonde: Yes. Yes. It's why I would say that it's a yes, PCA is certainly one, but we're also, you know, for our kind of standard and traditional M&A and restructuring businesses. We're using it in equities. It's really and frankly in corporate as well as we seek to drive efficiencies in the corporate side of our business. And so it's really, I would say, comprehensive. And then aside from the technology, as we expand and I'm pleased with the progress we've made in our geographic expansion, particularly in Europe. That, of course, leads to both in Europe and in the U.S. increased occupancy costs as well, which are part of the underlying growth you're seeing in the non-comp expense. Brennan Hawken: Great. Thanks, Tim. And well done on the comp ratio by the way. Timothy LaLonde: Thank you. Operator: Thank you. Our next question comes from Devin Ryan with Citizens Bank. Devin Ryan: Great. Good morning, John. Good morning, Tim. Question just on kind of the broader outlook. Obviously, a lot of, I think, enthusiasm in there just around kind of the momentum into 2026. And I think we can see a lot of that even from the outside in terms of M&A backlogs and just kind of where the types of deals that Evercore Inc. is currently involved in. So great to see that. And then you hit on some of the momentum you're still seeing in restructuring. Great if you could just hit on some of the other non-M&A businesses, whether that's private capital or capital markets advisory. And just kind of where all these stack together. So I think people are trying to kind of put all together the non-M&A businesses have clearly grown and are a bigger contribution. You've got this M&A business that's on fire right now. Where are these other businesses kind of in that mix in terms of like growth expectations over the next twelve to eighteen months? Can they keep up at a similar pace? Or are they kind of a ballast in the market and maybe M&A grows but these other businesses can provide a little bit more stability? Good to get some kind of directional color there. Thank you. John Weinberg: Sure, Devin. We really continue to see strength throughout our system. I think, as we said, virtually all of our businesses are at or very close to record levels. In terms of the businesses, which you specifically highlighted, private capital advisory, let me start with that. PCA had a record year this year. PFG, which is our, as you know, is our fundraising businesses, they had a record year. Our debt advisory private capital markets businesses, which really were new two years ago or three years ago, have actually performed at a very high level and are setting records also. Our real estate advisory businesses have really picked up dramatically. So across the board, we're seeing momentum to our businesses. So in terms of the breakout between M&A and other businesses, it's actually still continuing to be very high. Even when M&A is running as hot as it is, we still have 45% of our businesses are non-M&A. And I think that's going to persist no matter really how strong M&A gets. Now, obviously, if M&A really hits the tsunami, that may be hard to pick up to keep track to keep on top of that because the M&A business, as you know, has great leverage in our system. But I think really what you're seeing is a real diversification. We've worked really hard to diversify. We've built out these very, very strong businesses. And we continue to see that. On the PCA side, which had a, as I said, had a record year, they had a very high market share this year. I think it was over 45%. They continue to be looking at a very diversified product set, whether that is LP-based or the GP-based businesses. As you know, the GP is the continuation fund business, which has actually really been on fire. But we have significant new product in that business also. So I think really what we're really building and working hard to do is to keep our very strong businesses and performing at the highest level, but also making sure that we are investing in the diversification, which we have promised shareholders that we will do. And I think so far, we're working hard and it's going quite well. Thank you. That's excellent. Thank you. Operator: Our next question will come from Daniel Kaczarov with Bank of America. Daniel Kaczarov: Good morning and thanks for taking my question. Just given the sell-off in software yesterday and as well as your stock's reaction, there seems to be some fears just about the potential impact AI may have on advisory businesses in 2026. I was wondering if you could talk to us about the potential disruption risks AI may pose to your pipelines and if you can provide any color on sector exposures in your backlogs, both on the public and private sides, that would be very helpful. Thank you very much. John Weinberg: Sure. Obviously, we've taken a strong look at that certainly, especially over the last twenty-four hours. And honestly, we have in our backlogs and really our business activities, we are very diversified. There is no question that AI is influencing the world. As we look at our business in the near and medium term, we really don't see disruption. Now obviously, the markets could be significantly seeing further disruption. And I think it would be unrealistic to say if the markets got very disruptive, that it wouldn't impact our business. Certainly, it can. But right now, look at what we're working on our backlogs, really what we're seeing, as I said, near term and medium term. And given our diversification, really along products, geographies, and sectors, we actually feel quite good about where we stand and really the stability of our business. Operator: Thank you. As a reminder, that is our next question will come from Alexander Bond with KBW. Alexander Bond: Hey, good morning, everyone. I have a question on the expectations for ECM in 2026. So the IPO sentiment continues to improve and seems like there could be a strong lineup of large deals coming to market sometime in the near future. Can you just give us an update on your backlog here and maybe high-level outlook for the year? And then also on the equities front, if this environment that we're in now in terms of heightened volatility becomes more entrenched or persists, can you just help us think about maybe what the right or what the revenue potential is for that area of the business? Thank you. John Weinberg: Sure. In terms of our backlog, our backlogs are good and they're building. We really saw a really healthy build through the fourth quarter. And I think that has just continued. We will absolutely be involved in what I think is a very healthy IPO business going forward here. And I think we're feeling quite good about really our activity levels. As you know, we've really diversified. We're not just in healthcare, but we are very involved in many different sectors now, and we've really spent a lot of time and effort building out our capabilities in those areas. And I think also really with respect to our activity levels, having strong research with ISI really has helped us to stay involved in thinking about a lot of different sectors. The bottom line is that I think the equity capital markets business is actually healthy and growing. We expect that it's going to continue along the lines of where it was in the fourth quarter and strengthening from there. So we're feeling quite good about that. Alexander Bond: Great. Thank you. That's helpful. Operator: Thank you. Our next question comes from Jim Mitchell with Seaport Global Securities. Jim Mitchell: Hey, good morning. Tim, I guess I'll ask the question that you probably don't want to answer, but you highlighted, I think, the last two years, comp ratio improvement of 340 basis points. Is that sort of your definition of gradual and a decent way to think about the next couple of years, assuming the environment continues to improve as we expect? Just any help on how you're thinking about the evolution of the comp ratio from here? Timothy LaLonde: Yes. Jim, and sure, happy to share some thoughts. And yes, as you mentioned, we have made some progress these last couple of years, 340 basis points over the last two years, as we came down from 67.6% to 65.7% and now 64.2% this year. And look, I don't want to make this answer sound too much like a disclaimer, but there are really a lot of things that go into determining the comp ratio. And it has to do with absolute revenues, revenue growth, market comp, and competitive environment, number of SMDs and non-SMDs hiring. So there's an awful lot of things that go into that. And what I would say is, we're striving to make continued progress. Now, whether we could continue to decrease it every year at the same kind of pace and magnitude that you've seen over the last couple of years might be a bit challenging. But we're striving to make continued improvement as we head into 2026. Operator: Okay. Thanks. Thank you. Our next question comes from Brendan O'Brien with Wolfe Research. Brendan O'Brien: I guess I just wanted to ask on the backdrop, and specifically just how you use characterize the conversations that you're having with your sponsor clients at the moment and whether there's been any notable shifts in the tenor of those discussions and how we should be thinking about the trajectory of sponsor activity throughout the remainder of this year? John Weinberg: Thanks for the question. As you have seen, we've had a very interesting set of circumstances with sponsors. We have a lot of dry powder, we have LPs that really want liquidity, and we have markets that seem to be recovering. And in many respects, the sponsor business has really started to gain momentum in terms of that activity level. On the M&A side, with size being a dictator, the bigger the more active you're seeing in the market. I think what we're seeing on the M&A side is that the market is starting to really start to diversify some. And that some of the middle market assets or even the B assets are becoming more liquid. And we're seeing in some respects a capitulation where sponsors are trying to really look carefully at their portfolios and start to move things out because they really want to create more movement. And so I think there will be a growing momentum in the sponsor business. Obviously, the big highest quality assets will continue. And then I think you're going to see assets throughout really the spectrum. Now, one of the very important things in terms of sponsor activity for us is, as we've said, we have a very strong set of businesses which service sponsors, whether PCA or PFG, or LP stake sales. And those businesses are very healthy. The dialogues are very strong. We're seeing that activity level continue. And so from that perspective, the sponsor business for us continues to build. As we've articulated in many calls before this, one of the things that we're spending a lot of time focusing on is how do we bring together all of the strengths of our businesses. The M&A side and the coverage side of the sponsor themselves, the PCA business and how we really interact with GPs on that business. The fundraising business with PFG, and really how we think about advising the senior people in these businesses about liquidity. And I think we're basing a lot of progress on that and we're feeling momentum there. So I'm hoping that that will lead to even more dialogue activity and opportunities for us to serve this very important and just client base. Brendan O'Brien: Great. Thank you for taking my question. Operator: Next, we have a question from Nathan Stein with Deutsche Bank. Nathan Stein: So large mega deals really fueled the deal-making recovery in 2025 and we're all monitoring the industry data to see when this could really start to widen out down market. Can you talk about the are you seeing an uptick in the core upper middle market transactions within your business lines? John Weinberg: We are definitely seeing more activity. We are definitely seeing more in our backlog. We do have diversification in our backlog. So we are seeing we have a significant number of what you classify as middle market. And frankly, you think about our investment as a firm, we are investing in coverage of the middle market. And so we're seeing more of those types of assignments coming into our backlog. As the people who we've hired over the last two or three years begin to mature and to hit their stride. So we're seeing it building out. In terms of the market itself, which I think is what your question is, is there really continued or increasing activity in the middle market? We think there is. We think that there is a very healthy build in that side. And we're seeing a lot of that. Our numbers of pitches, both sponsors in the middle market companies as well as non-sponsor, is up significantly. And so we're seeing a very strong level of pitch activity and dialogue activity in that middle market sector. Operator: Thank you. Our next question will come from Ryan Kenny with Morgan Stanley. Ryan Kenny: Hi, good morning. Thanks for taking my question. So on the private capital advisory side, you are a market leader in secondaries. We've seen some peers lean in recently. We've seen some of the money center banks doing more. So what's your sense of competition ramping up? Are you feeling that? And how do you protect your share? John Weinberg: There is definitely a lot of activity in people trying to build these businesses. And I'm certain that there's going to be very worthy competition and it's going to grow. We have a very good business, and we have a really, really well-established base. We have a group of clients who are very happy with the service that we've been providing them. And I think there's a level of advantage for having been in this business for a long time and done it well, whether it's data that we've been able to capture and it's very strong data, an experience level that people recognize, and I think in many respects, clients appreciate, a track record of success and the relationships themselves. And so, I think that we're going to be able to compete very adequately as new entrants come into the market. But as you know, on Wall Street, competition can be intense. The competitors are always very worthy and good. So we're going to have our hands full, but I think we're ready for it. And I think we're actually competing extremely well right now. Thank you. Operator: And we do have a follow-up question from Daniel Kaczarov with Bank of America. Daniel Kaczarov: Thank you for sneaking me in. Just when thinking about private, we've seen all struggle in terms of price action. Do you think LPs are recalibrating how they allocate to private markets? And on the non-M&A revenues, is there a high correlation between M&A activity? Or should we think of these two as entirely uncorrelated? Thank you. John Weinberg: Well, I don't think you can ever have something be entirely uncorrelated with the flow of funds going back and forth through asset classes. I don't think that we're going to see that, you know, what I would call as kind of a rethinking or maybe a somewhat of a discussion on all to be changing what's happening on the M&A side. So I think that what you'll see is you'll see flows of funds going back and forth. There always is. We don't see any major impact right now in our business. But obviously, we're watching it. Just like you are. But we don't anticipate it's going to have a big impact. Operator: Thank you. We do have another follow-up question from Nathan Stein with Deutsche Bank. Nathan Stein: Hey, thanks for taking the follow-up. I was hoping you'd provide additional color on the capital allocation strategy in 2026. You called out doing buybacks again this year. Net of the employee comp program. Is the 4Q repurchase level a good run rate for buybacks for the rest of the year? And just how are you thinking about capital allocation this year? Timothy LaLonde: Yes. Sure, Nate, and thanks for the question. I would not take any particular quarter of buybacks that you see from us and annualize it. I think just to give you some color on it. First, I would note is that the $812 million that we returned last year was our second-highest return of capital ever, trailing only 2021 and trailing that number by not much. And so that'd be the first point. Second is each year we've indicated to the market that we strive to acquire at least a number of shares equivalent to the number of RSUs we grant as part of our bonus cycle. So that's probably the second point I would make. And then thirdly, we're sitting right now on a, as of year-end, about $3 billion of cash. And some of that, of course, is required for regulatory purposes and for underwriting capital and for operating capital, but there's still some excess there. And we intend to be repurchasing shares, not only for the last five years, not only have we repurchased a number equivalent to the RSUs issued as part of our comp cycle, but we've acquired a number in excess of that. And I think we'd certainly strive to do that this year as well. Operator: Thank you. We do have one more question in the queue. This one from Jim Mitchell with Seaport Global Securities. Jim Mitchell: Yeah. Hey. Sorry. Apologies for keeping you. But maybe just, John, can you speak about the recruiting environment, whether or not getting tougher to get people to leave their seats in this environment? And is it getting more expensive? And just overall, what's your take on your recruiting pipeline? John Weinberg: Thanks, Jim. The recruiting environment has heated up a lot. And it's very intense and it's very competitive. We feel good about the pipeline of people that we're talking to. There's no question that getting people to move is harder than it was two or three years ago. But I think what's happening is there's a lot of momentum at Evercore Inc. And we have a pretty compelling story for people. But I do think your the premise of your question, which is it's harder and it's going to take more work and it may even be more expensive, that premise is correct. There is definitely going to be more competition. It's probably going to be more expensive. We're going to be having to work harder to get people to make the move, especially if they're very busy in a recovering environment. So I do think it's going to be hard. We've spent a lot of effort and time finding the right people and going after A-plus candidates. I think one of the things that we're really happy about is that a lot of the people that we really have worked hard to get over the last three or four years, many of them have ramped, hit their stride, they're starting to really kick in. And some of the results that we're showing now is that group. So our incentive to continue to go even if the environment is harder, maybe more expensive, will still be there. We're going to continue our aggressive recruiting efforts throughout the cycle here. Timothy LaLonde: Right. One thing I might add to that, Jim, is the good news is we've made a lot of progress in these past three years. We've added 41 through external means, and promoted 25 internally. We've got 40 that are in ramp mode. And so while as John said, we're always out there working hard trying to implement our strategic plan. And talking to a lot of people. Though we never know in any given year, exactly how many will cross the finish line, the good news is I think we're really well positioned based on the success we have had over the past three years. Jim Mitchell: Okay. That's really great color. Thanks for taking the follow-up. Operator: And there are no further questions in the queue at this time. With that said, this does conclude Evercore Inc.'s fourth quarter 2025 and full year earnings conference call. You may now disconnect.
Operator: Welcome to the Fourth Quarter and Full Year 2025 Stanley Black & Decker Earnings Conference Call. My name is Shannon, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a formal presentation. Please note that this conference is being recorded. I will now turn the call over to Vice President of Investor Relations, Michael Wherley. Mr. Wherley, you may begin. Michael Wherley: Thank you, Shannon. Good morning, everyone, and thanks for joining us for our fourth quarter and full year earnings call. With us today are Christopher Nelson, President and CEO, and Patrick Hallinan, Executive Vice President, CFO, and Chief Administrative Officer. Our earnings release, which was issued earlier this morning, and a supplemental presentation, which we will refer to, are available on the IR section of our website. A replay of today's webcast will also be available beginning around 11 AM Eastern Time. This morning, Chris and Pat will review our fourth quarter and full year results, along with our outlook for 2026, followed by a Q&A session. During today's call, we will be making some forward-looking statements based on current views. Such statements are based on assumptions of future events that may not prove to be accurate, and as such, they involve risk and uncertainty. It's therefore possible that actual results may materially differ from any forward-looking statements that we might make today. We direct you to the cautionary statements in the 8-Ks that will be filed with our press release, and in our most recent 34 Act filing. Additionally, we may also reference non-GAAP financial measures during the call. For applicable reconciliations to the related GAAP financial measure and additional information, please refer to the appendix of the supplemental presentation and the corresponding press release, which are available on our website. I will now turn the call over to our President and CEO, Christopher Nelson. Christopher Nelson: Thank you, Michael, and good morning, everyone. I am proud of the results our team delivered in 2025, a testament to our resilience, innovation, and relentless pursuit of excellence. DEWALT and aerospace fasteners were areas of notable revenue growth this year, up low single digits and 25% respectively, which contributed to full year revenues of $15.1 billion. Total revenues were down about 1% organically in 2025. Stanley Black & Decker has remained steadfast in our commitment to disciplined execution. This is especially important considering the constantly shifting macroeconomic and operating environment. We continue to proactively execute targeted growth investments and to pursue aggressive tariff mitigation actions. Part of our tariff mitigation strategy has been pricing actions, and we are closely monitoring the market response to ensure a balanced approach to top-line growth and margin expansion. We are confident that over the long term, these thoughtful actions will continue to drive strong performance and deliver meaningful value for our end users, channel partners, and our shareholders. Our tariff mitigation actions along with supply chain transformation efficiencies led to our adjusted gross margin expanding 70 basis points to 30.7% for full year 2025. We also marked the completion of our global cost reduction program, successfully capturing $2.1 billion of run rate pretax cost savings since the program's inception in mid-2022. As we have stated before, we will continue to tenaciously pursue annual productivity savings in the neighborhood of 3% net spend on an ongoing basis. The global cost reduction program helped to set a foundation from which we are institutionalizing the achievement of annual productivity savings to drive sustainable growth and support our adjusted gross margin expansion goals. Full year adjusted EBITDA grew by 5% as the adjusted gross margin improvement drove a 70 basis point improvement in adjusted EBITDA margin. We rigorously controlled costs throughout the organization while prioritizing targeted strategic growth investments to support our brand activation and innovation agendas. Adjusted earnings per share grew 7% in 2025, to $4.67. We view this as a solid outcome considering the dynamic operating and macroeconomic environment this year, including the substantial tariff headwinds incurred by our industry. Earnings growth and working capital efficiencies each contributed to strong free cash flow of almost $700 million in 2025. These funds not only supported our dividend and continued debt reduction, but they also provided capital for impactful investments that amplify the power of our brands and accelerate innovation. Additionally, on December 22, we announced the definitive agreement to sell our aerospace fasteners business. This portfolio change is consistent with our dedication to focusing on growing our biggest brands and businesses and enhancing shareholder value. We expect to use the net proceeds of over $1.5 billion to significantly reduce our debt, affording us flexibility to pursue a much more dynamic capital allocation strategy. Now shifting to performance in the fourth quarter. We delivered strong results across many of our key metrics in the period, with continued gross margin expansion, robust free cash flow, and a strengthened balance sheet. Revenue was down 1% overall, and 3% organically, which was below our expectations. We posted a 4% price increase and benefited from a 2% currency tailwind, which were offset by the 7% volume decline. We will unpack these drivers shortly. The adjusted gross margin rate of 33.3% was strong and towards the high end of our planning range as we continue to deliver supply chain cost reductions, implement tailored pricing plans, and execute tariff mitigation actions. Adjusted EBITDA margin of 13.5% was up by a robust 330 basis points year over year. Adjusted earnings per share were $1.41. Fourth quarter free cash flow was over $880 million, a very strong result as we effectively managed working capital while continuing to optimize our operations and supply chain. Turning to our fourth quarter operating performance by segment. I'll start with Tools and Outdoor. Fourth quarter revenue was approximately $3.2 billion, down 2% year over year. Organic revenue was down 4%, as a 5% benefit from targeted pricing actions was more than offset by 9% of volume pressure. Currency contributed a 2% benefit in the quarter. We successfully implemented our second price increase of the year in our US tools business, a low single-digit increase this time, with full implementation in the fourth quarter. The volume decrease was largely due to power tool demand dynamics in retail channels in North America and a soft market backdrop in North America and other developed markets. Much of the US tools retail volume headwind was experienced with opening price point products and in select promotional areas, as consumers have gravitated towards promotions during these uncertain economic times. As we've mentioned previously, we have expected consumer, competitor, and channel response to the meaningful tariff pricing would take a while to shake out, and then our top line could be volatile during this period. We see the fourth quarter result as an indication of this. We expect top line volatility through at least the first quarter as competitors continue to take price and as we tune our approach to promotions. Tools and Outdoor fourth quarter adjusted segment margin was 13.6%, up 340 basis points year over year. Margin expansion was primarily driven by higher pricing, tariff mitigation, and supply chain cost reductions. Now for additional context on the top line performance by product line in the fourth quarter. Power tools organic revenue declined 8%, largely resulting from factors consistent with my previous comments, and partially offset by professional strength in the commercial and industrial channel. Hand tools, accessories, and storage organic revenue was flat, as strong professional-grade power tool accessory performance was offset by hand tools due to conditions observed across the broader segment. Outdoor revenue increased 2% organically, driven by strong preseason ordering for 2026. The independent retail channel also exited the year with normalized inventory levels. These factors are both indications of a solid setup for growth in 2026. Now tools and outdoor performance by region. In North America, organic revenue declined 5%, reflecting trends consistent with the overall segment performance. In Europe, organic revenue declined 3%. Growth in key investment markets, including Central Europe and Iberia, was offset by softer market conditions in other parts of the region. The rest of world organic revenue declined 4%, primarily due to market softness in Asia and South America. On a full year basis, Tools and Outdoor organic revenue declined 2% due to the aforementioned factors impacting the fourth quarter, combined with the midyear tariff-related promotional reductions. Full year POS demand was in the same zone as the organic change. DEWALT successfully overcame broader headwinds and posted low single-digit organic growth for the full year, including organic growth across all product lines and regions. Our success was underpinned by prioritized marketing activation and accelerated innovation initiatives, both of which I've highlighted as strategic imperatives at Stanley Black & Decker. A prime example of these imperatives in action is the launch of our Atomic 20-volt max cordless grinder suite. Designed for high performance and mobility in tight spaces, this new product lineup allows users executing demanding applications to transition from pneumatic to cordless. The fabrication trades, particularly fitters and welders, some of the most demanding applications in the field. Our dedicated team of trade specialists are actively in the market now offering hands-on experiences to end users to convert this high-power sector of tools to enjoy the benefits of a cordless compact tool without sacrificing performance. There are also several differentiating features, such as the DEWALT Perform and Protect anti-rotation to maximize user control, and the option to pair with ToolConnect for job site asset management, to name a few. Our platforming method enabled a swift launch of these tailored solutions, adding to our more than 300 product 20-volt max system for the toughest job sites. We intend to continue setting the industry benchmark and redefining the threshold of productivity for our end users. Turning now to engineered fastening. Fourth quarter revenue grew 6% on a reported basis and 8% organically. Revenue growth was comprised of a 7% volume increase, 1% higher pricing, and a 1% currency tailwind. This was partially offset by a 3% headwind from the previously disclosed product line transfer to the Tools and Outdoor segment. This is the final quarter where this impact will be a factor. The aerospace business continued its strong trajectory, achieving 35% organic growth in the quarter. The automotive business delivered mid-single-digit organic growth, reflecting strong sales of our systems for auto OEMs. General industrial fasteners organic revenue declined low single digits. Adjusted segment margin for engineered fastening was 12.1% in the quarter. Year over year expansion was primarily driven by higher volumes, modest price increases, and strong cost controls. On a full year basis, the engineered fastening segment delivered 3% organic revenue growth. This included high single-digit organic revenue growth in the second half, which more than offset the end market pressure experienced during the first half of the year. Overall, both the tools and outdoor and engineered fastening segments delivered margin rates in line or better than expectations this quarter through disciplined execution, targeted pricing strategies, and continuous improvements across our operations. I would like to thank our team for their resilience and commitment to serving our customers and achieving these results. I will now pass the call to Pat to discuss progress we achieved on key performance metrics and to outline our 2026 planning assumptions. Patrick Hallinan: Thank you, Chris, and good morning to everyone joining us today. During the fourth quarter, we delivered significant progress on two of our top strategic priorities, expanding gross margins and improving the health of our balance sheet. I'll begin by taking a closer look at our gross margin performance. In the fourth quarter, we delivered an adjusted gross margin of 33.3%, a 210 basis point increase over the same period last year. This is a meaningful accomplishment achieved through pricing, tariff mitigation, and supply chain cost reductions. These factors were also the drivers of the company's full year performance of 30.7% adjusted gross margin. This represents a solid 70 basis point improvement compared to the prior year, an achievement made even more impressive given the broader market volatility we faced. I'd like to commend our team's outstanding execution as we encountered unprecedented tariff rate increases that began during the first quarter and peaked in April. The team's swift adaptability limited the gross margin decline to just one quarter before we resumed our positive year-over-year margin expansion trajectory in the second half of the year. As Chris mentioned, our global cost reduction program achieved its targeted objective, having delivered $2.1 billion of pretax run rate cost savings in total, including approximately $120 million of incremental savings in the fourth quarter. Operational excellence is one of the company's three strategic imperatives. Going forward, we expect operational excellence to remain a strategic imperative and to target gross improvement of 3% of net spend annually. Looking ahead, we remain fully committed to achieving adjusted gross margins that are above 35%, a long-standing objective that continues to guide our efforts and priorities. We continue to aim for reaching this milestone by 2026. Now turning to our cash flow and year-end leverage results. We generated $883 million of free cash flow in the fourth quarter, bringing the 2025 total to $688 million. This performance surpassed our planning assumption of $600 million, driven by disciplined management of working capital, particularly in receivables and inventory. Our capital deployment in 2025 was consistent with the progress of recent years. As we reduced debt by $240 million, returned $500 million of cash to shareholders via our dividend, and also invested greater than $100 million in growth initiatives to fuel brand building and innovation. This approach underscores our ongoing commitment to deliver value to our shareholders while strengthening our financial position. In just the past two years, we have taken significant strides in reducing our net debt to adjusted EBITDA leverage ratio, bringing it down by two and a half turns. We have reduced debt by $1.3 billion, supported by working capital efficiencies and organic cash generation, and increased adjusted EBITDA by $500 million or 44% over this two-year period. In December, we announced a definitive agreement to sell our CAM business for $1.8 billion in cash. We expect net proceeds after taxes and fees ranging between $1.525 billion to $1.6 billion. We will apply these proceeds to pay down debt, supporting incremental leverage reduction of one to one and a quarter turns in 2026 and positioning the company to meet our target leverage ratio of at or below 2.5 times. Achieving this critical financial milestone will provide us with greater flexibility. We will be well-positioned to respond to market dynamics, invest in growth, and enhance shareholder value creation. We are committed to maintaining a solid investment-grade credit rating to support our brands and our businesses, and we will continue to allocate capital thoughtfully with organic value creation the priority. Overall, our capital allocation priorities remain consistent with those communicated at our 2024 Capital Markets Day. Funding organic growth investments that drive long-term value continues to be our top priority. The company also remains committed over time to maintaining a strong and growing dividend and has a preference towards opportunistic share repurchases, which reflect our confidence in the company's future. In recent periods, our excess capital has been deployed to reduce debt, but following the CAM transaction, we anticipate having additional options for capital deployment, always guided by our disciplined approach and focus on organic shareholder value creation. Now let me walk you through our planning assumptions for 2026. We anticipate that 2026 will be another year of progress towards our key financial objectives, though we do not expect progress to be linear, as peak 2025 tariff expense and second half 2025 volume deleverage rolled off our balance sheet into first quarter and first half expenses, and as macroeconomic and geopolitical uncertainties continue. Despite this backdrop, we expect to make meaningful progress towards our objective as we did during 2025. For 2026, we expect adjusted earnings per share to be in the range of $4.90 to $5.70, representing growth of 13% at the midpoint. This planning assumption includes a half year of CAM results. We are working to close the CAM transaction during the first half, though the actual closing date is subject to customary regulatory approval. We expect CAM to contribute quarterly sales of approximately $110 million to $120 million and quarterly segment profit of approximately $10 million to $20 million in each of the first two quarters, which includes expected corporate and segment allocation. We are targeting free cash flow generation of $700 million to $900 million for the year, reflecting our expected continuation of strong cash flow conversion. This will be accomplished through a disciplined and efficient approach to working capital management, progressing inventory towards pre-pandemic norms, while remaining attentive to our ongoing tariff mitigation and footprint optimization initiatives. We are planning total company revenue to grow in the low single digits year over year, with organic revenue also expected to grow at a similar rate. This outlook reflects our focus on pivoting to growth and our confidence in seizing share opportunities across our key markets. This revenue outlook includes an expectation of 50 to 100 basis points of benefit from foreign exchange, which should predominantly benefit the first half. There are two important revenue dynamics to appreciate for 2026. First, there is a second half year-over-year impact of the CAM divestiture. Second, we will be transitioning our gas-powered walk-behind outdoor product lines to a licensed model during 2026, which will enhance margin and returns but will result in a reduction of in-year revenue. Let me provide more detail on this gas-powered product transition. Starting around the middle of the year, we will move away from manufacturing gas-powered walk-behind outdoor products ourselves, and instead adopt a licensing model for these products. The impact of this change will not be reported in organic revenue performance and will be a separate factor. This product area represents a lower margin portion of our outdoor portfolio and a shrinking part of the outdoor market. Importantly, the strategic shift does not alter our long-term view for outdoor, particularly as we advance the electrification of our product lineup. We expect this change to result in a revenue reduction of approximately $120 million to $140 million in 2026, and another $150 million to $170 million reduction in 2027, with most of the impact to be realized in 2026 and 2027. We expect this business model transition to enhance margins and returns. This business model change is already contemplated in our sales, margin, and EPS guidance. Moving to gross margin expectations. We anticipate adjusted gross margin will expand by approximately 150 basis points year over year, supported by top-line expansion, price, ongoing tariff mitigation efforts, and continuous operational improvement. We expect year-over-year gross margin improvement in both halves of the year, though as indicated in my earlier comments, first half margins will reflect headwinds from tariff expense and under absorption from 2025. Our planning assumes that tariff levels remain at current levels, and we will continue to progress our tariff mitigation initiatives. Our planning reflects margin recovery from tariff mitigation efforts. We plan to continue growth investments in 2026 to further advance our robust innovation pipeline and fuel market activation with the goal of enhancing brand health and accelerating organic growth. We expect SG&A as a percentage of sales to remain around 22%. We will continue to manage SG&A thoughtfully, preserving strategic investments that position the business for long-term growth. Looking at our segments, we are planning for organic revenue growth and segment margin expansion across both segments. Tools and Outdoor is expected to deliver low single-digit organic growth in 2026, with an emphasis on market share gains in what we anticipate will be a roughly flat market characterized by continued uncertainty. Organic revenue in the first quarter is projected to be down in a low single-digit range, reflecting North American retail dynamics like those in the fourth quarter, ahead of full implementation of promotional adjustments and changes to opening price points in nonstrategic brands and product categories. We are confident in our plans to drive organic revenue growth beyond the first quarter as we start lapping the price increases and promotional disruptions that started in the second quarter of 2025 and as we refine some of our promotional strategies. We expect to see sales trends improve from our new product launches and commercial initiatives with a focus on outperforming the market. Adjusted segment margin is expected to improve year over year, driven primarily by price actions, tariff mitigation, operational excellence, and thoughtful SG&A investment. Engineered fastening is planned to grow mid-single digits organically, with comparatively strong performance in the first half reflecting an anticipated half-year contribution from CAM. Our other two businesses, excluding CAM, are expected to deliver low to mid-single-digit growth for the year. Adjusted segment margin is expected to improve year over year, primarily due to continuous operating cost improvement and volume leverage. Turning to other 2026 assumptions. Our GAAP earnings guidance of $3.15 to $4.35 includes pretax non-GAAP adjustments ranging from $270 million to $345 million, primarily from footprint optimization actions, with approximately 20% of the total representing noncash charges. Now for additional planning assumptions on the first quarter. We are planning for net sales to be around $3.7 billion, down roughly 1% year over year due to a solid 2025 comparable. Adjusted earnings per share are expected to be approximately $0.55 to $0.60. In the first quarter, our earnings contribution will be impacted primarily by the timing of tariff cost realization as peak 2025 tariff expense rolls off our balance sheet into the first quarter income statement. We anticipate the first quarter will reflect the highest level of tariff expense on the P&L, which combined with the second half 2025 volume deleverage offsets pricing and productivity initiatives. As a result, we expect adjusted gross margin rate to be roughly flat year over year. Additionally, our adjusted EPS for the quarter assumes a planned tax rate of approximately 30%. In summary, 2026 is set to be another important year for our company. With a strong foundation set, sharpened portfolio, disciplined cost and capital allocation, and a relentless focus on customers, we are well-positioned to deliver growth and create long-term value for our shareholders. Thank you, and I will now turn the call back to Chris. Christopher Nelson: Thank you, Pat. With a strong foundation in place and with a significantly simplified and focused business, we believe our future success will now be determined by how effectively we execute our strategy, which is firmly anchored by our three strategic imperatives: activating our brands with purpose, driving operational excellence, and accelerating innovation. As Pat outlined, we are continuing to proactively manage factors within our control to effectively navigate evolving market conditions and make progress towards achieving our goals. We believe our planning assumptions for 2026 are balanced given the elevated levels of global uncertainty, and we remain committed to driving towards the long-term goals outlined during our November 2024 Capital Markets Day. We expect to achieve the following level of performance in 2028: mid-single-digit sales growth, 35 to 37% adjusted gross margins on a full-year basis, accompanied by adjusted EBITDA margins of mid to high teens, cash flow conversion of net income approximating 100%, cash flow return on investment margins in the low to mid-teens. This will all be complemented by disciplined capital allocation and asset efficiency. As Pat and I discussed, we are focused on significantly deleveraging our balance sheet this year, which goes hand in hand with continuing to have a solid investment-grade credit rating. For clarity, the assumptions that underlie these 2026 to 2028 targets are that our markets are growing by low single digits, that the inflationary/deflationary environment is reasonable, avoiding the extremes of either. Finally, these goals assume the current tariff landscape. As we look ahead, I am energized by the opportunities that lie before us, and I'm confident in our strategy. With a clear vision for 2026, we are building on our hard-earned momentum to serve our end users and create lasting value for our stakeholders. We are now ready for Q&A, Michael. Michael Wherley: Thank you. We will now open for questions. Our first question comes from Julian Mitchell of Barclays. Your line is open. Julian Mitchell: Hi, good morning. I just wanted to dial in a little bit more into the cadence of the gross and operating margin performance for the year. I think you said gross margin is flat year on year in the first quarter, up 150 points for the year. So just trying to understand, does that imply in, say, the fourth quarter, you're up 300 points or something, and maybe flesh out a little bit, you know, how quickly that gross margin improvement happens? Do we see it in the second quarter example, growing year on year? Thank you. Patrick Hallinan: Hey, Julian. Good question. Certainly, a lot of moving pieces in gross margin as we head into 2026. You know, I'd say the cadence throughout the year is we expect, you know, the first quarter to be around 30 and a half, the second quarter to be between that and maybe 31, and then the back half to be for each of the third and the fourth quarter in the 34 to 35% range. And the reason for that, a bit maybe unanticipated gross margin cadence coming off of the 33.3 in the fourth quarter is we do have affecting both the first and the second quarter, peak tariff expense across the two years. Our quarterly reported tariff expense in the first quarter and '26 will be at their peak. We have the volume deleverage which was effectively under absorption in the back half of '25 rolling off the balance sheet, affecting both quarters, and that under absorption came from the volume declines associated with tariff pricing. As we said before, as we went into tariff pricing, we were emphasizing margin preservation with our pricing and mitigation actions and service level by keeping that capacity in place, but it does have a deleverage effect as an expense in the first half of the year. And roughly, you can kind of think of those as, you know, tariffs are about 100 basis points a quarter or maybe slightly less than that, and deleverage is 100 basis points or more than that in one of the in those two quarters. So you're kind of between the two of those factors, you're losing about 200 basis points a quarter in each of the first and the second quarter. You know, whether you're looking kind of sequentially coming off Q4 or whether you're looking for what would typically be the 200 basis points of margin improvement year over year. It's kind of the same way you look at it. You're both getting affected by tariff expenditure rolling off the balance sheet, and volume deleverage rolling off the balance sheet. The good news is we've already got actions underway in the form of tariff mitigation and in the form of production cost reduction as we kind of recalibrate our plans for the volume realities. So we started those actions, as you can imagine, in the back part of last year. We accelerated them in the fourth quarter. We'll continue with tariff mitigation throughout the year, but that's pacing well. And we'll do a bit more capacity resizing in the early part of first quarter. So by the time we get through with the first half, we'll kind of have neutralized those headwinds. And therefore, that expansion in the back half becomes, you know, much more manageable because we've kinda rightsized plant capacity. We've accelerated tariff mitigation. In the launching off point for the back half. Means that those back half year over year margin improvements are much like our annual continuous improvement, and we have the plans in place to deliver those. Operator: Thank you. And our next question comes from Nigel Coe of Wolfe Research. Your line is open. Nigel Coe: Thanks. Good morning, everyone. Thanks for the question. I just wanted to pick up maybe on the tariff mitigation measures, Chris. It doesn't sound like price is part of that. And I'd like I'd just I'd just like you to touch on the fact that you mentioned, you know, consumers are a bit more promotional sensitive. So maybe just address the price elasticity as part of question. But I'm more interested in really in the tariff mitigation and the measures you're taking around supply chain and other factors to, you know, USMCA to to mitigate those tariffs? Christopher Nelson: Sure, Nigel. Good morning. Nice hearing from you as always. So I'll start with the tariff mitigation, and just to make sure I rebaseline everybody is that we we started with the premise, as Pat said, that we're gonna continue to emphasize the service levels for our customers, which we've done very well. We're we're actually at all-time highs right now from recent history, as well as making sure that through mitigation pricing actions, we would be covering margin and cash going forward. If we start with the specific operational mitigation plan I think you're referencing, you'll remember recall that rough order of magnitude, we were importing about 20% of a little bit less than 20% of our volume, for North America sale from China. And we had talked about, by the end of this year, 2026, largely being out of China for US consumption less than 5%. Those actions are a multiple of actions whether it was transferring from China to North America, whether it was taking dual, dual qualified SKUs and starting the production in North America versus exclusively in China. And we are we are pacing ahead of those mitigation transfers, vis a vis what our plan was. So we are comfortably on a glide path and actually a little bit ahead of the glide path in order to be at that level of essentially being out by the end of the year. So that's that's that. And I I I would just be remiss to say that, you know, in all of this, the amount of work that the team has done to get us ahead of the game is is really admirable. And as we talked about when Pat said, you know, a little bit of the capacity rolling off, you'll a part of that is intentional because as you can imagine, as we're moving production around the around the world, we wanna make sure that we have the appropriate amount of capacity to receive that in in location. And we'll start to be able to study that as we go. Secondarily, on USMCA, I had previously say said that we started at less than a third of our products that were USC USMCA qualified. And we said that in the medium term, we saw no reason that we would not be able to be at or around industry averages. For what that USMCA qualified percentage of imports would look like for a company, an industrial company, such as ourselves. We actually are making great progress in that area, and we see absolutely no barrier to be at, or maybe slightly above what that industry average would be, and we're we're pacing once again, ahead of making that you know, I think we had talked about that being in a, you know, eighteen month to two year time frame. We're pacing nicely ahead of that right now. So the operational mitigation is going very strong, and we actually feel that that is, you know, a big part of, you know, what we'll be able to continue to do to deliver continue to deliver the margin expansion that that Pat referenced. I think that you you asked a little bit about the volume in April as well as what that means from a pricing perspective. So I would just say, if I think about April and what we saw, you know, I think there's a couple of things in there, Nigel. One would be that, you know, there was there was certainly in in the market and I think specifically in North American and retail, and this is I think a common thread that we've seen in a lot of different people's releases. It was just a softer market backdrop. Secondarily, that in that environment, in our industry in particular, as you think about the pricing actions that have been taken, we saw a particularly noted sensitivity in what pricing sensitivity in the opening price point products and brands. And, you know, I an example of that, Nigel, would be our, you know, our cleaning and vacuum business and our Black and Decker branded portfolio, which are both reported in our in our power tool results, those are in on that line where people are looking at know, should I be trading down and what is the right value of that I should be taking a look at. So that is where we where we have a look at making sure that we understand, are we appropriately making the price volume margin trade offs in those OP type of products, and we're working through those, those plans as we speak there. And then secondarily, you know, yes, it was we saw more more consumers and buyers looking for promotions. And, you know, I think that that's that's would be expected in an environment like this. And we will continue to know, kind of tweak and modify our promotional assortment and promotional plans as we go forward to adjust it. These are these are minor types of issues that we we understand what's going on, and we have the actions in place to address them. And they're they're around the edges to be sure. Because if I just bring back once again and reiterate you know, where we started and saying, wanted to make sure that we were pricing and mitigation mitigating for for preserving our margin to make sure that we had the right margin structure for long term investment and growth of our core brands. That's where we are, and we've accomplished that very nicely. And we also said that we expected a level of volatility as all of this plays out, and we're seeing that now. And I would expect that volatility to continue to play out because candidly, you know, there has been a large shock put into our industry, and people are adjusting their promotion approaches as we go in a post tariff pricing world. And, you know, and even right now as we continue as we speak, more pricing is going into the market from different members of the competitive set. So I think that this will continue to monitor and adjust around the edges where necessary, but we're we're very happy with where we are, and we're very confident that we understand the issues from a pricing perspective and that we're right on where we wanted to be from actually the strategy that we laid out from the very beginning of this, of this episode. Operator: Thank you. And our next question comes from Timothy Wojs of Baird. Your line is open. Timothy Wojs: Hey, guys. Good morning. Chris, I had a follow-up on that question and then just my question. So the follow-up is you know, the tweaks that you're making, you know, to some of the promotional cadences and and price points and things. Is that really more of a reaction to what the consumer and how they're reacting to to price? Or or is it more competitive? So that's my follow-up question. And then the question I have is just on volume. You do kind of expect it does seem like you kind of expect volume to start to improve at at some point in 2026. How much visibility, I guess, do you have that you know, do you to that? Any sort of kind of specific share gains that you could kind of talk about it, you know, outside of just having some easier volume comps as you kind of work through the? Christopher Nelson: Yes, Tim. Thank you. It's great hearing from you. I mean, I would just start by saying that everything that we do is going to be in response to what we see our end users and our buyers and our customers doing. And I think it's obviously, there's a byproduct of what the competitive set is doing, but we are we are looking at our core end users and and customers by segment. And these are tweaks around the edges that you would expect to modify as we go forward. And I think that, you know, I I can't completely tease the two apart because as I said, you know, right now, there are still pricing actions being taken in the market by the competitive set. And, obviously, we'll keep that as a part of what we monitor as we make the modifications. Now was it as it relates to the to the promotional question you asked, these are, you know, these are things that are they're normal. They're normal course of business as you think about how you set up your promotional plans, and their normal mode of modifications that we go through on a on an annual basis. I think what is different is that because we have gone through a step function change in pricing, getting those levels dialed in to understand exactly where our models say that we're getting the the absolute optimal trade off between the volume and the margin, we're just working through those in certain highly sensitive SKUs but they're they're minor adjustments for us to make going forward. And, you know, we're we're once again reiterate, we're confident that that we're on the path to being do so. And know, it'll it'll be kind of those those things will be able to be in place going into Q2, and we'll probably see them in Q2 and Q3. From a volume perspective, I'd say that the most encouraging thing that we see is that through all of this, we have continued to see a very strong professional market. And our, you know, our professional channels and the the construction and industrial channel was a nice nice growth generator in in Q4, and we see that continuing. And as we get the different kind of kind of opening price point branded type of work done in in the retail segment as well as our promotional line. That underlying momentum that we're seeing there, I think, is gonna be a nice it's a nice indication that the overall strategy that we've laid out is is is actually paying dividends. We'll continue continue to grow. So, yes, that there would be, nice indications underlying that we see the volume opportunity for 2026. Operator: Thank you. And our next question comes from Christopher Snyder of Morgan Stanley. Your line is open. Christopher Snyder: Thank you. I appreciate the question. If we you guys talked a couple quarters ago about an that the tariff related price increases on the industry would maybe like, a one for one elasticity, on volume. Know, if we look over the last three quarters, you know, it seems like the elasticity has been more significant than that. The volume declines have been steeper than the price increases. So I guess, is that just a function of, you know, some of the soft consumer backdrop that we've talked about? Could it be a function of, you know, maybe something Stanley specific and maybe that could change as competitors push more price? In '26 per some of the earlier conversation. But just any color on that? And what could maybe cause that to get better over the next twelve months? Thank you. Patrick Hallinan: Yeah, Chris. You know, that's certainly our expectation as we went into, this pricing dynamic, which started in the second quarter. And, you know, for the first two quarters, you know, our overall results were very much in line with that expectation. I mean, you could tell by the results we reported in the fourth quarter, we did see an elasticity that was greater than that one for one level. And, you know, consistent with, some of the points Chris made in the last couple questions, I said, you know, we we see that heightened sensitivity was was really concentrated in opening price points and a few promotional areas. And as we expected all along on this journey because we and other players in the industry, both, manufacturers and retailers, took prices at very different time points in very different manners that we'd all be adjusting along the way, and there'd be some choppiness along the way. And we think you know, the fourth quarter was an indication of that choppiness. We probably have another at least first quarter to go, of some of that choppiness. But we think with very manageable and modest adjustments to promotional rhythms and levels and a few targeted opening price points in some nonstrategic brands. That we get back into that one to one zone, is our expectation, we think. That's, you know, very much within the manageable boundaries of of all the things we're navigating during the tariff jolt that's impacting the industry. Operator: Thank you. And our next question comes from David MacGregor of Longbow Research. Your line is open. Joe Nolan: Hi. Good morning. This is Joe Nolan on for David. You guys talk about being focused on paying down debt after selling the aerospace fastener business. Can you just talk about plans to invest in growth in the Craftsman and Stanley brands? And just how you expect to see share gains there and margin improvement in these brands in 2026. And just along with that, if we see the DIY space remain a little bit softer, just how much progress you can make in those spaces? Thanks. Patrick Hallinan: Yeah. Joe, I'll start and give you kinda some of the financials, and then I'll let Chris talk about some of the things going on with the Stanley and the Craftsman brand, which we're very excited about, and we do expect to see sales inflections in both of those brands this year, 2026. You know, from a pure kind of financial framework, as we stated on the call, you know, we'll get the proceeds from this transaction and pay down debt and get very much you know, at or below the two point times net debt to leave to EBITDA threshold, we certainly plan to persist a growing dividend, but that should still result in additional capital flexibility that we'd probably more likely been biased to pursue share repurchases as an export of call. As it pertains to investments in the brands, we certainly, in 2026, expect to be making an incremental $75 million to $100 million greater investments in the brands versus 2025. And, you know, you see our SG&A for the year will be up somewhere in that $90 to $100 million range. And what's happening inside of SG&A is the brand investment is going in, but we continue with SG&A efficiencies elsewhere. So elsewhere, the efficiencies are offsetting the things like merit and benefit inflation and offsetting some of the overhead that gets stranded with CAM. And that just leaves our year-over-year SG&A cadence really reflecting the incremental investment in the business. But we don't see the investment in the business going beyond that kinda incremental $75 to $100 million in 2026. But Chris can talk a little bit about what's going on with Craftsman and Stanley. We've making investments in those brands. Over a twenty four month plus horizon, and we expect those investments to result in inflection this year. Christopher Nelson: So thanks a lot, Pat. You know, Joe, great question. What I'd say is that I just take us to the beginning and and, you know, if you remember the beginning of the of the when I started talking about this, it was we made the conscious decision to start having our investment towards DEWALT out of the gate. It was, you know, in the professional segment, you know, greatest scale as well as had the most, what we thought clear, quick payback on those. Quickly following that, we started, as Pat said, you know, in the you know, you know, twenty four months ago to then, layer in incremental investments in both Stanley as well as Craftsman. As our other core brands. And, specifically, we're gonna start to see the fruits of that what we've been putting in for the past twenty four months and specifically a lot of the last twelve months, as we come into this year, we'll continue to invest. Let me give a little bit of color to that. I would say that from a product perspective, Craftsman and Stanley are going to see the some of their largest new product launches from a from a a kind of quantity perspective in, you know, in certainly recent history as we're launching a a large suite of Craftsman 20 v 20 products in 2026 as well as, you know, as we've talked about before. We put in a lot of work into redefining and refreshing the Stanley lineup, and that is now coming in as we speak right now in the lineup and being launched into our channel with our channel partners. So we're very excited about the and what we see there, and I think that's gonna be a nice inflection point that we can see coming. Secondarily, with those brands, and I'll talk about Stanley specifically, for example, you know, which the the majority of Stanley sales are outside The US, and we have been putting in, you know, dedicated sales and and, you know, feet on the street for that STANLEY brand. Specifically in the the European hand tools market. That we are seeing pay dividends and as we continue to build demand and shelf space in what is a very professional market in Europe for those those products. We see that being something that will continue to pay off. We've started to see certainly the inflection already. And then from an activation standpoint, I would say that, you know, we are going to be this year really amping up our efforts in, in social spend. We're gonna be, you know, spending, you know, at or above what I think is the highest level we've done, in the history of this company on those brands. So we're very excited about the progress obviously, that we've been talking about and we've seen the results on. In in DEWALT, and I would anticipate seeing that this year, probably Stanley will be a little sooner than Craftsman. We'll see, Craftsman inflect in the back half of the year as well, but we're we're we're really excited about what we have, and they're they're tangible things that are have been in progress for a couple of years that are now being launched in the marketplace. Operator: Thank you. And our next question comes from Robert Wertheimer of Melius Research. Your line is open. Robert Wertheimer: Question is a little bit about margin trajectory and just drivers beyond 26. I wonder if you can comment on what your kind of rate of inflation, your natural rate of inflation is running. Does productivity fully offset that? And so kind of margin gains from here are are price led? Is the idea that the 3% productivity will give you tailwinds versus your cost structure? I'll stop there. Thanks. Patrick Hallinan: Yeah, Rob. Good question. I'd say beyond '26, as I think both Chris and I mentioned, in the opening comments, we're pursuing gross annual savings roughly in the ballpark of 3% of our cost structure, which is, you know, call it $300 million in that ZIP code. Those are gross savings. You know? And every year, you get a manner of wage and benefit inflation inside of our COGS cost structure, plus you get you know, materials inflation and deflation that tends to be kind of net inflationary predominantly driven by metals. You know, I'd I'd say that that leaves you with usually a net savings after inflation. You know, in in the, you know, 100 ish million dollar range. Which allows you to make choices on incremental margin expansion, and or investment in the brands. I'd say that's that's kind of our structure going forward. And, you know, we'll manage SG&A relative to overall volumes. So, you know, we'll manage SG&A up and down with the volume in the business. And I'd say, you know, our our pricing in the business will be will be driven by innovation and brand building, you know, that know, that can be in place, you know, should material inflation get outside of any kind of normal band. But I'd say that's our our margin algorithm going forward that you know, you should expect, you know, pricing to be something when you get high side, margin or material inflation rather or things like tariffs. That itself help inside of COGS elsewhere and that we kinda manage SG&A to deal with with volume. Versus SG&A inflation. Operator: Thank you. And our next question comes from Eric Bosshard of Cleveland Research Company. Your line is open. Eric Bosshard: Thank you. I think I understand strategically what you're talking about. In terms of managing pricing and promotion through the first half in order to get better volume? You also talked about some price increases in 4Q and competitors raising price in 1Q. And so I guess what I'm trying to really understand is how pricing behaves 1Q, 2Q and into the back half. Do you sustain the current level of price? Do you get more price? Do the tweaks mean you end up getting less price? Just trying to figure out how that behaves in one Q2 q, and two half. Patrick Hallinan: Yeah, Eric. I don't know that I know it intimately by quarter. I would say for the full year, enterprise-wide, we would expect pricing in the range of plus 2%. It's for the most part, the carry in with the absorption of, you know, kind of modest changes to promotions and OPP that are are baked within that 2% pricing. Obviously, most of that's gonna come in the first half of the year. I I don't know it precisely by first quarter versus second quarter, but mostly, that's gonna come in the form of positive pricing in the first and second quarter, I would assume dominated by the first quarter since we started our pricing in the second quarter of last year. And then be relatively flattish, the third and the fourth quarter. Michael Wherley: Thank you everybody for those questions. We would like to thank you for your time and participation on today's call. If you have any further questions, please reach out to me directly. Have a good day. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Sammy: Hello, everyone, and thank you for joining us today for the Yum! Brands 2025 fourth quarter earnings call. My name is Sammy, and I'll be coordinating your call today. Alright. Ask that you limit yourself to one question per participant. If you have any follow-up questions, please do rejoin the queue. I'm gonna hand over to your host, Matt Morris, Head of Investor Relations to begin. Please go ahead, Matt. Matthew Morris: Good morning, everyone, and thank you for joining us today. On our call are Chris Turner, our CEO, Ranjith Roy, our CFO, and Dave Russell, our Senior Vice President and Corporate Controller. Matthew Morris: Following remarks from Chris and Roy, we'll open the call to questions. Please note that this call includes forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements are made only as of the date of this call and should be considered in conjunction with the cautionary statements in our earnings release and risk factors discussed in our SEC filings. Please refer to today's release and filings with the SEC to find disclosures, definitions, and reconciliations of non-GAAP financial measures. Please note that during today's call, system sales and operating profit growth will exclude the impact of foreign currency. Our fourth quarter results reflect the comparison against an extra week in 2024 for business units that report on a period calendar basis. However, all figures discussed on this call exclude the impact of lapping that additional week. For more details on our reporting calendars, by market, please refer to our financial report section of our IR website. We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. We would like to make you aware that our first quarter earnings will be released on April 29 with a conference call on the same day. Now I'll turn the call over to our CEO, Chris Turner. Christopher Turner: Thank you, Matt. Good morning, everyone. Yum delivered another year of outstanding results at KFC and Taco Bell with our fundamentals stronger than ever at both brands. Looking back at 2025, Taco Bell again gained market share, outperforming the QSR industry with exceptional 7% same-store sales growth and KFC delivered record-breaking unit development while hitting an incredible milestone in opening its 30,000th international restaurant. Both Taco Bell and KFC delivered 10% divisional core operating profit growth, a strong outcome that speaks to the durability of Yum's portfolio and the skillful execution of our team. And these great results build on multiple years of compounding success, as best highlighted by Taco Bell's system sales being up nearly 40% and KFC International units being up over 30% since 2021. What excites me most as I've stepped into the CEO role is not just the strength of our results, but the clarity in how we will continue to grow. Building on our strengths, and elevating our ambition. The combination of our global scale, unrivaled culture and talent, and world-class franchise partnerships create a unique and unbeatable competitive advantage. Our digital capabilities continued to be a powerful sales driver in 2025 as we reached new milestones with digital mix approaching 60% and digital sales growing 20% year over year. We saw growth across all digital channels, including mobile apps, loyalty programs, first and third-party delivery, and kiosk ordering. Investments in the Byte by Yum platform, our loyalty ecosystem, and AI-driven personalized marketing all underpin this incredible top-line momentum. These early wins reinforce our digital and technology strategy. Owning our core digital and technology platforms gives us an edge over the competition. YumScale uniquely positions us to develop common platforms and deploy them across brands and markets, creating a scalable foundation for the next wave of digital innovation. As we move into 2026 and beyond, I'm eager to build on what's working and in collaboration with our leaders thoughtfully apply the insights and ideas generated in my conversations with franchisees, team members, investors, and employees. Our recipe for good growth remains unchanged. Everything we do at Yum! Brands is in service of our mission to grow iconic restaurant brands globally, that are loved by our consumers. Connected through people, systems, technology, and trusted everywhere we operate. All of our work is powered by our unrivaled culture and talent, which remains our greatest strength and most important differentiator. Looking forward, we are raising the bar with clear priorities to drive the next chapter of growth for Yum. This means setting bold aspirations and delivering industry-leading performance. We have three core priorities. The first is battling for the future consumer, with the goal of meaningfully lifting average unit volumes over time. Second, accelerating restaurant-level economics for our franchisees, which will enable sustained, industry-leading unit growth across our brand. And third, reaching the full potential of Byte, leveraging our technology and digital capabilities to create more connected experiences for our consumers, and more profitable growth for our franchisees. One clear example of what raising the bar looks like in practice is Taco Bell. The brand is relentlessly innovating for next-generation growth with clear 2030 ambitions including reaching approximately $3,000,000 in US average unit volume, expanding to 3,000 international stores, and delivering 25 to 26% US restaurant-level margin. This reflects a deliberate multiyear journey focused on battling the future consumer, including expanding digital and loyalty, and new category entry points, which together will drive higher frequency, stronger check, and increasing traffic across dayparts. Combined with leveraging our scale, these initiatives improve four-wall economics and create a more attractive repeatable growth model for franchisees, which in turn accelerates new unit builds. Byte continues to support this progress by enabling more personalized engagement, stronger operational execution, and improved restaurant-level economics. Together, these efforts demonstrate how bold aspiration, disciplined execution, and a clear strategic roadmap can deliver durable growth and attractive return. Another important capability that supports how we raise the bar across the portfolio is Collider, which has been our in-house consumer insights agency for over a decade. In December, Collider published its 2026 food trends report, which highlighted three clear shifts in consumer behavior. First is what we call the me, me, me economy, where consumers are increasingly over-indexing on customization and crave-worthy food. Second is choice therapy, where consumers reclaim a sense of agency through small intentional choices often expressed through sauces and add-ons. And third is vibe mapping, reflecting the importance of delivering affordability that feels good and connects emotionally. These insights shape how we think about menu architecture, innovation platforms, and brand expression across the system, all with the aim of giving consumers what they want, staying ahead of the competition, and taking share. Now let me turn to our full-year results. At KFC, which represents 51% of our divisional operating profit, the brand delivered a strong year with 6% system sales growth resulting in an impressive 10% core operating profit increase. We delivered exceptional results in The UK market, KFC's largest equity estate where relevant limited-time offers paired with disruptive value drove a 10% increase in same-store sales in Q4 and high single-digit same-store sales growth for the year. Our results were strong in The Middle East, where same-store sales growth was high single digits in the fourth quarter, building off of the 13% comp growth we experienced in the fourth quarter last year. As we move into 2026, KFC CEO Scott Mazzinski is leaning into his previous experience at Taco Bell, and leveraging findings from Collider to reengineer the menu and calendar, continuously evolve and modernize the brand, and accelerate net new unit development. On the menu and calendar, KFC will increase the pace of its marketing windows while upgrading its limited-time offerings through partnerships to enhance the brand's cultural relevance. We'll also invest in high-confidence platforms that drive frequency and check growth, including beverages, sauces, and tenders. Leveraging learnings from Saucy by KFC, the team has developed more than 20 sauces creating a scalable platform that allows us to move innovation from limited-time offers to always-on proposition. We are also rolling out our beverage platform, Quench, approximately 3,000 stores this year, while refining our tender offerings by adjusting portion sizes and tailoring crispiness to consumer preferences. Similar to Taco Bell's successful and robust testing platform, the KFC team launched a global innovation hub in September, a centralized database of historical products, tested ideas, and collider concepts that will meaningfully shorten development cycle. The team will pair its higher innovation cadence with profitable low price point products, compelling individual value offers, and expanded daily menus designed to drive traffic while protecting margins long term. At Taco Bell, which represents 38% of our divisional operating profit, the brand continues to fire on all cylinders with full-year system sales growth of 8% and core operating profit growth of 10%. At Taco Bell US, our momentum continues to be driven by sustainable market share gain. Importantly, that growth is broad-based, with increased penetration among higher-income consumers, families, and younger guests. Key growth drivers this year included innovation-led buzz, with National Taco Day and Baja Blast Pie, $5.07, and $9 Luxe boxes, decades2.o, returning favorites like cheesy dipping burritos, and nuggets and fries. Looking ahead, the 2026 marketing calendar builds on this momentum by broadening our core platforms while leaning into key themes that we know resonate with consumers. We're focused on unlocking more growth potential on the road to achieving our 2030 goals by leveraging our magic formula including driving brand buzz through 26 new and tested innovation launches, dominating on value with the new luxe value menu and optimized $5.07, and $9 boxes, and expanding and innovating off our core platforms across beverages, fries, cantina, and crispy chicken. Digital remains a powerful growth lever and is expected to drive nearly one quarter of Taco Bell average unit volume growth in 2026. At Taco Bell International, in 2025, we achieved 5% same-store sales growth with standout performance in Canada, The UK, and Spain. This included fourth-quarter double-digit same-store sales growth in Canada where we successfully launched crispy chicken. We achieved over 15% system sales growth in Europe, where we launched the LiveMOS Club in The UK, laying the foundation for deeper loyalty and e-commerce integration. The team is committed to strengthening its position as a distinctive and culturally relevant brand reinforcing its food leadership by scaling craveable platforms and test future menu icons across key markets leaning into value as a core traffic and relevance driver, and building digital engagement through locally relevant platforms and partnerships. Turning to the Pizza Hut strategic review that we announced last quarter. The process is proceeding as planned and as of now, we intend to complete the review of options this year. We are pleased with the Pizza Hut team's dedication through this process, including their work with franchise partners to strengthen near-term results. Given the ongoing nature of the process, at this time, we cannot share further details on the strategic review. As I look back on 2025, I am proud of our teams around the world who make our iconic brands loved by consumers, trusted by all stakeholders, and connected to the communities we serve. Last year, we expanded access to education, skill building, and employment opportunities for more than 400,000 people. In partnership with our franchisees, we donated more than 4,000,000 pounds of food and supported communities and team members affected by disasters around the world. I extend my heartfelt thanks to all the individuals who made these efforts possible, demonstrating how we lead with heart, which is what makes this company truly special. That's the power of Beyond. Serving up good wherever we operate. As we close, we have iconic global brands with clear growth runways and a commitment to raise the bar. I want to emphasize that our brands are executing with discipline, guided by insight, and grounded in purpose. Most importantly, we have exceptional people. Franchisees, team members, and leaders around the world. This gives me tremendous confidence in our ability to navigate change, take share, and deliver consistent long-term value for our shareholders. With that, Roy, over to you. Ranjith Roy: Thanks, Chris. And good morning, everyone. I'll begin with our fourth quarter and full-year results. Before discussing Yum's balance sheet, liquidity position, and guidance for the upcoming year. Beginning with the top line, we grew our Q4 system sales 5% driven by 3% unit growth, and 3% same-store sales growth. System sales were led by strong Taco Bell same-store sales growth, record-high KFC international unit openings, and robust digital sales growth. Our digital sales topped $11 billion and grew 25% year over year, raising digital mix nine points higher to nearly 60%. For the full year, 5% led by our two largest brands, Taco Bell at 8% and KFC at 6%. Q4 company restaurant margins were 16%. Taco Bell US delivered 25.7% restaurant-level margins, a 50 basis point expansion year over year on 4% same-store sales growth at company-operated restaurants. Full-year Taco Bell US restaurant margins ended at 24.4%, despite higher beef prices year over year full-year margins at Taco Bell US expanded thanks to strong top line and transaction growth. For KFC, Q4 restaurant-level margins were 12.7%, a 60 basis point expansion year over year driven by an improvement of 150 basis points in our UK store margins, and nearly 350 basis points in our US store margins. Q4 ex-special G and A was $337 million, up 5% year over year. Reported G and A of $377 million included $40 million of special expenses primarily related to the Pizza Hut strategic options review. For the year, ex-special G and A was in line with our guidance, up 5% year over year at $1.15 billion. As a result, Q4 core operating profit grew 11% and ex-special EPS was $1.73. For the year, 7%. Excluding the Pizza Hut division, core operating profit grew 10%. Yum! Ex-special EPS for the year was $6.05, up 10%. Moving on to development. We opened over 1,800 new units in Q4, and over 4,550 new units for the year. KFC led unit growth with over 1,100 units opened in Q4 and nearly 3,000 units opened in the year. This is a record base for KFC's gross unit openings, and spanned 105 different markets. Were it not for the Turkey closures in 2025, KFC would have set a net new unit record in 2025. As you may well know, many of our franchisees set their development plans more than twelve months in advance. So the record-setting unit growth in 2025 on the back of a challenged same-store sales environment in 2024 is a testament to the global appeal of the KFC brand, its attractive restaurant paybacks, and our advantaged franchise system. Building upon an already strong system, the KFC team is prioritizing further improvement in paybacks and setting bold goals to drive attractive long-term growth for the KFC brand. A strong network of franchise partners is key to our mission. And we continue to see franchise partners achieve greater scale, advance operational capabilities, and invest in growth. To that end, on January 1st this year, two of KFC's publicly traded partners, Bevyani and Saf announced an intent to merge creating one of the largest food and beverage companies in India. This will bring together two already strong partners, and enhance Deviani's supply chain technology and development capabilities and accelerate growth in one of the largest underpenetrated markets globally. Similar advantages and scale are being realized in other parts of Asia, where the Carlyle Group, which acquired KFC Japan in 2024, has now doubled down to acquire KFC Korea. Underscoring the attractiveness they see in the KFC brand and the long-term white space opportunity. Carlisle has been clear about their intentions. To accelerate KFC's growth across Asia as is evident in Japan, where the pace of net new unit development increased by nearly 70% in the past year. We're incredibly excited to see our sophisticated well-cap franchise partners around the world gain greater scale and further strengthen their capabilities. Which combined with the enormous white space, provides even more reason to believe in the store development opportunity ahead. To illustrate this point, consider Thailand, an emerging market where we have approximately 24 KFC restaurants per million consuming class population today, and where we continue to see strong unit growth. We have many other large markets where the future potential is even bigger. As examples, India has only five, and Brazil, recently under new management, has only two KFC restaurants per million consuming class population today. Turning to Taco Bell development. We opened 228 new units in Q4, our second-highest Q4 ever. We continue to see a very attractive development runway. Anchored by a clear target of reaching at least 10,000 units in North America and 3,000 units internationally. Taco Bell entered five new markets in 2025, and opened 155 gross units internationally, up almost 40% from the prior year. Development occurred in 26 countries, including 10 units or more in each of India, The UK, Thailand, Brazil, Spain, and Canada. International expansion is supported by analytics-driven store development plans, and strong top-line growth leading to improved franchisee economics. All of which reinforces our confidence in Taco Bell's global growth trajectory. Moving to technology. As Chris mentioned, last year was an important year for our technology initiatives. We consolidated our portfolio of leading technology solutions into a single restaurant technology platform unveiled as Bite by Yum. The Bite platform is the only multi-brand, multi-market, QSR technology platform built by restaurant operators, or restaurant operators. We think about Byte's evolution in chapters. Chapter one was about building, integrating, and proving the platform in The US. Chapter two now focuses on product excellence and accelerating adoption across our global system. To make this adoption easier, we've simplified Byte into two interconnected core bundles. The smart ops bundle and the digital ordering bundle. The smart ops bundle includes by point of sale, menu, and kitchen management. And is in over 7,000 restaurants at year-end. The digital ordering bundle includes web and app ordering, menu, and third-party marketplace integrations, and is in nearly 18,000 restaurants at year-end. When including the two bundles, plus more narrow a la carte offerings, at least one byte product is live in approximately 38,000 globally. In 2025, Byte digital ordering bundle expanded to five new markets and processed over 370 million digital transactions. Representing over 60% growth year over year. In 2026, we will deploy smart ops in KFC UK and digital ordering in KFC Australia. Marking an important next phase of expansion. BiTE's benefits are widespread and include operational and consumer-facing impacts. For example, we've delivered up to a 75% reduction in aggregator ordering failure rate through the digital ordering bundle. Within the smart ops bundle, we've had restaurants see up to a 10% increase in consumer satisfaction and up to an 85% reduction in stock outs. Such improvements directly support sales conversion, consumer trust, and restaurant efficiency. Over time, these improvements will continue to contribute to higher same-store sales growth and stronger unit economics in support of our raise the bar ambitions. Furthermore, as the pace of technology change accelerates, our ability to own our data and key strategic components of our technology stack provides a differentiated competitive advantage to stay ahead. For example, at Taco Bell, we are advancing intelligent drive-through capabilities and our next-generation kiosk experience both designed to improve throughput accuracy, and guest engagement. Now on to Pizza Hut. Looking back at 2025, Pizza Hut saw a 1% same-store sales decline globally for the quarter and the year. We were pleased with continued momentum in Pizza Hut International where same-store sales were up 1% with strength in The Middle East, Latin America, and Asia. Pizza Hut globally opened over 440 gross units and nearly 1,200 gross units in 2025 across in Q4, 65 countries. Representing the fifth highest gross new bills in seven decades and a sign of brand health and strong franchise partners. This was partially offset by a few specific franchise situations that resulted in elevated Q4 store closures. As Chris shared, the strategic review we announced in November is progressing according to plan. We have aligned stakeholders on a targeted program in The US. Hutt Forward, that represents a bridge to a longer-term acceleration of the brand. This program includes alignment on a vibrant marketing program modernization of certain technology and franchise agreements, and Yum! Providing a one-time contribution to marketing support, along with the approval of some targeted closures of underperforming units. We have confidence in our Pizza Hut team and the steps they are taking. To help set expectations on key Pizza Hut business metrics for 2026. From a unit standpoint, we expect strong gross openings globally which are seasonally in the back half of the year. In the first half, in The US, we expect approximately 250 targeted closures of underperforming units tied to the HUD forward program, which will result in a decline in global Pizza Hut units in the first half. We expect Pizza Hut Q1 core operating profit to be down approximately 15% driven by the Q1 impact of the one-time Hutt Forward marketing support investments, that will be recorded in franchise and property expenses and G and A growth due to integration costs related to recently acquired stores in The UK. Next, I'll provide an update on our balance sheet and liquidity position as it stands today. Our capital priorities remain unchanged. Maximize shareholder value through strategic investments in the business, maintain a strong and flexible balance sheet, offer a competitive dividend and return excess cash to shareholders. For the year, net CapEx was $293 million consisting of $78 million in refranchising proceeds and $371 million in gross CapEx. We also completed a 128-unit Taco Bell acquisition for $668 million in Q4. When combining dividends and share buybacks, we returned approximately $1.35 billion to shareholders in 2025. Our net leverage ended the year at approximately four times. Subject to market conditions we expect to hold our net leverage at approximately four times moving forward. Turning to 2026 outlook. When excluding the Pizza Hut division, will meet or exceed we are confident the rest of our portfolio every component of our long-term growth algorithm including delivering over 5% net new unit growth. We expect Taco Bell US restaurant level margins of between 24-25%. Excluding Pizza Hut, ex-special GNA will grow mid-single digits, which includes the incremental overhead assumed with the Q4 Taco Bell US store acquisition. Amortization of reacquired franchise rights, which we record in unallocated company restaurant expenses, will increase by $30 million. Again, reflecting the Q4 Taco Bell US store acquisition. We expect interest expense to fall in the range of $500 to $520 million for the full year when excluding any potential debt issuances. We expect our tax rate to be in the range of 22 to 24%. In closing, we are encouraged by the strength and resilience of our business. Significant white space opportunity, strong unit economics, highly capable franchise partners, and clear growth drivers. In 2026, we are focused on raising the bar across all our businesses and completing the review of Pizza Hut strategic options. Positioning Yum for its next phase of growth and long-term value creation. With that, operator, we are ready to take questions. Sammy: Thank you very much. Operator: To ask a question? Please press star followed by 1 on your telephone keypad now. If you change your mind, please press star followed by 2. Our first question comes from Dennis Geiger from UBS. Your line is open Dennis. Please go ahead. Dennis Geiger: Good morning, guys. Thank you. Appreciate all of the detail on color on the call. Very helpful. Wondering if you could talk a little bit more about some of the comments around accelerating the long-term growth. If there's anything to elaborate on sort of opportunities to accelerate an already strong growth profile, perhaps any high-level color on sort of a potential what a potential increased focus on the Taco Bell and KFC businesses post a strategic review, what that could do. As far as the growth and maybe strengthening that growth even further? Christopher Turner: Yeah. Thanks, Dennis. As we look forward, the business has momentum coming out of 2025, continuing into 2026, As we look at 2026, you've got a lot of great things happening across our two big businesses in KFC and Taco Bell. Of course, the unit development side, KFC delivered a tremendous 2025. You have record gross unit openings for the full year and in Q4. That tells you that paybacks are strong. Our franchisees are strong in KFC International. And with our raise the bar strategy, we're looking to accelerate restaurant economics over the coming years, which will help us to broaden and sustain that strong development pace. Taco Bell, we had strong same-store sales in both US and international. International, 5% same-store sales growth last year. We got back to pace on net new unit growth in Taco Bell. We can continue to build on that in Taco Bell International we feel good about the development trajectory. As we go to the same-store sales side and building to overall system sales. Really excited about what the KFC global team is doing. You saw acceleration on a two-year basis from Q3 into Q4 on KFC. Scott Misbinski and his team, of course, are taking a page from the magic formula playbook at Taco Bell. Scott spent many years there. And you're seeing that come to life in our marketing plans for 2026 and beyond. They're focused on elevating marketing things like the partnerships that we had with Stranger Things in The UK, which led to a plus seven last year in The UK and KFC. New category entry points. We talked about expanding beverages. For example, rolling quench out nearly 3,000 stores this year. Elevating our innovation. We talked about tenders and ensuring we've got the right size the right formulations across markets to resonate with that next generation of consumers. And, of course, expanding flavors through sauces. Loyalty. We'll continue to take loyalty to more markets in KFC, and underneath all of it is leveraging our scale to help franchisees to deliver the right value across markets. In Taco Bell, it's continuing the momentum. The plan is working. You know, we laid out Sean at the event early last year. The path to 2030, we are on or ahead of that plan to get approximately $3,000,000 AUVs. We talked about some of the excitement drivers for this year. I'll just highlight a few that I'm really excited about. The biggest value launch in the brand's history earlier this year with deluxe value menu tremendous items at $3 or less, Our loyalty program continues to grow 23% more members, last year. That's 23% more members where we can have a direct relationship. And then finally, I'll highlight the strength relative to the industry. Taco Bell continues play in a category of one. You sum it all up with the profit plan. We'll continue to be balanced on how we manage G and A. You know, you look at 2026, we were already in our ability to deliver the algorithm even before you take into account those Taco Bell store acquisitions. With that, it just raises our confidence and our ability to deliver or exceed the long-term growth algorithm ex Pizza Hut as we go into next year. Operator: Our next question comes from David Palmer from Evercore ISI. Your line is open, David. Please go ahead. David Palmer: Hey. Yep. Thank you. Good morning. I wanted to follow-up on the prospects for reacceleration in KFC Global Development. And maybe the potential for higher franchise revenue and profitability from the composition of growth in the future as hopefully, the non-China unit growth accelerates There's been some slowdown even beyond the Turkey closures. And wondering if you could give us some you know, reason to feel confident that you can get back to 23 levels of KFC international growth ex China? And I know you've talked about some European markets, for example, having a higher profit per store and that are also underpenetrated. So I'm wondering if there's maybe also a little thing there where your composition of growth could really be a positive for franchise revenue and the profitability of that revenue. And thank you. Christopher Turner: Yeah. Thanks, David. If we focus on KFC global development, hitting on some really important points. And they tie back to the raise the bar strategy. Bad link for the future consumer, which ultimately should result in higher AUV growth, and accelerating restaurant economics for our franchisees, which, of course, is the lifeblood of unit development. To your point, we have really strong paybacks in a number of markets where we get the most development today, China being our biggest development market. But we expect to grow units in all of our markets around the globe. Every country, 150 plus countries that KFC is in, of course, you do that by in markets where the paybacks aren't as strong. How do we accelerate those? And that's what Scott has been team are focused on. It starts with reaching the consumer and driving AUV growth The second piece of that is leveraging our scale to help our franchisees continue to improve margins. So we have focused goals on how over the next few years do we systematically improve paybacks. As we do that, we will unlock white space in those markets. To your point, many of those markets may have higher AUVs. Than some of the places where we get the most development today. They may also have higher royalty rates. So both of those help to build the economic picture over the long term. To give you a few examples of when we get focused on markets, how we can accelerate Let's start with Korea. We've done a lot of work transformation in that market with our partner. In 2023 and 2024, we had five and six net new units. Last year, we accelerated to 39. Italy, we were doing low double digits, 12 units in 2023. Brought in a new partner, got focused on driving growth there. We've done thirty-five and thirty-four units each of the last two years. Japan, we were doing mid-thirties. Development. New partner, focus strategy. We've elevated that to 69 units last year. So you've got these examples of how when we lean in, we can unlock development As I look forward, I'm really excited to see what happens in Brazil. We have plenty of other markets where Scott Myspinski and his team are focused on unlocking that white space that we know is out there. Operator: Thank you very much. Our next question comes from David Tarantino from Baird. Your line is open, David. Please go ahead. David Tarantino: Hi. Good morning. I guess my first question, sticking with the theme on unit development, I guess, I look at your business, excluding Pizza Hut and some of the turkey closures you've disclosed, earlier this last year. Your unit development would have been comfortably above 5%. I think it would be around 6%. For the remaining business. And I just wanted to ask how you're thinking about that growth rate, for I guess, the two you know, big brands and whether commentary this morning has meant that signal that you think you might be able to accelerate that pace, or or you just talking about perhaps trying to continue that type of pace of growth in the KFC and Taco Bell. Businesses. Thank you. Ranjith Roy: Yes. Thank you. Happy to cover that. Look. We we're very pleased with the unit development momentum. We have around the world. Both in terms of near record development in KFC accelerating development in Taco Bell, and this covers multiple markets around the world. Now you you guys are, you know, pointed out around, you know, things around the acceleration and so on and so forth. If you tie that to what Chris Turner just covered in terms of raising the bar, the natural, you know, outcome of that is accelerating development over the longer term. I think also as you think about, you pointed out, you know, how does that flow through to our good growth algorithm? Look. Look. We had a couple of factors in the last year. One, you pointed out turkey closures that obviously have an impact on flow through of net new units to system sales. The other is, you know, we are big believers in the Yum China strategy. They're they're going after consumers with models that have strong paybacks, delivering positive transactions and same-store sales growth. But with mathematically lower AUVs. We're fully supportive of that strategy, but when you couple that with accelerating development as we unlock higher AUV markets around the world along with the higher royalties we have relative to the advantage license fees we get from we we provide to Yum China. Get the double whammy of accelerating growth over time, and we're focused on going after that opportunity. Operator: Thank you very much. Our next question comes from Jon Tower from Citi. Your line is open, Please go ahead. Jon Tower: Great. Thanks for taking the question. I was hoping maybe you could discuss Taco Bell's comp growth in 25%. And specifically, maybe how much of it was traffic driven And then into that a little bit, breaking down how much was increased guest frequency rather than dragging not dragging, bringing in new guests. And then, you know, specifically, where these new guests are coming from with respect to demographics. Are you starting to hit more at the higher income level in '25 and how that sets up for next year. Christopher Turner: Yeah. Thanks, John. Look. Really healthy growth in 2025 in Taco Bell US. If you dig into it, we had, strong same-store sales growth. You know, our numbers would say we were five or more points ahead of the category taking share. If you look at transaction growth, our data would say we're nearly five points ahead of the category. So bringing more consumers on more occasions to our restaurants, That transaction growth was driven by penetration and frequency. And to your point, it happened with a broad range of consumers. We saw transaction growth at all income bands. We did train more higher-income consumers into Taco Bell. Saw transaction growth with younger consumers. And with consumers with families. In fact, from a penetration standpoint, we saw the highest penetration growth in the eighteen to twenty-four-year range. So think about battling for that future consumer. Taco Bell is showing us a great example of how to do that. With that kind of growth relative to category, I think we're taking share broadly. From a broad range of competitors. It tells us that the Taco Bell marketing and value are really resonating. The new category use occasions that the team has added are very well fit to consumer needs. And, of course, as we bring those new consumers in, we're working hard to get them into the loyalty program, which, helps us to build a relationship with them to keep them coming back for the long term and to continue to build frequent over time. I'm really excited. Just wait. You know, watch for announcements around this year's LiveMOS Live event whenever we know, have that, I think we'll all be really excited by what Sean and the team share. When you sum it up for Taco Bell, they're doing a few things together. They have a really cool brand that is incredibly relevant in culture. They are providing craveability providing tremendous value and a convenient experience. Some other brands can do one or two of those things, but Taco Bell does all four of those things incredibly well. That's why they're wetting, and it's proven by their results. Operator: Our next question comes from Christine Cho from Goldman Sachs. Your line is open, Christine. Please go ahead. Christine Cho: Thank you. Great to see the Byte initiatives really moving to the next level. Could you help us understand the current adoption of Byte in The US, to kind of get a sense of the outcomes from the step one? What are some of the primary areas of adoption? How does the PACE of progress compare with prior years? And and feedback you're getting from franchisees? And and lastly, Roy, could you share any latest thoughts on the tech-related G and A into 2026? Thank you. Ranjith Roy: Thanks, Christine. I'll take both those questions. Look, we mentioned in the prepared remarks, The US market is where Byte has the highest penetration today. I would say that most of its components are active in the Taco Bell US system. And that and you're seeing that not just in in in how it works in making the restaurant operations efficient, but also in consumer-facing technologies that enable the marketing teams to drive better outcomes on the top line. You know, we're we're also fairly penetrated, I'd say, in in the Pizza Hut system in The US. We we we need to do more penetration plan to do more penetration in KFC over time. You know, obviously, from a deployment perspective, you know, the focus is on into selected international markets, proving it out, and then scale it. There's a massive opportunity in the years ahead. In addition, we're not taking our eyes off the ball in terms of maintaining and upgrading technology that's already deployed. That includes various initiatives both between the Byte teams as well as the Taco Bell technology teams. And we're continuing to make investments in that respect. Our investments are going to be prudent as we deploy and update technology. And we'll continue to bend the curve on g and a. But to be clear, we are still investing in technology on behalf of our system, and it's an important component of us raising the bar. All of this is incorporated into our confidence in delivering the algorithm or above this year. Thanks very much. Operator: Our next question comes from Jacob Aiken Phillips from Melius Research. Your line is open, Jacob. Please go ahead. Jacob Aiken Phillips: Hey. Good morning. I I I just wanted to continue. Of the bite question a little bit. I appreciate you breaking it down into more easily communicable parts. But so in internationally, you're you're making strides and I'm just curious what's currently the gating factor for further international expansion Our new restaurants are opening up internationally coming with bite components. And then any color can you can give on like, the timeline once it's implemented in the restaurant, when do you start seeing benefits and and how does that mature? Christopher Turner: Yeah. Jacob, you know, as we talk about reaching the full potential of BiTE, of course, part of that is where we have BiTE deployed, how do we continue to innovate, and stay ahead on behalf of our franchisees the competition. But the other part of reaching the full potential of Byte is taking it to more of our international markets. We introduced it to our international franchisees last year. The steps that are involved, you have to be thoughtful as you deploy. You certainly evaluate the BiTE benefits relative to the technology systems that are currently in those markets, then once you aligned with the franchise partners on the upside from implementing Byte, You then think through the implementation plan, and you wanna be very thoughtful particularly on the smart ops side. You wanna be very thoughtful about how you implement the restaurant, how you work through the change management with the team members. So it's a process. That's why this will be a journey that takes, time. We talked about a couple of the big markets and deployment that we'll be focused on this year. So this will be a steady expansion, but we look forward to getting byte into more and more markets so that our franchise partners can benefit from it. And our marketing teams can leverage the bike capabilities to better connect with consumers. Operator: Our next question comes from Jeffrey Bernstein from Barclays. Your line is open, Jeffrey. Please go ahead. Jeffrey Bernstein: Great. Thank you. Just curious about, Chris, your views on life beyond Pizza Hut I know there's no color to share just yet, but your thoughts on the existing portfolio's ability to achieve the prior long-term algorithm It sounds like you're framing it as this potential upside as you focus on the two core brands. But as you think about willingness to consider adding another global brand or whether you prefer to focus on accelerating your two core brands where seemingly have momentum then just a clarification, Roy, I think you said potential upside to your long-term algorithm across 2026. Just want to make sure that includes we should be assuming upside to the potential 8% plus core operating profit growth target for this year? Thank you. Christopher Turner: Yes. Thanks a bunch. As we think about the business for the long term, you know, right now, we've gotta complete the review of strategic options in Pizza Hut. So our primary focus right now is driving performance in all four of our brands. Our teams are laser-focused on that. And then, of course, we have you know, a set of team members that are focused on that review of strategic options. And that is where the focus is right now As we conclude that process, we'll share more on the long-term thoughts on the evolution of Young's strategy, but that's where our focus is now. Clearly, as I said, all four of our brands, we want to perform exceptionally well. We want them to be growing. We want them to be taking share. The two biggest brands, Taco Bell and KFC, Yeah. We've talked extensively about our confidence based on the momentum last year. Coming into this year. And as we implement the raise the bar strategy, we believe that that should improve all elements of the algorithm. That's why we are doing it. It will improve our ability to deliver or or start out to overdeliver on elements of the algorithm. That's why we are doing raise the bar. Battle for the future consumer, how do we increase our relevance to the next generation of consumers while remaining relevant to our core consumers who love us so much. Accelerating restaurant economics, that is the lifeblood of unit development, as we talked earlier, allows us to broaden the base of development unlock white space, in a broader set of markets, and then, of course, reaching the full potential of buy where we've deployed, ensure we operate with excellence, and continue to innovate, with our franchisees And in new markets where we haven't deployed yet, how do we take bite there so that more markets can enjoy the benefits of it? That's why we're doing raise the bar. It's why we have confidence in the long-term trajectory of the business. Ranjith Roy: And to clarify around the specific question around guidance twenty-three six, look. I I hope, you know, you're hearing from the prepared remarks and the q and a. Our guidance is around twenty twenty-six. But this team's confidence is about the long-term potential of the business, is extremely strong. Our guidance is specific to ex Pizza Hut. We obviously give specific Pizza Hut specific guidance separately so you guys can model it out. And, yes, based on the strength that we're seeing in Taco Bell, you know, lapping the lap, KFC in Q4 beginning to lap the lap globally. We're we're continuing to see momentum in 2026. And the combination of factors allows us to have confidence that we're gonna meet or exceed every element of the algorithm in 2026 including the 8% operating profit growth. Ex Pizza Hut. Matthew Morris: Operator, we have time for one more question. Operator: Thank you very much. Our final question today will come from Brian Bittner from Oppenheimer. Your line is open, Brian. Please go ahead. Brian Bittner: Thank you. Good morning, and thanks for all the color on on this call. As it relates to Pizza Hut and just the positioning of The U. S. Portfolio, you did talk about closing 250 units in the first half as as part of this program. You anticipate this to to encompass the totality of the units you think you need to close, or or is there a reason to think that number could grow Just what do you think the optimal number of stores for Pizza Hut to operate in The US is as you position this brand moving forward? Ranjith Roy: Hey, brother. I'm happy to take that. Look. You as we said in the last earnings call, we are taking focused short-term actions on Pizza Hut focused on the execution of the strategic review. In that context, you know, tremendously happy with the progress the team has made. And as we talk about the HUD forward program, which is where the closures come from, we think you know, it's it's the HUD forward is all focused on early twenty twenty-six. The 250 stores that we mentioned is a very small portion of the 20,000 unit estate that Pizza Hut has globally. And it is the right answer for the brand as we move through the strategic review. Great. Hey. Thanks, everyone, for your time this morning and really good Just in closing, I'll note a couple of things. Our two big brands, Taco Bell incredible momentum, the category of one with a plan that is working, and the momentum continues. KFC, Global Structural Advantage, development momentum that continues, and a real focus on accelerating AUVs over time leveraging the best of the Taco Bell magic formula Scott and his team. All of that's powered by Yum's distinctive strengths, which are talent and culture, digital invite, scale, and a global franchise base of the best franchise partners in the business. All of that sums up the confidence entering 2026, and we're looking forward to raising the bar. Thanks so much. Operator: This concludes today's call. We thank everyone for joining. You may now disconnect your lines.
Operator: Greetings, and welcome to the Aurora Cannabis Inc. Third Quarter 2026 Results Conference Call. All participants will be in a listen-only mode, and a question and answer session will follow the formal presentation. This conference call is being recorded today, Wednesday, February 4, 2026. I would now like to turn the conference over to your host, Kevin Niland, Director of Strategic Finance and Investor Relations. Please go ahead, sir. Hello, and thank you for joining us. Kevin Niland: With me is Miguel Martin, Executive Chairman and CEO, and Simona King, CFO. Earlier this morning, we filed our financials for the fiscal third quarter 2026 period ending December 31, 2025. Make sure our news release contains these results. This news release, with our financial statements and MD&A, is available on our IR website as well as via SEDAR Plus and EDGAR. We have also posted our investor presentation to our IR website for reference purposes. Our discussion today serves as a reminder that certain matters could constitute forward-looking statements that are subject to risks and uncertainties relating to our future financial or business performance. Actual results could differ materially from those anticipated in those forward-looking statements. Risk factors that may affect actual results are detailed in our annual information form and other periodic filings and registration statements. These documents may similarly be accessed via SEDAR Plus and EDGAR. Following our prepared remarks, we will conduct a question and answer session. With that, I'll turn the call over to Miguel. Please go ahead. Miguel Martin: Thanks, Kevin. Our quarterly performance reflects our strong competitive position in the rapidly expanding global medical cannabis market and continued commitment to profitable and sustainable growth. This success is supported by proven commercial execution and purposeful investments in science, technology, and talent. Additionally, our dedicated focus on improving patient and strengthening physician engagement has contributed significantly to these results. Let's begin with a brief review of the quarter. In fiscal Q3, first, net revenue increased 7%, driven by a record 12% growth in global medical cannabis revenue, including a 17% increase internationally. Notably, more than half of our total net revenue was generated outside of Canada. Second, adjusted gross margin rose 100 basis points to 62%, where we benefited from strong medical cannabis margins of 69%, which was the result of sustained growth in our higher-margin international markets. Third, profitability held strong, with adjusted EBITDA of $18.5 million and adjusted net income of $7.2 million. And finally, we generated positive free cash flow of $15.5 million and maintained our strong balance sheet with over $150 million in cash and the absence of cannabis business-related debt. Unlike most peers, we have focused on medical cannabis as the most promising industry segment for nearly a decade. We have therefore deployed considerable resources and investments, providing us with the following competitive advantages. We are one of Canada's largest global medical cannabis companies. We are Canada's leading exporter of medical cannabis. And finally, we are a market leader in the three biggest nationally legal medical cannabis markets outside of Canada. Notably, about 90% of our annual manufacturing capacity is produced within Aurora's European and TGA GMP-certified facilities and is subject to very stringent international standards. These standards are only increasing, significantly limiting the number of market participants. There is a limited number of cannabis companies like Aurora that have regulatory certifications for their manufacturing facilities that permit shipments directly to European and Australian markets. Aurora manufactures most of its own products and distributes them compliantly and profitably. This advantage helps to ensure consistency of supply around the world, critical to both prescribers and patients, and achieves lower manufacturing costs through higher yields, potency improvements, and other operational efficiencies. As this industry evolves, maintaining our momentum in global medical cannabis requires an even greater commitment. This entails dedicating our full attention to solidifying and growing our leadership position. Following a strategic review, we have identified the following actions. First, we will begin exiting select markets within the lower Canadian consumer cannabis segment, enabling us to further prioritize allocating products and resources to our higher-margin global medical cannabis business. Since consumer cannabis carries higher sales and marketing expenses than medical, this will benefit adjusted SG&A and consolidated adjusted gross margins in the coming quarters. While we expect some one-time costs that will impact cash flow in fiscal Q4, once the initiative is complete, we anticipate higher adjusted EBITDA contributions thereafter. Second, in relation to our plant propagation business, we are divesting our lower-margin plant propagation operations by selling our controlling stake in Bevo to its other principal shareholders. Combined, these actions will allow us to allocate capital more effectively, deliver enhanced profitability, streamline our operations, and improve execution quality. On a related note, today, we filed a prospectus supplement establishing a new at-the-market equity program. The ATM provides us the flexibility to issue and sell up to $100 million of common shares from time to time at our discretion. The company intends to use proceeds raised under the ATM program, if any, for strategic and accretive purposes only, including for increased cultivation capacity and potential M&A. With that, let's now dive into our individual medical cannabis markets. Germany is the largest individual medical cannabis market in Europe and remains closely watched across the region due to its outsized influence on neighboring countries. More than half of EU member countries have already integrated medical cannabis into healthcare, including reimbursement, which leads towards greater international alignment on regulatory approaches. This provides an obvious advantage for compliant EU GMP-certified companies like Aurora. The German market is still growing and was the primary driver of our double-digit growth in international revenue. According to German regulatory data, imports reached 72 metric tons in 2024 and are estimated to have more than doubled in 2025. Our successful commercial execution and strong reputation among wholesalers, distributors, and pharmacists have enabled us to continue to gain share in this rapidly growing market. We have consistently maintained a broad selection of core and premium products for the German market. However, more recently, we enhanced our offerings by introducing a new medical cannabis brand that prioritizes affordability and expands patient options without compromising quality standards. While increased competition in Germany has led to some price pressure, mainly affecting the value segment as new players enter and grow, our core and premium products, which represent most of our sales volume, have remained largely unaffected in terms of baseline pricing. The German government is considering modifications to the current telehealth framework related to cannabis descheduling, but it is still unclear how developments will unfold. We want to ensure that reasonable access to high-quality medical cannabis for the general public is maintained. But should changes be implemented within telehealth, we will adapt just as we did in Poland. We are currently doubling production at our manufacturing site in Germany. Increasing scale will facilitate yield improvements and operational efficiencies, allowing this facility to mirror the performance of our Canadian sites based upon the same industry-leading genetics and product consistency. In addition to the planned operational improvements, our German site joins our Canadian facilities that were recently GMP certified for another three years. This consistent supply of GMP-manufactured product is vital as we prepare for further growth in Germany and adjacent regulated markets. Australia remains our largest international medical cannabis market, where we currently hold the number two share in what could become a $1 billion opportunity, according to the Pennington Institute. Notably, most sales in Australia, both for MedRelief Australia, which we fully acquired two years ago, and for the market overall, are concentrated in value-priced products. This differs significantly from our other national medical cannabis markets, where our portfolio is anchored in core and premium offerings with stronger margins. We are actively working to shift our Australian sales mix towards the same world-class core and premium products we offer globally and expand patient access, including through additional distribution agreements. The Australian market is particularly attractive and positively impacting patient outcomes, as it offers one of the broadest product format ranges outside of North America, enabling us to fully leverage our diverse portfolio beyond flower and oils. While we are confident in our ability to successfully elevate the product mix, we are working through some anticipated near-term pressure on both sales and gross profit during the transition. In Poland, through continued collaboration and effective commercial execution, we gained market share and held the number one position in calendar year 2025. We are widely regarded as a key partner advancing medical cannabis in the country and are benefiting from increased annual import limits, which further supports our continued growth potential, including in fiscal Q3. The market has certainly evolved, but we have successfully navigated the shift in prescriptions from telehealth platforms to clinics while maintaining solid relationships with the regulatory authorities. In our view, we are well-positioned to maintain this leadership position in Poland thanks to our very skilled team engaging with all the key stakeholders and our broadening product portfolio of high-quality medical cannabis products. We recently expanded our product portfolio with the launch of a third proprietary cultivar in Poland, following market success in Canada, Germany, and Australia. These new cultivars are grown and manufactured in our GMP-certified facilities, using premium hang drying and curing techniques to ensure consistently high-quality standards. In the UK, we primarily operate in the premium and super-premium segments, where there is less competition. But an influx of value products in the market resulted in lower year-over-year sales during fiscal Q3. Our strategy is focused on expanding our distribution and clinic relationships through new partnerships, a critical step to onboarding and connecting with patients. Turning to Canada, we remain a strong leader in medical cannabis. Net revenue grew year over year during fiscal Q3 to a new record, and we gained market share, a key point of differentiation for us in a competitive market. Our priorities are enhancing our online marketplace, product innovation, and assortment, and ensuring a high-quality patient experience, especially for our valued veteran patients. In summary, we are reallocating and directing our resources to focus primarily on the global medical cannabis market, where we excel and see runway for growth. This involves gradually scaling back our Canadian consumer cannabis operations and selling our controlling interests in our plant propagation business. We believe this approach will improve our operational efficiency, unlock greater opportunities in both our existing markets and new countries, and drive sustainable revenue growth and profitability. Let me now turn the call over to Simona for a detailed financial review of fiscal Q3, followed by an outlook session. Simona King: Thank you, Miguel. We are encouraged by our fiscal Q3 results as reflected in our revenue growth, strong adjusted EBITDA, positive adjusted net income, and free cash flow. Time and again, we have demonstrated the soundness of a medical cannabis-first strategy, our consistent ability to deliver results aligned with our long-term objective. Let's review fiscal Q3 2026 compared to the prior year quarter and then discuss our outlook for the full year. First, net revenue of $94.2 million represented 7% growth, supported by record contributions from our global medical cannabis and plant propagation segment. Second, consolidated adjusted gross margin rose 100 basis points to 62%, while adjusted gross profit reached $55.6 million, a 6% increase. Global medical cannabis held its robust 69% adjusted gross margin. Third, adjusted EBITDA was strong at $18.5 million, combined with adjusted net income of $7.2 million. Fourth, we generated positive free cash flow of $15.5 million. And finally, we ended the quarter with $154 million in cash, cash equivalents, and short-term investments and no cannabis business debt. In medical cannabis, net revenue rose 12% to $76.2 million, inclusive of 17% growth internationally. We benefited from increased distribution in Germany and new product offerings in Poland, which combined with continued strong contributions from Canadian Medical. Medical cannabis comprised 81% of net revenue, compared to 77% in the prior year, and approximately 95% of adjusted gross profit. Adjusted gross margin for medical cannabis held strong at 69%, driven by high-margin international markets that benefited from sustainable cost reductions, high selling prices, and operational efficiencies, including sourcing for Europe from Canada. Consumer cannabis net revenue was $5.2 million, down 48% from $9.9 million. The year-over-year change was the expected result of the company's strategic shift to focus on portfolio optimization and the allocation of cannabis flower to the highest-margin business segments. Adjusted gross margins for consumer cannabis was 28%, compared to 26% due to sales of higher-margin products. People's plant propagation net revenue increased to $11.3 million, up 27% from $8.9 million in the prior year. Adjusted gross margin for plant propagation revenue fell to 16% compared to 40%. The decrease was due to increased contract labor and utilities costs, as well as inventory write-offs of $1.1 million in the current quarter related to surplus plants. Consolidated adjusted SG&A increased 14.5% to $35.8 million. The year-over-year change relates to higher professional fees, as well as additional headcount and contract labor costs in Europe and Australia, that are supporting these growing higher-margin markets. Adjusted EBITDA was $18.5 million compared to $19.4 million in the prior year, with the decrease primarily related to lower adjusted gross profit in the planned propagation segment and an increase in adjusted SG&A. Adjusted net income held relatively consistent at $7.2 million compared to $7.4 million in the prior year. Our balance sheet remains one of the strongest in the global cannabis industry, and our cannabis operations are completely debt-free. Free cash flow was $15.5 million compared to $27.4 million in the prior year quarter, reflecting a decrease in the working capital recovery of $9.2 million. Let me now provide some thoughts on what we expect for our fiscal year 2026 outlook, which ends on March 31. Annual global medical cannabis net revenue is expected to increase year over year to between $269 million and $281 million, driven primarily by 10% to 15% growth in the global medical cannabis segment. Plant propagation revenue is expected to perform in line with traditional seasonal trends, as 65% to 75% of revenues are normally earned in the first half of a calendar year. Consolidated adjusted gross margins are expected to remain strong as we have benefited from favorable sales mix due to higher global medical cannabis revenue, along with operational efficiencies in our manufacturing sites. And finally, annual consolidated adjusted EBITDA is anticipated to increase year over year with an expected range of $52 million to $57 million, representing 5% to 10% annual growth. This expected growth is driven primarily by net revenue increases and industry-leading margin in the global medical cannabis business. Thank you for your time. I'll now turn the call back to Miguel. Miguel Martin: Thanks, Simona. Our primary objective is to grow our business by capitalizing on the rapidly evolving global medical cannabis opportunity, which is projected to surpass $9 billion, thereby maximizing shareholder returns. We have established a strong competitive position by first building deep regulatory and world-class genetic capabilities supported by an extensive network of GMP manufacturing facilities and then demonstrating consistent commercial execution excellence. This approach has enabled us to be a market leader with both healthcare providers and patients. Through our focused commitment to global medical cannabis, we will reinforce our market-leading presence in Canada, Europe, Australia, and New Zealand and expand into additional markets as opportunities arise. We look forward to providing updates on our progress and strategic direction as we advance. Operator, we are now ready to take questions. Operator: Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Kenric Tighe with Canaccord Genuity. Please proceed with your question. Kenric Tighe: Thank you, and good morning. Congrats on the quarter. I just wanted to follow up on the Select Market Exit in Canada. Now if we looked at a number on the print, you're looking at roughly a $20 million in revenues business on a go-forward. Could you sort of speak to what the run rate would look like on a select on the exit from those markets? And perhaps also where there's a point in time whether you could or would essentially fully exit consumer cannabis in Canada. Miguel Martin: Yeah. Good morning, and thank you for the question. We are continuing to evaluate exactly what that looks like. I think what I can say, though, is that those decisions will be beneficial or accretive to our overall financial results. What we've seen is that the reallocation of our resources, particularly that finite high-quality flower, into the international market will make a significant difference in overall financials. And so, it's a bit of an evolution for us. The other point I guess I'd make is this isn't anything new. You've seen us continue to prioritize global medical cannabis over the last couple of years and done it very successfully as we've gone through. And so we'll continue to be a bit flexible. Now your point about would we ever get out completely? I think that's something we continue to evaluate. We've been in rec cannabis or consumer cannabis in Canada since day one, and so we still have that touchpoint. But again, our focus is profitability and growth. And if that is a decision that looks like it's best suited to be exclusively on the medical cannabis side, it's something we would do. Kenric Tighe: Great. Thank you, Miguel. And just a quick one with respect to Australia. The other premiumization strategy or sort of moving upmarket in Australia, how disruptive is that shift to your presence in the market? And what are your expectations around the timeline when we can sort of get a better handle on how this will play out and the benefits for that Australian business and what that Australian business will look like once you sort of high-graded your portfolio in the market? Miguel Martin: Yeah. I don't think it—well, thank you for the question. I don't think it's disruptive at all. I mean, Australia really started out under a model they call a concession model and a value model for those patients. And as we talked about, it's quite a large and diverse market, and there is an expansion and an interest by both prescribing physicians and patients for a variety of products on the premium side. And as you well know, it's not just flower and oil. So we run globally a premium and core model. So it's not disruptive for us at all, and it's very accretive in terms of margins. And so we know there's a lot of value flower available in Australia like other markets. Whether it's Germany, Poland, the UK, or Canada, our sweet spot is the genetics production and delivery of core premium medical cannabis products. And so, it sits right in the middle of all that. So I think it's consistent and not disruptive in any way. Kenric Tighe: Great. Thank you. I'll get back in queue. Miguel Martin: You got it. Thank you. Operator: Our next question comes from Derek Lessard with TD Cowen. Please proceed with your question. Derek Lessard: Probably past the acceptable time frame, but happy new year anyways, and a great start to it. Miguel Martin: Happy New Year, Derek. And I think the snow makes that timing and that point relevant, but go ahead. Derek Lessard: Yes. A couple of questions for me. Just maybe talk about the strategic decision to exit the plant propagation and sort of the timing around the expected close of the transaction. Miguel Martin: Sure. I mean, again, focus and execution on global medical cannabis is what we've proven we're best at and where the most profitability is. I think consistent with the announcement we made on the consumer business, when we look at our resources and we look at the best use of our time and energy and focus, it really is in that area. And the investment in plant propagation, while interesting for a period of time, continued to evolve in a way that wasn't that. And so we saw a great opportunity in divesting that majority share to the shareholders that already exist there. There are some economics that continue that allow us to participate in the success of that, including earnouts in the facilities that we've ended in. But when you look at investment and ROI of our time and resources, clearly, with high-growth markets such as Germany and Poland and the UK, it makes absolute sense for us to put all of our time and effort there. And I think if you look at the last quarter and you look at the last couple of years, when we focus on global medical cannabis, the results have always been positive. Derek Lessard: Absolutely. Makes sense, Miguel. And maybe just one for Simona. Appreciate the additional full guidance on the year. How should we think about the plant propagation contribution to EBITDA, I guess, for the full year and maybe for Q4? Simona King: Yeah. And as we continue to finalize the closing conditions and implications to our financials as a result of this divestiture, we will have a better sense of the pro forma in Q4. We will no longer be consolidating the financial results of the Bevo business, so it will be treated as discontinued operations. That will be the treatment going forward. And so I would say the focus really should be on thinking through the implications to the global medical cannabis business and continuing to model and think about Q4 and the future around the strength of that business. So it really is focusing on the global medical side. Derek Lessard: Okay. And then maybe one last one. I'll sneak one in, switching gears back to global medical. You pointed to Poland as one of the contributors to growth, which is great to see. Just maybe talk about how you've been navigating the pressure there or if anything has changed since last quarter. I think when you guys pointed to additional pressure given the changes in the regs there related to restrictions around the online consultations. Miguel Martin: Yeah. I mean, I think it's a great question. So, these regulatory frameworks are evolving, albeit with a pretty specific scientific underpinning. We saw the change in Poland, you mentioned, and what it required really was to lean back on a strong system. Product development, product registration, distribution, and specifically, having a way to be able to connect the patients through clinics. And we were very quickly able to do that. I think really built on the background of the strength of the medications and the reputation that we had, having physicians and patients want to get those products. And so we navigated quickly. Obviously, our results reflect that. That's why we're encouraged by what's happening in Germany with what may land there that we'll be able to do a similar execution. So these regs continue to evolve. You have to be agile, but I think having tremendous relationships with them, we have a very strong GR organization, a very strong regulatory team. And so we are able to work with the regulators as things evolve, and we think that's a strength of ours. Derek Lessard: Yeah. Great job, everybody, and congrats again on the quarter. Miguel Martin: Thank you so much, Derek. We appreciate it. Operator: Okay. Our next question comes from Bill Kirk with Roth Capital Partners. Please proceed with your question. Bill Kirk: A point of clarity first. I have year-to-date global medical cannabis at $211 million. The full-year guide is February to February. Are those numbers comparable? Because even the high ends would imply quarter-over-quarter deceleration in Q4. And the low end would imply a big deceleration. So I guess the clarity point, am I looking at those numbers comparably? Simona King: Yeah. So let me jump in on that one. So the guidance that we provided is the full revenue for the company, which is inclusive of Bevo in there. And so with this announcement today around the divestiture of our stake in Bevo, that's what we will be working through is the pro forma impact of that in Q4. So, it's continuing to focus on them as we think about the implications for Q4 with those results being removed and shown as discontinued operations. It's really focusing on the medical cannabis, global cannabis revenues, and trending those out. So keeping in mind that the full guidance was reflective of the total revenue. Bill Kirk: Okay. Okay. Because in the press release, it says annual global medical cannabis is expected to be $269 million to $281 million. Simona King: So yes. A policy. Yes. Global medical cannabis is $211 million. Right? Bill Kirk: Yes. Yes. Just to clarify that, that is correct. Global medical cannabis. And so, yes, we expect a strong quarter in Q4. Bill Kirk: Wouldn't that be implied $58 million to $70 million in global medical cannabis? And I think you just did over $75 million. So I think I'm looking at something wrong because that would imply a big deceleration in Q4 global medical cannabis from March, February, January. Simona King: Yeah. Yeah. Yes. We do expect the ranges that we've provided in the expectations in the release to be in line with where we're projecting the full year to come in at. Bill Kirk: Okay. And then the follow-up would be why do you expect the deceleration in April? Simona King: So at this point, we're really focusing on the full-year guidance and the ranges that we provided, which we believe will be in line with where we're trending. Taking into account, there could be some headwinds in some of the markets. So, again, highlighting that this is a record result for us on a full-year basis. Bill Kirk: Okay. Thank you. And then one last one for me. The adjusted gross margin in the wholesale business, I think it was 35% in the quarter. It's been higher than the consumer cannabis segment for a while. Why would the wholesale gross margin be higher than the consumer segment gross margin? Miguel Martin: Well, for a couple of reasons. One is that the consumer business, not only for us but for others, is tight. And when you look at fully loaded where you sort of end up in that market, you end up with those types of margins. I mean, I think you've seen it in the industry. It's not just us. The wholesale business is pretty good. I mean, it's obviously not as good as when you distribute and sell it yourself. And so I think it's just indicative of what it is. The other aspect of the wholesale business is those products that we sell are not readily available all over the world because of some of the regulatory requirements. So I think it's inherent to what you're seeing overall. And like I said, it's not just us on the consumer side. Bill Kirk: Thank you. Appreciate it. Miguel Martin: You got it. Thank you, Bill. Operator: Our next question comes from Brenner Cunnington with ATB Capital Markets. Please proceed with your question. Brenner Cunnington: Hey, good morning, and congrats on the results this quarter. Just looking at the ATM, so you mentioned the funds for this could go to M&A, and we're just kind of wondering, like, are there any potential assets that you might be interested in? Is it potentially, like, cultivation capacity expansion opportunities? Or any other top goals for the funds raised from this? Miguel Martin: Yeah. And thanks for the question and the comment. You know, the over $150 million in cash and then you add this, it really allows us to be opportunistic. Clearly, as you've seen from our announcement, our focus and really what we excel at is around that global medical cannabis point. And there are many aspects to it. Clearly, cultivation of GMP flower and products for the international market are always an area of interest for us. Beyond M&A, we've invested over $40 million internally in significant capacity and quality upgrades in our existing facilities, which has helped us receive that GMP certification for another three years at three of them. So cultivation, as you mentioned, is always of interest to us. But there are other aspects to global medical cannabis that have the potential as well, whether that's on the distribution side or the clinic side or other aspects. So it's really to be opportunistic, and we intend to use that clearly not for operations, but for accretive aspects, including M&A. And so, I would say it would be consistent with what we're focusing on, but the exact aspects of it and what it might be, we're not in a position to say yet, but we'll obviously update folks as that becomes more specific. Brenner Cunnington: Okay. Perfect. Fair enough. And then just looking at the exit from a lot of the consumer cannabis in Canada, what type of SG&A savings might we see from this? Miguel Martin: Yeah. I mean, we're continuing to evaluate that. I would say you'll see some of that reporting as you see the full year and then into Q4. We definitely think it's going to be a benefit. Though the other aspect, beyond the SG&A savings, is taking those inputs, as you heard from the previous question, and putting them into higher-margin markets. So the differential between the margins of, say, our consumer business and international markets is significant. And you've seen where the overall margin landed. So I think more to follow on what it is you heard from Simona's comments about the benefits that we believe financially that will provide us, and we look forward to sharing that with you once they sort of work their way through. Brenner Cunnington: Perfect. And then if I could just sneak in one little last one. So on the international market, just out of curiosity, are there any other international markets that you may be looking at? Miguel Martin: I mean, we look at all of them as they come online. We're in 12 countries today. We've got a regulatory team and a product registration process that has allowed us to enter every market that's come online. Typically, we like to have markets that have a science-based regulatory profile, which we're starting to see in Europe. So the latest new markets that are bringing medical cannabis on, places like Switzerland, Austria, France, and some others, we are working to bring our products into those markets. But we're very excited about potential developments in other new countries such as, say, Ukraine and Turkey. And again, we've been very successful because of our stringent regulatory requirements and GMP products to be able to enter them as they come online. So we continue to see global growth. I know there's a lot of interest in the US. But we've seen the growth in medical cannabis regulations and overall systems throughout Europe and in other parts of the world. And so we'll be there as they come online, and I think we've demonstrated we can be successful, not only launching but also sustaining our business in those markets. Brenner Cunnington: Understood. Thank you so much for the color. I'll jump back in the queue. Miguel Martin: Thank you very much. Operator: Our next question comes from Pablo Zuanic with Zuanic and Associates. Please proceed with your question. Pablo Zuanic: Thank you, and good morning, everyone. Miguel, I also want to discuss supply chain, but just first one question on the US. In your opinion, if we get rescheduling as it's been announced, would that allow you to enter the US market? Are we thinking we're going to have a federal legalization of medical cannabis? Will Aurora be able to participate given its expertise? Or the rescheduling doesn't necessarily mean federally legalizing medical cannabis. What's your opinion on that? Miguel Martin: It's early days, Pablo, and good morning. First and foremost, what the Trump administration announced is very consistent with what we've said is important. Medical cannabis first, a strong regulatory approach. And we think that lines up beautifully for a company like Aurora that operates in regulated markets all around the world. As it's been laid out, we haven't seen any of the final details of what a schedule one to schedule three would look like. It does not allow a Canadian company traded on the Nasdaq to directly go into that market. It does expand research. It does start to open the door for some variety of different things. But we'll have to see what the details look like. But it is a step in the right direction, and we're very encouraged by that. But again, it was a very strong medical message. That photo op in the White House with doctors and folks from the medical community really reinforces what we've always believed, which is this will be a medical-first opportunity, which is why we think Aurora is so well-positioned when we get there. Pablo Zuanic: Thank you. Look. And regarding supply chain, it's a bit of a two-part question in terms of understanding what you have right now and then how you're thinking about acquisitions. In terms of what you have right now, for example, you said in the call that most of the products that you sell are own or products, not in your facilities, but does that mean 51%, 90%? If you can give some color in terms of how much you're buying from third parties, that would help. A reminder of what you have in terms of your current facilities, and looking back, lessons from the Aurora Sky facility. So that part of the question is what you have now. In terms of buying cultivation capacity, are we talking about indoor versus greenhouse? Are we talking about small little craft growers? Are we talking about just Canadian or maybe other countries? Any color in that sense would help. Thank you. Miguel Martin: Sure. So the majority—I'm not going to give you a number, but it's closer to 100 than it is to 50—of the products that we sell internationally, we produce, distribute, and sell ourselves. A really important dynamic for everybody to understand is the GMP flower dynamic. That standard is getting more challenging. It is difficult. And once you get that certification, which you need to have, say, Germany, the fastest-growing market in Europe, you have it for three years. So we've got three of our largest facilities just received that certification, which is very exciting. And so GMP, premium flower, those prices continue to be solid and, in some cases, go up. And is our focus. In terms of facilities and potential acquisition, we have the benefit of having one of the largest genetic facilities in the world, a facility called Aurora Coast off the West Coast of Canada. Those genetics that are created there that we use ourselves and also sell to others have been successful both in indoor, which is our primary method of current growing, as well as with greenhouses, which many of our customers use those genetics. So both work, and you can get GMP certification in both. We obviously have a long history in indoor, but that doesn't mean that we are bound to it. I will say Canada continues to be the best place to grow high-quality premium GMP flower in the world. And we're proud of that. And we continue to see great opportunities to ship it. So it's a big competitive advantage for us to be able to grow that much flower, be one of Canada's, if not the largest, one of the largest exporters of GMP flower. And that's a core part of why we've been successful and will be successful going forward. Pablo Zuanic: Thank you. Miguel Martin: You're very welcome. Operator: We have reached the end of our question and answer session. There are no more further questions at this time. I would now like to turn the floor back over to Miguel Martin for closing comments. Miguel Martin: Thank you very much. We're very excited about this quarter and, more importantly, excited about the future of Aurora Cannabis, and we're thrilled to share some color with you here today. We'll continue to update you. We hope everyone is safe and well. All the best. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings. Welcome to Reynolds Consumer Products Inc. Fourth Quarter and Full Year 2025 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is now my pleasure to introduce your host, Jill Coval, Director of Investor Relations. Thank you, Jill. You may begin. Jill Coval: Thank you, operator, and good morning, everyone. Thank you for joining us for Reynolds Consumer Products Inc. fourth quarter earnings conference call. Today's call is being webcast, and a replay will be available on the Investor Relations section of our corporate site at reynoldsconsumerproducts.com. Our earnings press release and investor presentation are also available. Joining me on the call today are Scott Huckins, our President and Chief Executive Officer, and Nathan Lowe, our Chief Financial Officer. Following their prepared remarks, we will open the call for a brief question and answer session. Before we begin, I would like to remind you that this morning's discussion will include forward-looking statements which are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those described today. Please refer to the Risk Factors section of our SEC filings for more information. The company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after the call. In addition, we will reference certain non-GAAP or adjusted financial measures during today's call. Reconciliations of these GAAP to non-GAAP financial measures are available in our earnings press release, investor presentation deck, and Form 10-Ks, which can be found on the Investor Relations section of our website. With that, I'd like to turn the call over to Scott. Scott Huckins: Thank you, Jill, and thank you to everyone joining us this morning. We closed 2025 with solid fourth quarter execution in what remains a challenging operating environment. Our team stayed focused on the fundamentals, evolving our portfolio to meet consumer needs, serving our retail partners well with case fill rates in the high 90s, protecting profitability, and advancing the strategic growth and profit-generating priorities that underpin our long-term value creation. We delivered sequential quarterly improvement throughout the year, mitigating escalating commodity, tariff, and consumer headwinds. Driven by our solid execution, along with successful innovation in our expanding revenue growth management capabilities, our strong fourth quarter performance was underpinned by share gains across the overwhelming majority of our categories, including our six largest core categories. These year gains included hefty waste bags, hefty food bags, Reynolds Wrap, Reynolds parchment, Reynolds Bakeware, hefty party cups, as well as the strong performance across our store brand offerings. These gains reflect the consumer's affinity for innovative and differentiated solutions in waste bags and food bags, sustained preference for branded quality and foil, and growing interest in convenience across cooking and baking products. All of this reinforces that our innovation priorities are on target and help shape our go-to-market execution. As a point of reference, we outperformed our categories by over one point in 2025, and by two points in the fourth quarter. I'm also very pleased that we were able to deliver these share gains while increasing profitability in the quarter versus a year ago. On our fourth quarter call last year, we noted that 2025 would be a transition year as we aligned our team and began executing against and investing behind a number of strategic priorities. These priorities span growth and innovation, productivity initiatives across manufacturing and supply chain, and other cost savings programs. Let me walk through our progress during the first year of implementing our strategy. Our innovation engine began to deliver in 2025, driven by a focused strategy on fewer ideas, bigger ambition, and better consumer outcomes. We expanded our hefty waste bag lineup with new scents and colors, including our popular watermelon scent. We introduced Reynolds Kitchen's parchment cooking bags and air fryer cups, EcoSafe compostable cutlery, and additional seasonal offerings in Reynolds Wrap holiday fun foil and festive printed hefty party cups. The success of these launches highlights the demand for fun, convenience, value, and highly functional sustainable alternatives. Importantly, these new products meet real consumer needs and reinforce our leadership in everyday household essential categories. These new items are in part why we outperformed our categories in 2025. We advanced our revenue growth management capabilities, beginning to migrate trade dollars from lower return programs to higher return and mutually beneficial programs that deliver better outcomes for both our retail partners and Reynolds. We also delivered early wins through pricing and price pack architecture optimization, helping to offset inflation and minimize elasticity. This disciplined approach produced results as evidenced in the foil category, where price gaps with store brands narrowed throughout the year, even as we successfully covered commodity pressure with substantial price increases. And we pursued targeted customer-level opportunities, beginning to close share gaps through expanded distribution in categories where our brands have a right to win. Our manufacturing and operating performance improved significantly in the second half of the year, as we accelerated our implementation of productivity initiatives, investments against our automation pipeline, and other complementary programs. All of these work streams are aimed at positioning our plants for increased efficiency and throughput. Our US-centric supply chain remains a competitive advantage, enabling our high service levels and supply chain agility in a volatile environment. Nathan will elaborate more on these initiatives in a few minutes. Importantly, we added significant talent to our management team to support and execute our strategy. We added experienced leaders across all areas of our business, including new leaders in sales, operations, supply chain, and our hefty tableware segment. I'm very pleased with how the leadership team has come together to drive the business forward and build momentum on each of our priorities as we exited 2025. As we enter 2026, we will continue to drive each of our priorities forward, which remain consistent with what I outlined a year ago. At the same time, we anticipate another year of sustained headwinds in 2026, underscoring the need for continued nimbleness, adaptability, and focus across the organization. As we move forward, we remain mindful of the state of the consumer environment and the retailer's focus on inventory management and consumer value. Our insights teams are tracking consumer patterns closely, helping refine our promotional strategy, price pack architecture, and innovation priorities to stay nimble as the year unfolds. Regarding raw materials, while resin has been relatively stable, aluminum has continued to move significantly higher. We've made excellent progress in aligning pricing with increasing costs, demonstrated by roughly 11 points of pricing present in the fourth quarter with only a two-point decline in retail volumes as seen in scanner data. For 2026, we have already implemented a price increase in January and are anticipating further adjustments for the second quarter. We will continue to balance pricing, potential elasticities, and promotions during key holiday shopping periods carefully to support demand. In terms of the competitive landscape, the dynamics have intensified in the waste bag and food bag categories as we exited the fourth quarter. We are seeing increased promotional and pricing activity being offered by the other brands we compete against, seemingly taking dollars out of these categories and creating added pressure for our business. Given our strong brand equity, we remain committed to our performance brand positioning and plan to stay the course on our current price points and promotional strategy, noting that value is a function of the consumer's view of product attributes and function relative to price, and not purely a measure of pricing relative to competitors. However, some near-term volume headwinds are possible, and we have embedded our estimate of this headwind into our outlook. Regarding our private label food and waste bag businesses, they remain resilient, delivering strong value for consumers as we continue to build a more robust branded presence. As you may recall from our commentary last quarter, the current environment is driving more transactional dynamics with retailers, including a greater focus on dual sourcing for private label programs. As this trend continues into 2026, we are actively managing both the risks and the opportunities. While this will create near-term pressure in 2026, we believe this will be more than offset by incremental opportunities over time. We remain confident that our category leadership and insights, strong service levels, innovation, quality, and increasing manufacturing efficiencies position us to compete effectively and remain an essential supplier. Despite the headwinds, our 2025 progress and momentum position us to deliver stable results in 2026, with adjusted EBITDA roughly flat year over year. This outlook reflects the achievements made against the priorities we outlined a year ago and recapped earlier. Importantly, this progress is not a one-time benefit but a foundation for sustained improvement going forward. Turning now to our strategic priorities. On the top line, we continue to work across our three core pillars of revenue growth management, share gap selling, and innovation. We are committed to building on the strong foundation established last year in revenue growth management. Our 2026 focus remains on channeling trade investments into higher return programs that drive improved results for both our retail partners and RCP. We have invested in people, tools, and training in 2025 to bring this forward into 2026. Emphasis will continue to be on closing share gaps between our category share and our retail partners' market shares. These opportunities exist in both our branded and private label businesses, and we seek to expand distribution in our core categories where we have demonstrated success. Innovation and differentiation will remain central to our growth strategy in 2026, building on the momentum established in 2025. By strengthening our enterprise-wide focus on consumer insights, we are increasing strategic precision, prioritizing innovation and our resources around the highest impact opportunities, enhancing our total portfolio value proposition with customers, and building scalable growth platforms to deliver sustained and profitable growth. Importantly, we are pleased with the strength of our current pipeline for 2026 and beyond. On the margin priorities, Nathan will cover how we are advancing our operations and supply chain priorities in a few minutes. We are also evolving how we look at our business. Beginning in Q1 2026, we will realign category organization across the hefty waste and storage, and Presto segments. Consolidating waste bags in one business and food bags and storage in another to increase efficiencies, sharpen the focus on innovation, and establish a structure to better unlock growth opportunities. Finally, on talent, our success at RCP is built on the strength of our 6,000 employee team. In 2026, we expect to continue developing talent and redefining what success looks like across the organization. We believe a high-performing and engaged workforce drives sustainable growth. In summary, 2025 was a year of disciplined execution, operating with greater agility, outperforming our categories at retail, and delivering sequentially improved financial results. All while beginning to drive out manufacturing and supply chain costs. The progress we achieved strengthens our confidence in both our strategy and our ability to execute in 2026 and beyond. While the near term will continue to see some challenges, we remain focused on driving sustained progress. With that, I will turn the call over to Nathan to review our financials and provide guidance for 2026. Nathan Lowe: Thank you, Scott, and good morning, everyone. 2025 was a year of taking decisive action in response to macro headwinds and building both resilience and momentum as we position the company for future success. Across the business, we delivered results that reflect meaningful advancement against our strategic objectives. We accelerated growth through expanded distribution and innovation. We delivered cost savings through productivity initiatives, strategic sourcing, and disciplined cost management. And we invested in a number of high ROI initiatives across our business, including capital to support growth in our fastest-growing segments, as well as making solid progress against our automation pipeline. We are encouraged by the progress we made against these initiatives through 2025, with early returns beginning to materialize in the fourth quarter. For the quarter, we are very pleased with how we closed out 2025, outperforming all guided metrics and delivering a strong performance that underscores the effectiveness of our strategy and disciplined execution. Net revenues of $1.03 billion represented 1% growth compared to $1.02 billion in 2024. Our retail volumes exceeded overall category trends, outperforming our categories by two points, while low-margin non-retail net revenues increased $24 million versus the prior year period. In the foil category, the underlying dynamics remain constructive despite multiple price increases in the last twelve months. Having executed multiple price increases in 2025, we are encouraged that fourth-quarter volume takeaways were down only two points, demonstrating the pricing power of our brands. Our hefty waste and storage and Presto segments each delivered strong volume growth and share gains in the quarter. And Hefty Tableware delivered a slight sequential volume improvement and improved profitability in the business to deliver a flat EBITDA result. However, declines in foam and the discretionary nature of the category continued to weigh heavily on the segment's top-line results. Stepping back up to the company results, we saw improved profitability in Q4. The impact of pricing to recover commodities and tariffs and growth in our low-margin non-retail business had a dilutive impact on gross margin percentages to the tune of 190 basis points, masking the underlying improvement in profitability. SG&A was down 19% versus 2024, driven by some delayering in the organization, surgical focus on optimizing advertising ROIs, and tight management of controllable costs. Adjusted EBITDA of $220 million represented a 3% increase on adjusted EBITDA in the year-ago period and was the only quarter of EBITDA growth in 2025. Manufacturing efficiencies and other cost improvements more than offset retail sales volume declines in the quarter. And adjusted EPS was $0.59 compared to $0.58 in 2024. Overall, our fourth-quarter results were strong, and we are well-positioned as we enter 2026 with the resources and continued willingness to invest in driving earnings growth. Turning to the full year 2025, we saw net revenues of $3.7 billion, representing year-over-year growth of 1%. The slight decline in retail revenues, which exceeded overall category performance, was more than offset by strong growth in non-retail revenues. SG&A was down 11% versus 2024, for the reasons I mentioned in the context of the fourth quarter. Adjusted EBITDA of $670 million is compared to adjusted EBITDA of $678 million in 2024. The change from the prior year was driven by lower retail volume, due in part to Q1 retailer destocking and overall decline in our categories, partially offset by cost reductions. It's important to underscore the pace and magnitude of the pricing and cost reduction actions taken to minimize the impact of approximately $100 million in higher tariffs and commodity costs on our result. And adjusted earnings per share were $1.66 compared to $1.67 in 2024, remembering that we are lapping a one-time 5¢ tax benefit in '24. We finished 2025 with very strong cash flow performance, generating full-year free cash flow of $316 million. This result benefited from our ongoing commitment to tightly managing working capital and driving improvements that offset the impact of higher commodity costs on cash flows. During the year, we successfully refinanced our term loan facility, extending the maturity of our debt and made an additional $100 million in voluntary principal payments. We reduced our net debt leverage to 2.1 times, at the low end of our stated target leverage range, providing significant financial flexibility to continue investing in the business. Taken together, these results reflect a business that is executing with greater agility and focus while building a stronger foundation for future growth. Turning now to our priorities for 2026. We made meaningful progress executing our strategic agenda in 2025, but we are still early in the journey with significant work ahead. We see substantial opportunities to deepen our capabilities, scale our initiatives, and unlock the full value of our strategy. Starting with margin expansion, we are committed to unlocking additional efficiencies across manufacturing and supply chain. Our approach centers on three key levers. First, embedding lean principles across our operations to improve yields, reduce bottlenecks, and improve productivity through process redesign and cost discipline, none of which require capital investment. Second, advanced technology deployment to provide real-time visibility into production metrics, uptime, and scrap, and enable faster data-driven decision-making on the floor. And third, pulling through high ROI automation investments from our multiyear pipeline that enhance operational performance across costs, quality, and safety. Outside of our operations, we will continue to invest in incremental innovation and distribution opportunities to accelerate earnings growth. For the full year 2026, we expect net revenues to be minus 3% to plus 1% compared to 2025 net revenues of $3.7 billion. The key drivers of this outlook include retail branded sales expected at or above category performance of down 2%. The anticipated category headwinds are primarily attributed to declines in foam and foil, the latter a function of elasticities on aluminum cost increases, while performance across our remaining categories is expected to remain relatively stable. Consistent with Scott's comments on increasing store brand bid activity given the macro environment, we have contemplated pressure in 2026 as we navigate losses in a portion of our store brand business, with replacement business coming on as the year progresses. Non-retail revenue is expected to be flat for the year. We expect net income and adjusted net income to be in the range of $331 million to $343 million and full-year EPS and adjusted EPS to be between $1.57 to $1.63. Our assumption is that interest expenses and D&A will be broadly in line with 2025, and our effective tax rate will be approximately 24.5%, consistent with historical rates. Our full-year adjusted EBITDA is expected to be in the range of $660 million and $675 million. Some other considerations to keep in mind. Our guide contemplates some level of pricing, and as Scott mentioned, we will take additional pricing actions where appropriate to reduce the impact of higher input costs while closely managing our price pack architecture, leveraging the revenue growth management tools we implemented in 2025. You should expect continued discipline in all areas of controllable costs. But we do expect SG&A will be up compared to 2025 levels, as we step up support for innovation and other strategic initiatives. With tableware trends likely to remain under pressure in 2026 due to foam and the discretionary nature of the category, our focus is to stabilize the core business away from foam with accelerated R&D efforts on innovation, the advancement of our sustainable solutions, and further extension of the entire Hefty Tableware portfolio into channels outside of mass and club. Moving now to the first quarter. We expect net revenues to be down 3% to plus 1% compared to the first quarter 2025 net revenues of $818 million. Net income and adjusted net income are expected to be between $49 million and $53 million in the first quarter, with EPS and adjusted EPS expected to be $0.23 to $0.25 compared to $0.23 in 2025. The company expects first-quarter adjusted EBITDA to be $120 million to $125 million compared to the first quarter '25 adjusted EBITDA of $117 million. Now turning to cash flow and capital allocation. We continue to advance our capital pipeline for organic investment opportunities. And as we begin executing 2026 projects, we are simultaneously replenishing the back end of our automation pipeline. I'm encouraged by the number of additional opportunities that we've identified and their attractive return profile. As a result, capital expenditures are expected to remain elevated as these capital projects extend beyond 2026 and into 2027, with 2026 CapEx expected to be in the low 200s. Our approach to capital allocation considers both organic and inorganic opportunities and continues to be centered around allocating capital to its highest value uses. We maintain a bias for investments that drive growth, with the proven ROIs in our automation CapEx pipeline essentially establishing a hurdle rate for other potential uses of capital. While we are pleased with our robust pipeline of opportunities to invest in the business and drive organic growth, we continue to explore M&A opportunities with more rigor to identify additional growth platforms for RCP. In closing, we are proud of the strong foundation we have built in 2025. The strength of our balance sheet, strong cash flows, and capital allocation discipline position us well for value-creating reinvestment in growth and profitability, and we look forward to unlocking even more of our potential in 2026 and the years that follow. With that, let's turn to your questions. Operator? Operator: Thank you. We will now be conducting a question and answer session. You may press 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Kaumil Gajrawala with Jefferies. Please proceed. Kaumil Gajrawala: Hey, everybody. Good morning. I guess a couple of questions. I maybe want to understand more around the restructuring with Presto and Hefty. And so I see at a very high level some of your comments on what you're hoping to do. But if you could provide some more details or are people moving around? What does success look like in terms of what you'll be able to accomplish that you can't do already? And then maybe some of the logic path on making this decision. Is there something that you see in the market from a demand perspective? Is it something that you see in the market from a competitive dynamic that you think is likely to be ongoing? Because making a change like this usually means there's a bit of a different view on either the top line or the profitability of the categories in general. Scott Huckins: First of all, good morning, Kaumil. Thanks for the question. I think there's a couple of factors at work. If I walk through them, I think the first is clarity and focus. So rather than having two different business units have participation in shared categories, what we're after is having clarity of focus. Each of those business units has a core focus on a category, just to keep it simple. There are a couple of benefits we see with that. The first is end-to-end management, all the way from consumer insights to innovation to operations to supply chain, end-to-end across each of those businesses. So we think there's an efficiency gain to be had. The second is we think it adds clarity for growth. And that clarity for growth comes in two dimensions. One, we've got one dedicated team focused on category innovation in one business, another dedicated team focused on innovation in another business. And then finally, the opportunities to assess and execute against potential growth outside of those categories are even sharper. So that's the substance. I think you've also asked, is there a bunch of people movement? The answer is really no. No real change in org design of any substance. Again, more reorganizing so that these teams are dedicated to their categories. Kaumil Gajrawala: Okay. Got it. And then if I can ask about foam, I believe we're lapping, you know, sort of the beginning of when foam really started to turn and at least at that time, it felt like it was not a one-and-done, but that there were some, you know, maybe some states or some markets that were going to be particularly impacted, others that were a lot less. So it sounds like the situation continues to be challenging. So I'm just curious. Are we anywhere near sort of a stabilization point? I know you're offsetting factors with sustainable goods and such, but are we hitting a stabilization point, or is this a sort of thing where the pressure just continues to build? Scott Huckins: Thanks for that one. So maybe a little dimension. So if you look at the performance of that category in 2025, volumes were down about 14%, plus or minus for the category. So to your point, we expect to see about half that for memorability, being half that rate of decline in 2026. So certainly, the bigger shock to the system would have been '25 versus '26. I think what's happening is more consumer-driven, including things like the considerations of the cost of alternatives. Yes, you'll see if you study pulp and paper, you know, those costs have generally come down over the most recent years. So I think that's more what we're seeing in 2026 compared with a real structural change in the regulatory landscape in 2025. Kaumil Gajrawala: Okay. Got it. Thank you. Operator: Our next question is from Peter Grom with UBS. Please proceed. Peter Grom: Great. Thank you. Good morning, everybody. I was hoping to get some more color on the competitive dynamics that you alluded to around the hefty business. Maybe just more color in terms of what you're seeing and ultimately, the decision around maintaining price points in the current promotion strategy? You mentioned that volumes will potentially be impacted. So curious what's embedded in the guidance. And I guess whether you'll be willing to shift your strategy should the volume declines be worse than expected. Scott Huckins: Good morning, Peter. I'll start, Nathan may add, in terms of guide effects. So I think what we're seeing is two different dynamics. As we exited 2025, at least the waste category, we saw a pronounced increase in the promotion and pricing activities from another competitor in that space. And for context, we actually would have seen our hefty branded promotion actually looked a lot like our total company, and, importantly, even down in the fourth quarter versus last year. Just to sort of set the stage on what are we seeing. The comments about staying the course are really a fundamental and long-term view of maintaining the brand equity in the hefty brand. And the business has been built around that very principle in offering consumer value. So our view is the right long-term strategy for the business is to see the course, and I think we certainly take some comfort in performance. You know, as we think back about the year, by seven points, the hefty brand on retail track channel data outperformed the category, outperformed the category in the fourth quarter by three points. So we feel like we've got the winning approach to the marketplace, and we think staying the course is the right strategy. Nathan, anything on the guide we want to share? Nathan Lowe: I think you kind of hinted at this, Scott, because we saw seven points of growth in the hefty waste bag business in 2025 on a category that was roughly up one. So whilst we wouldn't expect that level of success in the category in 2026, we've certainly factored in some continued success, just not to that degree. Peter Grom: Great. And then maybe related on foil, elasticities have been favorable thus far. But as you think about the January price increase, more increases to come. How are you thinking about elasticity from here and maybe managing around that $5 price clip as we move forward? Scott Huckins: Yes. Again, thanks. Another good question. So I think I'd start with we are really pleased with our commercial team and what we've seen thus far because it has certainly been a dynamic raw material climate, and it's not as simple as just quote, executing price increases. I think as we've assessed the situation throughout the year, we've been taking measured, generally quarterly, price increases. A good example of our developing our GM capability because while we've been taking those price increases, we've actually seen the pricing gap to private label contract throughout the balance of the year, and I think that's a very, very important observation. Another piece is on consumer insights. So when we study consumer research, what we find is the consumer will tend to look at their most recent one or two purchase cycles in considering the effective price. So going back to my comment about taking measured quarterly increases, we think that's had a bit of a muting effect on elasticities. And then in closing, having said all of that, we certainly enjoyed some share gains in the year and the quarter, but we also want to be realistic about the fact that with each subsequent increase, of course, there's more elasticity risk. So that's how we're thinking about it. You know, so far so good, but we also want to be, you know, foreshadowing there, you know, with each increase, there's more elasticity risk. Peter Grom: Thank you so much. I'll pass it on. Operator: Our next question is from Andrea Teixeira with JPMorgan. Please proceed. Andrea Teixeira: Hi, everyone. Good morning. Thank you for the question. I was hoping to see, like, a good segue into Peter's question on promotional activity. You also alluded to private label, and that's something obviously that you are very active on the bag side. So I was curious to see if you are, number one, obviously seeing the down trade, and that impacting your hefty and your branded tableware, and how Presto and other private label brands that you have been commissioned to have been getting market share. So can you comment on that and how we should be thinking about the impact of mix within your guide? Scott Huckins: Sure. So as a general statement, I'd say we continue to see stability in the categories in terms of brand in-store brand mix. The categories have actually been remarkably stable. In terms of I think you specifically asked about Presto. We have seen pronounced growth in that business, particularly around food bags, probably more prominent in club than other channels. So I think that would be the commentary on this generally. Have we seen material trade down? We haven't been pretty stable. We've certainly seen some wins in the Presto business in food bags. In terms of brand store brand mix, my expectation would be we'd probably see more branded mix in 2026 in light of some of the offsets in private label that Nathan spoke about in the outlook. Andrea Teixeira: And then, but more specifically, so how can we think about, like, the, I mean, go looking ahead if there is any opportunity for you to actually gain more, you know, more private label share or like, how you see you just discussed Presto, but also, like, good value for your bags. Like, how is that performing relative to your brand? I mean, obviously, you want to continue to gain share, but if that's not the case, how should we be thinking of that mix impact? Scott Huckins: Sure. So we definitely see opportunities from a share standpoint, what we call share gap selling that was referenced in prepared remarks, to both gain business in branded and store brand formats. What I was trying to reference in the prepared comments was that we're seeing just a lot of bid activity commensurate with the state of the economy, which is not surprising. And so we have near-term headwinds, we also have wins that you'll start to see flow through the business, particularly in the back half of the year. So we definitely think that there's opportunities in both the branded and store brand part of the business. We'll start with some headwinds, and we'll start to offset those in the store brand business as we work our way through the year. Andrea Teixeira: Okay. Thank you, Scott. Appreciate it. Operator: Our next question is from Lauren Lieberman with Barclays. Please proceed. Lauren Lieberman: Great. Thanks. Good morning. Curious on the SG&A. So you mentioned some delayering, but then also the shorter-term dynamics on advertising. And you're going to kind of true up in '26. I just wanted to get a sense for that. I would have thought that the run rate of the first three quarters was kind of a sustainable level given the delayering work, and it's really about that April maybe had some more short-term adjustments on the SG&A spend just as we think about into '26. Is that reasonable? Nathan Lowe: Yeah. Look. I would say when we talk about the actions that we took on SG&A in 2025, there's the when we talk about advertising, let's start there, is that we really focused on getting to the point of optimizing ROIs on a marginal ROI basis. So it's not that we took too much SG&A out. It's that we got it to the right point where we're optimizing that. When we think about bringing some of the SG&A back in 2026, we're really talking about investing behind particular launches of innovation. And the delayering, as you pointed out, is more structural. So there's not a lot more to talk about on SG&A other than that. Those variable compensation, the other swing factor. Lauren Lieberman: Okay. And so was the variable compensation a big factor in the fourth quarter? Could $80 million just it's a, you know, $20 million lower than the kind of quarterly run rate. It's a big number. Nathan Lowe: In terms of Yes. It certainly contributed to the fourth quarter SG&A. Lauren Lieberman: Okay. And then as I look into this year, just curious for any perspective you can offer on commodity cost inflation and kind of what type of headwind do you think that's going to be to gross margin, not you know? And then on top of that, obviously, we'll think about how to flow through pricing. Nathan Lowe: Yes. Sure. So I think the way to think about it, as we talked about it all last year, it was two to four points of cost and a similar quantum of pricing to offset that. Say, that this year, we'll talk about it in two to three points of cost headwinds and a similar amount in terms of pricing to offset that through the year. Roughly half of that is carryover of costs that ramped in 2025. And similarly, the pricing that we took in 2025 wrapping around. In terms of margins, probably worth starting with a couple of the comments I made in my prepared remarks. Just to put some color to that. First, we are talking about retail sales volumes down, so that's the reason Scott talked about. At the same time, SG&A is expected to be up, which you mentioned, and then EBITDA flat. So that certainly implies that we're expecting some improvement in profitability. At the same time, when we're in a period of taking pricing to cover commodity cost increases, expect that to have a dilutive impact on margin percentages as was the case in 2025. Lauren Lieberman: Okay. Great. Alright. Thank you so much. Operator: Our next question is from Robert Ottenstein with Evercore ISI. Please proceed. Robert Ottenstein: Great. Thank you very much. Good morning. A couple of follow-up questions. So first, on the combination of Hefty and Presto, from what I can gather, that's more sort of strategic and efficiency-related rather than pure cost takeout? Is that the right way to look at it? Scott Huckins: Yeah. Good morning, Robert. That is accurate. It is not a cost-driven motive. It's an execution-driven motive or focus. And, again, just to restate part of my comment to the prior question, we think that unlocks and provides additional clarity for growth. So not a cost motive. It's execution and growth. Robert Ottenstein: I like Perfet. It's better outcomes with the same resources. Okay. Great. Great. Great. Second, can you talk a little bit about the market share gains that you got in Q4? You had been running at roughly 100 basis points. That went to 200. Maybe some of the drivers around that and was there any kind of one-offs or anything that makes it unusual? And would that kind of continue, driving share gains, you know, in the first three quarters of this year at least and how that ties into the spring shelf set. So you're getting, you know, increased shelf space due to those gains. Scott Huckins: Thanks for the follow-up. So I think what's interesting is that the share gains were really across the portfolio. So if you think about our six largest categories, we actually enjoyed share gain performance in each of those six. The only outlier candidly was foam. So the point of that is it was fairly broad. Certainly, I think there's two drivers of that. One would be innovation. Newer items are certainly winning in the marketplace. I also think it goes back to our performance brand-oriented philosophy. I think more and more as the retail consumer has even a more prominent focus on value, I think that's probably an assist complementing those first two pieces. And then, frankly, last for me would be service. You think about it's a pretty challenging dynamic year. Global tariffs shift and evolve. And we ran a high 90 case fill rate for the full year. I'm very proud of our supply chain team for that. But I think those would be the three drivers that allowed that performance. You asked about looks into '26. We certainly are seeing continuation of that generally in our January results in terms of our performance against the categories against those same dimensions. So I think as we see it, we see some continuation. Robert Ottenstein: And is it also reflected in increased shelf space in the March, April resets? Scott Huckins: I guess two things. So part of it is we picked up about five points of distribution total distribution points here in the fourth quarter. So by definition, that provides distribution growth. We'll see as we get into the May, June time frame, the final outcomes of distribution. But as we're going into it, we're fairly optimistic. Because, of course, that very shared performance certainly is a useful marketing discussion topic with our retail partners. Robert Ottenstein: Terrific. Thank you very much. Scott Huckins: Thank you. Operator: Our next question is from Brian McNamara with Canaccord Genuity. Please proceed. Brian McNamara: Hey. Good morning, guys. Thanks for taking the question. I wanted to drill down on elasticity as it relates to aluminum foil, which appears well-behaved thus far. I'm curious how you would compare the current environment to 2022, where 75 square foot foil at retail breached the $5 price point for a time, and then you lost a few points of branded share, then you gained it back once you promoted below that kind of $5 price point. We've recently observed that 75 foot the price is kind of across the country, kind of well north of that $5 price point, close to $6 in some places. So I'm curious, has that $5 price point goalpost moved? I'm curious how you should how we should think about that the elasticity threshold. Scott Huckins: Good morning, Brian. Another really good question. So I think there's a couple of factors at work, probably three. What's different about now versus 2022 that you referenced would be specifically price gaps to private label. Back in that era, those gaps were over a dollar between the brand and store brand. We are seeing significantly tighter gaps as we exited the year in 2025 and early days in 2026. That's the first point. I think the second point, and this factors into our thinking, is over those last several years, if you look at the average cost of an item in a consumer item, excuse me, in a store, it's up about 25, 30%. So it's not as though we have a proof statement, but we certainly observe that on a comparable basis, what was the $5 price point you referenced is conceptually, if you inflated that against the balance of the store, we certainly think that might be providing some insulation. And then third and finally, is our team has been taking pricing actions. We believe that the quarterly more gradual increases are more effective with the consumer than, say, a semiannual much larger increase back to the comment I think I shared earlier about consumer insights where the consumer will tend to look at the most one or two most recent purchases assessing price. So I think those are the dynamics. But, you know, we study the category you would guess. Every single day, and I think are going to benefit from RGM capabilities where we've got continued capability development in how we think about how, where, and when to promote against those key cells us. So I think those are the variables, but we certainly would expect to see elasticities. But we think that we've got the data would suggest they've been certainly more muted than they would have been in 2022. Brian McNamara: That's helpful. Thank you. Scott Huckins: You're welcome. Operator: This will conclude our question and answer session. I would like to turn the conference back over to Scott for closing remarks. Scott Huckins: Thank you, operator, and thank you to everyone who joined us today. Our analysts, our investors, and certainly our 6,000 teammates who make RCP the great company that it is. We're energized about the opportunities ahead of us, and we look forward to sharing our progress with you in the quarters to come. Wish everybody a great morning and a great day. Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Good morning, and welcome to The New York Times Company Fourth Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Anthony DiClemente, Senior Vice President, Investor Relations. Please go ahead. Thank you. Anthony DiClemente: And welcome to The New York Times Company's fourth quarter and full year 2025 Earnings Conference Call. On the call today, we have Meredith Kopit Levien, President and Chief Executive Officer, and Will Bardeen, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call. These statements are based on current expectations and assumptions, which may change over time. Our actual results could differ materially due to a number of risks and uncertainties that are described in the company's 2024 10-Ks and subsequent SEC filings. In addition, our presentation will include non-GAAP financial measures, and we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website at investors.nytco.com. In addition to our earnings press release, we've also posted a slide presentation relating to our results on our website at investors.nytco.com. And finally, please note that a copy of the prepared remarks from this morning's call will be posted to our investor website shortly after we conclude. With that, I will turn the call over to Meredith. Meredith Kopit Levien: Thanks, Anthony, and good morning, everyone. 2025 was a great year for The New York Times. Thanks to strong execution against a clear long-term strategy. We added 1,400,000 net new digital subscribers, bringing total subscribers to 12,800,000. This puts us further down the path to our next milestone of 15,000,000 subscribers and beyond. Engagement across the portfolio was strong, which contributed to significant growth in digital advertising. We generated more than $2 billion in total digital revenues for the first time. Also grew adjusted operating profit more than 20% and expanded margin to 19.5%. Our fourth quarter results were a fitting capstone to the year and reflect contributions from every part of our portfolio. We added 450,000 net new digital subscribers in the quarter and digital subscription revenues grew 14%. Advertising beat our expectations with digital advertising up 25% and total advertising increasing 16%. Licensing, affiliate, and other revenues also grew. We delivered this growth by engaging and monetizing audiences across multiple products and revenue streams, which is a clear example of our strategy in action. AOP grew and margins expanded in the quarter even as we continue to invest in our world-class journalism and premium product experience. Let me spend a few minutes putting these results in a broader strategic context as we begin the year. The information ecosystem is changing rapidly, and the challenges media companies face remain steep. We're operating in a polarized, low-trust environment shaped by a few powerful platforms whose actions create headwinds for publishers. We believe that The Times is well-positioned to navigate these trends. Given the differentiated value we have developed based on years of strategic investment, there are even bigger opportunities ahead, and we are confident that we can pursue them ambitiously and profitably thanks to the durability of our essential subscription strategy and a handful of unique advantages. Let me name them. First, our world-class news coverage and each of our lifestyle products addresses a big global market. Hundreds of millions of people around the world engage with news, sports, games, recipes, and shopping recommendations in their daily lives. We already reach many tens of millions of them every week across our portfolio and see the opportunity to engage directly and deeply with many millions more than we do today. Second, we built a unique engine for creating original, independent, and high-quality content at scale. Our core New York Times newsroom is one of the few that can go wherever the story does and report it from on the ground in more than 150 countries and every US state last year. The Athletic is the world's largest sports journalism operation. Our in-house games team has a track record of producing original puzzles that are cultural sensations and played by millions. Cooking has more than 25,000 vetted recipes and a growing video catalog that gets people excited for their next meal. And Wirecutter's experts rigorously review thousands of consumer products every year. Providing independent, human-made journalism and lifestyle products that resonate with huge audiences around the world is not easy. While others have been doing less of it, we continue to thoughtfully invest, making what we do more rare and more valuable to more people. Third, we are constantly innovating to express our journalism and content in all the ways and formats that audiences want to consume it. We're using AI to make our reporting more accessible, and we're rapidly growing our offering in video, which represents a major new audience opportunity for us. As linear TV continues to decline and viewing habits shift even more to digital platforms, we see a long-term opportunity to establish The Times as a preferred brand for watching news in addition to reading and listening. Finally, we've developed multiple digital revenue streams to monetize consistently high engagement. We're confident that our product portfolio will continue to fuel strong digital subscription revenue growth and that digital advertising and our other digital revenue streams are positioned for healthy growth as well. We plan to further capitalize on these advantages in 2026 in a few ways. We'll keep covering the most important stories with independence and rigor. We'll do that in more formats and places, especially with video. We'll add even more value in every part of our portfolio through new shows, coverage areas, games, and product features. And we'll thoughtfully navigate the changing technological landscape to make The Times even more valuable to more people. Executing well against these priorities is how we plan to get millions more people to have direct relationships and daily habits with The New York Times. And as we do that, we expect 2026 to be another year of subscriber growth, revenue growth, AOP growth, margin expansion, and strong free cash flow. I will close by reflecting briefly on history. 2026 is a year of milestones. The 200th birthday of America and the 175th anniversary of the founding of The New York Times. Trustworthy, independent journalism has been a crucial part of our country's success, and that's just as true today as it was in 1851. But it requires continued vigilance to ensure journalism can play its essential role in society. And it requires continued reinvention for a journalism business to succeed. Over the course of nearly two centuries, The Times has experienced the advent of radio, broadcast TV, cable TV, the Internet, smartphones, social media, and now AI. Local markets turned into national and then international ones. Daily habits accelerated into a need for near-instantaneous information. Amidst this relentless change, The Times has adapted, thrived, and played a crucial civic role. Today, we anchor the daily habits of millions who rely on our journalism and lifestyle products, making us more essential to more people than ever before. This track record strengthens the conviction we have in our ability to continue to deliver on our mission and to build a larger and more valuable company as we do. And with that, I'll hand it over to Will. Thanks, Meredith, and good morning, everyone. Will Bardeen: In 2025, we delivered strong results, including another year of healthy revenue growth, AOP growth, margin expansion, and strong free cash flow generation. As Meredith said, we continue to grow our subscriber base over the course of the year, adding 1,400,000 digital subscribers. We also grew total digital-only ARPU and drove strong subscriber engagement. This led to an increase of approximately 14% in digital subscription revenues and helped power our multiple revenue streams, including digital advertising, which increased 20%. We grew overall revenue in the full year by approximately 9% as increases in digital revenues were partially offset by ongoing declines in print. These healthy revenue results coupled with our disciplined approach to cost throughout the year drove operating leverage. AOP grew by approximately 21% year over year in 2025 to $550 million. AOP margin expanded by approximately 190 basis points to 19.5%. We delivered these results even as we continue to prioritize strategic investments aimed at further differentiating our high-quality journalism and digital products. We generated approximately $551 million of free cash flow in 2025. That strong free cash flow generation primarily reflected our robust AOP and our capital-efficient model. We also benefited during the year from lower cash taxes due to the change in tax law for R&D expenditure deductions, as well as from the net proceeds of the sale of excess land at our printing facility. Over the course of the year, we returned approximately $275 million to shareholders. This included approximately $165 million in share repurchases and approximately $110 million in dividends. Today, we announced an increase in the quarterly dividend from $0.18 to $0.23, consistent with our capital allocation strategy. I'll note that as of year-end, we had $350 million remaining on our share repurchase authorization. Now I'll discuss the fourth quarter's key results, followed by our financial outlook for 2026. Please note that all comparisons are to the prior year period unless otherwise specified. I'll start with our subscription revenues. We added approximately 450,000 net new digital subscribers in the quarter, bringing our total subscriber count to approximately 12,800,000. Subscriber growth came from multiple products across our portfolio. We also continue to be pleased with the rollout of our family plan subscription offering. Total digital-only ARPU grew year over year to $9.72 as we stepped up subscribers from promotional to higher prices and raised prices on certain tenured subscribers. We continue to be encouraged by the results we're seeing at pricing step-up points, which we believe reflect the value we continue to add into our product. As a result, we remain confident in our ARPU trajectory. I'll note here that following 2025, we plan to make a change to our subscriber disclosures. We will continue to report total digital-only subscribers and total digital-only ARPU. However, we will discontinue reporting digital-only subscribers and ARPU by the categories of bundle and multiproduct, news only, and other single product, as well as the percentages represented by group corporate group education and family subscriptions. We believe total digital-only subscribers and total digital-only ARPU best align with how we manage the business for long-term growth. With both higher digital subscribers and higher total digital-only ARPU in the fourth quarter, digital-only subscription revenues grew approximately 14% to $382 million. Total subscription revenues grew approximately 9% to $510 million, which was in line with the guidance we provided for the quarter. Digital advertising revenues also came in above the guidance we provided, increasing approximately 25% to $147 million. The growth in digital advertising was due mainly to strong marketer demand and new advertising supply. Affiliate licensing and other revenues increased 5.5% in the quarter to $100 million, primarily as a result of higher licensing revenues. This was in line with our guidance. Adjusted operating costs grew 9.7%. This was above the 6% to 7% guidance range that we provided last quarter. I'll note that the primary reason for costs coming in above the guidance range was higher expenses associated with incentive compensation programs related to our financial outperformance. AOP grew 13% in the quarter to approximately $192 million, and AOP margin expanded 50 basis points to approximately 24%. Adjusted diluted EPS in Q4 increased $0.09 to $0.89, primarily driven by higher operating profit. I'll now look ahead to Q1. Digital-only subscription revenues are expected to increase 14% to 17%, and total subscription revenues are expected to increase 9% to 11%. Digital advertising revenues are expected to increase high teens to low 20s, and total advertising revenues are expected to increase low double digits. Affiliate licensing and other revenues are expected to increase high single digits. Adjusted operating costs are expected to increase 8% to 9%. We intend to continue operating efficiently while making disciplined investments in our high-quality journalism and digital product experiences that add value for our audiences. As we've discussed, video in particular remains an important area of strategic investment being reflected in our guidance. We are confident in our ability to generate strong returns as we grow the amount and impact of video journalism in news and across our portfolio. In summary, our strategy is continuing to work as designed. The strategic priorities for the coming year that Meredith highlighted are all aimed at building a larger and more engaged audience over time, growing our subscriber base, and powering our multiple revenue streams. For the full year 2026, we expect another year of healthy growth in revenues and AOP margin expansion and strong free cash flow generation. In addition, we remain on the path to achieving our midterm targets for subscribers, AOP growth, and capital returns. With that, we're happy to take your questions. We will now begin the question and answer session. Operator: To ask a question, press * then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. The first question today comes from David Karnovsky with JPMorgan. Please go ahead. David Karnovsky: Thank you. Meredith, when we look at that 20% digital ad growth last year, just with hindsight, is it possible to kind of break that out between kind of new supply, new products, or just engagement? And then kind of how much opportunity you see on these fronts? And then for Will, the adjusted cost guide for Q1 is a bit above recent trends. So I wanted to see if you could unpack some of the drivers there. And you mentioned video specifically. I'm not sure if there's a way for you to kind of dimensionalize the impact there. Thank you. Meredith Kopit Levien: Yes. Good morning. I'll start on ads. I mean, the first thing to say is we were very happy with the performance last year, and I'd say we feel good about what we see as sort of all three elements of the ad business in terms of supply, which you asked about. We did add more ad supply in a number of places last year. And I would say as we have more opportunities to engage the audience, we should have more to add new and different kinds of supply. And I'll also say on supply, we have a really good track record of, and we did a lot of this last year, making the supply we already have more valuable, and that's with data and improvements to campuses and overall performance. In terms of demand, I would say that picture has improved. It's improved in a couple of ways. One, you know, we can do bigger deals with the marketers we already work with because there's more to offer. And two, and I've talked about this for a while now, I think we appeal to more marketers because we're now at scale in multiple spaces that are very appealing to them. And then the last thing to say, and I think I said a version of this for years, our ad products really work. They're performing. And so because of that, marketers come back and they buy more, and that's, I would say, thanks to the quality of both the canvases and the sort of way we apply those canvases and also to our targeting tools. And then lastly, I would just say we really believe in our leadership and the team, and execution has been kind of strong across the board. Will, I think the next part of the question. Will Bardeen: Yeah, to take the question, David, on the cost guide. So looking forward on cost and investments, I think the most important thing to say is that our overall approach isn't changing. So we don't guide beyond the quarter, but we remain focused over the long term on sustaining healthy revenue growth, AOP growth, and margin expansion. In other words, growing revenues faster than growing costs. And we do that by managing costs very closely while also making strategic investments that continue to differentiate us. And as Meredith and I both said in our remarks, as you mentioned in your question, that does include investment into video, which we're excited about. You know, we ramped that up, particularly in the back half of '25. The Q1 expense guide reflects year-over-year impact of that ramp of volume and video production at both The Times and The Athletic across the portfolio. Also, you know, just full cost, we also continue, as we've said in the past, to value the flexibility to lean into areas like sales and marketing when there are good returns in the market, where we see a good opportunity to run a brand campaign. But stepping back, with respect to cost investments, our overall resource allocation approach reflects ongoing cost efficiency combined with that thoughtful investment into the journalism and digital product experiences that we really think are going to add value to our audiences over time. And it's that disciplined approach that enables us to continue to target not just healthy revenue growth, but also year-over-year AOP growth and margin expansion for '26 and beyond. David Karnovsky: Great. Thanks a lot, David. Operator, we'll take our next question, please. Operator: The next question comes from Benjamin Soff with Deutsche Bank. Please go ahead. Benjamin Soff: Good morning. Thanks for the question. I wanted to ask first about capital allocation. You had another healthy year of free cash flow. Your balance sheet is obviously in a pretty strong position. So what are your latest thoughts on capital allocation as we head into 2026? How do you think about perhaps updating your shareholder return target as you continue to build up cash? And then I wanted to ask about password sharing. To date, you primarily focused on approaching that with a carrot, not a stick. Can you talk about how you think about password sharing on your platform broadly? And the different tools that might be available to help unlock that opportunity? Thank you. Will Bardeen: Sure. I'll take the capital allocation question, and Meredith can take the password sharing question. Definitely appreciate the question. We're clearly pleased with both the strong free cash flow generation and the strong balance sheet. At this time, what I'd say is no change to our strategy here. We believe our capital allocation strategy continues to serve us well. And recall, the top priority on that is continuing high-return organic investment into our essential subscription strategy. And I think you hear with some of our remarks today and as we've been narrating over the last call or two, video is an exciting opportunity for us there. And then after that, we intend to return at least 50% of our free cash flow to shareholders over the midterm. That's our stated target. And you've seen and continue to see a balance as we are on pace for that target between dividends and share repurchases. I note today in my remarks, the $0.05 increase to the dividend from $0.18 to $0.23 and this track record of repurchases with $350 million of the authorization remaining at the end of the year. And then we like having a strong balance sheet. It's a dynamic time in the media industry, so we're comfortable with that. Any M&A would have a very high bar. We're very pleased with the pace of our strategy and the spaces we're in. So that's sort of the specifics to say we're pleased with our capital-light allocation strategy and nothing to change at this time. Meredith Kopit Levien: Great. Why don't I take password sharing? I think there's two answers to that. The first one is to say, and I talked about this in my prepared remarks, we still regard ourselves as playing in these very big spaces, you know, news, coverage broadly defined, and then sports, games, recipes, shopping, bikes, all of which have a lot of running room in them. So we see a really big market opportunity and regard ourselves as, you know, still having lots of room to penetrate there. So that should give you a sense of how we think about password sharing as, like, potentially an opportunity down the line, but we're still in a phase of really wanting to bring more people into using and engaging with The Times. And the way we've done that, you know, so far, like, in the last six or nine months is with our family plan, which we are incredibly excited about. So that's almost like the carrot version of password sharing. The family plan is going very, very well. And I would say it's got three elements to it that really work for us. One, it is a sort of further penetration move, and it is helping us do that. People are bringing new people into an opportunity to engage with The Times, and we're very excited about that. That's our own subscribers getting other people in their lives to subscribe. And a lot of the things we do at The Times are sort of fundamentally shared or shareable experiences. The second thing to say with the family plan is it is priced at a premium, it's just, like, additive out of the gate to revenue and the same, you know, again, the carrot version of using password sharing crackdown as the stick. And then the third thing to say is, like, a broad point that a whole model runs on very strong engagement from people, and the family plan is yet another way to improve engagement of our subscribers and ultimately retention. We've long had the insight if we can get you. First, it was to read across more topics. You'd be more likely to stay longer, pay more over time. And then if we could get you to engage with more products, that was true. And now it's if we can get you to do it with the people you love and interact with, that is also true. So our version for now in a sort of moment where we still feel like we're relatively early in market penetration of dealing with what you're describing as password sharing is the family plan. But I don't rule out something else to offer it. Will Bardeen: Thanks, Ben. Operator, next question, please. Operator: The next question comes from Thomas Yeh with Morgan Stanley. Please go ahead. Thomas Yeh: Thanks so much. One more on the video journalism initiative, which sounds like an area you're really deciding to lean in on. I think to date, you've been adding more videos of reporters explaining their work as kind of a brand trust or social media marketing tool. Can you just talk about how you see the evolution of that product towards something you mentioned maybe closer to what we see on linear TV and how that fits into the investment needs that Will referred to? On the non-news single product growth, that was again a pretty big contributor to subscriber growth this quarter. I know you'll change the disclosure going forward, but maybe one last time, can you add color on what's been driving that strength across games or athletic and what you're seeing there? Thank you. Meredith Kopit Levien: Yeah. I'm good morning, Thomas. I'm happy to take both of those. The first thing to say about video, and I think you got in both of our prepared remarks, is we just see it as a really big long-term opportunity to establish The Times as the preferred brand for watching news in addition to reading and listening to that news. And there are sort of three parts to it, one of which you're asking about specifically: production, and then engagement and monetization. In terms of production, which is what I think you're pushing on, you can regard us as being in a phase where we're really beginning to scale it. And I think to your point, what we feel really good about from 2025 is we've arrived at sort of two things. One, scalable formats, and I'll name them, and also kind of video language for The Times that feels like it's really, really working. So what does that look like? You mentioned reporter videos. We are scaling that up. And one of the inherent advantages we have in the model is an enormous one of the world's most robust reporting forces. So you can imagine how that scales. In addition to reporter video, I think we've really distinguished ourselves in our still, you know, in early days of it with what we call visual investigations. You've seen a lot of that recently. That is something we're doing more and more of. I think that becomes even more important in sort of a low-trust environment. We're just showing more, so they're straightforwardly showing more of what is happening when a reporter is on the scene somewhere in news clips. And then we've made a really deliberate effort to turn our hit podcast, in most cases, into full-bore video shows, and that's going very, very well. And in terms of where all that is playing out, you're seeing us do that in our new watch tab, which we launched last year, in the core app of The Times, and that's, you know, early days, but we're very, very happy with what we're seeing there so far. And then also putting more of our video in all the places people engage with news off-platform, which we think is a really important part of our long-term engaged audience growth strategy. So we feel very good about all that. The most important thing to say is it's early days, and the phase we're in right now is really ramping up that production and building a wide engaged audience for it. So more engagement from the people we already have and then, you know, net new audience to engage with video. I think your second question was about single product growth in non-news. I'll just say, we're really pleased with the strong net ads growth in the quarter. I'd say it's our strategy working as designed. And as you've heard us say before, the great thing about the model is we have multiple levers for growth, and the different levers, the different products in the portfolio are going to play different roles at different times. And I would even say all of our products played some role in the quarter, and that is almost always true depending on the time of year. Some are driving subscriber growth, some are driving audience engagement, but it's all sort of a system that's working together. And we're, you know, super excited about what we saw in the quarter. Will Bardeen: Great. Thank you, Thomas. Operator, next question, please. Operator: The next question comes from Ketan Mamrall with Evercore. Please go ahead. Ketan Mamrall: Good morning and thanks for taking the questions. One on ARPU and a follow-up on costs. On the digital-only subscriber ARPU side, growth has historically been a highlight over the last few quarters, up in the 3% to 4% range. That growth decelerated a bit more than expected in the quarter. Based on your Q1 outlook, it certainly seems like overall digital-only subscription revenue growth will remain healthy. But any more color on ARPU specifically and the moving pieces for 2026 would be appreciated. And to follow-up with another question on costs, Will, I appreciate that you don't guide beyond the quarter, but I think despite the very attractive strength in net adds, advertising, free cash flow, and other parts of the story, there'll be some consternation on costs. So I just wanted to see if there's anything more you can share on the trajectory over there. Should the takeaway be that the high single-digit growth range exiting 2025 into 2026 is perhaps the new normal? Or should we expect a deceleration back to the mid-single-digit range in the back half of the year as you begin to lap some of these investments in video? Thanks. Will Bardeen: Yes, I'll take both of those. Why don't I just start with the second one? I think the key thing to say there is simply that we remain very focused on sustaining not just the healthy revenue growth, but also AOP growth and margin expansion. So very disciplined on costs and investments. And I described that in my remarks. I think that's the framework that I want to make sure to leave you with that we're very focused on. Move to ARPU. I totally appreciate the question. We sort of provide, as you noted, quarterly guidance on digital subscription revenue growth, which is the thing that we're trying to maximize over the long term. And that's a function of both our sub base and our ARPU. And as you've seen and expect to continue, ARPU growth in any given quarter can fluctuate for a variety of reasons. Those can be the volume and mix of sub additions, and where the, you know, what's the nature of the sub? Are they on a promotion? Are they tenured? Are they international, domestic? We have some different pricing. And then the timing of targeted price increases can play a role as well. So you noted in our guidance, we're expecting strong digital sub revenue growth in 2026. And I think it's maybe worth calling out as we begin '26 some of the color you asked for, we do expect in particular to see the benefit of an increase in the digital bundle price to $30 from $25. A ten-year cohort of bundled subscribers began paying those higher prices in Q1. And as we'd expected from some of our earlier testing, we tend to test all of our pricing. The results so far are very encouraging. So we don't guide to ARPU specifically. Overall, we continue, as I said, to be pleased with the health of the ARPU drivers. And we see multiple factors that are giving us confidence in our ARPU trajectory over time. At the basic level, we're continuing to add value to our products. They become more valuable. We're seeing strong audience and subscriber engagement. So an appreciation among our audience for that value. And then we remain pleased with the performance of our pricing step-up points, including when we raised prices on some groups of tenured subscribers. Ketan Mamrall: That's great. Thank you, Ketan. Operator, next question. Operator: The next question comes from Jason Bazinet with Citi. Please go ahead. Jason Bazinet: Sorry to do this, another one on costs. So you said in the fourth quarter, the expenses were a bit higher because of incentive comp. But going forward, it's more of the investments you're making. The incentive comp just sort of spread across all the cost items you disclosed? Or is it isolated in one? And same thing on the video investments. Are those across? Will Bardeen: Yeah. Appreciate the question. Yeah. So let me take the Q4 dynamic there. As I said, the primary reason for the difference between the guidance and what we came in at was higher expenses associated with incentive compensation programs and our financial outperformance. Now I'll note here that, for example, having such strong advertising revenue performance, meaningfully higher than our expectations in Q4, which is a very big ad quarter, has an impact on the full year and multiyear financials that are tied to our incentive plan. And that did impact, to your question, all four of our expense lines in the quarter. G&A was where that impact was the most obvious. But it might also be helpful for me in response to your question to note that it's also kind of its impact on the sales and marketing line in particular. As we disclosed in our earnings release, our marketing media expenses in the quarter were only 1.8%. So higher compensation expenses were also a factor in why that overall sales and marketing line was up over 11.5% in Q4, and it plays it's really in all those lines. So that's kind of that main story in Q4. Underlying that, you know, included we had started to ramp up our video investments and continue to make disciplined investments in those areas that are positioning us for sustainable growth for the long term. And I think that I've already talked about that in the context of the guide going forward. Jason Bazinet: Great. Yep. Thanks. Thanks so much, Jason. Operator, we'll take our next question, please. Operator: The next question comes from Kanan Venkatesh with Barclays. Please go ahead. Kanan Venkatesh: Thank you. Meredith, when we look at the growth in advertising, obviously, it looks like there's a lot of upside there. I mean, something that you could see as potentially a way to manage your ARPUs and the. In other words, instead of raising price, would you use some of the advertising to essentially make the product affordable for customers, you know, courier subscribers, a bit faster by leaning in on advertising? So it'd be great to get your thoughts on that. And then on the AI front, I mean, obviously, there's a lot of litigation expense building on that. But would you be able to get some sense of timelines around this as to when you expect resolution? And when we think about the puts and takes, obviously, there's some licensing fees you could get out of some of these models, but at the same time, how do you view the threats from AI? Longer term? Like, how do you weigh the opportunity versus cost in that front? Thank you. Meredith Kopit Levien: Yeah. Thanks, Kanan. Let me start on the AI question. And then I think I heard you on the advertising question. If not, you can try and answer it. You can redirect me if I didn't hear you quite right. I would say on AI, you know, we continue to see headwinds. We've been talking about that for a while now. But our strategy of building differentiated products at scale, which are worthy of seeking out and building habits with, make us really resilient to headwinds and are rapidly changing and pretty low-trust ecosystem. And over the long term, we believe what we do is going to be even more valuable to consumers and to business partners and ultimately even the LLMs themselves in an information ecosystem where it's harder and harder to find things that are true and valuable and worthwhile. So, you know, and we're already using, and we've talked about this in prior calls, we're using AI to make our work more accessible, do a number of things in the subscription model. We've got an AI-powered ad product that is really working. So we're already sort of harnessing AI in effective ways to make the business more productive and build our engaged audience. I think the question, do you want to try one more time on the ad question just to make sure I heard it right, and then I'm happy to answer it. Kanan Venkatesh: I mean, basically, the question is, you can get ARPU through advertising or through subscription fees. So is there a path where you, because your advertising revenues are growing faster, you grow prices lower and therefore, you know? Meredith Kopit Levien: I see what you're asking. Yeah. Yeah. Yeah. Let me just say broadly, one of the things that we are most excited about in terms of our strategy and our model, and I talked about this in my prepared remarks, one of the unique advantages that The Times has is we have this multi-revenue stream model, and you saw that really working. And so, you know, we particularly as we focus on building a larger and more valuable New York Times company, the sort of what powers that is building our engaged audience. And having an opportunity to monetize that audience, particularly as we're building in early chapters through advertising, is awesome. And you're really seeing that play out. And I could talk about that literally in every part of the portfolio, and every part of the portfolio contributed to the ad success in 2025, and we expect every part of the portfolio to play a role going forward. But in places like games, we've got, I think we have 11 games now, and six of them, maybe off by one, I think, are free games. And we, you know, monetize the enormous amount of engagement we get with our free games, first through advertising, and that's a great and exciting aspect of the business. And as we build The Athletic and really widen people's understanding of the power of The Athletic, if you're a sports fan and what it can do, it really makes the audience bigger. We've been very, very happy with what it can do as a commercial business, as an ad business. So I'd regard it as a whole system working together. And ultimately, what we're doing is also building funnels for future subscription growth, and it all kind of works together. It's all very deliberate. Kanan Venkatesh: Okay. Great. Will Bardeen: Thanks, Kanan. Operator, let's take one final question. Operator: The final question comes from Doug Arthur with Huber Research. Please go ahead. Doug Arthur: Last but not least. Just on that single product growth, which there's been quite a few questions on. I mean, I guess the question is, do you remain confident that it's sort of expanding the funnel, expanding the TAM, and you are getting or do have the potential to convert strongly engaged single product users to, you know, more valuable bundle type subscription? Is that working? And then I've got a follow-up. Meredith Kopit Levien: My short answer on that, Doug, is yes. We, you know, this is a whole system. All of the products beyond news broadly defined are playing a role in the funnel. We really like what we see in terms of how it's working in the subscription funnel and ultimately bringing people in, you know, into initial products and then being able to engage them more over time. And as we engage them more, they become more valuable to us in multiple ways. So yes, yes, yes, yes to what you're asking. And I'll just add on the back of that. Will Bardeen: Absolutely to the subscription business. And as Meredith said, the power of those multiple products from games to The Athletic in supporting the ad results we're seeing is also part of the encouraging story that we're telling. Meredith Kopit Levien: And cooking and Wirecutter too? Yep. Doug Arthur: So do you, you said you had one last follow-up? Doug Arthur: Yeah. There's been chatter in the press about the contract negotiations with the News Guild. I guess, focus on remote work guidelines. Is there anything to see there? Is there anything you can comment on? Meredith Kopit Levien: We have a long history of working with a number of unions at The Times and productive relationships with all of our unions, and we are, I think, well-prepared to move through this contract period as we have been in the past. And we're very confident that The Times will continue to be a great place for, in this case, journalists and ad people who are most of the folks represented in the current negotiation to work. Operator: This concludes our question and answer session. I would like to turn the conference back over to Anthony DiClemente for any closing remarks. Anthony DiClemente: Great. Well, thank you, everyone, for joining us for the call, and we'll see you next quarter. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.